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As filed with the Securities and Exchange Commission on December 31, 2014
Registration No. 333-201106

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Amendment No. 1
to
Form S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

InfraREIT, Inc.
(Exact Name of Registrant as Specified in its Charter)

 
					
Maryland	 	6798	 	75-2952822	
(State or other Jurisdiction of
Incorporation or Organization)	 	(Primary Standard Industrial
Classification Code Number)	 	(IRS Employer
Identification Number)	
1807 Ross Avenue, 4 th Floor
Dallas, Texas 75201
(214) 855- 6700
(Address, including Zip Code, and Telephone Number, including Area Code, of Registrant’s Principal Executive Offices)

Benjamin D. Nelson
Senior Vice President and General Counsel
InfraREIT, Inc.
1807 Ross Avenue, 4 th Floor
Dallas, Texas 75201
(214) 855- 6700
(Name, Address, including Zip Code, and Telephone Number, including Area Code, of Agent for Service)

Copies to:

Andrew M. Baker
William D. Howell
Baker Botts L.L.P.
2001 Ross Avenue
Dallas, Texas 75201-2980
(214) 953-6500	 	Michael A. Pucker
Julian T.H. Kleindorfer
Cathy A. Birkeland
Latham & Watkins LLP
233 S. Wacker Drive
Suite 5800
Chicago, Illinois 60606
(312) 876-7700	

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.   ¨
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	 	¨	  	Accelerated filer	 	¨	
				
Non-accelerated filer	 	x   (Do not check if a smaller reporting company)	  	Smaller reporting company	 	¨	
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
 
Subject to Completion
Preliminary Prospectus dated December 31, 2014
PROSPECTUS
            Shares

Common Stock

This is InfraREIT, Inc.’s initial public offering. We are selling             shares of our common stock.
We expect the public offering price to be between $         and $         per share. Currently, no public market exists for the shares. After the pricing of this offering, we expect that the shares will trade on the New York Stock Exchange under the symbol “HIFR.”
Immediately following the consummation of this offering, InfraREIT, L.L.C. will merge with and into InfraREIT, Inc., which we refer to as the Merger, with InfraREIT, Inc. as the surviving entity in the Merger. InfraREIT, L.L.C. owns electric transmission and distribution assets in Texas and leases them to Sharyland Utilities, L.P., which is a regulated utility, as described under “Business and Properties—Our Tenant—Our Leases.” Upon the consummation of this offering, we will be externally managed by Hunt Utility Services, LLC, or Hunt Manager. Hunt Manager is owned by an affiliate of Hunt Consolidated, Inc., a privately held company engaged in energy, real estate, investment and ranching businesses.
We will elect to be taxed as a real estate investment trust, or REIT, for U.S. federal income tax purposes commencing with the taxable year ending December 31, 2015. We believe that we have been organized and operate in a manner that allows us to qualify for taxation as a REIT for U.S. federal income tax purposes commencing with such taxable year, and we intend to continue to be organized and operate in this manner. Shares of our common stock are subject to limitations on ownership and transfer that are intended to assist us in maintaining our qualification as a REIT. Our charter contains certain restrictions relating to the ownership and transfer of our capital stock, including, subject to certain exceptions, an ownership limit of 9.8%, in value or in number of shares, whichever is more restrictive, on the ownership of outstanding shares of our common stock and an ownership limit of 9.8% in value of the aggregate of the outstanding shares of all classes or series of our capital stock. See “Description of Our Capital Stock—Restrictions on Ownership and Transfer” beginning on page 174 of this prospectus for a detailed description of the ownership and transfer restrictions applicable to our common stock.
We are an “emerging growth company” as defined under the federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements.
Investing in the common stock involves risks that are described in the “ Risk Factors ” section beginning on page 34 of this prospectus.

 
									
 	  	Per Share	 	    	Total	 	
Public offering price	  	$	 	  	    	$	 	  	
Underwriting discounts and commissions (1)	  	$	 	  	    	$	 	  	
Proceeds, before expenses, to us	  	$	 	  	    	$	 	  	

(1)	Excludes an aggregate structuring fee payable to Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc. and RBC Capital Markets, LLC that is equal to             % of the gross proceeds of this offering. Please see “Underwriting.”	
The underwriters may also exercise their option to purchase up to an additional         shares from us, at the public offering price, less the underwriting discount, for 30 days after the date of this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The shares will be ready for delivery on or about                     , 2015.

 
			
BofA Merrill Lynch	 	Citigroup	

 

RBC Capital Markets	 	Morgan Stanley	

The date of this prospectus is                     , 2015.

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Table of Contents
 TABLE OF CONTENTS

 	  	Page	 	
GLOSSARY OF TERMS	  	 	ii	  	
PROSPECTUS SUMMARY	  	 	1	  	
RISK FACTORS	  	 	34	  	
FORWARD-LOOKING STATEMENTS	  	 	68	  	
USE OF PROCEEDS	  	 	70	  	
DISTRIBUTION POLICY	  	 	72	  	
CAPITALIZATION	  	 	79	  	
DILUTION	  	 	81	  	
SELECTED FINANCIAL INFORMATION	  	 	83	  	
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	  	 	86	  	
INDUSTRY OVERVIEW	  	 	105	  	
REGULATION AND RATES	  	 	106	  	
BUSINESS AND PROPERTIES	  	 	109	  	
FINANCIAL INFORMATION RELATED TO OUR TENANT	  	 	136	  	
MANAGEMENT	  	 	138	  	
OUR MANAGER AND MANAGEMENT AGREEMENT	  	 	150	  	
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	  	 	156	  	
INVESTMENT POLICIES AND POLICIES WITH RESPECT TO CERTAIN ACTIVITIES	  	 	164	  	
PRINCIPAL STOCKHOLDERS	  	 	166	  	
DESCRIPTION OF OUR CAPITAL STOCK	  	 	169	  	
CERTAIN PROVISIONS OF MARYLAND LAW AND OUR CHARTER AND BYLAWS	  	 	178	  	
THE OPERATING PARTNERSHIP AND THE PARTNERSHIP AGREEMENT	  	 	186	  	
SDTS COMPANY AGREEMENT AND DELEGATION AGREEMENT	  	 	194	  	
SHARES ELIGIBLE FOR FUTURE SALE	  	 	197	  	
MATERIAL FEDERAL INCOME TAX CONSEQUENCES	  	 	199	  	
ERISA CONSIDERATIONS	  	 	221	  	
UNDERWRITING	  	 	224	  	
LEGAL MATTERS	  	 	230	  	
EXPERTS	  	 	230	  	
WHERE YOU CAN FIND MORE INFORMATION	  	 	230	  	
INDEX TO FINANCIAL STATEMENTS	  	 	F-1	  	
Through and including                         (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.
You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered to you. We have not, and the underwriters have not, authorized anyone to provide you with different or additional information. If anyone provides you with different, additional or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate as of the date set forth on the cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.
The market data and certain other statistical information used throughout this prospectus are based on independent industry publications, government publications or other published independent sources. Some data is also based on our good faith estimates, which are derived from management’s knowledge of the industry and independent sources.
 
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 GLOSSARY OF TERMS
This glossary highlights some of the industry terms that we use in this prospectus and is not a complete list of all of the defined terms used herein.

Abbreviation	  	Term	
AFUDC	  	allowance for funds used during construction	
		
CREZ	  	competitive renewable energy zones, as defined by a 2005 Texas law establishing the Texas renewable energy program	
		
CWIP	  	construction work in progress	
		
DC Tie	  	high-voltage direct current interconnection necessary to provide for electricity flow between asynchronous electric grids in North America	
		
DCRF filing	  	a distribution cost recovery factor filing with the Public Utility Commission of Texas that a distribution service provider is permitted to make to update its distribution tariffs to reflect recent capital expenditures, among other matters	
		
distribution	  	that portion of a power delivery network consisting of an interconnected group of electric distribution lines, towers, poles, substations, transformers and associated assets over which electric power is distributed from points within the transmission network to end use consumers	
		
DSP	  	a distribution service provider, i.e., a utility operating within the Electric Reliability Council of Texas territory that owns and operates electric distribution facilities, or other participants in the Electric Reliability Council of Texas territory that collect and remit payments on behalf of a distribution service provider	
		
electric utilities	  	DSPs, transmission service providers, transmission and distribution service providers, municipalities, cooperatives and others defined as Electric Utilities by the Public Utility Commission of Texas	
		
ERCOT	  	Electric Reliability Council of Texas	
		
ERCOT 4CP	  	the average of ERCOT coincident peak demand for the months of June, July, August and September, excluding the portion of coincident peak demand attributable to wholesale storage load (during 2013, ERCOT 4CP was approximately 65 gigawatts)	
		
FERC	  	Federal Energy Regulatory Commission	
		
Footprint Projects	  	transmission or distribution projects primarily situated within our distribution service territory, or that physically hang from our existing transmission assets, such as the addition of another circuit to our existing transmission lines, or that are physically located within one of our substations; Footprint Projects do not include the addition of a new substation on our existing transmission lines or generation interconnects to our existing transmission lines, unless the addition or interconnection occurred within our distribution service territory	
		
kV	  	kilovolt	
		
kW	  	kilowatt	
		
kWh	  	kilowatt-hour	
		
MW	  	megawatts	
		
PUCT	  	Public Utility Commission of Texas	
 
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Abbreviation	  	Term	
		
rate base	  	calculated as our gross electric plant in service under generally accepted accounting principles, which is the aggregate amount of our total cash expenditures used to construct such assets plus AFUDC, less accumulated depreciation, and adjusted for accumulated deferred income taxes	
		
REP	  	retail electric provider, which are the companies that sell electricity to Texas customers	
		
revenue requirement	  	a transmission and distribution service provider’s revenue requirement is equal to its targeted total costs, including operating and maintenance costs, return on rate base and taxes	
		
ROFO Projects	  	identified projects that are being developed by Hunt Consolidated, Inc. and its affiliates with respect to which we will have a right of first offer	
		
RTO	  	regional transmission organization	
		
service territory	  	a designated area in which a utility is required or has the right to supply electric service to ultimate customers under a regulated utility structure	
		
SPP	  	Southwest Power Pool	
		
TCOS filing	  	an interim transmission cost of service filing with the PUCT that a transmission service provider is permitted to make up to twice per year to update its transmission cost of service, and therefore its transmission tariff, to reflect recent capital expenditures, among other matters. An interim TCOS filing establishes transmission cost of service until the next rate case or interim TCOS filing	
		
T&D	  	electric transmission and distribution	
		
T&D assets	  	rate-regulated electric transmission and distribution assets such as power lines, substations, transmission towers, distribution poles, transformers and related property and assets	
		
TDSP	  	transmission and distribution service provider, i.e. a utility operating within the ERCOT territory that owns and operates both electric transmission facilities and electric distribution facilities	
		
transmission	  	that portion of a power delivery network consisting of an interconnected group of electric transmission lines, towers, poles, switchyards, substations, transformers, and associated assets over which electric power is transmitted between points of supply or generation and distribution	
		
TSP	  	a transmission service provider, i.e., a utility operating within the ERCOT territory that owns and operates electric transmission facilities	
		
TWh	  	terawatt-hour	
 
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EXPLANATORY NOTE
Our business is currently conducted through InfraREIT, L.L.C. (formerly known as Electric Infrastructure Alliance of America, L.L.C.), a Delaware limited liability company. On the date of, and immediately following, the consummation of this offering, InfraREIT, L.L.C. will be merged with and into InfraREIT, Inc., a Maryland corporation. We refer to this transaction as the “Merger.” As used in this prospectus, unless the context requires otherwise or except as otherwise noted, the words “Company,” “we,” “our” and “us” refer to InfraREIT, L.L.C. or InfraREIT, Inc. after giving effect to the Merger, as the context requires, together with its subsidiaries, including InfraREIT Partners, LP, a Delaware limited partnership, which we refer to as our “Operating Partnership.” “InfraREIT” when used in a historical context refers to InfraREIT, L.L.C. and when used in the present tense or prospectively refers to InfraREIT, Inc. References to our “existing investors” refer to the investors in InfraREIT, L.L.C. and/or our Operating Partnership, as the context requires, prior to the consummation of this offering and the reorganization transactions described under “Prospectus Summary—Our Structure and Reorganization Transactions—Reorganization Transactions” beginning on page 22 of this prospectus, which we refer to as the “Reorganization.” “Hunt” refers to Hunt Consolidated, Inc. and its subsidiaries, including Hunt Utility Services, LLC, which we refer to as “Hunt Manager,” and Hunt Transmission Services, L.L.C., which we refer to as “Hunt Developer.” “Sharyland” or “our tenant” refers to Sharyland Utilities, L.P. When we refer to “Hunt” in the context of our development agreement with Hunt Developer and Sharyland, we are referring to Hunt Developer, Sharyland and to other affiliates of Hunt Consolidated, Inc. We refer in this prospectus to various Hunt entities, including Hunt, Hunt Manager, Hunt Developer and Hunt-InfraREIT, L.L.C., which we refer to as “Hunt-InfraREIT” and which holds Hunt’s equity in our Operating Partnership. Hunt has informed us that it intends to operate each such entity in a manner that respects its separate legal identity.
Unless otherwise indicated or the context requires, all information in this prospectus gives effect to a          for          reverse split of the shares of InfraREIT, L.L.C. and concurrent          for          reverse split of the units representing limited partnership interests in our Operating Partnership, which we will effect immediately prior to the effectiveness of the registration statement to which this prospectus relates. In addition, unless otherwise indicated, the information in this prospectus assumes the underwriters will not exercise their option to purchase up to an additional          shares of our common stock from us. Further, unless otherwise indicated or the context requires, all information in this prospectus relating to the number of shares of our common stock or the number of units in our Operating Partnership, as applicable, to be outstanding after the consummation of this offering gives effect to the Reorganization, including (1) the Merger, (2) the allocation of common units between Hunt-InfraREIT and InfraREIT, as the holders of LTIP units in our Operating Partnership, on the 32nd day following this offering (or, if later, the date on which the closing of the sale of additional shares of our common stock to the underwriters if they exercise their option to purchase additional shares) based on the assumption of an average closing price of our common stock during the 10 consecutive trading days prior to the end of the 30-day period following the completion of this offering equal to $            , which is the midpoint of the range set forth on the cover of this prospectus, and (3) the subsequent cancellation and conversion of our Class A common stock, redeemable Class A common stock and Class C common stock into shares of common stock based on such allocation of common units, as described under “Prospectus Summary—Our Structure and Reorganization Transactions—Reorganization Transactions” beginning on page 22 of this prospectus. Further, unless otherwise indicated or the context requires, the phrase “on a pro forma basis” refers to a basis after giving effect to the Pro Forma Adjustments described in the unaudited pro forma condensed consolidated financial statements for InfraREIT, Inc. included elsewhere in this prospectus.
 
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 PROSPECTUS SUMMARY
This summary highlights certain significant aspects of our business and this offering. This is a summary of information contained elsewhere in this prospectus, is not complete and does not contain all of the information that you should consider before making your investment decision. You should carefully read the entire prospectus, including the information presented under the section entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes thereto appearing elsewhere in this prospectus, before making an investment decision.

Company Overview
We are an externally-managed real estate investment trust (REIT) that owns rate-regulated electric transmission and distribution (T&D) assets, such as power lines, substations, transmission towers, distribution poles, transformers and related property and assets, in Texas. We are focused on paying a consistent and growing cash dividend that is sustainable on a long-term basis. We believe we are well positioned to take advantage of favorable trends in the T&D sector, including the replacement of aging assets and the construction of new assets to address growing energy demand. We believe our attractive REIT structure and focus on Texas and the southwestern United States, where we can leverage a proven track record of identifying, developing, constructing and acquiring critical infrastructure assets, provide us with a significant competitive advantage to execute our growth strategy.
We lease our T&D assets to Sharyland Utilities, L.P. (Sharyland), a Texas-based regulated electric utility, pursuant to leases that require Sharyland to make lease payments to us when our assets are placed in service. To support these lease payments, Sharyland delivers electric service and collects revenues directly from retail electric providers (REPs) and distribution service providers (DSPs), which pay rates approved by the Public Utility Commission of Texas (PUCT). REPs are the companies that sell electricity to Texas customers, and DSPs are primarily utilities operating within the Electric Reliability Council of Texas (ERCOT) territory that own and operate electric distribution facilities. Under the terms of our leases, Sharyland is responsible for the operation of our assets, all property related expenses associated with our assets, construction management and regulatory oversight and compliance related to our assets.
We have grown rapidly over the last several years, with our rate base increasing from approximately $60 million as of December 31, 2009 to approximately $1.1 billion as of September 30, 2014 and a projected $                as of December 31, 2015. Our rate base amount is important because it is the key determinant of rent paid by our tenant to us. Rate base is calculated as our gross electric plant in service under generally accepted accounting principles (GAAP), which is the aggregate amount of our total cash expenditures used to construct our T&D assets plus an allowance for funds used during construction (AFUDC), less accumulated depreciation, and adjusted for accumulated deferred income taxes. Our projected rate base as of December 31, 2015 is based upon our projection for each component of rate base through the remainder of 2015. We expect to grow our rate base in the future through organic growth, as well as through acquisitions of T&D assets from Hunt Consolidated, Inc. (Hunt) and Sharyland, who originated and founded our business, and from third parties.
We intend to distribute substantially all of our cash available for distribution, less prudent reserves, through regular quarterly cash dividends. We expect our initial quarterly dividend rate to be $        per share, or $         per share on an annualized basis. We believe that as we grow our rate base we will also be able to increase our cash available for distribution and, as a result, increase our distribution per share. We intend to target a three year cumulative annual growth rate of our cash available for distribution per share of          to         %. We intend to achieve the lower half of the range based solely on the expansion of T&D assets that are in the geographic footprint of our existing distribution assets or that are added to our existing transmission assets (Footprint Projects), with the ability to achieve the high end of the range coming from Hunt’s obligation under our development agreement to offer us identified T&D projects (ROFO Projects). See “—Agreements with Hunt—

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Development Agreement.” Our ability to grow our rate base, cash available for distribution and distributions per share is subject to a number of factors and other risks described under the caption “Risk Factors.”
Our business originated in the late 1990s when members of the Hunt family founded Sharyland, the first investor-owned utility created in the United States since the 1960s. In 2007, we obtained a private letter ruling from the Internal Revenue Service (IRS) confirming that our T&D assets could constitute real estate assets under applicable REIT rules. In 2008, the PUCT approved a restructuring that allowed us to utilize our REIT structure. In 2010, InfraREIT was formed as a REIT and, as part of that transaction, Hunt contributed assets into InfraREIT and obtained equity commitments from the following large institutional investors, which we refer to as our founding investors: Marubeni Corporation, John Hancock Life Insurance Company (U.S.A.), OpTrust Infrastructure N.A. Inc. and Teachers Insurance and Annuity Association of America.
Our T&D Assets
Our T&D assets are located throughout Texas and consist of over 50,000 electricity delivery points, approximately 620 miles of transmission lines, approximately 10,500 miles of distribution lines, 35 substations and a 300 megawatt (MW) high-voltage direct current interconnection (DC Tie) between Texas and Mexico, which we refer to as the Railroad DC Tie.
The following map shows the location and breakdown of our transmission assets and distribution assets:

 
 
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Our Relationship with Hunt
Ownership
Hunt will own          shares of our common stock and          units in our Operating Partnership (OP Units) following the completion of this offering and the Reorganization, which will be subject to long-term lock-ups with us. This ownership would constitute         % of our outstanding equity if all OP Units were exchanged for shares of our common stock. Hunt has informed us that it intends to continue to hold a substantial portion of its equity in us for the foreseeable future.
Leadership
Hunt Utility Services, LLC, which we refer to as Hunt Manager, serves as our external manager and is a subsidiary of Hunt. Additionally, members of the Hunt family own our tenant, Sharyland, which is controlled by Hunter L. Hunt, who is also a member of our board of directors. W. Kirk Baker, who is Chairman of our board of directors, previously served as president and chief executive officer of Hunt Manager and before that as Senior Vice President and General Counsel of Hunt Consolidated, Inc. Further, Hunt Transmission Services, L.L.C., which we refer to as Hunt Developer, has successfully developed transmission projects that are now in our rate base, and Hunt continues to develop transmission projects that we expect to have the opportunity to acquire in the future.
Hunt’s History of Success
Hunt was founded in 1934 when H.L. Hunt formed Hunt Oil Company and is actively engaged in energy, real estate, investment and ranching businesses in Texas and throughout the world. Mr. Hunt’s son, Ray L. Hunt, has been Hunt’s chairman since the mid-1970s. Hunt has a long history of entrepreneurial activity and a track record in developing and constructing large complex projects. In T&D acquisition and development, this history includes:
 
 	•	 	Hunt and Sharyland commenced development of the Railroad DC Tie in 2003 to link the ERCOT grid with the Mexican national grid operated by the Comisión Federal de Electricidad (CFE). Construction was completed in 2007, and the Railroad DC Tie was placed in service as the first cross-border DC Tie of its kind to support both emergency power and commercial business activities between Texas and Mexico.	
 
 	•	 	Our Panhandle transmission assets were constructed pursuant to the competitive renewable energy zone (CREZ) initiative. Hunt and its affiliates, including Sharyland, were a driving force throughout the development of the CREZ initiative, which was originated at the direction of the Texas Legislature in 2005 and continued with the PUCT designating renewable energy zones and awarding rights to build transmission lines. In a manner representative of Hunt’s general approach, Sharyland has worked with elected officials, utility regulators, community leaders, landowners and various other stakeholders throughout the development and construction of our approximately 300 miles of transmission lines and four substations, and Sharyland continues to interact with these stakeholders as ongoing partners in the operation and expansion of these assets.	
 
 	•	 	In July 2010, Hunt and Sharyland acquired and integrated the T&D assets of Cap Rock Energy Corporation (Cap Rock) into our REIT structure. In connection with that acquisition, our subsidiary, Sharyland Distribution and Transmission Services, L.L.C. (SDTS), which at that time was a wholly-owned subsidiary of Hunt, acquired the T&D assets that qualify as real estate assets under our private letter ruling. Sharyland acquired all of the other assets and all Cap Rock employees became employees of Sharyland. Both the PUCT and the Federal Energy Regulatory Commission (FERC) approved the acquisition and integration into our REIT structure.	

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Development Pipeline
Our development agreement with Hunt Developer and Sharyland provides us with a right of first offer to acquire the ROFO Projects described below, which consist solely of T&D projects that Hunt is developing or constructing. Although Hunt may develop other T&D projects that do not currently constitute ROFO Projects under the development agreement, Hunt has informed us that it intends for us to be the primary owner of all of Hunt’s T&D development projects as those projects are completed and placed in service. Under the terms of the development agreement, Hunt has the obligation to offer the ROFO Projects to us at least 90 days prior to the date on which such assets are expected to be placed in service. We expect the purchase price for the ROFO Projects or any other T&D projects Hunt develops will be negotiated by our Conflicts Committee and Hunt and will be based on a number of factors, such as the cash flow and rate base for the assets, market conditions, potential for incremental Footprint Projects, whether the assets are subject to a lease with Sharyland or another tenant, the terms of any such lease and the regulatory return we expect the assets will earn. Sharyland and Hunt Developer are each parties to our development agreement. However, the agreement, by its terms, applies to activities by all Hunt affiliates. As such, when discussing the development agreement, we use the term “Hunt” to refer to Hunt Developer, Sharyland and other affiliates of Hunt Consolidated, Inc.
Development Team
Our development agreement with Hunt Developer provides us with continued access to the Hunt Developer and Sharyland development teams and the development projects they source. Hunt Developer’s active and experienced T&D project development team includes Hunter Hunt and Pat Wood, a former FERC and PUCT chairman, and the eleven members of its team have 15 years of experience, on average. The Hunt Developer team has experience with ERCOT, the Southwest Power Pool (SPP), the California ISO (Cal-ISO) and CFE, which enables it to identify and pursue T&D opportunities across the southwestern United States. This team has an extensive track record of successfully pursuing a variety of projects, including greenfield development (Sharyland and CREZ transmission), acquisitions (Cap Rock and transmission assets from Southwest Public Service Company), partnering with municipalities (Cross Valley transmission line) and cross border activity (transmission interconnection between ERCOT and CFE and a power marketing entity to facilitate commercial transactions with Mexico). Our access to the Hunt Developer and Sharyland development pipelines position us to capitalize on growth opportunities beyond our existing footprint and to potentially add to our current list of ROFO Projects offered by Hunt.

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ROFO Projects
Our development agreement with Hunt Developer and Sharyland provides us with a right of first offer to acquire ROFO Projects that Hunt is currently developing or constructing, including the following:

ROFO Project	  	Description	  	Status	
Cross Valley transmission line	  	Approximately 50 mile transmission line in South Texas near the Mexican border. Total estimated construction cost (including financing costs) of $160 million to $185 million, of which $28.3 million has been spent though September 30, 2014.	  	Under construction; expected completion in 2016	
			
Golden Spread Electric Coop (GSEC) interconnection	  	Approximately 55 mile transmission line connecting one of GSEC’s gas-fired generation facilities to our Panhandle transmission line. Total estimated construction cost (including financing costs) of $100 million to $120 million, of which $2 million has been spent through September 30, 2014.	  	Certificate of Convenience and Necessity (CCN)
received in August 2014; expected completion in 2016	
			
Southline Transmission Project	  	Approximately 240 miles of new transmission line and upgrades of approximately 120 miles of existing transmission lines in southern New Mexico and southern Arizona. Initially estimated construction cost (excluding financing costs) of $700 million to $800 million.	  	In active development; draft environmental impact statement published	
			
Verde Transmission Project	  	Approximately 30 mile transmission line in northern New Mexico. Initially estimated construction cost (excluding financing costs) of $60 million to $80 million.	  	In development	
We have provided information about the Cross Valley and GSEC interconnection projects because of their size, their prominence in our core Texas markets and our belief that these ROFO Projects are the most likely ROFO Projects to be completed and offered to us. Although they are in the early stages of development and budgets for such projects, as well as potential arrangements that might result in developing the projects with partners, have not been finalized, we have also provided information about the Southline Transmission Project and Verde Transmission Project because they are the most prominent and advanced of Hunt’s non-Texas ROFO Projects. However, there can be no assurances that any of the ROFO Projects will be completed and offered to us or, if completed and offered to us, that the price and other terms of the acquisition of such projects can be negotiated on terms acceptable to us.
Other ROFO and Development Projects
In addition to the construction and development activity related to the projects above, Hunt and Sharyland are also evaluating and developing various projects in ERCOT and other regions of the United States. Such ROFO Projects include proposals to (i) reinforce the existing transmission grid in the Panhandle and South Plains region as

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new wind generators connect to the transmission grid, (ii) develop additional high-voltage DC ties along the Texas and desert Southwest border with Mexico, (iii) increase electric transmission between the PJM and MISO grids through projects in the Midwest and (iv) provide import capacity from New Mexico and Arizona into California.
Hunt and Sharyland are also developing a number of projects that are not included in the ROFO list. A typical example involves initiatives in South Texas to develop new transmission lines to enhance grid reliability and enable generation interconnections. Another example of Hunt’s innovative approach is Sharyland’s response to Lubbock Power & Light’s (LP&L) Request for Proposal (RFP) for generation services. In response to the RFP, Sharyland submitted a proposal to integrate LP&L’s system into ERCOT through multi-line alternatives ranging from approximately 67 to 92 miles, with an associated cost estimated to range from $166 million to $237 million. It is unknown at this time whether Sharyland will be successful in the RFP process. For any non-ROFO projects, Hunt has informed us that it intends for us to be the primary owner of Hunt’s T&D development projects as those projects are completed and placed in service. However, there can be no assurances that any of the non-ROFO Projects will be completed and offered to us or, if completed and offered to us, that the price and other terms of the acquisition of such projects can be negotiated on terms acceptable to us.
Transfer of ROFO Project Assets
Effective January     , 2015, we transferred the assets related to the Cross Valley transmission line and GSEC interconnection projects, which are designated as ROFO Projects under our development agreement, to Hunt or one of its affiliates. Hunt Developer will continue to construct these projects and will offer such projects to us prior to completion pursuant to the terms of the development agreement. In exchange for these assets, we received $            , which equaled the rate base of the transferred assets, plus reimbursement of out of pocket expenses associated with the formation of related special purpose entities and the Cross Valley project financing. The effect of this transfer is reflected in our unaudited pro forma condensed consolidated financial statements included elsewhere in this prospectus.
The Opportunity
The infrastructure necessary to transport and deliver electricity is vital to the continued economic advancement of the United States. At the national level, demand for T&D infrastructure is driven by several factors, including population growth, changes to a more environmentally-friendly generation mix and demand for a smarter grid. The Edison Electric Institute (EEI) estimates that its investor-owned utility members invested approximately $17.5 billion in the nation’s transmission grid in 2013, after investing $14.8 billion in 2012. This transmission investment cycle is expected to remain robust, with EEI estimating that over the next 10 years its members plan to invest over $60 billion, an approximate 18% increase from the prior year’s 10-year forecast. We believe we are well-positioned to capitalize on the opportunity created by the need for electric infrastructure spending in the United States and to execute our strategy.
T&D Infrastructure in the State of Texas
Texas, as one of the fastest-growing states, is expected to require significant T&D investments. Electricity demand has been increasing due to above-average economic growth, particularly as a result of oil and gas development and population growth. These two demand-side factors, as well as aging generation infrastructure, low natural gas prices and policy objectives to take advantage of the State’s attractive wind corridors, are driving significant T&D investments and support the $3.7 billion in transmission investment that ERCOT identifies in its five-year plan as of November 2014. Based on the location of our T&D assets and our service territory, we believe the opportunity to make investments in T&D assets that increase our rate base will be driven largely by extensive oil and gas production in West Texas, interconnections with renewable generation, particularly wind, in the Texas Panhandle and population growth in South Texas.

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The Permian Basin, where our Stanton service territory is located, covers an area 250 miles wide and 300 miles long and is one of America’s most prolific hydrocarbons fields, having produced more than 29 billion barrels of oil and 75 trillion cubic feet of natural gas since 1921. It also remains highly productive, with annual production in excess of 280 million barrels a year. According to the Texas Railroad Commission, which regulates oil and gas production in the State, issued drilling permits in the Permian Basin increased over 32% in five years, from 6,711 in 2008 to 8,872 in 2013 as new technologies in exploration have expanded recoverable resources. The U.S. Energy Information Administration expects this strong growth to continue, predicting that the region will see an increase in production from 1.3 million barrels per day in 2013 to 1.8 million barrels per day in 2015.
Power generation growth in Texas, particularly wind generation in which Texas leads the nation in operating MW, is a second driving factor for transmission infrastructure need. ERCOT expects total installed wind capacity to grow from 11,065 MW by the end of 2013 to 21,557 MW in 2017, an increase of approximately 95% based on signed interconnection agreements. The PUCT expects the completed CREZ system will ultimately transmit 18,500 MW of wind power from West Texas and the Panhandle to highly populated metropolitan areas of the State. In addition, ERCOT’s 2012 System Assessment forecasted that 16,500 MW of non-wind generation would be coming online in the next decade to help offset retiring coal units and other old assets. This demand from wind and other generators to connect to our Panhandle transmission facilities and other transmission systems should provide us with opportunities to construct or acquire interconnecting transmission lines, new substations and additional equipment and lines to support the increased electricity supply these developments will bring.
Finally, above-average population growth is driving electricity demand in the State and our service territories. The Texas State Data Center estimates that the population of the Lower Rio Grande Valley (LRGV), which includes the service area near McAllen as well as other border cities such as Edinburg, Harlingen and Brownsville, will grow more than 50% in the next 20 years from approximately 1.3 million in 2013 to nearly 2.0 million in 2033. We believe that substantial infrastructure investments will be required to ensure system reliability and serve growing demand in the LRGV.
T&D Infrastructure in the Southwestern United States
The southwestern United States, considered to be Arizona and New Mexico in addition to Texas, has seen significant investment in its electricity grid in response to new generation investment, particularly renewable generation, and a growing population.
Regional renewable energy generation is expected to double in the next ten years in Arizona and New Mexico to meet renewable portfolio standards (RPS), which we believe will provide transmission investment opportunities to connect new generation sources to local utility grids. Arizona’s renewable energy standard (RES) requires investor-owned utilities (IOUs) and cooperatives that have the majority of their customers in Arizona to meet 15% of their retail electric sales through eligible renewable technologies by 2025. According to the National Renewable Energy Laboratory (NREL), by 2025 this will require Arizona to purchase between 7.9 and 8.5 terawatt-hours (TWh) of renewable energy annually, compared to 3.2 TWh of annual production from existing or under-development assets as of 2012. This suggests that Arizona will need an additional 4.7 TWh to 5.3 TWh of annual renewable energy production by 2025, an approximate 150% increase. In New Mexico, the State’s RPS requires the IOUs to have 20% of annual sales from renewable energy by 2020. NREL suggests that the resulting demand for renewable energy related to the RES will be between 3.0 and 4.0 TWh in 2025, while the State’s existing facilities provide 2.0 TWh annually. This suggests an additional 1.0 to 2.0 TWh per year will be needed by 2025, a 50% to 100% increase.
Growing populations in the southwest are also expected to drive investment opportunities. According to the Arizona Department of Administration, the population of Arizona is expected to increase by approximately

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25% between 2013 and 2025, increasing from 6.6 million to 8.2 million individuals, while the New Mexico Bureau of Business and Economic Research expects the population of New Mexico to increase by approximately 20% by 2025, increasing from 2.1 million to 2.5 million individuals. The population increase of approximately 2 million in those states is expected to be concentrated in the cities of Phoenix, Tucson and Albuquerque and is expected to require additional grid transmission capability from the region’s generation sites.
Business Strategy
Focus on T&D assets. We intend to focus on owning T&D assets with long lives, low operating risks and stable cash flows consistent with the characteristics of our current portfolio. We believe that by focusing on this asset class and leveraging our industry knowledge we will maximize our strategic opportunities and overall financial performance.
Pursue sustainable dividend per share growth. We believe our platform will enable us to grow our rate base and, as a result, increase the amount of distributions we make to our stockholders. To achieve this growth, we will pursue the following:
 
 	•	 	Grow Rate Base by Investing in Footprint Projects. We expect to make significant capital expenditures in Footprint Projects, driven primarily by oil and gas activities in our Stanton territory in the Permian Basin and interconnections to our Panhandle transmission assets. Based on current estimates, we expect our aggregate capital expenditures for Footprint Projects from 2015 to 2017 to be between $760 million and $790 million.	
 
 	•	 	Acquire ROFO Projects and other T&D projects from Hunt. Hunt Developer has agreed to offer ROFO Projects to us prior to their completion. We are not obligated to purchase, and Hunt is not obligated to sell, these projects if we do not agree upon the price and other terms of the purchase. See “—Agreements with Hunt—Development Agreement.” Hunt has informed us that it intends for us to be the primary owner of Hunt’s T&D development projects as those projects are completed and placed in service.	
 
 	•	 	Acquire other T&D assets from third parties. We intend to leverage relationships that we, Sharyland and Hunt maintain in the energy industry to source acquisition opportunities. We have a track record of acquiring T&D assets from third parties as a result of relationships maintained by Hunt and Sharyland’s business development teams. We believe that our structure, which relies on an ongoing relationship with operating lessees, combined with Sharyland’s operating track record and Hunt’s reputation as an innovative and credible developer of energy assets, will competitively position us to acquire other T&D assets.	
Focus on Texas and southwestern United States initially. We are primarily focused on two main markets, Texas and the southwestern United States, where we believe the electric transmission sector will continue to grow significantly. This also allows us to leverage our existing relationships and a proven track record of identifying, developing, constructing and acquiring critical infrastructure assets. Substantially all of the ROFO Projects are located in Texas or the southwestern United States. Over time, we may expand our focus to other jurisdictions with favorable regulatory and growth characteristics.
Maintain a strong financial profile. We intend to maintain a balanced capital structure that enables us to increase our dividend over time and serve the long-term interests of our stockholders. Our financing policies will seek an optimal capital structure through various capital formation alternatives to minimize interest rate and refinancing risks and position us to pay stable and growing long-term dividends and maximize value.

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Competitive Strengths
Our assets generate stable cash flows. We generate revenue by leasing T&D assets to Sharyland. Sharyland’s lease payments to us are largely comprised of fixed base rent, with the remaining lease payments to us derived from a percentage of Sharyland’s gross revenue in excess of a specified threshold. Sharyland receives revenues from DSPs and REPs, which pay Sharyland PUCT-approved rates. The PUCT-approved rates are designed to allow the applicable utility to recover costs associated with maintaining and operating the assets and earn a return on invested capital. Through our leases, which include mechanisms for rent increases as we grow our rate base, we expect to benefit from the stability of Sharyland’s rate-regulated revenue stream. See “Business and Properties—Our Tenant — Our Leases.”
Our T&D assets are located in high-growth areas. Our Stanton territory assets serve a region atop the Permian Basin, which has experienced a rapid expansion in oil and gas investment. Our transmission assets in the Texas Panhandle are located in one of the most attractive wind corridors in the world and, we believe, will benefit from expanding wind power generation investment. Our McAllen territory is located in one of the most rapidly-growing population areas of the State and benefits from its border with Mexico, where we recently expanded power interconnection facilities through a long-standing relationship with CFE.
The ability to update transmission rates through interim TCOS filings, combined with Sharyland’s current distribution customer and load growth, reduces the necessity of filing frequent rate cases. The majority of Sharyland’s expected 2015-2017 capital expenditures are for transmission assets. Like other utilities in Texas, Sharyland is able to minimize regulatory lag through interim transmission cost of service (TCOS) filings. See “—Our Revenue Model—Regulatory Recovery.” With respect to capital expenditures for distribution assets, Sharyland’s revenues, and its lease payments to us, will grow as capital expenditures are made to support new customers and/or existing customers increase their electricity usage. We believe this growth will enable us to invest in our Footprint Projects and receive increased lease payments from Sharyland, without the need for Sharyland to frequently file rate cases to request increases in rates to cover such costs.
We benefit from our strong ties to and our alignment with Hunt. Hunt, and members of the Hunt family, own and control Hunt Manager, Sharyland and Hunt Developer. Hunt will own          shares of our common stock and          OP Units following this offering and the Reorganization, which will be subject to long-term lock-ups with us. See “Certain Relationships and Related Transactions—Arrangements with Hunt—Lock-Up Agreement.” This ownership would constitute         % of our outstanding equity if all OP Units were exchanged for shares of our common stock. In addition, the incentive payment under our management agreement with Hunt Manager is linked to our financial performance, requiring payment only if our quarterly distributions exceed $        per share.
Sharyland has a proven development, construction and operating history and a strong reputation in Texas. Since Sharyland began operations in 1999, it has successfully developed, constructed and operated several T&D projects, including the CREZ project and the Railroad DC Tie, and successfully integrated and improved the operations of Cap Rock following our acquisition of it in 2010. Sharyland completed the CREZ project in November 2013, within the original timeframe outlined by the PUCT and under budget. Sharyland’s expertise and reputation helps Sharyland maintain positive customer and regulatory relationships, which we believe increases our ability to generate the returns we expect on our T&D assets.
We have rights to Hunt’s T&D pipeline. Our development agreement with Hunt Developer requires Hunt to offer all ROFO Projects to us prior to their completion. Hunt and Sharyland are responsible for Sharyland’s growth from a start-up operation to a utility that operates approximately $1.1 billion in rate base as of September 30, 2014.

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Hunt originated, and Hunt Manager and Hunt have expertise in applying, the REIT structure to regulated T&D assets. In 2005, Hunt and Sharyland employees, led by our Chairman, W. Kirk Baker, initiated the process of owning regulated T&D assets through a REIT structure. Over the last nine years, Hunt and Sharyland gained significant experience applying the REIT structure to a high-growth, regulated T&D business. Furthermore, in 2010, Hunt and Sharyland successfully acquired and integrated the Cap Rock T&D assets and operation directly into our REIT structure. Hunt’s team also successfully sourced, structured and negotiated on our behalf debt and equity financing arrangements to fund our organic growth, construction projects and the Cap Rock acquisition. We believe Hunt’s and Hunt Manager’s knowledge and experience gives us a competitive advantage in analyzing the complexities associated with our expected rate base growth, executing on development and acquisition opportunities within a REIT structure, obtaining regulatory approvals and structuring lease agreements with tenants.
Our REIT structure and balance sheet provide us with long-term cash distribution advantages. We believe our REIT structure positions us well to make enhanced cash distributions to our stockholders over the long term as compared with utilities and power oriented yield vehicles. Additionally, on a pro forma basis, we expect to be able to fund estimated capital expenditures from Footprint Projects through the end of 2017 without raising proceeds from additional equity offerings. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for a description of our liquidity and target credit metrics.
Our Revenue Model
We lease our T&D assets to our tenant, Sharyland, which makes lease payments to us consisting of fixed base rent and percentage rent. To support its lease payments to us, Sharyland delivers electric service and collects revenues directly from DSPs and REPs, which pay PUCT-approved rates. Under the terms of our leases, Sharyland is responsible for the operation of our assets, payment of all property related expenses associated with our assets, including repairs, maintenance, insurance and taxes (other than income taxes) and construction of Footprint Projects. As our rate base increases through Footprint Projects, ROFO Projects or other acquisitions, we generally expect our lease revenue to increase.

Regulatory Recovery
General rate making
In Texas, an electric utility’s T&D rates are determined pursuant to rate case proceedings, which occur periodically, and are adjudicated by the PUCT to ensure that rates remain just and reasonable. Rates are determined after considering the utility’s annual operating cost of rendering service, adjusted for known and measurable changes, in addition to a reasonable return on invested capital. Sharyland makes all regulatory filings with the PUCT regarding our T&D assets. Per the terms of the leases, we have the right to request that Sharyland file a rate case proceeding.

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Updating Rates
Sharyland’s rates may be updated through three different mechanisms:
 
 	•	 	A general rate case . A rate case is usually initiated by the utility or the PUCT, on its own motion or on complaint by an affected stakeholder. In general, a rate case is initiated when one party believes the amount of capital invested or the cost of service (operating or cost of capital) has changed significantly enough to warrant a review by the PUCT. In Texas, once a rate case is filed, it is generally concluded within one year.	
 
 	•	 	TCOS filing . For transmission assets, Sharyland is permitted to update its transmission tariff up to two times per year, outside of a general rate case, for certain changes such as additional capital expenditures, through interim TCOS filings. If there are no material deficiencies in the TCOS filing, or objections from intervenors, Sharyland’s transmission rates generally will be updated within 60 days of the TCOS filing.	
 
 	•	 	DCRF filing . For distribution assets, Sharyland is permitted to update its distribution tariff once a year, outside of a general rate case, for changes in the amount of invested capital for distribution and certain associated costs. Sharyland historically has not used distribution cost recovery factor (DCRF) filings to update its distribution tariffs.	
Sharyland’s 2014 Rate Case
In January 2014, the PUCT approved a rate case filed by Sharyland applicable to all of our T&D assets other than our distribution assets in McAllen, Texas, providing for a capital structure consisting of 55% debt and 45% equity, a return on equity of 9.70% and a return on invested capital of 8.06% in calculating rates. The new rates became effective May 1, 2014. We expect Sharyland’s next rate case to be filed during the first half of 2016. For more information on how rates are determined, see “Regulation and Rates—Regulation of T&D Utilities.”
Rent Revenue
Rental Rates
All of our current revenue is comprised of rental payments from Sharyland under leases that were negotiated at various times between 2010 and 2014. Historically, we and Sharyland have negotiated rent payments intended to provide us with approximately 97% of the projected regulated return on rate base investment attributable to our assets that we and Sharyland would receive if we were a fully-integrated utility. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Expected To Affect Our Operating Results and Financial Condition—Regulatory Recovery” and “Business and Properties—Our Tenant—Sharyland’s Regulatory Proceedings.” We and Sharyland have negotiated these rental rates based on the premise that we, as the owner of regulated T&D assets, should receive most of the regulated return on our invested capital, while leaving Sharyland with a portion of the return that gives it the opportunity to operate prudently and remain financially stable. Our leases require us to continue to negotiate rent payments in the future in a manner similar to this historical negotiation.
Sharyland makes lease payments to us that consist of fixed base rent and percentage rent (based on an agreed-to percentage of Sharyland’s gross revenues, as defined in our leases, in excess of a specified threshold). Because our existing rate base will decrease over time as our T&D assets are depreciated, revenue under our leases will decrease over time unless we add to our existing rate base by making additional capital expenditures to offset

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the decreases in the rent resulting from depreciation. The weighted average annual depreciation rate of our assets as of September 30, 2014 was 2.67%. We negotiated our current leases to provide for fixed base rent to comprise approximately 80-90% of the total expected rent (with the exception of the lease related to our Stanton transmission loop assets, which does not provide for percentage rent).
Lease Renewals
We expect to renew our leases with Sharyland prior to expiration. Our leases provide that we and Sharyland negotiate lease terms based on our historical negotiations and the return that utilities in the State of Texas are allowed to earn at the time of the negotiation. We generally expect that renewal terms will be at least five years. If either we or Sharyland do not wish to renew a lease, or we cannot agree to new lease terms, we expect that our rent negotiations with a new third-party tenant would be based on the rate base of the assets subject to the expired lease and the rate of return expected at the time a new lease is negotiated, among other factors. Our Stanton/Brady/Celeste lease, which relates to less than 25% of our existing assets, expires on December 31, 2015, and leases relating to our remaining assets expire at various times between December 31, 2019 and December 31, 2022. See “Business and Properties—Our Leases.”
Lease Supplements
Our leases provide that as the completion of Footprint Projects increases our rate base, we and Sharyland will negotiate lease supplements so that Sharyland makes additional rent payments to us on this incremental rate base. Various factors could cause Sharyland’s expected lease payments on incremental rate base to be different than its lease payments to us on our existing rate base. For instance, if a rate case was finalized since the last lease or lease supplement, the new lease supplement would use regulatory assumptions from the most recent rate case. Also, our leases provide that either party can negotiate for economics that differ from our existing leases based on appropriate factors that our leases do not specifically list. However, the negotiation of lease supplements relates only to the revenue we expect to be generated from the incremental rate base subject to the negotiation, and in no circumstance will the negotiation change the rent payments negotiated with respect to prior leases and lease supplements.
Rate Base Growth
We will add to our rate base through capital expenditures for Footprint Projects, acquisitions of ROFO Projects or acquisitions of other T&D assets from Hunt or third parties.
For Footprint Projects, we generally fund all of the capital expenditures during the development or construction phase of a project, and these expenditures increase our rate base when they are placed in service. In advance of the time assets are placed in service, we will work with Sharyland to negotiate a supplement to our leases. Sharyland also may make a regulatory filing to update its rates to reflect the additional rate base.
When we acquire ROFO Projects or other T&D assets from Hunt, we would expect to assume any lease that is already negotiated with Sharyland or another tenant with respect to those T&D assets, and we will work with Sharyland or another tenant to update existing rates, as appropriate, for the addition to our rate base.
Prior to closing an acquisition from a third party, we will work with Sharyland, or another tenant, to pursue the addition of new leases and updating of existing rates, as appropriate, for the addition to our rate base.

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Described below are the key steps by which placing new assets into service increases our rate base and/or our expected lease payments, although the order and timing of each step will vary by asset:

Agreements with Hunt
We have various agreements with Hunt, Hunt Developer, Hunt Manager and Sharyland. The following chart illustrates our relationships and alignment with each of these entities following the consummation of this offering.

Management Agreement
We and Hunt Manager have entered into a management agreement pursuant to which Hunt Manager will manage our day-to-day business, subject to oversight from our board of directors.

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Compensation
The following table summarizes the fees and expense reimbursements that we will pay to Hunt Manager pursuant to the management agreement:

Compensation	  	Description	
Base Fee	  	We will pay an annual base fee, or management fee, of $10 million through April 1, 2015. Effective as of April 1, 2015, the annual base fee will be adjusted to 1.50% of our total equity (including non-controlling interest) as of December 31, 2014, on a pro forma basis assuming this offering and the Reorganization transactions were completed on December 31, 2014. Assuming we issue          shares of our common stock in this offering at an initial public offering price of $         per share, which is the midpoint of the range set forth on the cover of this prospectus, we estimate that the annual base fee will increase to approximately $         for the period from April 1, 2015 through March 31, 2016. The base fee for each twelve month period beginning on each April 1 thereafter will equal 1.50% of our total equity as reflected on our consolidated balance sheet (including non-controlling interest) as of December 31 of the previous year. See “Capitalization” and our unaudited pro forma condensed consolidated balance sheet and related notes included elsewhere in this prospectus for information regarding the amount of our total equity as of September 30, 2014 after giving effect to this offering and the Reorganization transactions. The base fee will be subject to a $30 million cap, unless a greater amount is approved by a majority of our independent directors (or a committee comprised solely of independent directors).	
		
Incentive Payment	  	We will pay Hunt Manager an incentive payment, payable quarterly, equal to 20% of quarterly per OP Unit distributions (inclusive of the incentive payment) in excess of the Threshold Distribution Amount (as defined below); provided, however, that any distributions in excess of our cash available for distribution (as defined in the management agreement as an amount equal to (A) net income before noncontrolling interest, plus (B) depreciation, plus (C) amortization of deferred financing costs, if any, minus (D) AFUDC equity, minus (E) capital expenditures to maintain net assets (which equals depreciation expense), subject to adjustments to eliminate the impact of certain other non-cash items) will not be considered distributions for purposes of calculating the incentive fee. See “Our Manager and Management Agreement—Management Agreement—Management Fees” for the complete definition of cash available for distribution. Pursuant to the management agreement, the Threshold Distribution Amount will equal $         per OP Unit, which is 120% of our initial projected annualized per OP Unit distribution for the year ending December 31, 2015, divided by four. See “Distribution Policy—Estimated Cash Available for the Twelve Months Ending December 31, 2015.”	

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Compensation	  	Description	
		
Reimbursement of Expenses	  	We will reimburse Hunt Manager for all third-party expenses incurred on our behalf or otherwise in connection with the operation of our business, other than: compensation expenses related to Hunt Manager’s personnel (including our officers), occupancy costs incurred by Hunt Manager related to its place of business, time or project-based billing for work done by Hunt affiliates, travel and expenses for Hunt Manager’s employees and fees or costs associated with professional service organizations, publications, periodicals, professional development or related matters for Hunt Manager employees, all of which will be the exclusive responsibility of Hunt Manager.	
		
Termination Fee	  	If we exercise our right not to renew the management agreement at the end of the then-current term, we will be required to pay Hunt Manager a termination fee, in cash or equity, at our election, in an amount equal to three times the most recent annualized base management fee and incentive payment amount. If we elect to pay the termination fee in equity, the fee will be paid in OP Units, which will be issued five days after the effective date of termination, with the number of OP Units based on the volume weighted average price of our common stock during the 10 trading day period that precedes such effective date of termination.	
Term
The term of the management agreement will expire December 31, 2019, except that it will automatically renew for successive five-year terms unless a majority of our independent directors decides to terminate the agreement. If our independent directors decide to terminate the agreement, we must give Hunt Manager notice of the termination at least one year in advance of the scheduled termination date and pay Hunt Manager the termination fee described above. We will also have the right to terminate the management agreement at any time for cause (as defined in the management agreement), and Hunt Manager may terminate the agreement at any time upon 365 days’ prior notice to us, provided that Hunt Manager may not terminate the agreement effective before December 31, 2019. In these circumstances, the termination fee would not be owed to Hunt Manager.
See “Our Manager and Management Agreement” for more information about the management agreement.
Structuring Fee Agreement
We have entered into a structuring fee agreement with Hunt-InfraREIT pursuant to which we have agreed to issue                  shares of common stock to Hunt-InfraREIT as a one-time reorganization advisory fee immediately prior to the effectiveness of the registration statement to which this prospectus relates in consideration for Hunt’s restructuring assistance in connection with the Reorganization and this offering.
Development Agreement
We have entered into a development agreement with Hunt Developer and Sharyland. Pursuant to the development agreement and our leases, we have the exclusive right to continue to fund the development and construction of Footprint Projects. Hunt will have the right to fund the development and construction of all ROFO Projects.
Hunt intends to fund the development and construction of the ROFO Projects through new development companies in which certain of our founding investors will have the opportunity to invest capital. We have a right of first offer with respect to these projects requiring Hunt to offer ROFO Projects to us at least 90 days prior to

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the date on which such assets are expected to be placed in service. Hunt’s offer will include price, form of consideration and other material terms of the proposed transaction, and delivery of the offer will commence a 75-day negotiation period. Following this period, if we are unable to reach an agreement on the terms of such purchase with Hunt and the investors in the project, they may, during the following 18 months, transfer the ROFO Project to a third party, but only on terms and conditions generally no more favorable to such third party than those offered by Hunt to us. Our governance policy will require that any acquisition of a ROFO Project by us be approved by our Conflicts Committee, which will be comprised solely of independent directors. Our Conflicts Committee will evaluate whether to seek to negotiate the acquisition of the ROFO Project based on whether it believes that the acquisition will be in our best interests taking into account the offered price and its analysis of the fair market value of the project. We expect the purchase price for any ROFO Projects will be negotiated by our Conflicts Committee and Hunt and will be based on a number of factors, such as the cash flow and rate base for the assets, market conditions, potential for incremental Footprint Projects, whether the assets are subject to a lease with Sharyland or another tenant, the terms of any such lease and the regulatory return we expect the assets will earn.
Hunt has informed us that the entities that hold certain of the ROFO Projects, including the Cross Valley transmission line project, will be owned by Hunt and certain of our founding investors. In all circumstances, an acquisition of a ROFO Project will require the approval of our Conflicts Committee following negotiations between that committee and Hunt. Hunt has informed us that it will have the unilateral authority to negotiate on behalf of these investors with our Conflicts Committee, and to negotiate and agree upon the terms of the sale of the ROFO Projects to us, as long as the consideration payable would result in the investors receiving at least 1.5 times the amount of equity capital they invested. We generally expect this threshold to translate into a purchase price equal to at least approximately 1.25 times the rate base for such assets, though the actual ratio will depend on the financing structure used on each development project. If the price does not meet this threshold, the sale of the ROFO Project will require the approval of Hunt and at least two of our founding investors in such project. In all circumstances, the acquisition of a ROFO Project from Hunt and these investors will require the approval of our Conflicts Committee. Although Hunt is required to offer all ROFO Projects prior to completion, there can be no assurances that the price and other terms of the acquisition of ROFO Projects can be negotiated on terms acceptable to us. The development agreement is coterminous with the management agreement, and our rights under the development agreement will expire effective upon the termination of the management agreement. See “Certain Relationships and Related Party Transactions—Development Agreement.”
Lock-up Agreements
Hunt has agreed with the underwriters of this offering to a one-year lock-up that applies to all of its equity in us and our Operating Partnership. In addition, we have entered into a lock-up agreement with Hunt, pursuant to which Hunt has agreed with us that it will not transfer or sell 80% of its equity in us and our Operating Partnership that it will hold after the consummation of this offering and the Reorganization until the three-year anniversary of this offering. After the three-year anniversary, this lock-up will continue to apply to 50% of such equity through the five-year anniversary of this offering. Each of these lock-up agreements is subject to exceptions permitting Hunt to transfer equity to affiliates, employees and service providers, except that Hunt cannot transfer a number of shares of common stock or OP Units that exceeds 20% of the aggregate number of shares of our common stock and OP Units it will hold following the Reorganization transactions described under “—Our Structure and Reorganization Transactions—Reorganization Transactions.” Furthermore, in some circumstances, the transferee must assume the applicable lock-up restrictions. Hunt’s lock-up agreement with us will terminate upon the termination or non-renewal of the management agreement and development agreement. See “Certain Relationships and Related Party Transactions—Lock-up Agreement.” Hunt has informed us that it currently intends to hold a substantial portion of its equity in us for the foreseeable future.

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Conflicts of Interest
We are and intend to be party to several agreements and transactions in which Hunt, one or more of our major stockholders, members of our board of directors or our officers may have interests that differ from our stockholders, including the following:
 
 	•	 	Each of our officers, including David Campbell, our President and Chief Executive Officer, is an employee of Hunt Manager. Hunt will control the compensation of our officers and the employees of Hunt Manager and has granted and in the future may grant compensation or awards that are based upon the performance of Hunt Manager, Hunt Developer, Sharyland or Hunt generally and from the profits that Hunt may generate from the sale of ROFO Projects to us. As a result, Mr. Campbell, as well as the other employees of Hunt Manager, may consider the interests of Hunt Manager, Hunt Developer, Sharyland and Hunt generally in any negotiation between us and one of those entities and may benefit from the consideration we pay Hunt Manager under the management agreement, from any economic benefit that Hunt or Sharyland receives from the sale of ROFO Projects to us pursuant to the development agreement and from the performance of Sharyland.	
 
 	•	 	W. Kirk Baker, who is the Chairman of our board of directors, was the President and Chief Executive Officer of Hunt Manager until August of 2014, was a senior officer in the Hunt Consolidated, Inc. organization until July of 2012, and received compensation and other benefits from Hunt and its affiliates during these time periods. Hunt and Mr. Baker have informed us that Mr. Baker continues to receive, and may in the future after completion of this offering continue to receive, various perquisites and incentive compensation from Hunt, including incentive compensation based on profits that Hunt may generate from the sale of ROFO Projects to us and payments that we make to Hunt Manager. Mr. Baker currently is Managing Director of Captra Capital, an investment firm in which Mr. Baker and Hunt are currently the primary investors, and Hunt has funded and may continue to fund the operating overhead of Captra Capital’s manager, Captra Holdings, an entity that currently provides compensation and other benefits to Mr. Baker. As a result, Mr. Baker may consider the interests of Hunt Manager, Hunt Developer, Sharyland and Hunt generally in any negotiation between us and one of those entities and may benefit from the consideration we pay Hunt Manager under the management agreement, from any economic benefit that Hunt or Sharyland receives from the sale of ROFO Projects to us pursuant to the development agreement and from the performance of Sharyland.	
 
 	•	 	Hunter L. Hunt, who is a member of our board of directors, is also the senior officer and/or director of various Hunt-affiliated entities, including Sharyland and Hunt Manager. As a result, Mr. Hunt may consider the interests of Hunt Manager, Hunt Developer, Sharyland and Hunt generally in any negotiation between us and one of those entities and may benefit from the consideration we pay Hunt Manager under the management agreement, from any economic benefit that Hunt or Sharyland receives from the sale of ROFO Projects to us pursuant to the development agreement and from the performance of Sharyland. Mr. Hunt and members of his family also own and direct the operations of our tenant, Sharyland. As a result, Mr. Hunt’s interests in our leases with Sharyland may be different than the interests of our stockholders.	
 
 	•	 	Several of our significant equityholders, including Hunt and certain of our founding investors, may own interests in ROFO Projects that we may acquire pursuant to the development agreement and therefore may benefit from any consideration that we pay in connection with our acquisition of these projects.	

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 	•	 	Under the terms of the development agreement with Hunt Developer, we have the exclusive right to fund the construction of Footprint Projects. In addition, Hunt has granted us a right of first offer on the ROFO Projects. However, Hunt is free to pursue the development and construction of other T&D projects and may compete directly with us for the acquisition of other T&D assets and businesses.	
 
 	•	 	We depend on Hunt Manager for our day-to-day management, and we do not have any independent officers or employees. The officers and other personnel of Hunt Manager may possibly engage in other activities unrelated to our business, which may reduce the time that they spend on our matters.	
 
 	•	 	The base fee under our management agreement is determined by reference to our total equity, not our financial performance. In addition, the incentive payment payable to Hunt Manager under our management agreement is calculated as a percentage of the per OP Unit distributions in excess of the Threshold Distribution Amount made by our Operating Partnership to the holders of OP Units. As a result, Hunt Manager could recommend that we grow total equity or make Operating Partnership distributions in a manner that is different from the interests of our stockholders generally.	
 
 	•	 	Our charter and our agreements with Hunt permit our directors and officers and their affiliates (including individuals serving in such capacities who are also directors, officers or employees of Hunt and its affiliates) to, among other things, compete with us, own any investments or engage in any business activities (including investments and business activities that are similar to our current or proposed investments or business activities) and to refrain from presenting to us any business opportunities unless the opportunity is expressly offered to such person in his or her capacity as a director or officer of us.	
We believe that Hunt’s shared alignment with our stockholders through Hunt’s ownership of equity in us and our Operating Partnership and the manner in which the incentive payment to Hunt Manager is calculated will help mitigate these conflicts of interests. In addition, consistent with New York Stock Exchange (NYSE) listing standards, a majority of our directors will be independent, and we intend to adopt a corporate governance policy designed to ensure that our Conflicts Committee, which will be comprised solely of independent directors, reviews and approves all material potential conflict transactions.
Risks Related to Our Business
Our business is subject to a number of risks, including risks that may prevent us from achieving our business objectives or may materially and adversely affect our business, financial condition, results of operations and cash flows. You should carefully consider these risks, including the risks discussed in the section entitled “Risk Factors,” before investing in our common stock. These risks include:
 
 	•	 	Footprint Projects may not materialize for a variety of reasons, including as a result of reductions in oil and gas drilling and related activity in the Permian Basin due to lower oil and gas prices relative to our current expectations;	
 
 	•	 	our growth depends on Hunt Developer’s successful development and construction of ROFO Projects and other T&D projects and our ability to negotiate acquisitions of those projects on acceptable terms;	
 
 	•	 	it is difficult to forecast the magnitude and timing of capital needs, in part due to the recent rapid growth in the areas where our T&D assets are located, and, if our rate base and capital need forecasts prove to be inaccurate, we may not experience the revenue growth we anticipate or we may be forced to raise additional capital;	

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 	•	 	we currently rely on Sharyland for all of our revenues and, as a result, our business, financial condition, results of operations and cash flows depend on Sharyland’s solvency and financial and operating performance;	
 
 	•	 	we have not yet negotiated lease payments with respect to substantially all of the capital expenditures that we expect to fund during the next several years, our leases currently expire at various times between 2015 and 2022, and there is no assurance that new negotiations will result in lease payments that are higher than or comparable to the lease payments we expect under our current leases;	
 
 	•	 	the market for investing in energy infrastructure projects is competitive, which could adversely affect our ability to execute our growth strategy;	
 
 	•	 	we are externally managed and depend on Hunt Manager and its key personnel to provide services to us;	
 
 	•	 	there are various conflicts of interest in our relationship with Hunt and Sharyland, which could result in decisions that are not in the best interests of our stockholders;	
 
 	•	 	Sharyland has regulatory-required rights as managing member and as a minority owner of our subsidiary, SDTS, which affect our ability to control SDTS;	
 
 	•	 	Sharyland is required to conduct a rate case in 2016, which could adversely affect our expected lease revenue, primarily under lease supplements and new leases executed after the conclusion of the case;	
 
 	•	 	our T&D assets and Sharyland’s operations are subject to governmental regulation, and we rely on Sharyland to manage these regulatory matters;	
 
 	•	 	the character, location and utilization of our T&D assets could change as the result of technology driven changes such as significant adoption of onsite generation;	
 
 	•	 	PUCT approval is required to transfer Sharyland’s operating licenses to a new tenant, which makes it difficult to replace Sharyland as our tenant in the event of a material breach of the leases or to replace Sharyland with a new tenant at the end of the lease terms;	
 
 	•	 	our REIT structure presents challenges to future acquisitions;	
 
 	•	 	we rely on our tenant to construct our T&D assets, and, in some circumstances, our tenant relies on other third parties to complete construction projects;	
 
 	•	 	there are practical limits on our tenant’s ability to increase its rates that affect our ability to generate revenue from our capital expenditures;	
 
 	•	 	we expect that we will rely on the capital markets in order to meet our significant capital expenditure obligations in the future and to continue to distribute at least 90% of our taxable income to our stockholders; and	
 
 	•	 	our failure to qualify or maintain our qualification as a REIT would have significant adverse consequences to us and the per share trading price of our common stock.	

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REIT Qualification
InfraREIT, L.L.C. elected to be treated as a REIT for U.S. federal income tax purposes commencing with the taxable year ended December 31, 2010 and, following the Merger, we will elect to be taxed as a REIT commencing with the taxable year ending December 31, 2015. We believe that we and InfraREIT, L.L.C. have been organized and operate in a manner that has allowed InfraREIT, L.L.C. to qualify for taxation as a REIT for U.S. federal income tax purposes commencing with its 2010 taxable year and through the consummation of the Merger, and will allow us to qualify for taxation as a REIT for U.S. federal income tax purposes commencing with the 2015 taxable year, and we intend to continue to be organized and operate in this manner. In order to qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy a number of organizational and operational requirements, including requirements relating to the qualification of sources of our income as rents from real property and certain other specified types of income, the composition and values of our assets, the amounts we distribute to our stockholders and the diversity of ownership of our stock. To comply with the REIT requirements, we may need to forgo otherwise attractive opportunities and limit our expansion opportunities and the manner in which we conduct our operations. See “Risk Factors—Risks Related to REIT Qualification and Federal Income Tax Laws.” As a REIT, we are subject to U.S. federal income tax, but we generally will not owe U.S. federal income tax on our REIT taxable income, including any net capital gains, that we currently distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will owe U.S. federal income tax at regular corporate rates. Even if we qualify for taxation as a REIT, we may also be subject to some federal, state and local taxes on our income or property. In addition, the income of any taxable REIT subsidiary that we own will be subject to taxation at regular corporate rates. See “Material Federal Income Tax Consequences.”
Distribution Policy
We intend to distribute substantially all of our cash available for distribution, less prudent reserves, through regular quarterly cash dividends.
The Internal Revenue Code of 1986, as amended, or the Code, generally requires that a REIT distribute annually at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains, and imposes tax on any taxable income retained by a REIT, including capital gains. To satisfy the requirements for qualification as a REIT, we intend to make regular quarterly distributions of all or substantially all of our REIT taxable income to holders of our common stock out of assets legally available for such purposes. We may also elect in the future to pay all or a portion of any distribution in the form of a taxable distribution of our stock or debt securities. Future distributions made by us, however, will be at the sole discretion of our board of directors.
We expect our cash available for distribution to be significantly more than taxable income for the foreseeable future. However, we may not be able to distribute 100% of our REIT taxable income for a variety of reasons, including because provisions of our financing arrangements limit our ability to make distributions in some circumstances. If we do not distribute 100% of our REIT taxable income, we will be subject to corporate income tax, and potentially excise tax, on the retained amounts. If our operations do not generate sufficient cash flow to allow us to satisfy the REIT distribution requirements, we may be required to fund distributions from working capital, borrow funds, sell assets or reduce such distributions. Our board of directors will review the alternative funding sources available to us from time to time.
Restrictions on Ownership and Transfer of Our Stock
Our charter will provide that, subject to certain exceptions, no person (other than John Hancock Life Insurance Company (U.S.A.), OpTrust N.A. Holdings Trust and Teachers Insurance and Annuity Association of America, each of which has been granted an exemption) may own more than 9.8% (in value or in number of

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shares, whichever is more restrictive) of the aggregate of the outstanding shares of our common stock or more than 9.8% (in value) of the aggregate of the outstanding shares of all classes or series of capital stock, which we refer to as the ownership limits, and will impose certain other restrictions on ownership and transfer of our stock. These restrictions are intended to assist with our REIT compliance under the Code, among other purposes. Our board of directors, in its sole discretion, may exempt a proposed transferee, prospectively or retroactively, from the ownership limits if certain conditions are satisfied and these restrictions will not apply if our board of directors determines that it is no longer in our best interests to continue to qualify as a REIT or that such restrictions are no longer necessary in order for us to continue to qualify as a REIT. The restrictions may delay or impede a transaction or a change of control that might be in your best interest. See “Description of Our Capital Stock—Restrictions on Ownership and Transfer” and “Risk Factors—Risks Related to Our Organization and Structure—Our charter contains restrictions on the ownership and transfer of our stock that may delay, defer or prevent a change of control transaction.”
JOBS Act
As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (JOBS Act).
An emerging growth company may take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended (Sarbanes-Oxley Act). We may take advantage of this provision until the last day of our fiscal year following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act of 1933, as amended (Securities Act), which fifth anniversary will occur in 2020. However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenues exceed $1.0 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period.
Furthermore, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for companies that are not emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
To the extent that we utilize certain provisions available to us as an emerging growth company, the information that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold equity interests.
Our Structure and Reorganization Transactions
UPREIT Structure
We conduct our business through a traditional umbrella partnership REIT, or UPREIT, in which our properties are owned by our Operating Partnership, or direct and indirect subsidiaries of our Operating Partnership. Upon the consummation of this offering, InfraREIT will be the sole general partner of our Operating Partnership, and, following the Reorganization transactions described below, InfraREIT, Marubeni Corporation (together with its subsidiaries, Marubeni) and Hunt-InfraREIT, L.L.C. (Hunt-InfraREIT), an indirect subsidiary

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of Hunt and a limited partner of our Operating Partnership, will initially own substantially all of the OP Units. Following this offering, subject to the terms of the partnership agreement and applicable lock-up agreements, the OP Units held by MC Transmission Holdings, Inc., a wholly owned subsidiary of Marubeni, Hunt-InfraREIT and other limited partners may be redeemed for cash or, at our option, exchanged for shares of our common stock on a one-for-one basis, as described under “The Operating Partnership and the Partnership Agreement—Redemption Rights.”
Reorganization Transactions
Our business has historically been operated through InfraREIT, L.L.C., a Delaware limited liability company. In connection with this offering and the Reorganization, we will engage in a number of transactions, including the Merger, which will result in InfraREIT, Inc., a Maryland corporation, surviving as the public issuer and general partner of the Operating Partnership. The bullet points below provide an overview of the steps of the Reorganization. For a more detailed description of the Reorganization, see “Description of Our Capital Stock—Reorganization.”
 
 	•	 	Immediately prior to the effectiveness of the registration statement to which this prospectus relates, our Operating Partnership will effect a reverse unit split whereby each holder of OP Units will receive              OP Units of the same class in exchange for each such unit it holds immediately prior to such time, which we refer to as the unit split.	
 
 	•	 	Immediately prior to the effectiveness of the registration statement to which this prospectus relates, we will issue                  shares of our common stock to Hunt-InfraREIT as a reorganization advisory fee. Hunt-InfraREIT will immediately transfer 75,000 of the shares it receives from us to OpTrust N.A. Holdings Trust (OpTrust) in settlement of potential claims related to events that gave rise to the Reorganization transactions. The beneficiary of OpTrust N.A. Holdings Trust is OPTrust Infrastructure N.A. Inc., a wholly owned subsidiary of OPSEU Pension Plan Trust Fund. Equity Financial Trust Company, a corporate trustee, acts as the trustee of OPTrust N.A. Holdings Trust.	
 
 	•	 	Immediately following the consummation of this offering and immediately before the Merger, our Operating Partnership will issue to Hunt-InfraREIT              OP Units as an accelerated payment of a portion of the carried interest anticipated to be owed to Hunt by our existing investors under the investment documents entered into by the parties in 2010. This portion of the carried interest is being accelerated as a result of negotiations with our founding investors in connection with the Reorganization transactions. To effect the shift in ownership from our existing investors to Hunt, an equal number of OP Units held by InfraREIT, L.L.C. in the Operating Partnership will be cancelled at the same time. This shift will not result in any dilution in the indirect ownership of our Operating Partnership by investors purchasing common stock in this offering.	
 
 	•	 	Immediately following the transactions described in the bullets above, InfraREIT, L.L.C. and InfraREIT, Inc. will engage in the Merger. As a result of the Merger, (1) holders of              common shares of InfraREIT, L.L.C. will receive cash consideration for each such common share equal to the public offering price (less the underwriting discount) received by us in this offering, (2) holders of the remaining              common shares of InfraREIT, L.L.C. will receive              shares of our Class A common stock and              shares of our redeemable Class A common stock, and (3) holders of              Class C shares of InfraREIT, L.L.C. will receive              shares of our Class C common stock. The shares of redeemable Class A common stock will only be issued to the extent the underwriters have not exercised their option to purchase additional shares from us prior to the Merger and will be redeemable by us for consideration per share equal to the public offering price (less the underwriting discount) per share received by us if the underwriters’ option is exercised at any time after the Merger and prior to the end of the 30-day period following the date of this prospectus.	

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 	•	 	Each founding investor will receive both cash and stock consideration in the Merger, and all other InfraREIT, L.L.C. shareholders will exclusively receive shares of Class A common stock or Class C common stock in the Merger. InfraREIT, L.L.C. gave each other holder of InfraREIT, L.L.C. common shares the opportunity to receive cash consideration in the Merger. Each such holder either elected to exclusively receive shares of Class A common stock under the merger agreement (all-stock election) or failed to respond timely to a request for an election and therefore was deemed to have made an all-stock election. All holders of InfraREIT, L.L.C. Class C common shares, as a separate class, will receive shares of Class C common stock pursuant to the merger agreement.	
 
 	•	 	Immediately following the consummation of this offering and simultaneously with the Merger, InfraREIT will contribute $            , which is the portion of the net proceeds from this offering not being paid as consideration in the Merger, to the Operating Partnership in exchange for OP Units.	
 
 	•	 	Immediately following the consummation of this offering and simultaneously with the Merger, we will issue              shares of our common stock to Hunt-InfraREIT in exchange for              OP Units tendered for redemption by Hunt-InfraREIT.	
 
 	•	 	Concurrently with the Merger, we will purchase              common shares that are currently held by a trust in consideration for the issuance of a promissory note to the trust in the principal amount of approximately $66.5 million.	
 
 	•	 	The trust will immediately transfer the promissory note to Marubeni or its designated affiliate as required under InfraREIT, L.L.C.’s limited liability company agreement, and, immediately following receipt of the promissory note, MC Transmission Holdings, Inc., a wholly-owned subsidiary of Marubeni, will purchase              OP Units from the Operating Partnership in consideration for the assignment of the promissory note. The promissory note will then be transferred to us in exchange for the redemption of              OP Units held by us and the subsequent cancellation of such promissory note by us, resulting in no cash consideration having been paid or received by us pursuant to the purchase from the trust or the sale of OP Units to Marubeni.	
 
 	•	 	Approximately 32 days following the consummation of this offering, we will calculate the unaccelerated portion of the carried interest owed by our existing investors to Hunt to determine whether additional ownership should be shifted from our existing investors to Hunt or whether Hunt received too much ownership in the accelerated payment of a portion of the carried interest described above. The determination will be based upon the cash amounts received by the existing investors in the Merger and the redemption of redeemable Class A common stock if the underwriters’ option to purchase additional shares is exercised as well as the weighted average daily market price of a share of our common stock during the 10 consecutive trading days ending on the 30th day following the completion of this offering. If Hunt is owed additional carry, it will receive additional OP Units from the Operating Partnership and an equal number of shares of Class A common stock and Class C common stock held by our existing investors will be cancelled. If Hunt has received too much carry, it will pay cash to the existing investors in an amount equal to the weighted average market price described above for each OP Unit it received in the advance settlement of the carry to which it would not have otherwise been entitled.	
 
 	•	 	Immediately upon settlement of the unaccelerated portion of the carried interest owed by our existing investors to Hunt as described in the preceding bullet, all remaining shares of Class A common stock, redeemable Class A common stock and Class C common stock will be converted on	

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 	a one-for-one basis into shares of common stock. No matter how our stock price performs during the 30-day period following this offering, the transactions related to Hunt’s carry will only result in a shift in the economic ownership of the Operating Partnership between Hunt and our existing investors and will not result in any dilution in the indirect ownership of our Operating Partnership by the investors in our common stock in this offering.	

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The following chart shows our organizational structure after giving effect to this offering and the Reorganization (based on the assumptions set forth in the “Explanatory Note” and as further described under “—Reorganization Transactions” above).

 

*	Sharyland’s economic interest in SDTS is de minimis, and we do not expect it to result in distributions to Sharyland. Although Sharyland is the managing member of SDTS, we do have certain negative control rights, i.e., Sharyland is prohibited from causing SDTS to take certain actions, such as incurring indebtedness, unless Sharyland obtains our consent. Furthermore, Sharyland has delegated to us some of the related managing member authority and obligations pursuant to a delegation agreement. For a more detailed description of these matters, see “SDTS Company Agreement and Delegation Agreement.”	
(1)	Includes              profit interest partnership units in our Operating Partnership (LTIP Units) that will be issued upon the consummation of this offering to the InfraREIT directors, other than David Campbell and Hunter L. Hunt. See “Management—2015 Equity Incentive Plan” and “The Operating Partnership and the Partnership Agreement—Partnership Units.”	

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Corporate Information
InfraREIT, Inc. was formed as a Delaware corporation in 2001 and converted into a Maryland corporation on September 29, 2014. Our Operating Partnership was formed as a Delaware limited partnership on December 16, 2009, and InfraREIT, L.L.C., which was formed as a Delaware limited liability company on October 4, 2010, acquired the general partner interest in our Operating Partnership on November 9, 2010 in connection with our formation transactions. For a detailed description of the Reorganization transactions to be effected in connection with this offering, see “—Our Structure and Reorganization Transactions—Reorganization Transactions.”
Our principal executive offices are located at 1807 Ross Avenue, 4 th Floor, Dallas, Texas 75201, and our telephone number is (214) 855-6700. We maintain a website at www.infrareitinc.com. The information contained on our website or that can be accessed through our website neither constitutes part of this prospectus nor is incorporated by reference herein.

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 The Offering
 
Common stock offered by us	             shares (plus up to an additional              shares if the underwriters exercise their option to purchase additional shares of our common stock in full) (1)	
 
Common stock to be outstanding after this offering	             shares	
 
Common stock and OP Units to be outstanding after this offering	             shares and OP Units (2)	
 
Use of proceeds	The net proceeds to us from this offering, after deducting underwriting discounts and commissions and the underwriter structuring fee, will be approximately $         million. We will use $         million of the net proceeds from this offering to fund the cash portion of the consideration to be issued in the Merger described under “—Our Structure and Reorganization Transactions—Reorganization Transactions.” We will contribute the remaining $         million of the net proceeds we receive from this offering to our Operating Partnership in exchange for OP Units.	
 
 	We expect our Operating Partnership will use the net proceeds from this offering that it receives from us (i) to repay an aggregate of approximately $1.0 million of indebtedness to Hunt Consolidated, Inc. pursuant to a promissory note, (ii) to repay an aggregate of approximately $         million of indebtedness outstanding under our Operating Partnership’s revolving credit facility and $         million of indebtedness outstanding under SDTS’s revolving credit facility, in each case based on outstanding balances as of                     , 2015, (iii) to pay estimated offering expenses (other than the underwriting discounts and commissions and the underwriter structuring fee) of $         million and (iv) for general corporate purposes.	
 
Distribution policy	We intend to distribute substantially all of our cash available for distribution, less prudent reserves, through regular quarterly cash dividends. We expect to set our initial quarterly dividend rate at $         per share of common stock, which amount may be changed in the future without advance notice. Our ability to pay the regular quarterly dividend is subject to various restrictions and other factors described in more detail under the caption “Distribution Policy.” We expect to pay a quarterly dividend on or about the          day of each fiscal quarter to holders of our common stock of record on or about the last day of the preceding fiscal quarter. With respect to our first dividend payable on                     , 2015, we intend to pay a pro-rated dividend (calculated from the date shares will be delivered to investors in this offering as set forth on the cover of this prospectus through and including                     , 2015) of $         per share of common stock.	

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Risk factors	See “Risk Factors” beginning on page 34 and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.	
 
Proposed NYSE ticker symbol	“HIFR.”	

(1)	As described under “—Our Structure and Reorganization Transactions—Reorganization Transactions,”              shares (plus up to an additional              shares if the underwriters exercise their option to purchase additional shares of our common stock in full) are intended to be attributable to sales by existing investors in InfraREIT, L.L.C. However, because those investors will not hold shares of our common stock until the Merger, which occurs immediately following the consummation of this offering, we will issue the shares intended to be attributed to these selling stockholders and the selling stockholders will receive the proceeds from the sale of those shares (less the underwriting discount) as merger consideration in the Merger. In addition, if the underwriters exercise their option to purchase additional shares from us, we will issue those additional shares and all of the proceeds from the sale of those additional shares (less the underwriting discount) will either be paid as additional merger consideration, if the exercise of the option occurs prior to the Merger, or used to redeem shares of our redeemable Class A common stock issued to InfraREIT, L.L.C.’s existing investors in the Merger.	
(2)	Consists of (i)              shares of common stock and (ii)              OP Units held by Hunt-InfraREIT, our directors and Marubeni after giving effect to the Reorganization described under “—Our Structure and Reorganization Transactions—Reorganization Transactions” and the issuance of              LTIP Units to our directors, other than David Campbell and Hunter L. Hunt, upon the consummation of this offering as described under “Management—2015 Equity Incentive Plan.”	

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Summary Pro Forma and Historical Selected Financial Data
The following tables show summary selected financial data on (1) a pro forma basis giving effect to the Pro Forma Adjustments described in the unaudited pro forma condensed consolidated financial statements included elsewhere in this prospectus for InfraREIT, Inc., and (2) a historical basis for InfraREIT, L.L.C. We have not presented summary selected financial data for InfraREIT, Inc. on a historical basis because InfraREIT, Inc. has had limited activity since its formation and because we believe that a discussion of the historical financial condition and results of operations of InfraREIT, Inc. would not be meaningful.
Historically, InfraREIT, L.L.C. followed the guidance included in SEC Staff Accounting Bulletin Topic 1.b. Accordingly, the InfraREIT, L.L.C. historical financial data as of and for the years ended December 31, 2013 and 2012 and for the nine months ended September 30, 2013 reflects all of the costs incurred on our behalf by our external manager for the periods presented. Beginning with the quarter ended June 30, 2014, the guidance in Staff Accounting Bulletin Topic 1.b. no longer applies. As a result, the historical financial data for InfraREIT, L.L.C., as well as the pro forma financial data, for the nine months ended September 30, 2014 does not include all costs incurred by our external manager during that period, but does include our management fees to Hunt Manager as well as the additional costs described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Significant Components of Our Results of Operations—Operating Expenses—General and Administrative.”
The summary pro forma financial data for the nine months ended September 30, 2014 and for the year ended December 31, 2013 has been derived from our unaudited pro forma consolidated financial statements included elsewhere in this prospectus. The InfraREIT, L.L.C. summary historical financial data as of and for the years ended December 31, 2013 and 2012 has been derived from the audited consolidated financial statements included elsewhere in this prospectus. The InfraREIT, L.L.C. summary historical financial data as of September 30, 2014 and for the nine months ended September 30, 2014 and 2013 was derived from the unaudited condensed consolidated financial statements included elsewhere in this prospectus, which include all adjustments, consisting of normal recurring adjustments, that our management considers necessary for a fair presentation of the financial position and the results of operations for such periods under GAAP. The results for the interim periods are not necessarily indicative of the results for the full year. The summary historical financial data is not necessarily indicative of results to be expected in future periods.

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The following tables should be read together with, and are qualified in their entirety by reference to, the pro forma and historical consolidated financial statements and the accompanying notes appearing elsewhere in this prospectus. Among other things, the pro forma and historical consolidated financial statements include more detailed information regarding the basis of presentation for the information in the following tables. The tables should also be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 	 	InfraREIT, Inc.
Pro Forma	 	 	InfraREIT, L.L.C.
Historical	 	
 	 	Nine Months
Ended
September 30,
2014	 	 	Year Ended
December 31,
2013	 	 	Nine Months
Ended
September 30,	 	 	Years Ended
December 31,	 	
 	 			 			 	2014	 	 	2013	 	 	2013	 	 	2012	 	
 	 	(in thousands)	 	
 	 	(Unaudited)	 	 	(Unaudited)	 	 	 	 	 	 	 	
Operating Information	 				 				 				 				 				
Lease revenue	 				 				 				 				 				 				
Base rent	 	$	                	  	 	$	                	  	 	$	76,399	  	 	$	35,714	  	 	$	57,979	  	 	$	30,961	  	
Percentage rent	 				 				 	 	12,972	  	 	 	7,654	  	 	 	15,214	  	 	 	11,821	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total lease revenue	 				 				 	 	89,371	  	 	 	43,368	  	 	 	73,193	  	 	 	42,782	  	
Operating costs and expenses	 				 				 				 				 				 				
General and administrative expense	 				 				 	 	12,839	  	 	 	10,262	  	 	 	13,691	  	 	 	12,521	  	
Depreciation	 				 				 	 	25,825	  	 	 	12,417	  	 	 	20,024	  	 	 	10,563	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total operating costs and expenses	 				 				 	 	38,664	  	 	 	22,679	  	 	 	33,715	  	 	 	23,084	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from operations	 				 				 	 	50,707	  	 	 	20,689	  	 	 	39,478	  	 	 	19,698	  	
Other (expense) income	 				 				 				 				 				 				
Interest expense, net	 				 				 	 	(24,364	) 	 	 	(10,764	) 	 	 	(17,384	) 	 	 	(17,314	) 	
Other income, net	 				 				 	 	333	  	 	 	19,571	  	 	 	20,932	  	 	 	14,520	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total other (expense) income	 				 				 	 	(24,031	) 	 	 	8,807	  	 	 	3,548	  	 	 	(2,794	) 	
Income tax expense	 				 				 	 	656	  	 	 	289	  	 	 	616	  	 	 	336	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 				 				 	 	26,020	  	 	 	29,207	  	 	 	42,410	  	 	 	16,568	  	
Less: Net income attributable to noncontrolling interest	 				 				 	 	6,046	  	 	 	7,075	  	 	 	10,288	  	 	 	4,151	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income attributable to InfraREIT, Inc. (pro forma) or InfraREIT, L.L.C. (historical)	 	$	            	  	 	$	            	  	 	$	19,974	  	 	$	22,132	  	 	$	32,122	  	 	$	12,417	  	

 
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 	 	InfraREIT, Inc.
Pro Forma	 	 	InfraREIT, L.L.C.
Historical	 	
 	 	Nine Months
Ended
September 30,
2014	 	 	Year Ended
December 31,
2013	 	 	Nine Months
Ended
September 30,	 	 	Years Ended
December 31,	 	
 	 			 			 	2014	 	 	2013	 	 	2013	 	 	2012	 	
 	 	(in thousands)	 	
 	 	(Unaudited)	 	 	(Unaudited)	 	 	 	 	 	 	 	
Other Information	 				 				 				 				 				
							
Cash flows provided by operating activities	 	$	            	  	 	$	            	  	 	$	67,691	  	 	$	17,943	  	 	$	21,321	  	 	$	15,349	  	
							
Cash flows used in investing activities	 				 				 	 	(170,200	) 	 	 	(286,284	) 	 	 	(390,283	) 	 	 	(361,340	) 	
							
Cash flows provided by financing activities	 				 				 	 	119,418	  	 	 	287,622	  	 	 	360,266	  	 	 	336,672	  	
							
FFO before noncontrolling interest (1)(2)	 				 				 	 	51,845	  	 	 	41,624	  	 	 	62,434	  	 	 	27,131	  	
							
EBITDA before noncontrolling interest (1)(2)	 				 				 	 	76,865	  	 	 	52,677	  	 	 	80,434	  	 	 	44,781	  	
							
Adjusted EBITDA before noncontrolling interest (1)(2)	 				 				 	 	76,543	  	 	 	33,121	  	 	 	59,620	  	 	 	30,261	  	

(1)	Unaudited	
(2)	For a discussion of FFO, EBITDA and Adjusted EBITDA and a reconciliation to their nearest GAAP counterparts, see “—Non-GAAP Financial Measures.”	

 	 	InfraREIT, Inc.
Pro Forma	 	 	InfraREIT, L.L.C.
Historical	 	
 	 	As of
September 30,
2014	 	 	As of
September 30,
2014	 	 	As of
December 31,	 	
 	 			 			 	2013	 	 	2012	 	
 	 	(in thousands)	 	
 	 	(Unaudited)	 	 	(Unaudited)	 	 	 	 	 	 	 	
Balance Sheet	 				 				 				
					
Gross property, plant and equipment	 	 	$            	  	 	$	1,329,577	  	 	$	1,303,828	  	 	$	900,444	  	
					
Cash and cash equivalents	 				 	 	24,655	  	 	 	7,746	  	 	 	16,442	  	
					
Total assets	 				 	 	1,448,503	  	 	 	1,326,363	  	 	 	928,976	  	
					
Short term borrowings and current portion of long-term debt	 				 	 	212,639	  	 	 	79,777	  	 	 	11,303	  	
					
Long-term debt	 				 	 	615,367	  	 	 	627,913	  	 	 	461,565	  	
					
Other liabilities	 				 	 	24,730	  	 	 	54,480	  	 	 	107,330	  	
					
Total liabilities	 				 	 	852,736	  	 	 	762,170	  	 	 	580,198	  	
					
Total InfraREIT, Inc. stockholders’ equity (pro forma) or InfraREIT, L.L.C. members’ capital (historical)	 				 	 	448,293	  	 	 	427,709	  	 	 	257,332	  	
					
Noncontrolling interest	 				 	 	147,474	  	 	 	136,484	  	 	 	91,446	  	
					
Total equity	 				 	 	595,767	  	 	 	564,193	  	 	 	348,778	  	
					
Total equity and liabilities	 				 	 	1,448,503	  	 	 	1,326,363	  	 	 	928,976	  	

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Non-GAAP Financial Measures
In this prospectus, we use financial measures that are derived on the basis of methodologies other than in accordance with U.S. GAAP. The “non-GAAP” financial measures used in this prospectus include FFO, EBITDA and adjusted EBITDA, all before noncontrolling interest. In this prospectus, when we use the phrase “before noncontrolling interest” to modify net income, FFO, EBITDA or Adjusted EBITDA, we are referring to the applicable amount of net income, FFO, EBITDA or Adjusted EBITDA, in each case before any reduction to such item as a result of the noncontrolling interest in our Operating Partnership. We derive these measures as follows:
 
 	•	 	The National Association of Real Estate Investment Trusts, or NAREIT, defines FFO as net income (computed in accordance with GAAP), excluding gains and losses from sales of property (net) and impairments of depreciated real estate, plus real estate depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments for unconsolidated partnerships and joint ventures. Applying the NAREIT definition to our financial statements results in FFO representing net income before net income attributable to noncontrolling interest, depreciation, impairment of assets and gain (loss) on sale of assets. FFO does not represent cash generated from operations as defined by GAAP and it is not indicative of cash available to fund all cash needs, including distributions.	
 
 	•	 	We define EBITDA as net income before net income attributable to noncontrolling interest, interest expense (net), income tax expense, depreciation and amortization.	
 
 	•	 	We define adjusted EBITDA as EBITDA adjusted to eliminate the impact of certain items that we do not consider indicative of our core operating performance, including: (a) the financial impact of contingent consideration, (b) AFUDC—equity and (c) change in fair value of derivatives.	
Our management uses FFO, EBITDA and adjusted EBITDA all before noncontrolling interest as important supplemental measures of our operating performance. We use these metrics before noncontrolling interest as we feel it is important to evaluate our entire consolidated business. These performance measures provide perspectives not immediately apparent from net income. We consider FFO to be an important supplemental disclosure of operating performance for an equity REIT due to their widespread acceptance and use among REITs. In addition, we believe that FFO, EBITDA and adjusted EBITDA are frequently used by securities analysts, investors and other interested parties in the evaluation of REITs.
We offer these measures to assist the users of our financial statements in assessing our operating performance under GAAP, but these measures are non-GAAP measures and should not be considered measures of liquidity, alternatives to net income or indicators of any other performance measure determined in accordance with GAAP, nor are they indicative of funds available to fund our cash needs, including capital expenditures, make payments on our indebtedness or make distributions. However, our method of calculating these measures may be different from methods used by other companies and, accordingly, may not be comparable to similar measures as calculated by other companies that do not use the same definition or implementation guidelines or interpret the standards differently from us. Investors should not rely on these measures as a substitute for any GAAP measure, including net income, cash flows provided by operating activities or revenues.

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FFO
The following table sets forth a reconciliation of net income attributable to InfraREIT to FFO before noncontrolling interest for the periods presented:

 	 	InfraREIT, Inc.
Pro Forma	 	 	InfraREIT, L.L.C.
Historical	 	
 	 	Nine Months Ended
September 30,
2014	 	 	Year Ended
December 31,
2013	 	 	Nine Months Ended
September 30,	 	 	Years Ended
December 31,	 	
 	 			 			 	2014	 	 	2013	 	 	2013	 	 	2012	 	
 	 	(Dollars in thousands)	 	
Net income attributable to InfraREIT, Inc. (pro forma) and InfraREIT, L.L.C. (historical) (1)	 	$	            	  	 	$	            	  	 	$	19,974	  	 	$	22,132	  	 	$	32,122	  	 	$	12,417	  	
Net income attributable to noncontrolling interest	 				 				 	 	6,046	  	 	 	7,075	  	 	 	10,288	  	 	 	4,151	  	
Depreciation	 				 				 	 	25,825	  	 	 	12,417	  	 	 	20,024	  	 	 	10,563	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
FFO before noncontrolling interest	 	$	            	  	 	$	            	  	 	$	51,845	  	 	$	41,624	  	 	$	62,434	  	 	$	27,131	  	

(1)	Net income of InfraREIT, Inc. (pro forma) reflects the impact of straight-line rents as follows: $(4.9) million for the nine months ended September 30, 2014 and $1.4 million for the year ended December 31, 2013. Net income of InfraREIT, L.L.C. (historical) reflects the impact of straight-line rents as follows: $(4.9) million for the nine months ended September 30, 2014, $4.0 million for the nine months ended September 30, 2013, $1.4 million for the year ended December 31, 2013 and $0.4 million for the year ended December 31, 2012.	
EBITDA and Adjusted EBITDA
The following table sets forth a reconciliation of net income attributable to InfraREIT to EBITDA before noncontrolling interest and Adjusted EBITDA before noncontrolling interest for the periods presented:

 	 	InfraREIT, Inc.
Pro Forma	 	 	InfraREIT, L.L.C.
Historical	 	
 	 	Nine Months Ended
September 30,
2014	 	 	Year Ended
December 31,
2013	 	 	Nine Months Ended
September 30,	 	 	Years Ended
December 31,	 	
 	 			 			 	2014	 	 	2013	 	 	2013	 	 	2012	 	
 	 	(Dollars in thousands)	 	
Net income attributable to InfraREIT, Inc. (pro forma) and InfraREIT, L.L.C. (historical) (1)	 	$	            	  	 	$	            	  	 	$	19,974	  	 	$	22,132	  	 	$	32,122	  	 	$	12,417	  	
Net income attributable to noncontrolling interest	 				 				 	 	6,046	  	 	 	7,075	  	 	 	10,288	  	 	 	4,151	  	
Interest expense, net	 				 				 	 	24,364	  	 	 	10,764	  	 	 	17,384	  	 	 	17,314	  	
Income tax expense	 				 				 	 	656	  	 	 	289	  	 	 	616	  	 	 	336	  	
Depreciation	 				 				 	 	25,825	  	 	 	12,417	  	 	 	20,024	  	 	 	10,563	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
EBITDA before noncontrolling interest	 				 				 	 	76,865	  	 	 	52,677	  	 	 	80,434	  	 	 	44,781	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Change in fair market value of contingent consideration	 				 				 	 	1,110	  	 	 	—  	  	 	 	841	  	 	 	753	  	
Allowance for funds used during construction—equity	 				 				 	 	(1,432	) 	 	 	(19,556	) 	 	 	(21,655	) 	 	 	(15,273	) 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Adjusted EBITDA before noncontrolling interest	 	$	 	  	 	$	 	  	 	$	76,543	  	 	$	33,121	  	 	$	59,620	  	 	$	30,261	  	

(1)	Net income of InfraREIT, Inc. (pro forma) reflects the impact of straight-line rents as follows: $(4.9) million for the nine months ended September 30, 2014 and $1.4 million for the year ended December 31, 2013. Net income of InfraREIT, L.L.C. (historical) reflects the impact of straight-line rents as follows: $(4.9) million for the nine months ended September 30, 2014, $4.0 million for the nine months ended September 30, 2013, $1.4 million for the year ended December 31, 2013 and $0.4 million for the year ended December 31, 2012.	

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 RISK FACTORS
An investment in shares of our common stock involves a high degree of risk. Before making an investment decision, you should carefully consider the following risk factors, together with the other information contained in this prospectus. If any of the risks discussed in this prospectus occurs, our business, financial condition, liquidity and results of operations could be materially and adversely affected. If this were to happen, the price of our common stock could decline significantly and you could lose a part or all of your investment.
Risks Related to Our Business
Our business model and growth strategy depends on our ability to grow our rate base and lease revenue.
We will not be able to increase our lease revenue significantly unless the rate base of our T&D assets grows. We expect to increase our rate base by funding Footprint Projects, acquiring ROFO Projects and other T&D assets from Hunt and acquiring T&D assets from third parties. Our development agreement with Hunt Developer distinguishes between Footprint Projects, which under the agreement are T&D assets that are in the geographic footprint of our existing distribution assets or that are added to our existing transmission assets and that we own and fund, and ROFO Projects, which are certain specified T&D projects being developed by Hunt. Our ability to grow our rate base and revenues in the manner we expect depends on Footprint Projects meeting or exceeding our capital expenditure budgets, Hunt’s ability to develop and construct ROFO Projects and our ability to acquire ROFO Projects or other T&D assets from Hunt or third parties on acceptable terms. The amount of available investment in Footprint Projects and ROFO Projects depends on a number of factors. For instance:
 
 	•	 	Our 2015 and forward capital expenditure projections incorporate our estimates of the potential impact of the recent oil price decline on demand in our service territories and our T&D investment in Footprint Projects. If the oil price declines continue, or if oil and gas producers, pipeline and processing companies and other service providers in West Texas respond with more significant reductions in their ongoing investments than we currently estimate, the load growth in our service territory in and around Stanton, Texas would be negatively impacted and our T&D investment in Footprint Projects in this territory would be less than we expect, particularly in 2017 and beyond. Furthermore, in a low oil price environment in which overall economic growth in Texas is reduced, Hunt’s ability to develop and construct additional ROFO Projects in Texas (other than the Cross Valley transmission line and the GSEC interconnection, which are under construction) may be adversely impacted, as there may be less need for new transmission investment.	
 
 	•	 	Both Footprint Projects and ROFO Projects will be adversely affected if electricity generators, particularly wind generators, in and near the Texas Panhandle do not request connection to our Panhandle transmission facilities or do not follow through on existing interconnection requests, or if ERCOT or the PUCT determines that generators, and not transmission service providers, should fund the construction of generation interconnects. The number and amount of these requests depends in large part on the viability and success of wind generators in the Texas Panhandle, which in turn depends on a number of factors that are outside of our control, including the economics of wind generation generally and in the ERCOT market in particular, the availability of the production tax credit for wind generators, which currently applies only to projects that began substantial construction before December 31, 2013, customer demand for generation, the availability of wind generation from other geographical regions and the price of natural gas.	
 
 	•	 	Although our right of first offer with Hunt applies to certain ROFO Projects that are in earlier stages of development, there are ROFO Projects currently under development or construction that are relatively important to our rate base growth plans. We refer to these projects as the Cross Valley transmission line and the GSEC interconnection, and they are described in more detail in “Business and Properties—Project Development—ROFO Projects.” Both projects are permitted and the Cross	
 
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 	Valley transmission line is currently under construction, but there is no assurance that either project will be completed. Even if these projects are completed and become operational, there is no assurance that we will be able to negotiate for their acquisition on acceptable terms.	
 
 	•	 	Additional T&D project development opportunities, including some of the ROFO Projects, will likely be adversely affected if population and cross-border trade in South Texas, including in our territory in and around McAllen, Texas, do not grow at the rates we anticipate.	
If our forecasts regarding Footprint Project and ROFO Project capital needs prove to be inaccurate, it could have a material adverse effect on our financial condition and results of operations.
Demand for electricity in our territories, in particular our territory in and around Stanton, Texas, has been growing rapidly, which makes forecasting capital expenditures more difficult than it would be in a utility with more consistent growth. Because we expect oil and gas drilling activities, along with related investments in processing facilities, pipelines and other supporting services and activities, to drive a substantial portion of the demand growth in this territory, recent oil price decreases and volatility compound these forecasting challenges. In many circumstances, the accuracy of forecasting our capital needs depends on whether or not existing and potential customers follow through on their planned facilities. We expect these forecasting challenges will continue, not only in our Stanton, Texas territory but also with respect to capital needs related to requests from generators to connect to our Panhandle transmission assets and with respect to other aspects of our capital expenditures plan. These difficulties affect both our ability to project capital expenditures for our Footprint Projects and Hunt’s ability to project its capital expenditures for ROFO Projects. Our forecasting difficulties are compounded by uncertainty regarding the acquisition cost of a ROFO Project, which we will not know with any level of certainty until we negotiate the terms of any such acquisition or whether we will be able to negotiate an acquisition. If, for these or other reasons, we are unable to forecast our capital needs accurately, our financial condition and stock price could be adversely affected. For instance, if our capital needs are significantly more than budgeted, we may need to raise debt or equity capital to meet our obligations, which we may not be able to do on favorable terms or at all. If we are unable to obtain the debt or equity financing to satisfy our capital expenditure demands, we may not be able to meet our capital expenditure obligations under our leases. If our forecasts prove to be inaccurate and capital needs are less than budgeted, we will likely have an inefficient capital structure or excess cash, and our growth would be less than we expect, which would adversely affect our financial condition, results of operations and our ability to make distributions to our stockholders.
We may not be able to make cash distributions to holders of our common stock comparable to our anticipated initial annual distribution rate or achieve our target growth rate of cash available for distributions to holders of our common stock.
We intend to make regular quarterly cash distributions to holders of our common stock. The amount of our cash available for distribution principally depends upon the amount of cash we generate from our operations, which may fluctuate from quarter to quarter based on, among other things:
 
 	•	 	the level and timing of capital expenditures we make;	
 
 	•	 	Hunt’s development and construction of ROFO Projects and other T&D projects and our ability to acquire those T&D assets;	
 
 	•	 	the amount of any cash management fees we pay Hunt Manager under the management agreement, as well as any third party expenses for which we are directly responsible;	
 
 	•	 	our debt service requirements and other liabilities;	
 
 	•	 	fluctuations in our working capital needs;	
 
 	•	 	our ability to borrow funds and access capital markets;	
 
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 	•	 	restrictions contained in the agreements governing our indebtedness;	
 
 	•	 	lease payments actually received; and	
 
 	•	 	other business risks affecting our cash levels.	
As a result of all these factors, we cannot guarantee that we will have sufficient cash generated from operations to pay a specific level of cash distributions to holders of our common stock.
Because all of our lease revenues are currently generated by lease payments from Sharyland, our business, financial condition, results of operations and cash flows are dependent on Sharyland’s financial and operating performance.
Our tenant’s ability to make lease payments to us under our leases is subject to its ability to generate cash flows or raise additional capital sufficient to support its obligations. Our tenant’s financial and operating performance is subject to the following risks, as well as other risks identified in this prospectus and those that we are not currently aware of, that could adversely affect its financial and operating performance and, as a result, its ability to make lease payments to us:
 
 	•	 	Although Sharyland reported net income during the nine months ended September 30, 2014, both on a GAAP basis and on a management-reported basis, Sharyland has historically incurred both GAAP and management-reported losses. For a discussion of our tenant’s management-reported net loss and a reconciliation to net income (loss), its nearest GAAP counterpart, see “Financial Information Related to Our Tenant.” These losses were largely due to its lease payment obligations to us, the rapid growth of demand in its service territory and the development of new systems and system upgrades from the business acquired in the Cap Rock acquisition in 2010. If our tenant were to operate at a loss in future years, and if it is unable to obtain debt or equity capital to fund its cash needs, its financial condition and liquidity may suffer.	
 
 	•	 	Our tenant’s rates are regulated by the PUCT. It must file a full rate proceeding with the PUCT in order to increase its rates to reflect higher operation and maintenance expense. Therefore, if its expenses increase rapidly, including for reasons outside of its control, our tenant’s revenues may not be sufficient to cover its expenses. Our anticipated growth in rate base during the next few years will exacerbate this risk, making it more likely that our tenant’s expenses will increase before it may increase its rates through a rate proceeding.	
 
 	•	 	If the PUCT determines that capital expenditures were not reasonable and necessary, recovery of such expenditures would not be included in our tenant’s tariff rates. Further, if our tenant is found to have imprudently incurred capital expenditures that were subject to a prior interim TCOS or DCRF filing, it could be required to refund the return it had received on those capital expenditures. Although such determinations would adversely impact our tenant’s results of operations and liquidity and would decrease the amount of percentage rent owed, they would not affect its obligations to make base rent payments to us.	
 
 	•	 	The amount of percentage rent that we generate is based on Sharyland’s revenues. If Sharyland’s revenue growth rate is lower than we expect, we will not generate the percentage rent we expect. Sharyland’s revenue growth depends on a number of factors, including the frequency and results of rate case filings and customer, load and kWh growth in Sharyland’s service territories, including in our Stanton service territory, which are in turn impacted by a number of factors, including the pace of oil and gas activity in the Permian Basin. Furthermore, if Sharyland’s load growth in its distribution service territories is lower than we expect, Sharyland may be required to file rate cases more frequently than we expect in order to generate revenue sufficient to pay its lease payments and	
 
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 	other expenses, which would increase the regulatory risk associated with our revenue, profitability and financial condition forecasts.	
 
 	•	 	When we negotiate our lease terms with our tenant, we make assumptions about the amount of tariff revenue the related assets will generate. Those assumptions may be incorrect, and, even if they are correct when made, the facts that informed those assumptions may change over time. Such changes could impose lease payment obligations on our tenant that are not matched to its revenue.	
 
 	•	 	Compliance with U.S. federal, state and local laws and regulations may cause our tenant to incur additional operating costs. In addition, failure to comply with these requirements could result in the imposition of liens, fines, civil or criminal liability and/or indemnification obligations that would significantly increase our tenant’s operating expenses.	
If our tenant experiences declines in its financial and operating performance, it may request discounts or deferrals on its lease payments to us or seek to terminate its leases with us, which would decrease the amount of lease revenue we receive from it. Decreases in the amount of lease revenue received from our tenant would adversely affect our business, financial condition, results of operations and cash flows.
The occurrence of a bankruptcy or insolvency by Sharyland could diminish the lease revenue we receive from our lease agreements with Sharyland, increase our financial obligations and cause acceleration of our debt.
Our leases include a provision permitting us to terminate the leases in the event of a bankruptcy by our tenant. However, should our tenant become a bankruptcy debtor, the bankruptcy court could declare that provision unenforceable or, if we do not terminate the lease, may permit our tenant to assume or reject any or all of our lease agreements, which Sharyland may be permitted to select at its option. If assumed, any past due amounts owing to us would be cured. If rejected, the rejection will be a breach of the particular lease or leases so rejected, and we would attempt to either renegotiate the lease with our tenant or identify an alternate tenant. Any new lease with an alternate tenant would require PUCT approval, including PUCT approval of the transfer of our tenant’s operating licenses to a new tenant. Pending our tenant’s decision, the bankruptcy laws require it to pay its post-bankruptcy rental obligations to us in full when due. Depending upon the sufficiency of assets available to pay claims, a rejection of the leases in bankruptcy or an insolvency of Sharyland could ultimately preclude full collection of sums due us under our lease agreements with our tenant. Furthermore, the agreements governing our indebtedness consider it a default if our tenant becomes bankrupt, which would automatically accelerate our indebtedness, or if our tenant is not the lessee of our assets, which could result in the acceleration of such indebtedness.
In addition, our leases are net leases and as such require that our tenant pay for repairs, maintenance, ad valorem or property taxes and other assessments levied on our T&D assets. See “Business and Properties—Our Tenant—Our Leases.” Many of these costs are both significant and payable in arrears. If not previously paid by our tenant, the default or bankruptcy of our tenant would likely place the financial burden for these accrued costs on us without any corresponding ability on our part to either transfer the obligation for these costs to a new tenant, recoup these costs from third parties or otherwise avoid paying these costs. To the extent any such events occur, our financial condition and results of operations may likely be adversely affected.
We have not yet negotiated lease payments with respect to substantially all of the capital expenditures that we expect to fund during the next several years, and our leases expire at various times between 2015 and 2022. There is no assurance that new negotiations will result in lease payments that are higher than or comparable to the lease payments we expect under our current leases.
From time to time, we negotiate rent supplements under our leases related to capital expenditures we fund to provide us with a return on such capital expenditures over time. Additionally, under the terms of our development agreement, we are required to give Sharyland a right of first offer to lease any assets we acquire or develop, subject
 
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to limited exceptions. If we and Sharyland are unable to agree on lease terms, we will only be able to lease the assets to other tenants on terms that are more favorable to us than Sharyland’s best offer. Historically, we and Sharyland have negotiated rent payments intended to provide us with approximately 97% of the projected regulated return on rate base investment attributable to our assets. The amount of the rent increase related to a supplement is subject to negotiation each time a supplement is agreed to, but our existing leases provide that our historical agreements with our tenant will serve as the basis for the rental rate increase or new rent payments, subject to limited factors that can affect the negotiation, including the rate of return that utilities in the State of Texas are generally earning at the time of the relevant negotiation. See “Business and Properties—Our Tenant—Our Leases—Supplements” for a description of the manner in which this supplement process operates and “Business and Properties—Our Revenue Model” for an explanation of how these rents are derived. Because we expect significant capital expenditures during the next several years, the results of these negotiations will affect a significant portion of the lease revenue we expect during the next several years. There is no assurance that the results of these negotiations will result in returns on these capital expenditures that are higher than or comparable to the returns we expect as a result of our tenant’s current lease obligations.
Furthermore, the lease relating to less than 25% of our existing assets expires on December 31, 2015, and leases relating to our remaining assets expire at various times between December 31, 2019 and December 31, 2022. There is no assurance that the lease payments in any renewals of these leases, or in any new lease with a different tenant, will be higher than or comparable to the payments we expect under our current leases. If we are unable to negotiate lease payments that are higher than or comparable to the lease payments we expect under our current leases, our financial condition, results of operations and cash flows will be negatively impacted.
Our structure and the terms of our leases with our tenant limit our control over SDTS and our T&D assets.
Sharyland, as the managing member of our subsidiary, SDTS, has the exclusive power and authority on behalf of SDTS to manage, control, administer and operate the properties, business and affairs of SDTS in accordance with the limited liability company agreement governing SDTS, subject to a variety of negative control rights in favor of our wholly-owned subsidiary Transmission and Distribution Company, L.L.C., or TDC, and a delegation agreement with us. See “SDTS Company Agreement and Delegation Agreement—Delegation Agreement.” TDC owns substantially all of the economic interest in SDTS. Nevertheless, our management and board of directors is limited in their ability to exert control over SDTS and our T&D assets. This arrangement also complicates any decision by our board of directors not to renew or terminate our leases with our tenant.
In addition, under the terms of our leases, our tenant is responsible for, and fulfills, substantially all of the operational functions that, in an integrated utility, would be controlled and directed by the owner of the T&D assets. These functions include repairing and maintaining the T&D assets leased from us, planning new T&D projects, forecasting capital expenditures, handling customer billing and complaints, handling community relations matters, accounting for substantially all of the utility’s operations and maintenance costs, cybersecurity, construction management, handling environmental and regulatory matters (including maintaining various regulatory certifications) and all other matters related to the operation of the utility. While we have influence over the manner in which our tenant provides these functions pursuant to the terms of our leases and through Hunt Manager’s working relationship with Sharyland, we do not control our tenant and, as a result, do not have the same level of control as a similarly situated owner of T&D assets in an integrated utility. As a result, even if we believe that our T&D assets are not being operated efficiently or effectively, we may not be able to require our tenant to change the way it operates them and our financial condition and results of operations may be adversely affected.
Further, due to the interrelated nature of our relationships with Sharyland, Hunt, Hunt Manager and Hunt Developer, conflicts of interests may arise between us and Sharyland when negotiating our leases or in Sharyland’s operation of the assets under our leases. In addition, any negative change in our relationships with Sharyland, Hunt, Hunt Manager or Hunt Developer could negatively impact the other relationships. Accordingly,
 
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the negotiations and agreements between us and these entities and their affiliates and the development of our assets under our leases may not reflect the best interests of our stockholders.
Changes in technology may reduce the value of our T&D assets and could adversely affect our business.
Research and development activities are ongoing to improve existing and alternative technologies to produce electricity, including advancements related to self-generation and distributed energy technologies such as gas turbines, fuel cells, microturbines, photovoltaic (solar) cells and concentrated solar thermal devices. It is possible that advances in these or other technologies will reduce the costs of electricity production from these technologies to a level that will enable these technologies to compete effectively with traditional generation plants. Self-generation itself may exacerbate these trends by reducing the pool of customers, subject to certain regulatory limits, from whom fixed costs are recovered, while potentially increasing costs of system modifications that may be needed to integrate the systemic effects of self-generation. To the extent self-generation facilities become a more cost-effective option for certain customers, T&D investment opportunities generally may decrease, adversely affecting our growth plans, and our tenant’s financial and operating performance may be adversely impacted, which in turn would decrease the amount of percentage rent our tenant owes us and may lead it to request discounts or deferrals on its lease payments to us or seek to terminate its leases with us. Decreases in the amount of lease revenue received from our tenant would adversely affect our business, financial condition, results of operations and cash flows.
Failure to renew a lease with Sharyland upon its expiration, or any decision to terminate a lease as a result of a material breach thereof by Sharyland, would be complicated and costly and could adversely affect our operating results, financial condition and relationship with regulators and ratepayers.
The lease relating to less than 25% of our existing assets, which we refer to as the S/B/C Lease, expires on December 31, 2015, and leases relating to our remaining assets expire at various times between December 31, 2019 and December 31, 2022. We have the right to terminate our leases if Sharyland breaches those leases by, for example, failing to pay us rent when that rent is due, after applicable grace periods. However, for a variety of reasons, terminating the leases, or entering into a new lease with a different tenant following expiration of our leases with Sharyland, would be complex and costly. Under our leases, Sharyland may not cease to be the operator of the T&D assets at any time, including upon termination or expiration of the leases, without first acquiring any necessary regulatory approvals from the PUCT and other regulatory bodies, including PUCT approval of the transfer of Sharyland’s operating licenses to a new tenant. As a result, Sharyland will continue to operate the T&D assets subject to the lease while we, Sharyland and the new tenant are obtaining these regulatory approvals. If we are terminating a lease because we believe that Sharyland has materially breached the lease, and Sharyland is contesting our right to terminate the lease, it would be difficult to obtain the necessary regulatory approvals to substitute a new tenant unless we can demonstrate that Sharyland was no longer capable of providing adequate service. We also must obtain approval under our debt agreements if we desire to terminate a lease, and if we terminate a lease with Sharyland without such approval, we would be in default under our debt agreements, which could result in the acceleration of any outstanding indebtedness thereunder. In addition, transfer of operational control of the related T&D assets from Sharyland to a new tenant could also be complicated, and problems associated with this transfer could adversely affect our results of operations and financial condition. For instance, if our tenant is in the process of constructing a Footprint Project, we would either have to transition responsibility for constructing that Footprint Project to the new tenant or negotiate for Sharyland to complete its construction of such project which could be costly. Any decision to not renew or terminate our leases with our tenant is also complicated by Sharyland’s position as the managing member of SDTS. See “SDTS Company Agreement and Delegation Agreement.” In addition, at the time a lease terminates, Sharyland may be a tenant under another lease with us that has not terminated, and we may be parties to a management agreement with Hunt Manager and a development agreement with Hunt Developer. We may choose not to terminate a lease, or not to enforce or to enforce less vigorously any rights we may have against Sharyland under a lease, because of our desire to maintain these other relationships with Sharyland or Hunt. The complexities associated with terminating a lease with Sharyland, or entering into a lease with a different tenant upon expiration of a
 
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Sharyland lease, could make us less likely to choose to do so, even if we would prefer a new tenant, which could adversely affect our operating results, financial condition and relationships with regulators and ratepayers.
If we decided to replace Sharyland as the tenant under our leases, we may have trouble identifying a new tenant that will agree to acceptable lease terms .
If we determine that a renewal of a lease with Sharyland is not in the best interests of our stockholders, if Sharyland determines it no longer wishes to be the tenant under a lease upon its expiration or if we desire to terminate a lease as a result of a breach of that lease by Sharyland, in each circumstance we would need to identify a new tenant for the lease. Any new tenant would need to be a qualified and reputable operator of T&D assets with the wherewithal and capability of acting as our tenant. Furthermore, in many such circumstances any new tenant of a significant portion of our assets would need to be willing and able to make their financial statements public and agree to timely provide us with those financial statements in order for us comply with our obligation to include our tenant’s financial statements in the periodic reports we file under the Securities Exchange Act of 1934, as amended (Exchange Act). There is no assurance that we would be able to identify a tenant that meets these criteria, or that if we are able to identify any such tenant, we would receive lease terms from a new tenant that are as favorable as the existing lease terms with Sharyland.
Our growth plan will continue to subject us to risks involved in single tenant leases.
We intend to focus our development and acquisition activities on real properties that are net leased to single tenants. If we are able to successfully implement our growth plan and develop and acquire infrastructure assets outside of Texas, we may enter into leases with counterparties other than Sharyland. Furthermore, we may develop and acquire assets in Texas that we lease to tenants other than Sharyland. However, even if this growth plan is implemented, it is likely that we will continue to rely on a small number of third-party tenants for all or substantially all of our revenue. Therefore, we expect that our business, financial condition and results of operations will continue to be subject to the concentration risks associated with a small number of tenants.
Our T&D assets and our tenant’s operations are subject to governmental regulation and oversight that could adversely impact our expected returns and operating results, and we rely upon our tenant to manage these matters.
Under the terms of our leases, our tenant is responsible for all of the regulatory matters associated with our T&D assets, including determining whether the capital expenditures we fund are reasonable and necessary, complying with regulatory, environmental and safety matters and interfacing with various regulatory bodies.
Our tenant’s rates are regulated by the PUCT and are subject to cost-of-service regulation and annual earnings oversight. Although rate regulation is premised on the timely recovery of prudently incurred costs and the opportunity to earn a reasonable rate of return on invested capital, there is no assurance that the PUCT will determine that all of our rate base can be recovered through our tenant’s rates, or that the PUCT will not otherwise make regulatory determinations that adversely affect our T&D assets or our tenant. The PUCT could determine that capital expenditures were not reasonable and necessary, and that recovery of such expenditures should not be included in our tenant’s rates, or the PUCT could challenge other regulatory judgments that our tenant makes, such as those related to affiliate charges, operations and maintenance expenses, tax elections, rate case expenses, regulatory assets and other matters. While these determinations would not affect our tenant’s previously negotiated rent obligations to us, they could adversely affect our tenant’s ability to meet its obligations generally, including its obligations to pay us rent pursuant to the leases. Furthermore, if the PUCT made a determination that adversely affected our rate base, and as a result our tenant were unable to meet its rent obligations to us and we terminated the related lease, it is unlikely that the replacement tenant would be willing to pay us rent for anything other than the PUCT-approved rate base amount. Also, if the PUCT makes a determination that adversely affects the amount of our rate base, we may need to take accounting charges that impair our assets, which could further adversely affect our results of operations and financial condition.
 
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We and our tenant are subject to periodic rate cases. In connection with the 2014 rate case settlement, Sharyland agreed to bring another rate case during 2016 based on a 2015 test year. The outcome of the 2016 rate case is unknown, but if Sharyland’s rates are reduced or if existing regulatory parameters are reduced, our lease revenue, and the fair market value of our T&D assets, will be adversely affected.
In addition, our T&D assets and our tenant’s operations are subject to U.S. federal, state and local laws and regulation, including laws and regulations related to regulatory, environmental and human health and safety matters. We generally rely on our tenant to ensure compliance with these laws and rules, and, generally, our tenant is required under our leases to remedy the effect of any non-compliance during the term of the applicable lease. Compliance with the requirements under these various regulatory regimes may cause us or our tenant to incur significant additional costs, and failure to comply with these requirements could result in the shutdown of the non-complying assets, the imposition of liens, fines and/or civil or criminal liability. Utility operations may also be affected by legislative and regulatory changes, as well as changes to market design, market rules, tariffs and cost allocation by ERCOT, the PUCT or FERC. Further, for regulatory reasons, we may be forced to sell certain of our assets or to swap assets with another utility in order to improve service performance. We cannot predict what effect any such changes in the regulatory environment will have on us or on Sharyland’s operations. Furthermore, under some of our leases, we indemnify our tenant for environmental liabilities that materialized prior to the date we acquired the property. Although in some instances we are indemnified by the prior owner of such property, any material expenditures, fines or damages that we must pay, including pursuant to the indemnity given to our tenant, would adversely affect our results of operations and financial condition.
Our growth depends in part on Hunt’s ability to develop and construct ROFO Projects and other T&D assets and our acquisition of all or a significant interest in such assets at a price that is accretive to our stockholders.
We have a right of first offer with respect to ROFO Projects during the term of the development agreement with Hunt Developer. We also expect that Hunt will continue to pursue additional development opportunities for T&D projects and that we will have an opportunity to acquire those in the future. However, we do not have the right to require Hunt Developer to pursue the development and construction of any such projects, and Hunt Developer’s development team may not be successful in identifying additional projects that are attractive investments. Furthermore, we may not be able to reach agreement on the purchase price and other terms of the acquisition of ROFO Projects or any other T&D projects. If we are unable to reach agreement on the terms of the acquisition of a ROFO Project, we will not have the right to prohibit Hunt or Sharyland from operating the T&D assets for its own benefit or from selling the assets to another third party on terms no less favorable than those offered by us. If Hunt does not develop ROFO Projects that are attractive to us, or if we are unable to agree upon the terms of the acquisition of ROFO Projects, we will not experience the rate base and lease revenue growth we expect.
Also, Hunt may not be able to sell to us a ROFO Project even if we agree with Hunt on the price and other terms of the sale. Hunt intends to finance the development of ROFO Projects through development companies in which certain of our founding investors will have the opportunity to invest capital. Hunt may require those investors to sell their interests in the ROFO Projects only if the consideration payable would result in the investors receiving at least 1.5 times the amount of equity capital they invested; we generally expect this threshold to translate into a purchase price equal to at least approximately 1.25 times the rate base for the related assets, though the actual ratio will depend on the financing structure used on each development project. If the price does not meet this threshold, the sale of the ROFO Project will require the approval of Hunt and at least two of our founding investors in such project. There can be no assurance that the price for which we are willing to purchase a ROFO Project will satisfy that return threshold and, if we fail to satisfy such threshold, that the investors will otherwise agree to sell their interests in the ROFO Project.
The development agreement is coterminous with the management agreement and will expire effective upon the termination of the management agreement. Accordingly, if either we or Hunt Manager decide not to renew or to terminate the management agreement pursuant to its terms, we will no longer have rights to the ROFO Projects.
 
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Our growth, financial condition and results of operations would be negatively impacted if the PUCT, the FERC or other utility commissions outside of the State of Texas determine that a utility that leases its regulated assets from a REIT should not benefit from an income tax allowance.
In determining an electric utility’s tariff, part of the cost of service is an income tax allowance, or ITA. Either the FERC or a state utility commission first determines the appropriate investment return for the utility and then grosses up the return to cover the taxes imposed on the utility’s income. An ITA for a C corporation is well established.
The FERC’s current policy on ITAs for pass-through entities is set forth in its 2005 Policy Statement on Income Tax Allowances, which provides that a partnership, which is a pass-through entity for tax purposes, that owns regulated utility assets can receive an ITA in its rates so long as the partnership can demonstrate that its partners (or owners of the partners) have actual or a potential income tax liability for the income generated by the regulated utility. If the partners in the partnership do not pay taxes (i.e., municipalities) then no ITA will be granted. The ITA of a pass-through entity will be determined in a rate case proceeding by the weighted marginal tax rate of the owning partners. Pass-through entities that the FERC has considered include master limited partnerships, limited liability companies and Subchapter S corporations. So long as InfraREIT qualifies as a REIT, it may claim a deduction for dividends it pays its stockholders in calculating its taxable income. Otherwise, InfraREIT pays tax as a C corporation. InfraREIT does not own utility property directly, but instead invests in utility assets indirectly through its Operating Partnership. The Operating Partnership is a limited partnership and is therefore a pass-through entity. We believe that each of its partners (InfraREIT, Hunt-InfraREIT and other limited partners) has actual or potential income tax liability, and that, as such, an ITA is appropriate under current FERC policy. However, while the FERC approved our acquisition of Cap Rock in 2010 with an ownership structure in which the FERC-regulated assets were held through a lease, the approval did not explicitly address whether an ITA would be allowed in our structure. Although we believe that the same question is now a matter of settled law in Texas, there can be no assurance that the law will not change. In addition, we are also targeting regulated infrastructure assets in jurisdictions outside of Texas, some of which have addressed pass-through entities, but none have explicitly addressed how an ITA would apply to our structure. If these jurisdictions determine that a utility that leases its regulated assets from a REIT should not benefit from an ITA, the regulated rates will be lower and our growth plan related to developing or acquiring assets in these jurisdictions may be adversely affected.
Our REIT structure may pose challenges to our ability to acquire infrastructure assets, and our inability to successfully acquire infrastructure assets would adversely affect growth in our asset base .
Because we intend to continue to qualify as a REIT, a limited amount of our revenues can be generated from non-qualifying sources. See “Material Federal Income Tax Consequences—Taxation of the Company—Requirements for Qualification as a REIT—Gross Income Tests.” As a result, a component of our growth strategy is to acquire qualifying REIT assets and lease them to third parties with the personnel and expertise to operate these assets, which we refer to as the lessor/lessee structure. The lessor/lessee structure poses a number of challenges to our ability to acquire additional T&D assets, including:
 
 	•	 	regulatory agencies in many jurisdictions are unfamiliar with our lessor/lessee structure, which could result in greater regulatory scrutiny or longer regulatory approval processes in connection with any proposed acquisition of REIT qualifying assets and, in some circumstances, may cause the regulatory agency to withhold approval for any such acquisition;	
 
 	•	 	the acquisition of a business by us would require us either to acquire only the REIT qualifying assets or to separate the assets of the business between us and a third party tenant;	
 
 	•	 	if a target business owns both REIT qualifying assets, such as T&D assets, and non-qualifying assets, such as generation assets, we may need to dispose of the non-qualifying assets or hold those assets in a taxable REIT subsidiary, which could complicate and delay the acquisition or lower our expected returns from such acquisition;	
 
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 	•	 	transaction structures would require us to either lease the acquired assets back to the seller of the assets, which the seller may not prefer, or to identify a third party lessee that is willing to operate the assets as a tenant and assume the related risks and rewards, which may be difficult;	
 
 	•	 	we may not be able to negotiate favorable rent and other terms with third-party lessees;	
 
 	•	 	publicly traded utilities who are potential sellers of T&D assets to us may be hesitant to lease those assets back from us because of the potential failed sale-leaseback accounting repercussions of such transactions and the potential related negative credit impacts; and	
 
 	•	 	the complexity involved in separating the REIT-qualifying assets from the assets associated with the operation of the business may take additional management time and resources, challenge our ability to successfully integrate the acquisition and cost more than an acquisition by a conventional utility would in most circumstances; in addition, selling the operating assets may result in gain on sale and an associated tax cost of separating the assets.	
As a result of these and other challenges, some sellers may prefer other potential buyers even in situations where we have agreed to pay comparable consideration. Our inability to acquire additional REIT-qualifying assets would limit our ability to execute on our growth strategy and would adversely affect our results of operations.
Acquisitions of T&D assets, including ROFO Projects, could divert time and resources and may not result in the benefits anticipated, which would adversely affect our financial condition and results of operations.
Future acquisitions could divert time and focus from operating our business. Integrating acquired assets may also result in unforeseen operating difficulties and expenditures. We may not accurately assess the value or prospects of acquisition candidates, and the anticipated benefits from our future acquisitions may not materialize. We expect the purchase price for any ROFO Projects will be negotiated by our Conflicts Committee and Hunt based on a number of factors. Such purchase price may include a premium to rate base, however, we expect that any lease with respect to such assets with Sharyland or another tenant would be negotiated with the intent to provide us with a return on and of the rate base associated with the assets over time, without regard to the acquisition premium, if any. In addition, future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, including our common stock, the incurrence of debt, the assumption of contingent liabilities and the future impairment of goodwill, any of which could harm our financial condition and results of operations.
We rely on third parties to support our growth, and our inability to find qualified third-party providers or the failure of third parties to provide timely and quality services would have an adverse impact on our ability to grow.
We do not have internal operational or construction management expertise. As a result, we rely on third parties to manage aspects of our growth, including the construction of our T&D assets. To date, our tenant has managed the planning and construction of our projects, but, in some circumstances, our tenant also relies on third-party contractors to complete these projects. For instance, our tenant managed the recent expansion of the Railroad DC Tie at the Mexican border and is currently managing the construction of various interconnects to generators from our Panhandle transmission assets, among other projects. Furthermore, we expect that Sharyland or another third party will manage the construction of a number of ROFO Projects. In some geographic areas where we expect growth, particularly in the Permian Basin, there is a shortage of qualified personnel to provide all of the services we need. If we are unable to find qualified personnel and third-party service providers to support the planning and construction of our projects, we may not be able to grow our rate base in the manner that we expect or at all. In addition, there is no assurance that these third parties will comply with their contractual obligations and complete construction projects efficiently, timely, cost-effectively or prudently,
which could cause regulatory agencies to rule adversely on the revenue from related rate base investments.
 
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Construction problems could adversely affect the timing of expected revenues from those projects, since we do not begin to recognize revenues under our leases with respect to Footprint Projects until the related assets are placed in service, and also could subject Sharyland or us to fines and penalties for failure to complete projects on the agreed-upon schedule.
The rapid growth that we expect increases the risk that construction project difficulties will adversely affect our financial condition and results of operations.
A substantial portion of the growth that we expect in our asset base is comprised of construction projects in the State of Texas. This growth profile makes us particularly susceptible to risks that construction projects generally are subject to, including:
 
 	•	 	the ability to obtain labor or materials on favorable terms or at all;	
 
 	•	 	ability to obtain right-of-way on a timely basis;	
 
 	•	 	equipment, engineering and design failure;	
 
 	•	 	labor strikes;	
 
 	•	 	adverse weather conditions;	
 
 	•	 	the ability to obtain necessary operating permits in a timely manner;	
 
 	•	 	legal challenges;	
 
 	•	 	delays due to funding that is yet to be secured by third parties;	
 
 	•	 	changes in applicable law or regulations;	
 
 	•	 	adverse interpretation or enforcement of permit conditions, laws and regulations by courts or the permitting agencies;	
 
 	•	 	other governmental actions; and	
 
 	•	 	events in the global economy.	
Many of these risks, if they materialize, could result in substantial delays in construction projects. For instance, many projects require environmental and other permits and approvals. Obtaining these permits can be time consuming and unpredictable. If these or other issues result in delays, the timing and amount of capital expenditures and lease revenues from these projects may be different than we anticipated, which could adversely affect our results of operations and cash flow.
The lag time between the time we fund capital expenditures and the time we begin receiving rent payments related to those capital expenditures can be lengthy.
Our tenant’s obligation to pay rent in respect of capital expenditures we fund does not begin until the assets related to such capital expenditures are placed in service. The lag time between the time that we fund capital expenditures with respect to a project and when the assets related to such project are placed in service and begin generating revenue can be lengthy. Although we will earn AFUDC on the amounts we have expended on capital expenditures that have not yet been placed in service, this accrual does not represent cash earnings. Because a significant portion of the growth we expect over the next several years relates to multi-year Footprint Projects, this lag will apply to a significant portion of our capital expenditures. Additionally, we may in some
 
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cases agree to rent holidays in connection with the negotiation of rent supplements. Such rent holidays are designed to delay our tenant’s rent obligations to us until the cost of such assets are reflected in our tenant’s revenue. These rent holidays typically last between one and eight months, during which we will not receive lease payments related to the increase in rate base or recognize AFUDC. See “Business and Properties—Our Tenant—Our Leases—Supplements.” Failure to timely receive rent payments related to the capital expenditures we fund could inhibit our ability to make cash distributions to our stockholders and could force us to fund our business from other sources, including the issuance of equity securities or the incurrence of additional indebtedness. Those funding sources may not be available on favorable terms or at all, which would adversely affect our business, results of operations, cash flow and financial condition.
There are limitations on our tenant’s ability to increase its rates, which could adversely affect our tenant’s ability to meet its rent obligations to us.
Our tenant’s rates are established through rate proceedings and may be updated through interim TCOS and DCRF filings. These interim filings allow our tenant to adjust its rates to reflect capital expenditures that have been made since the prior filing but not to reflect increased operation and maintenance expense. In order to increase its rates to reflect higher operation and maintenance expense, our tenant must file a full rate proceeding with the PUCT.
Various limitations apply to our tenant’s ability to make interim TCOS and DCRF filings. For example, our tenant may only make interim TCOS filings twice per year and may only make a DCRF filing once per year during a one-week window each April. Additionally, even if our capital expenditures or our tenant’s increased costs justify an increase to its distribution tariff rates, it may be difficult in certain circumstances for our tenant to implement the rate adjustments without engendering significant public opposition, which could adversely affect its ability to meet its rent obligations to us. If our tenant is unable to meet its rent obligations to us, our cash flows, results of operations and financial condition will be adversely affected.
The relative illiquidity of our infrastructure assets may hinder our ability to sell our assets when we desire and may discourage third parties from seeking to acquire the Company or our business.
Investments in infrastructure assets are relatively illiquid compared to other investments. Thus, we may not be able to sell our T&D assets when we desire or at prices acceptable to us in response to changes in economic or other conditions. Additionally, the relative illiquidity of our assets may make us less desirable to third parties seeking to acquire our business, which may prevent a change in control of our company that would be in the best interests of our stockholders.
We expect to rely on the capital markets in order to meet the significant capital expenditures and acquisition costs we expect in the future and to continue to distribute at least 90% of our taxable income to our stockholders.
To qualify as a REIT, we generally must distribute annually to our stockholders at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains, and we will be subject to regular corporate income taxes to the extent that we distribute less than 100% of our REIT taxable income each year, determined without regard to the dividends paid deduction and including any net capital gains. We expect to raise equity and debt capital in the future to support our growth and the distributions we will be required to make to our stockholders. As a result, our financial condition and liquidity will be adversely affected if market conditions prevent us from obtaining financing on favorable terms or at all. Adverse business developments or market disruptions could increase the cost of financing or prevent us from accessing the capital markets. Events that could cause or contribute to a disruption of the capital markets include, but are not limited to:
 
 	•	 	a recession or an economic slowdown;	
 
 	•	 	the bankruptcy of one or more energy companies or financial institutions;	
 
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 	•	 	a significant change in energy prices;	
 
 	•	 	a terrorist or cyber attack or threatened attack;	
 
 	•	 	a material change in the U.S. federal income tax code;	
 
 	•	 	the outbreak of a pandemic or other similar event; or	
 
 	•	 	a significant electricity or natural gas transmission disruption.	
Our ability to access the capital markets may be severely restricted at a time when we would like, or need, to access those markets, which could impact our flexibility to react to changing economic and business conditions. In some scenarios, if debt or equity capital were unavailable on any terms, we would be unable to comply with the REIT distribution rules or our obligations to fund capital expenditures for Footprint Projects under the leases, or both.
Covenants under the agreements governing our indebtedness may limit our operational flexibility and may restrict our ability to make distributions to our stockholders.
The agreements governing our indebtedness contain covenants that place restrictions that, among other things, limit our ability to:
 
 	•	 	incur indebtedness;	
 
 	•	 	make restricted payments (distributions) from the borrowing entity;	
 
 	•	 	merge, consolidate or transfer all or substantially all of our or our subsidiaries’ assets;	
 
 	•	 	enter into transactions with affiliates;	
 
 	•	 	create liens on our or our subsidiaries’ assets;	
 
 	•	 	make certain investments or acquisitions;	
 
 	•	 	change the nature of our business;	
 
 	•	 	sell or lease assets; and	
 
 	•	 	terminate or modify certain terms of our leases.	
The agreements also require us to maintain specified financial ratios and satisfy financial condition tests.
For example, the Operating Partnership must maintain at all times, on a consolidated basis, a total debt to capitalization ratio of not more than 0.75 to 1.00 and, for each period of four consecutive fiscal quarters, a consolidated debt service coverage ratio of at least 1.20 to 1.00. Debt service coverage ratio means cash available for debt service divided by debt service payments, and is measured on a 12-month trailing basis. Cash available for debt service means lease revenue less general and administrative expenses. TDC, a member of SDTS and a wholly owned subsidiary of the Operating Partnership, must maintain at all times a total debt to capitalization ratio of not more than 0.75 to 1.00 on a consolidated basis and must maintain, for each four consecutive fiscal quarter period, a consolidated debt service coverage ratio of at least 1.20 to 1.00 and a balance in a debt service reserve account equal to two quarterly principal plus interest payments payable on TDC’s senior secured notes. A dividend stopper is also in place prohibiting distributions unless the debt service coverage ratio is at least 1.20 to 1.00. In addition, SDTS must maintain at all times, on a consolidated basis, a total debt to capitalization ratio of not more than 0.65 to 1.00 and, for each period of four consecutive fiscal quarters, a consolidated debt service coverage ratio (as defined above) of at least 1.40 to 1.00. Furthermore, under the CREZ term loan, Sharyland Projects, L.L.C., or SPLLC, the entity that owns substantially all of our Panhandle assets, must maintain a debt to total capitalization ratio not to exceed 0.70 to 1.00 at the end of any fiscal quarter.
 
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Our ability to continue to borrow and make restricted payments is subject to compliance with our covenants, and a failure to comply with our covenants could cause a default under the applicable debt instrument or limit our ability to make restricted payments to fund distributions to stockholders we are required to make in accordance with the REIT rules unless we are able to take other mitigating steps or are eligible for certain statutory relief provisions, which could require us to seek an amendment or waiver or cause us to no longer maintain our status as a REIT, or ultimately repay the related debt with capital from other sources. See “Material Federal Income Tax Consequences—Taxation of the Company—Annual Distribution Requirements” and “—Failure To Continue To Qualify.” Under those circumstances, other sources of capital may not be available to us or may be available only on unattractive terms. In addition, our T&D assets are collateral under our secured financings. If we are unable to make our debt payments, or otherwise default under the agreements governing our indebtedness, the property could be foreclosed upon or transferred to the collateral agent with a consequent loss of income and asset value. A foreclosure of any of our properties would adversely affect our financial condition, results of operations, liquidity and our ability to service debt and make distributions to our stockholders.
We rely on our tenant to comply with some of the covenants under our credit arrangements.
Our credit facilities and other indebtedness require our tenant to deliver certain financial statements and reports, maintain its licenses and permits, deliver certain required notices, operate and maintain our T&D assets and maintain proper books of records and account in conformity with GAAP and include events of default triggered by (i) a bankruptcy by our tenant, (ii) any judgment being entered against our tenant for payment of money in excess of $2 million, (iii) a default by our tenant with respect to any of its indebtedness in excess of $2 million or any other default by our tenant with respect to any of its indebtedness that could lead to a material adverse effect (as defined in the applicable debt agreements) and (iv) in some cases, a default by our tenant under our leases that could lead to a material adverse effect (as defined in the applicable debt agreements). Our debt agreements also limit our tenant’s ability to incur indebtedness, subject to some exceptions. We have reflected these covenants in our leases. Our ability to continue to borrow is subject to our tenant’s continued compliance with these and other covenants, and our tenant’s failure to comply with these covenants could cause a default under our credit facilities, which could require us to repay the related debt with capital from other sources, all of which would adversely affect our financial condition and results of operations.
We have a significant amount of indebtedness, and we expect to incur significant additional indebtedness. Our indebtedness limits our financial flexibility, and, if we are unable to borrow on favorable terms, our financial condition and results of operations would be adversely affected.
As of September 30, 2014, on a pro forma basis, we had total consolidated indebtedness of $     million, of which $     million (or approximately     %) was variable rate debt. We expect substantial capital expenditures related to Footprint Projects and acquisition costs related to ROFO Projects during the next several years. To fund these capital expenditures and acquisition costs, we expect to incur significant additional indebtedness. There can be no assurance that these funds will be available to us on favorable terms or at all. Furthermore, significant debt levels can reduce our flexibility to react to changing business and economic conditions, increasing the risk of investing in our common stock. A material portion of our lease revenue will be dedicated to the payment of interest on our indebtedness, thereby reducing the funds available for working capital, capital expenditures and distributions to our stockholders. When our credit facilities mature, we will need to be able to repay the debt, most likely by incurring additional indebtedness or issuing common stock or other equity. Our ability to secure additional financing, if needed, prior to or after our existing debt instruments mature may be substantially restricted by the existing level of our indebtedness and the restrictions contained in our debt instruments. We may not be able to refinance some or all of our indebtedness on favorable terms or at all, which could inhibit our ability to fulfill our obligations to fund capital expenditures for Footprint Projects under the leases, execute our growth strategies, complete future acquisitions or take advantage of other business opportunities and could have a material adverse effect on our financial condition and results of operations.
 
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Our T&D assets and our tenant’s operations may be affected by hazards associated with electricity transmission and distribution and other events for which our tenant’s and/or our property insurance may not provide adequate coverage.
Our T&D assets and our tenant’s operations are subject to hazards associated with electricity transmission and distribution, including explosions, fires, inclement weather, natural disasters, mechanical failure, unscheduled downtime, equipment interruptions, remediation, discharges or releases of toxic or hazardous substances and other environmental risks. These hazards can cause severe damage to or destruction of property and equipment and may result in suspension of operations and the imposition of civil or criminal penalties. However, there may not be adequate property insurance to cover the associated costs of repair or reconstruction, or insurance may not be available at commercially reasonable rates, or, for some events, at all. For instance, property insurance coverage for a portion of our T&D assets has not been available on commercially reasonable terms for several years, and, as a result, we have waived or amended the requirements under our leases that Sharyland obtain such insurance. In this respect, we and Sharyland are self insured for a substantial portion of our T&D assets. In the event remediating any damage or loss is considered a repair under the applicable lease, our tenant is responsible for the cost of repairing or replacing such damage or loss whether or not covered by insurance. On the other hand, in the event remediating any damage or loss is considered a Footprint Project under the lease, we will be responsible for payment of any insurance deductible, as well as for any such damage or loss not covered by insurance.
Although it is possible that our capital expenditures to fund these remediations could be recoverable pursuant to an interim TCOS or DCRF filing or a rate case, in some circumstances recovery of the related expenditures could be delayed, in which case our tenant may likely request a rent holiday with respect to the related capital expenditures until they are generating revenue. If we agreed to this rent holiday, our financial condition and results of operations would be adversely affected. If we do not agree, the financial burden of paying us rent on these remediation costs would adversely affect our tenant’s financial condition, cash flows and revenues.
In addition, any damage or destruction to our T&D assets could interrupt our tenant’s operations, reducing the amount of tariff revenue it collects, which would lower the amount of percentage rent payments that our tenant owes us. Furthermore, any such revenue reduction would make it more difficult for our tenant to meet its obligations generally, including its rent obligations to us. We carry no business interruption insurance independent of what our tenant carries, and it carries only a minimal amount of business interruption insurance.
Sharyland has the right to cause our subsidiary, SDTS, to raise equity capital without our consent, which could dilute our interests in our T&D assets .
Generally, our consent is required before our subsidiary, SDTS, engages in any material action. The exception is that if improvements to our T&D assets that constitute Footprint Projects are required by a regulatory authority or are reasonably necessary in order to serve Sharyland’s customers or to maintain the safety or reliability of our T&D assets, and if the SDTS working capital reserve is insufficient for such Footprint Projects, Sharyland may, without our consent, cause SDTS to raise capital to fund these Footprint Projects through the admission of additional members of SDTS. We can prevent Sharyland from doing so, at any time, by contributing the necessary capital to SDTS. Furthermore, Sharyland’s rights to dilute our interest in SDTS are subject at all times to its obligation as the tenant under our leases to negotiate and pay us rent on the related capital expenditures when they are placed in service. However, subject to these limitations, Sharyland may exercise its right in a manner that may dilute our economic interest in our T&D assets, which could adversely affect our financial condition and results of operations. See “SDTS Company Agreement and Delegation Agreement.”
 
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Because of the lessor/lessee structure, if our tenant’s revenue increases in the future, our lease revenue will not increase as quickly as it would if we were operating as an integrated utility.
All of our revenues come from lease payments from our tenant. The lease payments for the assets we owned at our inception in 2010 were negotiated in 2010, the lease payments for our Panhandle and Stanton transmission loop assets were negotiated in 2014 and the lease payments for our other capital expenditures have been, or will be, negotiated at or around the time the applicable assets are placed in service. If market conditions change, e.g., there is inflation or an increase in authorized returns on equity or other changes that could increase our tenant’s rate of return, and our tenant completes a rate case that allows it to realize a greater rate of return than what was originally anticipated, we would not be able to force our tenant to renegotiate the leases to reflect the effect of the higher rate of return. Because percentage rent is based on our tenant’s revenues, we would share some of the benefit of the increase in our tenant’s rates, but our revenue may not increase to the same extent as our peers’ revenue increases in those circumstances or if we were operating as an integrated utility.
Our industry is highly competitive, and increased competitive pressure could adversely affect our business and our ability to execute our growth strategy.
The market for investing in energy infrastructure assets is highly competitive and fragmented, and recently the number and variety of investors for energy infrastructure assets has been increasing, specifically in our core Texas market. Some of our competitors are large companies that have greater financial, managerial and other resources than we do. In addition, some of our competitors have established relationships with other utilities and other stakeholders that may better position them to take advantage of certain opportunities. Furthermore, in small portions of our service territories, existing and potential customers have a choice between Sharyland and other utilities that may have lower distribution tariffs than Sharyland, which could result in those customers choosing the other utility over Sharyland. Our ability to execute our growth strategy could be adversely affected by the activities of our competitors and other stakeholders. These competitive pressures could have a material adverse effect on our business, expected capital expenditures, results of operations, financial condition and our distributions to our stockholders.
We have a limited history, and our business strategy may not succeed in the long term.
We began generating revenues from lease payments from T&D assets in 2010, and a significant portion of our total assets were placed in service and began generating revenues in 2013. If our assets are unable to generate the lease revenues we predict, or if our business model does not generate the benefits and growth opportunities that we are seeking to achieve, we may be forced to change our business model and our financial condition and results of operations may suffer.
We may be subject to increased finance expenses if we do not effectively manage our exposure to interest rate risks.
We are exposed to various types of market risk in the normal course of business, including the impact of interest rate changes. Some of our indebtedness bears interest at variable rates, generally linked to market benchmarks such as LIBOR. The credit markets have recently experienced historical lows in interest rates. As the overall economy strengthens, it is possible that monetary policy will continue to tighten further, resulting in higher interest rates to counter possible inflation. Interest rates on floating rate credit facilities and future debt offerings could be higher than current levels, causing our financing costs to increase accordingly. If we are not successful in limiting our exposure to changes in interest rates, our business, financial condition and results of operations could be materially and adversely affected.
 
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If we are unable to protect our rights to the land under our towers, lines and substations, it could adversely affect our business and operating results.
Our T&D real property interests include fee interests, easements, licenses and rights-of-way. A loss of these interests at a particular tower site may interfere with our tenant’s operations and ability to generate lease revenues from our T&D assets. In addition, any such loss could result in a default under our credit facilities, which could distract our management team, damage our relationship with our lenders and result in the acceleration of our indebtedness. Although our tenant generally has condemnation authority, use of condemnation can be expensive, resulting in costs to our tenant or us that may not be recoverable in rates, and the exercise of condemnation authority can be time consuming, sometimes taking several months or even years before the related real property assets are acquired. We generally rely on our tenant for title work related to our real property acquisitions. For various reasons, our tenant may not always have the ability to access, analyze and verify all information regarding titles and other issues prior to our acquisition of T&D assets. If we and our tenant are unable to protect our real property rights related to our T&D assets, our results of operation and financial condition may be adversely affected.
Utilities, including our tenant, are subject to adverse publicity and reputational risks, which make them vulnerable to negative customer perception and could lead to increased regulatory oversight or other sanctions.
Utility companies, including our tenant, are important to transmitting and distributing electricity that is critical to end-use customers and as a result have been the subject of public criticism focused on the reliability of their distribution services and the speed with which they are able to respond to outages caused by storm damage or other events. Adverse publicity of this nature may render legislatures, public service commissions and other regulatory authorities and government officials less likely to view utilities such as our tenant in a favorable light and may cause it to be susceptible to less favorable legislative and regulatory outcomes or increased regulatory oversight. Unfavorable regulatory outcomes can include more stringent laws and regulations governing our tenant’s operations, such as reliability and customer service quality standards or vegetation management requirements, as well as fines, penalties or other sanctions or requirements. The imposition of any of the foregoing could have a material negative impact on our tenant’s business, results of operations, cash flow and financial condition, which in turn could negatively impact its ability to make lease payments to us.
A portion of our net income relates to AFUDC, which is a non-cash income accrual and not representative of cash earnings.
A significant portion of the capital expenditures we expect during the next several years relates to multi-year projects. As a result of this and other construction projects, we expect a portion of our net income during the next several years to relate to AFUDC. This is a non-cash accounting accrual that increases the rate base balance of previously incurred capital expenditures when the related assets are placed in service but does not represent cash generated from operations. As a result, our net income is a less reliable indicator of the cash our business is generating than it would be if we were funding less capital expenditures or if our capital expenditures related to shorter term projects.
The preparation of our financial statements involves the use of estimates, judgments and assumptions, and our financial statements may be materially affected if our estimates prove to be inaccurate.
Financial statements prepared in accordance with U.S. GAAP require the use of estimates, judgments and assumptions that affect the reported amounts. Different estimates, judgments and assumptions reasonably could be used, which could materially affect our financial statements. Further, changes in these estimates, judgments and assumptions are likely to occur from period to period in the future. Significant areas of accounting requiring the application of management’s judgment include determining the fair value of our assets. These estimates, judgments and assumptions are inherently uncertain and, if they prove to be wrong, we face the risk
 
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that charges to income will be required. In addition, because we have a limited operating history, in some of these areas we have limited experience in making these estimates, judgments and assumptions that could cause the risk of future charges to income to be greater than if we had more experience in these areas. Any such charges could significantly harm our business, financial condition, results of operations and the price of our securities. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Summary of Significant Accounting Policies” for a discussion of the accounting estimates, judgments and assumptions that we believe are the most critical to an understanding of our business, financial condition and results of operations.
We will incur increased costs as a result of being a publicly traded company.
As a public company, we will incur additional legal, accounting and other expenses that we did not incur as a private company. In addition, rules implemented by the Securities and Exchange Commission (SEC) and NYSE have imposed various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Our management will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors, our board committees or as executive officers.
We have a significant goodwill balance related to the acquisition of Cap Rock and our formation transactions, both of which occurred in 2010. A determination that goodwill is impaired could result in a significant non-cash charge to earnings.
We had a goodwill balance at September 30, 2014 of approximately $138.4 million, of which $83.4 million is attributable to our acquisition of Cap Rock and $55 million is attributable to our formation transactions in 2010. An impairment charge must be recorded under GAAP to the extent that the implied fair value of goodwill is less than the carrying value of goodwill, as shown on the consolidated balance sheet. We are required to test goodwill for impairment at least annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that may result in an interim impairment test include a decline in our stock price causing market capitalization to fall below book value, an adverse change in business conditions or an adverse regulatory action. If we were to determine that our goodwill is impaired, we would be required to reduce our goodwill balance by the amount of the impairment and record a corresponding non-cash charge to earnings. Depending on the amount of the impairment, an impairment determination could have a material adverse effect on our financial condition and results of operations but would not have an impact on our cash flow.
As a holding company with no operations of our own, we will depend on distributions from our subsidiaries to meet our payment obligations and make distributions to our stockholders.
We derive all of our operating income from, and hold all of our assets through, our subsidiaries. As a result, we depend on distributions from our subsidiaries in order to meet our payment obligations and make distributions to our stockholders, but our subsidiaries generally have no obligation to distribute cash to us. Provisions of applicable law, contractual restrictions or covenants or claims of a subsidiary’s creditors may limit our subsidiaries’ ability to make payments or other distributions to us.
 
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We expect to become subject to financial reporting and other requirements for which our accounting, internal audit and other management systems and resources may not be adequately prepared.
Following this offering, we will become subject to reporting and other obligations under the Exchange Act, including the requirements of Section 404 of the Sarbanes-Oxley Act. Section 404 requires management to annually assess the effectiveness of our internal controls over financial reporting and, after we are no longer an “emerging growth company” (as described below), requires our independent registered public accounting firm to express an opinion on the effectiveness of our internal controls over financial reporting. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting, as well as a statement that our independent registered public accounting firm has issued an opinion on our internal control over financial reporting. To the extent applicable to us, these reporting and other obligations place or will place significant demands on our management, administrative, operational, internal audit and accounting resources and will cause us to incur significant expenses. To comply with these obligations, we may need to upgrade our systems or create new systems, implement additional financial and management controls, reporting systems and procedures, expand or outsource our internal audit function, and hire additional accounting, internal audit and finance staff. Design of our internal control environment is particularly challenging given our business model of owning regulated T&D assets and leasing them to a third party.
In addition, we will be required to include Sharyland’s financial statements in the periodic reports we file under the Exchange Act. However, our management does not prepare Sharyland’s financial statements, and neither our board of directors nor our management has any oversight over the preparation of those financial statements or over Sharyland’s internal control over financial reporting. Sharyland’s auditors identified a material weakness in Sharyland’s review process related to failed sale-leaseback accounting during its review of Sharyland’s financial statements for the quarter ended September 30, 2013. Although the material weakness was remediated by the fourth quarter of 2013 and Sharyland’s auditors did not identify a material weakness in connection with the 2013 year-end audit of Sharyland’s financial statements, there can be no assurance that Sharyland will not have additional material weaknesses or significant deficiencies in the future that may result in material misstatements in Sharyland’s financial statements or in Sharyland’s inability to timely provide us its financial statements. If Sharyland is unable to timely provide us with its financial statements, we may be unable to file our periodic reports within the timeframe required by the Exchange Act, which could result in certain penalties imposed by the SEC and could negatively impact our ability to access the capital markets or to comply with our obligations under our registration rights agreement.
The JOBS Act will allow us to postpone the date by which we must comply with certain laws and regulations intended to protect investors and to reduce the amount of information we provide in our reports filed with the SEC.
The JOBS Act is intended to reduce the regulatory burden on “emerging growth companies.” As defined in the JOBS Act, a public company whose initial public offering of common equity securities occurred after December 8, 2011 and whose annual gross revenues are less than $1.0 billion will, in general, qualify as an “emerging growth company” until the earliest of:
 
 	•	 	the last day of its fiscal year following the fifth anniversary of the date of its initial public offering of common equity securities;	
 
 	•	 	the last day of its fiscal year in which it has annual gross revenue of $1.0 billion or more;	
 
 	•	 	the date on which it has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; and	
 
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 	•	 	the date on which it is deemed to be a “large accelerated filer,” which will occur at such time as the Company (1) has an aggregate worldwide market value of common equity securities held by non-affiliates of $700 million or more as of the last business day of its most recently completed second fiscal quarter, (2) has been required to file annual and quarterly reports under the Exchange Act for a period of at least 12 months and (3) has filed at least one annual report pursuant to the Exchange Act.	
Under this definition, we will be an “emerging growth company” upon the completion of this offering and could remain an “emerging growth company” until as late as December 31, 2020.
The JOBS Act provides that, so long as a company qualifies as an “emerging growth company,” it will, among other things, be exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that its independent registered public accounting firm provide an attestation report on the effectiveness of its internal control over financial reporting and from any rules that may be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report on the financial statements.
Although we are still evaluating the JOBS Act, we may take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us so long as we qualify as an “emerging growth company.” Among other things, this means that our independent registered public accounting firm will not be required to provide an attestation report on the effectiveness of our internal control over financial reporting so long as we qualify as an “emerging growth company,” which may increase the risk that weaknesses or deficiencies in our internal control over financial reporting go undetected. Likewise, so long as we qualify as an “emerging growth company,” we may elect not to provide you with certain information that we would otherwise have been required to provide in filings we make with the SEC, which may make it more difficult for investors and securities analysts to evaluate our company. As a result, investor confidence in the Company and the market price of our common stock may be adversely affected.
Risks Related to Related Party Transactions and Conflicts of Interest
Hunt’s ownership and control of Hunt Manager and its current and prior relationships with our Chief Executive Officer and other officers and with three members of our board of directors give rise to conflicts of interest.
Our business originated in the Hunt organization, and Hunt Manager, our external manager, is a subsidiary of Hunt. All of our officers, including our President and Chief Executive Officer, David Campbell, are employees of Hunt Manager. Hunt controls, and will continue to control after the completion of this offering, the compensation of all our officers, including Mr. Campbell, and Hunt Manager’s employees will continue to enjoy various employee perquisites and access associated with being a Hunt employee. Hunt Manager has granted, and may in the future grant, compensation or awards that are based upon the performance of Hunt Manager, Hunt Developer, Sharyland and Hunt generally to our officers, including Mr. Campbell. As a result, Mr. Campbell and our other officers and other employees of Hunt Manager may benefit from the consideration paid by us under the management agreement, from any economic benefit that Hunt or Sharyland receives from the sale of ROFO Projects to us pursuant to the development agreement or from the performance of Sharyland. As a result, Mr. Campbell, our other officers and the other employees of Hunt Manager may consider the interests of these Hunt affiliates in any negotiations and may be incentivized to focus on ROFO Projects and divert attention from Footprint Projects. The duties our officers, including Mr. Campbell, owe us, and Mr. Campbell’s duties to us as a director, may conflict with duties to, and pecuniary interest in, Hunt Manager, Hunt Developer, Sharyland and Hunt generally. Therefore, the negotiations and agreements between us, our subsidiaries or our Operating Partnership and these entities and their affiliates may not solely reflect the interests of our stockholders.
 
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W. Kirk Baker, who is the Chairman of our board of directors, was the President and Chief Executive Officer of Hunt Manager until August of 2014, was a senior officer in the Hunt Consolidated, Inc. organization until July of 2012, and received compensation and other benefits from Hunt and its affiliates during these time periods. Hunt and Mr. Baker have informed us that Mr. Baker continues to receive, and may in the future after completion of this offering continue to receive, various perquisites and incentive compensation from Hunt, including incentive compensation based on profits that Hunt may generate from the sale of ROFO Projects to us and payments that we make to Hunt Manager. Mr. Baker currently is Managing Director of Captra Capital, an investment firm in which Mr. Baker and Hunt are currently the primary investors, and Hunt has funded and may continue to fund the operating overhead of Captra Capital’s manager, Captra Holdings, an entity that currently provides compensation and other benefits to Mr. Baker. Mr. Baker’s duties to us as a director may conflict with his duties to, and pecuniary interest in, Captra Capital, Captra Holdings, Hunt Manager, Hunt Developer and Sharyland. As a result, Mr. Baker may consider the interests of Hunt Manager, Hunt Developer, Sharyland and Hunt generally in any negotiation between us and one of those entities and may benefit from the consideration we pay Hunt Manager under the management agreement, from any economic benefit that Hunt or Sharyland receives from the sale of ROFO Projects to us pursuant to the development agreement and from the performance of Sharyland. Therefore, the negotiations and agreements between us, our subsidiaries or our Operating Partnership and these entities and their affiliates may not solely reflect the interests of our stockholders.
Hunter L. Hunt, who is a member of our board of directors, directly or indirectly has a significant economic interest in, and controls, Hunt Manager, Hunt Developer and Sharyland. Accordingly, Mr. Hunt will benefit from the consideration paid to Hunt Manager under the management agreement, from any economic benefit that Hunt or Sharyland receives from the sale of ROFO Projects to us pursuant to the development agreement and from the performance of Sharyland under the leases. Mr. Hunt’s duties to us as a director may conflict with his duties to, and pecuniary interest in, Hunt Manager, Hunt Developer, Sharyland and Hunt generally. As a result, Mr. Hunt may consider the interests of Hunt Manager, Hunt Developer, Sharyland and Hunt generally in any negotiation between us and one of those entities and may benefit from the consideration we pay Hunt Manager under the management agreement, from any economic benefit that Hunt or Sharyland receives from the sale of ROFO Projects to us pursuant to the development agreement and from the performance of Sharyland.
Although we intend to operate and manage our business for the benefit of our stockholders, there is a risk that actual or perceived conflicts of interests could affect the manner in which we treat Hunt as a limited partner in the Operating Partnership or how we manage our relationships with Hunt Manager, Hunt Developer and Sharyland under the management agreement, the development agreement and our leases. If we were to terminate any of our leases with Sharyland, we would lose the benefit of the relationship that we have cultivated with Sharyland and could damage our relationship with Hunt. Further, if we were to terminate the management agreement with Hunt Manager, we would no longer have the benefits associated with our development agreement with Hunt Developer, since the development agreement automatically expires upon the termination of the management agreement. These complications and costs could adversely affect our results of operations, financial condition and relationship with regulators and ratepayers.
Other than our right to own and construct Footprint Projects and an obligation to offer us ROFO Projects, Hunt and Sharyland are not contractually prohibited from competing against us for T&D assets or businesses, including within the State of Texas, and our charter contains provisions waiving any liability to us or our stockholders as a result of the participation of directors and officers and their affiliates in any such competitive activity.
Under the terms of the development agreement with Hunt Developer and Sharyland, we have the exclusive right to fund the construction of Footprint Projects. In addition, Hunt has granted us a right of first offer on ROFO Projects. However, Hunt is free to pursue the development and construction of other T&D projects and may compete directly with us for the acquisition of other T&D assets and businesses, including within the State of Texas. If Hunt were to acquire another utility that owns T&D assets, it may direct future
 
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development and acquisition opportunities to the other utility. Moreover, Hunt Manager may also serve as manager for any other T&D business that Hunt may acquire, which could divert the time and focus of our management team away from our business, which could materially harm our business and our results of operations. Additionally, as permitted by the Maryland General Corporation Law (MGCL), our charter contains provisions that permit our directors and officers and their affiliates (including individuals serving in such capacities who are also directors, officers and/or employees of Hunt and its affiliates) to compete with us, own any investments or engage in any business activities, including investments and business activities that are similar to our current or proposed investments or business activities, without any obligation to present any such business opportunity to us unless the opportunity is expressly offered to such person in his or her capacity as a director or officer of us.
We are dependent on Hunt Manager and its executive officers and key personnel, who provide services to us through the management agreement. We may not find a suitable replacement for Hunt Manager if the management agreement is terminated or for these executive officers and key personnel if any of them leaves Hunt Manager or otherwise becomes unavailable to us.
We are externally advised and managed by Hunt Manager, and all members of our senior management are employees of Hunt Manager. Pursuant to our management agreement, Hunt Manager is obligated to supply us with all of our senior management team. Subject to guidelines or policies adopted by our board of directors, Hunt Manager has significant discretion regarding the implementation of our investment and operating policies and strategies. Accordingly, our success depends significantly upon the experience, skill, resources, relationships and contacts of the executive officers and key personnel of Hunt Manager. The executive officers and key personnel of Hunt Manager have extensive knowledge of the Company and our industry. If any executive officer or key person of Hunt Manager leaves Hunt Manager or otherwise becomes unavailable to manage our business, our performance could be adversely impacted.
Our management agreement with Hunt Manager expires on December 31, 2019, and termination of the management agreement would eliminate our rights to Hunt Developer’s development pipeline and could harm our relationship with our tenant. Additionally, Hunt Manager’s interests and incentives relating to our business may differ from our long-term best interests.
The initial term of the management agreement will expire on December 31, 2019. The management agreement will automatically extend for additional five-year terms, unless we decide to terminate it pursuant to its terms. We will also have the right to terminate the management agreement at any time for cause, and Hunt Manager may terminate the agreement at any time upon 365 days’ prior notice to us, provided that Hunt Manager may not exercise this right in a manner that results in the management agreement terminating before December 31, 2019. Any termination of the management agreement would end Hunt Manager’s obligation to provide us with the executive officers and key personnel upon whom we rely for the operation of our business and, unless we terminate for cause, would also terminate our rights to ROFO Projects under the development agreement. In addition, we are required to pay Hunt a termination fee equal to three times the most recent annualized base management and incentive payment if we terminate the agreement for any reason other than cause. Further, any termination of our relationships with Hunt Manager and Hunt Developer may negatively impact our relationship with Sharyland, including Sharyland’s willingness to renew our leases or to negotiate supplements on terms that are favorable to us. Termination or failure to renew our leases could result in a default under our indebtedness. Additionally, because the base fee payable to Hunt Manager under the management agreement is calculated by reference to our total equity and the incentive payment payable to Hunt Manager is calculated as a percentage of the per OP Unit distributions to the Operating Partnership’s unitholders in excess of the Threshold Distribution Amount, Hunt Manager may be motivated to grow total equity or make Operating Partnership distributions in a manner that is not in our long-term best interests or in the best interests of our other stockholders.
 
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Hunt Manager’s liability is limited under the management agreement, and we have agreed to indemnify Hunt Manager against certain liabilities. As a result, we could experience poor performance or losses for which Hunt Manager would not be liable.
Pursuant to the management agreement, Hunt Manager will not assume any responsibility other than to render the services called for thereunder and will not be responsible for any action of our board of directors in following or declining to follow its advice or recommendations. Hunt Manager maintains a contractual as opposed to a fiduciary relationship with us. Under the terms of the management agreement, Hunt Manager, its officers, members and personnel, any person controlling or controlled by Hunt Manager and any person providing sub-advisory services to Hunt Manager will not be liable to us, any subsidiary of ours, our directors, our stockholders or any subsidiary’s stockholders or partners for acts or omissions performed in accordance with and pursuant to the management agreement, except those resulting from acts constituting gross negligence, willful misconduct, bad faith or reckless disregard of Hunt Manager’s duties under the management agreement. In addition, we have agreed to indemnify Hunt Manager and each of its officers, directors, members, managers and employees from and against any claims or liabilities, including reasonable legal fees and other expenses reasonably incurred, arising out of or in connection with our business and operations or any action taken or omitted on our behalf pursuant to authority granted by the management agreement, except where attributable to gross negligence, willful misconduct, bad faith or reckless disregard of such person’s duties under the management agreement. As a result, we could experience poor performance or losses for which Hunt Manager would not be liable.
The management agreement, the development agreement and our leases were not negotiated on an arm’s-length basis and may not be as favorable to us as if they had been negotiated with unaffiliated third parties.
The management agreement with Hunt Manager, the development agreement with Hunt Developer and our leases with Sharyland were negotiated between related parties and before our independent directors were elected, and their terms, including the consideration payable to Hunt Manager and lease payments to us, may not be as favorable to us as if they had been negotiated with unaffiliated third parties.
The terms of these agreements and leases may not solely reflect your best interest and may be overly favorable to the other party to such agreements and leases, including in terms of the substantial compensation to be paid to these parties under these agreements. Further, we may choose not to enforce, or to enforce less vigorously, our rights under the management agreement, the development agreement or our leases, as applicable, because of our desire to maintain our ongoing relationships with Hunt, Sharyland and our founding investors.
Risks Related to REIT Qualification and Federal Income Tax Laws
Qualifying as a REIT involves highly technical and complex provisions of the Code, and our failure to qualify or remain qualified as a REIT would cause us to owe U.S. federal income tax, which would negatively impact our results of operations and reduce the amount of cash available for distribution to our stockholders.
InfraREIT, L.L.C. elected to be taxed as a REIT under the Code commencing with the taxable year ended December 31, 2010 and, following the Merger described under “Prospectus Summary—Our Structure and Reorganization Transactions—Reorganization Transactions,” we will elect to be taxed as a REIT commencing with the taxable year ending December 31, 2015. We believe that InfraREIT, L.L.C. was organized and operated in a manner that allowed it to qualify for taxation as a REIT for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2010. We further believe that InfraREIT, Inc. has been organized and will operate in a manner that will enable it to qualify as a REIT for U.S. federal income tax purposes commencing with its taxable year ending December 31, 2015. The U.S. federal income tax laws governing REITs are complex and require us to meet, on an ongoing basis, various tests regarding the nature and diversification of our assets and our income, the ownership of our outstanding shares, and the amount of our distributions. Even a technical or inadvertent violation could jeopardize our REIT qualification.
 
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We are one of only a few REITs to be engaged in owning and leasing T&D assets or similar assets. There is little or no guidance in the tax law regarding the qualification of T&D assets as real estate assets for purposes of qualifying as a REIT and the rent therefrom as qualifying rental income under the REIT asset and income tests. We hold a private letter ruling from the IRS that provides that T&D systems qualify as real estate assets and the rent therefrom generally constitutes qualifying rental income. We are entitled to rely upon that ruling for those assets that fit within the scope of the rulings only to the extent that (i) we have the legal and contractual rights described therein and are considered to be the same taxpayer as, or are treated for tax purposes as the successor to, the taxpayer that obtained the ruling, (ii) we did not misstate or omit in the ruling request a relevant fact and (iii) we continue to operate in the future in accordance with the relevant facts described in such request. No assurance can be given that we will always be able to operate in the future in accordance with the relevant facts described in such request. If we were not able to treat the T&D assets as real estate assets and/or the rent therefrom as qualifying rental income for purposes of applying the REIT asset or income tests, we may fail to qualify as a REIT.
In addition, our compliance with the REIT income and quarterly asset requirements depends upon our ability to successfully manage the composition of our income and assets on an ongoing basis in accordance with existing REIT regulations and rules and interpretations thereof. Furthermore, judicial and administrative interpretations of the U.S. federal income tax laws governing REIT qualification are limited, and new IRS guidance, legislation, court decisions or other administrative guidance, in each case possibly with retroactive effect, may make it more difficult or impossible for us to qualify as a REIT or adversely change the tax treatment of a REIT. Thus, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations and the possibility of future changes in our circumstances or the rules applicable to REITs, no assurance can be given that we will so qualify for any particular year, and we could be adversely affected by any such change in, or any new, U.S. federal income tax law, regulation or administrative interpretation.
If we fail to qualify as a REIT in any taxable year, unless we were eligible for certain statutory relief provisions:
 
 	•	 	we would not be allowed a deduction for distributions to our stockholders in computing our taxable income and would be required to pay U.S. federal income tax on our taxable income at corporate income tax rates;	
 
 	•	 	we also could be liable for alternative minimum tax and increased state and local taxes;	
 
 	•	 	we would be liable for interest and possible penalties for failure to make any required estimated tax payments in a year in which the failure occurred;	
 
 	•	 	we no longer would be required to distribute substantially all of our taxable income to our stockholders; and	
 
 	•	 	we could not re-elect to be taxed as a REIT for four taxable years following the year in which we failed to qualify as a REIT.	
In such a case, any such corporate tax liability could be substantial and would reduce our net income and cash available for, among other things, our operations and distributions to stockholders. In addition, we might need to borrow money or sell assets in order to pay any corporate tax liability. As a result of all these factors, our failure to qualify as a REIT also could impair our ability to expand our business and raise capital, and could materially and adversely affect our results of operations and financial condition and the trading price of our common stock.
 
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Even if we qualify as a REIT, we may face tax liabilities that reduce our cash flow.
Even if we qualify for taxation as a REIT, we may be liable for certain U.S. federal, state and local taxes on our income and assets, including taxes on any undistributed income, a 100% penalty tax on gain if we sell property as a dealer, alternative minimum tax, tax on income from some activities conducted as a result of a foreclosure, and state or local income, franchise, property and transfer taxes, including mortgage recording taxes. See “Material Federal Income Tax Consequences—Taxation of the Company—General.” In addition, although we do not currently own any taxable REIT subsidiaries, if we were to acquire or form a taxable REIT subsidiary, it would be subject to U.S. federal, state and local corporate income or franchise taxes. In order to meet the REIT qualification requirements, or to avoid the imposition of the 100% tax penalty that applies to certain gains if we sell property as a dealer to customers in the ordinary course of business, we may hold some of our assets through taxable REIT subsidiaries. Any taxes paid by such taxable REIT subsidiary would decrease the cash available for distribution to our stockholders.
If our Operating Partnership fails to qualify as a partnership for federal income tax purposes, we would cease to qualify as a REIT and suffer other adverse consequences.
We believe that our Operating Partnership is treated as a partnership for federal income tax purposes. As a partnership, our Operating Partnership is not subject to federal income tax on its income. Instead, for federal income tax purposes, each of its partners, including us, are allocated, and may be required to pay tax with respect to, such partner’s share of the Operating Partnership’s income. We cannot guarantee that the IRS will not challenge the status of our Operating Partnership or any other subsidiary partnership in which we own an interest as a partnership or disregarded entity for federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating our Operating Partnership or certain subsidiary partnerships as an entity taxable as a corporation for federal income tax purposes, we would fail to meet the applicable REIT gross income tests and certain of the asset tests applicable to REITs and, accordingly, we would likely cease to qualify as a REIT. Also, the failure of our Operating Partnership or certain subsidiary partnerships to qualify as a partnership or disregarded entity could cause the applicable entity to become subject to federal corporate income tax, which would adversely affect our results of operations and reduce significantly the amount of cash the Operating Partnership has available for distribution to its partners, including us.
Our ownership of taxable REIT subsidiaries is subject to certain restrictions, and we will be required to pay a 100% penalty tax on certain income or deductions if our transactions with our taxable REIT subsidiaries are not conducted on arm’s length terms.
We may acquire securities in taxable REIT subsidiaries in the future. A taxable REIT subsidiary is a corporation, other than a REIT, in which a REIT directly or indirectly holds stock, and that has made a joint election with such REIT to be treated as a taxable REIT subsidiary. If a taxable REIT subsidiary owns more than 35% of the total voting power or value of the outstanding securities of another corporation, such other corporation will also be treated as a taxable REIT subsidiary. Other than some activities relating to lodging and health care facilities, a taxable REIT subsidiary may generally engage in any business, including the provision of customary or non-customary services to tenants of its parent REIT. A taxable REIT subsidiary is subject to federal income tax as a regular C corporation. In addition, a 100% excise tax will be imposed on certain transactions between a taxable REIT subsidiary and its parent REIT that are not conducted on an arm’s length basis.
A REIT’s ownership of securities of a taxable REIT subsidiary is not subject to the 5% or 10% asset tests applicable to REITs. Not more than 25% of the value of our total assets may be represented by securities (including securities of taxable REIT subsidiaries), other than those securities includable in the 75% asset test. We anticipate that the aggregate value of the stock and securities of any taxable REIT subsidiaries and other nonqualifying assets that we own will be less than 25% of the value of our total assets, and we will monitor the
 
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value of these investments to ensure compliance with applicable ownership limitations. In addition, we intend to structure our transactions with any taxable REIT subsidiaries that we own to ensure that they are entered into on arm’s length terms to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with the 25% limitation or to avoid application of the 100% excise tax discussed above.
To maintain our REIT status, we may be forced to borrow funds during unfavorable market conditions, and the unavailability of such capital on favorable terms at the desired times, or at all, may cause us to curtail our investment activities and/or to dispose of assets at inopportune times, which could materially and adversely affect us and the per share trading price of our common stock.
To qualify as a REIT, we generally must distribute annually to our stockholders at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains, and we will be liable for regular corporate income taxes to the extent that we distribute less than 100% of our REIT taxable income, determined without regard to the dividends paid deduction and including any net capital gains, each year. In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years. In order to maintain our REIT status and continue to receive a deduction from income for dividends paid to our stockholders, we may need to borrow funds to meet the REIT distribution requirements even if the then prevailing market conditions are not favorable for these borrowings. See “Material Federal Income Tax Consequences—Taxation of the Company—Annual Distribution Requirements.” These borrowing needs could result from, among other things, differences in timing between the actual receipt of cash and recognition of income for federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt or amortization payments. These sources, however, may not be available on favorable terms or at all. Our access to third-party sources of capital depends on a number of factors, including the market’s perception of our growth potential, our current debt levels, the market price of our common stock, and our current and potential future earnings. We cannot guarantee that we will have access to such capital on favorable terms at the desired times, or at all, which may cause us to curtail our investment activities and/or to dispose of assets at inopportune times, and could materially and adversely affect us and the per share trading price of our common stock.
If InfraREIT, L.L.C. is determined to have failed to qualify as a REIT for any reason or if we acquire C corporations in the future, we may inherit material tax liabilities and other tax attributes from InfraREIT, L.L.C. or such acquired corporations, and we may be required to distribute earnings and profits.
The formation of a partnership unrelated to InfraREIT in 2011 between a Hunt affiliate and an affiliate of Marubeni triggered certain provisions in InfraREIT, L.L.C.’s limited liability company agreement designed to protect against rent received from Sharyland being deemed to be rent from a related party which could have caused InfraREIT, L.L.C. to fail to qualify as a REIT. As a result of the application of these provisions, shares held by Marubeni that would have resulted in Marubeni holding in excess of 9.8% of the total number of outstanding shares of InfraREIT, L.L.C. were automatically transferred to a trust for the benefit of a charitable beneficiary. If these provisions were deemed to be ineffective, InfraREIT, L.L.C. would not have met the REIT requirements and, as a result, would have been taxed as a C corporation. If InfraREIT, L.L.C. is deemed to have failed to meet the REIT requirements as a result of the 2011 transaction or otherwise, we would be liable for the taxes InfraREIT, L.L.C. would have been required to pay, which could have an adverse effect on our financial condition and results of operations.
In addition, we have previously acquired, and from time to time we may acquire, C corporations or assets of C corporations in transactions in which the basis of the corporations’ assets in our hands is determined by reference to the basis of the assets in the hands of the acquired corporations, or carry-over basis transactions. In this regard, in 2010, we acquired Cap Rock Holdings Corporation in a transaction that was treated as a carry-over basis transaction.
 
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In the case of assets we acquire from a C corporation in a carry-over basis transaction, including the assets of InfraREIT, L.L.C. if it failed to meet the REIT requirements and, thus, it is deemed to have been taxed as a C corporation prior to the Merger, if we dispose of any such asset in a taxable transaction (including by deed in lieu of foreclosure) during the ten-year period beginning on the date of the carry-over basis transaction, then we will be required to pay tax at the highest regular corporate tax rate on the gain recognized to the extent of the excess of (1) the fair market value of the asset over (2) our adjusted tax basis in the asset, in each case determined as of the date of the carry-over basis transaction. Any taxes we pay as a result of such gain would reduce the amount available for distribution to our stockholders. The imposition of such tax may require us to forgo an otherwise attractive disposition of any assets we acquire from a C corporation in a carry-over basis transaction, and as a result may reduce the liquidity of our portfolio of investments. In addition, in such a carry-over basis transaction, we will succeed to any tax liabilities and earnings and profits of the acquired C corporation. To qualify as a REIT, we must distribute any non-REIT earnings and profits by the close of the taxable year in which such transaction occurs. If the IRS were to determine that we acquired non-REIT earnings and profits from a corporation that we failed to distribute prior to the end of the taxable year in which the carry-over basis transaction occurred, we could avoid disqualification as a REIT by paying a “deficiency dividend.” Under these procedures, we generally would be required to distribute any such non-REIT earnings and profits to our stockholders within 90 days of the determination and pay a statutory interest charge at a specified rate to the IRS. Such a distribution would be in addition to the distribution of REIT taxable income necessary to satisfy the REIT distribution requirement and may require that we borrow funds to make the distribution even if the then-prevailing market conditions are not favorable for borrowings. In addition, payment of the statutory interest charge could materially and adversely affect us.
If InfraREIT, L.L.C. failed to qualify as a REIT and we are considered a “successor” to InfraREIT, L.L.C. under applicable Treasury Regulations, we may be ineligible to elect REIT status for the four taxable years following the year in which InfraREIT, L.L.C. ceased to qualify as a REIT. We believe that we would not be a considered a “successor” to InfraREIT, L.L.C. for purposes of such provisions. See “Material Federal Income Tax Consequences—Certain Tax Considerations Related to the Reorganization.”
The IRS may treat sale-leaseback transactions as loans, which could jeopardize our REIT status or require us to make an unexpected distribution.
The IRS may take the position that specific sale-leaseback transactions that we treat as leases are not true leases for federal income tax purposes but are, instead, financing arrangements or loans. If a sale-leaseback transaction were so re-characterized, we might fail to satisfy the REIT asset tests, the income tests or distribution requirements and consequently lose our REIT status effective with the year of re-characterization. The primary risk relates to our loss of previously incurred depreciation expenses, which could affect the calculation of our REIT taxable income and could (unless we were able to take other mitigating steps or were eligible for certain statutory relief provisions) cause us to fail the REIT distribution test that requires a REIT to distribute at least 90% of its REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. In this circumstance, we may elect to distribute an additional dividend of the increased taxable income so as not to fail the REIT distribution test. This distribution would be paid to all stockholders at the time of declaration rather than the stockholders existing in the taxable year affected by the re-characterization. See “Material Federal Income Tax Consequences—Taxation of the Company—Annual Distribution Requirements” and “—Failure To Continue To Qualify.”
Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
The current maximum U.S. federal income tax rate for certain qualified dividends payable to U.S. stockholders that are individuals, trusts and estates is 20%, or 23.8% including investment taxes on investment income applicable to certain stockholders under the Patient Protection and Affordable Care Act, or PPACA. Dividends payable by REITs are generally not eligible for the reduced rates and therefore may be subject to a
 
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39.6%, or 43.4% including PPACA investment taxes, maximum U.S. federal income tax rate on ordinary income. Although the reduced U.S. federal income tax rate applicable to dividend income from regular corporate dividends does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including the per share trading price of our common stock. States may also choose to tax investment and dividend income at higher rates than ordinary income, and to the extent more states do so, then such taxes may further reduce the attractiveness of REITs from an investment standpoint. Any future changes in the federal, state or local income tax laws regarding the taxation of dividends payable to stockholders could also impact the attractiveness of REITs from an investment standpoint.
Complying with REIT requirements may affect our profitability and may force us to liquidate or forgo otherwise attractive investments.
To qualify as a REIT, we must continually satisfy tests concerning, among other things, the nature and diversification of our assets, the sources of our income and the amounts we distribute to our stockholders. We may be required to liquidate or forgo otherwise attractive investments in order to satisfy the asset and income tests or to qualify under certain statutory relief provisions. We also may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. As a result, having to comply with the distribution requirement could cause us to sell assets in adverse market conditions, borrow on unfavorable terms or distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt. Accordingly, satisfying the REIT requirements could materially and adversely affect us.
Legislative or other actions affecting REITs could have a negative effect on us.
The rules dealing with federal, state and local income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury. Changes to the tax laws, with or without retroactive application, could materially and adversely affect our investors or us. We cannot predict how changes in the tax laws might affect our investors or us. New legislation, Treasury Regulations, administrative interpretations or court decisions could significantly and negatively affect our ability to qualify as a REIT or the income tax consequences of such qualification.
Complying with REIT requirements may limit our ability to hedge effectively.
The REIT provisions of the Code may limit our ability to hedge our assets and operations. Under these provisions, any income that we generate from transactions intended to hedge our interest rate exposure will be excluded from gross income for purposes of the gross income tests if the instrument hedges interest rate risk on liabilities used to carry or acquire real estate assets, or certain other specified types of risk, and such instrument is properly identified under applicable Treasury Regulations. Income from hedging transactions that do not meet these requirements will generally constitute nonqualifying income. As a result of these rules, we may have to limit our use of hedging techniques that might otherwise be advantageous or implement those hedges through a taxable REIT subsidiary, which would be liable for tax on gains and for which we would not receive any tax benefit for losses, except to the extent they were carried forward to offset future taxable income of the taxable REIT subsidiary.
Liquidation of our assets may jeopardize our REIT qualification.
If we are compelled to liquidate our assets to repay obligations to our lenders, we may be unable to comply with the requirements relating to our assets and our sources of income, thereby jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any resultant gain if we sell assets that are treated as inventory or property held primarily for sale to customers in the ordinary course of business.
 
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Risks Related to the Offering and Ownership of Our Common Stock
The OP Units in our Operating Partnership held by the limited partners, including Hunt-InfraREIT and MC Transmission Holdings, Inc., may be redeemed by the limited partners, which could result in the issuance of a large number of new shares of our common stock and/or force us to expend significant cash which may not be available to us on favorable terms or at all.
Assuming our stock trades at $        , which is the midpoint of the offering range on the cover of this prospectus, for the 30-day period following the closing of this offering, Hunt-InfraREIT will own approximately             OP Units in our Operating Partnership. In addition, Marubeni will own approximately          OP Units in our Operating Partnership. Subject to any contractual lock-up provisions, including the one year lock-up agreement with the underwriters in this offering (or six months with respect to MC Transmission Holdings, Inc.), and a one year holding period (or six months with respect to MC Transmission Holdings, Inc.) required by our Operating Partnership’s partnership agreement, a limited partner of our Operating Partnership may at any time require us to redeem the OP Units it holds for cash at a per-OP Unit value equal to the 10 day trailing trading average of a share of our common stock at the time of the requested redemption. At our election, we may satisfy the redemption through the issuance of shares of our common stock on a one share of common stock for one OP Unit basis. However, the limited partners’ redemption right may not be exercised if and to the extent that the delivery of the shares upon such exercise would result in any person violating the ownership and transfer restrictions set forth in our charter. See “The Operating Partnership and the Partnership Agreement—Redemption Rights.”
This offering is expected to be dilutive to the net tangible book value per share of our common stock purchased in this offering, and there may be future dilution related to subsequent issuances of shares of our common stock.
We expect the initial public offering price of our common stock to be substantially higher than the book value per share of our outstanding common stock immediately after this offering and completion of the Merger. If you purchase common stock in this offering, you will incur immediate dilution of approximately $         in the net tangible book value per share of common stock from the price you pay for our common stock in this offering, based on an initial public offering price of $         per share. See “Dilution” for further discussion of how your ownership interest in us will be immediately diluted.
There is currently no public market for our common stock, and an active trading market for our common stock may not develop following this offering.
There is no established trading market for our common stock. We expect our common stock will be approved for listing on the NYSE. We cannot guarantee, however, that an active trading market for our common stock will develop after this offering or, if one develops, that it will be sustained. In the absence of a public market, you may be unable to liquidate an investment in our common stock. The initial public offering price for shares of our common stock will be determined by negotiations between us and the representatives of the underwriters, and the price at which shares of our common stock trade after the completion of this offering may be lower than the price at which the underwriters sell them in this offering.
The market price and trading volume of shares of our common stock may fluctuate significantly following this offering.
Even if an active trading market develops after this offering, the market price of our common stock may be highly volatile and subject to wide fluctuations. Our financial performance, governmental regulatory action, tax laws, interest rates and market conditions in general could have a significant impact on the future market price of our common stock. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. If the market price of our common stock declines significantly, you may be unable to resell your shares at or above the public offering price or at all.
 
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Some of the factors that could negatively affect our share price or result in fluctuations in the price of our stock include:
 
 	•	 	our quarterly distributions;	
 
 	•	 	our operating performance and the performance of other similar companies;	
 
 	•	 	changes in the rates our tenant can charge its customers;	
 
 	•	 	deviations from funds from operations, adjusted funds from operations, capital needs or earnings estimates;	
 
 	•	 	adverse market reaction to any increased indebtedness we incur in the future;	
 
 	•	 	the termination of or failure to renew a lease with Sharyland;	
 
 	•	 	announcements by us or our competitors of significant contracts or acquisitions;	
 
 	•	 	additions or departures of key personnel;	
 
 	•	 	general market, economic and political conditions;	
 
 	•	 	changes in accounting standards, policies, guidance, interpretations or principles;	
 
 	•	 	changes in the tax laws applicable to REITs;	
 
 	•	 	passage of legislation or other regulatory developments that adversely affect us or our industry; and	
 
 	•	 	other factors described in these “Risk Factors.”	
Future sales of shares of our common stock, or the perception that such sales might occur, may depress the price of our shares.
Future issuances of shares of our common stock, the availability of shares for resale in the open market and the perception that these issuances or resales may occur could decrease the market price per share of our common stock. Any sales by us or our existing investors of a substantial number of shares of our common stock in the public market, or the perception that such sales might occur, may cause the market price of our shares to decline. Upon the consummation of this offering, all shares of common stock sold in this offering will be freely tradable without restriction (other than the ownership limit and the other restrictions on ownership and transfer of our stock as set forth in our charter), unless the shares are owned by one of our affiliates or subject to the lock-up agreements described below. See “Shares Eligible for Future Sale.”
We, each of our directors and executive officers and certain of our other existing investors have agreed, with limited exceptions, that we and they will not, without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global Markets Inc., on behalf of the underwriters, during the period ending one year (for directors, executive officers and Hunt) or 180 days (for certain of our other existing investors) after the date of this prospectus, directly or indirectly, offer to sell or otherwise dispose of any shares of our common stock or file a registration statement with the SEC relating to the offering of any shares of our common stock.
Certain of our existing investors and Hunt-InfraREIT, as a limited partner of our Operating Partnership, are party to a registration rights agreement with us. Pursuant to this agreement, and after the lock-up agreements
 
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with the underwriters pertaining to this offering and the additional lock-ups with us agreed to by Hunt and Hunt-InfraREIT expire, we have agreed to register under the Securities Act for resale all or a portion of the approximately             shares of our common stock, including             OP Units that upon redemption may, at our option, be exchanged for shares of our common stock on a one-for-one basis, held by the parties to that agreement. Registration of the sale of these shares of our common stock would facilitate their sale into the public market. If any or all of these holders cause a large number of their shares to be sold in the public market, such sales could reduce the trading price of our common stock and could impede our ability to raise future capital.
Future offerings of debt, which would be senior to our common stock upon liquidation, and/or preferred equity securities, which may be senior to our common stock for purposes of distributions or upon liquidation, may adversely affect the market price of our stock.
In the future, we may attempt to increase our capital resources and fund capital needs by making additional offerings of debt or preferred equity securities. Upon liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive distributions of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both. Holders of our common stock are not entitled to preemptive rights or other protections against dilution. Our preferred stock, if issued, could have a preference on liquidating distributions or a preference on distribution payments that could limit our ability to make a distribution to the holders of our common stock. Since our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future offerings reducing the market price of our common stock and diluting their stock holdings in us.
Market interest rates may affect the value of our common stock.
One of the factors that investors may consider in deciding whether to buy or sell our common stock is our distribution rate as a percentage of our stock price, relative to market interest rates. If market interest rates increase, prospective investors may desire a higher distribution rate on our common stock, implying a lower stock price all other things being equal, or seek securities paying higher dividends or interest. Higher interest rates would likely increase our borrowing costs and potentially decrease the cash available for distribution. As a result, interest rate fluctuations and capital market conditions can affect the market value of our common stock.
Risks Related to Our Organization and Structure
Certain provisions of Maryland law and of our charter and bylaws could inhibit changes in control, preventing our stockholders from realizing a potential premium over the market price of our stock in a proposed acquisition.
Certain provisions of the MGCL may have the effect of inhibiting or deterring a third party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then-prevailing market price of such shares, including:
 
 	•	 	“Business Combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding voting stock or an affiliate or associate of ours who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner, directly or indirectly, of 10% or more of our then outstanding voting stock) or an affiliate of an interested stockholder for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter impose special stockholder voting requirements and special appraisal rights on these combinations; and	
 
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 	•	 	“Control Share” provisions that provide that holders of “control shares” of our Company (defined as shares which, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares”) have no voting rights with respect to such shares except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.	
As permitted by the MGCL, we have elected, by resolution of our board of directors, to exempt from the business combination provisions of the MGCL any business combination between us and any other person that is first approved by our board of directors (including a majority of our directors who are not affiliates or associates of such person), and our bylaws contain a provision exempting any and all acquisitions of our stock from the control share provisions of the MGCL. However, our board of directors may by resolution elect to repeal the exemption from the business combination provisions of the MGCL and may by amendment to our bylaws opt in to the control share provisions of the MGCL at any time in the future.
Certain provisions of the MGCL permit our board of directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to implement certain corporate governance provisions. Our charter contains a provision whereby we elect, at such time as we become eligible to do so (which we expect to be upon the completion of this offering), to be subject to the provisions of Title 3, Subtitle 8 of the MGCL relating to the filling of vacancies on our board of directors. In addition, through provisions in our charter and bylaws unrelated to Subtitle 8, we already (1) have a board of directors that is classified in three classes serving staggered three-year terms, (2) require a two-thirds vote for the removal of any director from the board, which removal must be for cause, (3) vest in the board the exclusive power to fix the number of directorships, subject to limitations set forth in our charter and bylaws, and (4) require, unless called by the chairman of our board of directors, our lead director, if any, our chief executive officer, our president or our board of directors, the request of stockholders entitled to cast not less than a majority of all votes entitled to be cast on a matter at such meeting to call a special meeting to consider and vote on any matter that may properly be considered at a meeting of stockholders. These provisions may have the effect of limiting or precluding a third party from making an unsolicited acquisition proposal for us or of delaying, deferring or preventing a change in control of us under circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then current market price.
In addition, the advance notice provisions of our bylaws could delay, defer or prevent a transaction or a change of control of our company that might involve a premium price for holders of our common stock or otherwise be in their best interest. See “Certain Provisions of Maryland Law and Our Charter and Bylaws.”
Our external management structure and our relationships with and dependence on Hunt and its affiliates could prevent a change in control.
Our relationships with Hunt Manager, Hunt Developer and Sharyland are interrelated. The development agreement with Hunt Developer expires automatically upon termination of the management agreement, regardless of whether the management agreement is terminated by us or by Hunt Manager (unless we terminate for cause). Accordingly, the termination of our relationship with Hunt Manager as our external manager would terminate our right of first offer with respect to ROFO Projects. Further, any negative change in our relationships with Hunt Manager, Hunt Developer or Sharyland could negatively impact the other relationships. The existence of and our dependence on these relationships, and the perceived impact that a change in control may have on them, may have the effect of limiting or precluding a third party from making an unsolicited acquisition proposal for us, even if such a transaction would otherwise be in the best interests of our stockholders.
In addition, we are required to pay Hunt a termination fee equal to three times the most recent annualized base management and incentive payment if we terminate the agreement for any reason other than
 
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cause. Except in cases of for-cause termination, we are only allowed to exercise this termination right on or before December 31, 2018, to be effective December 31, 2019. The payment of a termination fee, and the limited time period in which the termination right may be exercised, may discourage the acquisition of us by any third party that does not want to continue the relationship with Hunt Manager.
Our charter contains restrictions on the ownership and transfer of our stock that may delay, defer or prevent a change of control transaction.
Our charter, subject to certain exceptions, authorizes our board of directors to take such actions as it determines are advisable to preserve our qualification as a REIT. Our charter also prohibits, among other things, the beneficial or constructive ownership by any person (which includes any “group” as defined by Section 13(d)(3) of the Exchange Act) of more than 9.8% in value or number of shares, whichever is more restrictive, of the aggregate of the outstanding shares of our common stock or more than 9.8% in value of the aggregate of the outstanding shares of all classes or series of our capital stock, in each case excluding any shares that are not treated as outstanding for federal income tax purposes. Our board of directors, in its sole and absolute discretion, may exempt a person, prospectively or retroactively, from these ownership limits if certain conditions are satisfied. The restrictions on ownership and transfer of our stock may:
 
 	•	 	discourage a tender offer or other transactions or a change in management or of control that might involve a premium price for our common stock or that our stockholders otherwise believe to be in their best interests; or	
 
 	•	 	result in the transfer of shares acquired in excess of the restrictions to a trust for the benefit of a charitable beneficiary and, as a result, the forfeiture by the acquirer of the benefits of owning the additional shares.	
See “Description of Our Capital Stock—Restrictions on Ownership and Transfer.”
Our structure as an UPREIT may give rise to conflicts of interest.
Our directors and officers have duties under Maryland law to us. At the same time, we have fiduciary duties, as general partner, to our Operating Partnership and to its limited partners under Delaware law. Our duties as the general partner of the Operating Partnership may come into conflict with the duties of our directors and officers to us. Although our Operating Partnership’s partnership agreement generally limits our liability for our acts or omissions in our capacity as the general partner of the Partnership, provided we acted in good faith, Delaware law is not settled on these types of modifications to fiduciary duties and we have not obtained an opinion of counsel as to the validity or enforceability of such provisions.
We may structure acquisitions of assets in exchange for OP Units on terms that could limit our liquidity or our flexibility.
We may acquire assets by issuing OP Units in exchange for an asset owner contributing assets to our Operating Partnership. If we enter into such transactions, in order to induce the contributors of such assets to accept OP Units, rather than cash, in exchange for their assets, it may be necessary for us to provide them additional incentives. For instance, our Operating Partnership’s partnership agreement provides that any holder of OP Units may exchange such units for cash equal to the value of an equivalent number of shares of our common stock or, at our option, for shares of our common stock on a one-for-one basis. Finally, in order to allow a contributor of assets to defer taxable gain on the contribution of assets to our Operating Partnership, we might agree not to sell a contributed asset for a defined period of time or until the contributor exchanged the contributor’s units for cash or shares. Such an agreement would prevent us from selling those assets, even if market conditions made such a sale favorable to us.
 
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Our authorized but unissued shares of common and preferred stock may prevent a change in our control.
Our charter authorizes our board of directors to issue additional authorized but unissued shares of common or preferred stock. In addition, our board of directors may, without stockholder approval, amend our charter to increase the aggregate number of our authorized shares of stock or the number of shares of stock of any class or series that we have authority to issue and classify or reclassify any unissued shares of common or preferred stock and set the preferences, rights and other terms of the classified or reclassified shares. As a result, our board of directors may establish a class or series of shares of common or preferred stock that could delay or prevent a transaction or a change in control that might involve a premium price for our shares of common stock or otherwise be in the best interests of our stockholders.
Our charter contains provisions that make removal of our directors difficult, which could make it difficult for our stockholders to effect changes to our board of directors.
Our board of directors is classified into three classes, and our charter provides that, subject to the rights of holders of any class or series of preferred stock, a director may be removed only for cause (as defined in our charter) and then only by the affirmative vote of holders of shares entitled to cast at least two-thirds of all the votes entitled to be cast generally in the election of directors. Further, our charter and bylaws provide that, at such time as we become eligible to make an election under Title 3, Subtitle 8 of the MGCL (which we expect to be upon the completion of this offering), except as may be provided by our board of directors in setting the terms of any class or series of stock, any and all vacancies on our board of directors shall be filled only by the affirmative vote of a majority of the remaining directors in office, even if less than a quorum, for the full term of the class of directors in which the vacancy occurred. These requirements prevent stockholders from removing directors except for cause and with a substantial affirmative vote and from replacing directors with their own nominees and may prevent a change in control of our company that is in the best interests of our stockholders.
 
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 FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus may contain forward-looking statements. Forward-looking statements give our current expectations, contain projections of results of operations or of financial condition, or forecasts of future events. Words such as “could,” “will,” “may,” “assume,” “forecast,” “position,” “predict,” “strategy,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “believe,” “project,” “budget,” “potential” or “continue” and similar expressions are used to identify forward-looking statements. Without limiting the generality of the foregoing, forward-looking statements contained in this prospectus include our expectations regarding our strategies, objectives, growth and anticipated financial and operational performance, including guidance regarding our capital expenditures and rate base, expected lease payments, our infrastructure programs, estimated cash flow projections, estimated distributions to our stockholders and our tax position. Forward-looking statements can be affected by assumptions used or by known or unknown risks or uncertainties. Consequently, no forward-looking statements can be guaranteed.
A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe that we have chosen these assumptions or bases in good faith and that they are reasonable. However, when considering these forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this prospectus. Actual results may vary materially. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. Factors that could cause our actual results to differ materially from the results contemplated by such forward-looking statements include:
 
 	•	 	risks that the Footprint Projects will not materialize for a variety of reasons, including as a result of reductions in oil and gas drilling and related activity in the Permian Basin due to lower oil and gas prices relative to our current expectations;	
 
 	•	 	our ability to acquire ROFO Projects or other T&D assets from Hunt on terms that are accretive to our stockholders;	
 
 	•	 	our current reliance on our tenant for all of our revenues and, as a result, our dependency on our tenant’s solvency and financial and operating performance;	
 
 	•	 	defaults on or non-renewal or early termination of leases by our tenant;	
 
 	•	 	risks related to future lease negotiations;	
 
 	•	 	changes in the regulated rates the tenants of our assets may charge their customers;	
 
 	•	 	the completion of our capital expenditure projects on time and on budget;	
 
 	•	 	competitive conditions for the development and acquisition of T&D assets;	
 
 	•	 	insufficient cash available to meet distribution requirements;	
 
 	•	 	the price and availability of debt and equity financing;	
 
 	•	 	increased interest rates;	
 
 	•	 	changes in the availability and cost of capital;	
 
 	•	 	our level of indebtedness or debt service obligations;	
 
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 	•	 	changes in governmental policies or regulations with respect to our permitted capital structure, acquisitions and dispositions of assets, recovery of investments and our authorized rate of return;	
 
 	•	 	weather conditions and other natural phenomena;	
 
 	•	 	the effects of existing and future tax and other laws and governmental regulations;	
 
 	•	 	our failure to qualify or maintain our status as a REIT;	
 
 	•	 	availability of qualified personnel;	
 
 	•	 	the termination of our management agreement or development agreement or the loss of the services of Hunt Manager or the loss of access to the development function of Hunt Developer;	
 
 	•	 	the effects of future litigation;	
 
 	•	 	changes in the tax laws applicable to REITs;	
 
 	•	 	adverse economic developments in the electric power industry;	
 
 	•	 	changes in general business and economic conditions, particularly in Texas; and	
 
 	•	 	certain factors discussed elsewhere in this prospectus.	
Forward-looking statements speak only as of the date on which they are made. While we may update these statements from time to time, we are not required to do so other than pursuant to applicable laws. For a further discussion of these and other factors that could impact our future results and performance, see “Risk Factors.”
 
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 USE OF PROCEEDS
We estimate that we will receive net proceeds from this offering of approximately $         million, assuming an initial public offering price of $         per share, which is the midpoint of the range set forth on the cover of this prospectus, and after deducting the underwriting discounts and commissions and the underwriter structuring fee. We will use $         million of the net proceeds from this offering to fund the cash portion of the consideration to be issued in the Merger described under “Prospectus Summary—Our Structure and Reorganization Transactions—Reorganization Transactions.” We will contribute the remaining $         million of the net proceeds we receive from this offering to our Operating Partnership in exchange for common units. We expect our Operating Partnership will use the net proceeds from this offering that it receives from us (i) to repay an aggregate of $1.0 million of indebtedness to Hunt Consolidated, Inc. pursuant to a promissory note, (ii) to repay an aggregate of approximately $         million of indebtedness outstanding under our Operating Partnership’s revolving credit facility and $             million of indebtedness outstanding under SDTS’s revolving credit facility, in each case based on outstanding balances as of                     , 2015, (iii) to pay estimated offering expenses (other than the underwriting discounts and commissions and the underwriter structuring fee) of $         million and (iv) for general corporate purposes.
On November 20, 2014, Hunt Consolidated, Inc. loaned $1.0 million to InfraREIT, Inc. The promissory note bears interest at 2.5%, compounded annually and is due on the earlier of November 1, 2015 and the completion of this offering. The proceeds from this promissory note were used to purchase stock in other publicly traded REITs prior to this offering. We do not expect to invest in other publicly traded securities in the future.
As of September 30, 2014, the Operating Partnership had $118.5 million of indebtedness outstanding under its prior credit facility at a 2.66% interest rate. Borrowings under the prior credit facility bore interest, at the Operating Partnership’s election, at a rate equal to (1) the one, two, three or six-month LIBOR plus 2.5%, or (2) a base rate (equal to the highest of (A) the Federal Funds Rate plus 1/2 of 1%, (B) the Bank of America prime rate and (C) LIBOR plus 1%) plus 1.5%. Borrowings made under the Operating Partnership’s prior credit facility within the last twelve months were used primarily to fund capital expenditures. On December 10, 2014, the Operating Partnership entered into a new $75.0 million revolving credit facility that will mature on December 10, 2019 and terminated its prior credit facility after repaying the prior facility with proceeds of its new revolving credit facility and proceeds of SDTS’s amended and restated revolving credit facility.
As of September 30, 2014, SDTS had $75.0 million of indebtedness outstanding under its revolving credit facility at a 2.15% interest rate. The revolving credit facility matures on December 10, 2019, and borrowings bear interest, at SDTS’s option, at a rate per annum equal to either (1) a base rate, determined as the greatest of (A) the administrative agent’s prime rate, (B) the federal funds effective rate plus 1/2 of 1% and (C) LIBOR plus 1.00% per annum, plus a margin of 1.00% per annum or (2) LIBOR plus a margin of 2.00% per annum. Borrowings made under SDTS’s revolving credit facility within the last twelve months were used primarily to fund capital expenditures. On December 10, 2014, the SDTS credit agreement was amended and restated in order to, among other things, increase the amount of the revolving credit facility to a total of $250.0 million.
Affiliates of the underwriters are lenders under the Operating Partnership’s revolving credit facility and SDTS’s revolving credit facility and will, in that respect, receive a portion of the proceeds from this offering through the repayment of such indebtedness. Please read “Underwriting.”
A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, based on the midpoint of the range set forth on the cover of this prospectus, would increase (decrease) the net proceeds to us from this offering by $         million, $         million of which would increase (decrease) the cash merger consideration payable to our existing investors, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the underwriting discounts and commissions and the underwriter structuring fee. In addition, each increase (decrease) of 1.0 million shares of common stock offered by
 
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us would increase (decrease) the net proceeds to us from this offering by approximately $         million, assuming the initial public offering price of $         per share, which is the midpoint of the range set forth on the cover of this prospectus, remains the same and after deducting the underwriting discounts and commissions and the underwriter structuring fee. An increase or decrease in the number of shares offered by us would not result in an increase or decrease in the amount of cash merger consideration payable to our existing investors.
 
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 DISTRIBUTION POLICY
You should read the following discussion of our distribution policy in conjunction with “—Assumptions and Considerations” below, which includes the factors and assumptions upon which we base our cash distribution policy. In addition, this discussion contains forward-looking statements that involve numerous risks and uncertainties. The forward-looking statements are subject to a number of important factors, including those factors discussed under “Risk Factors” and “Forward-Looking Statements,” that could cause our actual results to differ materially from the results contemplated by such forward-looking statements.
For information regarding our historical consolidated results of operations, you should refer to our historical consolidated financial statements included elsewhere in this prospectus.
We intend to distribute substantially all of our cash available for distribution, less prudent reserves, through regular quarterly cash dividends. To qualify as a REIT, we must distribute annually to our stockholders an amount equal to at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gain. We will be liable for income tax on our taxable income that is not distributed and for an excise tax to the extent that certain percentages of our taxable income are not distributed by specified dates. We expect our cash available for distribution to be significantly more than taxable income for the foreseeable future. Therefore, we expect to distribute an amount in excess of our REIT taxable income. Furthermore, we anticipate that, at least during our initial taxable years, our distributions will exceed our then current and then accumulated earnings and profits, as determined for U.S. federal income tax purposes, due to non-cash expenses, primarily depreciation and amortization charges that we expect to incur. Therefore, all or a portion of these distributions may represent a non-taxable return of capital for U.S. federal income tax purposes. The extent to which our distributions exceed our current and accumulated earnings and profits may vary substantially from year to year. To the extent that a distribution is treated as a return of capital for U.S. federal income tax purposes, it will reduce a holder’s adjusted tax basis in the holder’s shares, and to the extent that it exceeds the holder’s adjusted tax basis will be treated as gain resulting from a sale or exchange of such shares. As a result, the gain (or loss) recognized on the sale of that common stock or upon our liquidation will be decreased (or increased) accordingly. For a more complete discussion of the tax treatment of distributions to holders of our common stock, see “Material Federal Income Tax Consequences.” Income as computed for purposes of the foregoing tax rules will not necessarily correspond to our income as determined for financial reporting purposes pursuant to generally accepted accounting principles.
Any distributions we make will be authorized by and at the discretion of our board of directors based upon a variety of factors deemed relevant by our directors, which may include:
 
 	•	 	actual cash available for distribution;	
 
 	•	 	our financial condition;	
 
 	•	 	our level of retained cash flows;	
 
 	•	 	our capital requirements;	
 
 	•	 	any debt service requirements;	
 
 	•	 	our taxable income;	
 
 	•	 	the annual distribution requirements under the REIT provisions of the Code;	
 
 	•	 	applicable provisions of Maryland law; and	
 
 	•	 	other factors that our board of directors may deem relevant.	
 
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Our ability to make distributions to our stockholders will depend upon the performance of our business. To the extent that our cash available for distribution is less than the amount required to be distributed under the REIT provisions of the Code, we may consider various funding sources to cover any shortfall, including borrowing funds, using a portion of the net proceeds we receive in this offering or future offerings or selling certain of our assets. We do not currently intend to pay future distributions from the proceeds of this offering. We also may elect in the future to pay all or a portion of any distribution in the form of a taxable distribution of our stock or debt securities. In addition, our board of directors may change our distribution policy in the future. Our debt arrangements include covenants that may restrict our ability to make distributions to our equityholders. We currently have no intention to issue any preferred stock, but, if we do, the distribution preference on the preferred stock could limit our ability to make distributions to the holders of our common stock. See “Risk Factors” and “Material Federal Income Tax Consequences—Taxation of the Company—Annual Distribution Requirements.”
Estimated Cash Available for Distribution for the Twelve Months Ending December 31, 2015
We intend to pay a regular quarterly dividend initially set at a rate of $             per share, but which may be changed in the future without advance notice. See “—Assumptions and Considerations” for further information as to the assumptions we have made for the forecast. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Summary of Significant Accounting Policies” for information regarding the accounting policies we have followed for the forecast.
We have included below our estimated cash available for distribution for the 12-month period ending December 31, 2015. We expect our quarterly dividend rate to be $             per share, or $             per share on an annualized basis. The actual dividends paid to stockholders with respect to the first quarter of 2015 will be pro-rated, calculated from the date shares will be delivered to investors in this offering as set forth on the cover of this prospectus through                     , 2015. We have presented estimated cash available for distribution for 2015 because we intend to report this data on a calendar year basis after the conclusion of the offering to which this prospectus relates. Our forecast is a forward-looking statement and reflects our judgment as of the date of this prospectus of the conditions we expect to exist and the course of action we expect to take during the twelve months ending December 31, 2015. It should be read together with the historical consolidated financial statements and the accompanying notes thereto included elsewhere in this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We believe that we have a reasonable basis for these assumptions and that our actual results of operations will approximate those reflected in our forecast, but we can give no assurance that our forecasted results will be achieved. The assumptions and estimates underlying the forecast, as described below under “—Assumptions and Considerations,” are inherently uncertain and, although we consider them reasonable as of the date of this prospectus, they are subject to a wide variety of significant business, economic and competitive risks and uncertainties that could cause actual results to differ materially from forecasted results, including, among others, the risks and uncertainties described in “Risk Factors.” Any of the risks discussed in this prospectus, to the extent they occur, could cause actual results of operations to vary significantly from those presented below. Accordingly, there can be no assurance that the forecast will be indicative of our future performance or that actual results will not differ materially from those presented in the forecast. If our forecasted results are not achieved, we may not be able to pay a regular quarterly dividend at our initial annual distribution rate or at all. Inclusion of the forecast in this prospectus should not be regarded as a representation by us, the underwriters or any other person that the results contained in the forecast will be achieved. Therefore, you are cautioned not to put undue reliance on this information.
The accompanying forecast was not prepared with a view toward complying with the guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information. Neither our independent auditors, nor any other independent accountants, have compiled, examined or performed any procedures with respect to our forecast, nor have they expressed any opinion or any other form of assurance on our forecast or its achievability, and our independent auditors assume no responsibility for, and disclaim any association with, our forecast.
 
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We do not undertake any obligation to release publicly any revisions or updates that we may make to the forecast or the assumptions used to prepare the forecast to reflect events or circumstances after the date of this prospectus other than as required by law.

 	  	Twelve Months Ending
December 31, 2015	 	
 	  	(in thousands)	 	
Lease revenue	  	$	149,507	  	
Operating costs and expenses	  				
General and administrative expenses (1)	  	 	(54,463	) 	
Depreciation	  	 	(39,986	) 	
	  	 	 	 	
Total operating costs and expenses	  	$	(94,449	) 	
	  	 	 	 	
Income from operations	  	$	55,057	  	
Other income (expense)	  				
Interest expense, net	  	$	(36,479	) 	
Other income (expense), net (2)	  	 	(6,053	) 	
	  	 	 	 	
Total other income (expense)	  	$	(42,532	) 	
Income tax expense	  	 	(1,057	) 	
	  	 	 	 	
Net income before noncontrolling interest	  	$	11,468	  	
Add: Depreciation	  	 	39,986	  	
	  	 	 	 	
Funds From Operations before noncontrolling interest	  	$	51,454	  	
Add: Amortization of deferred financing cost (3)	  	 	3,108	  	
Add: Non-cash consideration paid in Class A OP Units (2)	  	 	7,384	  	
Add: Non-cash equity compensation (1)	  	 	560	  	
Less: Allowance for funds used during construction—equity	  	 	(1,330	) 	
Add (Less): Effect of percentage rent calculation method	  	 	—  	  	
Add (Less): Effect of straight-line rents (4)	  	 	7,876	  	
Less: Capital expenditures to maintain net assets (5)	  	 	(39,986	) 	
Add: Reorganization expenses (1)	  	 	35,827	  	
Estimated Cash Available for Distribution	  	 	64,893	  	
	  	 	 	 	
Less: Growth capital expenditures (6)	  	 	(208,340	) 	
Add: Net debt borrowed to fund growth capital expenditures and principal amortization (7)	  	 	208,340	  	
Estimated Cash Available for Distribution after investing and financing activities	  	 	64,893	  	
	  	 	 	 	
Annualized Dividend per Share (8)	  				
	  	 	 	 	
Total estimated initial annual distributions to limited partners and stockholders (9)	  				
Excess (10)	  				
Payout ratio (11)	  				
 
(1)	Our estimated general and administrative expenses for 2015 include (i) recurring expenses of $18.6 million (including non-cash equity compensation of $0.6 million) and (ii) expenses associated with the Reorganization, consisting of a non-cash expense of $34.0 million related to the issuance of 1.7 million shares of our common stock to Hunt-InfraREIT as a reorganization advisory fee (based on an assumed initial public offering price of $20.00 per share, which is the midpoint of the range set forth on the cover of this prospectus), and cash expenses of $1.8 million for professional services, primarily related to legal, audit and tax services.	
(2)	Includes a non-cash expense of $7.4 million related to the issuance of                  Class A OP Units to Hunt-InfraREIT upon consummation of this offering. We intend to issue these Class A OP Units to settle our contingent obligation related to the CREZ construction project owed to Hunt-InfraREIT pursuant to the	
 
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 	InfraREIT, L.L.C. constituent documents. We have calculated the amount of this non-cash expense based on an assumed initial public offering price of $20.00 per share, which is the midpoint of the range set forth on the cover of this prospectus.	
(3)	Represents non-cash amortization of deferred financing costs associated with debt issuances.	
(4)	Represents an adjustment related to the difference between the timing of cash based rent payments made under our lease and when we recognize base rent revenue under GAAP. We recognize base rent on a straight-line basis over the applicable term of the lease commencing when the related assets are placed in service, which is frequently different than the period in which the cash rent becomes due.	
(5)	Our definition of cash available for distribution includes a deduction of the portion of capital expenditures needed to maintain our net assets. This amount is equal to the depreciation expense within the applicable period. The portion of capital expenditures in excess of depreciation, which we refer to as growth capital expenditures, will increase our net assets and is expected to be funded in the near term with cash on hand and debt financing. The amounts of growth capital expenditures and related funding sources are excluded from the definition of cash available for distribution. The amount of capital expenditures we expect during the near term is higher than depreciation, as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Expenditures.”	
(6)	Represents estimated total capital expenditures less the portion of capital expenditures needed to maintain our net assets.	
(7)	Represents estimated amortization of debt in the amount of $19.2 million, offset by debt that we intend to raise in the same amount and debt that we intend to issue to fund our growth capital expenditures.	
(8)	Based upon the expected initial quarterly dividend rate of $         per share. As we pay per-share dividends, we expect that our Operating Partnership will make distributions to its limited partners. We expect the per-unit distributions that our Operating Partnership makes to equal the per-share distributions that we make to our stockholders.	
(9)	Based upon a total of                  OP Units outstanding after this offering and the Reorganization.	
(10)	Calculated as estimated cash available for distributions for the 12 months ending December 31, 2015 minus the total estimated initial annual dividend to stockholders.	
(11)	Calculated as the total estimated initial annual dividend to stockholders divided by estimated cash available for distribution for the 12 months ending December 31, 2015.	
Assumptions and Considerations
Set forth below are the material assumptions that we have made to demonstrate our ability to generate our estimated funds from operations before noncontrolling interest and estimated cash available for distribution for the twelve months ending December 31, 2015. The forecast has been prepared by and is the responsibility of our management. Our forecast reflects our judgment of the conditions we expect to exist and the course of action we expect to take during the forecast periods. The assumptions we disclose are those we believe are material to our forecasted results of operations. We believe we have a reasonable basis for these assumptions. However, we can give no assurance that our forecasted results will be achieved. There will likely be differences between our forecasted and our actual results, and those differences may be material. If our forecast is not achieved, we may not be able to pay cash dividends on our common stock at the initial quarterly dividend level or at all.
The forecast assumes that in                  2015 we will raise net proceeds of $         million in this offering (after deducting underwriting discounts and commissions and the underwriter structuring fee) through the issuance of                  shares of our common stock at a price of $         per share, which is the midpoint of the price range set forth on the cover of this prospectus. The forecast also assumes that the proceeds of this offering will be used as described in “Use of Proceeds” elsewhere in this prospectus, including the payment of $         million to existing investors as merger consideration in the Merger immediately following the consummation of this offering.
 
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Lease Revenue

 	  	Twelve Months Ending
December 31, 2015	 	
 	  	(in thousands)	 	
Signed base rent(1)(2)	  	$	122,352	  	
Unsigned base rent(3)	  	$	 	  	
Signed percentage rent(2)(4)(5)	  	$	27,154	  	
Unsigned percentage rent(5)(6)	  	$	 	  	
 
(1)	Represents the amount of base rent lease revenue we expect under lease supplements that are signed and in effect as of the date of this prospectus, with base rent straight-lined over the term of the lease in accordance with GAAP.	
 
(2)	In late 2014, we agreed to lease supplements with Sharyland related to expected 2015 placed-in-service capital expenditures of $330.7 million. A portion of our 2015 base rent and percentage rent is attributable to the capital expenditures to which these supplements relate. If the actual placed-in-service amounts and/or weighted-average placed-in-service date of the related T&D assets is different than the assumptions we made in late 2014, then either we or Sharyland can request a validation. Pursuant to a validation, base rent amounts and percentage rent percentages may be amended, and a true-up payment may be required. See “Business and Properties—Our Tenant—Our Leases” for a description of this validation process. In no event will we use the validation process to account for differences between the expected and actual return on capital expenditures, rather only to account for the difference in estimated and actual capital expenditures and related matters such as the actual placed in service date of T&D assets funded by our capital expenditures.	
 
(3)	Represents the amount of base rent lease revenue we expect to recognize in 2015 related to a validation of our 2014 placed-in-service distribution capital expenditures under our leases. In early 2014, we entered into lease supplements with Sharyland that estimated the amount of expected 2014 placed-in-service capital expenditures. We expect that the actual amount of 2014 placed-in-service distribution capital expenditures will be higher under our S/B/C Lease than we expected when we executed these lease supplements. As a result, we have the right to, and expect to request, a validation under our S/B/C Lease in the first quarter of 2015.	
 
(4)	Represents the amount of percentage rent lease revenue we expect under lease supplements that are signed and in effect as of the date of this prospectus. Based on the existing terms of these supplements, we have assumed that the weighted average percentage rent rate under these supplements is         %.	
 
(5)	Because Sharyland owes us percentage rent based on percentages of Sharyland’s gross revenue, our percentage rent estimates for both signed lease supplements and unsigned lease supplements are based in part on projections of Sharyland’s gross revenue during 2015. Gross revenue is a defined term under our leases that generally means the revenue Sharyland generates from our T&D assets, subject to a number of adjustments described in “Business and Properties—Our Tenant—Our Leases.” We have assumed that Sharyland’s distribution gross revenue will grow         % in 2014 compared to 2013 and 4.9% in 2015 compared to 2014. These assumptions are based in part on Sharyland’s and our projections regarding customer, load and kWh growth in Sharyland’s service territories during the remainder of 2014 and throughout 2015, which in turn are based on estimates of the level of oil and gas activity in our Stanton territory in the Permian Basin. Our assumptions regarding Sharyland’s transmission gross revenue assume that there will be additional TCOS filings effective in April and November of 2015. We have based our assumptions regarding the timing of these TCOS filings, and the amounts of transmission capital expenditures that will be placed in service throughout 2015, on Sharyland’s transmission project capital expenditure budgets and completion schedules, which are in turn based in part on a variety of factors, including reliability and growth-driven needs in Sharyland’s service territory and on requests from wind and other generators to connect to our Panhandle transmission assets.	
 
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(6)	Represents the amount of percentage rent lease revenue we expect to recognize in 2015 related to a validation of our 2014 placed-in-service distribution capital expenditures under our leases. In early 2014, we entered into lease supplements with Sharyland that estimated the amount of expected 2014 placed-in-service capital expenditures. We expect that the actual amount of 2014 placed-in-service distribution capital expenditures will be higher under our S/B/C Lease than we expected when we executed these lease supplements. As a result, we have the right to, and expect to request, a validation under our S/B/C Lease in the first quarter of 2015.	
General and Administration Expenses
We have assumed that the total general and administration expenses in 2015 will be $54.4 million. Our assumptions include:
 
 	•	 	Base management fees of $         million, assuming $2.5 million for the first quarter based on the existing contract, which provides for a $10 million annual base fee through March 31, 2015, and $         million for the last three quarters, which is calculated as 1.50% of projected total equity (including non-controlling interest) of $         million as of December 31, 2014, on a pro forma basis assuming we completed this offering and the Reorganization transactions on December 31, 2014.	
 
 	•	 	A non-cash expense of $34.0 million related to the issuance of 1.7 million shares of our common stock to Hunt-InfraREIT as a reorganization advisory fee at an assumed initial public offering price of $20.00 per share, which is the midpoint of the range set forth on the cover of this prospectus.	
 
 	•	 	Cash expenses incurred in 2015 related to the Reorganization of $1.8 million.	
 
 	•	 	No incentive payments in 2015 based on the projected dividend (and our expectation that the Operating Partnership will make per-unit distributions in the same amount).	
 
 	•	 	Other third-party expenses of $6.6 million in 2015, including the costs of being a public company.	
Depreciation Expense
We estimate that we will incur depreciation and amortization expense of $40.0 million in 2015. We have assumed gross electric plant of $                 for 2015 and a weighted average depreciation rate of         % for 2015. Forecasted depreciation and amortization expense reflects management’s estimates, which are based on consistent average depreciable asset lives and depreciation methodologies under GAAP.
Interest Expense
Our interest expense forecast assumes:
 
 	•	 	$             million of debt will be repaid immediately following the consummation of this offering using the proceeds of this offering, resulting in estimated funded indebtedness of $             million as of                 , 2015. We have assumed $         million of debt will be issued in 2015 resulting in an estimated year-end balance of $             million. We have assumed that debt at SDTS will not exceed 55% of total capital, which is the percentage of debt allowed for setting Sharyland’s rates.	
 
 	•	 	A weighted average interest rate of 4.67% for 2015.	
 
 	•	 	AFUDC debt of $0.6 million in 2015 based on an AFUDC debt rate of 6.73% applied to construction work in progress (CWIP).	
 
 	•	 	An amortization rate for deferred financing costs of 23.0% in 2015, resulting in debt amortization costs of $3.1 million in 2015.	
 
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Other Income, Net
Our other income, net forecast assumes:
 
 	•	 	The forecast for other income, net assumes AFUDC equity will be $1.3 million in 2015 based on an AFUDC equity rate of 9.7% applied to CWIP.	
 
 	•	 	A non-cash expense of $7.4 million as a result of a change in the fair market value of our contingent consideration owed to Hunt-InfraREIT (based on an assumed initial public offering price of $20.00 per share, which is the midpoint of the range set forth on the cover of this prospectus).	
Income Tax Expense
Income tax expense is the Texas state margin tax, and we have assumed that this tax will equal approximately 0.7% of our revenue.
 
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 CAPITALIZATION
The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2014:
 
 	•	 	On an actual basis for InfraREIT, L.L.C.; and	
 
 	•	 	On a pro forma basis for InfraREIT, Inc.	
We derived this table from, and it should be read in conjunction with and is qualified in its entirety by reference to, our historical and pro forma consolidated financial statements and the accompanying notes included elsewhere in this prospectus. You should also read this table in conjunction with “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Description of Our Capital Stock—Reorganization.”

 	 	As of September 30, 2014	 	
 	 	Actual	 	 	Pro Forma (1)	 	
 	 	(in thousands)	 	
Cash and cash equivalents	 	$	24,655	  	 	$	            	 	
	 	 	 	 	 	 	 	 	
Total debt:	 				 				
Short-term borrowings	 	$	193,500	  	 	$	 	  	
Current portion of long-term debt	 	 	19,139	  	 				
Long-term debt	 	 	615,367	  	 				
	 	 	 	 	 	 	 	 	
Total debt	 	 	828,006	  	 				
	 	 	 	 	 				
Equity:	 				 				
Total InfraREIT, L.L.C. members’ capital	 	 	448,293	  	 				
	 	 	 	 	 				
Preferred stock, $0.01 par value per share;             shares authorized, none issued and outstanding, pro forma	 				 				
Common stock, $0.01 par value per share;             shares authorized and             shares issued and outstanding, pro forma	 				 				
Additional paid in capital	 				 				
Accumulated deficit	 	 	—  	  	 				
	 	 	 	 	 				
Members’ capital	 	 	448,293	  	 				
	 	 	 	 	 				
Total stockholders’ equity	 				 				
Noncontrolling interests	 	 	147,474	  	 				
	 	 	 	 	 				
Total equity	 	 	595,767	  	 				
	 	 	 	 	 				
Total capitalization	 	$	1,448,503	  	 	$	 	  	

(1)	A $1.00 increase or decrease in the assumed initial public offering price of $         per share, the midpoint of the range set forth on the cover of this prospectus, would result in an approximately $         million increase or decrease in each of cash and cash equivalents, total equity and total capitalization after giving effect to the $             million increase or decrease in the amount of cash merger consideration payable to our existing investors, assuming that the number of shares offered by us set forth on the cover of this prospectus remains the same, and after deducting the underwriting discounts and commissions and the underwriter structuring fee. Each 1.0 million increase or decrease in the number of shares offered by us would increase or decrease each of cash and cash equivalents, total equity and total capitalization by approximately $         million, assuming the initial public offering price of $         per share, which is the midpoint of the range set forth on the cover of this prospectus, remains the same, and after deducting the underwriting discounts and	
 
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 	commissions and the underwriter structuring fee. An increase or decrease in the number of shares offered by us would not result in an increase or decrease in the amount of cash merger consideration payable to our existing investors. The as adjusted information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering.	
 
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 DILUTION
Purchasers of our common stock in this offering will experience an immediate and substantial dilution in the net tangible book value of our common stock from the initial public offering price. At             , we had a net tangible book value of approximately $         million, or $         per share of our common stock held by existing investors before this offering. After giving effect to the sale by us of the shares of our common stock in this offering, including the use of proceeds as described under “Use of Proceeds,” and the deduction of underwriting discounts and commissions and the underwriter structuring fee, the pro forma net tangible book value at September 30, 2014 attributable to common stockholders would have been $         million, or $         per share of our common stock. This amount represents an immediate increase in net tangible book value of $         per share to existing investors in InfraREIT and an immediate dilution in pro forma net tangible book value of $         per share from the assumed public offering price of $         per share of our common stock to new public investors in this offering. In order to allow you to evaluate this dilution, in presenting this information we have assumed the completion of our Reorganization, which is described in detail in “Description of Our Capital Stock—Reorganization.” As such, we have presented the information in this “Dilution” section assuming that the Reorganization transactions described under “Prospectus Summary—Our Structure and Reorganization Transactions—Reorganization Transactions” and the related Pro Forma Adjustments described in the unaudited pro forma condensed consolidated financial statements included elsewhere in this prospectus (other than those solely relating to the issuance of shares of our common stock in this offering and the use of proceeds therefrom) have occurred. Both the pre- and post-offering information in this section give effect to these assumptions. The following table illustrates the per share dilution:

Assumed initial public offering price per share	  	$	            	  	
Net tangible book value per share before this offering (1)	  	$	 	  	
Net increase in net tangible book value per share attributable to this offering	  	$	 	  	
Pro forma net tangible book value per share after this offering (2)	  	$	 	  	
	  	 	 	 	
Dilution in net tangible book value per share to new investors in this offering (3)	  	$	 	  	

(1)	Net tangible book value per share of our common stock before this offering is determined by dividing net tangible book value (consisting of total assets less intangible assets, which are comprised of goodwill, deferred financing costs and other regulatory assets, net of liabilities and non-controlling interest) of $             as of September 30, 2014 by the number of shares of our common stock held by existing investors before this offering.	
 
(2)	Based on pro forma net tangible book value of approximately $         million divided by the number of shares of our common stock outstanding after this offering.	
 
(3)	Dilution is determined by subtracting pro forma net tangible book value per share of our common stock after giving effect to this offering from the initial public offering price paid by a new investor for a share of our common stock.	
A $1.00 increase or decrease in the assumed initial public offering price of $         per share would increase or decrease the pro forma net tangible book value per share after giving effect to this offering by $         per share and would increase or decrease the dilution in pro forma net tangible book value per share to new investors in this offering by $         per share. This calculation assumes that the number of shares offered by us, as set forth in “Prospectus Summary—The Offering,” remains the same and reflects the deduction of the underwriting discounts and commissions and the underwriter structuring fee.
 
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Differences Between New Investors and Existing Investors in Number of Shares and Amount Paid
The table below summarizes, as of September 30, 2014, on a pro forma basis, the total consideration paid and the average price per share paid by the existing investors and paid in cash by the new investors purchasing shares in this offering (based on the net tangible book value attributable to the existing investors). In calculating the shares to be issued in this offering, we used an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover of this prospectus.

 	  	Shares Issued	 	 	Total
Consideration
Paid	 	 	Average
Price
Per
Share	 	
 	  	Number	  	Percent	 	 	Amount	 	  	Percent	 	 			
Existing investors	  		  	 	    	% 	 	$	            	  	  	 	    	% 	 	$	            	  	
New investors	  		  				 				  				 				
Total	  		  	 	    	% 	 	$	            	  	  	 	    	% 	 	$	            	  	
 
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 SELECTED FINANCIAL INFORMATION
The following tables set forth selected financial data on (1) a pro forma basis giving effect to the Pro Forma Adjustments described in the unaudited pro forma condensed consolidated financial statements included elsewhere in this prospectus for InfraREIT, Inc., and (2) a historical basis for InfraREIT, L.L.C. We have not presented selected financial data for InfraREIT, Inc. on a historical basis because InfraREIT, Inc. has had limited activity since its formation and because we believe that a discussion of the historical financial condition and results of operations of InfraREIT, Inc. would not be meaningful.
Historically, InfraREIT, L.L.C. followed the guidance included in SEC Staff Accounting Bulletin Topic 1.b. Accordingly, the InfraREIT, L.L.C. historical financial data as of and for the years ended December 31, 2013 and 2012 and for the nine months ended September 30, 2013 reflects all of the costs incurred on our behalf by our external manager for the periods presented. Beginning with the quarter ended June 30, 2014, the guidance in Staff Accounting Bulletin Topic 1.b. no longer applies. As a result, the historical financial data for InfraREIT, L.L.C., as well as the pro forma financial data, for the nine months ended September 30, 2014 does not include all costs incurred by our external manager during that period, but does include our management fees to Hunt Manager as well as the additional costs described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Significant Components of Our Results of Operations—Operating Expenses—General and Administrative.” You should read the following selected pro forma and historical consolidated data in connection with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the pro forma and historical consolidated financial statements and related notes thereto appearing elsewhere in this prospectus.
The selected pro forma financial data for the nine months ended September 30, 2014 and for the year ended December 31, 2013 has been derived from our unaudited pro forma consolidated financial statements included elsewhere in this prospectus. The InfraREIT, L.L.C. selected historical consolidated financial data as of and for the years ended December 31, 2013 and 2012 have been derived from the audited historical consolidated financial statements appearing elsewhere in this prospectus. The InfraREIT, L.L.C. selected historical financial data as of September 30, 2014 and for the nine months ended September 30, 2014 and 2013 was derived from the unaudited condensed consolidated financial statements included elsewhere in this prospectus, which include all adjustments, consisting of normal recurring adjustments, that our management considers necessary for a fair presentation of the financial position and the results of operations for such periods under GAAP. The results for the interim periods are not necessarily indicative of the results for the full year. The historical results are not indicative of the results we expect in the future. For a discussion of FFO, EBITDA and Adjusted EBITDA, including their limits as financial measures, see “Prospectus Summary—Non-GAAP Financial Measures.”
 
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 	 	InfraREIT, Inc.
Pro Forma	 	 	InfraREIT, L.L.C.
Historical	 	
 	 	Nine Months
Ended
September 30,
2014	 	 	Year Ended
December 31,
2013	 	 	Nine Months
Ended
September 30,	 	 	Years Ended
December 31,	 	
 	 			 			 	2014	 	 	2013	 	 	2013	 	 	2012	 	
 	 	(in thousands)	 	
 	 	(Unaudited)	 	 	(Unaudited)	 	 	 	 	 	 	 	
Operating Information	 				 				 				 				 				
Lease revenue	 				 				 				 				 				 				
Base rent	 	$	            	  	 	$	            	  	 	$	76,399	  	 	$	35,714	  	 	$	57,979	  	 	$	30,961	  	
Percentage rent	 				 				 	 	12,972	  	 	 	7,654	  	 	 	15,214	  	 	 	11,821	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total lease revenue	 				 				 	 	89,371	  	 	 	43,368	  	 	 	73,193	  	 	 	42,782	  	
Operating costs and expenses	 				 				 				 				 				 				
General and administrative expense	 				 				 	 	12,839	  	 	 	10,262	  	 	 	13,691	  	 	 	12,521	  	
Depreciation	 				 				 	 	25,825	  	 	 	12,417	  	 	 	20,024	  	 	 	10,563	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total operating costs and expenses	 				 				 	 	38,664	  	 	 	22,679	  	 	 	33,715	  	 	 	23,084	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from operations	 				 				 	 	50,707	  	 	 	20,689	  	 	 	39,478	  	 	 	19,698	  	
Other (expense) income	 				 				 				 				 				 				
Interest expense, net	 				 				 	 	(24,364	) 	 	 	(10,764	) 	 	 	(17,384	) 	 	 	(17,314	) 	
Other income, net	 				 				 	 	333	  	 	 	19,571	  	 	 	20,932	  	 	 	14,520	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total other (expense) income	 				 				 	 	(24,031	) 	 	 	8,807	  	 	 	3,548	  	 	 	(2,794	) 	
Income tax expense	 				 				 	 	656	  	 	 	289	  	 	 	616	  	 	 	336	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 				 				 	 	26,020	  	 	 	29,207	  	 	 	42,410	  	 	 	16,568	  	
Less: Net income attributable to noncontrolling interest	 				 				 	 	6,046	  	 	 	7,075	  	 	 	10,288	  	 	 	4,151	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss) attributable to InfraREIT, Inc. (pro forma) or InfraREIT, L.L.C. (historical)	 	$	            	  	 	$	            	  	 	$	19,974	  	 	$	22,132	  	 	$	32,122	  	 	$	12,417	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other Information	 				 				 				 				 				
Cash flows provided by operating activities	 	$	            	  	 	$	            	  	 	$	67,691	  	 	$	17,943	  	 	$	21,321	  	 	$	15,349	  	
Cash flows used in investing activities	 				 				 	 	(170,200	) 	 	 	(286,284	) 	 	 	(390,283	) 	 	 	(361,340	) 	
Cash flows provided by (used in) financing activities	 				 				 	 	119,418	  	 	 	287,622	  	 	 	360,266	  	 	 	336,672	  	
FFO before noncontrolling interest (1)(2)	 				 				 	 	51,845	  	 	 	41,624	  	 	 	62,434	  	 	 	27,131	  	
EBITDA before noncontrolling interest (1)(2)	 				 				 	 	76,865	  	 	 	52,677	  	 	 	80,434	  	 	 	44,781	  	
Adjusted EBITDA before noncontrolling interest (1)(2)	 				 				 	 	76,543	  	 	 	33,121	  	 	 	59,620	  	 	 	30,261	  	

(1)	Unaudited.	
 
(2)	For a discussion of FFO, EBITDA and Adjusted EBITDA and a reconciliation to their nearest GAAP counterparts, see “Prospectus Summary—Non-GAAP Financial Measures.”	
 
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 	 	InfraREIT, Inc.
Pro Forma	 	 	InfraREIT, L.L.C.
Historical	 	
 	 	As of
September 30,
2014	 	 	As of
September 30,
2014	 	 	As of
December 31,	 	
 	 			 			 	2013	 	 	2012	 	
 	 	(in thousands)	 	
 	 	(Unaudited)	 	 	(Unaudited)	 	 	 	 	 	 	 	
Balance Sheet	 				 				 				
Gross property, plant and equipment	 	 	$            	  	 	$	1,329,577	  	 	$	1,303,828	  	 	$	900,444	  	
Cash and cash equivalents	 				 	 	24,655	  	 	 	7,746	  	 	 	16,442	  	
Total assets	 				 	 	1,448,503	  	 	 	1,326,363	  	 	 	928,976	  	
Short term borrowings and current portion of long-term debt	 				 	 	212,639	  	 	 	79,777	  	 	 	11,303	  	
Long-term debt	 				 	 	615,367	  	 	 	627,913	  	 	 	461,565	  	
Other liabilities	 				 	 	24,730	  	 	 	54,480	  	 	 	107,330	  	
Total liabilities	 				 	 	852,736	  	 	 	762,170	  	 	 	580,198	  	
Total InfraREIT, Inc. stockholders’ equity (pro forma) or InfraREIT, L.L.C. members’ capital (historical)	 				 	 	448,293	  	 	 	427,709	  	 	 	257,332	  	
Noncontrolling interest	 				 	 	147,474	  	 	 	136,484	  	 	 	91,446	  	
Total equity	 				 	 	595,767	  	 	 	564,193	  	 	 	348,778	  	
Total equity and liabilities	 				 	 	1,448,503	  	 	 	1,326,363	  	 	 	928,976	  	
 
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 MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with “Selected Financial Information,” “Business and Properties” and our historical consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve numerous risks and uncertainties. The forward-looking statements are subject to a number of important factors, including those factors discussed under “Risk Factors” and “Forward-Looking Statements,” that could cause our actual results to differ materially from the results described herein or implied by such forward-looking statements.
InfraREIT, L.L.C., InfraREIT, Inc. and InfraREIT Partners, LP (Operating Partnership) intend to enter in to a merger and transaction agreement to be dated on or around the date of effectiveness of the registration statement to which this prospectus relates. Pursuant to that merger agreement, InfraREIT, L.L.C. will merge with and into InfraREIT, Inc. immediately following completion of this offering, with InfraREIT, Inc. surviving (the Merger). Because InfraREIT, L.L.C. owned and conducted substantially all of our historical assets and operations before this Merger, the following discusses and analyzes the financial condition and results of operation of InfraREIT, L.L.C. Where material, the following discusses and analyzes the pro forma financial condition and results of operations of InfraREIT, Inc. described in the unaudited pro forma condensed consolidated financial statements included elsewhere in this prospectus. For more information regarding InfraREIT, Inc.’s historical financial condition and results of operations, as well as the pro forma information, you should read the consolidated financial statements and related notes included elsewhere in this prospectus.
Overview
We own rate-regulated electric transmission and distribution (T&D) assets in Texas as part of a dividend growth oriented real estate investment trust (REIT). We currently own T&D assets throughout Texas, including the Texas Panhandle near Amarillo, the Permian Basin in and around Stanton, Central Texas around Brady, Northeast Texas in and around Celeste and South Texas near McAllen. We have grown rapidly over the last several years, with our rate base increasing from approximately $60 million as of December 31, 2009 to approximately $1.1 billion as of September 30, 2014. We expect that organic growth as well as acquisitions of T&D assets from Hunt Consolidated, Inc. (Hunt) and Sharyland Utilities (Sharyland) and from third parties will allow us to achieve continued growth in our rate base, which is calculated as our gross electric plant in service under generally accepted accounting principles (GAAP) less accumulated depreciation and adjusted for deferred taxes. For additional information on our assets, see “Business and Properties — Properties.”
We are externally managed by Hunt Utility Services, which we refer to as Hunt Manager. All of our officers are employees of Hunt Manager, and we do not expect to have any employees upon completion of this offering. We expect to benefit from the experience, skill, resources, relationships and contacts of the executive officers and key personnel of Hunt Manager. Pursuant to our management agreement with Hunt Manager, Hunt Manager provides for the day-to-day management of the Company, subject to the oversight of our board of directors. In exchange for these management services, we pay a management fee to Hunt Manager. See “Our Manager and Management Agreement—Management Agreement.”
Our Revenue Model
We lease our T&D assets to our tenant, Sharyland, a Texas-based utility regulated by the Public Utility Commission of Texas (PUCT). To support its lease payments to us, Sharyland delivers electric service and collects revenues directly from distribution service providers and retail electric providers, which pay PUCT-approved rates. Under the terms of our leases, Sharyland is responsible for the operation of our assets, all property related expenses associated with our assets, including repairs, maintenance, insurance and taxes (other than income and REIT excise taxes), construction management and regulatory oversight and compliance. Our
 
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development agreement with Hunt Transmission Services, L.L.C., which we refer to as Hunt Developer, and our leases provide that we will own and fund the development and construction of T&D assets that are in our distribution service territory or that are added to one of our transmission substations or that hang from one of our existing transmission lines (Footprint Projects). For Footprint Projects, we generally fund all of the capital expenditures during the construction or development phase of a project, and these expenditures increase our rate base when the related assets are placed in service. During this period, we also accrue an allowance for funds used during construction (AFUDC), which represents the approximate cost of the debt and equity used to fund these cash expenditures. AFUDC that accrues during this period increases our rate base when the assets are placed in service. Once our T&D assets are placed in service, we stop accruing AFUDC and begin depreciating those assets. Hunt Developer has agreed to give us a right of first offer on certain specified transmission development projects (ROFO Projects). We do not fund capital expenditures associated with ROFO Projects. Instead, Hunt is obligated to offer ROFO Projects to us at least 90 days before they are energized, giving us an opportunity to acquire ROFO Projects at a purchase price that will be negotiated by our Conflicts Committee, which will be comprised solely of independent directors. We expect that the negotiated price will be based on a number of factors, including the rate base for the assets, market conditions, potential for incremental Footprint Projects, whether the lease terms have been negotiated with Sharyland or another tenant, and the regulatory return we expect the assets will earn.
Significant Components of Our Results of Operations
Lease Revenue
All of our revenue is comprised of rental payments from Sharyland under our leases with Sharyland. Sharyland makes scheduled lease payments to us that generally consist of base rent, which is a fixed amount, and percentage rent, which is based on an agreed-to percentage of Sharyland’s gross revenue, as defined in the leases, earned through the PUCT-approved rates charged to its customers in excess of an annual specified threshold. We recognize base rent under these leases on a straight-line basis over the applicable term. We recognize percentage rent under these leases once the revenue earned by Sharyland on the leased assets exceeds the annual specified threshold. Because the annual threshold must be met before we can recognize any percentage revenue, we anticipate our revenue during the first and second quarters each year will be lower than the third and fourth quarters. For information regarding how we calculate Sharyland’s gross revenue, see “Business and Properties—Our Tenant—Our Leases—Rent.”
Operating Expenses
General and Administrative
Our historical general and administrative expenses during the nine-month period ended September 30, 2014 included management fees to Hunt Manager as well costs we incurred directly, such as professional services costs. In preparing our financial statements for the years ended December 31, 2013 and 2012 and the nine-month period ended September 30, 2013, we followed the guidance included in SEC Staff Accounting Bulletin Topic 1.b. Pursuant to this guidance, our general and administrative expenses included all costs incurred on our behalf by Hunt Manager, including compensation expenses, overhead costs related to the lease of our office space and software license fees during the nine-month period ended September 30, 2013 and the years ended December 31, 2013 and 2012. Our historical general and administrative expenses during these periods also included costs we incurred directly, such as professional services costs. On June 24, 2014, our board of directors agreed to increase the annual management fee from $2.5 million to $10.0 million effective January 1, 2014. Accordingly, beginning with the six-month period ended June 30, 2014, the guidance in Staff Accounting Bulletin Topic 1.b. no longer applies. As a result, our general and administrative expenses for the nine-month period ended September 30, 2014 does not include all costs incurred by our external manager during that period but does include management fees paid to Hunt Manager as well as additional costs we incur directly, such as professional services costs and direct reimbursement of third-party costs paid to outside service providers. We expect the general and administrative expenses we incur directly to increase significantly during 2015 compared
 
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to 2014, primarily as a result of an expected non-cash expense of $                         million related to the issuance of              million shares of our common stock to Hunt-InfraREIT as a reorganization advisory fee (based on an assumed initial public offering price of $                         per share, which is the midpoint of the range set forth on the cover of this prospectus). We expect that general and administrative expense will also increase after the completion of this offering because we will be a public company and because our management fee will increase, effective April 1, 2015, with these increases partially offset by an expected decrease in expenses we incur to prepare for this offering in 2015 compared to 2014. After this offering, we will begin paying stock exchange listing fees, transfer agent costs and other expenses, such as legal and audit costs related to filings with the Securities and Exchange Commission, that we did not incur as a private company. Effective April 1, 2015, our management fee will increase from $10 million annually to an estimated $             annually through April 1, 2016. During that period, the annual management fee will equal 1.50% of our total equity (including non-controlling interest) as of December 31, 2014, assuming we had consummated this offering and the Reorganization transactions on December 31, 2014. Our estimate of the management fee is based on the assumption that we will issue                  shares in this offering at a price of $             per share, which is the mid-point of the range on the cover of this prospectus, and complete the Reorganization transactions in the manner described in “Prospectus Summary—Our Structure and Reorganization Transactions—Reorganization Transactions.”
Depreciation
Depreciation expenses consist primarily of depreciation of electric plant using the straight-line method of accounting based on rates established in our tenant’s most recent rate case. We begin to recognize depreciation on our assets when they are placed in service, which reduces our rate base in those assets.
Other Items of Income or Expense
AFUDC, which represents the approximate cost of debt and equity used to finance plant under construction, is a non-cash accounting accrual that increases our construction work in progress (CWIP) balance. AFUDC rates are determined based on electric plant instructions found in the Federal Energy Regulatory Commission (FERC) regulations; AFUDC does not represent cash generated from operations. Once our T&D assets are placed in service, we stop accruing AFUDC on those assets.
Interest Expense, net
Interest expense, net is comprised of interest expense associated with our outstanding borrowings, increased or decreased by realized gains or losses on our cash flow hedging instruments, increased by amortization of deferred financing costs and decreased by the portion of AFUDC that relates to our cost of borrowed funds (AFUDC on borrowed funds).
Other Income, net
Other income, net is comprised primarily of AFUDC that relates to the cost of our equity (AFUDC on other funds), offset by any expenses we incurred related to certain changes in the assessed value of the contingent consideration our Operating Partnership owes to Hunt-InfraREIT, L.L.C. (Hunt-InfraREIT), which is a limited partner of our Operating Partnership. As a result of the consummation of this offering, we expect to incur a non-cash expense of $                     million related to the issuance of              Class A units representing partnership interests in our Operating Partnership (Class A OP Units) to Hunt-InfraREIT upon consummation of this offering. We intend to issue these Class A OP Units to settle our contingent obligation related to the CREZ construction project owed to Hunt-InfraREIT pursuant to the InfraREIT, L.L.C. constituent documents. We have estimated the amount of this non-cash expense based on an assumed initial public offering price of $                     per share, which is the midpoint of the range set forth on the cover of this prospectus. Following the consummation of this offering, other than the expense described above, we do not expect to incur any additional expenses related to contingent consideration. See “ — Contingent Consideration and Deemed Capital Contributions” for additional disclosure regarding this contingent consideration.
 
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Factors Expected To Affect Our Operating Results and Financial Condition
Our results of operations and financial condition will be affected by numerous factors, many of which are beyond our control. The key factors we expect to impact our results of operations and financial condition include our lease revenues, the amount of additional capital expenditures we make to fund Footprint Projects and the acquisition cost of any ROFO Projects we acquire.
Lease Revenues
Our revenue is derived from rent from Sharyland, which is comprised of base rent, which is a fixed amount, and percentage rent, which is based on an agreed-to percentage of Sharyland’s gross revenue, as defined in the leases, earned through the PUCT-approved rates charged to its customers in excess of a specified threshold. See “—Regulatory Recovery.” Our negotiations of both base and percentage rent with Sharyland depend on the amount of rate base that is up for renewal or subject to a new lease. Because our existing rate base will decrease over time as our T&D assets are depreciated, the base rent under our leases with respect to a significant portion of our assets will also decrease over time as our assets are depreciated. As a result, rent under our leases will decrease over time unless we add to our existing rate base by making additional capital expenditures and supplementing our leases to increase the rent owed to us in an amount sufficient to offset the decreases in the base rent resulting from depreciation. Additionally, as a result of the percentage rent component of our leases, our revenue will vary based on Sharyland’s revenue. However, because the percentage rent under our leases currently ranges from 24% to 37% of Sharyland’s annual gross revenue in excess of specified thresholds, our revenue does not vary as significantly as it would if we were an integrated utility.
We expect to report an increase in lease revenue for 2014 compared to 2013, primarily due to having a full year of lease revenue relating to our Panhandle assets under our competitive renewable energy zone (CREZ) lease as well as the effect of other lease supplements. Also, we expect to report an increase in base rent as a percentage of total rent for 2014 compared to 2013 because CREZ lease base rent, as a percentage of total rent, is higher than under our other existing leases. We also expect lease revenue to increase during the first nine months of 2015 compared to the first nine months of 2014 as a result of lease revenue generated from the assets we placed in service during 2014 and the assets we expect to place in service during 2015. As required by our leases, Sharyland’s January 2014 rate case settlement, described below, as well as any future Sharyland rate case results, will impact our negotiations with Sharyland regarding rental rates included in lease renewals and lease supplements related to future capital expenditures.
Regulatory Recovery
Sharyland charges rates for its T&D services that are approved by the PUCT. With respect to transmission services, Sharyland charges all distribution service providers (DSPs) for its cost of service, or revenue requirement, as set in its most recent rate case. DSPs pay Sharyland a monthly amount based on each DSP’s pro rata share, during the prior year, of the average of ERCOT coincident peak demand for the months of June, July, August and September (ERCOT 4CP). With respect to distribution services, Sharyland charges retail electric providers (REPs) rates that are based upon tariffs approved in its most recent rate case. The tariff typically includes a per-kilowatt hour (kWh) charge and a flat customer charge for residential customers, and may include a per-kWh, a per kilowatt (kW) and a flat customer charge for other customer classes. See “Regulation and Rates” and “Business and Properties—Our Tenant—Sharyland’s Regulatory Proceedings.” Sharyland may update its rates through a full rate proceeding with the PUCT. Additionally, Sharyland may update its transmission rates up to two times per year through interim transmission cost of service (TCOS) filings and its distribution rates no more than once a year through a distribution cost recovery factor filing. Sharyland settled a rate case that relates to substantially all of our assets other than our distribution assets in McAllen, Texas that was approved by the PUCT on January 23, 2014. As a result of the rate case, Sharyland is entitled to earn a return on equity of 9.70% and a return on invested capital of 8.06% in calculating rates, assuming a capital
 
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structure consisting of 55% debt and 45% equity. The new rates became effective on May 1, 2014. Sharyland agreed in that settlement to file its next rate proceeding in 2016, based upon the test year ending December 31, 2015. Sharyland updated its transmission tariff through an interim TCOS filing in January 2014, a filing effective May 1, 2014 (the reconciliation filing) that gave effect to the rate case results and a subsequent interim TCOS filing in August of 2014. The following outlines, by way of example, the manner in which Sharyland’s TCOS filing on August 15, 2014 (the August 2014 interim TCOS filing) updated Sharyland’s transmission rates:
 
 	•	 	The August 2014 interim TCOS filing compared Sharyland’s revenue requirement as of July 31, 2014 (approximately $136.6 million) to Sharyland’s revenue requirement established in Sharyland’s reconciliation filing in March 2014 (approximately $128.5 million). The August 2014 revenue requirement updated rate base, taking into account changes in the original cost of plant in service and accumulated depreciation. The August 2014 revenue requirement also updated for changes in depreciation expense, taxes other than income tax and federal income tax.	
 
 	•	 	The difference in the revenue requirement for the August 2014 interim TCOS filing and the reconciliation filing in March 2014 was approximately $8.1 million. Sharyland’s interim annual transmission rate was then calculated by dividing its updated annual transmission revenue requirement of approximately $136.6 million by 2013 ERCOT 4CP of approximately 65 gigawatts, deriving a transmission rate of $2.094/kW.	
The PUCT approved the August 2014 interim TCOS filing on October 3, 2014, giving Sharyland the right to begin billing DSPs at the updated transmission rate of $2.094/kW, instead of the rate established in connection with the reconciliation filing that applied through October 3, 2014. Effective October 3, 2014, each DSP paid Sharyland, monthly, an amount that on an annualized basis equals $2.094/kW multiplied by the DSP’s ERCOT 4CP usage during 2013. In other words, the amount the DSP paid Sharyland after the effectiveness of the August 2014 interim TCOS filing has depended on the DSP’s 2013 usage, and not the DSP’s 2014 usage. This tariff has been and will be subsequently updated for any subsequent interim TCOS filings, rate cases and other filings. We have amended our lease supplements with Sharyland to reflect the increased rent that Sharyland owes with respect to the additional transmission assets added in the August 2014 interim TCOS filing.
As a result of the amount of capital expenditures we expect to fund over the next several years, we expect that Sharyland will continue to use the twice-yearly interim TCOS mechanism to update its revenue requirement and wholesale transmission tariff. See “Business and Properties—Our Tenant—Sharyland’s Regulatory Proceedings—Transmission Tariff.”
Capital Expenditures
Generally, we expect to enter into lease supplements related to capital expenditures in advance of the year in which the related assets are placed in service. For instance, in late 2014, we entered into revised lease supplements that memorialized Sharyland’s obligation to pay us rent on the capital expenditures we expect for 2015. As 2015 progresses, if the amount of expected placed-in-service capital expenditures, or the related placed-in-service dates, differ from expectations, either Sharyland or we may request a rent validation in order to adjust rent obligations to true-up the difference between actual and expected capital expenditure amounts and placed-in-service dates. Our leases do not require that we follow this exact timeline and process, and we may determine, together with Sharyland, that an alternate process is more efficient.
Historically, the capital expenditures during the construction or development phase of a project have been reflected in our electric plant, net as CWIP. However, due to the development agreement, the capital expenditures for ROFO Projects prior to acquisition by us will be funded by third parties, and therefore will not be included in the CWIP reflected on our balance sheet. Partially as a result, our AFUDC income will be lower in future years than it has been historically.
 
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InfraREIT, L.L.C. Results of Operations

 	  	Nine Months Ended
September 30,	 	 	Years Ended
December 31,	 	
 	  	2014	 	 	2013	 	 	2013	 	 	2012	 	
 	  	(in thousands)	 	
 	  	(Unaudited)	 	 	 	 	 	 	 	
Operating Information	  				 				 				 				
Lease revenue	  				 				 				 				
Base rent	  	$	76,399	  	 	$	35,714	  	 	$	57,979	  	 	$	30,961	  	
Percentage rent	  	 	12,972	  	 	 	7,654	  	 	 	15,214	  	 	 	11,821	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total lease revenue	  	 	89,371	  	 	 	43,368	  	 	 	73,193	  	 	 	42,782	  	
Operating costs and expenses	  				 				 				 				
General and administrative expense	  	 	12,839	  	 	 	10,262	  	 	 	13,691	  	 	 	12,521	  	
Depreciation	  	 	25,825	  	 	 	12,417	  	 	 	20,024	  	 	 	10,563	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total operating costs and expenses	  	 	38,664	  	 	 	22,679	  	 	 	33,715	  	 	 	23,084	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from operations	  	 	50,707	  	 	 	20,689	  	 	 	39,478	  	 	 	19,698	  	
Other (expense) income	  				 				 				 				
Interest expense, net	  	 	(24,364	) 	 	 	(10,764	) 	 	 	(17,384	) 	 	 	(17,314	) 	
Other income, net	  	 	333	  	 	 	19,571	  	 	 	20,932	  	 	 	14,520	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total other (expense) income	  	 	(24,031	) 	 	 	8,807	  	 	 	3,548	  	 	 	(2,794	) 	
Income tax expense	  	 	656	  	 	 	289	  	 	 	616	  	 	 	336	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	  	 	26,020	  	 	 	29,207	  	 	 	42,410	  	 	 	16,568	  	
Less: Net income attributable to noncontrolling interest	  	 	6,046	  	 	 	7,075	  	 	 	10,288	  	 	 	4,151	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income attributable to InfraREIT, L.L.C.	  	$	19,974	  	 	$	22,132	  	 	$	32,122	  	 	$	12,417	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013
Lease revenue —Lease revenue was $89.4 million for the nine months ended September 30, 2014 compared to $43.4 million for the nine months ended September 30, 2013, an increase of $46.0 million, or 106.1%. Base rent contributed $76.4 million and $35.7 million during the nine months ended September 30, 2014 and 2013, or 85.5% and 82.4%, of the total revenue, respectively. Percentage rent was $13.0 million, or 14.5%, of our total revenue for the nine months ended September 30, 2014, compared to $7.7 million, or 17.6%, of our total revenue during the nine months ended September 30, 2013. We recognize percentage rent on our leases once Sharyland’s revenue exceeds the annual specified thresholds.
The increase in base rent was primarily driven by the additional lease revenue associated with the Panhandle transmission assets being placed in service, which resulted in revenue recognition of $46.6 million under our CREZ lease during the nine-month period ended September 30, 2014 compared to $10.3 million for the same period in 2013. Additionally, other distribution and transmission assets placed in service generated additional base rent of $4.4 million during the nine months ended September 30, 2014 as compared to the same period in 2013. The increase in percentage rent of $5.3 million was primarily driven by an increase of percentage rent related to our CREZ lease that resulted in $3.8 million of percentage rent being recognized during the nine months ended September 30, 2014, compared to no percentage rent recognized during the comparable period in the prior year on the same lease. We also experienced an increase in our other leases that generated an additional $1.6 million of percentage rent during the nine months ended September 30, 2014 compared to the same period in the prior year. The increase in our percentage rent is due to the additional assets we have placed in service coupled with an increase in revenue at Sharyland through the nine months ended September 30, 2014 as compared to the previous year. See Note 2 of the Notes to the condensed consolidated financial statements for additional information regarding our leases.
 
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General and administrative expense —General and administrative expenses were $12.8 million and $10.3 million for the nine months ended September 30, 2014 and 2013, respectively, an increase of $2.6 million, or 25.1%. The increase in general and administrative expense has been driven by an increase in professional services of $3.4 million, primarily related to legal, audit and tax services. These costs have been the results of our efforts to prepare the company for an initial public offering. The increase in professional services has been partially offset by the management fee paid to our manager being lower than the allocated manager costs reflected in the prior period. Historically, we followed the guidance included in SEC Staff Accounting Bulletin Topic 1.b. Pursuant to this guidance, our general and administrative expenses included all costs incurred on our behalf by Hunt Manager, including compensation expenses, overhead costs related to the lease of our office space and software license fees. On June 24, 2014, our board of directors agreed to increase the annual management fee from $2.5 million to $10.0 million effective January 1, 2014. Beginning with the quarter ended June 30, 2014, the guidance in Staff Accounting Bulletin Topic 1.b. no longer applies. As a result, our general and administrative expenses for the nine-month period ended September 30, 2014 does not include all costs incurred by our external manager during that period but does include management fees paid to Hunt Manager as well as additional costs we incur directly, such as professional services costs and direct reimbursement of third-party costs paid to outside service providers. As a result of the increased management fee, we, through our Operating Partnership, incurred costs associated with management fees of $7.5 million during the nine months ended September 30, 2014.
Depreciation —Depreciation expense was $25.8 million for the nine months ended September 30, 2014 compared to $12.4 million for the nine months ended September 30, 2013, an increase of $13.4 million, or 108.0%. The increase in depreciation expense is due to additional assets being placed in service, primarily driven by our Panhandle transmission assets being placed in service throughout 2013.
Interest expense, net —Interest expense, net was $24.4 million during the nine months ended September 30, 2014 compared to $10.8 million for the nine months ended September 30, 2013, an increase of $13.6 million, or 126.3%. The increase in interest expense, net is due to lower AFUDC on borrowed funds of $10.2 million during the nine months ended September 30, 2014 compared to the same period in 2013, resulting from our lower CWIP balances after our Panhandle transmission assets were placed in service throughout 2013. Additionally, the remaining increase in interest expense of $3.4 million during the nine months ended September 30, 2014, compared to the same period in 2013, was primarily a result of higher debt balances. See Notes 9 and 10 of the Notes to the condensed consolidated financial statements for additional information.
Other income, net —Other income, net was $333,000 during the nine-month period ended September 30, 2014 compared to $19.6 million for the nine-month period ended September 30, 2013, a decrease of $19.2 million, or 98.3%. The decrease in other income, net was driven by a decline in AFUDC on other funds by $18.1 million to $1.5 million for the nine-month period ended September 30, 2014 compared to $19.6 million the prior period. The decrease of AFUDC on other funds resulted from our lower CWIP balances after our Panhandle transmission assets were placed in service throughout 2013. Other income, net also included $1.1 million of expense related to a change in fair value of the Operating Partnership’s contingent consideration owed to Hunt-InfraREIT pursuant to the provisions of the Operating Partnership’s partnership agreement during the nine months ended September 30, 2014. There was no such charge in the same period in 2013. See Note 15 of the Notes to the condensed consolidated financial statements for additional information regarding contingent consideration.
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Lease revenue —Lease revenue was $73.2 million for the year ended December 31, 2013 compared to $42.8 million for the year ended December 31, 2012, an increase of $30.4 million, or 71.1%. Base rent contributed $58.0 million and $31.0 million during the years ended December 31, 2013 and 2012, or 79.2% and 72.4%, of the total revenue, respectively. Percentage rent was $15.2 million, or 20.8%, of our total revenue for the year ended December 31, 2013, compared to $11.8 million, or 27.6%, of our total revenue during the year ended December 31, 2012.
 
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The increase in base rent was significantly driven by the additional lease revenue associated with the Panhandle transmission assets being placed in service, which resulted in revenue recognition of $23.3 million under our CREZ lease during the twelve month period ended December 31, 2013 compared to none for the same period in 2012. Additionally, other distribution and transmission assets placed in service generated an additional base revenue of $3.7 million during the twelve months ended December 31, 2013 as compared to the same period in 2012. The increase in percentage rent of $3.4 million during the year ended December 31, 2013 as compared to the same period in 2012 was primarily driven by a $67.3 million increase in Sharyland’s gross revenue. Our percentage rent is driven by the revenue earned by Sharyland for the usage of our total leased assets. Our increase in percentage rent of $3.4 million during the twelve month period ended December 31, 2013 as compared with the twelve month period ended December 31, 2012 was driven by additional lease revenue associated with the Panhandle transmission assets of $1.6 million, an increase in usage of $1.4 million across the leased system and an increase of $0.4 million due to a change in percentage rent rates used in 2013 as compared to 2012. There was no revenue associated with the Panhandle transmission assets during the twelve month period ended December 31, 2012. See Note 3 of the Notes to the consolidated financial statements for additional information regarding our leases.
General and administrative expense —General and administrative expenses were $13.7 million and $12.5 million for the years ended December 31, 2013 and 2012, respectively, an increase of $1.2 million, or 9.3%. We have reflected the costs incurred on the Company’s behalf by Hunt Manager during these periods. These costs include compensation, rent expense and other costs totaling $11.6 million and $10.7 million for the years ended December 31, 2013 and 2012, respectively. General and administrative expenses also included professional services such as audit, tax and legal of $2.1 million and $1.8 million during the years ended December 31, 2013 and 2012, respectively.
Depreciation —Depreciation expense was $20.0 million for the year ended December 31, 2013 compared to $10.6 million for the year ended December 31, 2012, an increase of $9.5 million, or 89.6%. The increase in depreciation expense is due to additional assets being placed in service, primarily driven by our Panhandle transmission assets being placed in service during the 2013 twelve month period.
Interest expense, net —Interest expense, net was $17.4 million during the year ended December 31, 2013 compared to $17.3 million for the year ended December 31, 2012, an increase of $70,000, or 0.4%. The increase in interest expense, net is due to higher interest expense of $30.0 million during the 2013 twelve month period, compared to $26.5 million during the 2012 twelve month period, as a result of higher debt balances, partially offset by higher AFUDC on borrowed funds of $12.6 million during the 2013 twelve month period compared to $9.2 million during the 2012 twelve month period. See Notes 10 and 11 of the Notes to the consolidated financial statements for additional information.
Other income, net —Other income, net was $20.9 million during the twelve month period ended December 31, 2013 compared to $14.5 million for the twelve month period ended December 31, 2012, an increase of $6.4 million, or 44.2%. Other income, net was driven primarily by AFUDC on other funds of $21.7 million and $15.3 million during the twelve month periods ended December 31, 2013 and 2012, respectively. The increase of AFUDC on other funds resulted from our higher CWIP balances during the 2013 period compared to the 2012 period, partially offset by a higher debt to equity structure used to calculate the AFUDC on other funds during the 2013 twelve month period compared to the 2012 twelve month period. Other income, net included $841,000 and $753,000 of expense related to a change in fair value of the Operating Partnership’s contingent consideration owed to Hunt-InfraREIT pursuant to the provisions of the Operating Partnership’s partnership agreement during the twelve month periods ended December 31, 2013 and 2012, respectively. See Note 16 of the Notes to the consolidated financial statements for additional information regarding contingent consideration.
 
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Liquidity and Capital Resources
As of September 30, 2014, we had $24.7 million of unrestricted cash and cash equivalents, or $             on a pro forma basis. We use our cash on hand primarily for the payment of capital expenditures, operating expenses, debt service payments and our dividend payments. As of September 30, 2014, we also had $1.7 million of restricted cash and $11.5 million of unused capacity under our revolving credit facilities, or $         million and $             million, respectively, on a pro forma basis. Before the completion of this offering, our principal sources of liquidity were members’ contributions, proceeds from borrowings under our credit facilities and cash flows from operations. Following completion of this offering, our members will no longer periodically contribute cash to InfraREIT, as they have historically. We expect the proceeds from this offering, cash flows from operations and borrowings under our credit facilities to be sufficient to fund current obligations, projected working capital requirements, maturities of long-term debt, budgeted capital spending and the payment of dividends in accordance with REIT requirements of the U.S. federal income tax laws and our distribution policy for at least the next twelve months. We expect that we will be able to fund estimated capital expenditures associated with Footprint Projects through the end of 2017 without raising proceeds from additional equity offerings. However, if (i) debt capital is unavailable on favorable terms or at all at a time when we would choose to access debt capital markets, (ii) the capital expenditure requirements of our business are different than expectations, (iii) we have the need for equity capital in connection with the purchase of ROFO Projects or other non-Footprint Projects, (iv) our credit metrics are weaker than our expectations and/or (v) the cash flows from operations do not meet our current estimates or any other unexpected factors impact our liquidity and cash position, we may seek to raise proceeds from the equity markets at an earlier time.
Under the terms of our leases, Sharyland provides a capital expenditure forecast on a rolling three-year basis that sets forth anticipated capital expenditures related to our T&D assets. We fund Footprint Projects related to our T&D assets as we and Sharyland determine such Footprint Projects are required pursuant to the terms of our leases. To the extent we fund such Footprint Projects, Sharyland is required to lease the assets related to such Footprint Projects.
Although we expect to have sufficient funds to address our capital needs for at least the next twelve months, in the future we expect to rely on the capital markets in order to meet our capital expenditure obligations and to continue to distribute at least 90% of our taxable income to our stockholders. If our ability to access the capital markets is restricted or if debt or equity capital were unavailable on favorable terms or at all at a time when we would like, or need, to access those markets, our ability to fund capital expenditures under our leases or to comply with the REIT distribution rules could be adversely affected.
Capital Expenditures
Our total capital expenditures for the nine months ended September 30, 2014 and for the years ended December 31, 2013 and 2012 were $170.2 million, $390.3 million and $361.3 million, respectively. Although our development agreement will not be effective until the consummation of this offering and we have not historically categorized projects as Footprint Projects, our capital expenditures for the nine months ended September 30, 2014 include expenditures of $25.4 million on projects that will be transferred prior to the consummation of this offering to Hunt or one of its affiliates and designated as ROFO Projects under our development agreement. See “Prospectus Summary—Our Relationship with Hunt—Development Pipeline—Transfer of ROFO Project Assets.”
We expect to have significant future capital expenditures as a result of the customer growth in Sharyland’s service territory. The table below shows the estimated aggregate capital expenditures for 2014 through 2017 for Footprint Projects. We intend to fund these projects with a mix of debt, contributions from members (prior to the completion of this offering), proceeds from this offering and cash flows from operations. Our expected capital
 
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expenditures are primarily related to the expansion of our existing transmission grid, such as adding a second circuit to our Panhandle transmission assets due to increased wind generation capacity, and growth in our distribution service territories, such as customer interconnects driven by oil and gas activity in the Permian Basin.
The estimated capital expenditure amounts listed below relate solely to Footprint Projects that we expect to own from project inception and not to the acquisition price of any ROFO Projects pursuant to our development agreement or the acquisition of any other T&D assets from Hunt or any other third party. The aggregate estimated amounts listed below are based upon a variety of assumptions, including load growth, Sharyland’s and our past experience, reliability needs and historical precedent.

 	  	(in millions)	 	
 	  	2014	 	  	2015	 	  	2016	 	  	2017	 	
Transmission	  	$	100	  	  	$	135	  	  	$	155	  	  	$	175	  	
Distribution	  	 	60	  	  	 	110	  	  	 	105	  	  	 	95	  	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total	  	$	155-165	  	  	$	240-250	  	  	$	255-265	  	  	$	265-275	  	
Our anticipated capital expenditures are based on a three-year rolling forecast and judgments of the conditions we expect to exist and the capital expenditures we expect to be able to make in the future. The assumptions and estimates underlying the forecast and these judgments are believed by us to be reasonable as of the date of this prospectus but are inherently uncertain and subject to a wide variety of significant business, economic and competitive risks and uncertainties, including but not limited to the growth of wind and other generation assets in the Panhandle and South Plains, ongoing growth in the oil and gas sector in West Texas, and population growth and economic expansion in South Texas, that could cause the amount and timing of our capital expenditures to differ materially from our current expectations.
Credit Arrangements
Prior Operating Partnership Revolving Credit Facility
On January 3, 2014, the Operating Partnership established a revolving credit facility led by Bank of America, N.A., as administrative agent, which includes a letter of credit facility. The prior credit facility was guaranteed by Transmission and Distribution Company, L.L.C. (TDC), a subsidiary of the Company. The maximum amount of borrowings and other extensions of credit under the prior credit facility was limited to $130.0 million. The borrowings and other extensions of credit under the revolving credit facility were secured by the assets of, and the Operating Partnership’s equity interests in, TDC on the same basis as the senior secured notes issued by TDC, as described below.
Under the prior credit facility, the Operating Partnership was required to maintain at all times, on a consolidated basis, a total debt to capitalization ratio (as defined in the Operating Partnership’s prior credit agreement) of not more than 0.75 to 1.00, and maintain for each period of four consecutive fiscal quarters a debt service coverage ratio (as defined in the Operating Partnership’s credit agreement) of at least 1.20 to 1.00.
At September 30, 2014, the Operating Partnership was in compliance with all covenants under this agreement.
Borrowings and other extensions of credit under the prior credit facility bore interest, at the Operating Partnership’s election, at a rate equal to (i) the one, two, three or six-month London Interbank Offered Rate (LIBOR) plus 2.5%, or (ii) a base rate (equal to the highest of (A) the Federal Funds Rate plus  1 ⁄ 2 of 1%, (B) the Bank of America prime rate and (C) LIBOR plus 1%) plus 1.5%. The agreement required maintenance of certain financial ratios and imposes certain restrictive covenants.
At September 30, 2014, the Operating Partnership had $118.5 million outstanding related to the prior credit facility. The Operating Partnership had $11.5 million of remaining capacity and no letters of credit
 
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outstanding under the prior credit facility as of September 30, 2014. On November 13, 2014, we amended the credit facility to extend the maturity date to March 31, 2015, and on December 10, 2014, we terminated the prior credit facility in connection with the Operating Partnership’s entry into the new revolving credit facility described below.
New Operating Partnership Revolving Credit Facility
On December 10, 2014, the Operating Partnership entered into a new $75.0 million five-year revolving credit facility to be led by Bank of America, N.A. Up to $15.0 million of the new revolving credit facility is available for issuance of letters of credit. The new revolving credit facility is guaranteed by TDC and is secured by the assets of, and the Operating Partnership’s equity interests in, TDC on the same basis as the senior secured notes issued by TDC, as described below. Additionally, upon the consummation of this offering and the Merger, InfraREIT, Inc. will also become a guarantor under the new revolving credit facility.
The credit agreement governing the new revolving credit facility imposes certain restrictive covenants on the Operating Partnership, including, but not limited to, restrictions on the ability of the Operating Partnership to incur additional indebtedness, create liens or other encumbrances, make investments, enter into mergers or consolidations, sell or otherwise transfer assets, enter into any line of business other than the business of the transmission and distribution of electric power and the provision of ancillary services and certain restrictions on the payment of dividends. The credit agreement requires the Operating Partnership to maintain, at all times, on a consolidated basis, a total debt to capitalization ratio of not more than 0.75 to 1.00 and to maintain, for each period of four consecutive fiscal quarters, a debt service coverage ratio of at least 1.20 to 1.00. The credit agreement also contains restrictions on the amount of Sharyland’s indebtedness and other restrictions on, and covenants applicable to, Sharyland.
Borrowings and other extensions of credit under the revolving credit facility bear interest, at the Operating Partnership’s election, at a rate equal to (i) the one, two, three or six-month London Interbank Offered Rate (LIBOR) plus 2.5%, or (ii) a base rate (equal to the highest of (A) the Federal Funds Rate plus  1 ⁄ 2 of 1%, (B) the Bank of America prime rate and (C) LIBOR plus 1%) plus 1.5%. Letters of credit are subject to a letter of credit fee equal to the daily amount available to be drawn times 2.5%. The Operating Partnership also is required to pay a commitment fee and other customary fees under the new revolving credit facility.
The credit agreement contains customary events of default. If an event of default occurs and is continuing, the lenders may accelerate amounts due under the new revolving credit facility (except in the case of a bankruptcy event of default, in which case such amounts will automatically become due and payable).
The new revolving credit facility commitment will terminate on December 10, 2016; provided that the maturity date will automatically be extended to December 10, 2019 upon the completion of this offering. The Operating Partnership may prepay amounts outstanding under the new revolving credit facility in whole or in part without premium or penalty.
SDTS Revolving Credit Facility
On June 28, 2013, our subsidiary, Sharyland Distribution and Transmission Services, L.L.C. (SDTS), entered into a credit agreement, which we refer to as the SDTS credit agreement, providing for a five-year revolving credit facility in the amount of $75.0 million led by Royal Bank of Canada, as administrative agent. On December 10, 2014, the SDTS credit agreement was amended and restated in order to, among other things, increase the amount of the revolving credit facility to a total of $250.0 million. Up to $25.0 million of the revolving credit facility is available for issuance of letters of credit, and up to $5.0 million of the revolving credit facility is available for swingline loans. The revolving credit facility is secured by substantially all of the assets of, and TDC’s equity interests in, SDTS on the same basis as the senior secured notes issued by SDTS, as described below.
 
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The SDTS credit agreement contains customary covenants including, but not limited to, restrictions on the ability of SDTS to incur additional indebtedness, create liens or other encumbrances, make investments, enter into mergers, consolidations, liquidations or dissolutions, sell or otherwise transfer assets, enter into any line of business other than the business of the transmission and distribution of electric power and the provision of ancillary services and certain restrictions on the payment of dividends. We are not able to use proceeds of the revolving credit facility to fund projects that are separately owned and financed by Sharyland Projects, L.L.C. (SPLLC), our project finance subsidiary and a wholly-owned subsidiary of SDTS, such as our Panhandle transmission assets or any other future project finance subsidiary of SDTS.
The facility also contains restrictions on the amount of Sharyland’s indebtedness and other restrictions on, and covenants applicable to, Sharyland. SDTS must maintain at all times, on a consolidated basis, a total debt to capitalization ratio of not more than 0.65 to 1.00, and maintain for each period of four consecutive fiscal quarters a debt service coverage ratio (as defined in the SDTS credit agreement) of at least 1.40 to 1.00.
As of September 30, 2014, SDTS was in compliance with all covenants of its credit agreement.
Loans outstanding under the revolving credit facility bear interest, at SDTS’s option, at a rate per annum equal to either (i) a base rate (determined as the greatest of (A) the administrative agent’s prime rate, (B) the federal funds effective rate plus 1/2 of 1% and (C) LIBOR plus 1.00% per annum), plus a margin of either 0.75% or 1.00% per annum, depending on the total debt to capitalization ratio of SDTS on a consolidated basis, or (ii) LIBOR plus a margin of either 1.75% or 2.00% per annum, depending on the total debt to capitalization ratio of SDTS on a consolidated basis. Letters of credit are subject to a letter of credit fee equal to the daily amount available to be drawn times either 1.75% or 2.00% per annum, depending on the total debt to capitalization ratio of SDTS on a consolidated basis. SDTS is also required to pay a commitment fee and other customary fees under its revolving credit facility.
The revolving credit facility is subject to customary events of default. If an event of default occurs and is continuing, the required lenders (as defined in the SDTS credit agreement) may accelerate amounts due under the credit facility (except in the case of a bankruptcy event of default, in which case such amounts will automatically become due and payable).
SDTS is entitled to prepay amounts outstanding under the facility with no prepayment penalty.
The outstanding borrowings under the revolving credit facility at September 30, 2014 were $75.0 million, a portion of which was used to repay a term loan facility that SDTS had previously established. The revolving credit facility commitment terminates on December 10, 2019.
CREZ Construction Loan
On June 20, 2011, our project finance subsidiary, SPLLC, which owns our Panhandle transmission assets constructed as part of the CREZ project, entered into a construction-term loan agreement consisting of a $667.0 million construction-term loan syndicated broadly to a group of 14 international banks, with Société Generale as administrative agent. At that time, SPLLC also issued $60.0 million in 5.04% fixed rate notes due June 2018. The construction-term loan agreement was reduced to $447.0 million on March 8, 2013 as a result of a reduction in the expected CREZ construction budget. The outstanding amount of $407.0 million under the construction-term loan converted to a term loan on May 16, 2014 in connection with our Panhandle transmission assets being placed in service, execution of a related lease supplement and related matters. The outstanding borrowings under the term loan at September 30, 2014 were $400.9 million. SPLLC is entitled to prepay amounts outstanding under the loan agreement, subject to payment of any swap or breakage costs incurred by a lender in connection with such prepayment. The CREZ term loan accrues interest at LIBOR plus 2.25% for a period of three years, at which point the interest rate will increase to LIBOR plus 2.50%. Currently, interest on the term loan is payable the last day of the selected interest period for interest periods of three months or less, and every
 
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three months for interest periods that are greater than three months. Interest on the fixed rate note is payable at the end of each quarter. Amortized principal amounts on the term loan are payable quarterly; the fixed rate note does not provide for any current principal amortization. SPLLC is entitled to prepay amounts outstanding under the fixed rate notes, subject to payment of a prepayment penalty equal to the excess of the discounted value of the remaining scheduled payments with respect to such notes over the amount of the prepaid notes. The CREZ term loan contains customary covenants that include restrictions on the ability of SPLLC to incur additional indebtedness, create liens or other encumbrances, make investments, enter into mergers, consolidations, liquidations or dissolution (provided that SPLLC may merge into or consolidate with SDTS), sell or otherwise transfer its assets and enter into any activities other than the ownership and development of the CREZ project, and the loan includes certain restrictions on the payment of dividends. Under the CREZ term loan, SPLLC must maintain a debt to total capitalization ratio not to exceed 0.70 to 1.00 at the end of any fiscal quarter. We are currently in compliance with all covenants under these loans. The loan matures on June 20, 2018.
Senior Secured Notes
On December 31, 2009, our subsidiary, SDTS, issued $53.5 million aggregate principal amount of 7.25% per annum senior secured notes, which mature on December 30, 2029 with principal and interest payable quarterly. As of September 30, 2014, $46.7 million of principal was outstanding under this loan. In connection with our $221.5 million acquisition of Cap Rock Holdings Corporation in 2010, our subsidiaries entered into several different debt arrangements. SDTS issued $110.0 million aggregate principal amount of 6.47% per annum senior secured notes, which mature on September 30, 2030, with principal and interest payable quarterly. The SDTS notes are secured by the assets of, and TDC’s equity interests in, SDTS. As of September 30, 2014, $106.6 million of principal was outstanding under this loan.
Another subsidiary, TDC, issued $25.0 million aggregate principal amount of 8.5% per annum senior notes, which mature on December 30, 2020, with principal and interest payable quarterly. The TDC notes are secured by the assets of, and the Operating Partnership’s equity interests in, TDC. As of September 30, 2014, $20.3 million of principal was outstanding under this loan.
SDTS and TDC are entitled to prepay amounts outstanding under the notes, subject to payment of a prepayment penalty equal to the excess of the discounted value of the remaining scheduled payments with respect to such notes over the amount of the prepaid notes.
These facilities contain customary covenants that include restrictions on the ability to incur additional indebtedness, create liens or other encumbrances, make investments, enter into mergers, consolidations, liquidations or dissolution, sell or otherwise transfer assets, enter into any line of business other than the business of the transmission and distribution of electric power and the provision of ancillary service, and certain restrictions on the payment of dividends. The facilities also contain restrictions on the amount of Sharyland’s indebtedness and other restrictions on, and covenants applicable to, Sharyland. TDC must maintain at all times, on a consolidated basis, a total debt to capitalization ratio of not more than 0.75 to 1.00, and must maintain, for each four consecutive fiscal quarter period, a consolidated debt service coverage ratio of at least 1.20 to 1.00 and a balance in a debt service reserve account equal to two quarterly principal plus interest payments payable on the notes. SDTS must maintain at all times, on a consolidated basis, a total debt to capitalization ratio of not more than 0.65 to 1.00 and, for each period of four consecutive fiscal quarters, a consolidated debt service coverage ratio of at least 1.40 to 1.00. Debt service coverage ratio means cash available for debt service divided by debt service payments, and is measured quarterly on a 12-month trailing basis. Cash available for debt service means lease revenue less general and administrative expenses. We are currently in compliance with all covenants under these loans.
 
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The following chart illustrates our various debt obligations as of                     , 2015 after giving effect to the use of proceeds from this offering:

The foregoing descriptions of our credit arrangements are only summaries. For complete descriptions, we refer you to the credit documents which are filed as exhibits to the registration statement of which this prospectus is a part. See “Where You Can Find More Information.”
Cash Flows
Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013
Cash flows from operating activities —Net cash provided by operating activities was $67.7 million and $17.9 million during the nine months ended September 30, 2014 and 2013, respectively. In addition to working capital changes during the periods presented, our increase in cash rent payments was the primary driver in the change in cash flows from operating activities.
Cash flows from investing activities —Net cash used in investing activities was $170.2 million and $286.3 million during the nine months ended September 30, 2014 and 2013, respectively. The net cash used in investing activities was driven by our capital expenditures related to construction of our T&D assets, including payments associated with our Panhandle transmission assets pursuant to the CREZ Project, which decreased during the nine months ended September 30, 2014.
Cash flows from financing activities —Net cash provided by financing activities was $119.4 million and $287.6 million during the nine months ended September 30, 2014 and 2013, respectively. Cash provided by financing activities was driven by borrowings of $134.5 million and $231.5 million during the nine months ended September 30, 2014 and 2013, respectively. Additionally, cash provided by financing activities included members’ contributions of $90.9 million during the nine months ended September 30, 2013. Cash provided by financing activities was partially offset by cash used in financing activities, including dividends paid and
 
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distributions to noncontrolling interest of $12.2 million during the nine months ended September 30, 2013. Cash provided by financing activities also included repayments of borrowings of $14.2 million and $22.2 million during the nine months ended September 30, 2014 and 2013, respectively.
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Cash flows from operating activities —Net cash provided by operating activities was $21.3 million and $15.3 million during the years ended December 31, 2013 and 2012, respectively. In addition to working capital changes during the periods presented, our increase in cash rent payments was the primary driver in the change in cash flows from operating activities.
Cash flows from investing activities —Net cash used in investing activities was $390.3 million and $361.3 million during the years ended December 31, 2013 and 2012, respectively. The net cash used in investing activities was driven by our capital expenditures related to construction of our T&D assets including the construction of our Panhandle transmission assets pursuant to the CREZ project.
Cash flows from financing activities —Net cash provided by financing activities was $360.3 million and $336.7 million during the years ended December 31, 2013 and 2012, respectively. Cash provided by financing activities was driven by borrowings of $258.0 million and $213.0 million during the years ended December 31, 2013 and 2012, respectively. Additionally, cash provided by financing activities included members’ contributions of $136.9 million and $130.4 million during the years ended December 31, 2013 and 2012, respectively. Cash provided by financing activities was partially offset by cash used in financing activities, including dividends paid and distributions to noncontrolling interest of $12.2 million during the year ended December 31, 2013. Cash used in financing activities also included repayments of borrowings of $23.2 million and $9.0 million during the years ended December 31, 2013 and 2012, respectively.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of December 31, 2013 and 2012.
Contingent Consideration and Deemed Capital Contributions
Contingent Consideration
We conduct our business as a traditional umbrella partnership REIT, or UPREIT. InfraREIT, the corporate parent in our structure and the entity that is selling shares of common stock in this offering, is the general partner of our Operating Partnership. In connection with our organization in November 2010, the Operating Partnership agreed to issue up to $82.5 million of capital account credit to Hunt-InfraREIT, the limited partner of the Operating Partnership, pro rata as we funded the first $737.0 million of cash expenditures on our CREZ project. In accordance with Accounting Standards Codification (ASC) 805 and 480, we determined that the obligation to issue these future deemed capital credits was contingent consideration, and we assessed the fair value of our obligation at $78.6 million as of the date of acquisition in November 2010. We have included the related obligation as a long-term liability in our consolidated balance sheet. The fair value of the contingent consideration is evaluated at each reporting period based on, among other things, expected capital expenditures, and any change in its current fair value is recognized by us as an expense in the current period. As a result of these evaluations, we recognized $1.1 million of expense during the nine months ended September 30, 2014 and no expense during the nine months ended September 30, 2013. We also recognized approximately $841,000 and $753,000 of expense during the years ended December 31, 2013 and 2012, respectively. These expenses resulted from our evaluation that the value of this contingent consideration liability had changed during these periods primarily due to changes in the amount and timing of expected capital expenditures.
As of September 30, 2014 and December 31, 2013, the Operating Partnership had issued approximately $71.4 million and $67.9 million, respectively, of capital account credits to Hunt-InfraREIT in partial settlement of
 
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this contingent consideration obligation. As of September 30, 2014 and December 31, 2013, approximately $10.2 million and $12.6 million, respectively, was recorded as contingent consideration in our consolidated balance sheets.
Upon completion of this offering, the Operating Partnership will issue Hunt-InfraREIT an accelerated deemed capital credit equal to $                , and, in respect thereof, an additional             Class A OP Units. This issuance will settle our contingent obligation to Hunt-InfraREIT pursuant to our constituent documents.
Deemed Capital Credits
At the inception of the Operating Partnership, we agreed that the Operating Partnership would issue deemed capital credits to Hunt-InfraREIT with respect to certain development projects. The amount of capital account credit issued equals 5% of our capital expenditures on these projects, including AFUDC. As of September 30, 2014, the Operating Partnership had issued Hunt-InfraREIT $2.1 million in capital account credits with respect to this obligation. As of September 30, 2014, $20,000 of capital account credits had been earned with respect to this obligation, which we issued on October 1, 2014. We record these capital account credits as asset acquisition costs included as part of the capital project in our CWIP balance. Upon the consummation of this offering, we will no longer have the obligation to issue deemed capital credits.
Contractual Obligations
The table below summarizes our contractual obligations and other commitments as of December 31, 2013:

Contractual Obligations	  	Total	 	  	Less than
1 year	 	  	1-3 years	 	  	3-5 years	 	  	More than
5 years	 	
 	  	(in thousands)	 	
Long-term debt—principal	  	$	632,690	  	  	$	4,777	  	  	$	14,447	  	  	$	472,154	  	  	$	141,312	  	
Long-term debt—interest *	  	 	166,495	  	  	 	23,741	  	  	 	46,144	  	  	 	38,066	  	  	 	58,544	  	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total	  	$	799,185	  	  	$	28,518	  	  	$	60,591	  	  	$	510,220	  	  	$	199,856	  	

*	Interest for floating rate based on LIBOR as of December 31, 2013 plus an applicable margin.	
There have been no material changes, outside the ordinary course of business, to our contractual obligations and other commitments set forth in the table above since December 31, 2013.
Quantitative and Qualitative Disclosure About Market Risk
We have floating rate debt under our CREZ term loan and our revolving credit facilities and are exposed to changes in interest rates on this indebtedness. The credit markets have recently experienced historical lows in interest rates. As the overall economy strengthens, it is possible that monetary policy will continue to tighten further, resulting in higher interest rates to counter possible inflation. Interest rates on our floating rate debt and future debt offerings could be higher than current levels, causing our financing costs to increase accordingly.
To mitigate the risk associated with the CREZ loan, in 2010 we entered into an interest rate swap contract that effectively capped our LIBOR based interest rate exposure on up to $261.0 million of our outstanding principal through June 2014. As of September 30, 2014, the outstanding balance on that loan was $404.0 million. This swap terminated effective June 30, 2014.
A hypothetical increase or decrease in interest rates by 1.0% would have changed our interest expense by $3.2 million for the nine months ended September 30, 2014. If our CREZ loan hedge had not been in effect, a hypothetical increase or decrease in interest rates by 1.0% would have changed interest expense by $4.5 million for the nine months ended September 30, 2014.
 
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Summary of Significant Accounting Policies
The selection and application of accounting policies is an important process that has developed as our business activities have evolved and as the accounting rules have developed. Accounting rules generally do not involve a selection among alternatives, but involve an implementation and interpretation of existing rules, and the use of judgment to the specific set of circumstances existing in our business. Compliance with the rules necessarily involves reducing a number of very subjective judgments to a quantifiable accounting entry or valuation. We endeavor to properly comply with all applicable rules on or before their adoption, and we believe the proper implementation and consistent application of the accounting rules are critical. Our most significant accounting policies are discussed below. See Note 1 of the Notes to the Consolidated Financial Statements included elsewhere in this prospectus for further details on our accounting policies.
Regulatory
For regulatory purposes, including regulatory reporting, our T&D assets and the operations of our tenant, Sharyland, are viewed on a combined basis. As a result, regulatory principles applicable to the utility industry also apply to us. Accordingly, we capitalize AFUDC during the construction period of our T&D assets, and our lease agreements with Sharyland rely on FERC definitions and policies regarding capitalization of expenses to define the term Footprint Projects, which are the amounts we are obligated to fund pursuant to the leases. The amounts we fund for these Footprint Projects include allocations of Sharyland employees’ time, including overhead allocations consistent with FERC policies and GAAP.
Electric Plant , net
Electric plant is stated at the original cost of acquisition or construction, which includes the cost of contracted services, direct labor, materials, acquisition adjustments and overhead items. In accordance with the FERC uniform system of accounts guidance, we capitalize AFUDC, which represents the approximate cost of debt and equity to finance plant under construction. AFUDC on borrowed funds is classified on our income statement as a reduction of our interest expense, while AFUDC on other funds is classified as other income. AFUDC rates are determined based on electric plant instructions found in the FERC regulations.
Gains or losses resulting from retirement or other disposition of utility property in the normal course of business are credited or charged to accumulated depreciation.
Under the leases, we are responsible for funding Footprint Projects, and Sharyland is responsible for funding all repairs. Footprint Projects are funded by expenditures that are capitalized under GAAP, and repairs are replacements or remedial activity on our T&D assets that are expensed, and not capitalized, under GAAP.
Goodwill
Goodwill represents the excess of costs of an acquired business over the fair value of the assets acquired, less the amount of liabilities assumed. Goodwill is not amortized and is tested for impairment annually or more frequently if events or changes in circumstances arise. As of September 30, 2014 and December 31, 2013, we had $138.4 million in goodwill recorded on our consolidated balance sheets, of which $83.4 million related to the acquisition of Cap Rock Holdings Corporation and $55.0 million related to InfraREIT, L.L.C.’s formation transactions, each of which occurred in 2010. These amounts are not reflected as goodwill for federal income tax purposes.
Business Combinations
We account for business combinations under ASC 805, “ Business Combinations ,” which requires the acquirer of a business to recognize and measure in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree, measured at their fair values as of the
 
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acquisition date. Under ASC 805, we recognize contingent consideration arrangements at their acquisition-date fair values with subsequent changes in fair value reflected in earnings. Significant estimates and management assumptions are used to determine the fair value of business combinations and the accounting for contingent consideration.
Income Taxes
InfraREIT, L.L.C. elected to be treated as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the Code), commencing with the taxable year ended December 31, 2010 and, following the Merger, InfraREIT, Inc. will elect to be taxed as a REIT commencing with the taxable year ending December 31, 2015. We believe that we and InfraREIT, L.L.C. have been organized and operate in a manner that has allowed InfraREIT, L.L.C. to qualify for taxation as a REIT for U.S. federal income tax purposes commencing with its 2010 taxable year and through the consummation of the Merger, and will allow us to qualify as a REIT for federal income tax purposes commencing with the 2015 taxable year, and we intend to continue operating in such a manner. To maintain our qualification as a REIT, we are required to annually distribute to our stockholders at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, and meet the various other requirements imposed by the Code relating to such matters as operating results, asset holdings, distribution levels and diversity of stock ownership. Provided that we qualify for taxation as a REIT, we generally will receive a deduction for dividends paid to our stockholders for U.S. federal income tax purposes which will reduce our taxable income. We are still liable for state and local income and franchise taxes and to federal income and excise tax on our undistributed income. If we fail to qualify as a REIT in any taxable year and are unable to avail ourselves of certain savings provisions set forth in the Code, all of our taxable income would be subject to federal income tax at regular corporate rates, including any applicable alternative minimum tax. Unless entitled to relief under specific statutory provisions, we would be ineligible to elect to be treated as a REIT for the four taxable years following the year for which we lose our qualification. It is not possible to state whether in all circumstances we would be entitled to this statutory relief.
Revenue Recognition
Our lease revenue consists of annual base rent and percentage rent based upon a percentage of the revenue Sharyland generates on our leased T&D assets in excess of a specified amount. Applicable guidance provides that we recognize lease revenue over the term of lease agreements with Sharyland. Applying this principle, we recognize the base rent amounts that were in effect at the time the original leases were executed over the term of the applicable lease on a straight-line basis. Our leases require that we and Sharyland supplement the base rent amounts, and the percentages that are used to calculate percentage rent, if the amount of capital expenditures we have funded that are placed in service exceeds base amounts set forth in the lease. We recognize the increases to base rent related to these incremental capital expenditures on a straight-line basis over the lease term. We recognize percentage rent under the leases at such time as the revenue earned by Sharyland on the leased assets exceeds the annual specified threshold for the applicable lease.
Deferred Financing Costs and Other Regulatory Assets
Amortization of deferred financing costs associated with TDC’s debt issuance is computed using the straight-line method over the life of the loan, which approximates the effective interest method. Amortization of deferred financing costs associated with the debt of SDTS and SPLLC is computed using the straight-line method over the life of the loan in accordance with the applicable regulatory guidance.
Deferred costs recoverable in future years of $23.8 million at September 30, 2014 and December 31, 2013 represent operating costs incurred from inception of Sharyland through December 31, 2007. We have determined that these costs are probable of recovery through future rates based on orders of the PUCT in Sharyland’s prior rate cases and regulatory precedent.
 
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Derivative Instruments
We use derivatives to hedge against changes in cash flows related to interest rate risk (cash flow hedging instrument). ASC Topic 815, “ Derivatives and Hedging ,” requires all derivatives be recorded on the consolidated balance sheet at fair value. We determine the fair value of the cash flow hedging instrument based on the difference between the cash flow hedging instrument’s fixed contract price and the underlying market price at the determination date. The asset or liability related to the cash flow hedging instrument is recorded on the consolidated balance sheet at its fair value.
We record unrealized gains and losses on the effective cash flow hedging instrument as components of accumulated other comprehensive income. We record realized gains and losses on the cash flow hedging instrument as adjustments to interest expense, net. Settlements of derivatives are included within operating activities on the consolidated cash flow statement. Any ineffectiveness in the cash flow hedging instrument would be recorded as an adjustment to interest expense in the current period.
 
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 INDUSTRY OVERVIEW
The electric power industry is composed of power plants that generate electricity, transmission networks that move power at high-voltage from generation stations to areas where electricity is needed and distribution systems that deliver power at lower voltages from substations and transformers to customers. Electric transmission systems generally consist of transmission towers, power lines, substations and associated facilities, typically operated at 60 kilovolts (kV) or above, that are used to reliably serve their loads and to transmit electricity to another transmission service customer. Electric distribution systems generally consist of facilities, including power lines, poles, meters and associated support systems, typically operated below 60 kV, that are used for the distribution of electricity to end users. According to the Edison Electric Institute (EEI), an industry association, the U.S. electric transmission grid consists of more than 200,000 miles of high-voltage (230 kV and greater) transmission lines. Since 2000, EEI’s members have significantly increased their development of the United States transmission infrastructure, investing approximately $17.5 billion in 2013 alone, and are projected to spend an additional $60.6 billion through 2024.
In the contiguous United States, the network of transmission and distribution (T&D) lines is not unified into a single power grid. Instead, there are three main grids that are distinct and have only limited points of interconnection. These grids are the Western Interconnected System, the Eastern Interconnected System and the Texas Interconnected System. As of June 18, 2007, the Federal Energy Regulatory Commission (FERC) granted the North American Electric Reliability Corporation (NERC) the legal authority to enforce reliability standards with all users, owners and operators of the bulk power system in the United States, and made compliance with those standards mandatory and enforceable. In many regions of the United States, in coordination with the FERC and the NERC, regional transmission organizations (RTOs) or independent system operators (ISOs) manage the flow of electric power and help administer the bulk power market in their respective geographic regions. ISOs and RTOs have similar responsibilities. Each is generally responsible for the administration and control of the electric transmission grid in its respective area or region, although RTOs have greater flexibility in their organizational structure.
There are several RTOs or ISOs operating within the United States. The Electric Reliability Council of Texas (ERCOT) is the ISO that manages the Texas Interconnected System. It coordinates the flow of electric power to 23 million Texans and schedules power on a grid that connects 40,500 miles of transmission lines and more than 550 generation units. ERCOT also performs financial settlement for the competitive wholesale bulk-power market and administers retail switching for 6.7 million premises in competitive choice areas of Texas. ERCOT is a non-profit corporation governed by a board of directors and subject to oversight by the Public Utility Commission of Texas (PUCT) and the Texas Legislature.
Texas is the only state in the contiguous United States with its own power grid, making it largely independent from other networks in the United States. In 1995, the Texas Legislature began the process of deregulation in the electricity market, requiring utilities to provide independent generators with non-discriminatory, open access to transmission to support wholesale competition. In 1999, the Texas Legislature continued the transition, requiring the retail electric market to be opened to competition by 2002 and requiring incumbents to unbundle business functions into separate wholesale generation, transmission and distribution service providers (TDSPs) or “wires companies,” and retail electric providers (REPs) (which are the companies that sell electricity to Texas customers). Owners of wholesale generation, which consist, in Texas, primarily of owners of gas or coal-fired generation plants, nuclear plants and wind farms, generate electricity and sell it to REPs. REPs in turn enter into agreements with end-users to provide electricity, and the electricity is delivered through T&D systems owned by TDSPs. TDSPs maintain the poles, wires and meters that deliver and measure the electricity consumed, restore power following outages, read customer meters, and provide the amount of electricity consumed to the customers’ designated REP for billing and customer service.
 
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 REGULATION AND RATES
Overview
In the United States, electric infrastructure assets are generally owned by utilities that are subject to regulation by various federal, state and local agencies. State regulatory commissions generally establish utility rates based on a traditional cost of service basis, providing for the timely recovery of prudently incurred costs and the opportunity to earn a reasonable rate of return on invested capital, subject to review and approval through periodic regulatory proceedings.
Regulation of T&D Utilities
Federal Regulation
The FERC regulates transmission and wholesale sales of electricity in interstate commerce, reviews mergers and acquisitions, direct and indirect transfers of jurisdictional assets, issuance of debt or securities and corporate transactions by electricity companies, and reviews siting applications for electric transmission projects under limited circumstances. The FERC also protects the reliability of the high voltage interstate transmission system through mandatory reliability standards. Pursuant to the Federal Power Act, the FERC is responsible for ensuring that the rates, terms and conditions of electric transmission service and the wholesale sale of electric energy are “just and reasonable” and “not unduly discriminatory or preferential.” The Energy Policy Act of 2005 directed the FERC to develop incentive-based rate treatments for transmission of electric energy in interstate commerce, including incentive rates of return on equity for new investment by public utilities and full recovery of prudently incurred costs. Although currently none of our T&D assets are regulated by the FERC, we were subject to FERC regulation with respect to some of our T&D assets in the past and the FERC has agreed to our structure of leasing T&D assets to Sharyland.
Regulation in Our Territories
T&D services provided wholly within ERCOT are not subject to traditional rate regulation by the FERC. All of our T&D assets are located in ERCOT within the State of Texas.
The PUCT regulates “electric utilities” and TDSPs under the Public Utility Regulatory Act, including approving rates for T&D service, setting reliability and safety standards, and ensuring that the TDSP does not discriminate in its treatment of customers, REPs and generators in the delivery of electricity. TDSPs are comprised of distribution service providers (DSPs), which generally own and operate electric distribution systems, and transmission service providers (TSPs), which generally own and operate electric transmission systems. Both our subsidiary, Sharyland Distribution & Transmission Services, L.L.C. (SDTS), and our tenant, Sharyland Utilities (Sharyland), are “electric utilities” subject to regulation by the PUCT. Sharyland is also subject to regulation by the PUCT as both a TSP and a DSP, as is the case with other investor-owned utilities that own T&D assets in Texas. Rates are established through rate case proceedings, which occur periodically and are typically initiated by the utility or the PUCT, on its own motion or on complaint by an affected stakeholder, to ensure that rates remain just and reasonable. In this prospectus, when we refer to a “rate case” or a “rate proceeding,” we are referring to these formal proceedings before the PUCT, and not to interim transmission cost of service filings (interim TCOS filings) or distribution cost recovery factor filings (DCRF filings), which are described below. Rates are determined by the electric utility’s cost of rendering service to the public during a historical test year, adjusted for known and measurable changes, in addition to a reasonable return on invested capital.
We own our T&D assets and lease them to Sharyland, which is an operating utility. We cannot remove Sharyland as the tenant under our leases without prior approval of the PUCT. The T&D rates for Sharyland are based on the combined financial statements of Sharyland and SDTS. In other words, the lease obligations that
 
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Sharyland owes us are disregarded in the PUCT’s evaluation of matters related to the utility, and the audited books and records of Sharyland and SDTS are used to prepare a combined rate filing. As our tenant and the operator of the electric system, Sharyland holds the Certificate of Convenience and Necessity (CCN) for all of our T&D assets.
TSP Rates
In ERCOT, TSPs generate revenue primarily by charging all DSPs within ERCOT for the TSP’s cost of service, or revenue requirement. ERCOT DSPs pay TSPs annual amounts, typically billed to the DSP monthly, based on the DSP’s pro rata share, during the prior year, of the average of ERCOT coincident peak demand for the months of June, July, August and September (ERCOT 4CP), excluding the portion of coincident peak demand attributable to wholesale storage load. Each TSP files a tariff for transmission service to establish its rates, calculated as the TSP’s commission-approved transmission cost of service, or revenue requirement, divided by the aggregate ERCOT 4CP during the prior year. Therefore, the monthly transmission service charge to be paid by each DSP is the product of each TSP’s monthly rate as specified in its tariff and the DSP’s previous year’s share of the aggregate ERCOT 4CP. An example of how this calculation works in Sharyland’s transmission tariff is described below under “Business and Properties—Our Tenant—Sharyland’s Regulatory Proceedings—Transmission Tariff.”
The transmission revenue that ERCOT TSPs generate has not varied significantly within any given year, except when the TSP has updated its revenue requirement through an interim TCOS filing, described in the next paragraph, or a rate proceeding. Transmission revenue can vary from year to year if ERCOT 4CP increases or decreases. In addition, revenue is subject to theoretical variability based on the credit-worthiness of DSPs in Texas, but generally this has not significantly affected transmission revenue for TSPs, as no DSP has become subject to a bankruptcy or insolvency proceeding since deregulation in 2002.
A TSP can update its transmission rates up to two times per year through interim TCOS filings. In an interim TCOS filing, the TSP updates its revenue requirement to reflect changes in in-service net transmission assets, the effect of depreciation and any update to ERCOT 4CP and property taxes, among other matters. The TSP is not permitted in these filings to update its revenue requirement to reflect any changes in its operations and maintenance charges, which can be updated only through a full rate proceeding with the PUCT. If a TSP’s application is materially sufficient and there are no intervenors that challenge the update, generally the TSP’s transmission rates will be updated within 60 days of the date of the interim TCOS filing. After this update, the TSP will be permitted to update the monthly invoices that the TSP sends to ERCOT DSPs to reflect the adjusted transmission rates. The updates of the rates pursuant to an interim TCOS filing will be subject to review in the next rate case filing for the TSP.
DSP Rates
DSP revenue is subject to more variability than TSP revenue. Distribution rates, or tariffs, are determined in the DSP’s most recent rate proceeding. Typically, tariffs are assigned to different classes of retail customers in a rate case, which classes generally include residential, commercial and industrial customers. The tariff typically includes a per-kilowatt hour (kWh) charge and a flat customer charge for residential customers, and may include a per-kWh, a per kilowatt (kW) and a flat customer charge for other customer classes. Because of the per kWh charge, generally there is more variability in a DSP’s revenue than there is in a TSP’s revenue. DSPs collect revenue by charging REPs, which are the entities that interface with and bill the end users. The REPs are permitted to pass on to end users the distribution charges REPs pay to the DSPs.
A DSP can update its distribution rates no more than once a year through a DCRF filing. A TDSP such as Sharyland may only make a DCRF filing between April 1 and April 8 in any given year. Additionally, a DSP can only change its rates pursuant to a DCRF filing no more than four times between rate proceedings and may not make a DCRF filing while a rate proceeding is pending. In a DCRF filing, the DSP updates its amount of
 
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invested capital for its distribution facilities and certain associated costs. The DSP is not permitted in a DCRF filing to update changes in its operations and maintenance expenses. If a DSP’s application is not materially deficient and there are not intervenors that challenge the filing, generally the DSPs distribution rates will be updated on September 1 of the year in which the DCRF filing was made (unless the DSP can show good cause for the rates to be updated as of another date). Sharyland has not historically used DCRF filings to update its distribution rates.
 
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 BUSINESS AND PROPERTIES
We are an externally-managed REIT that owns T&D assets in Texas. We are focused on paying a consistent and growing cash dividend that is sustainable on a long-term basis. We believe we are well positioned to take advantage of favorable trends in the T&D sector, including the replacement of aging assets and the construction of new assets to address growing energy demand. We believe our attractive REIT structure and focus on Texas and the southwestern United States, where we can leverage a proven track record of identifying, developing, constructing and acquiring critical infrastructure assets, provide us with a significant competitive advantage to execute our growth strategy.
We lease our T&D assets to Sharyland, a Texas-based regulated electric utility, pursuant to leases that require Sharyland to make lease payments to us when our assets are placed in service. To support these lease payments, Sharyland delivers electric service and collects revenues directly from DSPs and REPs, which pay rates approved by the PUCT.
We have grown rapidly over the last several years, with our rate base increasing from approximately $60 million as of December 31, 2009 to approximately $1.1 billion as of September 30, 2014 and a projected $         as of December 31, 2015. We expect to grow our rate base in the future through organic growth, as well as through acquisitions of T&D assets, including ROFO Projects, from Hunt Consolidated, Inc. (Hunt) and Sharyland, who originated and founded our business, and from third parties.
We intend to distribute substantially all of our cash available for distribution, less prudent reserves, through regular quarterly cash dividends. We expect our initial quarterly dividend rate to be $        per share, or $         per share on an annualized basis. We believe that as we grow our rate base we will also be able to increase our cash available for distribution and, as a result, increase our distribution per share. We intend to target a three year cumulative annual growth rate of our cash available for distribution per share of          to         %. We intend to achieve the lower half of the range based solely on the expansion of T&D assets that are in the geographic footprint of our existing distribution assets or that are added to our existing transmission assets (Footprint Projects), with the ability to achieve the high end of the range coming from Hunt’s obligation under our development agreement to offer us identified T&D projects (ROFO Projects). See “Certain Relationships and Related Transactions—Arrangements with Hunt—Development Agreement.” Our ability to grow our rate base, cash available for distribution and distributions per share is subject to a number of factors and other risks described under the caption “Risk Factors.”
Our business originated in the late 1990s when members of the Hunt family founded Sharyland, the first investor-owned utility created in the United States since the 1960s. In 2007, we obtained a private letter ruling from the Internal Revenue Service (IRS) confirming that our T&D assets could constitute real estate assets under applicable REIT rules. In 2008, the PUCT approved a restructuring that allowed us to utilize our REIT structure. In 2010, InfraREIT was formed as a REIT and, as part of that transaction, Hunt contributed assets into InfraREIT and obtained equity commitments from the following large institutional investors, which we refer to as our founding investors: Marubeni Corporation, John Hancock Life Insurance Company (U.S.A.), OpTrust Infrastructure N.A. Inc. and Teachers Insurance and Annuity Association of America.
 
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Our T&D Assets
Our T&D assets are located throughout Texas, including the Texas Panhandle near Amarillo, the Permian Basin in and around Stanton, Central Texas around Brady, Northeast Texas in and around Celeste and South Texas near McAllen. Our T&D assets consist of over 50,000 electricity delivery points, approximately 620 miles of transmission lines, approximately 10,500 miles of distribution lines, 35 substations and a 300 megawatt (MW) high-voltage direct current interconnection (DC Tie) between Texas and Mexico, which we refer to as the Railroad DC Tie.
The following map shows the location and breakdown of our transmission assets and distribution assets:

Our T&D assets are owned by our subsidiary SDTS and its wholly-owned subsidiaries, Sharyland Projects, L.L.C. (SPLLC) and SDTS FERC, L.L.C. (SDTS FERC). Substantially all of our T&D assets are security under our SDTS revolving credit facility and SDTS senior secured notes. Our Panhandle transmission assets constructed pursuant to the CREZ project are security under a separate CREZ project finance loan we have with a consortium of banks. For more information on our revolving credit facility, senior secured notes and CREZ project finance loan, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Arrangements.”
 
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The following table is a summary description of our T&D assets:

Asset Name	 	Owner/Landlord	 	Location of Assets	 	Description of Assets	 	Encumbrances	
Panhandle Assets	 	SPLLC	 	Texas Panhandle	 	Approximately 300 miles of 345 kV transmission lines and 4 designated collection stations	 	Security under CREZ term loan and senior secured notes	
					
Stanton/Brady/Celeste Assets	 	SDTS	 	In and around Stanton, Brady and Celeste, Texas	 	Approximately 9,500 miles of overhead distribution lines; underground distribution lines; transmission lines and substations	 	Security under SDTS revolving credit facility and SDTS senior secured notes	
					
McAllen Assets	 	SDTS	 	Primarily South Texas	 	DC Tie; transmission operations center; approximately 15 miles of 138 kV transmission lines; distribution lines and 3 substations	 	Security under STDS revolving credit facility and SDTS senior secured notes	
					
Stanton Transmission Loop Assets	 	SDTS FERC	 	Near Stanton, Texas	 	Approximately 305 miles of 138 kV transmission lines and connected substations	 	The equity in SDTS FERC is security under SDTS revolving credit facility and SDTS senior secured notes	
					
ERCOT Transmission Assets	 	SDTS	 	Texas Panhandle	 	A substation in the Panhandle; additional ERCOT transmission assets may be added in the future	 	Security under SDTS revolving credit facility and SDTS senior secured notes	
Our T&D assets are subject to regulation as an electric utility by the PUCT. For additional information on regulation by the PUCT, see “Regulation and Rates.”
 
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Our Relationship with Hunt
Ownership
Hunt will own                  shares of our common stock and              units in our Operating Partnership (OP Units) following the completion of this offering and the Reorganization, which will be subject to long-term lock-ups with us. This ownership would constitute     % of our outstanding equity if all OP Units were exchanged for shares of our common stock. Hunt has informed us that it intends to continue to hold a substantial portion of its equity in us for the foreseeable future.
Leadership
Hunt Utility Services, LLC, which we refer to as Hunt Manager, serves as our external manager and is a subsidiary of Hunt. Additionally, members of the Hunt family own our tenant, Sharyland, which is controlled by Hunter L. Hunt, who is also a member of our board of directors. W. Kirk Baker, who is Chairman of our board of directors, previously served as president and chief executive officer of Hunt Manager and before that as Senior Vice President and General Counsel of Hunt Consolidated, Inc. Further, Hunt Transmission Services, L.L.C., which we refer to as Hunt Developer, has successfully developed transmission projects that are now in our rate base, and Hunt continues to develop transmission projects that we expect to have the opportunity to acquire in the future.
The following chart illustrates our relationships and alignment with Hunt and its affiliates following the consummation of this offering.

Hunt’s History of Success
Hunt was founded in 1934 when H.L. Hunt formed Hunt Oil Company and is actively engaged in energy, real estate, investment and ranching businesses in Texas and throughout the world. Mr. Hunt’s son, Ray L. Hunt, has been Hunt’s chairman since the mid-1970s. Hunt has a long history of entrepreneurial activity and a track record in developing and constructing large complex projects. In T&D acquisition and development, this history includes:
 
 	•	 	In 1984, at a time when Hunt was the only active oil company in Yemen, Hunt discovered a major oil field that helped Yemen reach production levels in excess of 150,000 barrels of oil per day.	
 
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 	•	 	Hunt and Sharyland commenced development of the Railroad DC Tie in 2003 to link the ERCOT grid with the Mexican national grid operated by the Comisión Federal de Electricidad (CFE). Construction was completed in 2007, and the Railroad DC Tie was placed in service as the first cross-border DC Tie of its kind to support both emergency power and commercial business activities between Texas and Mexico.	
 
 	•	 	In 2010, Hunt and its partners launched PERU LNG, which is the first natural gas liquefaction plant in South America and represents the largest investment in one single project ever made in Peru. Delivering gas to the PERU LNG facility from the Camisea gas fields also required Hunt to manage the construction of a 250-mile pipeline over the Andes that holds the record for the highest pipeline in the world at over 16,000 feet.	
 
 	•	 	Our Panhandle transmission assets were constructed pursuant to the competitive renewable energy zone (CREZ) initiative. Hunt and its affiliates, including Sharyland, were a driving force throughout the development of the CREZ initiative, which was originated at the direction of the Texas Legislature in 2005 and continued with the PUCT designating renewable energy zones and awarding rights to build transmission lines. In a manner representative of Hunt’s general approach, Sharyland has worked with elected officials, utility regulators, community leaders, landowners and various other stakeholders throughout the development and construction of our approximately 300 miles of transmission lines and four substations, and Sharyland continues to interact with these stakeholders as ongoing partners in the operation and expansion of these assets.	
 
 	•	 	In July 2010, Hunt and Sharyland acquired and integrated the T&D assets of Cap Rock Energy Corporation (Cap Rock) into our REIT structure. In connection with that acquisition, our subsidiary, SDTS, which at that time was a wholly-owned subsidiary of Hunt, acquired the T&D assets that qualify as real estate assets under our private letter ruling. Sharyland acquired all of the other assets and all Cap Rock employees became employees of Sharyland. Both the PUCT and the FERC approved the acquisition and integration into our REIT structure.	
Development Pipeline
Our development agreement with Hunt Developer and Sharyland provides us with a right of first offer to acquire the ROFO Projects described below, which consist solely of T&D projects that Hunt is developing or constructing. Although Hunt may develop other T&D projects that do not currently constitute ROFO Projects under the development agreement, Hunt has informed us that it intends for us to be the primary owner of all of Hunt’s T&D development projects as those projects are completed and placed in service. Under the terms of the development agreement, Hunt has the obligation to offer the ROFO Projects to us at least 90 days prior to the date on which such assets are expected to be placed in service. We expect the purchase price for the ROFO Projects or any other T&D projects Hunt develops will be negotiated by our Conflicts Committee and Hunt and will be based on a number of factors, such as the cash flow and rate base for the assets, market conditions, potential for incremental Footprint Projects, whether the assets are subject to a lease with Sharyland or another tenant, the terms of any such lease and the regulatory return we expect the assets will earn. Sharyland and Hunt Developer are each parties to our development agreement. However, the agreement, by its terms, applies to activities by all Hunt affiliates. As such, when discussing the development agreement, we use the term “Hunt” to refer to Hunt Developer, Sharyland and other affiliates of Hunt Consolidated, Inc.
Development Team
Our development agreement with Hunt Developer provides us with continued access to the Hunt Developer and Sharyland development teams and the development projects they source. Hunt Developer’s active and experienced T&D project development team includes Hunter Hunt, co-President of Hunt Consolidated, and
 
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Pat Wood, a former FERC and PUCT chairman, and the eleven members of its team have 15 years of experience, on average. Additionally, the Hunt Developer team has experience with ERCOT, the Southwest Power Pool (SPP), California ISO (Cal-ISO) and CFE which enables them to identify and pursue T&D opportunities across the southwestern United States. This team has an extensive track record of successfully pursuing a variety of projects including greenfield development (Sharyland and CREZ transmission), acquisitions (Cap Rock and transmission assets from Southwest Public Service Company), partnering with municipalities (Cross Valley transmission line) and cross border activity (transmission interconnection between ERCOT and CFE and a power marketing entity to facilitate commercial transactions with Mexico). Our access to the Hunt Developer and Sharyland development pipelines position us to capitalize on growth opportunities beyond our existing footprint and to potentially add to our current list of ROFO Projects offered by Hunt.
ROFO Projects
Our development agreement with Hunt Developer and Sharyland provides us with a right of first offer to acquire ROFO Projects that Hunt is currently developing or constructing, including the following:
					
ROFO Project	  	Description	  	Status	
Cross Valley transmission line	  	Approximately 50 mile transmission line in South Texas near the Mexican border. Total estimated construction cost (including financing costs) of $160 million to $185 million, of which $28.3 million has been spent though September 30, 2014.	  	Under construction; expected completion in 2016	
			
Golden Spread Electric Coop
(GSEC) interconnection	  	
Approximately 55 mile transmission line connecting one of GSEC’s gas-fired generation facilities to our Panhandle transmission line. Total estimated construction cost (including financing costs) of $100 million to $120 million, of which $2 million has been spent through September 30, 2014.	  	Certificate of Convenience and Necessity (CCN)
received in August 2014; expected completion in 2016	
			
Southline Transmission Project	  	Approximately 240 miles of new transmission line and upgrades of approximately 120 miles of existing transmission lines in southern New Mexico and southern Arizona with an initially estimated construction cost (excluding financing costs) of $700 million to $800 million.	  	In active development; draft environmental impact statement published	
			
Verde Transmission Project	  	Approximately 30 mile transmission line in northern New Mexico with an initially estimated construction cost (excluding financing costs) of $60 million to $80 million.	  	In development	
 
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We have provided information about the Cross Valley and GSEC interconnection projects because of their size, their prominence in our core Texas markets and our belief that these ROFO Projects are the most likely ROFO Projects to be completed and offered to us. Although they are in the early stages of development and budgets for such projects, as well as potential arrangements that might result in developing the projects with partners, have not been finalized, we have also provided information about the Southline Transmission Project and Verde Transmission Project because they are the most prominent and advanced of Hunt’s non-Texas ROFO Projects. However, there can be no assurances that any of the ROFO Projects will be completed and offered to us or, if completed and offered to us, that the price and other terms of the acquisition of such projects can be negotiated on terms acceptable to us.
Other ROFO and Development Projects
In addition to the construction and development activity related to the projects above, Hunt and Sharyland are also evaluating and developing various projects in ERCOT and other regions of the United States. Such ROFO Projects include proposals to (i) reinforce the existing transmission grid in the Panhandle and South Plains region as new wind generators connect to the transmission grid, (ii) develop additional high-voltage DC ties along the Texas and desert Southwest border with Mexico, (iii) increase electric transmission between the PJM and MISO grids through projects in the Midwest and (iv) provide import capacity from New Mexico and Arizona into California.
Hunt and Sharyland are also developing a number of projects that are not included in the ROFO list. A typical example involves initiatives in South Texas to develop new transmission lines to enhance grid reliability and enable generation interconnections. Another example of Hunt’s innovative approach is Sharyland’s response to Lubbock Power & Light’s (LP&L) Request for Proposal (RFP) for generation services. In response to the RFP, Sharyland submitted a proposal to integrate LP&L’s system into ERCOT through multi-line alternatives ranging from approximately 67 to 92 miles, with an associated cost estimated to range from $166 million to $237 million. It is unknown at this time whether Sharyland will be successful in the RFP process. For any non-ROFO projects, Hunt has informed us that it intends for us to be the primary owner of Hunt’s T&D development projects as those projects are completed and placed in service. However, there can be no assurances that any of the non-ROFO Projects will be completed and offered to us or, if completed and offered to us, that the price and other terms of the acquisition of such projects can be negotiated on terms acceptable to us.
Transfer of ROFO Project Assets
Effective January     , 2015, we transferred the assets related to the Cross Valley transmission line and GSEC interconnection projects, which are designated as ROFO Projects under our development agreement, to Hunt or one of its affiliates. Hunt Developer will continue to construct these projects and will offer such projects to us prior to completion pursuant to the terms of the development agreement. In exchange for these assets, we received $            , which equaled the rate base of the transferred assets, plus reimbursement of out of pocket expenses associated with the formation of related special purpose entities and the Cross Valley project financing. The effect of this transfer is reflected in our unaudited pro forma condensed consolidated financial statements included elsewhere in this prospectus.
The Opportunity
The infrastructure necessary to transport and deliver electricity is vital to the continued economic advancement of the United States. At the national level, demand for T&D infrastructure is driven by several factors, including population growth, changes to a more environmentally-friendly generation mix and demand for a smarter grid. EEI estimates that its investor-owned utility members invested approximately $17.5 billion in the nation’s transmission grid in 2013, after investing $14.8 billion in 2012. This transmission investment cycle is expected to remain robust, with EEI estimating that over the next 10 years its members plan to invest over $60 billion, an approximate 18% increase from the prior year’s 10-year forecast. We believe we are well-positioned to capitalize on the opportunity created by the need for electric infrastructure spending in the United States and to execute our strategy.
 
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T&D Infrastructure in the State of Texas
Texas, as one of the fastest-growing states, is expected to require significant T&D investments. Electricity demand has been increasing due to above-average economic growth, particularly as a result of oil and gas development and population growth. These two demand-side factors, as well as aging generation infrastructure, low natural gas prices and policy objectives to take advantage of the State’s attractive wind corridors, are driving significant T&D investments and support the $3.7 billion in transmission investment that ERCOT identifies in its five-year plan as of November 2014. Based on the location of our T&D assets and our service territory, we believe the opportunity to make investments in T&D assets that increase our rate base will be driven largely by extensive oil and gas production in West Texas, interconnections with renewable generation, particularly wind, in the Texas Panhandle and population growth in South Texas.
The Permian Basin, where our Stanton service territory is located, covers an area 250 miles wide and 300 miles long and is one of America’s most prolific hydrocarbons fields, having produced more than 29 billion barrels of oil and 75 trillion cubic feet of natural gas since 1921. It also remains highly productive, with annual production in excess of 280 million barrels a year. According to the Texas Railroad Commission, which regulates oil and gas production in the State, issued drilling permits in the Permian Basin increased over 32% in five years, from 6,711 in 2008 to 8,872 in 2013 as new technologies in exploration have expanded recoverable resources. The U.S. Energy Information Administration expects this strong growth to continue, predicting that the region will see an increase in production from 1.3 million barrels per day in 2013 to 1.8 million barrels per day in 2015.
Power generation growth in Texas, particularly wind generation in which Texas leads the nation in operating MW, is a second driving factor for transmission infrastructure need. ERCOT expects total installed wind capacity to grow from 11,065 MW by the end of 2013 to 21,557 MW in 2017, an increase of approximately 95% based on signed interconnection agreements. The PUCT expects the completed CREZ system will ultimately transmit 18,500 MW of wind power from West Texas and the Panhandle to highly populated metropolitan areas of the State. In addition, ERCOT’s 2012 System Assessment forecasted that 16,500 MW of non-wind generation would be coming online in the next decade to help offset retiring coal units and other old assets. This demand from wind and other generators to connect to our Panhandle transmission facilities and other transmission systems should provide us with opportunities to construct or acquire interconnecting transmission lines, new substations and additional equipment and lines to support the increased electricity supply these developments will bring.
Finally, above-average population growth is driving electricity demand in the State and our territories. The Texas State Data Center estimates that the population of the Lower Rio Grande Valley (LRGV), which includes the service area near McAllen as well as other border cities such as Edinburg, Harlingen and Brownsville, will grow more than 50% in the next 20 years from approximately 1.3 million in 2013 to nearly 2.0 million in 2033. We believe that substantial infrastructure investments will be required to ensure system reliability and serve growing demand in the LRGV.
T&D Infrastructure in the Southwestern United States
The southwestern United States, considered to be Arizona and New Mexico in addition to Texas, has seen significant investment in its electricity grid in response to new generation investment, particularly renewable generation, and a growing population.
Regional renewable energy generation is expected to double in the next ten years in Arizona and New Mexico to meet renewable portfolio standards (RPS), which we believe will provide transmission investment opportunities to connect new generation sources to local utility grids. Arizona’s renewable energy standard (RES) requires investor-owned utilities (IOUs) and cooperatives that have the majority of their customers in Arizona to meet 15% of their retail electric sales through eligible renewable technologies by 2025.
 
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According to the National Renewable Energy Laboratory (NREL), by 2025 this will require Arizona to purchase between 7.9 and 8.5 terawatt-hours (TWh) of renewable energy annually, compared to 3.2 TWh of annual production from existing or under-development assets as of 2012. This suggests that Arizona will need an additional 4.7 TWh to 5.3 TWh of annual renewable energy production by 2025, an approximate 150% increase. In New Mexico, the State’s RPS requires the IOUs to have 20% of annual sales from renewable energy by 2020. NREL suggests that the resulting demand for renewable energy related to the RES will be between 3.0 and 4.0 TWh in 2025, while the State’s existing facilities provide 2.0 TWh annually. This suggests an additional 1.0 to 2.0 TWh per year will be needed by 2025, a 50% to 100% increase.
Growing populations in the southwest are also expected to drive investment opportunities. According to the Arizona Department of Administration, the population of Arizona is expected to increase by approximately 25% between 2013 and 2025, increasing from 6.6 million to 8.2 million individuals, while the New Mexico Bureau of Business and Economic Research expects the population of New Mexico to increase by approximately 20% by 2025, increasing from 2.1 million to 2.5 million individuals. The population increase of approximately 2 million in those states is expected to be concentrated in the cities of Phoenix, Tucson and Albuquerque and is expected to require additional grid transmission capability from the region’s generation sites.
Business Strategy
Focus on T&D assets. We intend to focus on owning T&D assets with long lives, low operating risks and stable cash flows consistent with the characteristics of our current portfolio. We believe that by focusing on this asset class and leveraging our industry knowledge we will maximize our strategic opportunities and overall financial performance.
Pursue sustainable dividend per share growth. We believe our platform will enable us to grow our rate base and, as a result, increase the amount of distributions we make to our stockholders. To achieve this growth, we will pursue the following:
 
 	•	 	Grow Rate Base by Investing in Footprint Projects. We expect to make significant capital expenditures in Footprint Projects, driven primarily by oil and gas activities in our Stanton territory in the Permian Basin and interconnections to our Panhandle transmission assets. Based on current estimates, we expect our aggregate capital expenditures for Footprint Projects from 2015 to 2017 to be between $760 million and $790 million.	
 
 	•	 	Acquire ROFO Projects and other T&D projects from Hunt. Hunt Developer has agreed to offer the ROFO Projects to us prior to their completion. We are not obligated to purchase, and Hunt is not obligated to sell, these projects if we do not agree upon the price and other terms of the purchase. Hunt has informed us that it intends for us to be the primary owner of Hunt’s T&D development projects as those projects are completed and placed in service.	
 
 	•	 	Acquire other T&D assets from third parties. We intend to leverage relationships that we, Sharyland and Hunt maintain in the energy industry to source acquisition opportunities. We have a track record of acquiring T&D assets from third parties as a result of relationships maintained by Hunt and Sharyland’s business development teams. We believe that our structure, which relies on an ongoing relationship with operating lessees, combined with Sharyland’s operating track record and Hunt’s reputation as an innovative and credible developer of energy assets, will competitively position us to acquire other T&D assets.	
Focus on Texas and southwestern United States initially. We are primarily focused on two main markets, Texas and the southwestern United States, where we believe the electric transmission sector will continue to grow significantly. This also allows us to leverage our existing relationships and a proven track record of identifying, developing, constructing and acquiring critical infrastructure assets. Substantially all of the ROFO Projects are located in Texas or the southwestern United States. Over time, we may expand our focus to other jurisdictions with favorable regulatory and growth characteristics.
 
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Maintain a strong financial profile. We intend to maintain a balanced capital structure that enables us to increase our dividend over time and serve the long-term interests of our stockholders. Our financing policies will seek an optimal capital structure through various capital formation alternatives to minimize interest rate and refinancing risks and position us to pay stable and growing long-term dividends and maximize value.
Competitive Strengths
Our assets generate stable cash flows. We generate revenue by leasing T&D assets to Sharyland. Sharyland’s lease payments to us are largely comprised of fixed base rent, with the remaining lease payments to us derived from a percentage of Sharyland’s gross revenue in excess of a specified threshold. Sharyland receives revenues from DSPs and REPs, which pay Sharyland PUCT-approved rates. The PUCT-approved rates are designed to allow the applicable utility to recover costs associated with maintaining and operating the assets and earn a return on invested capital. Through our leases, which include mechanisms for rent increases as we grow our rate base, we expect to benefit from the stability of Sharyland’s rate-regulated revenue stream. See “Business and Properties—Our Tenant — Our Leases.”
Our T&D assets are located in high-growth areas. Our Stanton territory assets serve a region atop the Permian Basin, which has experienced a rapid expansion in oil and gas investment. Our transmission assets in the Texas Panhandle are located in one of the most attractive wind corridors in the world and, we believe, will benefit from expanding wind power generation investment. Our McAllen territory is located in one of the most rapidly-growing population areas of the State and benefits from its border with Mexico, where we recently expanded power interconnection facilities through a long-standing relationship with CFE.
The ability to update transmission rates through interim TCOS filings, combined with Sharyland’s current distribution customer and load growth, reduces the necessity of filing frequent rate cases. The majority of Sharyland’s expected 2015-2017 capital expenditures are for transmission assets. Like other utilities in Texas, Sharyland is able to minimize regulatory lag through interim TCOS filings. See “—Our Revenue Model—Regulatory Recovery.” With respect to capital expenditures for distribution assets, Sharyland’s revenues, and its lease payments to us, will grow as new customers connect and/or existing customers increase their electricity usage. We believe this growth will enable us to invest in our Footprint Projects and receive increased lease payments from Sharyland, without the need for Sharyland to frequently file rate cases to request increases in rates to cover such costs.
We benefit from our strong ties to and our alignment with Hunt. Hunt, and members of the Hunt family, own and control Hunt Manager, Sharyland and Hunt Developer. Hunt will own              shares of common stock and              OP Units in our Operating Partnership following this offering and the Reorganization, which will be subject to long-term lock-ups with us. See “Certain Relationships and Related Transactions—Arrangements with Hunt—Lock-Up Agreement.” This ownership would constitute     % of our outstanding equity if all OP Units were exchanged for shares of our common stock. In addition, the incentive payment under our management agreement with Hunt Manager is linked to our financial performance, requiring payment only if our quarterly distributions exceed $        per share.
Sharyland has a proven development, construction and operating history and a strong reputation in Texas. Since Sharyland began operations in 1999, it has successfully developed, constructed and operated several T&D projects, including the CREZ project and the Railroad DC Tie, and successfully integrated and improved the operations of Cap Rock following our acquisition of it in 2010. Sharyland completed the CREZ project in November 2013, within the original timeframe outlined by the PUCT and under budget. Sharyland’s expertise and reputation helps Sharyland maintain positive customer and regulatory relationships, which we believe increases our ability to generate the returns we expect on our T&D assets.
We have rights to Hunt’s T&D pipeline. Our development agreement with Hunt Developer requires Hunt to offer all ROFO Projects to us prior to their completion. Hunt and Sharyland are responsible for Sharyland’s growth from a start-up operation to a utility that operates approximately $1.1 billion in rate base as of September 30, 2014.
 
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Hunt originated, and Hunt Manager and Hunt have expertise in applying, the REIT structure to regulated T&D assets. In 2005, Hunt and Sharyland employees, led by our Chairman, W. Kirk Baker, initiated the process of owning regulated T&D assets through a REIT structure. Over the last nine years, Hunt and Sharyland gained significant experience applying the REIT structure to a high-growth, regulated T&D business. Furthermore, in 2010, Hunt and Sharyland successfully acquired and integrated the Cap Rock T&D assets and operation directly into our REIT structure. Hunt’s team also successfully sourced, structured and negotiated on our behalf debt and equity financing arrangements to fund our organic growth, construction projects and the Cap Rock acquisition. We believe Hunt’s and Hunt Manager’s knowledge and experience gives us a competitive advantage in analyzing the complexities associated with our expected rate base growth, executing on development and acquisition opportunities within a REIT structure, obtaining regulatory approvals and structuring lease agreements with tenants.
Our REIT structure and balance sheet provide us with long-term cash distribution advantages. We believe our REIT structure positions us well to make enhanced cash distributions to our stockholders over the long term as compared with utilities and power oriented yield vehicles. Additionally, on a pro forma basis, we expect to be able to fund estimated capital expenditures from Footprint Projects through the end of 2017 without raising proceeds from additional equity offerings. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for a description of our liquidity and target credit metrics.
Our Revenue Model
We lease our T&D assets to our tenant, Sharyland, which makes lease payments to us consisting of fixed base rent and percentage rent. To support its lease payments to us, Sharyland delivers electric service and collects revenues directly from DSPs and REPs, which pay PUCT-approved rates. Under the terms of our leases, Sharyland is responsible for the operation of our assets, payment of all property related expenses associated with our assets, including repairs, maintenance, insurance and taxes (other than income taxes) and construction of Footprint Projects. As our rate base increases through Footprint Projects, ROFO Projects or other acquisitions, we generally expect our lease revenue to increase.

Regulatory Recovery
General rate making
In Texas, an electric utility’s T&D rates are determined pursuant to rate case proceedings, which occur periodically, and are adjudicated by the PUCT to ensure that rates remain just and reasonable. Rates are determined after considering the utility’s annual operating cost of rendering service, adjusted for known and measurable changes, in addition to a reasonable return on invested capital. Sharyland makes all regulatory filings with the PUCT regarding our T&D assets. Per the terms of the leases, we have the right to request that Sharyland file a rate case proceeding.
Updating Rates
Sharyland’s rates may be updated through three different mechanisms:
 
 	•	 	A general rate case . A rate case is usually initiated by the utility or the PUCT, on its own motion or on complaint by an affected stakeholder. In general, a rate case is initiated when one party believes	
 
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 	the amount of capital invested or the cost of service (operating or cost of capital) has changed significantly enough to warrant a review by the PUCT. In Texas, once a rate case is filed, it is generally concluded within one year.	
 
 	•	 	TCOS filing . For transmission assets, Sharyland is permitted to update its transmission tariff up to two times per year, outside of a general rate case, for certain changes such as additional capital expenditures, through interim TCOS filings. If there are no material deficiencies in the TCOS filing, or objections from intervenors, Sharyland’s transmission rates generally will be updated within 60 days of the TCOS filing.	
 
 	•	 	DCRF filing . For distribution assets, Sharyland is permitted to update its distribution tariff once a year, outside of a general rate case, for changes in the amount of invested capital for distribution and certain associated costs. Sharyland historically has not used DCRF filings to update its distribution tariffs.	
Sharyland’s 2014 Rate Case
In January 2014, the PUCT approved a rate case filed by Sharyland applicable to all of our T&D assets other than our distribution assets in McAllen, Texas, providing for a capital structure consisting of 55% debt and 45% equity, a return on equity of 9.70% and a return on invested capital of 8.06% in calculating rates. The new rates became effective May 1, 2014. We expect Sharyland’s next rate case to be filed during the first half of 2016. For more information on how rates are determined see “Regulation and Rates—Regulation of T&D Utilities.”
Rent Revenue
Rental Rates
All of our current revenue is comprised of rental payments from Sharyland under leases that were negotiated at various times between 2010 and 2014. Historically, we and Sharyland have negotiated rent payments intended to provide us with approximately 97% of the projected regulated return on rate base investment attributable to our assets that we and Sharyland would receive if we were a fully-integrated utility. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Expected To Affect Our Operating Results and Financial Condition—Regulatory Recovery” and “—Our Tenant—Sharyland’s Regulatory Proceedings.” We and Sharyland have negotiated these rental rates based on the premise that we, as the owner of regulated T&D assets, should receive most of the regulated return on our invested capital, while leaving Sharyland with a portion of the return that gives it the opportunity to operate prudently and remain financially stable. Our leases require us to continue to negotiate rent payments in the future in a manner similar to this historical negotiation.
Sharyland makes lease payments to us that consist of fixed base rent and percentage rent (based on an agreed-to percentage of Sharyland’s gross revenues, as defined in our leases, in excess of a specified threshold). Because our existing rate base will decrease over time as our T&D assets are depreciated, revenue under our leases will decrease over time unless we add to our existing rate base by making additional capital expenditures to offset the decreases in the rent resulting from depreciation. The weighted average annual depreciation rate of our assets as of September 30, 2014 was 2.67%. We negotiated our current leases to provide for fixed base rent to comprise approximately 80-90% of the total expected rent (with the exception of the lease related to our Stanton transmission loop assets, which does not provide for percentage rent).
Lease Renewals
We expect to renew our leases with Sharyland prior to expiration. Our leases provide that we and Sharyland negotiate lease terms based on our historical negotiations and the return that utilities in the State of Texas are allowed to earn at the time of the negotiation. We generally expect that renewal terms will be at least five years.
 
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If either we or Sharyland do not wish to renew a lease, or we cannot agree to new lease terms, we expect that our rent negotiations with a new third-party tenant would be based on the rate base of the assets subject to the expired lease and the rate of return expected at the time a new lease is negotiated, among other factors. Our S/B/C lease, which relates to less than 25% of our existing assets, expires on December 31, 2015, and leases relating to our remaining assets expire at various times between December 31, 2019 and December 31, 2022.
Lease Supplements
Our leases provide that as the completion of Footprint Projects increases our rate base, we and Sharyland will negotiate lease supplements so that Sharyland makes additional rent payments to us on this incremental rate base. Various factors could cause Sharyland’s expected lease payments on incremental rate base to be different than its lease payments to us on our existing rate base. For instance, if a rate case was finalized since the last lease or lease supplement, the new lease supplement would use regulatory assumptions from the most recent rate case. Also, our leases provide that either party can negotiate for economics that differ from our existing leases based on appropriate factors that our leases do not specifically list. However, the negotiation of lease supplements relates only to the revenue we expect to be generated from the incremental rate base subject to the negotiation, and in no circumstance will the negotiation change the rent payments negotiated with respect to prior leases and lease supplements.
Rate Base Growth
We will add to our rate base through capital expenditures for Footprint Projects, acquisitions of ROFO Projects or acquisitions of other T&D assets from Hunt or third parties.
For Footprint Projects, we generally fund all of the capital expenditures during the development or construction phase of a project, and these expenditures increase our rate base when they are placed in service. In advance of the time assets are placed in service, we will work with Sharyland to negotiate a supplement to our leases. Sharyland also may make a regulatory filing to update its rates to reflect the additional rate base.
When we acquire ROFO Projects or other T&D assets from Hunt, we would expect to assume any lease that is already negotiated with Sharyland or another tenant with respect to those T&D assets, and we will work with Sharyland or another tenant to update existing rates, as appropriate, for the addition to our rate base.
Prior to closing an acquisition from a third party, we will work with Sharyland, or another tenant, to pursue the addition of new leases and updating of existing rates, as appropriate, for the addition to our rate base.
Described below are the key steps by which placing new assets into service increases our rate base and/or our expected lease payments, although the order and timing of each step will vary by asset:

 
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Our Tenant
Overview
Our tenant, Sharyland, has been a regulated utility since 1999 and currently serves over 50,000 electricity delivery points in 29 counties throughout Texas. Sharyland is responsible for construction management, operation and maintenance of our T&D assets and regulatory oversight and compliance. See “—Our Leases” and “Financial Information Relating to Our Tenant.”
Our Relationship with Sharyland
In 2005, under the leadership of Hunter L. Hunt, a Hunt team directed by W. Kirk Baker, our Chairman, initiated the process of owning regulated infrastructure assets through a REIT structure. The objective of this structure is to provide for efficient access to capital markets to fund infrastructure additions while positioning a qualified utility to operate and control the infrastructure assets. We believe that the REIT structure that we have established with Sharyland meets this objective.
A REIT is required to lease its assets to third-party tenants and to generate a substantial portion of its income from lease payments from these tenants. As a result, we have structured ownership of our T&D assets through a lessor/lessee structure, with Sharyland acting as the tenant under each of our leases. Sharyland, as lessee, has control of, and is responsible for operating and maintaining, our T&D assets. We are a passive owner of our T&D assets, with no operational control over those assets. We have memorialized Sharyland’s operational control primarily through the leases. However, the PUCT order approving our structure also requires that Sharyland maintain operational control of SDTS as the managing member. Under the PUCT order and the SDTS company agreement, we are not able to remove Sharyland as managing member without prior PUCT permission. We have negative control rights over SDTS that passive owners would expect such as the right to approve renewals of the leases or any new leases, sales or dispositions of assets, debt issuances and annual budgets, subject to some exceptions. To the extent that day-to-day operations of SDTS involve matters primarily related to passive ownership of the assets, such as capital sourcing, financing, cash management and investor relations, Sharyland has delegated those responsibilities and authorities to us pursuant to a delegation agreement. See “SDTS Company Agreement and Delegation Agreement” for more details.
The leases assume that Sharyland, as lessee, should earn a regulated return to compensate it for the capital it has invested and for the risks that it is taking as the tenant under the lease. Sharyland bears the risks that most utilities face such as changes in regulatory policy, changes in regulated rates, change in usage and demand, credit risk of counterparties, damage to properties, increases in operating expenses and increases in taxes. Many of these risks may ultimately lead to lower revenue, or increased costs, which would affect Sharyland’s ability to fulfill its lease obligations or its willingness to enter into new leases or renewals of existing leases under similar economic terms. We believe that Sharyland is incentivized to operate the assets in accordance with good utility practice to ensure that it is able to continue to lease the assets and be a utility in good standing with the PUCT. As a public utility, Sharyland’s practices, cost structure and its investments are subject to review by the PUCT, and Sharyland understands that we expect a regulated return on the investments we make in our T&D assets. Therefore, Sharyland is incentivized to only incur costs and investments that are reasonable and necessary, while also honoring obligations to customers.
The leases also assume that, as lessor and owner of the T&D assets, we should receive a regulated return on the capital we have invested in our T&D assets. The combined return that we and Sharyland receive should be comparable to the return that other integrated T&D utilities receive. As part of our negative control rights in the SDTS company agreement, we have the right to approve the annual financial plan of SDTS and any leases between Sharyland and SDTS. We intend to negotiate the leases to ensure that we receive our expected regulated return, keeping in mind that Sharyland has to be willing to enter into the lease. Thus, both parties will negotiate the leases keeping in mind the current and expected economic environment, current and expected regulatory
 
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environment and current and expected capital market environment. It is in each party’s best interest to negotiate leases that are expected to result in beneficial economic outcomes. To the extent that conditions change, both parties are incentivized to negotiate long-term solutions.
Separation of Utility Functions
Pursuant to our leases, the SDTS company agreement and the delegation agreement, we have separated, between Sharyland and us, the functionality that is typically combined under one commonly owned group in an integrated utility. Through Hunt Manager, we are generally responsible for debt and equity financing, capital markets planning, investor relations, tax administration and accounting for the substantial portion of the combined utility’s assets and liabilities. Sharyland is responsible for operating, repairing and maintaining the T&D assets, planning new T&D projects, handling customer billing and complaints, managing regulatory matters and relationships with various regulatory bodies, handling community relations matters, accounting for substantially all of the combined utility’s operations and maintenance costs, ensuring that the T&D assets and the combined utility’s operations comply with applicable environmental, safety and other laws applicable to operations, working with us to forecast the combined utility’s capital needs, construction management and all other matters related to the operation of the combined utility. Since we separated these functions in 2010, Hunt Manager and Sharyland have developed expertise in ensuring that the relationship functions properly and that electricity is effectively and efficiently provided in a safe and reliable manner to Sharyland’s customers.
Competition
The market for acquiring and developing energy infrastructure assets is highly competitive. Within the State of Texas, namely ERCOT, Sharyland competes with other TDSPs such as AEP, CenterPoint Energy, Oncor Electric and Texas New Mexico Power (PNM Resources), with municipally-owned electric utilities such as Austin Energy and CPS Energy and with electric cooperatives like South Texas Electric Cooperative to develop transmission projects. Given the robust growth and business-friendly environment in Texas, there are several private developers who are seeking transmission development opportunities as well. However, we are not aware of any other utility that is structured as a REIT.
In addition, Sharyland is subject to customer conservation and energy efficiency activities and research and development activities are ongoing to improve existing and alternative technologies to produce electricity, including advancements related to self-generation and distributed energy technologies such as gas turbines, fuel cells, microturbines, photovoltaic (solar) cells and concentrated solar thermal devices. It is possible that advances in these or other technologies could result in a reduction of demand for Sharyland’s T&D services, but these have not been a significant factor to date. Furthermore, in small portions of our service territories, existing and potential customers have a choice between Sharyland and other utilities and may choose the other utility over Sharyland.
Regulation
Sharyland is subject to regulation by the PUCT, including with respect to approval of Sharyland’s rates for T&D service, setting reliability and safety standards, and ensuring that Sharyland does not discriminate in its treatment of customers, REPs and generators in the delivery of electricity. Below is a description of some of Sharyland’s more significant recent regulatory proceedings.
Sharyland’s Regulatory Proceedings
2013 Rate Case
In Texas, an electric utility’s T&D rates are determined pursuant to a rate case proceeding adjudicated by the PUCT to ensure that rates remain just and reasonable. On January 23, 2014, the PUCT approved a rate case settlement applicable to all of our T&D assets other than our distribution assets in McAllen, Texas providing
 
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for a capital structure consisting of 55% debt and 45% equity, a return on equity of 9.70% and a return on invested capital of 8.06% in calculating rates. The new rates became effective on May 1, 2014. Sharyland agreed in that settlement to file its next rate proceeding in 2016, based upon the test year ending December 31, 2015. For more information on how rates are determined see “Regulation and Rates—Regulation of T&D Utilities.”
Transmission Tariff
In Texas, Sharyland is permitted to update its transmission tariff by making interim TCOS filings twice a year with the PUCT. Sharyland is currently collecting transmission revenue pursuant to a tariff approved in connection with an interim TCOS filing that Sharyland made in August 2014, which updated Sharyland’s tariff from a March 2014 reconciliation filing that updated its transmission tariff to incorporate the results of the 2013 rate case (the reconciliation filing). Furthermore, as a result of the amount of capital expenditures we expect to fund over the next several years, we expect that Sharyland will continue to use the twice yearly interim TCOS mechanism to update its revenue requirement and wholesale transmission tariff.
The following outlines, by way of example, the manner in which Sharyland’s TCOS filing on August 15, 2014 (the August 2014 interim TCOS filing) updated Sharyland’s transmission rates:
 
 	•	 	The August 2014 interim TCOS filing compared Sharyland’s revenue requirement as of July 31, 2014 (approximately $136.6 million) to Sharyland’s revenue requirement established in Sharyland’s reconciliation filing in March 2014 (approximately $128.5 million). The August 2014 revenue requirement updated rate base, taking into account changes in the original cost of plant in service and accumulated depreciation. The August 2014 revenue requirement also updated for changes in depreciation expense, taxes other than income tax and federal income tax.	
 
 	•	 	The difference in the revenue requirement for the August 2014 interim TCOS filing and the reconciliation filing in March 2014 was approximately $8.1 million. Sharyland’s interim annual transmission rate was then calculated by dividing its updated annual transmission revenue requirement of approximately $136.6 million by 2013 ERCOT 4CP of approximately 65 gigawatts, deriving a transmission rate of $2.094/kW.	
The PUCT approved the August 2014 interim TCOS filing on October 3, 2014, giving Sharyland the right to begin billing DSPs at the updated transmission rate of $2.094/kW, instead of the rate established in connection with the reconciliation filing that applied through October 3, 2014. Effective October 3, 2014, each DSP paid Sharyland, monthly, an amount that on an annualized basis equaled $2.094/kW multiplied by the DSP’s ERCOT 4CP usage during 2013. In other words, the amount the DSP paid Sharyland after the effectiveness of the August 2014 interim TCOS filing depended on the DSP’s 2013 usage, and not the DSP’s 2014 usage. We have amended our lease supplements with Sharyland to reflect the increased rent that Sharyland owes with respect to the additional transmission assets added in the August 2014 interim TCOS filing.
Move to Competition
In the late 1990s and early 2000s, upon direction from the Texas legislature and the PUCT, utility incumbents in the ERCOT market unbundled business functions and, thereafter, most retail customers in Texas began purchasing electricity in a competitive market from REPs. However, not all markets unbundled at that time. We acquired Cap Rock’s T&D assets in 2010, and, at that time, none of Cap Rock’s service territories had moved to competition. In other words, in each of these territories, customers purchased bundled electric service from Sharyland and did not have the option of choosing the REP from which they purchase electricity. In connection with the regulatory approval for the Cap Rock acquisition, Sharyland agreed to study whether the territories that had not yet moved to competition, which included the Stanton territory in West Texas near Midland, the Brady territory Northwest of Austin and the Celeste territory Northeast of Dallas, should be moved to the competitive market. These territories comprise, in the aggregate, approximately 50,000 customers, which is more than 90% of Sharyland’s total distribution customer base, and we lease the distribution assets situated in these territories to Sharyland pursuant to the S/B/C Lease (defined below). As a result of the study, it was
 
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determined that the customers should be moved to competition. Sharyland commenced the move to competition on May 1, 2014, and it is now complete. As a result, Sharyland no longer delivers bundled electricity service to retail customers in these service territories. Instead, retail customers purchase electricity in the competitive market from REPs. As is the case with other DSPs with service territories that are part of competitive electricity markets, Sharyland now receives payments from REPs, rather than directly from retail customers. The move to competition has not materially affected Sharyland’s financial condition or results of operations, although it has resulted in lower reported revenue for Sharyland because its service charge to REPs no longer includes the cost of purchased power it used to charge to retail customers.
Our Leases
We lease all of our T&D assets to Sharyland under the following five separate leases:
McAllen Lease . SDTS and Sharyland are party to a lease pursuant to which Sharyland leases our assets located in South Texas, including our Railroad DC Tie and our transmission operation centers in Amarillo, Texas. We refer to this lease as the McAllen Lease.
S/B/C Lease . SDTS and Sharyland are party to a lease pursuant to which Sharyland leases our T&D assets located in and around Stanton, Brady and Celeste, Texas, other than our 138 kV transmission loop, which is described below. We refer to this lease as the S/B/C Lease.
CREZ Lease . SPLLC, a wholly-owned subsidiary of SDTS, and Sharyland are party to a lease pursuant to which Sharyland leases substantially all of our Panhandle transmission assets. We refer to this lease as the CREZ Lease.
Stanton Transmission Loop Lease . SDTS FERC, a wholly-owned subsidiary of SDTS, and SU FERC, L.L.C., which is a wholly-owned subsidiary of Sharyland, are party to a lease pursuant to which Sharyland leases our 138 kV transmission line that loops around our Stanton, Texas territory in the Permian Basin. This transmission line formerly was subject to FERC regulation prior to the move to ERCOT, which was completed effective January 1, 2014. We refer to this lease as the Stanton Transmission Loop Lease.
ERCOT Transmission Lease . SDTS and Sharyland are party to a lease pursuant to which Sharyland leases a small portion of our Panhandle transmission assets. We refer to this lease as the ERCOT Transmission Lease.
The table below provides a summary of lease revenue and certain other information with respect to our leases:
(Dollar amounts in thousands)
																													
Lease	 	Lease Expiration
Date	 	 	Net
Effective
Rent (1)	 	 	Percentage
of Net
Effective
Rent (2)	 	 	Annualized
Rent (3)	 	 	Percentage
of
Annualized
Rent (4)	 	 	Total
Electric
Plant, net (5)	 	 	Percentage
of Total
Electric
Plant,
net (6)	 	
CREZ Lease	 	 	December 31, 2020	  	 	$	24,918	(7) 	 	 	34.0	% 	 	$	82,650	  	 	 	60.3	% 	 	$	643,618	  	 	 	61.0	% 	
S/B/C Lease	 	 	December 31, 2015	  	 	$	32,384	(8) 	 	 	44.3	% 	 	$	39,732	  	 	 	29.0	% 	 	$	289,593	  	 	 	25.8	% 	
McAllen Lease	 	 	December 31, 2019	  	 	$	9,371	(9) 	 	 	12.8	% 	 	$	9,840	  	 	 	7.2	% 	 	$	149,026	  	 	 	9.8	% 	
Stanton Transmission Loop Lease	 	 	December 31, 2021	  	 	$	6,520	(10) 	 	 	8.9	% 	 	$	4,788	  	 	 	3.5	% 	 	$	35,401	  	 	 	3.4	% 	
ERCOT Transmission Lease (11)	 	 	December 31, 2022	  	 	$	 	  	 	 	    	% 	 	$	    	  	 	 	    	% 	 	$	        	  	 	 	    	% 	
	 				 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 				 	$	73,193	  	 	 	100.0	% 	 	$	137,010	  	 	 	100.0	% 	 	$	1,117,638	  	 	 	100.0	% 	

(1)	Consists of lease revenue under the lease for the year ended December 31, 2013, determined on a straight-line basis under GAAP. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Summary of Significant Accounting Policies—Revenue Recognition.”	
 
(2)	Calculated as lease revenue for the applicable lease for the year ended December 31, 2013 divided by lease revenue for all leases.	
 
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(3)	Annualized rent is calculated by multiplying (i) rental payments (defined as cash fixed base rent and cash percentage rent (based on an agreed percentage of Sharyland’s gross revenues, as defined in each lease)) for the month ended September 30, 2014, by (ii) 12. Cash base rent for the month ended September 30, 2014 was $5.9 million for our CREZ Lease, $2.4 million for our S/B/C Lease, $618,000 for our McAllen Lease, $399,000 for our Stanton Transmission Loop Lease and $0 for our ERCOT Transmission Lease. Cash percentage rent for the month ended September 30, 2014 was $1.0 million for our CREZ Lease, $871,000 for our S/B/C Lease, $202,000 for our McAllen Lease, $0 for our Stanton Transmission Loop Lease and $0 for our ERCOT Transmission Lease.	
 
(4)	Calculated as annualized rent for the applicable lease divided by annualized rent for all leases.	
 
(5)	Consists of electric plant, net for the applicable lease as of September 30, 2014.	
 
(6)	Calculated as the electric plant, net for the applicable lease divided by total electric plant, net for all leases as of September 30, 2014.	
 
(7)	Consists of lease revenue for the year ended December 31, 2013. We did not recognize any lease revenue under our CREZ Lease before January 1, 2013.	
 
(8)	Consists of lease revenue for the year ended December 31, 2013. Lease revenue for each of the years ended December 31, 2011 and December 31, 2012 was $27.1 million.	
 
(9)	Consists of lease revenue for the year ended December 31, 2013. Lease revenue for the years ended December 31, 2011 and December 31, 2012 was $8.9 million and $9.2 million, respectively.	
 
(10)	Consists of lease revenue for the year ended December 31, 2013. Lease revenue for each of the years ended December 31, 2011 and December 31, 2012 was $6.5 million.	
 
(11)	We did not receive lease revenue under our ERCOT Transmission Lease during the applicable periods. We began receiving lease revenue under the ERCOT Transmission Lease in December 2014.	
In general, our leases include the following terms:
Net Lease
Each of our lease agreements is a net lease that grants Sharyland exclusive rights to and responsibility for the maintenance and operation of our T&D assets, requires Sharyland to maintain appropriate insurance with respect to our T&D assets, requires Sharyland to pay any property, franchise, sales and other taxes related to the T&D assets and gives Sharyland responsibility for regulatory compliance and reporting requirements related to our T&D assets. See “—Insurance” for disclosure regarding the waiver we have provided to Sharyland regarding the insurance requirements in our CREZ Lease.
Operation of Our T&D Assets
The leases require that Sharyland operate the T&D assets in a reasonable and prudent manner in accordance with PUCT guidelines and applicable law. Sharyland must obtain and maintain any licenses, permits or other approvals required by applicable law to operate the T&D assets under the leases.
 
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Expenditures
The following chart demonstrates how the leases define and assign responsibility for various expenditures related to our T&D assets:

Type of Expenditure	  	Definition	  	Sharyland’s Responsibilities	  	Our Responsibilities	
Footprint Projects	  	Expenditures for T&D projects primarily situated within our distribution service territory or that are added to an existing transmission substation or physically hang from our existing transmission assets and that are characterized as capital expenditures under generally accepted accounting principles (GAAP) that are used to acquire real property assets	  	Send us three-year capital expenditure budgets, request that we fund these Footprint Projects as prudent, construct T&D assets with the capital we provide, and pay us rent with respect to these capital expenditures, typically commencing when the related assets are placed in service	  	Fund capital expenditures requested by Sharyland	
				
Repairs	  	Expenditures related to our T&D assets that are expensed, and not capitalized, under GAAP	  	Make and fund all repairs	  	None	
Whether a particular expenditure is characterized as a Footprint Project (which we are required to fund) or a repair (which Sharyland is required to fund) depends on its characterization under GAAP. Expenditures relating to Footprint Projects are capitalized under GAAP, and expenditures relating to repairs to our existing T&D assets are expensed under GAAP. As a result of this construct, capital expenditures that we fund related to Footprint Projects increase our net electric plant.
Sharyland is required to provide a capital expenditure budget on a rolling three-year basis that sets forth anticipated capital expenditures related to Footprint Projects, which the leases require us to fund. Because Sharyland is obligated to pay us rent with respect to our capital expenditures, and because of our strong working relationship with Sharyland and its history as a prudent and responsible operating utility, we do not expect that Sharyland will require us to fund capital expenditures unless Sharyland believes those expenditures are prudent and will be included in our rate base.
Rent
We have negotiated the rental rates under our leases with Sharyland at various times between 2010 and 2014. Historically, we and Sharyland have negotiated rent payments intended to provide us with approximately 97% of the projected regulated return on rate base investment attributable to our assets that we and Sharyland would receive if we were a fully-integrated utility. We and Sharyland have negotiated these rental rates based on the premise that we, as the owner of regulated T&D assets, should receive most of the regulated return on our invested capital, while leaving Sharyland with a portion of the return that gives them the opportunity to operate prudently and remain financially stable.
Actual revenue and expenses incurred by Sharyland will be different from those expected at the time we negotiate rental rates with Sharyland. As a result, we and Sharyland may earn more or less than originally projected. Our leases prohibit both parties from adjusting for the effect of differences between Sharyland’s actual and projected results.
 
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Sharyland makes scheduled base rent and percentage rent payments under each of our leases (with the exception of the Stanton Transmission Loop Lease, which does not provide for percentage rent). The percentage rent is based upon a percentage of Sharyland’s annual gross revenue in excess of specified threshold amounts, which are at least equal to base rent under each of our leases. Our leases define gross revenue to mean all revenue that Sharyland generates from the leasehold T&D assets, subject to the following definitional provisions. First, the definition of gross revenue specifically excludes pass-through items. For instance, Sharyland’s tariff includes rate riders, including a rider allowing Sharyland to recover costs related to its move to competition. Revenue that Sharyland collects pursuant to this rider is excluded from the definition of gross revenue under our leases. Second, we also subtract from revenue an amount necessary to provide Sharyland with a return on any capital expenditures that Sharyland has made related to the leasehold assets. For instance, Sharyland has made capital expenditure investments in rolling stock such as service trucks. We did not fund these capital expenditures because the related assets do not constitute real property under applicable law. Sharyland is entitled to make a return on those investments, just as we are entitled to make a return in investments on our T&D assets. Our leases provide Sharyland with this return by subtracting the related return amount from gross revenue, allowing Sharyland to retain 100% of this revenue. Third, we allocate total transmission revenue based on net plant in service for each lease for purposes of calculating the amount of gross revenue Sharyland has generated under each lease. We make this allocation because Sharyland’s transmission revenue, which is paid by all DSPs in ERCOT, cannot be tracked to a particular lease, which distinguishes it from distribution revenue. We have ERCOT transmission assets in all five of our leases.
Supplements
We negotiated our S/B/C Lease and McAllen Lease payments with Sharyland assuming that we would fund a certain amount of base capital expenditures annually. If capital expenditures are expected to exceed these base capital expenditures, we negotiate rent supplements with Sharyland. No base capital expenditure level is assumed in our CREZ Lease or our ERCOT Transmission Lease, so all expected capital expenditures related to these leases result in a related negotiated rent supplement with Sharyland. None of the capital expenditures we make are allocated to the Stanton Transmission Loop Lease. For purposes of determining whether there are capital expenditures that require rent supplements, we measure capital expenditures based on the date the assets funded by those capital expenditures are placed in service, rather than the date of funding the capital expenditures. Placed in service, in this context, means the related T&D project has been completed and is used and useful to ratepayers. Likewise, Sharyland should start collecting revenue on those assets at the time they are placed in service, not when they are funded.
As our rate base increases, Sharyland is required to agree to supplements to our leases to increase its rent payments to us. The amount of the rent increase is subject to negotiation each time a supplement is agreed to, but our existing leases provide that our historical agreements with Sharyland on target rate of return will serve as the basis for the rental rate increase, subject to limited factors that can affect the negotiation. For example, the negotiated target rate of return on the incremental rate base may be different from the negotiated target rate of return on the prior rate base due to a variety of factors, including the rate of return that utilities in the State of Texas are generally earning at the time of the relevant negotiation. The leases do not explicitly define which factors would be appropriate or the effect that any appropriate factor should have on the negotiation. However, the negotiation of lease supplements relates only to the revenue we expect to be generated from the incremental rate base subject to the negotiation, and in no circumstance will the negotiation change the rent payments negotiated with respect to prior leases and lease supplements (or result in any true-up with respect thereto).
Additionally, the lease supplement process allows us to address and update a number of other matters under our leases, such as updating the amount of revenue attributable to Sharyland’s capital expenditures and related matters. Because we frequently prepare supplements based on the expectations we and Sharyland have regarding various matters, including expected capital expenditures, we have a mechanism, which we refer to as a validation, that we use to true-up previously negotiated supplements in order to reflect the difference between the capital expenditures we expected and the capital expenditures that were actually placed in service and related
 
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matters such as the actual placed in service date of T&D assets funded by our capital expenditures. In no event will we use the validation process to account for differences between the expected and actual return on capital expenditures. If we and Sharyland are unable to agree on a rent supplement or a validation, the leases obligate us to submit the dispute to binding arbitration.
Generally, we expect to enter in to lease supplements related to capital expenditures in advance of the year in which the related assets are placed in service. For instance, in late 2014, we entered in to revised lease supplements that memorialized Sharyland’s obligation to pay us rent on the capital expenditures we expect for 2015. As 2015 progresses, if the amount of expected placed-in-service capital expenditures, or the related placed-in-service dates, differ from expectations, either Sharyland or we may request a rent validation in order adjust rent obligations to true-up the difference between actual and expected capital expenditure amounts and placed-in-service dates. Our leases do not require that we follow this exact timeline and process, so we may determine, with Sharyland, that an alternate process is more efficient.
Events of Default
Under our leases, a default will be deemed to occur upon certain events, including (1) the failure of Sharyland to pay rent, after applicable cure periods, (2) certain events of bankruptcy or insolvency with respect to Sharyland, (3) Sharyland’s breach of a representation or warranty in a lease in a material manner, (4) Sharyland’s breach of a covenant in a lease in a material manner or (5) a final judgment for the payment of cash in excess of $1,000,000 is rendered against Sharyland and is not bonded, stayed pending appeal or discharged within 60 days.
Remedies Upon a Default
Upon a default under a lease, we may, at our option, exercise the following remedies: (1) subject to PUCT approval, terminate the applicable lease agreement upon notice to Sharyland and recover any damages to which we are entitled under applicable law, (2) subject to PUCT approval, terminate Sharyland’s right to use our T&D assets and recover any damages to which we are entitled under applicable law and (3) take reasonable action to cure Sharyland’s default at Sharyland’s expense.
Renewal
Our leases provide that, if both we and Sharyland desire to renew a lease, we and Sharyland will negotiate rent applicable to the renewal term based on our historical negotiations and the return that utilities in the State of Texas are generally earning at the time of the negotiation. Generally we expect to begin the process of renegotiating a lease within the six-month period prior to its expiration and that renewal terms will be at least five years, although the leases do not require this length of a renewal term, and we may agree with Sharyland that a shorter or longer renewal term will apply.
Financial Covenants
Under our leases, Sharyland is prohibited from incurring indebtedness other than:
 
 	•	 	Secured indebtedness, which may be senior to or pari passu with Sharyland’s lease obligations to us, in an amount equal to the greater of:	
 
 	¡  	 	$5 million; or	
 
 	¡  	 	1% of the sum of, without duplication:	
 
 	¡	 	the consolidated net plant (as defined in our leases) of Sharyland;	
 
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 	¡	 	the consolidated net plant of any guarantor under a lease of our T&D assets to Sharyland; and	
 
 	¡	 	the portion of the consolidated net plant of SDTS that is the subject of the applicable lease.	
 
 	•	 	Additional indebtedness, which must be subordinated to the lease obligations that Sharyland owes to us, in an amount equal to the greater of:	
 
 	¡  	 	$10 million; or	
 
 	¡  	 	1.5% of the sum of, without duplication:	
 
 	¡	 	the consolidated net plant of Sharyland;	
 
 	¡	 	the consolidated net plant of any guarantor under a lease of our T&D assets to Sharyland; and	
 
 	¡	 	the portion of the consolidated net plant of SDTS that is the subject of the applicable lease.	
 
 	•	 	An additional $5 million of loans from us to Sharyland to fund Sharyland’s capital expenditures.	
 
 	•	 	With respect to indebtedness of Sharyland’s subsidiaries that is nonrecourse to Sharyland, an additional amount equal to the product of:	
 
 	¡  	 	the lesser of:	
 
 	¡	 	the regulatory-approved debt ratio (expressed as a percentage) plus 5%; or	
 
 	¡	 	65%; and	
 
 	¡  	 	Sharyland’s consolidated net plant.	
In determining Sharyland’s net plant, the effect of failed sale-leaseback treatment will be reversed in a manner determined by Sharyland in good faith. See “Financial Information Related to Our Tenant” for a description of the manner in which Sharyland’s reverses the effect of failed sale-leaseback accounting. In addition, under our leases, Sharyland has agreed to comply with certain of our covenants relating to Sharyland under our debt arrangements.
Assignment and Subletting
Sharyland may not assign or otherwise transfer or sublet any of our T&D assets under the leases without our prior written consent and the approval of the PUCT or other applicable governmental authority.
Indemnification
Sharyland is required to defend, indemnify and hold us harmless from and against any and all claims, obligations, liabilities, damages and costs and expenses arising from any act or omission of Sharyland with respect to (1) the operation of the T&D assets, (2) damage to the T&D assets, (3) physical injuries or death (including in connection with the operation of the T&D assets), (4) any breach of any representation or warranty or covenant or (5) any negligence, recklessness or intentional misconduct of Sharyland.
Lease Expiration
The S/B/C Lease, which relates to less than 25% of our existing assets, expires on December 31, 2015 and leases relating to our remaining assets expire at various times between December 31, 2019 and December 31, 2022. If either we or Sharyland do not wish to renew a lease, we expect that our rent negotiations with a new third-party tenant would be based on the rate base of the assets subject to the expired lease and the rate of return
 
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expected at the time a new lease is negotiated, among other factors. In any event, because our T&D assets are rate-regulated and necessary for the transmission and distribution of electricity, we expect that they will continue to generate tariff revenue. As a result, we believe we will be able to identify a qualified tenant to operate our T&D assets who will be able to make lease payments to us based on the tariff revenue our assets generate. Before we can lease our T&D assets subject to the expiring lease to a new tenant, we and Sharyland must obtain PUCT approval for the transfer of the related operating licenses. Sharyland is required under the leases to use commercially reasonable efforts to obtain these approvals as soon as is reasonably practicable. Until we obtain those approvals, Sharyland will continue to operate our T&D assets and pay us rent. If it takes longer than 12 months to obtain these approvals, rent payments will be adjusted to 80% of the amounts otherwise due, if the failure to obtain the approval is a result of our failure to reasonably pursue the approval, and will be 105% of the amounts otherwise due, if the failure to obtain the approval is the result of Sharyland’s failure to reasonably pursue the approvals. We also have the right to buy, from Sharyland, any equipment or property that Sharyland uses in connection with the lease, with the price equal to the greater of 110% of book value or fair market value, as mutually agreed by Sharyland and us.
Construction Management
We rely on third parties to manage the construction of our T&D assets. To date, Sharyland has managed all of our construction projects, but, in some circumstances, Sharyland in turn relies on third-party construction contractors to complete these projects.
Project Development
Under the terms of our leases and our development agreement with Hunt Developer and Sharyland, we fund the construction of Footprint Projects, which are defined under our development agreement as transmission or distribution projects primarily situated within our distribution service territory, or that physically hang from our existing transmission assets, such as the addition of another circuit to our existing transmission lines, or that are physically located within one of our substations. Footprint Projects would not, however, include the addition of a new substation on our existing transmission lines or generation interconnects to our existing transmission lines, unless the addition or interconnection occurred within our distribution service territory. ROFO Projects are defined under our development agreement to consist of identified projects that are being developed by Hunt. Hunt has the right to fund the development and construction of ROFO Projects. Once a ROFO Project is acquired and the applicable T&D assets are added to our rate base, future additions to those T&D assets, such as the addition of another circuit to the asset’s transmission lines or an addition physically located within one of the asset’s substations, would be considered a Footprint Project. In connection with any renewal of our management agreement with Hunt Manager, we may request that the list of ROFO Projects under the development agreement be updated to include additional projects that Hunt is then developing. Sharyland and Hunt Developer are each parties to our development agreement. However, the agreement, by its terms, applies to activities by all Hunt affiliates. As such, when discussing the development agreement, we use the term “Hunt” to refer to Hunt Developer, Sharyland and other affiliates of Hunt Consolidated, Inc.
Under the terms of our development agreement, Hunt is required to offer all ROFO Projects to us prior to energization. We expect that the purchase price for ROFO Projects will be based on a number of factors, such as the cash flow and rate base for the assets, market conditions, potential for incremental Footprint Projects, whether the assets are subject to a lease with Sharyland or another tenant, the terms of any such lease and the regulatory return we expect the asset will earn. Our governance policy will require that any such acquisition be approved by our Conflicts Committee, which will be comprised solely of independent directors.
 
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ROFO Projects
Cross Valley Transmission Line
The Cross Valley transmission line, which has been jointly developed and permitted by Sharyland and Electric Transmission Texas, is a new approximately 100 mile transmission line in South Texas near the Mexican border, known as the North Edinburg to Loma Alta 345 kV Transmission Line Project. The CCN for this project was received in April 2014 and Sharyland has begun construction on the eastern half of the project. The Loma Alta substation is owned by the Brownsville Public Utilities Board (BPUB), and BPUB has assigned its right to construct its portion of the Cross Valley project (approximately 50 miles) to Sharyland pursuant to a pre-existing relationship between BPUB and Sharyland. Hunt and our founding investors are funding the Sharyland/BPUB portion of the project, and we expect to have an opportunity to acquire the transmission assets upon the completion of construction. Sharyland and BPUB expect the project to be completed and in service in 2016. Hunt expects the cost of this project to be between $160 million and $185 million, including financing costs.
GSEC Interconnection
The GSEC interconnection will connect GSEC’s gas-fired generation facility in Hale County, Texas, to our transmission line in Floyd County, Texas through the development of a new approximately 55 mile single-circuit 345 kV (on double-circuit capable towers) transmission line. The CCN for this project was received in August 2014, and Sharyland expects to complete the project and place it in service in the middle of 2016. Hunt expects the cost of this project to be between $100 million and $120 million, including financing costs.
Southline Transmission Project
The Southline Transmission Project is a proposed high voltage electric transmission project in southern New Mexico and southern Arizona. The project consists of constructing approximately 240 miles of new double-circuit 345 kV transmission lines and upgrading approximately 120 miles of existing Western Area Power Administration transmission lines. The completed project would allow up to 1,000 MW of bi-directional capacity and provide system benefits throughout the Southwest. The project is in the late stages of Phase 2b of the WECC Three Phase Ratings Process that will establish the project’s capacity rating. On April 11, 2014, the U.S. Bureau of Land Management (BLM) and Western Area Power Administration (Western) issued a Notice of Availability for the Draft Environmental Impact Statement (DEIS) for the proposed Southline Transmission Project. The initially estimated construction cost of this project ranges from $700 million to $800 million, excluding financing costs.
Verde Transmission Project
The Verde Transmission Project is an approximately 30-mile 345 kV line in northern New Mexico that would provide enhanced import capability into the electric system in New Mexico and an alternative path westward for renewable energy. Hunt has obtained two of the three easement agreements with the Native American Pueblos and intends to commence the National Environmental Policy Act (NEPA) process for environmental approval as soon as the third easement agreement is obtained. The initially estimated construction cost of this project ranges from $60 million to $80 million, excluding financing costs.
Other ROFO and Development Projects
In addition to the construction and development activity related to the projects above, Hunt and Sharyland are also evaluating and developing various projects in ERCOT and other regions of the United States. In addition to the four projects listed above, the identified ROFO projects in our development agreement include the following: (i) all generation inter-connections to the CREZ Panhandle Transmission Lines (other than those
 
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that would be classified as Footprint Projects), which will serve to reinforce and expand the transmission grid in the Panhandle and Texas South Plains region as new wind and other generators connect to the transmission grid; (ii) additional high-voltage DC ties that Hunt is currently developing along the Texas and Southwestern border with Mexico, capitalizing on Hunt’s prior experience with the steps and approvals required to develop the Railroad DC Tie and Hunt’s relationship with CFE in Mexico; (iii) the ERCOT Southeast Loop Transmission Line, which focuses on grid enhancement to reduce congestion and improve reliability in the southeastern region of ERCOT; (iv) the Indiana to Illinois Transmission Project, which seeks to increase electric transmission between the PJM and MISO grids; and (v) current development efforts to provide for increased import capacity from New Mexico and Arizona into California.
Hunt and Sharyland are also developing a number of projects that are not included in the ROFO list. A typical example involves initiatives in South Texas to develop new transmission lines to enhance grid reliability and enable generation interconnections. Another example of Hunt’s innovative approach is Sharyland’s response to LP&L’s RFP for generation services. In response to the RFP, Sharyland submitted a proposal to integrate LP&L’s system into ERCOT through multi-line alternatives ranging from approximately 67 to 92 miles, with an associated cost estimated to range from $166 million to $237 million. It is unknown at this time whether Sharyland will be successful in the RFP process. For any non-ROFO projects, Hunt has informed us that it intends for us to be the primary owner of Hunt’s T&D development projects as those projects are completed and placed in service.
Other than with respect to the Cross Valley transmission line and the GSEC interconnection, Hunt may opt to partner with other parties in the development of projects depending on their scope, location and cost.
Seasonality
Our results of operations are subject to some seasonal variation. Our revenues consist of rent Sharyland pays to us, a portion of which is variable based on Sharyland’s gross revenues as defined in the leases. Sharyland receives revenue from its customers as both a TSP and as a DSP. Sharyland’s transmission revenue is not subject to seasonality, but its distribution revenue, which is based on a variety of factors, including customer usage, is and can be higher during the summer and early fall months, when temperatures are hot, and lower during the winter months, when customers generally use less electricity in Texas. As a result, the percentage rent payment we receive in November, which relates to revenue Sharyland generates during the third quarter, is typically slightly higher than our other percentage rent payments during the summer and early fall months. As of September 30, 2014, approximately 75% of our rate base generated transmission revenue.
Competition
The market for making investments in energy infrastructure assets is highly competitive and fragmented, and we have seen an increase in both the amount of and different types of investors for energy infrastructure assets rise over the last several years. Many fully integrated utility companies, master limited partnerships, public and private funds, commercial and investment banks, commercial financing companies and foreign investors pursue the types of investments that we compete for in the U.S. energy infrastructure sector. Recent active investors include Algonquin, Alinda Capital, CenterPoint Energy, Crestwood Partners, Kinder Morgan, Macquarie Infrastructure Fund, Mid-American Energy Holdings and Teco Energy. Within the State of Texas, namely ERCOT, we compete with other TDSPs such as AEP, CenterPoint Energy, Oncor Electric and Texas New Mexico Power (PNM Resources) to develop transmission projects. Municipally-owned electric utilities such as Austin Energy and CPS Energy and electric cooperatives like South Texas Electric Cooperative are also competing to develop transmission projects. Finally, given the robust growth and business-friendly environment in Texas, there are several private developers who are seeking transmission development opportunities as well.
 
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Customers
We lease all of our T&D assets to Sharyland, which supports its lease payments to us by collecting transmission revenue from other electric utilities and distribution revenue from REPs.
Transmission
As of September 30, 2014, approximately 75% of our rate base generated transmission revenue. Sharyland’s 2014 transmission revenue, like the revenue of all other ERCOT TSPs, is received primarily from ERCOT DSPs, which include investor-owned utilities, cooperatives and municipalities. Throughout 2014, each ERCOT DSP will pay Sharyland, on a monthly basis, an annualized amount that equals the product of that DSPs ERCOT 4CP usage during 2013 and Sharyland’s per-kW transmission tariff, which is derived from Sharyland’s most recent interim TCOS filing, which was effective in October 2014. Actual usage of our transmission lines during 2014 will have no effect on the amount of transmission revenues that Sharyland collects from ERCOT DSPs. The top six ERCOT DSPs based on the 2013 ERCOT 4CP allocation, which were responsible for approximately 82% of this proportionate allocation, are all investment grade investor-owned utilities and municipal electric utilities. The remaining 18% of this allocation is paid for by a group of 120 smaller entities. We do not know of any ERCOT DSP that has declared bankruptcy since ERCOT deregulated its electricity markets in the early 2000s.
Distribution
Sharyland currently receives distribution revenue from REPs, who in turn collect from end users in Sharyland’s distribution territories. The REPs, and not Sharyland, generally bear the risk of end-user non-payment.
Environmental Matters
Our tenant’s day-to-day operations are subject to a wide range of environmental laws and regulations across a broad number of jurisdictions, including laws and regulations that impose limitations on the discharge of pollutants into the environment, establish standards for the management, treatment, storage, transportation and disposal of hazardous materials and of solid and hazardous wastes, and impose obligations to investigate and remediate contamination in certain circumstances. We rely on our tenant for the compliance of our T&D assets with such laws and regulations. Under the terms of our leases, our tenant is required to indemnify us if we incur damages as a result of its failure to comply with any such law or regulation.
These laws and regulations also generally require that governmental permits and approvals be obtained before construction and during operation of T&D assets. As construction manager of our T&D projects, we also rely on our tenant for compliance with such permit and approvals, and our tenant is required to indemnify us if they fail to obtain or comply with any permit or approval in accordance with the terms of our leases.
We currently do not believe that we have any material environmental liabilities.
Insurance
Our leases require our tenant to carry liability and casualty insurance on our properties covering certain hazards with specific policy limits set forth in the lease agreement. However, there may not be adequate insurance to cover the associated costs of repair or reconstruction, or insurance may not be available at commercially reasonable rates or, for some events, at all. For instance, Sharyland has not been able to obtain property insurance coverage for a substantial portion of our T&D assets on commercially reasonable terms. As a result, we have waived or amended the requirements under our leases that Sharyland obtain such insurance. In
 
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this respect, we and Sharyland are self insured for a substantial portion of our T&D assets. In the event remediating any damage or loss is considered a repair under the applicable lease, our tenant is responsible for the cost of repairing or replacing such damage or loss whether or not covered by insurance. On the other hand, in the event remediating any damage or loss is considered a Footprint Project under the lease, we will be responsible for payment of any insurance deductible, as well as for any such damage or loss not covered by insurance. We believe that our T&D assets are covered by adequate insurance, including those T&D assets for which our tenant is self-insured.
Legal Proceedings
We are not a party to any legal proceedings other than legal proceedings arising in the ordinary course of our business.
 
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 FINANCIAL INFORMATION RELATED TO OUR TENANT
Sharyland’s GAAP financial statements are included in this prospectus. To supplement these financial statements, we are presenting the non-GAAP information below, which our management reviews to help its evaluation of Sharyland’s results of operations and financial condition, and which we believe will provide you with information regarding Sharyland’s ability to meet its rent obligations. We have legal title to our T&D assets. However, Sharyland maintains operational control through the leases and through its managing member interest in SDTS and is responsible for construction and maintenance of our T&D assets. These rights and obligations constitute continuing involvement, which results in failed sale-leaseback financing accounting with respect to the lease of our T&D assets in Sharyland’s financial statements. Under failed sale-leaseback financing accounting, Sharyland is treated as the owner of the assets under all lease agreements, including T&D assets currently under construction. Consequently, our T&D assets, including any T&D assets currently under construction, are reflected as assets, and an estimate of Sharyland’s lease obligations to us are reflected as liabilities, on Sharyland’s balance sheet.
We present the following below:
 
 	•	 	Sharyland’s net income (loss), calculated in accordance with GAAP.	
 
 	•	 	Sharyland’s management-reported net income (loss), which is calculated by adding the amount of depreciation expense and interest expense that Sharyland incurs as a result of failed sale-leaseback accounting to Sharyland’s GAAP net income and subtracting Sharyland’s management-calculated rent expense. Sharyland’s management-calculated rent expense differs from our lease revenue because Sharyland’s management calculates rent expense on a cash rather than GAAP basis.	
 
 	•	 	Sharyland’s management-reported net income before interest, taxes, depreciation, amortization and rent (EBITDAR), which is calculated by adding Sharyland’s management-calculated interest, taxes, depreciation, amortization and rent expense to Sharyland’s management reported net loss.	
 
 	•	 	A coverage ratio illustrating how EBITDAR relates to Sharyland’s management-calculated rent expense.	
 
 	•	 	Sharyland’s management-reported balance sheet, which is derived by removing the impacts of the required GAAP failed sale-leaseback accounting treatment.	

 	  	Nine Months Ended
September 30,	 	 	Years Ended
December 31,	 	
 	  	    2014    	 	  	    2013    	 	 	    2013    	 	 	    2012    	 	
 	  	(in thousands)	 	
Net income (loss)	  	$	12,830	  	  	$	(4,069	) 	 	$	1,552	  	 	$	(7,475	) 	
Failed-lease back adjustments:	  				  				 				 				
Add: Failed-lease back depreciation expense	  	 	19,700	  	  	 	11,900	  	 	 	19,300	  	 	 	10,200	  	
Add: Failed-lease back interest expense	  	 	77,100	  	  	 	35,500	  	 	 	49,600	  	 	 	36,900	  	
Deduct: Rent expense	  	 	103,100	  	  	 	42,100	  	 	 	72,000	  	 	 	42,800	  	
	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	
Sharyland’s Management reported net income (loss)	  	 	6,530	  	  	 	1,231	  	 	 	(1,548	) 	 	 	(3,175	) 	
Adjustments:	  				  				 				 				
Add: Interest (income) expense, net	  	 	165	  	  	 	159	  	 	 	498	  	 	 	59	  	
Add: Income tax expense	  	 	1,550	  	  	 	942	  	 	 	1,287	  	 	 	702	  	
Add: Depreciation and amortization	  	 	1,813	  	  	 	1,330	  	 	 	2,060	  	 	 	1,743	  	
Add: Rent expense	  	 	103,100	  	  	 	42,100	  	 	 	72,000	  	 	 	42,800	  	
	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	
EBITDAR	  	$	113,158	  	  	$	45,762	  	 	$	74,297	  	 	$	42,129	  	
Ratio of EBITDAR to rent expense	  	 	1.09x	  	  	 	1.08x	  	 	 	1.03x	  	 	 	0.98x	  	

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 	  	As of September 30, 2014	 	
 	  	GAAP
Balance
Sheet	 	  	Failed Sale-
Leaseback
Adjustments	 	 	Non-GAAP
Balance
Sheet	 	
 	  	(in thousands)	 	
Assets	  				  				 				
Property, plant and equipment—net	  	$	1,185,503	  	  	$	(1,174,813	) 	 	$	10,690	  	
Current assets	  	 	58,459	  	  				 	 	58,459	  	
	  	 	 	 	  				 	 	 	 	
Goodwill	  	 	1,100	  	  				 	 	1,100	  	
Deferred charges—regulatory assets, net	  	 	42,216	  	  	 	(23,793	) 	 	 	18,423	  	
	  	 	 	 	  				 	 	 	 	
Total Assets	  	$	1,287,278	  	  				 	$	88,672	  	
	  	 	 	 	  				 	 	 	 	
Partners’ Capital and Liabilities	  				  				 				
Partners’ capital	  	 	4,554	  	  	 	7,053	  	 	 	11,607	  	
	  	 	 	 	  				 	 	 	 	
Long-term financing obligation	  	 	1,177,166	  	  	 	(1,177,166	) 	 	 	—  	 	
OPEB and other long-term liabilities	  	 	12,199	  	  				 	 	12,199	  	
	  	 	 	 	  				 	 	 	 	
Total capitalization	  	 	1,193,919	  	  				 	 	23,806	  	
	  	 	 	 	  				 	 	 	 	
Current liabilities:	  				  				 				
Accounts payable and accrued liabilities	  	 	43,326	  	  				 	 	43,326	  	
Due to affiliates	  	 	16,540	  	  				 	 	16,540	  	
Revolving line of credit	  	 	5,000	  	  				 	 	5,000	  	
Current portion of financing obligation	  	 	28,493	  	  	 	(28,493	) 	 	 	—  	 	
	  	 	 	 	  				 	 	 	 	
Total current liabilities	  	 	93,359	  	  				 	 	64,866	  	
	  	 	 	 	  				 	 	 	 	
Total Partners’ Capital and Liabilities	  	$	1,287,278	  	  				 	$	88,672	  	
	  	 	 	 	  				 	 	 	 	
The PUCT approved in January 2014 a rate case applicable to all of our T&D assets other than our distribution assets in McAllen, Texas, which was Sharyland’s first rate case in several years. The new rates became effective on May 1, 2014. In the rate case, Sharyland updated its tariff to account for the increased operating and maintenance costs related to our increased T&D assets, including Sharyland’s significant investment of capital in building its systems, operational infrastructure and processes.
 
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 MANAGEMENT
General
We are externally managed by Hunt Manager. Pursuant to the terms of the management agreement, Hunt Manager provides us with our senior management team. We do not have any employees. Hunt Manager will at all times remain subject to the oversight of our board of directors.
Executive Officers and Directors
The following table sets forth certain information regarding our executive officers and directors upon completion of this offering:

Name	  	Age	 	  	Position	
W. Kirk Baker	  	 	56	  	  	Chairman of the Board of Directors	
Hunter L. Hunt	  	 	46	  	  	Director	
David Campbell	  	 	46	  	  	President, Chief Executive Officer and Director	
Brant Meleski	  	 	43	  	  	Senior Vice President and Chief Financial Officer	
Benjamin D. Nelson	  	 	43	  	  	Senior Vice President and General Counsel	
W. Kirk Baker has served as our Chairman since our formation in November 2010. Mr. Baker is the managing partner of Captra Capital LLC, an infrastructure investment firm in which Mr. Baker and Hunt are currently the primary investors . Mr. Baker served as our chief executive officer and as president and chief executive officer of Hunt Manager from November 2010 until August 2014. Mr. Baker also served as a member of the board of directors of Hunt from April 2006 until August 2013. Mr. Baker was Senior Vice President and General Counsel of Hunt from February 2007 until January 2011 and was an executive and Tax Counsel from 1998 until 2007. During his time at Hunt, Mr. Baker had various positions, including manager of Hunt Developer and Senior Vice President of Sharyland, and was involved in structuring many transactions for the subsidiaries and affiliates of Hunt in the oil and gas, real estate, power and private equity markets. Mr. Baker was part of the team that originated the idea to own regulated infrastructure assets through a REIT structure and led the effort for Hunt to obtain the private letter ruling confirming that electricity delivery systems constitute real property for purposes of the REIT rules of the IRS. Mr. Baker also led the effort to raise capital commitments resulting in the formation of the Company. Prior to joining Hunt, Mr. Baker was with the law firms of Oppenheimer, Blend, Harrison & Tate in San Antonio, Texas and O’Melveny & Myers in New York, New York. As the Chairman of our board of directors, Mr. Baker brings his unique knowledge of the Company and its business and operations to the board of directors, as well as extensive experience in structuring complex transactions.
Mr. Baker earned a Bachelor degree in accounting from Baylor University in 1980 and a Juris Doctorate with high honors from the University of Texas School of Law in 1987.
Hunter L. Hunt has served as a director of InfraREIT since September 2013. Mr. Hunt is the Chairman of Hunt Manager, President and Chief Executive Officer of Hunt Consolidated Energy, the holding company for Hunt Oil, Hunt Power and the other energy activities of the Ray L. Hunt family of Dallas, Texas, and has held various positions within the Hunt organization since 1998. The Hunt family of companies is one of the largest privately-owned energy companies in the world, engaging in exploration and production as well as LNG. Hunt is also engaged in refining, development of energy technologies and developing renewable energy projects. Mr. Hunt has also been Chairman and Chief Executive Officer of Sharyland since 1999. Prior to joining Hunt, Mr. Hunt began his career with the investment bank Morgan Stanley, both in corporate finance and commodity trading. Mr. Hunt brings his extensive expertise in the energy industry as well as with respect to executive management and operations to the board of directors.
 
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Mr. Hunt graduated from Southern Methodist University summa cum laude, earning Bachelor of Science degrees with honors in both economics and political science in 1990.
David Campbell has served as our president and chief executive officer since August 2014 and as a member of our board of directors since September 2014. Mr. Campbell also is the president and chief executive officer of Hunt Manager. From 2012 until joining Hunt Manager in August 2014, Mr. Campbell was president and chief operating officer of Bluescape Resources, an independent resource and investment company based in Dallas, Texas. From mid-2008 through 2012, Mr. Campbell served as CEO of Luminant, a competitive power generation subsidiary of EFH (previously TXU), and prior to that, Mr. Campbell served as EFH’s and TXU’s chief financial officer. Mr. Campbell originally joined TXU Corp. in 2004 as executive vice president of corporate planning, strategy and risk. Before TXU, Mr. Campbell was a principal in the Dallas office of McKinsey & Company, where he led the Texas and Southern Region hubs of McKinsey’s corporate finance and strategy practice. From 2010 to 2012, Mr. Campbell served as a board member for the National Nuclear Accrediting Board and the Electric Power Research Institute. Mr. Campbell brings his extensive expertise in the utility industry as well as executive leadership and experience to the board of directors.
Mr. Campbell earned a Bachelor of Arts from Yale University in 1990 and a Juris Doctorate from Harvard Law School in 1995; in 1992 he graduated with a Master’s degree from Oxford University, where he studied as a Rhodes Scholar.
Brant Meleski has served as our senior vice president and chief financial officer since September 2014. Mr. Meleski also is the chief financial officer of Hunt Manager. Prior to joining Hunt Manager in September 2014, Mr. Meleski spent 17 years in Bank of America Merrill Lynch’s Global Energy & Power Group, most recently as a Managing Director of Investment Banking. During this time, Mr. Meleski was responsible for leading public equity and debt underwriting and merger and advisory assignments for many U.S. utility clients. Mr. Meleski’s experience includes advising Duke Energy on their $25 billion merger with Progress Energy and underwriting the $1.4 billion initial public offering of American Water.
Mr. Meleski earned a Bachelor of Science in Finance from Clemson University in 1993 and an M.B.A. from the Goizueta Business School at Emory University in 1997.
Benjamin D. Nelson has served as our senior vice president and general counsel since December 2014. Mr. Nelson also is the senior vice president and general counsel of Hunt Manager. Mr. Nelson previously served in these capacities from April 2012 until June 2014. From June 2014 until December 2014, Mr. Nelson served as a senior vice president in the Hunt organization, focusing primarily on our business and this offering during that period. From August 2007 until April 2012, Mr. Nelson served in various capacities with Hunt, including as general counsel of various Hunt affiliates. From 2005 to 2007, Mr. Nelson was a partner with Hughes & Luce LLP in Dallas (now K&L Gates LLP). He also was with the law firms Wilson Sonsini Goodrich & Rosati in Palo Alto, California, and Austin, Texas from 2000 to 2005 and with Fulbright & Jaworski LLP in Dallas, Texas from 1996 until 2000. While at these firms and with Hunt, he was involved in more than 225 private equity, mergers and acquisitions, public offering or other financing transactions.
Mr. Nelson earned a Bachelor of Arts in History from Stanford University in 1993 and a Juris Doctorate from Duke Law School in 1996.
We intend to appoint additional directors prior to the completion of this offering.
Composition of the Board of Directors
Our business and affairs are managed under the direction of our board of directors. Following the completion of this offering, we expect our board of directors to initially consist of              directors,             of whom will be independent within the meaning of the listing standards of the New York Stock Exchange (NYSE). The charter to be adopted in connection with our corporate conversion will provide for a classified board of
 
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directors, with              directors in Class I (expected to be                 ),              directors in Class II (expected to be                 ) and              directors in Class III (expected to be                 ). Each class will serve for a staggered three-year term. The Class I directors’ terms will expire at the annual meeting of stockholders in 2016, the Class II directors’ terms will expire at the annual meeting of stockholders in 2017 and the Class III directors’ terms will expire at the annual meeting of stockholders in 2018. Directors may be removed from our board of directors only for cause and then only by the affirmative vote of the holders of shares entitled to cast at least two-thirds of all the votes entitled to be cast generally in the election of directors. Our charter and bylaws provide that, at such time as we are eligible to elect to be subject to the provisions of Title 3, Subtitle 8 of the Maryland General Corporation Law (MGCL), which we expect to be upon completion of this offering, except as may be provided by our board of directors in setting the terms of any class or series of our stock, any and all vacancies on our board of directors, and any newly created director positions created by the expansion of the board of directors, can be filled only by a majority of the remaining directors then in office. The number of directors may never be less than the number required by the MGCL, which is currently one, nor more than 15. Any decrease in the number of directors will not affect the tenure of office of a then-current director. See “Certain Provisions of Maryland Law and Our Charter and Bylaws—Board of Directors.”
Director Independence
The rules of the NYSE require that a majority of a company’s board of directors be composed of “independent directors,” which the NYSE listing standards generally define as a person other than an executive officer or employee of the Company or its subsidiaries or any other individual having a relationship, which, in the opinion of the Company’s board of directors, would interfere with the director’s exercise of independent judgment in carrying out the responsibilities of a director. Consistent with these considerations, we expect our board of directors to affirmatively determine that each of                 ,                 ,                 and                  is an independent director.
Our board of directors may elect an independent director to serve as our lead director. The lead director will have clearly defined leadership authority and responsibilities, which include:
 
 	•	 	presiding at all board meetings at which the Chairman is not present, including executive sessions of the non-management directors;	
 
 	•	 	serving as a liaison between the Chairman, the Chief Executive Officer and the non-management directors;	
 
 	•	 	consulting with the Chairman on board meeting agendas and information provided to the directors;	
 
 	•	 	calling meetings of the non-management directors and sets agendas for executive sessions; and	
 
 	•	 	serving as board representative for consultation and direct communication with major stockholders on issues that the board determines may not be addressed by the Chairman or other board designees and as otherwise deemed appropriate by the board.	
We expect our board of directors to appoint                  to serve as lead director upon the completion of this offering.
Family Relationships
There are no family relationships among any of our executive officers and directors.
Corporate Governance Profile
We have structured our corporate governance in a manner we believe closely aligns our interests with those of our stockholders. Notable features of our corporate governance structure include the following:
 
 	•	 	our board of directors is classified, with each of three classes serving for a staggered three-year term;	
 
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 	•	 	of the seven persons who will serve on our board of directors immediately after the completion of this offering, we expect our board of directors to determine that         , or         %, of our directors satisfy the NYSE listing standards for independence and Rule 10A-3 under the Exchange Act of 1934, as amended (Exchange Act);	
 
 	•	 	we anticipate that at least one of our directors will qualify as an “audit committee financial expert” as defined by the Securities and Exchange Commission (SEC); and	
 
 	•	 	we have exempted from the business combination statute in the MGCL any business combination first approved by our board (including a majority of unaffiliated directors) and have opted out of the control share acquisition statute in the MGCL.	
Our directors will stay informed about our business by attending meetings of our board of directors and its committees and through supplemental reports and communications. Our independent directors are expected to meet regularly in executive sessions without the presence of our corporate officers or non-independent directors.
Role of Our Board of Directors in Risk Oversight
One of the key functions of our board of directors is informed oversight of our risk management process. Our board of directors will administer this oversight function directly, with support from three of our standing committees, the Audit Committee, the Compensation, Nominating and Corporate Governance Committee and the Conflicts Committee, each of which will address risks specific to its respective areas of oversight. In particular, as more fully described below, our Audit Committee will have the responsibility to consider and discuss our major financial risk exposures and the steps our management has taken to monitor and control these exposures, including guidelines and policies to govern the process by which risk assessment and management is undertaken. The Audit Committee also will monitor compliance with legal and regulatory requirements, in addition to oversight of the performance of our internal audit function. Our Compensation, Nominating and Corporate Governance Committee will assess and monitor whether any of our compensation policies and programs has the potential to encourage excessive risk-taking and will provide oversight with respect to corporate governance and ethical conduct and monitor the effectiveness of our corporate governance guidelines, including whether such guidelines are successful in preventing illegal or improper liability-creating conduct. Our Conflicts Committee will review and advise our board of directors on specific matters that our board of directors believes may involve conflicts of interest.
Committees of the Board of Directors
Upon completion of this offering, our board of directors will establish an Audit Committee, a Compensation, Nominating and Corporate Governance Committee and a Conflicts Committee, each of which will have the composition and responsibilities described below. Our board of directors may also establish from time to time one or more other committees as it deems necessary or desirable.
Audit Committee
Upon completion of this offering, our board of directors will establish an Audit Committee that we expect to consist of                 ,                  and                 , and                  will serve as the chair. All of the members of the Audit Committee will be “independent” as defined in Rule 10A-3 of the Exchange Act and under the NYSE listing standards and will be “financially literate” under the NYSE listing standards. We expect our board of directors to determine that                  qualifies as an “audit committee financial expert,” as that term is defined by the SEC. The Audit Committee will have oversight responsibilities regarding the quality and integrity of our financial statements, the qualifications and independence of our independent accountants, the scope of our annual audits, fees to be paid to the independent accountants, the performance of our internal audit function, and the performance of our independent accountants and our accounting practices. In addition, the Audit Committee will oversee our compliance programs relating to legal and regulatory requirements and will prepare the Audit Committee report required by the SEC to be included in our proxy statement.
 
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Our board of directors will adopt a written charter for our Audit Committee, which will be available on our website upon completion of this offering.
Compensation, Nominating and Corporate Governance Committee
Upon completion of this offering, our board of directors will establish a Compensation, Nominating and Corporate Governance Committee that we expect to consist of                 ,                  and                 , and                 will serve as the chair. All of the members of the Compensation, Nominating and Corporate Governance Committee will be independent within the meaning of the NYSE listing standards. The committee will be responsible for:
 
 	•	 	evaluating the performance of Hunt Manager;	
 
 	•	 	administering any incentive compensation and benefit plans we may adopt in the future;	
 
 	•	 	reviewing, evaluating and recommending changes, if appropriate, to the compensation of our directors;	
 
 	•	 	preparing the compensation committee report required by the SEC to be included in our proxy statement;	
 
 	•	 	periodically preparing and submitting to our board of directors for consideration the committee’s selection criteria for director nominees;	
 
 	•	 	overseeing the director candidate identification and nomination process and recommending a slate of nominees for election as directors at the annual meeting of stockholders;	
 
 	•	 	annually recommending to our board of directors nominees for each committee of our board of directors;	
 
 	•	 	facilitating the annual self-evaluation of the board of directors, the committees and each individual director and reporting thereon to our board of directors; and	
 
 	•	 	reviewing and making recommendations on matters involving the general operation of our board of directors and our corporate governance.	
Our board of directors will adopt a written charter for our Compensation, Nominating and Corporate Governance Committee, which will be available on our website upon completion of this offering.
Conflicts Committee
Upon completion of this offering, our board of directors will establish a Conflicts Committee that we expect to consist of                 ,                 ,                  and                 , and                  will serve as the chair. All of the members of the Conflicts Committee will be independent within the meaning of the NYSE listing standards. The Conflicts Committee reviews and advises the board of directors on specific matters that the board of directors believes may involve conflicts of interest.
Our board of directors will adopt a written charter for our Conflicts Committee, which will be available on our website upon completion of this offering.
Compensation Committee Interlocks and Insider Participation
None of the individuals who will serve as a member of our Compensation, Nominating and Corporate Governance Committee has at any time been one of our executive officers or employees. None of the individuals who will serve as our executive officers currently serves, or has served during the last completed fiscal year, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors.
 
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Code of Ethics
Upon the consummation of this offering, our board of directors will adopt a Code of Business Conduct and Ethics that applies to all of our directors and officers, which will be available on our website upon the completion of this offering. The code will address, among other things, honesty and ethical conduct, conflicts of interest, compliance with laws, regulations and policies, including disclosure requirements under the federal securities laws, confidentiality, trading on insider information and reporting of violations of the code. However, we cannot assure you that these policies or provisions of law will always be successful in eliminating or minimizing the influence of such conflicts of interest, and if they are not successful, decisions could be made that might fail to reflect fully our interests or the interests of stockholders. For a discussion of our policy with respect to related person transactions, see “Certain Relationships and Related Transactions.” Under our bylaws, our directors and officers may have business interests and engage in business activities similar to, in addition to or in competition with those of or relating to our business. Our Code of Business Conduct and Ethics is a “code of ethics,” as defined in Item 406(b) of Regulation S-K. We will make any legally required disclosures regarding amendments to, or waivers of, provisions of our code of ethics on our website.
Conflict of Interest and Self-Dealing Policies
In addition to the Code of Business Conduct and Ethics described above under “—Code of Ethics,” we also intend to adopt a corporate governance policy designed to protect our stockholders against conflicts of interest. We expect that policy, among other things, to require the approval of the independent members of our board of directors on certain decisions related to our leases, the development agreement and the management agreement. We cannot assure you that these policies or provisions of law will always be successful in eliminating or minimizing the influence of such conflicts of interest, and if they are not successful, decisions could be made that might fail to reflect fully the interests of stockholders. For a discussion of our policy with respect to related person transactions, see “Certain Relationships and Related Transactions.”
Indemnification
We intend to enter into indemnification agreements with each of our directors and executive officers that will obligate us to indemnify and advance expenses to them to the maximum extent permitted by Maryland law. The indemnification agreements will provide that, if a director or executive officer is a party or is threatened to be made a party to any proceeding by reason of his or her service as a director, officer, employee or agent of our Company or as a director, officer, partner, managing member, manager, fiduciary, employee, agent or trustee of any other corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise that he or she is or was serving in such capacity at our request, we must indemnify the director or executive officer for all expenses and liabilities actually and reasonably incurred by him or her, or on his or her behalf, to the maximum extent permitted under Maryland law, including expenses in any proceeding brought by the director or executive officer to enforce his or her rights under the indemnification agreement, to the extent provided by the agreement. The indemnification agreements will also require us to advance reasonable expenses incurred by the indemnitee within ten days of the receipt by us of a statement from the indemnitee requesting the advance, provided the statement evidences the expenses and is accompanied or preceded by:
 
 	•	 	a written affirmation of the indemnitee’s good faith belief that he or she has met the standard of conduct necessary for indemnification; and	
 
 	•	 	a written undertaking, which may be unsecured, by the indemnitee or on his or her behalf to repay the amount paid if it shall ultimately be established that the standard of conduct has not been met.	
The indemnification agreements will also provide for procedures for the determination of entitlement to indemnification, including requiring such determination be made by independent counsel after a change of control of us.
 
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Our charter authorizes us to obligate ourselves, and our bylaws obligate us, to the maximum extent permitted by Maryland law in effect from time to time, to indemnify and pay or reimburse reasonable expenses in advance of final disposition of such a proceeding to:
 
 	•	 	any present or former director or officer of our company who is made, or threatened to be made, a party to, or a witness in, the proceeding by reason of his or her service in that capacity; or	
 
 	•	 	any individual who, while a director or officer of our company and at our request, serves or has served as a director, officer, partner, trustee, member or manager of another corporation, REIT, limited liability company, partnership, joint venture, trust, employee benefit plan or other enterprise and who is made, or threatened to be made, a party to, or a witness in, the proceeding by reason of his or her service in that capacity.	
Our charter and bylaws also permit us to indemnify and advance expenses to any individual who served any predecessor of us or any entity acquired by us or any partnership controlled by us, or an “acquired entity,” or any predecessor entity to an acquired entity in any of the capacities described above and to any employee or agent of our Company or any predecessor of us or of any acquired entity or any predecessor of an acquired entity. See “Certain Provisions of Maryland Law and Our Charter and Bylaws—Limitation of Directors’ and Officers’ Liability and Indemnification.”
In addition, our directors and officers may be entitled to indemnification pursuant to the terms of the partnership agreement of our Operating Partnership.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (Securities Act), may be permitted to directors, officers or persons controlling our company pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Director Compensation
Historically, we have not compensated our directors for their service on our board of directors, with the exception of two of our independent directors who received equity compensation for their service as non-voting members of the board of directors of InfraREIT, L.L.C. See “The Operating Partnership and the Partnership Agreement—Partnership Units.” Following this offering, we intend to pay director compensation to each of our directors other than David Campbell and Hunter Hunt, who will not receive compensation from InfraREIT for serving on our board of directors. Each other director (our non-executive directors) will receive an annual base fee for his or her services of $60,000, payable in quarterly installments on the first business day of each quarter. Each non-executive director will also receive an annual award (the Annual Equity Award) of shares of our common stock or, at the election of the non-executive director, a number of LTIP Units, in each case equal to $80,000 divided by the volume weighted average daily closing price of the shares of our common stock on the NYSE during the fifteen (15) consecutive trading days prior to the immediately preceding January 1. In addition, our lead director will receive an additional annual cash retainer of $25,000, the chairs of our audit, compensation, nominating and corporate governance and conflicts committees will each receive an additional annual cash retainer of $10,000, in each case payable in quarterly installments. Further, each member of the audit, conflicts and compensation, nominating and corporate governance committees will receive an additional annual cash retainer of $12,000, $12,000 and $6,000, respectively, payable in quarterly installments. In lieu of receiving the cash fees described above, each non-executive director shall be entitled at the beginning of each year to elect to receive fees in shares of our common stock. If a non-executive director makes this election, the number of shares of common stock issued will be calculated by dividing the cash value of the payment by the closing price of our common stock as of the last trading day of each applicable quarter. We will also reimburse each of our directors
 
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for their travel expenses incurred in connection with their attendance at board of directors and committee meetings. For the first quarter of 2015:
 
 	•	 	the cash base fee, the lead director cash retainer and the committee chair and membership fees will be paid, in full with no proration, on or around the effective date of this registration statement; and	
 
 	•	 	we will issue the Annual Equity Award, in full with no proration, upon completion of this offering, with the number of shares or LTIP Units calculated by dividing $80,000 by the offering price to the public set forth on the cover of this prospectus.	
2015 Equity Incentive Plan
Our board of directors has adopted the InfraREIT, Inc. 2015 Equity Incentive Plan, which we refer to as the Equity Incentive Plan, which permits us to provide equity-based compensation to certain personnel who provide services to us, Hunt Manager or an affiliate of either, in the form of stock options, stock appreciation rights, dividend equivalent rights, restricted stock, stock units, performance-based awards, unrestricted stock, LTIP Units and other awards. We currently intend to utilize the 2015 Equity Incentive Plan primarily to compensate our non-employee directors for their service on our board of directors.
Upon completion of this offering, pursuant to the Equity Incentive Plan, we expect to grant an aggregate of $560,000 in LTIP Units equal to an aggregate of              LTIP Units, assuming a public offering price of $     per share, which is the midpoint of the range set forth on the cover of this prospectus, to our directors, other than David Campbell and Hunter L. Hunt. The actual number of LTIP Units issued will depend upon the initial public offering price per share of our common stock.
General
The Equity Incentive Plan provides for the grant of options to purchase shares of common stock, share awards (including restricted stock and stock units), stock appreciation rights, performance awards and annual incentive awards, dividend equivalent rights, long-term incentive units, cash and other equity-based awards up to an aggregate of              shares (which approximates 0.6% of our common stock issued and outstanding upon completion of this offering and the recapitalization transactions, including any shares that may be issued by us upon exercise of the underwriters’ option to purchase additional shares, on a fully diluted basis (assuming, if applicable, the exercise of all outstanding options and the conversion of all warrants and convertible securities, including OP Units and LTIP Units, into shares of common stock)).
The Equity Incentive Plan provides, among other things, that no participant in the plan will be permitted to acquire, or will have any right to acquire, shares thereunder if such acquisition would be prohibited by the ownership limits contained in our charter or bylaws or would impair our status as a REIT.
Administration of the Equity Incentive Plan
The Equity Incentive Plan will be administered by our board of directors or a committee appointed by the board of directors. Our board of directors has appointed our Compensation, Nominating and Corporate Governance Committee to administer the Equity Incentive Plan. Subject to the terms of the Equity Incentive Plan, our Compensation, Nominating and Corporate Governance Committee will determine all terms of awards under the Equity Incentive Plan, who will receive awards under the Equity Incentive Plan, the type of award and its terms and conditions and the number of shares of common stock subject to the award, if the award is equity based. Our Compensation, Nominating and Corporate Governance Committee may also interpret the provisions of the Equity Incentive Plan and the award agreements thereunder. References below to our Compensation, Nominating and Corporate Governance Committee refer to the board of directors or another committee appointed by the board of directors for those periods in which the board of directors or such other committee is acting.
 
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Each member of our Compensation, Nominating and Corporate Governance Committee that administers the Equity Incentive Plan (i) will be a “non-employee director” within the meaning of Rule 16b-3 of the Exchange Act and (ii) will, at such times as we are subject to Section 162(m) of the Code and to the extent it is intended that awards will be treated as performance-based compensation for purposes of Section 162(m), qualify as an outside director for purposes of Section 162(m) of the Code.
Eligibility
Awards under the Equity Incentive Plan may be granted to our employees (if any), directors and officers and any employees, directors and officers of our affiliates. Hunt Manager and its affiliates and other personnel of Hunt Manager and its affiliates are also eligible to receive awards under the Equity Incentive Plan. In addition, consultants and advisers who perform services for us and our affiliates may receive awards under the Equity Incentive Plan. Similarly, consultants and advisers who perform services for Hunt Manager and its affiliates are also eligible to receive awards under the Equity Incentive Plan. Incentive stock options, however, are only available to our employees or employees of our corporate subsidiaries, if any.
Share Authorization
The number of shares of common stock that may be issued under the Equity Incentive Plan, consisting of authorized but unissued shares, is up to an aggregate of              shares (which approximates 0.6% of the shares of our common stock issued and outstanding upon completion of this offering and the recapitalization transactions, including any shares that may be issued by us upon exercise of the underwriters’ option to purchase additional shares, on a fully diluted basis (assuming, if applicable, the exercise of all outstanding options and the conversion of all warrants and convertible securities, including OP Units and LTIP Units, into shares of common stock)).
Share Usage
Shares of common stock that are subject to awards will be counted as used as of the grant date. If any award expires, is forfeited or is terminated without having been exercised or is paid without delivery of stock, then any shares of stock covered by such lapsed, cancelled, expired, unexercised or cash-settled portion of such award or grant will be available for the grant or settlement of other awards under the Equity Incentive Plan. The number of shares subject to any stock appreciation rights awarded under the Equity Incentive Plan will be counted against the aggregate number of shares available for issuance under the Equity Incentive Plan regardless of the number of shares actually issued to settle the stock appreciation right upon exercise.
No Repricing
Except in connection with certain corporate transactions, no amendment or modification may be made to an outstanding stock option or stock appreciation right, including by replacement with or substitution of another award type, that would be treated as a repricing under applicable stock exchange rules or would replace stock options or stock appreciation rights with cash, in each case without the approval of the stockholders (although appropriate adjustments may be made to outstanding stock options and stock appreciation rights to achieve compliance with applicable law, including the Code).
Options
The Equity Incentive Plan authorizes our Compensation, Nominating and Corporate Governance Committee to grant incentive stock options (under Section 422 of the Code) and options that do not qualify as incentive stock options. The number of shares of common stock that may be issued pursuant to awards of incentive stock options under the Equity Incentive Plan is limited to 200,000. The exercise price of each option will be determined by the compensation committee, provided that the price cannot be less than 100% of the fair market value of shares of our common stock on the date on which the option is granted. If we were to grant incentive stock options to any 10% stockholder, the exercise price may not be less than 110% of the fair market value of our shares of common stock on the date of grant.
 
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The term of an option cannot exceed 10 years from the date of grant. If we were to grant incentive stock options to any 10% stockholder, the term cannot exceed five years from the date of grant. Our Compensation, Nominating and Corporate Governance Committee determines at what time or times each option may be exercised and the period of time, if any, after retirement, death, disability or termination of employment during which options may be exercised. Options may be made exercisable in installments. The vesting and exercisability of options may be accelerated by the Compensation, Nominating and Corporate Governance Committee. The exercise price of an option may not be amended or modified after the grant of the option, and an option may not be surrendered in consideration of or exchanged for or substituted for a grant of a new option having an exercise price below that of the option which was surrendered or exchanged or substituted for without stockholder approval.
The exercise price for any option or the purchase price for restricted stock, if any, is generally payable (i) in cash or cash equivalents, (ii) to the extent the award agreement provides, by the surrender of shares of common stock (or attestation of ownership of such shares) with an aggregate fair market value, on the date on which the option is exercised, of the exercise price, (iii) to the extent the award agreement provides, by payment through a broker in accordance with procedures set forth by us or (iv) to the extent the award agreement provides and/or unless otherwise specified in an award agreement, any other form permissible by applicable laws, including net exercise to us, Hunt Manager or an affiliate of ours or Hunt Manager.
Other Awards
Our Compensation, Nominating and Corporate Governance Committee may also award:
 
 	•	 	restricted stock, which are shares of common stock subject to restrictions on transferability and such other restrictions the Compensation, Nominating and Corporate Governance Committee may impose at the date of grant;	
 
 	•	 	stock units, which are units entitling the recipient to receive shares of our common stock (or a cash amount equal to the value thereof) upon or following the completion of a vesting period;	
 
 	•	 	dividend equivalent rights, which are rights entitling the recipient to receive credits for dividends that would be paid if the recipient had held a specified number of shares of common stock. Dividend equivalents rights may be granted with stock units and are earned during the vesting period;	
 
 	•	 	stock appreciation rights, which are a right to receive a number of shares or, in the discretion of our Compensation, Nominating and Corporate Governance Committee, an amount in cash or a combination of shares and cash, based on the increase in the fair market value of the shares underlying the right during a stated period specified by our Compensation, Nominating and Corporate Governance Committee;	
 
 	•	 	performance and annual incentive awards, ultimately payable in common stock or cash, as determined by our Compensation, Nominating and Corporate Governance Committee. Our Compensation, Nominating and Corporate Governance Committee may grant multi-year and annual incentive awards subject to achievement of specified goals tied to business criteria Our Compensation, Nominating and Corporate Governance Committee may modify, amend or adjust the terms of each award and performance goal. Awards to individuals who are covered under Section 162(m) of the Code, if any, will comply with the requirement that payments to such employees qualify as performance-based compensation under Section 162(m) of the Code to the extent that our Compensation, Nominating and Corporate Governance Committee so designates.	
 	Such employees include our Chief Executive Officer and the three highest compensated executive officers determined at the end of each year other than our Chief Financial Officer (the covered employees);	
 
 	•	 	cash;	
 
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 	•	 	LTIP Units, which are profits interests in our Operating Partnership; and	
 
 	•	 	other equity-based awards.	
LTIP Units are a special class of partnership interests in our Operating Partnership. See “The Operating Partnership and the Partnership Agreement—Partnership Units” for a description of the LTIP Units. Each LTIP Unit awarded will be deemed to be equivalent to an award of one share of our common stock reserved under the Equity Incentive Plan and will reduce the amount of shares of common stock available for other equity awards on a one-for-one basis.
Recoupment
Award agreements for awards granted pursuant to the Equity Incentive Plan may be subject to mandatory repayment by the recipient to us of any gain realized by the recipient to the extent the recipient is in violation of or in conflict with certain agreements (including but not limited to an employment or non-competition agreement with us, Hunt Manager or an affiliate of either) or upon termination for cause as defined in the Equity Incentive Plan, applicable award agreement or any other agreement between us, Hunt Manager or an affiliate of either and the recipient. Reimbursement or forfeiture may also apply if we are required to prepare an accounting restatement due to a material noncompliance by us, as a result of misconduct, with any financial reporting requirement under the securities laws or if an award was earned or vested based on achievement of pre-established performance goals that are later determined, as a result of the accounting restatement, not to have been achieved.
Change in Control
Except as otherwise provided in an applicable award agreement, if we experience a change in control in which the applicable outstanding awards (as described below) that are not exercised prior to the change in control will not be assumed or continued by the surviving entity: (i) except for performance awards, all restricted stock and LTIP Units will vest, and all stock units and dividend equivalent rights will vest and the underlying shares will be delivered immediately before the change in control, and (ii) at our board of directors’ discretion either all options and stock appreciation rights will become exercisable 15 days before the change in control and terminate upon the consummation of the change in control (to the extent such awards are not exercised as of the change in control), or all options, stock appreciation rights, restricted stock and stock units will be cashed out or redeemed for securities of equivalent value before the change in control. In the case of performance awards denominated in stock, stock units or LTIP Units, if half or more of the performance period has lapsed, the performance award will be converted into restricted stock or stock units based on actual performance to date. If less than half of the performance period has lapsed, or if actual performance is not determinable, the performance award will be converted into restricted stock or stock units assuming target performance has been achieved. Other equity-based awards will be governed by the terms of the applicable award agreement.
Adjustments for Stock Dividends and Similar Events
Our Compensation, Nominating and Corporate Governance Committee will make appropriate adjustments in outstanding awards and the number of shares available for issuance under the Equity Incentive Plan, including the individual limitations on awards, to reflect stock splits and other similar events.
Section 162(m) of the Code
Section 162(m) of the Code limits publicly held companies such as us to an annual deduction for federal income tax purposes of $1 million for compensation paid to their covered employees. However, performance-based compensation is excluded from this limitation. To the extent our Compensation, Nominating and Corporate Governance Committee deems appropriate, it will establish performance criteria and satisfy such other requirements as may be applicable in order to satisfy the requirements for performance-based compensation under Section 162(m) of the Code with respect to our covered employees, if any.
 
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Amendment; Termination
Our board of directors may amend or terminate the Equity Incentive Plan at any time; provided that no amendment may adversely impair the benefits of a participant, without his or her consent, with respect to his or her outstanding awards. Our stockholders must approve any amendment if such approval is required by our board of directors or under applicable law or stock exchange requirements. Our stockholders also must approve any amendment that changes the no-repricing provisions of the Equity Incentive Plan. Unless terminated sooner by our board of directors or extended with stockholder approval, the Equity Incentive Plan will terminate on the tenth anniversary of its effective date.
2015 Employee Stock Purchase Plan
We have adopted the InfraREIT, Inc. Employee Stock Purchase Plan, which we refer to as the Employee Stock Purchase Plan, that will allow employees of Hunt Manager or its affiliates whose principal duties include the management and operation of our business to purchase shares of our common stock at a discount. Pursuant to the management agreement, Hunt Manager is obligated to fund all of the costs associated with the Employee Stock Purchase Plan, including the funds necessary to purchase shares of our common stock in the open market pursuant to the plan. A total of 250,000 shares of common stock will be reserved for sale and authorized for issuance under the Employee Stock Purchase Plan.
Executive Compensation
Because our management agreement provides that Hunt Manager is responsible for managing our affairs, our executive officers, who are employees of Hunt Manager, do not receive cash compensation from us for serving as our officers. Hunt Manager or one of its affiliates compensates each of our executive officers. We pay Hunt Manager a management fee and Hunt Manager uses the proceeds from the management fee in part to pay compensation to its personnel. We have no control over the amount or form of consideration Hunt Manager pays our executive officers.
 
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 OUR MANAGER AND MANAGEMENT AGREEMENT
General
We are externally managed by Hunt Manager. Each of our executive officers is an executive officer of Hunt Manager. The executive offices of Hunt Manager are located at 1807 Ross Avenue, 4 th Floor, Dallas, Texas 75201 and the telephone number of Hunt Manager’s executive offices is (214) 855-6700.
Executive Officers of Hunt Manager
The following table sets forth certain information with respect to the executive officers of Hunt Manager:

Name	  	Age	 	  	Position	
David Campbell	  	 	46	  	  	President, Chief Executive Officer and Director	
Brant Meleski	  	 	43	  	  	Senior Vice President and Chief Financial Officer	
Benjamin D. Nelson	  	 	43	  	  	Senior Vice President and General Counsel	
For the biographical information for the executive officers of Hunt Manager, see “Management— Executive Officers and Directors.”
Management Agreement
The material terms of our management agreement with Hunt Manager are described below.
Management Services
Hunt Manager is responsible for our day-to-day business and performs (or causes to be performed) such services and activities relating to our assets and business, including:
Investor Communications
 
 	•	 	communicating on our behalf with the holders of any of our securities, analysts and the investment community;	
 
 	•	 	satisfying reporting and compliance obligations under applicable securities laws or the rules of the NYSE, including preparing annual reports and SEC filings;	
Debt and equity
 
 	•	 	sourcing, evaluating and, subject to appropriate board approvals, directing the issuance of any of our securities;	
 
 	•	 	sourcing, facilitating and evaluating any financing arrangements appropriate in connection with our business and managing our relationship with existing or potential lenders;	
Treasury
 
 	•	 	evaluating and recommending to our board hedging strategies and engaging in hedging activities;	
 
 	•	 	investing and reinvesting any money and securities of us and advising us as to our capital structure and capital raising;	
 
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Leases
 
 	•	 	negotiating with Sharyland and other tenants any new leases, lease amendments or lease renewals, subject to appropriate board approvals;	
 
 	•	 	performing our obligations under our leases and enforcing any related rights;	
Project acquisition and construction
 
 	•	 	evaluating, negotiating and, subject to appropriate board approvals, entering into agreements with Hunt or other parties relating to project acquisitions, including ROFO Projects (our governance policy will require that any acquisition of ROFO Projects by us be approved by our Conflicts Committee, which will be comprised solely of independent directors);	
 
 	•	 	working with Sharyland or other third parties to construct our T&D projects;	
Budgets
 
 	•	 	preparing our annual budgets, and any related amendments, for board approval;	
Accounting
 
 	•	 	preparing financial statements, including evaluating and recommending appropriate accounting policy changes, and designing and monitoring our internal controls and disclosure controls and procedures;	
 
 	•	 	managing our relationship with our external auditors, subject to oversight from the audit committee, and managing any required internal audit function;	
M&A
 
 	•	 	sourcing, evaluating and, subject to appropriate board approvals, entering into agreements relating to any potential merger, acquisition, joint venture, development or disposition opportunities;	
Insurance
 
 	•	 	monitoring the insurance required under our leases and, subject to appropriate board approvals, obtaining insurance as necessary or appropriate;	
Tax
 
 	•	 	counseling us regarding the maintenance of our qualification as a REIT and monitoring compliance with the various REIT qualification tests and other tax laws and regulations;	
 
 	•	 	managing all our tax matters, including making necessary tax filings, and causing us to make any related payments that are owed to taxing authorities;	
Board
 
 	•	 	scheduling, managing and preparing materials for all meetings of the board or committees thereof;	
Compliance and legal
 
 	•	 	subject to board oversight, selecting and managing relationships with external counsel and handling and resolving all claims, disputes or controversies;	
 
 	•	 	assisting us in complying with all regulatory requirements applicable to us with respect to our business;	
 
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General
 
 	•	 	administering our day-to-day business, including providing executive and administrative personnel and office space; and	
 
 	•	 	performing such other services as may be required from time to time for the management of, and other activities relating to, our assets and business and operations as our board shall reasonably request or as Hunt Manager deems appropriate under the particular circumstances.	
Liability and Indemnification
Pursuant to the management agreement, Hunt Manager does not assume any responsibility other than to render the services called for thereunder and will not be responsible for any action of our board of directors in following or declining to follow its advice or recommendations. Hunt Manager maintains a contractual, as opposed to a fiduciary, relationship with us. However, to the extent that officers of Hunt Manager also serve as our officers or officers of any of our subsidiaries, such officers will owe us or the subsidiary, as applicable, duties under Maryland law in their capacity as our officers. Under the terms of the management agreement, Hunt Manager, its affiliates and their respective officers, directors, stockholders and employees will not be liable to us, our directors, our stockholders or any partners of our Operating Partnership for acts or omissions performed in accordance with and pursuant to the management agreement, except where such liability arises as a result of acts constituting gross negligence, willful misconduct, bad faith or reckless disregard of their duties under the management agreement. We have agreed to indemnify Hunt Manager, its affiliates and each of their respective officers, directors, stockholders and employees from and against any claims or liabilities, including reasonable legal fees and other expenses reasonably incurred, arising out of or in connection with its business and operations or any action taken or omitted on its behalf pursuant to authority granted by the management agreement, except where attributable to gross negligence, willful misconduct, bad faith or reckless disregard of their duties under the management agreement. Hunt Manager has agreed to indemnify us and each of our officers, directors, employees and agents from and against any claims or liabilities arising out of or in connection with acts of Hunt Manager constituting gross negligence, willful misconduct, bad faith or reckless disregard of their duties under the management agreement or any claims by Hunt Manager’s employees relating to the terms and conditions of their employment by Hunt Manager. However, neither Hunt Manager’s affiliates nor any of their respective stockholders, partners, members, managers, officers, directors, employees, agents or representatives will have personal liability for any of the foregoing acts.
If Hunt Manager, its affiliates or any of their officers, directors, stockholders or employees becomes involved in any suit, action, proceeding or investigation in connection with any matter arising out of or in connection with Hunt Manager’s duties under the management agreement, we will periodically reimburse such person for reasonable legal and other expenses (including the cost of any investigation and preparation) incurred in connection therewith. However, prior to any such advancement of expenses, such person must provide us with (1) an undertaking to promptly repay us if it is ultimately determined that such person was not entitled to be indemnified as provided in the management agreement, and (2) a written affirmation that such person in good faith believes that it has met the standard of conduct necessary for indemnification under the management agreement.
Any person entitled to indemnification under the management agreement must seek recovery under any insurance policies by which such person is covered and must obtain our written consent prior to entering into any compromise or settlement which would result in us having an obligation to indemnify such person. Any amounts actually recovered under any applicable InfraREIT-funded insurance policies will offset any amounts that we owe pursuant to our indemnification obligations under the management agreement. If the amounts for which indemnification is sought arise out of the conduct of our business and affairs and also of any other person for which an indemnified party was then acting in a similar capacity, the amount of the indemnification to be provided by us and our subsidiaries may be limited to our proportionate share thereof if so determined by us in good faith.
 
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Management Team
Pursuant to the terms of the management agreement, Hunt Manager is required to provide us with a management team, including a chief executive officer, president and chief financial officer, along with appropriate support personnel, to provide management services to it. We have no employees. The members of our management team are required to devote such time to their management of us as is necessary and appropriate, commensurate with their level of activity, but are otherwise permitted to engage in other activities unrelated to our business, including rendering services similar to those provided to us pursuant to the management agreement or investing in, or rendering advisory services to others investing in, acquisitions of assets that would meet our principal investment objectives. Additionally, Hunt Manager and the members of our management team are not restricted from buying, selling or trading any securities or investments for their own accounts or for the accounts of others for whom Hunt or any of its affiliates (other than Hunt Manager), officers, directors, employees or personnel may be acting.
Hunt Manager is required to refrain from any action that, in its sole judgment made in good faith:
 
 	•	 	is not in compliance with the guidelines and policies of our board of directors;	
 
 	•	 	would adversely affect our qualification as a REIT under the Internal Revenue Code of 1986, as amended (the Code) or our status as an entity intended to be exempted or excluded from investment company status under the Investment Company Act of 1940, as amended (the 1940 Act); or	
 
 	•	 	would violate any law, rule or regulation of any governmental body or agency having jurisdiction over us or that would otherwise not be permitted by our or any of our subsidiaries’ charter, bylaws or code of conduct or other compliance policies.	
If Hunt Manager is ordered to take any action by our board of directors, Hunt Manager will promptly notify the board of directors if it is Hunt Manager’s judgment that such action would adversely and materially affect such status or violate any such law, rule or regulation or our charter or bylaws. Hunt Manager and its officers, directors, stockholders and employees will not be liable to us or any of our directors or stockholders for acts or omissions performed in accordance with and pursuant to the management agreement, except as provided in the management agreement.
Term and Termination
The initial term of the management agreement will expire on December 31, 2019. The management agreement will automatically extend for additional five-year terms, unless a majority of our independent directors determine that it is in our best interests not to renew the agreement and we give notice of our intent not to renew to Hunt Manager at least 365 days prior to expiration of the term. In connection with the renewal of this agreement, at least 15 months prior to the expiration of the initial term or a renewal term, a party may request changes to the management agreement or the development agreement to address market changes, changes in the relationship between the parties or such other changes in circumstances that a party determines in good faith warrant revisions to the management agreement (including, without limitation, a request that the list of ROFO Projects included in the development agreement be updated to include the transmission and development projects in the then-current pipeline of Hunt and its affiliates); provided, however , that the parties do not generally expect to change the manner in which the base fee, incentive fee or termination fee are calculated unless such amounts are determined to be, in consultation with a nationally recognized investment banking firm, materially less favorable to Hunt Manager or us, as the case may be, than other similar compensation arrangements for externally managed vehicles in the same or comparable industries. We will also have the right to terminate the management agreement at any time for cause, and Hunt Manager may terminate the agreement at any time upon 365 days’ prior notice to us, provided that Hunt Manager may not exercise this right in a manner that results in the management agreement terminating before December 31, 2019. “Cause” is defined in our management agreement to include (i) Hunt Manager’s material breach of the agreement that continues without cure for a period of 30 days from notice of such breach, (ii) any act
 
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of fraud, misappropriation of funds, or embezzlement by Hunt Manager against us, other than an immaterial misapplication of funds that is promptly corrected, (iii) an act of bad faith, willful misconduct or gross negligence by Hunt Manager in the performance of its duties that results in material harm to us, (iv) the commencement of any proceeding relating to Hunt Manager’s bankruptcy, insolvency or similar events, (v) any dissolution of Hunt Manager or (vi) Hunt Manager’s conviction of a felony (including a plea of nolo contendere ). In these circumstances, the termination fee described below would not be owed.
If we elect not to renew the management agreement, our development agreement with Hunt Developer will automatically terminate. In addition, we will be obligated to pay Hunt Manager a termination fee in cash or equity, at our election, in an amount equal to three times the sum of (1) the base management fee paid with respect to the 12-month period that precedes the termination date and (2) the trailing 12-month incentive payment owed by us under the terms of the agreement measured from the date of termination. If we elect to pay the termination fee in equity, the fee will be paid in OP Units, which will be issued five days after the effective date of termination, with the number of OP Units based on the volume weighted average price of our common stock during the 10 trading day period that precedes such effective date of termination.
Management Fees
We will pay Hunt Manager an annual base fee of $10 million through April 1, 2015. Effective as of April 1, 2015, the annual base fee will be adjusted to 1.50% of our total equity (including non-controlling interest) as of December 31, 2014, on a pro forma basis assuming this offering and the Reorganization transactions were completed on December 31, 2014. Assuming we issue          shares of our common stock in this offering at an initial public offering price of $         per share, which is the midpoint of the range set forth on the cover of this prospectus, we estimate that the annual base fee will increase to approximately $         for the period from April 1, 2015 through March 31, 2016. The base fee for each twelve month period beginning on April 1 through March 31 thereafter will be based upon total equity as reflected on our consolidated balance sheet (including non-controlling interest) as of December 31 of the immediately preceding year, subject to a $30 million cap, unless a greater amount is approved by a majority of our independent directors (or a committee comprised solely of independent directors). See “Capitalization” and our unaudited pro forma condensed consolidated balance sheet and related notes included elsewhere in this prospectus for information regarding the amount of our total equity after giving effect to this offering and the Reorganization transactions. The base fee will be payable quarterly in cash in arrears.
We will pay Hunt Manager an incentive payment, payable quarterly, equal to 20% of quarterly per OP Unit distributions (inclusive of the incentive payment) in excess of the Threshold Distribution Amount. The Threshold Distribution Amount will equal $             per OP Unit, which is 120% of our initial projected annualized per OP Unit distribution for the year ending December 31, 2015, divided by four. See “Distribution Policy—Estimated Cash Available for the Twelve Months Ending December 31, 2015.” For purposes of calculating the incentive payment, distributions in excess of 100% of our cash available for distribution will not be included in the calculation. Cash available for distribution, as defined in the management agreement, is an amount equal to (A) net income before noncontrolling interest, plus (B) depreciation, plus (C) amortization of deferred financing costs, if any, minus (D) AFUDC equity, minus (E) capital expenditures necessary to maintain net assets, subject to adjustments to eliminate the impact of certain other non-cash items. For purposes of calculating cash available for distribution, capital expenditures necessary to maintain net assets are equal to the amount of depreciation expense. The non-cash adjustments to be made include additions or subtractions related to the effect of the Company’s percentage rent calculation method, which represents the difference between the quarterly cash payments due on percentage rent and the revenue included in net income; (2) the effect of straight-line rents, which represents the difference between the timing of cash based rent payments and the recognition of base rent revenue in accordance with GAAP; (3) the fair value adjustment of balance sheet items such as contingent consideration and hedges; (4) non-cash equity compensation; (5) goodwill impairment; and (6) subject to the approval of the audit committee of the Company’s board of directors, such other adjustments as Hunt Manager may recommend from time to time to give effect to the intent in the calculation of cash available for distribution under the management agreement or to reflect changes in the public reporting practices of the
 
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Company. By way of example only, if the Operating Partnership plans to make a quarterly distribution of $             in cash per OP Unit, the incentive payment would be $             per OP Unit (($             - Threshold Distribution Amount of $             + incentive payment) x 20%). The incentive payment will be payable in cash within five days of the related quarterly distribution date.
In the event of any restatements of our financial statements affecting either total equity or cash available for distribution that would have otherwise decreased the base fee or incentive payment payable to Hunt Manager pursuant to the foregoing during the affected period, such fees shall be retroactively decreased and Hunt Manager will refund any related costs and amounts to us.
Reimbursement of Expenses
We will reimburse Hunt Manager for all third-party expenses incurred on our behalf or otherwise in connection with the operation of our business, other than: compensation expenses related to Hunt Manager’s personnel (including our officers), occupancy costs incurred by Hunt Manager related to its place of business, time or project-based billing for work done by Hunt affiliates, travel and expenses for Hunt Manager’s employees and fees or costs associated with professional service organizations, publications, periodicals, professional development or related matters for Hunt Manager employees, all of which will be the exclusive responsibility of Hunt Manager. Additionally, we are required to include Hunt Manager and its affiliates under our directors and officers insurance policy, including professional liability coverage, with limits of at least $50,000,000. In the event that Hunt Manager requests that additional professional liability insurance be purchased and added to our policy, Hunt Manager will bear any additional premium costs.
 
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 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Related Party Transaction Policy
Related party transactions are defined by Item 404(a) of Regulation S-K as transactions in which we are a participant where the amount involved exceeds $120,000 and a member of our board of directors or nominee, an executive officer or a holder of more than 5% of our voting securities (or an immediate family member of any of the foregoing) has a direct or indirect material interest. Upon the consummation of this offering, our board of directors will adopt a related person transactions policy to address the reporting, review, approval and ratification of transactions with related persons. Directors will be required to recuse themselves from any vote on any related person transaction in which they have an interest. Our policy will define “related person transaction” in accordance with Item 404(a) of Regulation S-K.
Arrangements with Our Existing Investors
Below is a description of our arrangements with the existing investors. Several of our significant existing investors, including Hunt and our founding investors, may own interests in ROFO Projects that we may acquire pursuant to the development agreement (as described below) and therefore may benefit from any consideration that we pay in connection with our acquisition of these projects.
Master Securityholders’ Agreement
InfraREIT, L.L.C. and the Operating Partnership are party to a master securityholders’ agreement with Hunt-InfraREIT, John Hancock Life Insurance Company (U.S.A.), Marubeni Corporation (together with its subsidiaries, Marubeni), OpTrust N.A. Holdings Trust, as assigned by OpTrust Infrastructure N.A. Inc. and one of its affiliates, and Teachers Insurance and Annuity Association of America, each of which will be a beneficial owner of more than 5% of our common stock upon the consummation of the Reorganization. The master securityholders’ agreement sets forth, among other things, the mechanics of capital contributions prior to this offering, board representation and approval rights prior to this offering, and certain requirements for our initial public offering. Additionally, the master securityholders’ agreement includes certain non-competition restrictions described below under “—Arrangements with Hunt—Non-Competition.” The master securityholders’ agreement will be terminated upon the consummation of this offering.
Registration Rights
We are party to a registration rights and lock-up agreement, or the Registration Rights Agreement, with certain of our existing stockholders (including our founding investors, W. Kirk Baker, who is the Chairman of our board of directors, and Benjamin D. Nelson, who is our Senior Vice President and General Counsel), and with Hunt-InfraREIT, a holder of OP Units in our Operating Partnership, that provides for rights relating to the registration of such parties’ shares of our common stock. See “Description of Our Capital Stock—Registration Rights” for a description of such agreement.
Secondee Agreement
InfraREIT, L.L.C. and the Operating Partnership are party to a secondee agreement with Marubeni Power International, Inc. (Marubeni Power), an affiliate of Marubeni which will be a beneficial owner of more than 5% of our common stock, under which two employees of Marubeni Power provide services to Hunt Manager. Pursuant to the secondee agreement, we are required to pay Marubeni Power a secondment fee equal to $280,000 for two secondees. For each of the years ended December 31, 2011, 2012 and 2013, we made payments to Marubeni Power of $239,000, $280,000 and $160,000, respectively. Through September 30, 2014, we made payments to Marubeni Power of $23,000 under the secondee agreement. As of September 30, 2014 and the date of this offering, no Marubeni Power employees were providing services under this agreement. The secondee agreement will terminate upon the consummation of this offering.
 
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Equity Contribution Agreement
In connection with SPLLC’s construction-term loan agreement, we entered into an equity contribution agreement with Hunt-InfraREIT, John Hancock Life Insurance Company (U.S.A.), Marubeni, OpTrust Infrastructure N.A. Inc. and one of its affiliates and Teachers Insurance and Annuity Association of America, each of which will be a beneficial owner of more than 5% of our common stock. The equity contribution agreement provides for, among other things, certain equity contributions to be made by Hunt-InfraREIT, John Hancock Life Insurance Company (U.S.A.), Marubeni, OpTrust Infrastructure N.A. Inc., Teachers Insurance and Annuity Association of America and us to SPLLC in connection with the CREZ transmission project and construction-term loan agreement. This agreement terminated upon the conversion of the construction-term loan agreement to a term loan agreement on May 16, 2014. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Arrangements—CREZ Term Loan.”
Transfer of ROFO Project Assets
Cross Valley Project
Our subsidiary, SDTS, previously transferred the assets related to the Cross Valley transmission line project to a newly formed subsidiary (Cross Valley Project, LLC) that was, initially, wholly owned by SDTS. On January     , 2015, SDTS sold all of the equity in Cross Valley Project, LLC to a newly formed development company owned by Hunt and certain of our existing investors for $            , which equaled the rate base of the project on the date of transfer, plus reimbursement of out of pocket expenses associated with the formation of the special purpose entity and the project financing. The Cross Valley transmission line project is a ROFO Project that Hunt is required to offer to us at least 90 days before it is placed in service. See “—Arrangements with Hunt—Development Agreement.”
GSEC Interconnection Project
Also effective January     , 2015, SDTS transferred all of the assets related to the GSEC interconnection project to Hunt for $            , which equaled the rate base of the project on the date of transfer, plus reimbursement of out of pocket expenses associated with the formation of the special purpose entity. The GSEC interconnection project is a ROFO Project that Hunt is required to offer to us at least 90 days before it is placed in service. See “—Arrangements with Hunt—Development Agreement.” Hunt has informed us that it intends to permit our founding investors to invest equity in the project.
Reorganization Transactions
In connection with this offering, we will engage in certain reorganization transactions with our existing investors that we collectively refer to as the Reorganization. For a detailed description of the Reorganization, see “Prospectus Summary—Our Structure and Reorganization Transactions—Reorganization Transactions” and “Description of Our Capital Stock—Reorganization.” The principal agreements related to the Reorganization include those listed below.
Merger and Transaction Agreement
InfraREIT, Inc., InfraREIT, L.L.C. and the Operating Partnership are party to a merger and transaction agreement, which sets forth generally the steps to be taken in connection with the Reorganization. Pursuant to the merger and transaction agreement, InfraREIT, L.L.C. will be merged with and into InfraREIT, Inc. immediately following the consummation of this offering.
 
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Trust Purchase Agreement
InfraREIT, Inc. has entered into a trust share purchase agreement with Westwood Trust, as trustee, pursuant to which InfraREIT will purchase the              common shares in InfraREIT, L.L.C. held by the trust concurrently with the Merger in consideration for the issuance of a promissory note in the principal amount of $66,517,480. The trustee will then immediately transfer the promissory note to Marubeni.
Structuring Fee Agreement
InfraREIT, Inc. has entered into a structuring fee agreement with Hunt-InfraREIT pursuant to which it has agreed to issue              shares of common stock to Hunt-InfraREIT as a one-time reorganization advisory fee immediately prior to the effectiveness of the registration statement to which this prospectus relates in consideration for Hunt’s restructuring assistance in connection with the Reorganization and this offering. The services that Hunt-InfraREIT provided in connection with this agreement include tax, securities and corporate law advice related to these transactions, coordinating offering-related matters with our investment banks, restructuring our leases to accommodate this offering, assisting in the transfer of the Cross Valley transmission line project and the GSEC interconnection project in advance of this offering, assisting InfraREIT, L.L.C. in its evaluation of the trigger of the “excess share” provisions of InfraREIT, L.L.C.’s limited liability company agreement described in “Description of Our Capital Stock—Reorganization,” assisting us in the evaluation of the proposed terms of our management agreement and development agreement, restructuring our debt-related agreements to position us to help finance our business after this offering, assembling contingency capital plans for circumstances where this offering is delayed, assisting in the structuring of the development company that will own ROFO Projects and other related matters. Our board of directors did not conduct a valuation or market check to determine the fair market value of these services, as the amount was negotiated as part of the overall restructuring discussions we conducted in connection with this offering and the Reorganization. The structuring fee agreement was unanimously approved by our founding investors, by the board of directors of InfraREIT, L.L.C., which included, at the time of the approval, representatives of each of the founding investors, and by the InfraREIT, Inc. board of directors, which at the time of approval was comprised of W. Kirk Baker, the Chairman of our board of directors, David Campbell, our President and Chief Executive Officer, and Hunter L. Hunt, a member of our board of directors.
Redemption Agreement
InfraREIT, Inc. has entered into a redemption agreement with Hunt-InfraREIT, L.L.C., pursuant to which InfraREIT will satisfy Hunt-InfraREIT’s election to redeem              Class A OP Units in exchange for the issuance of              shares of our common stock immediately following the consummation of this offering.
Unit Subscription Agreement
InfraREIT, Inc. and the Operating Partnership have entered into a unit subscription agreement with MC Transmission Holdings, Inc. (MC Transmission), an affiliate of Marubeni, pursuant to which MC Transmission has agreed to purchase immediately following the consummation of the Merger              common OP units (common units) from the Operating Partnership. In exchange for the common units, MC Transmission has agreed to assign the promissory note in the principal amount of $66,517,480 originally received by the trust from InfraREIT, Inc. pursuant to the trust purchase agreement described above and subsequently transferred to Marubeni.
Release Agreement
InfraREIT, Inc., InfraREIT, L.L.C, and the Operating Partnership are parties to a release agreement with our investors, Marubeni, John Hancock Life Insurance Company (U.S.A.), OpTrust Infrastructure N.A. Inc., OpTrust N.A. Holdings Trust and Teachers Insurance and Annuity Association of America, pursuant to which, effective upon the consummation of the Merger, each party to the release agreement will release claims against the other parties and their affiliates arising out of the events giving rise to the transfer of common shares previously held by Marubeni to Westwood Trust, as trustee for a charitable beneficiary.
 
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Legal Expense Reimbursement
In connection with this offering, the Reorganization and related transactions, we incurred an aggregate of approximately $                         of legal fees, a portion of which was paid to reimburse Hunt and its affiliates, our founding investors and our independent directors for legal expenses they incurred in connection with such transactions.
Arrangements with Hunt
Below is a description of our arrangements with Hunt and its affiliates. Hunt also indirectly owns Hunt Manager, our external manager, Hunt Developer, the counterparty to our development agreement, and Hunt-InfraREIT, which will be deemed to be a beneficial owner of more than 5% of our common stock as a result of its ownership of OP Units in our Operating Partnership. Ray L. Hunt and Hunter L. Hunt may each also be deemed to be a beneficial owner of more than 5% of our common stock through their indirect control of Hunt. Additionally, Sharyland, our sole tenant, is privately-owned by Hunter L. Hunt and other members of the family of Ray L. Hunt and is controlled by Hunter L. Hunt. Hunt will control the compensation of our officers and the employees of Hunt Manager and has granted, and may in the future grant, compensation or awards that are based upon the performance of Hunt Manager, Hunt or Sharyland. As a result, our officers and other employees of Hunt Manager may benefit from the payment of fees by us under the management agreement, from our acquisition of ROFO Projects from Hunt and from the performance of Sharyland.
Management Agreement
We are externally managed by Hunt Manager pursuant to a management agreement under which Hunt Manager manages our day-to-day operations. Under the management agreement, Hunt Manager is responsible for presenting to us and managing our investment opportunities, conducting our investor relations, implementing our financial policies and practices and generally administering our day-to-day operations. For each of the years ended December 31, 2011, 2012 and 2013, Hunt Manager earned $2.5 million of fees under the management agreement. Through September 30, 2014, Hunt Manager earned $7.5 million of fees under the management agreement.
Effective upon the consummation of this offering, we will be managed pursuant to a new management agreement with Hunt Manager. The new management agreement differs in a number of ways from our existing management agreement, including the list of services Hunt Manager provides us, the fee structure and the term and termination rights. For a description of our new management agreement, see “Our Manager and Management Agreement—Management Agreement.”
Operating Partnership and the Partnership Agreement
InfraREIT, L.L.C. is the sole general partner of the Operating Partnership, and, prior to the consummation of this offering, Hunt-InfraREIT has been a limited partner. We entered into the amended and restated agreement of limited partnership with Hunt-InfraREIT on November 23, 2010. Certain provisions of the amended and restated agreement of limited partnership are summarized below.
Deemed Capital Credits
In connection with our formation in 2010, the Operating Partnership issued Hunt-InfraREIT $40 million of capital account credit and 4,000,000 Class A units representing partnership interests in our Operating Partnership (Class A OP Units) (                 Class A OP Units after giving effect to the reverse unit split we will effect immediately prior to the effectiveness of the registration statement to which this prospectus relates) as partial consideration for Hunt-InfraREIT’s contributions to the Operating Partnership.
Since our formation, the Operating Partnership has also been issuing Hunt-InfraREIT:
 
 	•	 	an additional capital account credit equal to approximately 11.19% of cash expenditures related to the CREZ project through March 31, 2014 as those cash expenditures were made, plus Class A OP Units in respect of that credit at $10.00 per Class A OP Unit;	
 
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 	•	 	an additional capital account credit of 5% on cash expenditures related to the CREZ project incurred after March 31, 2014, plus Class A OP Units in respect of that credit at $10.00 per Class A OP Unit; and	
 
 	•	 	an additional capital account credit of 5% on capital expenditures and AFUDC related to the expansion of our Railroad DC Tie, as those capital expenditure amounts were incurred, plus Class A OP Units in respect of that credit at $10.00 per Class A OP Unit.	
Through September 30, 2014, the Operating Partnership had issued Hunt-InfraREIT an aggregate of $73.6 million of capital account credits in respect of these obligations, $71.4 million of which was issued in respect of CREZ-related expenditures and $2.1 million of which was issued in respect of expenditures related to the Railroad DC Tie. In connection with these capital account credits, the Operating Partnership has issued Hunt-InfraREIT an aggregate of 11,356,582 Class A OP Units (             Class A OP Units after giving effect to the reverse unit split we will effect immediately prior to the effectiveness of the registration statement to which this prospectus relates) through September 30, 2014.
Upon completion of this offering, the Operating Partnership will issue Hunt-InfraREIT an accelerated capital account credit equal to $        , and, in respect thereof, an additional             Class A OP Units. This issuance will settle our contingent obligation to Hunt-InfraREIT pursuant to our constituent documents.
After the completion of this offering, we will no longer have the obligation to issue these deemed capital credits.
Amended and Restated Agreements of Limited Partnership
Upon completion of this offering, a second amended and restated agreement of limited partnership will become effective and will reflect certain of the reorganization transactions described in “Description of Our Capital Stock—Reorganization.” In addition, a third amended and restated agreement of limited partnership will become effective approximately 33 days after the completion of this offering and will give effect to the cancellation and conversion, as applicable, of the OP Units outstanding prior to the Reorganization and this offering. For additional information on these amended and restated agreements of limited partnership, see “The Operating Partnership and the Partnership Agreement.”
Non-Competition
As described above under “—Arrangements with Our Equityholders—Master Securityholders’ Agreement,” InfraREIT, L.L.C. and the Operating Partnership are party to a master securityholders’ agreement. Pursuant to the master securityholders’ agreement and a separate letter agreement with Hunt Developer and Hunt, and subject to certain exceptions, Hunt and its affiliates have been subject to a non-competition provision prohibiting them from engaging in the business of making investments in T&D assets and leasing such T&D assets, other than through Hunt-InfraREIT’s investment in the Operating Partnership until the consummation of this offering. This non-competition provision will terminate upon the consummation of this offering.
Development Agreement
Pursuant to the development agreement with Hunt Developer and Sharyland, which will become effective upon the consummation of this offering, we will have the exclusive right to continue to fund the construction of Footprint Projects, which are defined under our development agreement as transmission or distribution projects primarily situated within our distribution service territory, or that physically hang from our existing transmission assets, such as the addition of another circuit to our existing transmission lines, or that are physically located within one of our substations. Our right to fund Footprint Projects is also memorialized in our leases. ROFO Projects are defined under our development agreement to consist of identified projects that are being developed by Hunt. Hunt and its affiliates will have the right to fund the development and construction of
 
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the ROFO Projects during the term of the development agreement. Once a ROFO Project is acquired and the applicable T&D assets are added to our rate base, future additions to those T&D assets, such as the addition of another circuit to the asset’s transmission lines or an addition physically located within one of the asset’s substations, would be considered a Footprint Project. Generally, the addition of a new substation to our existing transmission lines would not constitute a Footprint Project unless the transmission line is located within one of our service territories. However, Hunt has agreed that the construction of the White River substation, which is located on one of our Panhandle transmission lines, will nevertheless constitute a Footprint Project. We are currently funding the capital expenditures associated with Sharyland’s construction of the White River substation and expect to continue to do so after the completion of this offering. Sharyland and Hunt Developer are each parties to our development agreement. However, the agreement, by its terms, applies to activities by all Hunt affiliates. As such, when discussing the development agreement, we use the term “Hunt” to refer to Hunt Developer, Sharyland and other affiliates of Hunt Consolidated, Inc.
Our development agreement requires Hunt to offer ROFO Projects to us at least 90 days prior to the date on which such assets are expected to be placed in service. Hunt’s offer will include price, form of consideration and other material terms of the proposed transaction, and delivery of the offer will commence a 75-day negotiation period. Following this period, if we are unable to reach an agreement on the terms of such purchase with Hunt and the investors in the project, they may, during the following 18 months, transfer the ROFO Project to a third party, but only on terms and conditions generally no more favorable to such third party than those offered by Hunt to us. Our governance policy will require that any acquisition of a ROFO Project by us be approved by our Conflicts Committee, which will be comprised solely of independent directors. Our Conflicts Committee will evaluate whether to seek to negotiate the acquisition of the ROFO Project based on whether it believes that the acquisition will be in our best interests taking into account the offered price and its analysis of the fair market value of the project. We expect the purchase price for any ROFO Projects will be negotiated by our Conflicts Committee and Hunt and will be based on a number of factors, such as the cash flow and rate base for the assets, market conditions, potential for incremental Footprint Projects, whether lease terms have been negotiated with Sharyland or another tenant, and the regulatory return we expect the assets will earn.
Hunt has informed us that the entities that hold certain of the ROFO Projects, including the Cross Valley transmission line project, will be owned by Hunt and certain of our founding investors. In all circumstances, an acquisition of a ROFO Project will require the approval of our Conflicts Committee following negotiations between that committee and Hunt. Hunt has informed us that it will have the unilateral authority to negotiate on behalf of these investors with our Conflicts Committee, and to negotiate and agree upon the terms of the sale of the ROFO Projects to us, as long as the consideration payable would result in the investors receiving at least 1.5 times the amount of equity capital they invested. We generally expect this threshold to translate into a purchase price equal to at least approximately 1.25 times the rate base for such assets, though the actual ratio will depend on the financing structure used on each development project. If the price does not meet this threshold, the sale of the ROFO Project will require the approval of Hunt and at least two of our founding investors that invested in such project. In all circumstances, the acquisition of a ROFO Project from Hunt and these investors will require the approval of our Conflicts Committee. Although Hunt is required to offer all ROFO Projects prior to completion, there can be no assurances that the price and other terms of the acquisition of ROFO Projects can be negotiated on terms acceptable to us. Under our development agreement, Hunt is permitted to transfer ROFO Projects to an affiliate, provided that the right of first offer will continue to apply to such ROFO Project. For Texas-based projects, Hunt has informed us that, if we do not acquire the project prior to its completion, Sharyland will acquire the project.
The development agreement is coterminous with the management agreement, and our rights under the development agreement will expire effective upon the termination of the management agreement.
 
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License Agreement
We have a perpetual, non-exclusive license from Hunt Manager to use certain methods, processes, trade secrets and other intellectual property rights utilized in managing and operating our assets. We do not pay a separate fee to Hunt Manager under the license agreement.
Intellectual Property Assignment Agreement
In December 2014, we entered into an intellectual property assignment agreement with Hunt Manager pursuant to which Hunt Manager transferred to us any and all intellectual property rights to the InfraREIT name and to our website address. We did not pay a separate fee to Hunt Manager under the intellectual property assignment agreement.
Lock-Up Agreement with InfraREIT, Inc.
We have entered into a lock-up agreement with Hunt-InfraREIT and Hunt, which will become effective upon the consummation of this offering, pursuant to which Hunt has agreed with us that, subject to limited exceptions, it will not transfer or sell the equity interests it holds in us and our Operating Partnership (including shares of common stock issued by us upon redemption of such equity interests) for an agreed upon period following this offering. Hunt has agreed not to transfer or sell 80% of its equity in us and our Operating Partnership that it will hold after consummation of this offering for a period of three years and for an additional two years (total of five years) with respect to 50% of its equity; provided that Hunt may transfer 75,000 shares of common stock it receives upon the consummation of this offering to OpTrust N.A. Holdings Trust, as described under “Prospectus Summary—Our Structure and Reorganization Transactions—Reorganization Transactions.” Each of these lock-up arrangements is subject to an exception permitting Hunt to transfer its equity to its affiliates, employees and service providers, except that Hunt cannot transfer a number of shares of common stock or OP Units that exceeds 20% of the number of shares of our common stock and OP Units it will hold following the reorganization transactions described under “Description of Our Capital Stock—Reorganization.” Furthermore, in some circumstances, the transferee must agree to the applicable lock-up provisions. If Hunt transfers its equity to a Hunt affiliate or family member, the transferee will be bound by Hunt’s lock-up provision. If Hunt transfers its equity to an employee or service provider, who is not a Hunt affiliate or family member, the transferee will only be bound by the lock-up with us for the initial one-year period. Pursuant to our related person transactions policy, any waiver of the lock-up provisions would require the approval of a majority of our independent directors. Hunt’s lock-up agreement with us will terminate upon the termination or non-renewal of the management agreement and development agreement.
Loan to InfraREIT, Inc.
Pursuant to a promissory note dated November 20, 2014, Hunt Consolidated, Inc. loaned $1.0 million to InfraREIT, Inc. The promissory note bears interest at 2.5%, compounded annually, and is due on the earlier of November 1, 2015 and completion of this offering. A portion of the proceeds of this offering will be used to repay this note. The proceeds from this promissory note were used to purchase stock in publicly traded REITs prior to this offering. We do not expect to invest in other publicly traded securities in the future.
Arrangements with Sharyland
Sharyland is privately-owned by Hunter L. Hunt and other members of the family of Ray L. Hunt and is controlled by Hunter L. Hunt.
 
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Ownership of Sharyland Distribution & Transmission Services, L.L.C.; Delegation Agreement
Together with Sharyland, our wholly-owned subsidiary, Transmission and Distribution Company, L.L.C. (TDC), owns SDTS. SDTS owns, either directly or through wholly-owned subsidiaries, all of our T&D assets. For a description of the SDTS company agreement and Sharyland’s and TDC’s rights and obligations thereunder, as well as a related delegation agreement between Sharyland and InfraREIT related to Sharyland’s rights as a managing member of SDTS, see “SDTS Company Agreement and Delegation Agreement.”
Leases with Sharyland
We lease our T&D assets to Sharyland or a Sharyland subsidiary under five separate lease agreements as described in “Business and Properties—Our Tenant—Our Leases.” For the years ended December 31, 2011, 2012 and 2013, we recognized revenue from Sharyland in an amount of $42.5 million, $42.8 million and $73.2 million based on payments received, respectively. For the period from January 1, 2014 through September 30, 2014, we recognized revenue from Sharyland in an amount equal to $89.4 million. For the years ended December 31, 2011, 2012 and 2013, we funded capital expenditures under the lease agreements in an amount of $14.6 million, $31.8 million and $133.5 million, respectively. For the period from January 1, 2014 through September 30, 2014, we funded capital expenditures under the lease agreements in an amount equal to $144.8 million, including the capital expenditures related to the Cross Valley transmission line project and the GSEC interconnection project. These numbers exclude capital expenditures related to our CREZ construction project, because those capital expenditures were funded directly by our project finance subsidiary, Sharyland Projects, LLC, rather than through Sharyland. These numbers also exclude payments made directly to third-party vendors by SDTS. An aggregate of $24.8 million of the capital expenditures funded under our leases during the nine month period ended September 30, 2014 related to the Cross Valley transmission line project and the GSEC interconnection project, which SDTS subsequently transferred to Hunt or a Hunt affiliate. See “—Transfer of ROFO Project Assets.”
Construction Management Agreement
In connection with the construction of our CREZ transmission project, we entered into a construction management agreement with Sharyland pursuant to which Sharyland managed the construction process and we reimbursed Sharyland for its related costs. For the years ended December 31, 2011, 2012 and 2013, we paid Sharyland $2.4 million, $3.2 million and $3.1 million, respectively, pursuant to this agreement. For the period from January 1, 2014 through September 30, 2014, we paid Sharyland $1.3 million pursuant to this agreement.
Arrangements with Our Directors and Officers
Indemnification Agreements
Upon the consummation of this offering, we expect to enter into indemnification agreements with each of our directors and officers. See “Management—Indemnification.”
Other Interests
W. Kirk Baker, who is the Chairman of our board of directors, was previously a Hunt executive officer and participates in various Hunt benefit and incentive programs, and as such may be deemed to have a material interest in the transactions described above to which a Hunt-affiliated entity is a party. Our executive officers are also executive officers of various Hunt-affiliated entities and also participate in various Hunt benefit and incentive plans and programs, and as such may be deemed to have a material interest in the transactions described above to which a Hunt-affiliated entity is a party. Hunter L. Hunt, one of our directors, is an executive officer of various Hunt-affiliated entities and, as described under “—Arrangements with Hunt” above, also may be deemed to beneficially own interests in Hunt, and as such may be deemed to have a material interest in the transactions described above to which a Hunt-affiliated entity is a party.
 
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 INVESTMENT POLICIES AND POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of our policies with respect to investments, financing and certain other activities. These policies may be amended and revised from time to time at the discretion of our board of directors without notice to or a vote of our stockholders.
Investment Policies
Investments in Real Estate Assets or Interests in Real Estate Assets
We own T&D assets in Texas as part of a dividend growth oriented REIT. We conduct all of our investment activities through our Operating Partnership and its subsidiaries. Our overall investment objectives are to take advantage of growth opportunities in regulated infrastructure assets through Footprint Projects, as well as through acquisitions of ROFO Projects from Hunt and Sharyland and other acquisitions from Hunt or third parties with a goal of increasing our cash flows and our dividends to stockholders over time. For a discussion of our portfolio and our business and other strategic objectives, see “Business and Properties.”
We expect to pursue our investment objectives through the ownership of properties by our subsidiaries but may also make investments in other entities, including joint ventures. We anticipate that future investment activity will be focused primarily in the United States and North America but will not be limited to any geographic area. We intend to engage in such future investment activities in a manner that is consistent with requirements applicable to REITs for U.S. federal income tax purposes. Provided we comply with these requirements, however, there are no limitations on the percentage of our assets that may be invested in any one real estate asset or leased to any particular tenant. We anticipate that our real estate investments will continue to be in a relatively concentrated number of tenants.
Equity investments may be subject to existing mortgage financing and other indebtedness or such financing or indebtedness may be incurred in connection with acquiring properties, or a combination of these methods. Any such financing or indebtedness will have priority over our equity interest in such property. Investments are also subject to our policy not to be treated as an investment company under the 1940 Act.
Investments in Securities or Interests in Entities Primarily Engaged in Investing in Real Estate Assets and Securities of Other Issuers
Subject to the gross income and asset requirements required for REIT qualification, we may invest in securities of entities engaged in investing in real estate assets or securities of other issuers. We may acquire some, all or substantially all of the securities or assets of other REITs or entities engaged in investing in real estate assets where such investment would be consistent with our investment policies and the REIT requirements. There are no limitations on the amount or percentage of our total assets that may be invested in any one issuer and we do not currently have any specific criteria set forth for the purchase of such securities and interests, other than those imposed by the gross income and asset tests we must meet in order to qualify as a REIT under the Code. In any event, we do not intend that our investments in securities will require us to register as an “investment company” under the 1940 Act, and we would generally divest appropriate securities before any such registration would be required.
Dispositions
We do not currently intend to dispose of any of our properties, although we reserve the right to do so if, based upon management’s periodic review of our initial portfolio, our board of directors determines that such action would be in our best interest.
 
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Financing Policies
To the extent that our board of directors or management determines that it is necessary to raise additional capital, we may, without stockholder approval, borrow under our credit facilities, issue debt or equity securities, including additional OP Units or preferred stock, retain earnings (subject to the REIT distribution requirements for U.S. federal income tax purposes), assume secured or unsecured indebtedness, obtain mortgage financing on a portion of our owned properties, engage in joint ventures, issue other types of securities or employ a combination of these methods.
We expect to employ leverage in our capital structure in amounts that we determine from time to time. We are required under our credit facilities to not exceed a specified leverage ratio. In certain circumstances, the amount of leverage we can place on a particular property may be subject to limitations under federal or state regulations applicable to regulated utility companies. We expect to target consolidated total debt to capitalization of less than 60% and consolidated FFO to total debt of at least 12%. Our charter and bylaws do not limit the amount of debt that we may incur. Our board of directors has not adopted a policy limiting the total amount of debt that we may incur nor do we have a policy that restricts the form of indebtedness that we may incur (including secured or unsecured debt, recourse or non-recourse debt, cross collateralized debt, etc.). We may from time to time modify our leverage profile in light of then-current economic conditions, relative costs of debt and equity capital, market values of our properties, general market conditions for debt and equity securities, fluctuations in the market price of our common stock, growth and acquisition opportunities and other factors. Our decision to use leverage in the future to finance our assets will be at our discretion and will not be subject to the approval of our stockholders.
Other Policies
We may make investments other than as previously described. We may offer shares of our common stock or other equity or debt securities in exchange for cash or property and repurchase or otherwise re-acquire shares of our common stock or other equity or debt securities in exchange for cash or property. We may issue preferred stock from time to time, in one or more classes or series, as authorized by our board of directors without the need for stockholder approval. See “Description of Our Capital Stock.” At all times, we intend to make investments in a manner consistent with the REIT requirements of the Code unless, because of business circumstances or changes in the Code (or the Treasury Regulations promulgated thereunder), our board of directors determines that it is no longer in our best interests for us to qualify as a REIT. We intend to make investments in such a way that we will not be treated as an “investment company” under the 1940 Act. Our policies with respect to such activities may be reviewed and modified from time to time by our board of directors without notice to or the vote of our stockholders.
Lending Policies
Although we have not engaged in any significant lending activities in the past, we do not have a policy limiting our ability to make loans to other persons. Subject to REIT qualification rules, we may make loans to third parties. We also may consider offering purchase money financing in connection with the sale of properties where the provision of that financing will increase the value to be received by us for the property sold or we may consider making loans to joint ventures in which we or they participate or may participate in the future. We may choose to guarantee the debt of certain joint ventures with third parties. Consideration for those guarantees may include, but are not limited to, fees, long-term management contracts, options to acquire additional ownership and promoted equity positions. Our board of directors may, in the future, adopt a lending policy without notice to or the vote of our stockholders.
 
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 PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of our common stock that will be owned upon the consummation of this offering by:
 
 	•	 	each person known by us to be a beneficial owner of more than 5% of the common stock;	
 
 	•	 	each of our directors;	
 
 	•	 	each of our executive officers; and	
 
 	•	 	all directors and executive officers as a group.	
The amounts and percentage of common stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. Except as indicated by footnote, the persons named in the table below have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to community property laws where applicable. Unless otherwise indicated, the address of each named person is c/o InfraREIT, Inc., 1807 Ross Avenue, 4 th Floor, Dallas, Texas 75201.
The number of shares and OP Units outstanding before this offering assumes that a          for          reverse split of the InfraREIT, L.L.C. shares and the OP Units has occurred, but assumes that none of the other Pro Forma Adjustments have occurred. The number of shares of our common stock and OP Units outstanding after this offering and the Reorganization assume that all of the transactions described as Pro Forma Adjustments have occurred. The number of shares of our common stock and OP Units outstanding after the option exercise also assumes that the underwriters exercise in full their option to purchase up to an additional          shares of our common stock from us and that, immediately thereafter, we use the net proceeds of that issuance to purchase an equal number of shares of redeemable Class A common stock from certain of our existing investors. For clarity, except as provided in the notes below, this table does not assume that OP Units held by any person have been exchanged for shares of InfraREIT, L.L.C. or InfraREIT, Inc. See “Description of Our Capital Stock—Reorganization.”

Name of Beneficial Owner	 	Shares of
InfraREIT,
L.L.C. or
OP Units
beneficially
owned
prior to
this
offering (1)	 	Percentage
of all
outstanding
InfraREIT,
L.L.C.
shares (2)	 	 	Percentage
of all
shares and
OP Units
outstanding
(3)	 	 	Number
of shares
exchanged
for cash in
the
Merger
(4)	 	Shares of
Common
Stock and/
or OP
Units to be
Beneficially
Owned
After
Offering
and the
Merger (5)	 	Percentage
of
All Shares
of
Common
Stock
(6)	 	 	Percentage
of All
Shares
of
Common
Stock and
OP Units
(7)	 	 	Shares of
Common
Stock and/
or OP
Units to be
Beneficially
Owned
After
Option
Exercise
(8)	 	Percentage
of All
Shares of
Common
Stock
(6)	 	Percentage
of All
Shares
of
Common
Stock and
OP Units
(7)	 	
5% Holders:	 		 				 				 		 		 				 				 		 		 				
Hunt Consolidated, Inc. (9) (10)	 		 	 	    	% 	 	 	    	% 	 		 		 	 	    	% 	 	 	    	% 	 		 		 	 	    	% 	
John Hancock Life Insurance Company (U.S.A.) (11)	 		 	 	    	% 	 	 	    	% 	 		 		 	 	    	% 	 	 	    	% 	 		 		 	 	    	% 	
Teachers Insurance and Annuity Association of America (12)	 		 	 	    	% 	 	 	    	% 	 		 		 	 	    	% 	 	 	    	% 	 		 		 	 	    	% 	
OpTrust N.A. Holdings Trust (13)	 		 	 	    	% 	 	 	    	% 	 		 		 	 	    	% 	 	 	    	% 	 		 		 	 	    	% 	
Marubeni Corporation (14)	 		 	 	    	% 	 	 	    	% 	 		 		 	 	    	% 	 	 	    	% 	 		 		 	 	    	% 	
Westwood Trust (15)	 		 				 				 		 		 				 				 		 		 				
Directors, Director Nominees and Executive Officers:	 		 				 				 		 		 				 				 		 		 				
Hunter L. Hunt (10)	 		 				 				 		 		 				 				 		 		 				
W. Kirk Baker (16)	 		 				 				 		 		 				 				 		 		 				
David Campbell (17)	 		 				 				 		 		 				 				 		 		 				
Brant Meleski (18)	 		 				 				 		 		 				 				 		 		 				
Benjamin D. Nelson (19)	 		 				 				 		 		 				 				 		 		 				
All directors, director nominees and executive officers as a group
(         persons)	 		 	 	    	% 	 	 	    	% 	 		 		 	 	    	% 	 	 	    	% 	 		 		 	 	    	% 	

*	Less than 1%.	
 
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(1)	Consists of the sum of (i) the number of outstanding common shares and Class C Shares of InfraREIT, L.L.C. held, (ii) the number of Class A OP Units held by Hunt-InfraREIT and (iii) the number of LTIP Units held by certain of our independent directors. Does not include Class B OP Units held by Hunt-InfraREIT or Class A Units or Class C OP Units held by InfraREIT, L.L.C.	
 
(2)	Assumes an aggregate of          common shares and Class C Shares are outstanding. In addition, in computing the percentage ownership of a person or group, we have assumed that the Class A OP Units or LTIP Units held by that person or the persons in the group have been exchanged for common shares on a one-for-one basis and that those shares are outstanding but that no OP Units held by other persons have been exchanged for shares.	
 
(3)	Assumes all Class A OP Units and LTIP Units, other than those held by InfraREIT, L.L.C., have been exchanged, one-for-one, for common shares, and, following this exchange, there are an aggregate of         common shares and Class C common shares outstanding.	
 
(4)	Consists of common shares of InfraREIT, L.L.C. that will be exchanged for cash consideration in the Merger.	
 
(5)	Consists of the sum of (i) the number of outstanding shares of common stock held, and (ii) the number of common units held.	
 
(6)	Assumes an aggregate of          shares of common stock are outstanding. In addition, in computing the percentage ownership of a person or group, we have assumed that the OP Units held by that person or the persons in the group have been exchanged for shares of common stock on a one-for-one basis and that those shares are outstanding but that no OP Units held by other persons have been exchanged for shares.	
 
(7)	Assumes all OP Units, other than those held by InfraREIT, Inc., have been exchanged, one-for-one, for shares of common stock, and, following this exchange, there are an aggregate of          shares of common stock outstanding.	
 
(8)	Gives effect to the terms of Redeemable Class A Common Stock issued in the Merger that provide that, if the underwriters option to purchase additional shares is exercised for a number of shares of common stock, InfraREIT, Inc. will use the net proceeds of that exercise to redeem an equal number of shares of Redeemable Class A Common Stock.	
 
(9)	Hunt Consolidated, Inc. (Hunt Consolidated) is the beneficial owner of such shares of common stock and OP Units, which are or may be held directly by one or more of its affiliates. The current holder of the OP Units and shares of common stock is Hunt-InfraREIT, but Hunt Consolidated has informed us that Hunt-InfraREIT may transfer such equity to one or more other affiliates of Hunt Consolidated. Pursuant to the terms of the Operating Partnership’s partnership agreement, Hunt-InfraREIT or its transferee may not exchange its OP Units for shares of common stock until the one-year anniversary of the closing of this offering. Before the offering, Hunt Consolidated is deemed to own          shares of common stock, which InfraREIT, Inc. issued immediately prior to the effectiveness of the registration statement to which this prospectus relates, and          common shares for which the OP Units owned by Hunt Consolidated may be redeemed, at our option, in lieu of cash, on a one-for-one basis. After this offering, Hunt Consolidated is deemed to beneficially own (i)          shares of common stock and (ii)          shares of common stock for which the OP Units beneficially owned by Hunt Consolidated may be redeemed, at our option, in lieu of cash, on a one-for-one basis. The number of shares deemed to be owned by Hunt Consolidated after this offering includes (i)          shares of common stock issued to Hunt-InfraREIT in connection with the transactions described as “Pro Forma Adjustments” in our unaudited pro forma condensed consolidated financial statements included elsewhere in this prospectus, including          shares of common stock issued immediately before the effectiveness of the registration statement related to this offering and          shares of common stock issued to Hunt-InfraREIT in redemption of          of Hunt-InfraREIT’s OP Units, and (ii) an additional          shares of our common stock underlying OP Units issued to Hunt-InfraREIT in connection with those transactions. Hunt Consolidated has informed us that, pursuant to internal incentive plans that pre-date this offering, all pecuniary interests in a portion of the OP Units held will automatically be allocated to current and former employees of, or service providers to, Hunt Manager, Hunt Developer, Sharyland and other Hunt affiliates. Hunt Consolidated has indicated that it expects the recipients of these allocations to include our Chairman and our executive officers. Although Hunt Consolidated has no pecuniary interest in these OP Units that will automatically be allocated to the incentive plan recipients, its deemed beneficial ownership after this offering includes these OP Units because, following this allocation, Hunt Consolidated will continue to share voting and investment power with respect to the allocated OP Units until such time as the OP Units are distributed to the incentive plan recipients. These allocated OP Units will, after such disposition, remain subject to the lock-up agreements with the underwriters executed by Hunt-InfraREIT and other current shareholders, which prohibit the sale or transfer of the related OP Units until the one-year anniversary of this offering. The allocated OP Units will also remain subject to the separate lock-up agreement between Hunt-InfraREIT and InfraREIT, Inc., until such time as the related OP Units are actually distributed to the participants and are no longer owned of record by an entity affiliated with Hunt Consolidated. We do not control the date of this distribution, which will occur in the discretion of Hunt Consolidated, and which may vary depending on the identity of the recipient of the related OP Units. The ownership limitation provisions included in the charter of InfraREIT, Inc. and in the partnership agreement of the Operating Partnership limit Hunt-InfraREIT’s right to redeem its OP Units. The address for Hunt Consolidated, Inc. is 1900 N. Akard Street, Dallas, TX 75201.	
 
(10)	Ray L. Hunt and Hunter L. Hunt, through one or more intermediaries, control Hunt Consolidated, Inc. By virtue of this relationship, they may be deemed to have or share beneficial ownership of securities held by Hunt Consolidated, Inc. The address for each of Messrs. Hunt and Hunt is 1900 N. Akard Street, Dallas, TX 75201. Messrs. Hunt and Hunt expressly disclaim beneficial ownership of such securities, except to the extent of their pecuniary interest therein.	
 
(11)	Before this offering, consists of common shares of InfraREIT, L.L.C. After this offering and the Merger, consists of shares of common stock in InfraREIT, Inc. that will be issued upon the conversion of the shares of Class A common stock to be issued in the Merger. The address for John Hancock Life Insurance Company (U.S.A.) is 197 Clarendon Street, C-2, Boston, MA 02116.	
 
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(12)	Before this offering, consists of common shares of InfraREIT, L.L.C. After this offering and the Merger, consists of shares of common stock in InfraREIT, Inc. that will be issued upon the conversion of the shares of Class A common stock to be issued in the Merger. The address for Teachers Insurance and Annuity Association of America is 730 Third Avenue, 4th Floor, New York, NY 10017.	
 
(13)	Before this offering, consists of (i) common shares of InfraREIT, L.L.C. and (ii) 75,000 shares of common stock that Hunt-InfraREIT, L.L.C transferred to OpTrust N.A. Holdings Trust upon receipt of a reorganization advisory fee immediately prior to the effectiveness of the registration statement to which this prospectus relates. After this offering and the Merger, includes (i) shares of common stock in InfraREIT, Inc. that will be issued upon the conversion of the shares of Class A common stock to be issued in the Merger and (ii) the 75,000 shares of common stock transferred by Hunt-InfraREIT as described in the foregoing sentence. The address for OpTrust N.A. Holdings Trust is 130 King Street W., Suite 700, P.O. Box 197, Toronto, Ontario, M5X 1A6 Canada.	
 
(14)	Before this offering, consists of common shares of InfraREIT, L.L.C. After this offering and the Merger, includes (i) shares of common stock in InfraREIT, Inc. that will be issued upon the conversion of the shares of Class A common stock to be issued in the Merger, and (ii)          shares of common stock for which the          OP Units that a wholly-owned subsidiary of Marubeni Corporation has agreed to purchase immediately upon the consummation of the Merger may be redeemed, at our option, in lieu of cash, on a one-for-one basis. The ownership limitation provisions included in the charter of InfraREIT, Inc. and in the partnership agreement of the Operating Partnership limit Marubeni’s right to redeem its OP Units. The address for Marubeni Corporation is 4-2, Ohtemachi 1-chome, Chiyoda-ku, Tokyo, 100-8088.	
 
(15)	Before this offering, consists of          common shares of InfraREIT, L.L.C. As part of the Reorganization, InfraREIT, Inc. will purchase all such shares, and, as a result, Westwood Trust will not own any shares of common stock or OP Units after the completion of this offering and the Merger.	
 
(16)	Before the offering, consists of          common shares of InfraREIT, L.L.C. After this offering and the Merger, includes          shares of common stock in InfraREIT, Inc. that will be issued upon the conversion of the shares of Class A common stock to be issued in the Merger. The number of shares beneficially owned after this offering excludes common shares of InfraREIT, L.L.C. and shares of Class A common stock of InfraREIT, Inc. that we expect Mr. Baker to forfeit as a result of the related issuance by the Operating Partnership of OP Units to Hunt-InfraREIT in respect of the carried interest provisions of the Operating Partnership’s partnership agreement and the merger agreement. After this offering, also includes          shares of common stock underlying the          OP Units. Hunt Consolidated has informed us that these          OP Units will automatically be allocated by one of its affiliates to Mr. Baker immediately following the Reorganization pursuant to an internal Hunt incentive plan that pre-dates this offering and that this number may increase or decrease if the average trading price of our common stock is more or less than $         during the 10 consecutive trading days prior to the end of the 30-day period following the closing of this offering. Hunt Consolidated has informed us that Mr. Baker would not be the record owner of the OP Units following such allocation, but holds all pecuniary interests in such OP Units, would share voting and investment control of such OP Units, is entitled to receive any distributions in respect of such OP Units, and will be entitled, in some cases, to become the record owner of such OP Units on July 1, 2017 (or sooner, at the discretion of Hunt Consolidated).	
 
(17)	Number of shares of common stock owned after this offering consists of          shares of common stock underlying the          OP Units. Hunt Consolidated has informed us that these          OP Units will automatically be allocated by one of its affiliates to Mr. Campbell immediately following the Reorganization pursuant to an internal Hunt incentive plan that pre-dates this offering and that this number may increase or decrease if the average trading price of our common stock is more or less than $         during the 10 consecutive trading days prior to the end of the 30-day period following the closing of this offering. Hunt Consolidated has informed us that Mr. Campbell would not be the record owner of the OP Units following such allocation, but holds all pecuniary interests in such OP Units, would share voting and investment control of such OP Units, is entitled to receive any distributions in respect of such OP Units, and will be entitled, in some cases, to become the record owner of such OP Units on                     , 20     (or sooner, at the discretion of Hunt Consolidated).	
 
(18)	Number of shares of common stock owned after this offering consists of          shares of common stock underlying          OP Units. Hunt Consolidated has informed us that these          OP Units will automatically be allocated by one of its affiliates to Mr. Meleski immediately following the Reorganization pursuant to an internal Hunt incentive plan that pre-dates this offering and that this number may increase or decrease if the average trading price of our common stock is more or less than $         during the 10 consecutive trading days prior to the end of the 30-day period following the closing of this offering. Hunt Consolidated has informed us that Mr. Meleski would not be the record owner of the OP Units following such allocation, but holds all pecuniary interests in such OP Units, would share voting and investment control of such OP Units, is entitled to receive any distributions in respect of such OP Units, and will be entitled, in some cases, to become the record owner of such OP Units on                     , 20     (or sooner, at the discretion of Hunt Consolidated).	
 
(19)	Before this offering, consists of          common shares and Class C common shares of InfraREIT, L.L.C. After this offering and the Merger, includes          shares of common stock in InfraREIT, Inc. that will be issued upon the conversion of the shares of Class A common stock and Class C common stock to be issued in the Merger. The number of shares beneficially owned after the offering excludes common shares of InfraREIT, L.L.C. and shares of Class A common stock and Class C common stock of InfraREIT, Inc. that we expect Mr. Nelson to forfeit as a result of the related issuance by the Operating Partnership of OP Units to Hunt-InfraREIT in respect of the carried interest provisions of the Operating Partnership’s partnership agreement and the merger agreement. After this offering, also includes          shares of common stock underlying          OP Units. Hunt Consolidated has informed us that these          OP Units will automatically be allocated by one of its affiliates to Mr. Nelson immediately following the Reorganization pursuant to internal Hunt incentive plans that pre-date this offering and that this number may increase or decrease if the average trading price of our common stock is more or less than $         during the 10 consecutive trading days prior to the end of the 30-day period following the closing of this offering. Hunt Consolidated has informed us that Mr. Nelson would not be the record owner of the OP Units following such allocation, but holds all pecuniary interests in such OP Units, would share voting and investment control of such OP Units, is entitled to receive any distributions in respect of such OP Units, and will be entitled, in some cases, to become the record owner of such OP Units on July 1, 2017 (or sooner, at the discretion of Hunt Consolidated).	
 
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 DESCRIPTION OF OUR CAPITAL STOCK
The following is a summary of the rights and preferences of our capital stock and related provisions of our charter and bylaws as they will be in effect upon the completion of this offering. Although we believe that the following description covers the material terms of our capital stock, the description is only a summary and may not contain all of the information that is important to you. For a complete description, we refer you to the MGCL and to our charter and our bylaws, copies of which are filed as exhibits to the registration statement of which this prospectus is a part. See “Where You Can Find More Information.”
General
We are structured as a traditional umbrella partnership REIT, or UPREIT. We are the sole general partner of the Operating Partnership and are entitled to economic and control rights in respect of that ownership. In addition, the limited partners of the Operating Partnership have equity rights that affect our stockholders’ ownership of the businesses our subsidiaries own. The descriptions in this section apply primarily to the rights of holders of our common stock, although, where necessary for you to understand your rights as a stockholder, we also describe the rights possessed by holders of OP Units in our Operating Partnership. For more information about these rights, see “The Operating Partnership and the Partnership Agreement.”
Authorized Shares
Our charter authorizes us to issue up to          shares of common stock, $0.01 par value per share,          shares of Class A common stock, $0.01 par value per share,          shares of redeemable Class A common stock, $0.01 par value per share,          shares of Class C common stock, $0.01 par value per share, and          shares of preferred stock, $0.01 par value per share. As a result of the reorganization described below, on or around the 32nd day following the completion of this offering all of our outstanding shares of Class A common stock, redeemable Class A common stock and Class C common stock will convert to common stock. Within 10 days following such conversion, we intend to take the necessary steps to restate our charter to eliminate the designation of the Class A common stock and Class C common stock.
Under our charter, our board of directors has the power, with approval of a majority of our entire board of directors and without stockholder approval, to amend our charter to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series we are authorized to issue.
Outstanding Shares
Immediately following the completion of this offering and the Merger, we expect that          shares of our common stock, shares of our Class A common stock,          shares of our redeemable Class A common stock and          shares of our Class C common stock will be issued and outstanding. As described below, our Class A common stock, redeemable Class A common stock and Class C common stock will convert into common stock on or around the 32nd day following the completion of this offering, and the exact number of shares of common stock that will be outstanding at that time depends, in part, on the weighted average daily market price of a share of our common stock during the 10 consecutive trading days ending 30 days following the consummation of this offering. See “—Reorganization” below for more information. In addition, there will be          OP Units outstanding that, subject to the terms of the partnership agreement, may be redeemed for cash or, at our option, exchanged for shares of our common stock on a one-for-one basis, as described under “The Operating Partnership and the Partnership Agreement—Redemption Rights.” As described below, the exact number of OP Units that will be outstanding following the conversions of our Class A common stock, redeemable Class A common stock and Class C common stock will depend, in part, on the weighted average daily market price of a share of our common stock during the 10 consecutive trading days ending 30 days following the consummation of this offering. We will have no shares of preferred stock outstanding following completion of this offering.
 
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Reorganization
In connection with this offering, we will engage in certain reorganization transactions, which we refer to as the Reorganization. Our business has historically been operated through InfraREIT, L.L.C., a Delaware limited liability company. As part of the Reorganization, InfraREIT, L.L.C. will be merged with and into InfraREIT, Inc., which is a Maryland corporation and the issuer in this offering. InfraREIT, Inc. will survive the merger, which we refer to as the Merger, as the general partner of the Operating Partnership.
In 2011, the formation of an unrelated partnership between a Hunt affiliate and an affiliate of one of our founding investors, resulted in the application of certain “excess share” provisions in InfraREIT, L.L.C.’s governing documents. As a result of these provisions, shares held by that founding investor in excess of 9.8% of the total number of outstanding shares of InfraREIT, L.L.C. were automatically transferred to a trust for the benefit of a charitable organization. The Reorganization transactions are designed to, among other things, ensure that we qualify as a REIT going forward without regard to whether the excess share provisions were effective to allow InfraREIT, L.L.C. to continue to be qualified as a REIT.
Prior to the Reorganization, InfraREIT, L.L.C.’s capital structure was as follows:
 
 	•	 	the existing investors in InfraREIT, L.L.C. held common shares and Class C common shares in InfraREIT, L.L.C.;	
 
 	•	 	InfraREIT, L.L.C. held Class A OP Units and Class C OP Units;	
 
 	•	 	certain of our directors held LTIP Units; and	
 
 	•	 	Hunt-InfraREIT held Class A OP Units and Class B OP Units.	
The following chart sets forth this organizational structure:

In connection with this offering and the Reorganization, we will engage in a number of transactions, including the Merger. The bullet points below provide an overview of the steps of the Reorganization:
 
 	•	 	Immediately prior to the effectiveness of the registration statement to which this prospectus relates, our Operating Partnership will effect a reverse unit split whereby each holder of Class A OP Units, Class B OP Units, Class C OP Units and LTIP Units will receive          Class A OP Units, Class B	
 
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 	OP Units, Class C OP Units or LTIP Units, as applicable, in exchange for each such unit it holds immediately prior to such time.	
 
 	•	 	Immediately prior to the effectiveness of the registration statement to which this prospectus relates, we will pay Hunt-InfraREIT a reorganization advisory fee of                  shares of our common stock. Hunt has separately agreed to immediately transfer to OpTrust N.A. Holdings Trust (OpTrust) 75,000 of the shares it receives from us in settlement of potential claims related to events that gave rise to the Reorganization transactions. The beneficiary of OpTrust N.A. Holdings Trust is OPTrust Infrastructure N.A. Inc., a wholly owned subsidiary of OPSEU Pension Plan Trust Fund. Equity Financial Trust Company, a corporate trustee, acts as the trustee of OPTrust N.A. Holdings Trust. See “Principal Stockholders.”	
 
 	•	 	Immediately following the consummation of this offering and immediately prior to the Merger, our Operating Partnership will issue to Hunt-InfraREIT              common units as an accelerated payment of a portion of the carried interest anticipated to be owed to Hunt by our existing investors under the investment documents entered into by the parties in 2010. This portion of the carried interest is being accelerated as a result of negotiations with our founding investors in connection with the Reorganization transactions. To effect the shift in ownership from our existing investors to Hunt, an equal number of Class A OP Units held by InfraREIT, L.L.C. in the Operating Partnership and an equal number of common shares in InfraREIT, L.L.C. held by our existing investors will be cancelled at the same time. This shift will not result in any dilution in the indirect ownership of our Operating Partnership by investors purchasing common stock in this offering.	
 
 	•	 	Immediately following the transactions described in the bullets above, InfraREIT, L.L.C. and InfraREIT, Inc. will engage in the Merger. As a result of the Merger, (1) holders of common shares of InfraREIT, L.L.C. will receive cash consideration for each such common share equal to the public offering price (less the underwriting discount) received by us in this offering, (2) holders of the remaining              common shares of InfraREIT, L.L.C. will receive shares of our Class A common stock and              shares of our redeemable Class A common stock, and (3) holders of              Class C shares of InfraREIT, L.L.C. will receive              shares of our Class C common stock. The shares of redeemable Class A common stock will only be issued to the extent the underwriters have not exercised their option to purchase additional shares from us prior to the Merger and will be redeemable by us for consideration per share equal to the public offering price (less the underwriting discount) per share received by us if the underwriters’ option is exercised at any time after the Merger and prior to the end of the 30-day period following the date of this prospectus. In the aggregate,                      common shares of InfraREIT, L.L.C. will be exchanged for cash in the Merger, and the remainder will be exchanged for shares of InfraREIT, Inc. Class A common stock, redeemable Class A common stock or Class C common stock.	
 
 	•	 	Each founding investor will receive both cash and stock consideration in the Merger, and all other InfraREIT, L.L.C. shareholders will exclusively receive shares of Class A common stock or Class C common stock in the Merger. InfraREIT, L.L.C. gave each other holder of InfraREIT, L.L.C. common shares the opportunity to receive cash consideration in the Merger. Each such holder either elected to exclusively receive shares of Class A common stock under the merger agreement (all-stock election) or failed to respond timely to a request for an election and therefore was deemed to have made an all-stock election. All holders of InfraREIT, L.L.C. Class C common shares, as a separate class, will receive shares of Class C common stock pursuant to the merger agreement.	
 
 	•	 	Immediately following the consummation of this offering and simultaneously with the Merger, InfraREIT will contribute $            , which is the portion of the net proceeds from this offering not being paid as consideration in the Merger, to the Operating Partnership in exchange for OP Units.	
 
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 	•	 	Immediately following the consummation of this offering and simultaneously with the Merger, we will issue              shares of our common stock to Hunt-InfraREIT in exchange for              Class A Units tendered for redemption by Hunt-InfraREIT.	
 
 	•	 	Our charter provides that, if the underwriters exercise their right to purchase additional shares from us after the Merger, we will redeem an equal number of shares of redeemable Class A common stock from the holders of those shares for a $             per share. See “Principal Stockholders.”	
 
 	•	 	Concurrently with the Merger, we will purchase              common shares that are currently held by a trust in consideration for the issuance of a promissory note to the trust in the principal amount of approximately $66.5 million.	
 
 	•	 	The trust will immediately transfer the promissory note to Marubeni or its designated affiliate as required under InfraREIT, L.L.C.’s limited liability company agreement, and, immediately following receipt of the promissory note, MC Transmission Holdings, Inc., a wholly-owned subsidiary of Marubeni, will purchase              OP Units from the Operating Partnership in consideration for the assignment of the promissory note. The promissory note will then be transferred to us in exchange for the redemption of Class A Units held by us and the subsequent cancellation of such promissory note by us, resulting in no cash consideration having been paid or received by us pursuant to the purchase from the trust or the sale of OP Units to Marubeni.	
 
 	•	 	Approximately 32 days following the consummation of this offering, we will calculate the unaccelerated portion of the carried interest owed by our existing investors to Hunt to determine whether additional ownership should be shifted from our existing investors to Hunt or whether Hunt received too much ownership in the accelerated payment of a portion of the carried interest described above. The determination will be based upon the cash amounts received by the existing investors in the Merger and the redemption of redeemable Class A common stock if the underwriters’ option to purchase additional shares is exercised as well as the weighted average daily market price of a share of our common stock during the 10 consecutive trading days ending on the 30th day following the completion of this offering. If Hunt is owed additional carry, it will receive additional OP Units from the Operating Partnership and an equal number of shares of Class A common stock and Class C common stock held by our existing investors will be cancelled. If Hunt has received too much carry, it will pay cash to the existing investors in an amount equal to the weighted average market price described above for each OP Unit it received in the advance settlement of the carry to which it would not have otherwise been entitled.	
 
 	•	 	Immediately upon settlement of the unaccelerated portion of the carried interest owed by our existing investors to Hunt as described in the preceding bullet, all remaining shares of Class A common stock, redeemable Class A common stock and Class C common stock will be converted on a one-for-one basis into shares of common stock. In addition, each LTIP Unit, other than LTIP Units granted to our directors in connection with this offering, will convert into one common unit. No matter how our stock price performs during the 30-day period following this offering, the transactions related to Hunt’s carry will only result in a shift in the economic ownership of the Operating Partnership between Hunt and our existing investors and will not result in any dilution in the indirect ownership of our Operating Partnership by the investors in our common stock in this offering.	
 
 	•	 	After taking into account the foregoing allocations and adjustments, the number of common units owned by us will equal the number of shares of our common stock that is outstanding and will represent a           % interest in the Operating Partnership.	
 
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The following chart shows our organizational structure after giving effect to the Reorganization and this Offering:

Common Stock
All shares of our common stock offered by this prospectus will be duly authorized, fully paid and nonassessable. Stockholders are entitled to receive dividends when, as and if authorized by our board of directors and declared by us out of assets legally available for the payment of distributions. Stockholders are also entitled to share ratably in our assets legally available for distribution to our stockholders in the event of our liquidation, dissolution or winding up, after payment of, or adequate provision for, all of our known debts and liabilities. These rights are subject to the preferential rights of any other class or series of our stock and to the provisions of our charter regarding restrictions on ownership and transfer of our stock.
Subject to our charter restrictions on ownership and transfer of our stock, each outstanding share of our common stock entitles the holder thereof to one vote on all matters submitted to a vote of our common stockholders, including the election of directors. Except as to certain matters affecting the holders of our Class A common stock, redeemable Class A common stock or Class C common stock, as applicable, or as otherwise provided with respect to any other class or series of stock, our common stockholders will possess exclusive voting power. Cumulative voting in the election of directors is not permitted. Directors will be elected by a plurality of the votes cast at the meeting in which directors are being elected. This means that the holders of a majority of the outstanding shares of our common stock can effectively elect all of the directors then standing for election, and the holders of the remaining shares will not be able to elect any directors.
Our common stockholders have no preference, conversion, exchange, sinking fund or redemption rights and have no preemptive rights to subscribe for any of our capital stock. Our charter provides that our stockholders generally have no appraisal rights unless our board of directors determines prospectively that appraisal rights will apply to one or more transactions in which our common stockholders would not otherwise be entitled to exercise such rights. Subject to our charter restrictions on ownership and transfer of our stock, holders of shares of our common stock will initially have equal dividend, liquidation and other rights.
Our charter authorizes our board of directors, without stockholder approval, to reclassify any unissued shares of our common stock into other classes or series of stock and establish the number of shares in each class or series and to set the preferences, conversion or other rights, voting powers (including voting rights exclusive to such class or series), restrictions (including, without limitation, restrictions on transferability), limitations as to dividends or other distributions, qualifications and terms and conditions of redemption for each such class or series.
 
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Class A Common Stock, Redeemable Class A Common Stock and Class C Common Stock
Prior to the conversion of the Class A common stock, redeemable Class A common stock and Class C common stock to shares of our common stock in the manner described above in “—Reorganization,” we will not pay any dividend or other distribution on any share of Class A common stock, redeemable Class A common stock or Class C common stock. Holders of shares of our Class A common stock, redeemable Class A common stock and Class C common stock have equal liquidation and other rights as the holders of our common stock but do not have voting rights other than with respect to certain matters materially and adversely affecting the rights of holders of our Class A common stock, redeemable Class A common stock or Class C common stock, as applicable. Holders of the Class A common stock, redeemable Class A common stock and Class C common stock have no preemptive rights to subscribe for any of our capital stock. Our redeemable Class A common stock will be redeemable for $             per share in the event the underwriters exercise their option to purchase additional shares of common stock from us.
Preferred Stock
Our charter authorizes our board of directors, without stockholder approval, to classify any unissued shares of preferred stock and to reclassify any previously classified but unissued shares of any class or series of preferred stock. Prior to issuance of shares of each class or series, our board of directors is required by the MGCL and our charter to set the preferences, conversion or other rights, voting powers (including voting rights exclusive to such class or series), restrictions (including, without limitation, restrictions on transferability), limitations as to dividends or other distributions, qualifications and terms and conditions of redemption for each such class or series. As a result, our board of directors could authorize the issuance of shares of preferred stock that have priority over our common stock with respect to dividends or other distributions or rights upon liquidation or with terms and conditions that could have the effect of delaying, deferring or preventing a transaction or a change in control of InfraREIT that might involve a premium price for holders of our common stock or otherwise be in their best interests. As of the date of this prospectus, no shares of preferred stock are outstanding, and we have no present plans to issue any preferred stock.
Power to Increase or Decrease Authorized Stock and Issue Additional Shares of Our Common Stock and Preferred Stock
Our charter authorizes our board of directors, with the approval of a majority of our entire board of directors, to amend our charter to increase or decrease the aggregate number of authorized shares of stock or the number of authorized shares of stock of any class or series without stockholder approval. We believe that the power of our board of directors to increase or decrease the number of authorized shares of stock and to classify or reclassify unissued shares of our common stock or preferred stock and thereafter to cause us to issue such classified or reclassified shares of stock will provide us with increased flexibility in structuring possible future financings and acquisitions and in meeting other needs that might arise. The additional classes or series, as well as the additional shares of common stock, will be available for issuance without further action by our stockholders, unless such action is required by applicable law or the rules of any stock exchange on which our securities may be listed or traded. Although our board of directors does not intend to do so, it could authorize us to issue a class or series that could, depending upon the terms of the particular class or series, delay, defer or prevent a transaction or a change in control of InfraREIT that might involve a premium price for our common stockholders or otherwise be in their best interests. In addition, our issuance of additional shares of stock in the future could dilute the voting and other rights of your shares. See “Certain Provisions of Maryland Law and Our Charter and Bylaws—Anti-takeover Effect of Certain Provisions of Maryland Law and Our Charter and Bylaws.”
Restrictions on Ownership and Transfer
In order for us to qualify as a REIT under the Code, our stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year. Also, not more than 50% of the value of the outstanding shares of stock (after taking into account
 
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options to acquire shares of stock) may be owned, directly or through certain constructive ownership rules by five or fewer individuals (as defined in the Code to include certain entities such as private foundations) at any time during the second half of a taxable year.
Our charter contains restrictions on the ownership and transfer of our stock that are intended to assist us in complying with these requirements and continuing to qualify as a REIT, among other purposes. Subject to certain exceptions, no person or entity may beneficially or constructively own, or be deemed to own by virtue of the attribution provisions of the Code, more than 9.8% (in value or in number of shares, whichever is more restrictive) of the aggregate of the outstanding shares of our common stock or more than 9.8% (in value) of the aggregate of the outstanding shares of all classes or series of our capital stock. Under our charter, the term “person” means an individual, corporation, partnership, limited liability company, estate, trust (including a trust qualified under Section 401(a) or 501(c)(17) of the Code), portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the Code, joint stock company or other entity and also includes a group as that term is used for purposes of Section 13(d)(3) of the Exchange Act.
Our charter also prohibits any person from (i) beneficially or constructively owning shares of our capital stock if such ownership would result in our being “closely held” under Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year) or otherwise cause us to fail to qualify as a REIT, (ii) owning shares of our capital stock to the extent such ownership would, at any time prior to January 1, 2020, result in 50% or more in value of our stock being owned, directly or indirectly, by persons who owned, at any time, directly or indirectly, 50% or more in value of the outstanding shares of InfraREIT, L.L.C. or (iii) transferring shares of our capital stock if such transfer would result in our capital stock being beneficially owned by fewer than 100 persons (determined under the principles of Section 856(a)(5) of the Code). Any person who acquires or attempts or intends to acquire beneficial or constructive ownership of shares of our stock that will or may violate any of the foregoing restrictions on ownership and transfer, or who is the intended transferee of shares of our stock that are transferred to the trust (as described below), will be required to give written notice immediately to us or, in the case of a proposed or attempted transaction, to give at least 15 days’ prior written notice, and provide us with such other information as we may request in order to determine the effect, if any, of such transfer on our status as a REIT. The foregoing restrictions on ownership and transfer will not apply if our board of directors determines that it is no longer in our best interests to attempt to qualify, or to continue to qualify, as a REIT, or that compliance with the restrictions on ownership and transfer is no longer required for us to qualify as a REIT.
Our board of directors, in its sole discretion, may exempt (prospectively or retroactively) one or more persons from certain of the limits described above and may establish or increase an excepted holder limit for such person. The persons seeking an exemption must provide to our board of directors any such representations, covenants and undertakings as our board of directors may request in order to conclude that granting the exemption and/or establishing or increasing an excepted holder limit, as the case may be, will not cause us to fail to qualify as a REIT. Our board of directors may also require a ruling from the IRS or an opinion of counsel in order to determine that granting the exemption will not cause us to lose our qualification as a REIT. In connection with granting a waiver of the ownership limit or creating an excepted holder limit or at any other time, our board of directors may from time to time increase or decrease the ownership limit, subject to certain restrictions.
If shares of our stock are certificated, all such certificates will bear a legend referring to the restrictions described herein (or a declaration that we will furnish a full statement about certain restrictions on transferability to a stockholder on request and without charge).
If any transfer of shares of our stock would result in shares of our stock being beneficially owned by fewer than 100 persons (determined under the principles of Section 856(a)(5) of the Code), the transfer will be void and the proposed transferee will acquire no rights in the shares. If any transfer of shares of our stock would otherwise result in any person violating the ownership limits or an excepted holder limit established by our board
 
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of directors, or in our being “closely held” under Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year) or otherwise failing to qualify as a REIT, then the number of shares causing the violation (rounded up to the nearest whole share) will be automatically transferred to a charitable trust for the benefit of a charitable beneficiary and the proposed transferee will not acquire any rights in such shares. The automatic transfer will be effective as of the close of business on the business day (as defined in our charter) prior to the date of the transfer. If, for any reason, the transfer to the charitable trust would not be effective to prevent the violation of the foregoing restrictions, our charter provides that the transfer of that number of shares that would otherwise cause such violation will be void and the proposed transferee will acquire no rights in such shares. Shares of our capital stock held in the trust will be issued and outstanding shares of stock. The proposed transferee will not benefit economically from ownership of any shares of stock held in the trust, will have no rights to dividends or other distributions and no rights to vote or other rights attributable to the shares of stock held in the trust.
A trustee appointed by our board of directors will have all voting rights and rights to dividends or other distributions with respect to shares held in the trust. These rights will be exercised for the exclusive benefit of the charitable beneficiary. Any dividend or other distribution paid prior to our discovery that shares of stock have been transferred to the trust must be paid by the recipient to the trustee upon demand. Any dividend or other distribution authorized but unpaid will be paid when due to the trustee. Any dividend or other distribution paid to the trustee will be held in trust for the charitable beneficiary. Subject to Maryland law, the trustee will have the authority (in the trustee’s sole and absolute discretion) (i) to rescind as void any vote cast by the proposed transferee prior to our discovery that the shares have been transferred to the trust and (ii) to recast the vote in accordance with the desires of the trustee acting for the benefit of the charitable beneficiary. However, if we have already taken irreversible corporate action, then the trustee will not have the authority to rescind and recast the vote.
Within 20 days after receiving notice from us that shares of our stock have been transferred to the trust, the trustee must sell the shares to a person whose ownership of the shares will not violate the above ownership and transfer restrictions. Upon such sale, the interest of the charitable beneficiary in the shares sold will terminate and the trustee will distribute the net proceeds of the sale to the proposed transferee and to the charitable beneficiary as follows. The proposed transferee will receive the lesser of (i) the price paid by the proposed transferee for the shares or, if the proposed transferee did not give value for the shares in connection with the event causing the shares to be held in the trust (e.g., a gift, devise or other similar transaction), the market price (as defined in our charter) of the shares on the day of the event causing the shares to be held in the trust and (ii) the price received by the trustee from the sale or other disposition of the shares (net of any commissions and other expenses). Any net sale proceeds in excess of the amount payable to the proposed transferee will be paid immediately to the charitable beneficiary. The trustee may reduce the amount payable to the proposed transferee by the amount of dividends and other distributions paid to the proposed transferee and owed by the proposed transferee to the trustee.
In addition, shares of our stock held in the trust will be deemed to have been offered for sale to us, or our designee, at a price per share equal to the lesser of (i) the price per share in the transaction that resulted in the transfer to the trust (or, in the case of a devise or gift, the market price at the time of the devise or gift) and (ii) the market price on the date we accept, or our designee accepts, the offer, which we may reduce by the amount of dividends and other distributions paid to the proposed transferee and owed by the proposed transferee to the trustee. We will have the right to accept the offer until the trustee has sold the shares of our stock as discussed above.
Our board of directors has granted John Hancock Life Insurance Company (U.S.A.), OpTrust N.A. Holdings Trust and Teachers Insurance and Annuity Association of America an exemption from the ownership limits in our charter, subject to certain initial and ongoing conditions designed to protect our status as a REIT.
Every beneficial owner of 5% or more (or such lower percentage as required by the Code or the regulations promulgated thereunder) of the outstanding shares of our capital stock, including shares of common stock, within 30 days after the end of each taxable year, must give written notice to us stating the name and address of such owner, the number of shares of each class and series of shares of our stock that the owner
 
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beneficially owns and a description of the manner in which the shares are held. Each owner must also provide to us such additional information as we may request in order to determine the effect, if any, of the beneficial ownership on our status as a REIT. In addition, each beneficial or constructive owner of our capital stock and each person (including the stockholder of record) who is holding shares of our capital stock for a beneficial or constructive owner must, upon demand, provide to us such information as we may request in order to determine our status as a REIT and to comply with the requirements of any taxing authority or governmental authority or to determine such compliance.
The restrictions on ownership and transfer described above could delay, defer or prevent a transaction or a change in control that might involve a premium price for our securities or might otherwise be in the best interests of our stockholders.
Registration Rights
Effective on the closing of this offering, we intend to enter into the Registration Rights Agreement with certain of our existing investors (including our founding investors, W. Kirk Baker, who is the Chairman of our board of directors, and Benjamin D. Nelson, who is our Senior Vice President and General Counsel), which amended and restated the registration rights agreement executed in connection with the formation of InfraREIT, L.L.C. in November 2010. The Registration Rights Agreement provides for rights relating to the registration of such parties’ shares of our common stock. Upon completion of the Reorganization, this agreement will relate to                      shares of our common stock, including shares of common stock issuable upon the conversion of our OP Units, assuming no exercise of the underwriters’ option to purchase additional shares.
Registration Rights
Subject to certain limitations, we have agreed to use our commercially reasonable efforts to register the shares held by the parties to the Registration Rights Agreement, as well as permitted assignees and transferees of such shares, on the first anniversary of the completion of this offering or as soon as possible thereafter. We have also agreed to effect up to four underwritten offerings upon notice by parties holding at least 10% of the securities subject to the Registration Rights Agreement, subject to certain limitations. In addition, if we propose to register shares of our common stock in a manner that would permit registration of the shares covered by the Registration Rights Agreement, each holder of such shares will have the right, subject to certain limitations, to register all or part of the shares covered by the Registration Rights Agreement held by such holder.
Limitations and Expenses
In the event that any of the registrable shares are to be sold in an underwritten offering, the number of registrable shares to be included may, in specified circumstances, be limited due to market conditions. Additionally, in the event our board of directors determines, and we notify the parties to the Registration Rights Agreement, or the permitted assignees and transferees of such shares, that a sale of the securities subject to the Registration Rights Agreement would be seriously detrimental to the Company or its stockholders due to a pending material corporate development or transaction, each party to the Registration Rights Agreement has agreed not to effect any sale through any shelf registration statement for a period of up to 90 days. Pursuant to the Registration Rights Agreement, we are required to pay all registration expenses, including the fees and expenses of one counsel to represent the selling holders, other than any underwriting discounts, selling commissions and similar discounts relating to underwriters or commissions related to sales, related to any underwritten offering of the registrable securities. We are also required to indemnify each participating holder with respect to each registration of registrable shares that is effected.
Transfer Agent and Registrar
Wells Fargo Shareowner Services will serve as registrar and transfer agent for the common stock. The transfer agent’s address is Wells Fargo Shareowner Services, 110 Centre Point Curve, Suite 101, Mendota Heights, MN 55120-4100 and its telephone number is (800) 468-9716.
 
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 CERTAIN PROVISIONS OF MARYLAND LAW AND OUR CHARTER AND BYLAWS
The following describes certain material provisions of Maryland law applicable to us and of our charter and bylaws as they will be in effect upon the completion of this offering. The following description is only a summary. For a complete description, we refer you to the MGCL and to our charter and our bylaws, copies of which are filed as exhibits to the registration statement of which this prospectus is a part. See “Where You Can Find More Information.”
Organization and Duration
InfraREIT, Inc. was formed as a Delaware corporation in 2001 and converted into a Maryland corporation on September 29, 2014. We have a perpetual existence unless terminated pursuant to the terms of our charter and our bylaws.
Board of Directors
Our charter and bylaws provide that the number of directors we have may be established only by our board of directors but may not be fewer than the minimum number required under the MGCL, which is one, and our bylaws provide that the number of our directors may not be more than 15. Following the completion of this offering, we will have             directors. Our charter provides for a staggered board of directors consisting of three classes. Directors of each class are elected for three-year terms and until their successors are duly elected and qualify. Each year one class of our directors will be elected by our stockholders. The Class I, Class II and Class III directors’ terms will expire at the annual meeting of stockholders in 2016, 2017 and 2018, respectively, and until their successors are duly elected and qualify. Holders of shares of common stock will have no right to cumulative voting in the election of directors. Directors are elected by a plurality of the votes cast.
We believe that classification of our board of directors will help to assure the continuity and stability of our business strategies and policies as determined by our board of directors. This classified board provision could have the effect of making the replacement of incumbent directors more time-consuming and difficult since at least two annual meetings of stockholders will generally be required to effect a change in a majority of our board of directors.
Pursuant to our charter, we have elected to be subject to the provisions of Subtitle 8 of Title 3 of the MGCL regarding the filling of vacancies on our board of directors. Accordingly, except as may be provided by our board of directors in setting the terms of any class or series of stock, any and all vacancies on our board of directors may be filled only by a majority of the remaining directors, even if the remaining directors do not constitute a quorum. Any director so elected to fill a vacancy will serve for the remainder of the full term in which the vacancy occurred and until his or her successor is duly elected and qualifies.
Related Person Transactions
Pursuant to the MGCL, a contract or other transaction between us and a director or between us and any other corporation, firm or other entity in which any of our directors is a director or has a material financial interest is not void or voidable solely because of such common directorship or interest, the presence of such director at the meeting at which the contract or transaction is authorized, approved or ratified or the counting of the director’s vote in favor thereof, if:
 
 	•	 	the fact of the common directorship or interest is disclosed or known to our board of directors or a committee of our board, and our board or such committee authorizes, approves or ratifies the contract or transaction by a majority of disinterested directors, even if the disinterested directors constitute less than a quorum;	
 
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 	•	 	the fact of the common directorship or interest is disclosed or known to our stockholders entitled to vote, and the contract or transaction is authorized, approved or ratified by a majority of the votes cast by the stockholders entitled to vote other than the votes of shares owned of record or beneficially by the interested director or corporation, firm or other entity; or	
 
 	•	 	the contract or transaction is fair and reasonable to us.	
Removal of Directors
Our charter provides that, subject to the rights of holders of one or more classes or series of preferred stock to elect or remove one or more directors, a director may be removed only for cause (as defined in our charter), and only by the affirmative vote of the holders of shares entitled to cast at least two-thirds of all the votes entitled to be cast generally in the election of directors. This provision, when coupled with the exclusive power of our board of directors to fill vacancies on the board of directors, may preclude stockholders from (1) removing incumbent directors except for cause and upon a substantial affirmative vote and (2) filling the vacancies created by such removal with their own nominees.
Business Combinations
Under the MGCL, certain “business combinations” (including a merger, consolidation, statutory share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities) between a Maryland corporation and an interested stockholder, or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. An interested stockholder is defined as:
 
 	•	 	any person who beneficially owns, directly or indirectly, 10% or more of the voting power of the corporation’s outstanding voting stock; or	
 
 	•	 	an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding voting stock of the corporation.	
A person is not an interested stockholder under the statute if the board of directors approved in advance the transaction by which the person otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of the approval, with any terms and conditions determined by the board.
After the five-year prohibition, any such business combination between the Maryland corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:
 
 	•	 	80% of the votes entitled to be cast by holders of outstanding voting stock of the corporation; and	
 
 	•	 	two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom (or with whose affiliate) the business combination is to be effected or held by an affiliate or associate of the interested stockholder.	
These super-majority vote requirements do not apply if, among other conditions, the corporation’s common stockholders receive a minimum price, as defined under the MGCL, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares.
These provisions of the MGCL do not apply, however, to business combinations that are approved or exempted by a Maryland corporation’s board of directors prior to the time the interested stockholder becomes an interested stockholder. As permitted by the MGCL, our board of directors has adopted a resolution exempting,
 
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and consequently the five-year prohibition and the supermajority vote requirements will not apply to, any business combination between us and any other person, provided that the business combination is first approved by our board of directors (including a majority of directors who are not affiliates or associates of such persons). As a result, any person described above may be able to enter into business combinations with us that may not be in the best interests of our stockholders without compliance with the supermajority vote requirements and other provisions of the statute. However, our board of directors may repeal or modify this resolution at any time in the future, in which case the applicable provisions of this statute will become applicable to business combinations between us and interested stockholders. The business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any such acquisition.
Control Share Acquisitions
The MGCL provides that a holder of “control shares” of a Maryland corporation acquired in a “control share acquisition” has no voting rights with respect to such shares except to the extent approved by the affirmative vote of at least two-thirds of the votes entitled to be cast by stockholders entitled to vote generally in the election of directors other than the person who has made or proposes to make the control share acquisition, an officer of the corporation or an employee of the corporation who is also a director of the corporation. “Control shares” are voting shares of stock that, if aggregated with all other shares of stock owned by the acquirer or in respect of which the acquirer is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise voting power in electing directors within one of the following ranges of voting power:
 
 	•	 	one-tenth or more but less than one-third,	
 
 	•	 	one-third or more but less than a majority, or	
 
 	•	 	a majority or more of all voting power.	
Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval or shares acquired directly from the corporation. A control share acquisition means the acquisition, directly or indirectly, of ownership of, or the power to direct the exercise of voting power with respect to, issued and outstanding control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition may compel the board of directors of the corporation to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. The right to compel the calling of a special meeting is subject to the satisfaction of certain conditions, including an undertaking to pay the expenses of the meeting and making an acquiring person statement (as described in the MGCL). If no request for a meeting is made, the corporation may itself present the question at any stockholders meeting.
If voting rights for control shares are not approved at the meeting or if the acquiring person does not deliver an “acquiring person statement” as required by the statute, then the corporation may redeem for fair value any or all of the control shares, except those for which voting rights have previously been approved. The right of the corporation to redeem control shares is subject to certain conditions and limitations. Fair value is determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquirer or, if a meeting of stockholders is held at which the voting rights of the shares are considered and not approved, then as of the date of the meeting. If voting rights for control shares are approved at a stockholders meeting and the acquirer becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights, unless the corporation’s charter or bylaws provide otherwise. The fair value of the shares as determined for purposes of appraisal rights may not be less than the highest price per share paid by the acquirer in the control share acquisition.
 
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The control share acquisition statute does not apply (1) to shares acquired in a merger, consolidation or statutory share exchange if the corporation is a party to the transaction or (2) to acquisitions approved or exempted by the charter or bylaws of the corporation.
Our bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of shares of our stock. There can be no assurance that this provision will not be amended or eliminated at any time in the future.
Maryland Unsolicited Takeovers Act
Subtitle 8 of Title 3 of the MGCL permits the board of directors of a Maryland corporation with a class of equity securities registered under the Exchange Act and at least three independent directors to elect to be subject, by provision in its charter or bylaws or a resolution of its board of directors and notwithstanding any contrary provision in the charter or bylaws, to any or all of the following five provisions:
 
 	•	 	a classified board;	
 
 	•	 	a two-thirds vote requirement for removing a director;	
 
 	•	 	a requirement that the number of directors be fixed only by vote of the directors;	
 
 	•	 	a requirement that a vacancy on the board be filled only by the remaining directors (if the board is classified) and for the remainder of the full term of the class of directors in which the vacancy occurred; or	
 
 	•	 	a majority requirement for the calling of a stockholder-requested special meeting of stockholders.	
Our charter provides that, at such time as we become eligible to make a Subtitle 8 election (which we expect will be upon the completion of this offering) and except as may be provided by our board of directors in setting the terms of any class or series of stock, we elect to be subject to the provisions of Subtitle 8 relating to the filling of vacancies on our board of directors. Through provisions in our charter and bylaws unrelated to Subtitle 8, we already (1) have a classified board, (2) require a two-thirds vote for the removal of any director from the board, which removal must be for cause, (3) vest in the board the exclusive power to fix the number of directorships, subject to limitations set forth in our charter and bylaws and (4) require the request of stockholders entitled to cast not less than a majority of all votes entitled to be cast on any matter that may properly be considered at a meeting of stockholders in order to call a special meeting, unless called by the chairman of our board of directors, our lead director, if any, our chief executive officer, our president or our board of directors.
Stockholder Rights Plan
We do not have a stockholder rights plan.
Extraordinary Transactions
Under the MGCL, a Maryland corporation generally cannot dissolve, merge, sell all or substantially all of its assets, engage in a statutory share exchange or convert into another entity unless declared advisable by its board of directors and approved by the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter unless a lesser percentage (but not less than a majority of all of the votes entitled to be cast on the matter) is set forth in the corporation’s charter. As permitted by the MGCL, our charter provides that any of these actions may be approved by the affirmative vote of stockholders entitled to cast a majority of all of the votes entitled to be cast on the matter. Further, all of our operating assets are held by our subsidiaries, and these subsidiaries may be able to merge or sell all or substantially all of their assets without the approval of our stockholders. Our charter provides that our stockholders generally will not be entitled to exercise statutory appraisal rights.
 
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Anti-Takeover Effect of Certain Provisions of Maryland Law and Our Charter and Bylaws
Our charter and bylaws and Maryland law contain provisions that may delay, defer or prevent a change in control or other transaction that might involve a premium price for our common stock or otherwise be in the best interests of our stockholders, including business combination provisions; the classification of our board; supermajority vote and cause requirements for removal of directors; provisions that vacancies on our board of directors may be filled only by the remaining directors for the full term of the directorship in which the vacancy occurred; the power of our board of directors to increase or decrease the aggregate number of authorized shares of stock or the number of shares of any class or series of stock, to cause us to issue additional shares of stock of any class or series and to fix the terms of one or more classes or series of stock without stockholder approval; the restrictions on ownership and transfer of our stock; the requirement that stockholders holding at least a majority of our outstanding shares of common stock must act together to make a written request before our stockholders can require us to call a special meeting of stockholders; and advance notice requirements for director nominations and stockholder proposals. Likewise, if the provision in the bylaws opting out of the control share acquisition provisions of the MGCL or the resolution of our board of directors opting out of the business combination provisions of the MGCL were repealed or rescinded, or if a business combination was not first approved by our board of directors, these provisions of the MGCL could have similar anti-takeover effects.
Amendment of Our Charter
Our charter generally provides that charter amendments requiring stockholder approval must be declared advisable by our board of directors and approved by the affirmative vote of stockholders of a majority of all the votes entitled to be cast on the matter. However, our charter’s provisions regarding the removal of directors, and amendments to the vote required to amend these provisions, may be amended only if such amendment is declared advisable by our board of directors and approved by the affirmative vote of stockholders entitled to cast not less than two-thirds of all the votes entitled to be cast on the matter. Our board of directors, with the approval of a majority of the entire board, and without any action by our stockholders, may also amend our charter to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series we are authorized to issue.
Amendment of Our Bylaws
Our board of directors has the exclusive power to adopt, alter or repeal any provision of our bylaws and to make new bylaws.
Meetings of Stockholders
Under our bylaws, annual meetings of stockholders will be held each year at a date and time determined by our board of directors. Special meetings of stockholders may be called by our board of directors, the chairman of our board of directors, our lead director, if any, our president or our chief executive officer. Additionally, subject to the provisions of our bylaws, special meetings of the stockholders must be called by our secretary to act on any matter that may properly be considered at a meeting of stockholders upon the written request of stockholders entitled to cast not less than a majority of the votes entitled to be cast on such matter at such meeting who have requested the special meeting in accordance with the procedures set forth in, and provided the information and certifications required by, our bylaws. Only matters set forth in the notice of the special meeting may be considered and acted upon at such a meeting.
Advance Notice of Director Nominations and New Business
Our bylaws provide that, with respect to an annual meeting of stockholders, nominations of individuals for election to our board of directors and the proposal of other business to be considered by our stockholders at an annual meeting of stockholders may be made only (1) pursuant to our notice of the meeting, (2) by or at the
 
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direction of our board of directors or (3) by a stockholder who was a stockholder of record both at the time of giving of notice and at the time of the meeting, who is entitled to vote at the meeting on the election of the individual so nominated or on such other business and who has complied with the advance notice procedures set forth in our bylaws, including a requirement to provide certain information about the stockholder and its affiliates and the nominee or business proposal, as applicable.
With respect to special meetings of stockholders, only the business specified in our notice of meeting may be brought before the meeting. Nominations of individuals for election to our board of directors may be made at a special meeting of stockholders at which directors are to be elected only (1) by or at the direction of our board of directors, (2) by a stockholder that has requested a special meeting for the purpose of electing directors in compliance with our bylaws and who has provided the information required by our bylaws or (3) provided that the special meeting has been properly called for the purpose of electing directors, by a stockholder who was a stockholder of record both at the time of giving of notice and at the time of the meeting, who is entitled to vote at the meeting on the election of each individual so nominated and who has complied with the advance notice provisions set forth in our bylaws, including a requirement to provide certain information about the stockholder and its affiliates and the nominee.
The purpose of requiring stockholders to give advance notice of nominations and other proposals is to afford our board of directors the opportunity to consider the qualifications of the proposed nominees or the advisability of the other proposals and, to the extent considered necessary by our board of directors, to inform stockholders and make recommendations regarding the nominations or other proposals. The advance notice procedures also permit a more orderly procedure for conducting our stockholder meetings. Although our bylaws do not give our board of directors the power to disapprove timely stockholder nominations and proposals, our bylaws may have the effect of precluding a contest for the election of directors or proposals for other action if the proper procedures are not followed, and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors to our board of directors or to approve its own proposal.
Corporate Opportunity
As permitted by the MGCL, our charter contains provisions that permit our directors and officers, and their affiliates (including individuals serving in such capacities who are also directors, officers and/or employees of Hunt and its affiliates), to compete with us, own any investments or engage in any business activities (including investments and business activities that are similar to our current or proposed investments or business activities) or buy, sell or trade any securities or commodities for their own accounts (including taking positions contrary to ours). Our charter provides that, to the maximum extent permitted by law, no such person will be liable to us or any stockholder by reason of the fact that the person participates in any such activity. Our charter also provides that, to the maximum extent permitted by law, none of our directors or officers, or their affiliates, are required to present any business opportunity to us unless the opportunity is expressly offered to such person in his or her capacity as a director or officer of us.
Limitation of Directors’ and Officers’ Liability and Indemnification
The MGCL permits a Maryland corporation to include in its charter a provision eliminating the liability of its directors and officers to the corporation and its stockholders for money damages, except for liability resulting from (1) actual receipt of an improper benefit or profit in money, property or services or (2) active and deliberate dishonesty that is established by a final judgment and is material to the cause of action. Our charter contains a provision that eliminates such liability to the maximum extent permitted by Maryland law.
Our charter and bylaws provide for indemnification of our officers and directors against liabilities to the maximum extent permitted by the MGCL, as amended from time to time.
The MGCL requires us (unless our charter provides otherwise, which our charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to
 
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which he or she is made, or threatened to be made, a party by reason of his or her service in that capacity. The MGCL permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made, or threatened to be made, a party by reason of their service in those or other capacities unless it is established that:
 
 	•	 	the act or omission of the director or officer was material to the matter giving rise to the proceeding and (1) was committed in bad faith or (2) was the result of active and deliberate dishonesty;	
 
 	•	 	the director or officer actually received an improper personal benefit in money, property or services; or	
 
 	•	 	in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful.	
However, under the MGCL, a Maryland corporation may not indemnify a director or officer for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis that personal benefit was improperly received by such director or officer, unless in either case a court orders indemnification if it determines that the director or officer is fairly and reasonably entitled to indemnification, and then only for expenses.
In addition, the MGCL permits a Maryland corporation to advance reasonable expenses to a director or officer upon its receipt of:
 
 	•	 	a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation; and	
 
 	•	 	a written undertaking by the director or officer or on the director’s or officer’s behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that the director or officer did not meet the standard of conduct.	
Our charter authorizes us to obligate ourselves, and our bylaws obligate us, to the maximum extent permitted by Maryland law in effect from time to time, to indemnify and pay or reimburse reasonable expenses in advance of final disposition of such a proceeding to:
 
 	•	 	any present or former director or officer of our company who is made, or threatened to be made, a party to, or witness in, the proceeding by reason of his or her service in that capacity; or	
 
 	•	 	any individual who, while a director or officer of our company and at our request, serves or has served as a director, officer, partner, trustee, member or manager of another corporation, REIT, limited liability company, partnership, joint venture, trust, employee benefit plan or other enterprise and who is made, or threatened to be made, a party to, or witness in, the proceeding by reason of his or her service in that capacity.	
Our charter and bylaws also permit us to indemnify and advance expenses to any individual who served any predecessor of us or any entity acquired by us or any partnership controlled by us, or an “acquired entity,” or any predecessor entity to an acquired entity in any of the capacities described above and to any employee or agent of our company or any predecessor of us or of any acquired entity or any predecessor of an acquired entity.
Upon completion of this offering, we intend to enter into indemnification agreements with each of our directors and executive officers that will provide for indemnification and advance of expenses to the maximum extent permitted by Maryland law. See “Certain Relationships and Related Transactions—Arrangements with Our Directors and Officers—Indemnification Agreements.”
 
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Exclusive Forum for Certain Litigation
Our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the Circuit Court for Baltimore City, Maryland, or, if that Court does not have jurisdiction, the United States District Court for the District of Maryland, Baltimore Division, will be the sole and exclusive forum for (a) any derivative action or proceeding brought on our behalf, (b) any action asserting a claim of breach of any duty owed by any director or officer or other employee of ours to us or to our stockholders, (c) any action asserting a claim against us or any director or officer or other employee of ours arising pursuant to any provision of the MGCL or the charter or these bylaws, or (d) any action asserting a claim against us or any director or officer or other employee of ours that is governed by the internal affairs doctrine.
REIT Qualification
Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without approval of our stockholders, if it determines that it is no longer in our best interests to attempt to qualify, or to continue to qualify, as a REIT. Our charter also provides that our board of directors may determine that compliance with the restrictions on ownership and transfer of our stock is no longer required for us to qualify as a REIT.
 
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 THE OPERATING PARTNERSHIP AND THE PARTNERSHIP AGREEMENT
The following describes the material provisions of the partnership agreement of our Operating Partnership, InfraREIT Partners, LP, as it will be amended and restated upon the consummation of this offering. The following description is only a summary. For a complete description, we refer you to the partnership agreement, a copy of which is filed as an exhibit to the registration statement of which this prospectus is a part. See “Where You Can Find More Information.”
General
We conduct our business through a traditional umbrella partnership REIT, or UPREIT, in which our properties are owned by InfraREIT Partners, LP, a Delaware limited partnership that InfraREIT, L.L.C. acquired in connection with its organization in November 2010. At the time of the effectiveness of the registration statement to which this prospectus relates, Hunt-InfraREIT and each of                      and                     , who will be elected to the InfraREIT, Inc. board of directors prior to the consummation of this offering, are limited partners, and InfraREIT, L.L.C. is the general partner; however, upon the consummation of the Merger, InfraREIT, Inc. will become the general partner and InfraREIT, Inc. will succeed to all of InfraREIT, L.L.C.’s interest in the Operating Partnership. Furthermore, at that time, MC Transmission Holdings, LLC, an affiliate of Marubeni Corporation, and each of the remaining InfraREIT, Inc. directors, other than David Campbell and Hunter L. Hunt, will become a limited partner in our Operating Partnership.
All of our assets are held by, and all of our business activities, including all activities pertaining to the acquisition or disposition of properties, are conducted through the Operating Partnership, either directly or through its subsidiaries. The Operating Partnership will be operated in a manner that will enable us to satisfy the requirements for qualification as a REIT. We do not intend to list any OP Units on any exchange or any national market system.
Amendment and Restatement of the Partnership Agreement
Upon completion of this offering, a second amended and restated agreement of limited partnership will become effective and, effective approximately 33 days after completion of this offering, a third amended and restated agreement of limited partnership will become effective. These agreements will reflect certain of the reorganization transactions described in “Description of Our Capital Stock—Reorganization.” The disclosures in this section give effect to these amendments and restatements, except where otherwise noted.
Purpose, Business and Management
The Operating Partnership was formed for the purpose of conducting any business that may be lawfully conducted under the Delaware Revised Uniform Limited Partnership Act, or DRULPA. However, the Operating Partnership may not, without our specific consent, which we may give or withhold in our sole and absolute discretion, take, or refrain from taking, any action that, in our judgment, could adversely affect our ability to continue to qualify as a REIT.
As the sole general partner of the Operating Partnership, we have, subject to certain protective rights of limited partners described below, full, exclusive and complete responsibility and discretion in the management and control of the Operating Partnership. As a result, we have the sole ability to cause the Operating Partnership to enter into certain major transactions including acquisitions, dispositions, refinancings, selection of tenants, a merger of the Operating Partnership or a sale of substantially all of the assets of the Operating Partnership. Although, as a practical matter, our ability to cause the Operating Partnership to engage in any of these activities is limited by applicable regulatory restrictions and by restrictions set forth in our leases or subsidiary governing documents, the Operating Partnership agreement does not contain any explicit restriction on our ability to do so. No limited partner, in its capacity as a limited partner, has any right to participate in or exercise control or management power over the Operating Partnership’s business and affairs. We may not be removed as the general partner of the Operating Partnership, with or without cause.
 
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The partnership agreement does not impose any obligation on us to give priority to the interests of our stockholders or the interests of the limited partners of the Operating Partnership in deciding whether to cause the Operating Partnership to take or decline to take any actions. If there is a conflict between the interests of our stockholders and the limited partners, we will endeavor, in good faith, to resolve the conflict in a manner not adverse to either our stockholders or the limited partners. We are not liable under the partnership agreement to the Operating Partnership or to any partner for monetary damages for losses sustained, liabilities incurred, or benefits not derived by limited partners in connection with such decisions, provided that we have acted in good faith.
Restrictions on General Partner’s Authority
Without the consent of all partners adversely affected or such lower percentage of the limited partnership interests as may be specifically provided for under a provision of the partnership agreement or DRULPA, we may not (i) take any action in contravention of an express prohibition or limitation of the partnership agreement, (ii) perform any act that would subject a limited partner to liability as a general partner in any jurisdiction or any other liability except as provided in the partnership agreement or DRULPA or (iii) enter into any contract, mortgage, loan or other agreement that restricts, or has the effect of prohibiting or restricting, the ability of a limited partner to exercise the redemption right granted to it under the partnership agreement. Additionally, without the prior consent of the partners holding a majority of the OP Units (including OP Units held by us), we may not amend, modify or terminate the partnership agreement, except for certain amendments that we may approve without the approval or consent of any limited partner, described in “—Amendment of the Partnership Agreement.” Upon the completion of this offering, we expect to own a majority of the outstanding OP Units. In addition to any approval or consent required by any other provision of the partnership agreement, we may not, in our capacity as general partner of the Operating Partnership, amend the partnership agreement to take away any right under the partnership agreement of any limited partner that is personal to that limited partner and different from the rights of other partners or in a manner that would adversely affect any limited partner in a materially disproportionate manner compared to other partners without the consent of the affected limited partner.
Partnership Units
Upon completion of this offering, there will be five types of OP Units outstanding: common units, Class A OP Units, Class B OP Units, Class C OP Units and profit interest partnership units (LTIP Units).
Effective 32 days after consummation of this offering (or, if later, the date on which the closing of the sale of additional shares of our common stock to the underwriters if they exercise their option to purchase additional shares), the Partnership will issue common units in exchange for outstanding Class A OP Units (including the Class A OP Units issued upon the conversion of the LTIP Units as described below) and Class C OP Units. Such common units will be allocated among the holders of Class A OP Units, Class B OP Units and Class C OP Units and the Class A OP Units, Class B OP Units and Class C OP Units will be cancelled. See “Description of Our Capital Stock—Reorganization” for a description of the manner in which these allocations will occur. Following such allocation, we intend to adopt a third amended and restated partnership agreement that will eliminate the provisions related to the Reorganization and the description of the Class A OP Units, Class B OP Units and Class C OP Units; however, it will continue to provide for amendments to issue additional classes of OP Units in the future.
On May 1, 2014, the Operating Partnership issued an aggregate of              LTIP Units to                      and                      , who we expect to become members of our board of directors prior to the consummation of this offering. The value of these LTIP Units, at the time of their issuance, was an aggregate of $120,000. We issued these LTIP Units to              and              as compensation for their service as non-voting members of the InfraREIT, L.L.C. board of directors. LTIP Units are intended to qualify as “profits interests” under IRS Revenue Procedures 93-27 and 2001-43; these              LTIP Units will automatically convert into an equivalent number of common units in connection with the reorganization transactions and allocations described above. In addition,
 
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upon completion of this offering, we intend to issue a number of additional LTIP Units in an aggregate amount equal to $560,000 divided by the initial public offering price per share of our common stock to                     ,                     ,                     ,                     and                     , who we expect to become members of our board of directors prior to the completion of this offering.
Additional Limited Partners
In our capacity as the general partner of the Operating Partnership, we may cause the Operating Partnership to issue additional partnership interests and to admit additional limited partners to the Operating Partnership from time to time, on such terms and conditions and for such capital contributions as we may establish in our sole and absolute discretion, without the approval or consent of any limited partner.
The Operating Partnership may issue common units and additional partnership interests in one or more additional classes, or one or more series of any of such classes, with such designations, preferences, conversion or other rights, voting powers or rights, restrictions, limitations as to distributions, qualifications or terms or conditions of redemption (including terms that may be senior or otherwise entitled to preference over the common units) as we may determine, in our sole and absolute discretion, without the approval of any limited partner.
Distributions
The Operating Partnership will make distributions at such times and in such amounts as we may determine. Distributions will be pro rata based on the number of OP Units held by each partner. However, we are required to make reasonable efforts to cause the Operating Partnership to make distributions in an amount sufficient to enable us to make distributions to our stockholders that will enable us to satisfy the requirements for qualification as a REIT and avoid any U.S. federal income or excise tax liability.
Allocations of Net Income and Net Loss
Net income of the Operating Partnership is allocated to us, as the general partner, and to the limited partners (including us) as follows:
 
 	•	 	first, 100% to us, as the general partner, to the extent that cumulative net losses previously allocated to us exceed the cumulative net income previously allocated to us;	
 
 	•	 	second, 100% to the holders of any partnership interests that are entitled to any preference upon liquidation until the cumulative net income allocated hereunder equals the cumulative net losses allocated to such partners; and	
 
 	•	 	thereafter, in accordance with the holders’ entitlement to distributions, as described in “—Distributions” above.	
Net loss is generally allocated in the reverse order of net income. The allocations of taxable income and loss are subject to special rules and may differ from the allocation of net income or net loss.
Borrowing by the Operating Partnership
We may cause the Operating Partnership to borrow money and to issue and guarantee debt as we, acting in our capacity as the general partner of the Operating Partnership, deem necessary or desirable for the conduct of the activities of the Operating Partnership. Such debt may be secured by, among other things, mortgages, deeds of trust or liens on the properties of the Operating Partnership.
Reimbursements of Expenses; Transactions with Us and Our Affiliates
We do not receive any compensation for our services as the general partner of the Operating Partnership. The Operating Partnership must reimburse us for all amounts expended by us in connection with the
 
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ownership and operation of, or for the benefit of, the Operating Partnership, including expenses related to our operations and to the management and administration of any of our or the Operating Partnership’s respective subsidiaries. Following the completion of this offering, this reimbursement obligation will apply to the expenses we incur by virtue of being a public company.
Except as expressly permitted by the partnership agreement, the Operating Partnership may not, directly or indirectly, sell, transfer or convey any property to, or purchase any property from, or borrow funds from, or lend funds to, any partner or any affiliate of the Operating Partnership (other than its subsidiaries) unless such transaction is on terms that are fair and reasonable and no less favorable to the Operating Partnership than would be obtained from an unaffiliated third-party.
Exculpation and Indemnification of Us
The partnership agreement provides that neither we nor any of our officers, directors or stockholders, any limited partner or officer of the Operating Partnership or any person serving at the request of the Operating Partnership or us as an officer, director, trustee, employee or agent of any entity in which the Operating Partnership or we hold an investment (we refer to them collectively as Covered Persons) is liable to the Operating Partnership or any partner for (i) any act or omission performed or failed to be performed by such person, or for any losses, claims, costs, damages or liabilities (collectively, Losses) arising from such act or omission, provided that such Loss did not result from such person’s gross negligence, willful misconduct or fraud or any act or omission constituting a breach of such person’s duty of loyalty or good faith and fair dealing, (ii) any tax liability imposed on the Operating Partnership, provided that such tax liability did not result from such person’s gross negligence, willful misconduct or fraud or (iii) any Losses due to the negligence, dishonesty or bad faith of any agents of the Operating Partnership that are not Covered Persons or affiliates of any Covered Person, as long as such persons are selected with reasonable care.
In addition, the partnership agreement requires the Operating Partnership to indemnify each Covered Person against any Losses to which such Covered Person may become subject in connection with the business or affairs of the Operating Partnership or one of its direct or indirect subsidiaries or serving at the Operating Partnership’s or one of its direct or indirect subsidiaries’ request as a director, trustee, officer, partner, employee or agent of another entity, provided that such Loss did not result from such Covered Person’s gross negligence, willful misconduct or fraud or any act or omission constituting a breach of such Covered Person’s duty of loyalty or good faith and fair dealing. The Operating Partnership must also pay or reimburse the reasonable expenses of any such person upon its receipt of a written affirmation of the person’s good faith belief that the standard of conduct necessary for indemnification has been met and a written undertaking to repay any amounts paid or advanced if it is ultimately determined that the person did not meet the standard of conduct for indemnification. Notwithstanding the foregoing, we are not entitled to indemnification by the Operating Partnership pursuant to the partnership agreement for any Loss for which we are obligated to indemnify the Operating Partnership under any other agreement between us and the Operating Partnership.
Fiduciary Responsibilities
Our directors will have duties under applicable Maryland law to act in good faith, with a reasonable belief that their actions are in our best interests, with the care of an ordinarily prudent person in a like position under similar circumstances. At the same time, we, as the general partner of the Operating Partnership, have fiduciary duties to manage the Operating Partnership in a manner beneficial to the Operating Partnership and its partners. Our duties to the Operating Partnership and its limited partners, therefore, may come into conflict with the duties of our directors to us. We will be under no obligation to give priority to the interests of the limited partners of the Operating Partnership in deciding whether to cause the Operating Partnership to take or decline to take any actions and will not be liable for monetary damages for losses sustained, liabilities incurred or benefits not derived by the limited partners in connection with such decisions, provided that we have acted in good faith.
 
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Tax Matters
Pursuant to the partnership agreement, as the general partner we are the tax matters partner of the Operating Partnership. Accordingly, we have the authority to handle tax audits and to make tax elections under the Code, in each case, on behalf of the Operating Partnership.
Redemption Rights
Each limited partner of the Operating Partnership holding common units has the right, subject to certain terms and conditions set forth in the partnership agreement, to require the Operating Partnership to redeem all or a portion of the common units held by such limited partner in exchange for a cash amount equal to the number of tendered common units multiplied by the average price of a share of our common stock during a 10-day trailing period. For any common units issued in connection with the Reorganization on or around the 32nd day following the completion of this offering, the redemption right is not available until the day before the one-year anniversary of the issue date. For common units the Operating Partnership is issuing to MC Transmission Holdings, Inc., an affiliate of Marubeni Corporation (one of our founding investors), on the closing date of this offering, the redemption right is not available until the six-month anniversary of the closing of this offering. For any other common units issued after the closing of the offering, the redemption right is not available until the day before the one-year anniversary of the issuance of that common unit. This redemption right is not available with respect to any class of preferred units unless so provided in the applicable instrument establishing such class of preferred units. However, in lieu of causing the Operating Partnership to redeem such common units for cash, on or before the close of business on the tenth business day after we receive a notice of redemption (or the thirtieth business day if our shares are not publicly traded), we may, in our sole and absolute discretion, subject to the restrictions on the ownership and transfer of our common stock set forth in our charter, elect to acquire some or all of the common units subject to the redemption notice from the redeeming limited partner in exchange for shares of our common stock, based on an exchange ratio of one share of our common stock for each common unit (subject to antidilution adjustments provided in the partnership agreement). Limited partners may not exercise redemption rights, however, if and to the extent that the delivery of shares upon such exercise would result in any person violating the ownership and transfer restrictions set forth in our charter.
Transferability of General Partner Interest
We, as general partner, may not transfer all or any portion of our interest in the Operating Partnership, whether by sale, disposition, statutory merger or consolidation, liquidation or otherwise, unless:
 
 	•	 	(a) we transfer all of our interest in the Operating Partnership in connection with a merger, consolidation or other combination of our or the Operating Partnership’s assets with another entity, a sale of all or substantially all of our or the Operating Partnership’s assets not in the ordinary course of the Operating Partnership’s business or a reclassification, recapitalization or change of any outstanding shares of our stock or other outstanding equity interests (each, a “Termination Transaction”) in a manner described in the next paragraph; (b) such transfer is to a subsidiary of InfraREIT that is a “qualified REIT subsidiary” within the meaning of Section 856(i)(2) of the Code; or (c) the limited partners consent to such transaction;	
 
 	•	 	the transferee is admitted as a general partner pursuant to the terms of the partnership agreement;	
 
 	•	 	the transferee assumes, by operation of law or express agreement, all of the obligations of the general partner under the partnership agreement with respect to such transferred interest; and	
 
 	•	 	the transferee has executed such instruments as may be necessary to effectuate such admission and to confirm the agreement of such transferee to be bound by all the terms and provisions of the partnership agreement with respect to the interest so acquired and the admission of such transferee as the general partner.	
 
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We may not, without the consent of the limited partners, transfer all of our interest in the Operating Partnership in connection with a Termination Transaction, unless:
 
 	•	 	in connection with which all partners (other than InfraREIT) who hold OP Units either will receive, or will have the right to receive, for each OP Unit an amount of cash, shares of our common stock or other securities paid to a holder of one share of our common stock in consideration of one share of our common stock pursuant to the terms of such transaction; provided that if, in connection with the transaction, a purchase, tender or exchange offer shall have been made to and accepted by the holders of more than 50% of the outstanding shares of our common stock, each holder of OP Units shall be given the option to exchange its OP Units for the amount of cash, securities or other property that a limited partner would have received had it (1) exercised its redemption right (described above) and (2) sold, tendered or exchanged pursuant to the offer, the shares of our common stock received upon exercise of the redemption right immediately prior to the expiration of the offer; or	
 
 	•	 	all of the following conditions are met: (A) substantially all of the assets directly or indirectly owned by the surviving entity are owned directly or indirectly by the Operating Partnership or another limited partnership or limited liability company which is the survivor of a merger, consolidation or combination of assets with the Operating Partnership, (B) the limited partners that held OP Units immediately prior to the consummation of such transaction own a percentage interest of the surviving entity based on the relative fair market value of the net assets of the Operating Partnership and the other net assets of the surviving entity immediately prior to the consummation of such transaction; (C) the rights, preferences and privileges in the surviving entity of such limited partners are at least as favorable as those in effect with respect to the OP Units immediately prior to the consummation of such transaction and as those applicable to any other limited partners or non-managing members of the surviving entity; and (D) the rights of such limited partners include a redemption right similar to that currently offered under our partnership agreement, or, if the ultimate controlling person of the surviving entity has publicly traded common equity securities, such common equity securities, with an exchange ratio based on the determination of relative fair market value of such securities and the shares.	
Term
The term of the Operating Partnership will continue until terminated in the following circumstances:
 
 	•	 	unless consented to by all partners of the Operating Partnership, the general partner makes an assignment for the benefit of creditors; files a petition or answer seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any statute, law or regulation; files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against it in any proceeding of this nature; or seeks, consents to or acquiesces in the appointment of a trustee, receiver or liquidator of the general partner or of all or any substantial part of its properties, in each case unless within 90 days after the withdrawal the partners (including the general partner) who hold more than 50% of the percentage interests of the OP Units (a “majority in interest”) consent in writing to continue the business of the Operating Partnership and to the appointment, effective as of the date of withdrawal, of a substitute general partner;	
 
 	•	 	the incapacity or dissolution of the general partner;	
 
 	•	 	an election to dissolve the Operating Partnership made by the general partner that is approved by the holders of at least a majority of the then-outstanding OP Units;	
 
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 	•	 	entry of a decree of judicial dissolution of the Operating Partnership pursuant to the provisions of DRULPA;	
 
 	•	 	the sale of all or substantially all of the assets and properties of the Operating Partnership for cash or for marketable securities;	
 
 	•	 	a good faith determination by the general partner that dissolution of the Operating Partnership is necessary or desirable to avoid any material adverse consequences to the Operating Partnership, us, our board of directors or our officers as a result of any law applicable to a regulated entity; or	
 
 	•	 	a final and nonappealable judgment is entered by a court of competent jurisdiction ruling that the general partner is bankrupt or insolvent, or a final and nonappealable order for relief is entered by a court with appropriate jurisdiction against the general partner, in each case under any federal or state bankruptcy or insolvency laws as now or hereafter in effect, unless, prior to or at the time of the entry of such order or judgment, a majority in interest of the remaining partners agree in writing to continue the business of the Operating Partnership and to the appointment, effective as of a date prior to the date of such order or judgment, of a substitute general partner.	
Amendment of the Partnership Agreement
Amendments to the partnership agreement may only be proposed by the general partner. Except as described below and amendments requiring the consent of each affected partner described in “—Restrictions on General Partner’s Authority,” amendments to the partnership agreement generally must be approved by the consent of the general partner and the partners holding a majority of the OP Units (including Class A OP Units held by us). Upon the completion of this offering, we expect to own a majority of the outstanding OP Units.
Notwithstanding the foregoing, we have the power as the general partner of the Operating Partnership, without the consent of the limited partners, to amend the partnership agreement to facilitate or implement any of the following purposes:
 
 	•	 	to add to our obligations as general partner or surrender any right or power granted to us or any of our affiliates for the benefit of the limited partners;	
 
 	•	 	to reflect the admission, substitution or withdrawal of partners, the transfer of any partnership interest, or the termination of the Operating Partnership in accordance with the partnership agreement;	
 
 	•	 	to reflect a change that does not adversely affect the limited partners in any material respect, or to cure any ambiguity, correct or supplement any provision in the partnership agreement not inconsistent with law or with other provisions of the partnership agreement, or make other changes with respect to matters arising under the partnership agreement that will not be inconsistent with law or with the provisions of the partnership agreement;	
 
 	•	 	to satisfy any requirements, conditions or guidelines contained in any order, directive, opinion, ruling or regulation of a U.S. federal, state or local agency or contained in federal, state or local law;	
 
 	•	 	to change the name of the Operating Partnership, the location of the principal place of business of the Operating Partnership or the registered agent or registered office of the Operating Partnership;	
 
 	•	 	to effect a change that, in the sole discretion of the general partner, is necessary or appropriate to qualify or continue the qualification of the Operating Partnership as a limited partnership or a	
 
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 	partnership in which the limited partners have limited liability under the laws of any state or that is necessary or advisable in the opinion of the general partner to ensure that the Operating Partnership will not be treated as an association taxable as a corporation or otherwise taxed as an entity for U.S. federal income tax purposes;	
 
 	•	 	to effect a change in the fiscal year or taxable year of the Operating Partnership and any changes that, in the sole discretion of the general partner, are necessary or appropriate as a result of a change in the fiscal year or taxable year of the Operating Partnership;	
 
 	•	 	to adopt an amendment that is necessary, in the opinion of counsel to the Operating Partnership, to prevent the Operating Partnership or the general partner or its directors or officers from in any manner being subjected to the provisions of the 1940 Act or the Investment Advisers Act of 1940, as amended;	
 
 	•	 	to take actions contemplated by the partnership agreement to cure any consequences or otherwise remediate the effects of an event causing the assets of the Operating Partnership to be deemed “plan assets” under applicable Department of Labor regulations or to prevent any material consequences arising from an investment in the Operating Partnership by an investor that is a regulated entity or the treatment of the Operating Partnership or the general partner as a fiduciary under any law applicable to such regulated entity;	
 
 	•	 	to adopt any amendment expressly permitted in the partnership agreement to be made by the general partner acting alone, including creating a new class or series of limited partner interests;	
 
 	•	 	to reflect such actions as may be necessary or appropriate to avoid the Operating Partnership’s assets being treated for any purpose of ERISA or section 4975 of the Code as assets of any “employee benefit plan” as defined in and subject to ERISA or of any “plan” subject to section 4975 of the Code (or any corresponding provisions of succeeding law) or to avoid the Partnership’s engaging in a prohibited transaction as defined in Section 406 of ERISA or Section 4975(c) of the Code; and	
 
 	•	 	to effect any other amendments of a nature substantially similar to the foregoing.	
 
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 SDTS COMPANY AGREEMENT AND DELEGATION AGREEMENT
The following describes the material provisions of the company agreement of Sharyland Distribution & Transmission Services, L.L.C., or SDTS, as it will be amended and restated upon the consummation of this offering, and the related delegation agreement between Sharyland and us. The following description is only a summary. For a complete description, we refer you to the company agreement and the delegation agreement, copies of which are filed as exhibits to the registration statement of which this prospectus is a part. See “Where You Can Find More Information.”
General
SDTS was formed as a Texas limited partnership in 2006, and in 2009 converted into a Texas limited liability company. SDTS owns, directly or indirectly, all of our T&D assets. The members of SDTS are TDC, which is a wholly-owned subsidiary of the Operating Partnership, and Sharyland. We do not believe that Sharyland’s economic interest in SDTS, described below under “—Distributions,” will result in distributions to Sharyland, except in extraordinary circumstances.
Managing Member
Sharyland is the managing member of SDTS, and as such has exclusive power and authority to manage and control SDTS, subject to the negative TDC control rights described below. Although Sharyland has full operational control of our T&D assets pursuant to the leases, we established Sharyland as the managing member of SDTS to provide the PUCT with certainty that Sharyland retains this operational control. Under the SDTS company agreement, we are not able to remove Sharyland as managing member without PUCT permission.
Delegation Agreement
Sharyland has entered into a delegation agreement with InfraREIT, which will become effective upon the consummation of this offering, delegating certain of Sharyland’s management rights to us. Under this agreement, Sharyland expressly reserves certain rights related to the management of SDTS, including the right to cause SDTS to fund its obligations under the leases if we fail to do so. Subject to this reservation, the delegation agreement generally gives us primary responsibility for raising equity and debt capital for SDTS and its subsidiaries, opening bank accounts, preparing and obtaining approval for annual business plans (with Sharyland’s assistance), managing external auditor and law firm relationships, preparing financial statements, communicating with external equity and debt financing sources, acting as the tax matters partner of SDTS and other day to day operational matters. The delegation agreement also delegates to us the right to elect officers of SDTS to carry out the responsibilities and obligations delegated to us pursuant to the delegation agreement, provided that we have agreed that one designee from Sharyland will be elected as a senior vice president of SDTS. In this respect, we have elected Mark Caskey, the President of Sharyland, as a senior vice president of SDTS. Additionally, the delegation agreement gives us the right to direct Sharyland to file a rate case proceeding. The delegation agreement expires (1) upon any expiration or termination of the SDTS company agreement or (2) at such time as Sharyland is no longer the managing member of SDTS.
TDC Negative Control Rights
We also exercise control over SDTS through TDC’s negative control rights. Under the SDTS company agreement, Sharyland may not cause SDTS to take a number of actions without TDC’s consent, including renewing or entering into new leases, acquiring assets or projects, selling assets, incurring indebtedness, approving annual business plans or material amendments thereto, making expenditures outside of approved business plans (subject to a 5% cushion), appointing or removing outside auditors, changing accounting methods, entering into transactions with Sharyland, effecting mergers or consolidations, filing bankruptcy petitions, initiating or settling material litigation or administrative proceedings and other matters.
 
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Capital To Fund Necessary Footprint Projects
Under the SDTS company agreement, generally Sharyland may not cause SDTS to raise equity capital without TDC’s permission, and Sharyland is not permitted to contribute capital to SDTS. However, if improvements to our T&D assets that constitute Footprint Projects are required by a regulatory authority or are reasonably necessary in order to serve Sharyland’s customers or to maintain the safety or reliability of a system and SDTS’ working capital reserve is insufficient to fund the necessary Footprint Projects, Sharyland may contribute cash to SDTS or cause SDTS to raise capital to fund these Footprint Projects, unless TDC contributes the necessary cash to SDTS. This exception allows Sharyland to cause SDTS to raise equity capital through the admission of additional members. Sharyland has not previously exercised this right.
Working Relationship with Sharyland
In practice, as a result of the delegation agreement, we are responsible for the management and direction of SDTS on the matters that concern us, such as capital sourcing and creditor relations. On matters that are Sharyland’s responsibility, such as the operation and regulatory control of our T&D assets, our leases with Sharyland reserves these rights to Sharyland and not to SDTS. Furthermore, Sharyland retains the right to cause SDTS to fund Footprint Projects as required under the leases. We believe these control mechanisms allow our board and management team to exert a sufficient amount of control over the operations and properties of SDTS and its subsidiaries.
Right of Competition
Our right to own and construct Footprint Projects and our rights to the ROFO Projects are set forth in our leases and the development agreement, as applicable. Subject to the terms of the leases and the development agreement, the SDTS company agreement does not require Sharyland or TDC to offer to SDTS or to each other any business opportunity, project or property. Each of Sharyland and TDC is obligated to devote its time to the business of SDTS as necessary to carry out its duties and obligations set forth in the SDTS company agreement but otherwise is permitted to engage in and possess interests in other business ventures of any kind, including the ownership, acquisition, development, operation and management of T&D assets or any other business that may be in direct or indirect competition with the business and assets of SDTS. Sharyland’s or TDC’s pursuit of any such independent venture will not constitute a breach of the respective duties or obligations owed to SDTS or each other, and neither SDTS, Sharyland nor TDC will have any right, title or interest in or to any independent venture of the other party or to any resulting profits.
Purchase of Sharyland Interest
TDC may purchase Sharyland’s interest in SDTS, including its rights as managing member, at any time. In all circumstances, doing so will require the approval of the PUCT. The purchase price will be $25 million, except in certain circumstances involving the termination of the management agreement or development agreement or Sharyland’s misconduct, bankruptcy or breach of a duty owed to TDC, in which case the payment will equal Sharyland’s capital account in SDTS, which is currently less than $1 million.
Transferability of Membership Interests
We may not, without the approval of Sharyland, and Sharyland may not without our approval, sell, transfer or encumber all or any portion of our respective interests in SDTS or withdraw from SDTS. However, we may mortgage or pledge our interest in SDTS in connection with a bona fide financing transaction.
Distributions
The SDTS company agreement requires SDTS to distribute available cash among the members at least quarterly, subject to any required working capital reserve holdback. As a result of SDTS’ extensive capital expenditure plans during the last several years, which have required a relatively large working capital reserve, SDTS has not
 
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generally made quarterly cash distributions but is expected to make distributions after the completion of this offering. The SDTS company agreement provides that distributions are to be made 100% to TDC until TDC has received all of its contributed capital plus a 12% annualized return. After that time, 10% of distributions will be made to Sharyland and 90% will be made to TDC, except that, if the distributions relate to a sale of assets, insurance recoveries or other capital transactions, Sharyland will receive 1% of such distributions and TDC will receive 99%. Based on our current projections, we generally do not expect SDTS to make any distributions to Sharyland pursuant to the SDTS company agreement for the foreseeable future.
Allocations of Net Profit and Net Loss
Generally, net profit or net loss of SDTS is allocated to the members in a manner that, as nearly as possible, after such allocation would result in each member having a positive balance in its capital account equal to the amount such member would be entitled to receive if SDTS were liquidated and its assets distributed as of that date. The allocations of nonrecourse debt, taxable income and loss and in the event of a decrease in company minimum gain are subject to special rules and may differ from the allocation of net profit or net loss.
REIT Matters
The SDTS company agreement imposes obligations on Sharyland related to maintaining our REIT status, such as Sharyland agreeing that it will not permit SDTS to take any action that would result in less than 75% of SDTS’ assets qualifying as “real estate assets” under applicable tax law.
Exculpation and Indemnification
The SDTS company agreement provides that no member nor any of their officers, directors, partners, members or shareholders, any officer of SDTS or any person serving at the request of SDTS or Sharyland as an officer, director, partner, member, trustee, employee or agent of any entity in which SDTS holds an investment (we refer to them collectively as Covered Persons) is liable to SDTS or any other member for losses sustained, liabilities incurred or benefits not derived as a result of errors in judgment or mistakes of fact or law or any act or omission, unless the Covered Person acted in bad faith and the act or omission was material giving rise to the loss, liability or benefit not derived. SDTS must also pay or reimburse the reasonable expenses of any such person upon its receipt of a written affirmation of the Covered Person’s good faith belief that the standard of conduct necessary for indemnification has been met and a written undertaking to repay any amounts paid or advanced if it is ultimately determined that the person did not meet the standard of conduct for indemnification.
Tax Matters
Pursuant to the company agreement, Sharyland, as the managing member, is the “tax matters partner” of SDTS for federal income tax purposes. Accordingly, Sharyland has the authority to handle tax audits and to make tax elections under the Code, in each case, on behalf of SDTS. However, Sharyland has delegated this authority to our Operating Partnership pursuant to the delegation agreement.
Term
The term of SDTS will continue until the earliest to occur of the sale or other disposition of all or substantially all of its assets and properties; the written agreement of Sharyland and TDC to wind up SDTS; a bankruptcy or similar event with respect to Sharyland; and the occurrence of any other event or action that requires winding up under laws applicable to SDTS.
Amendment of the Company Agreement
The SDTS company agreement may only be modified or amended by written agreement of both Sharyland and us.
 
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 SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common stock. We cannot predict the effect, if any, that future sales of shares or the availability of shares for future sale will have on the market price of our common stock prevailing from time to time. Sales of substantial amounts of our common stock in the public market, or the perception that such sales could occur, could adversely affect the prevailing market price of our common stock or adversely affect our ability to raise equity capital in the future. The number of shares available for future sale in the public market is subject to legal and contractual restrictions described below. The following discussion assumes the consummation of the Reorganization. It also assumes the subsequent conversion of the equity interests held by current InfraREIT investors into shares of common stock based on such allocation of common units.
Sale of Restricted Shares
Upon completion of this offering, we will have issued and outstanding an aggregate of              shares of our common stock. Of these shares, the              shares being sold in this offering will be freely tradable without restriction or further registration under the Securities Act, subject to the restrictions on ownership and transfer set forth in our charter, except for any shares purchased by our “affiliates,” as that term is defined by Rule 144 under the Securities Act (Rule 144). Such shares will be subject to the volume limitations and other restrictions of Rule 144 as described below. In addition to the              shares of our common stock issued and outstanding upon completion of this offering,              shares of our common stock are reserved for issuance upon exchange of OP Units. The remaining shares of our common stock that will be outstanding upon completion of this offering, as well as shares purchased by affiliates in this offering and shares of our common stock owned by affiliates upon conversion of OP Units, will be “restricted securities,” as that term is defined by Rule 144, and, subject to the lock-up agreements described below as well as any other shares of our common stock and OP Units held by our affiliates, may be resold only pursuant to an effective registration statement or an applicable exemption from registration, including an exemption under Rule 144, which rules are summarized below.
Redemption/Exchange Rights
Beginning on the date that is twelve months after the completion of the Reorganization, with respect to common units to be issued to Hunt-InfraREIT, or six months after the closing of this offering, with respect to OP Units we expect to issue MC Transmission Holdings, Inc., an affiliate of Marubeni, on the closing date of this offering, our Operating Partnership’s limited partners will have the right to require our Operating Partnership to redeem part or all of their OP Units for cash, or, at our election, shares of our common stock. The price at which we must redeem OP Units is based upon a 10-day trailing trading average of a share of our common stock at the time of the redemption. At our election, we may satisfy the redemption through the issuance of shares of our common stock on a one share of common stock for one OP Unit basis. If we elect to redeem OP Units by issuing new shares of our common stock, the issuance would be subject to the restrictions on ownership and transfer of our stock contained in our charter and described under “Description of Our Capital Stock—Restrictions on Ownership and Transfer” and “The Operating Partnership and the Partnership Agreement—Redemption Rights.”
Lock-Up Agreements
We, our officers, directors and substantially all of our existing investors have agreed with the underwriters, subject to certain exceptions, not to dispose of, offer to dispose of, redeem, contract to sell or hedge any of the shares of our common stock or securities (including OP Units) convertible into or exchangeable for, or that represent the right to receive, shares of our common stock during the period from the date hereof continuing through the date that is, in the case of our officers, directors and Hunt, twelve months after the date of the underwriting agreement, and in the case of InfraREIT and all other existing investors who have signed a lock-up agreement, 180 days after the date of the underwriting agreement, except in connection with this offering or with the prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global Markets Inc., as representatives of the underwriters in this offering. See “Underwriting.”
 
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In addition, Hunt has agreed to certain lock-up arrangements with us. See “Certain Relationships and Related Party Transactions—Arrangements with Hunt—Lock-Up Agreement.”
Rule 144
In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of ours at any time during the three months preceding a sale and who has beneficially owned restricted securities within the meaning of Rule 144 for at least six months (including any period of consecutive ownership of preceding non-affiliated holders) would be entitled to sell those shares, subject only to the availability of current public information about us. A non-affiliated person who has beneficially owned restricted securities within the meaning of Rule 144 for at least one year would be entitled to sell those shares without regard to the provisions of Rule 144.
A person (or persons whose shares are aggregated) who is deemed to be an affiliate of ours and who has beneficially owned restricted securities within the meaning of Rule 144 for at least six months would be entitled to sell within any three-month period a number of shares of our common stock that does not exceed the greater of 1% of the then outstanding shares of our common stock or the average weekly trading volume of our common stock reported through the NYSE during the four calendar weeks preceding such sale. Such sales are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about us.
The Reorganization will not affect the requirements or periods described above.
Registration Rights
Pursuant to the Registration Rights Agreement, we have agreed to use our commercially reasonable efforts to register              shares of our common stock (including              OP Units that upon redemption may, at our option, be exchanged for shares of our common stock on a one-for-one basis) on the first anniversary of the completion of this offering or as soon as possible thereafter as reasonably practicable. See “Description of Our Capital Stock—Registration Rights.” As part of that registration statement, we also may register shares of common stock that may, at our option, be exchanged on a one-for-one basis, for the              OP Units we expect our directors, other than David Campbell and Hunter L. Hunt, to hold upon the completion of this offering, as well as any OP Units or common stock we may issue to the directors in the future.
 
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 MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of certain material U.S. federal income tax considerations regarding our company and this offering of our common stock. For purposes of this section under the heading “Material Federal Income Tax Consequences,” references to “we,” “our” and “us” mean only InfraREIT and its predecessor, InfraREIT, L.L.C., and not its subsidiaries, except as otherwise indicated. This summary is for general information only and is not tax advice. The information in this summary is based on the Code, current, temporary and proposed Treasury Regulations promulgated under the Code, the legislative history of the Code, administrative interpretations and practices of the IRS, and court decisions, in each case, as of the date of this prospectus. In addition, the administrative interpretations and practices of the IRS include its practices and policies as expressed in private letter rulings that are not binding on the IRS except with respect to the particular taxpayers who requested and received those rulings. The sections of the Code and the corresponding Treasury Regulations that relate to qualification and taxation as a REIT are highly technical and complex. The following discussion sets forth certain material aspects of the sections of the Code that govern the federal income tax treatment of a REIT and its stockholders. This summary is qualified in its entirety by the applicable Code provisions, Treasury Regulations promulgated under the Code, and administrative and judicial interpretations thereof. Future legislation, Treasury Regulations, administrative interpretations and practices and/or court decisions may adversely affect the tax considerations contained in this discussion. Any such change could apply retroactively to transactions preceding the date of the change.
We hold a private letter ruling from the IRS that provides that T&D systems qualify as real estate assets and the rent therefrom generally constitutes qualifying rental income. We are entitled to rely upon this ruling for those assets that fit within the scope of the ruling only to the extent that (i) we have the legal and contractual rights described therein and are considered to be the same taxpayer as, or are treated for tax purposes as the successor to, the taxpayer that obtained the ruling, (ii) we did not misstate or omit in the ruling request a relevant fact and (iii) we continue to operate in the future in accordance with the relevant facts described in such request. No assurance can be given that we will always be able to operate in the future in accordance with the relevant facts described in such request. Moreover, we have not requested a ruling from the IRS that we otherwise qualify as a REIT, and the statements in this prospectus are not binding on the IRS or any court. Thus, we can provide no assurance that the tax considerations contained in this discussion will not be challenged by the IRS or will be sustained by a court if challenged by the IRS.
This discussion does not comment on all federal income tax matters affecting us or our stockholders. Moreover, the summary does not discuss any state, local or non-U.S. tax consequences associated with the purchase, ownership, or disposition of our common stock or our election to be taxed as a REIT. Accordingly, you are urged to consult, and depend on, your own tax advisor in analyzing the federal, state, local and non-U.S. tax consequences to you of the purchase, ownership or disposition of our common stock.
Taxation of the Company
General
We will elect to be taxed as a REIT under Sections 856 through 860 of the Code commencing with our taxable year ending December 31, 2015. We believe that we have been organized and operate in a manner that allows us to qualify for taxation as a REIT under the Code commencing with such taxable year, and we intend to continue to be organized and operate in this manner. However, qualification and taxation as a REIT depend upon our ability to meet the various qualification tests imposed under the Code, including through actual annual operating results, asset composition, distribution levels and diversity of stock ownership. Accordingly, no assurance can be given that we have been organized and have operated, or will continue to be organized and operate, in a manner so as to qualify or remain qualified as a REIT. See “—Failure To Continue To Qualify.”
 
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Baker Botts L.L.P. has acted as our tax counsel in connection with this offering of our common stock and our federal income tax status as a REIT. Baker Botts L.L.P. will render an opinion to us to the effect that, commencing with our taxable year ending December 31, 2015, we have been organized in conformity with the requirements for qualification and taxation as a REIT under the Code, and our proposed method of operation will enable us to meet the requirements for qualification and taxation as a REIT under the Code. It must be emphasized that this opinion will be based on various assumptions and representations as to factual matters, including representations made by us in a factual certificate provided by one or more of our officers and representations made by Hunt-InfraREIT in a factual certificate provided by one or more officers of Hunt-InfraREIT. In addition, this opinion will be based upon our factual representations set forth in this prospectus. Moreover, our qualification and taxation as a REIT depend upon our ability to meet the various qualification tests imposed under the Code, which are discussed below, including through actual annual operating results, asset composition, distribution levels and diversity of stock ownership, the results of which have not been and will not be reviewed by Baker Botts L.L.P. Accordingly, no assurance can be given that our actual results of operations for any particular taxable year will satisfy those requirements. Further, the anticipated federal income tax treatment described in this discussion may be changed, perhaps retroactively, by legislative, administrative or judicial action at any time. Baker Botts L.L.P. has no obligation to update its opinion subsequent to the date of such opinion.
Provided we qualify for taxation as a REIT, we generally will receive a deduction for dividends paid to our stockholders, and our taxable income generally would be eliminated to the extent such deductible dividends equal or exceed our taxable income. We will, however, be required to pay federal income tax as follows:
 
 	•	 	We will be required to pay tax at regular corporate rates on any undistributed REIT taxable income, including undistributed net capital gains.	
 
 	•	 	We may be required to pay the “alternative minimum tax” on our items of tax preference under some circumstances.	
 
 	•	 	We will be required to pay a 4% excise tax to the extent we fail to distribute during each calendar year at least the sum of (1) 85% of our ordinary income for the year, (2) 95% of our capital gain net income for the year, and (3) any undistributed taxable income from prior periods.	
 
 	•	 	We may elect to retain and pay income tax on our net capital gain. In that case, a stockholder would include its proportionate share of our undistributed net capital gain (to the extent we make a timely designation of such gain to the stockholder) in its income, would be deemed to have paid the tax that we paid on such gain, and would be allowed a credit for its proportionate share of the tax deemed to have been paid, and an adjustment would be made to increase the basis of the stockholder in our common stock.	
 
 	•	 	If we have (1) net income from the sale or other disposition of “foreclosure property” held primarily for sale to customers in the ordinary course of business or (2) other nonqualifying income from foreclosure property, we will be required to pay tax at the highest corporate rate on this income. To the extent that income from foreclosure property is otherwise qualifying income for purposes of the 75% gross income test, this tax is not applicable. Subject to certain other requirements, foreclosure property generally is defined as property we acquired through foreclosure or after a default on a loan secured by the property or a lease of the property.	
 
 	•	 	We will be required to pay a 100% tax on any net income from prohibited transactions. Prohibited transactions are, in general, sales or other taxable dispositions of property, other than foreclosure property, held as inventory or primarily for sale to customers in the ordinary course of business.	
 
 	•	 	If we fail to satisfy the 75% gross income test or the 95% gross income test, as described below, but have otherwise maintained our qualification as a REIT because certain other requirements are met, we will be required to pay a tax equal to (1) the greater of (A) the amount by which we fail to	
 
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 	satisfy the 75% gross income test and (B) the amount by which we fail to satisfy the 95% gross income test, multiplied by (2) a fraction intended to reflect our profitability.	
 
 	•	 	If we fail to satisfy any of the asset tests (other than a de minimis failure of the 5% or 10% asset test), as described below, due to reasonable cause and not due to willful neglect, and we nonetheless maintain our REIT qualification because of specified cure provisions, we will be required to pay a tax equal to the greater of $50,000 or the highest corporate tax rate multiplied by the net income generated by the nonqualifying assets that caused us to fail such test.	
 
 	•	 	If we fail to satisfy any provision of the Code that would result in our failure to qualify as a REIT (other than a violation of the gross income tests or certain violations of the asset tests, as described below) and the violation is due to reasonable cause and not due to willful neglect, we may retain our REIT qualification but we will be required to pay a penalty of $50,000 for each such failure.	
 
 	•	 	If we acquire any asset from a corporation that is or has been a C corporation in a transaction in which our initial tax basis in the asset is less than the fair market value of the asset on the date on which we acquired the asset, and we subsequently recognize gain on the disposition of the asset during the ten-year period beginning on the date on which we acquired the asset, then we will be required to pay tax at the highest regular corporate tax rate on this gain to the extent of the excess of (1) the fair market value of the asset over (2) our adjusted tax basis in the asset, in each case determined as of the date on which we acquired the asset. The results described in this paragraph with respect to the recognition of gain assume that the C corporation will refrain from making an election to receive different treatment under applicable Treasury Regulations on its tax return for the year in which we acquire the asset from the C corporation. The IRS has issued Treasury Regulations which generally exclude from the application of this built-in gains tax any gain from the sale of property we acquire in an exchange under Section 1031 (a like-kind exchange) or 1033 (an involuntary conversion) of the Code. These Treasury Regulations apply to such transactions occurring on or after August 2, 2013, but taxpayers may elect to apply the Treasury Regulations to transactions that occurred before this date but after January 2, 2002. See “—Tax Liabilities and Attributes Inherited from Other Entities.”	
 
 	•	 	Our subsidiaries that are C corporations, including any potential “taxable REIT subsidiaries,” generally will be required to pay federal corporate income tax on their earnings.	
 
 	•	 	We will be required to pay a 100% tax on any “redetermined rents,” “redetermined deductions” or “excess interest.” See “—Penalty Tax.” In general, redetermined rents are rents from real property that are overstated as a result of services furnished to any of our tenants by a taxable REIT subsidiary of ours. Redetermined deductions and excess interest generally represent amounts that are deducted by a taxable REIT subsidiary of ours for amounts paid to us that are in excess of the amounts that would have been deducted based on arm’s length negotiations.	
Requirements for Qualification as a REIT
The Code defines a REIT as a corporation, trust or association:
 
 	(1)	that is managed by one or more trustees or directors;	
 
 	(2)	that issues transferable shares or transferable certificates to evidence its beneficial ownership;	
 
 	(3)	that would be taxable as a domestic corporation, but for Sections 856 through 860 of the Code;	
 
 	(4)	that is not a financial institution or an insurance company within the meaning of the Code;	
 
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 	(5)	that is beneficially owned by 100 or more persons;	
 
 	(6)	not more than 50% in value of the outstanding stock of which is owned, actually or constructively, by five or fewer individuals, including certain specified entities, during the last half of each taxable year; and	
 
 	(7)	that meets other tests regarding the nature of its income and assets and the amount of its distributions that are more particularly described below in “—Gross Income Tests,” “—Asset Tests” and “—Annual Distributions Requirements.”	
The Code provides that conditions (1) to (4), inclusive, must be met during the entire taxable year and that condition (5) must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. Conditions (5) and (6) do not apply until after the first taxable year for which an election is made to be taxed as a REIT. For purposes of condition (6), the term “individual” includes a supplemental unemployment compensation benefit plan, a private foundation or a portion of a trust permanently set aside or used exclusively for charitable purposes, but generally does not include a qualified pension plan or profit sharing trust.
We believe that we have been organized, have operated and have issued sufficient shares of stock with sufficient diversity of ownership to allow us to satisfy conditions (1) through (7) inclusive, during the relevant time periods. In addition, our charter provides for restrictions regarding ownership and transfer of our shares that are intended to assist us in continuing to satisfy the share ownership requirements described in (5) and (6) above. A description of the share ownership and transfer restrictions relating to our common stock is contained in the discussion in this prospectus under the heading “Description of Our Capital Stock—Restrictions on Ownership and Transfer.” These restrictions, however, do not ensure that we have previously satisfied, and may not ensure that we will, in all cases, be able to continue to satisfy, the share ownership requirements described in conditions (5) and (6) above. If we fail to satisfy these share ownership requirements, except as provided in the next sentence, our status as a REIT will terminate. If, however, we comply with the rules contained in applicable Treasury Regulations that require us to ascertain the actual ownership of our shares and we do not know, or would not have known through the exercise of reasonable diligence, that we failed to meet the requirement described in condition (6) above, we will be treated as having met this requirement. See “—Failure To Continue To Qualify.”
In addition, we may not maintain our status as a REIT unless our taxable year is the calendar year. We have and will continue to have a calendar taxable year.
Finally, if InfraREIT, L.L.C. failed to meet the REIT requirements and we were deemed to be a successor to InfraREIT, L.L.C., we would be prohibited from re-electing REIT status for the four taxable years following the year during which InfraREIT, L.L.C. ceased to qualify as a REIT, unless certain relief provisions of the Code applied. We would be considered a successor if at any time during the taxable year the persons who own, directly or indirectly, 50% or more in value of our outstanding shares of stock owned, at any time during the first taxable year for which InfraREIT, L.L.C.’s REIT election terminated, 50% or more of the value of InfraREIT, L.L.C.’s outstanding shares. Those persons who at any time have owned InfraREIT, L.L.C.’s outstanding shares collectively will own less than 50% of our outstanding stock after the IPO and Merger and related transactions. Accordingly, we do not believe we are a successor to InfraREIT, L.L.C. See “Certain Tax Considerations Related to the Reorganization” below.
Gross Income Tests
We must satisfy two annual gross income requirements to qualify as a REIT:
 
 	•	 	At least 75% of our gross income (excluding gross income from prohibited transactions, certain hedging transactions and certain foreign currency gains) for each taxable year must consist of	
 
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 	defined types of income derived directly or indirectly from investments relating to real property or mortgages on real property (including pledges of equity interest in certain entities holding real property), including “rents from real property” (as defined in the Code), interest on obligations adequately secured by mortgages on real property, dividends from other qualifying REITs, gains from the sale or other disposition of real property, stock of other qualifying REITs and mortgages on real property, interest and dividends on certain types of temporary investment and other specified types of income; and	
 
 	•	 	At least 95% of our gross income (excluding gross income from prohibited transactions, certain hedging transactions and certain foreign currency gains) for each taxable year must be derived from the sources specified in the preceding paragraph, dividends, interest and gain from the sale or disposition of stock or securities, or from any combination of the foregoing.	
Rents we receive from a tenant will qualify as “rents from real property” for the purpose of satisfying the gross income requirements for a REIT described above only if all of the following conditions are met:
 
 	•	 	The amount of rent is not based in whole or in part on the income or profits of any person. However, an amount we receive or accrue generally will not be excluded from the term “rents from real property” solely because it is based on a fixed percentage or percentages of receipts or sales;	
 
 	•	 	Neither we nor an actual or constructive owner of 10% or more of our capital stock actually or constructively owns 10% or more of the interests in the assets or net profits of a non-corporate tenant, or, if the tenant is a corporation, 10% or more of the total combined voting power of all classes of stock entitled to vote or 10% or more of the total value of all classes of stock of the tenant. Rents we receive from such a tenant that is a taxable REIT subsidiary of ours, however, generally will not be excluded from the definition of “rents from real property” as a result of this condition if at least 90% of the space at the property to which the rents relate is leased to third parties, and the rents paid by the taxable REIT subsidiary are substantially comparable to rents paid by our other tenants for comparable space;	
 
 	•	 	Rent attributable to personal property, leased in connection with a lease of real property, is not greater than 15% of the total rent received under the lease. If this condition is not met, then the portion of the rent attributable to personal property will not qualify as “rents from real property.” To the extent that rent attributable to personal property, leased in connection with a lease of real property, exceeds 15% of the total rent received under the lease, we may transfer a portion of such personal property to a taxable REIT subsidiary; and	
 
 	•	 	We generally do not operate or manage the property or furnish or render services to our tenants, subject to a 1% de minimis exception and except as provided below. We are permitted, however, to perform directly certain services that are “usually or customarily rendered” in connection with the rental of space for occupancy only and are not otherwise considered “rendered to the occupant” of the property. In addition, we are generally permitted to employ an independent contractor from whom we derive no revenue, or a taxable REIT subsidiary (which may be wholly or partially owned by us) to provide services to our tenants, without causing the rent we receive from those tenants to fail to qualify as “rents from real property.”	
We generally do not intend, and as the sole general partner of our Operating Partnership, do not intend to permit our Operating Partnership, to take actions we believe will cause us to fail to satisfy the rental conditions described above. However, we may intentionally fail to satisfy some of these conditions to the extent we determine, based on the advice of our tax counsel, that the failure will not jeopardize our tax status as a REIT.
From time to time, we may enter into hedging transactions with respect to one or more of our assets or liabilities. Our hedging activities may include entering into interest rate swaps, caps, and floors, options to
 
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purchase these items, and futures and forward contracts. Income from a hedging transaction, including gain from the sale or disposition of such a transaction, that is clearly identified as a hedging transaction as specified in the Code will not constitute gross income for purposes of applying the 75% and 95% gross income tests. The term “hedging transaction,” as used above, generally means any transaction we enter into in the normal course of our business primarily to manage risk of (1) interest rate changes or fluctuations with respect to borrowings made or to be made by us to acquire or carry real estate assets, or (2) currency fluctuations with respect to an item of qualifying income under the 75% or 95% gross income test. To the extent that we do not properly identify such transactions as hedges or we hedge with other types of financial instruments, the income from those transactions will likely be treated as gross income that is not qualifying income for purposes of the gross income tests. We intend to structure any hedging transactions in a manner that does not jeopardize our status as a REIT.
To the extent any of our potential taxable REIT subsidiaries pay dividends, such dividend income will qualify under the 95%, but not the 75%, gross income test.
We will monitor the amount of the dividend and other income from our taxable REIT subsidiaries and will take actions intended to keep this income, and any other nonqualifying income, within the limitations of the gross income tests. Although we expect these actions will be sufficient to prevent a violation of the gross income tests, we cannot guarantee that such actions will in all cases prevent such a violation.
If we fail to satisfy one or both of the 75% or 95% gross income tests for any taxable year, we may nevertheless qualify as a REIT for the year if we are entitled to relief under certain provisions of the Code. We generally may make use of the relief provisions if (i) following our identification of the failure to meet the 75% or 95% gross income tests for any taxable year, we file a schedule with the IRS setting forth each item of our gross income for purposes of the 75% or 95% gross income tests for such taxable year in accordance with Treasury Regulations to be issued; and (ii) our failure to meet these tests was due to reasonable cause and not due to willful neglect. It is not possible, however, to state whether in all circumstances we would be entitled to the benefit of these relief provisions. For example, if we fail to satisfy the gross income tests because nonqualifying income that we intentionally accrue or receive exceeds the limits on nonqualifying income, the IRS could conclude that our failure to satisfy the tests was not due to reasonable cause. If these relief provisions do not apply to a particular set of circumstances, we will not qualify as a REIT. As discussed above in “—General,” even if these relief provisions apply, and we retain our status as a REIT, a tax would be imposed with respect to our nonqualifying income. We may not always be able to comply with the gross income tests for REIT qualification despite periodic monitoring of our income.
Prohibited Transaction Income
Any gain that we realize on the sale of property held as inventory or otherwise held primarily for sale to customers in the ordinary course of business, including our share of any such gain realized by our Operating Partnership, either directly or through its subsidiary partnerships and limited liability companies, will be treated as income from a prohibited transaction that is subject to a 100% penalty tax, unless certain safe harbor exceptions apply. This prohibited transaction income may also adversely affect our ability to satisfy the gross income tests for qualification as a REIT. Under existing law, whether property is held as inventory or primarily for sale to customers in the ordinary course of a trade or business is a question of fact that depends on all the facts and circumstances surrounding the particular transaction. As the general partner of our Operating Partnership, we intend to cause our Operating Partnership to hold its properties for investment with a view to long-term appreciation, to engage in the business of acquiring and owning its properties and to make occasional sales of the properties as are consistent with our investment objective. We do not intend, and do not intend to permit our Operating Partnership or its subsidiary partnerships or limited liability companies, to enter into any sales that are prohibited transactions. However, the IRS may successfully contend that some or all of the sales, if any, made by our Operating Partnership or its subsidiary partnerships or limited liability companies are prohibited transactions. We would be required to pay the 100% penalty tax on our allocable share of the gains resulting from any such sales.
 
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Penalty Tax
Any redetermined rents, redetermined deductions or excess interest we generate will be subject to a 100% penalty tax. In general, redetermined rents are rents from real property that are overstated as a result of any services furnished to any of our tenants by a taxable REIT subsidiary of ours, and redetermined deductions and excess interest represent any amounts that are deducted by a taxable REIT subsidiary of ours for amounts paid to us that are in excess of the amounts that would have been deducted based on arm’s length negotiations. Rents we receive will not constitute redetermined rents if they qualify for certain safe harbor provisions contained in the Code.
If a taxable REIT subsidiary of ours provides services to our tenants, we intend to set the fees paid to any such taxable REIT subsidiary for such services at arm’s length rates, although the fees paid may not satisfy the safe- harbor provisions referenced above. These determinations are inherently factual, and the IRS has broad discretion to assert that amounts paid between related parties should be reallocated to clearly reflect their respective incomes. If the IRS successfully made such an assertion, we would be required to pay a 100% penalty tax on the excess of an arm’s length fee for tenant services over the amount actually paid.
Asset Tests
At the close of each quarter of our taxable year, we must satisfy the following tests relating to the nature of our assets:
 
 	•	 	At least 75% of the values of our total assets must be represented by cash or cash items (including certain receivables), U.S. government securities, “real estate assets” (including interests in real property and in mortgages on real property and shares in other qualifying REITs) and/or, in cases where we raise new capital through stock or long-term (maturity of at least five years) debt offerings, temporary investments in stock or debt instruments during the one-year period following our receipt of such capital (the 75% asset test).	
 
 	•	 	Not more than 25% of the value of our total assets may be represented by securities (including securities of taxable REIT subsidiaries), other than those securities that are qualifying assets under the 75% asset test.	
 
 	•	 	Except for those securities that are qualifying assets under the 75% asset test and securities of taxable REIT subsidiaries, not more than 5% of the value of our total assets may be represented by securities of any one issuer, we may not own more than 10% of the total vote or, subject to certain limited exceptions, 10% of the total value of the outstanding securities of any one issuer.	
If we fail to satisfy one or more asset tests at the end of any quarter, we may nevertheless continue to qualify as a REIT if we satisfied all of the asset tests at the close of the preceding calendar quarter and the discrepancy between the value of our assets and the asset test requirements is due to changes in the market value of our assets and not caused in any part by our acquisitions of non-qualifying assets. Furthermore, if we fail to satisfy any of the asset tests at the end of any calendar quarter without curing such failure within thirty days after the end of such quarter, we would fail to qualify as a REIT unless we are eligible for certain relief provisions described below.
Under one relief provision, we would continue to qualify as a REIT if our failure to satisfy the 5% asset test or one of the 10% asset tests is due to our ownership of non-qualifying assets having a total value not exceeding the lesser of 1% of our assets at the end of the relevant quarter or $10.0 million and we disposed of such assets (or otherwise met such assets tests) within six months after the end of the quarter in which the failure was identified (or the period of time prescribed by Treasury Regulations to be issued). If we fail to satisfy any one or more of the asset tests for a particular quarter but do not qualify under the relief provision described in the preceding sentence, then we would be deemed to have satisfied the relevant asset test if: (i) following identification of the failure, we filed a schedule with a description of each asset that caused the failure; (ii) the
 
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failure is due to reasonable cause and not willful neglect; (iii) we disposed of the non-qualifying asset (or otherwise met the relevant asset test) within six months after the end of the quarter in which the failure was identified (or the period of time prescribed by Treasury Regulations to be issued); and (iv) we paid a penalty tax equal to the greater of $50,000 or the highest corporate tax rate multiplied by the net income generated by the non-qualifying asset during the period beginning on the first date of the failure and ending on the date we disposed of the asset (or otherwise cured the asset test failure). We cannot predict, however, whether in all circumstances we would be entitled to the benefit of these relief provisions. If we fail to satisfy any of the asset tests and do not qualify for the relief provision, we will lose our REIT status, which would have a material adverse effect on us.
Although we believe we have satisfied the asset tests described above and plan to take steps to ensure that we satisfy such tests for any quarter with respect to which retesting is to occur, there can be no assurance that we will always be successful, or will not require a reduction in our overall interest in an issuer (including in a taxable REIT subsidiary). If we fail to cure any noncompliance with the asset tests in a timely manner, and the relief provisions described above are not available, we would cease to qualify as a REIT.
Ownership of Interests in Partnerships, Limited Liability Companies and Qualified REIT Subsidiaries. In the case of a REIT that is a partner in a partnership or a member in a limited liability company treated as a partnership for federal income tax purposes, Treasury Regulations provide that the REIT will be deemed to own its proportionate share of the assets of the partnership or limited liability company, as the case may be, based on its interest in partnership capital, subject to special rules relating to the 10% asset test described below. Also, the REIT will be deemed to be entitled to its proportionate share of the income of that entity. The assets and gross income of the partnership or limited liability company retain the same character in the hands of the REIT for purposes of Section 856 of the Code, including satisfying the gross income tests and the asset tests. Thus, our pro rata share of the assets and items of income of any partnership or limited liability company treated as a partnership or disregarded entity for federal income tax purposes, including such partnership’s or limited liability company’s share of these items of any partnership or limited liability company treated as a partnership or disregarded entity for federal income tax purposes in which it owns an interest, would be treated as our assets and items of income for purposes of applying the requirements described in this discussion, including the gross income and asset tests described below. A brief summary of the rules governing the federal income taxation of partnerships and limited liability companies is set forth below in “—Tax Aspects of Our Operating Partnership and Subsidiary Partnerships and Limited Liability Companies.”
We have control of our Operating Partnership and the subsidiary partnerships and limited liability companies and intend to operate them in a manner consistent with the requirements for our qualification as a REIT. If we become a limited partner or non-managing member in any partnership or limited liability company and such entity takes or expects to take actions that could jeopardize our status as a REIT or require us to pay tax, we may be forced to dispose of our interest in such entity. In addition, it is possible that a partnership or limited liability company could take an action that could cause us to fail a gross income or asset test, and that we would not become aware of such action in time to dispose of our interest in the partnership or limited liability company or take other corrective action on a timely basis. In that case, we could fail to qualify as a REIT unless we were entitled to relief, as described above.
We may from time to time own and operate certain properties through subsidiaries that we intend to be treated as “qualified REIT subsidiaries” under the Code. A corporation will qualify as our qualified REIT subsidiary if we own 100% of the corporation’s outstanding stock and do not elect with the subsidiary to treat it as a “taxable REIT subsidiary,” as described below. A qualified REIT subsidiary is not treated as a separate corporation, and all assets, liabilities and items of income, gain, loss, deduction and credit of a qualified REIT subsidiary are treated as assets, liabilities and items of income, gain, loss, deduction and credit of the parent REIT for all purposes under the Code, including all REIT qualification tests. Thus, in applying the federal tax requirements described herein, any qualified REIT subsidiaries we own are ignored, and all assets, liabilities and items of income, gain, loss, deduction and credit of such corporations are treated as our assets, liabilities and
 
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items of income, gain, loss, deduction and credit. A qualified REIT subsidiary is not subject to federal income tax, and our ownership of the stock of a qualified REIT subsidiary will not violate the restrictions on ownership of securities, as described above under “—Asset Tests.”
Ownership of Interests in Taxable REIT Subsidiaries. We may acquire securities in taxable REIT subsidiaries in the future. A taxable REIT subsidiary is a corporation, other than a REIT, in which a REIT directly or indirectly holds stock, and that has made a joint election with such REIT to be treated as a taxable REIT subsidiary. If a taxable REIT subsidiary owns more than 35% of the total voting power or value of the outstanding securities of another corporation, such other corporation will also be treated as a taxable REIT subsidiary. Other than some activities relating to lodging and health care facilities, a taxable REIT subsidiary may generally engage in any business, including the provision of customary or non-customary services to tenants of its parent REIT. A taxable REIT subsidiary is subject to federal income tax as a regular C corporation. In addition, a taxable REIT subsidiary may be prevented from deducting interest on debt funded directly or indirectly by its parent REIT if certain tests regarding the taxable REIT subsidiary’s debt to equity ratio and interest expense are not satisfied. A REIT’s ownership of securities of a taxable REIT subsidiary is not subject to the 5% or 10% asset test described below. See “—Asset Tests.”
Annual Distribution Requirements
In order to maintain our qualification as a REIT, we are required to distribute dividends (other than capital gain dividends) to our stockholders in an amount equal to at least (i) 90% of our “REIT taxable income” (computed without regard to the dividends paid deduction and our net capital gain), plus (ii) 90% of the net income (after tax), if any, from foreclosure property, minus (iii) the excess of the sum of certain items of non-cash income, over 5% of our REIT taxable income.
We generally must pay, or be treated as paying, the distributions described above in the taxable year to which they relate, or in the following taxable year if (i) such distributions are declared in October, November or December, payable to stockholders of record on a specified date in any one of those months and actually paid during January of such following year or (ii) such distributions are declared before we timely file our tax return for such year and paid on or before the first regular dividend payment after such declaration, and we elect on our federal income tax return for the prior year to have a specified amount of the subsequent dividend treated as paid in the prior year. In order to be taken into account for purposes of our distribution requirement, the amount distributed must not be preferential, i.e., every stockholder of the class of stock to which a distribution is made must be treated the same as every other stockholder of that class, and no class of stock may be treated other than according to its dividend rights as a class.
To the extent we do not distribute all of our net capital gain (less any applicable capital loss carryovers) or at least 90%, but less than 100%, of our “REIT taxable income” (less any applicable carryovers), as adjusted, we will be subject to tax on the undistributed amount at regular capital gains and ordinary corporate tax rates. Moreover, if we fail to distribute during each calendar year (or, in the case of distributions with declaration and record dates falling in the last three months of the calendar year, by the end of January following such calendar year) at least the sum of 85% of our REIT ordinary income for such year, 95% of our REIT capital gain net income for such year (other than long-term capital gain we elect to retain and treat as having been distributed to stockholders), and any undistributed taxable income from prior periods, we will be subject to a 4% nondeductible excise tax on the excess of such required distribution over the amounts actually distributed.
We believe that we have made, and we intend to continue to make, timely distributions sufficient to satisfy these annual distribution requirements and to minimize our corporate tax obligations. In this regard, the partnership agreement of our Operating Partnership will authorize us, as the sole general partner of our Operating Partnership, to take such steps as may be necessary to cause our Operating Partnership to distribute to its partners an amount sufficient to permit us to meet these distribution requirements and to minimize our corporate tax obligation.
 
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We expect that our REIT taxable income will be less than our cash flow because of depreciation and other non-cash charges, and because of certain net operating loss carryovers, included in computing REIT taxable income. Accordingly, we anticipate that we generally will have sufficient cash or liquid assets to enable us to satisfy the distribution requirements described above. However, from time to time, we may not have sufficient cash or other liquid assets to meet these distribution requirements due to timing differences between the actual receipt of income and actual payment of deductible expenses, and the inclusion of income and deduction of expenses in determining our taxable income. In addition, we may decide to retain our cash, rather than distribute it, in order to repay debt or for other reasons. If these timing differences occur, we may borrow funds to pay dividends or we may pay part of the distribution in kind by distributing additional shares of our stock.
Under certain circumstances, we may be able to rectify an inadvertent failure to meet the 90% distribution requirement for a year by paying “deficiency dividends” to our stockholders in a later year, which may be included in our deduction for dividends paid for the earlier year. Thus, we may be able to avoid being taxed on amounts distributed as deficiency dividends, subject to the 4% excise tax described above. However, we will be required to pay interest to the IRS based upon the amount of any deduction claimed for deficiency dividends. While the payment of a deficiency dividend will apply to a prior year for purposes of our REIT distribution requirements, it will be treated as an additional distribution to our stockholders in the year such dividend is paid.
Like-Kind Exchanges
We may dispose of properties in transactions intended to qualify as like-kind exchanges under the Code. Such like-kind exchanges are intended to result in the deferral of gain for federal income tax purposes. The failure of any such transaction to qualify as a like-kind exchange could require us to pay federal income tax, possibly including the 100% prohibited transaction tax, depending on the facts and circumstances surrounding the particular transaction.
Failure To Continue To Qualify
If we fail to satisfy one or more requirements for REIT qualification, other than by violating a gross income or asset test for which relief is otherwise available as described above, we would retain our REIT qualification if the failure is due to reasonable cause and not willful neglect and if we pay a penalty of $50,000 for each such failure. We cannot predict, however, whether in all circumstances we would be entitled to the benefit of this relief provision.
If our election to be taxed as a REIT is revoked or terminated (e.g., due to a failure to meet the REIT qualification tests without qualifying for any applicable relief provisions), we would be liable for tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates (for all open tax years beginning with the year our REIT election is revoked or terminated), and distributions to stockholders would not be deductible by us, nor would they be required to be made. In such event, to the extent of current and accumulated earnings and profits, all distributions to stockholders would be taxable as ordinary income (except to the extent such dividends are eligible for the qualified dividends rate generally available to non-corporate holders), and subject to certain limitations in the Code, corporate stockholders may be eligible for the dividends received deduction. In addition, we would be prohibited from re-electing REIT status for the four taxable years following the year during which we ceased to qualify as a REIT, unless certain relief provisions of the Code applied. We cannot predict, however, whether we would be entitled to such relief.
Tax Aspects of Our Operating Partnership and Subsidiary Partnerships and Limited Liability Companies
General
All of our investments will be held indirectly through our Operating Partnership. We will own all of the general partner interests in our Operating Partnership and we will be the sole general partner of our Operating
 
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Partnership. In addition, our Operating Partnership will hold certain of its investments indirectly through subsidiary partnerships and limited liability companies that we believe will be treated as disregarded entities or partnerships for federal income tax purposes. In general, entities that are treated as partnerships or disregarded entities for federal income tax purposes are “pass-through” entities that are not required to pay federal income tax. Rather, partners or members of such entities are allocated their shares of the items of income, gain, loss, deduction and credit of the partnership or limited liability company, and are potentially required to pay tax on this income, without regard to whether they receive a distribution from the partnership or limited liability company. We will include in our income our share of these partnership and limited liability company items for purposes of the various gross income tests, the computation of our REIT taxable income, and the REIT distribution requirements. Moreover, for purposes of the asset tests, we will include our pro rata share of assets held by our Operating Partnership, including its share of its subsidiary partnerships and limited liability companies, based on our capital interests in each such entity. See “—Taxation of the Company.”
Entity Classification
Our interests in our Operating Partnership and the subsidiary partnerships and limited liability companies involve special tax considerations, including the possibility that the IRS might challenge the status of these entities as disregarded entities (or partnerships). For example, an entity that would otherwise be treated as a partnership for federal income tax purposes may nonetheless be taxable as a corporation if it is a “publicly traded partnership” and certain other requirements are met. A partnership or limited liability company would be treated as a publicly traded partnership if its interests are traded on an established securities market or are readily tradable on a secondary market or a substantial equivalent thereof, within the meaning of applicable Treasury Regulations. We do not anticipate that our Operating Partnership or any subsidiary partnership or limited liability company will be treated as a publicly traded partnership that is taxable as a corporation. However, if any such entity were treated as a corporation, it would be required to pay an entity-level tax on its income. In this situation, the character of our assets and items of gross income would change and could prevent us from satisfying the REIT asset tests and possibly the REIT income tests. See “—Taxation of the Company—Asset Tests” and “—Gross Income Tests.” This, in turn, could prevent us from qualifying as a REIT. See “—Taxation of the Company—Failure To Continue To Qualify” for a discussion of the effect of our failure to meet these tests. In addition, a change in the tax status of our Operating Partnership or a subsidiary partnership or limited liability company might be treated as a taxable event. If so, we might incur a tax liability without any related cash payment. We believe our Operating Partnership will be treated as a partnership for federal income tax purposes, and each of its subsidiary partnerships and limited liability companies will be treated as disregarded entities or partnerships for federal income tax purposes.
Allocations of Income, Gain, Loss and Deduction
A partnership agreement (or, in the case of a limited liability company treated as a partnership for federal income tax purposes, the limited liability company agreement) will generally determine the allocation of income and loss among partners. These allocations, however, will be disregarded for tax purposes if they do not comply with the provisions of Section 704(b) of the Code and the Treasury Regulations thereunder. Generally, Section 704(b) of the Code and the Treasury Regulations thereunder require that partnership allocations respect the economic arrangement of the partners. If an allocation of partnership income or loss does not comply with the requirements of Section 704(b) of the Code and the Treasury Regulations thereunder, the item subject to the allocation will be reallocated in accordance with the partners’ interests in the partnership. This reallocation will be determined by taking into account all of the facts and circumstances relating to the economic arrangement of the partners with respect to such item. See “The Operating Partnership and the Partnership Agreement—Allocations of Net Income and Net Loss” for a summary of certain allocation provisions in the partnership agreement of our Operating Partnership. Our Operating Partnership’s allocations of taxable income and loss are intended to comply with the requirements of Section 704(b) of the Code and the Treasury Regulations thereunder.
 
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Tax Allocations With Respect to the Properties
Under Section 704(c) of the Code, income, gain, loss and deduction attributable to appreciated or depreciated property that is contributed to a partnership (including a limited liability company treated as a partnership for federal income tax purposes) in exchange for an interest in the partnership, must be allocated in a manner so that the contributing partner is charged with the unrealized gain or benefits from the unrealized loss associated with the property at the time of the contribution. The amount of the unrealized gain or unrealized loss generally is equal to the difference between the fair market value or book value and the adjusted tax basis of the contributed property at the time of contribution (this difference is referred to as a book-tax difference), as adjusted from time to time. These allocations are solely for federal income tax purposes and do not affect the book capital accounts or other economic or legal arrangements among the partners.
Our Operating Partnership may, from time to time, acquire interests in property in exchange for interests in our Operating Partnership. In that case, the tax basis of these property interests will generally carry over to our Operating Partnership, notwithstanding their different book (i.e. , fair market) value. The partnership agreement will require that, if our Operating Partnership is treated as a partnership for federal income tax purposes, income and loss allocations with respect to these properties be made in a manner consistent with Section 704(c) of the Code. Treasury Regulations issued under Section 704(c) of the Code provide partnerships (including a limited liability company treated as a partnership for federal income tax purposes) with a choice of several methods of accounting for book-tax differences. Depending on the method we choose in connection with any particular contribution, the carryover basis of each of the contributed interests in the properties in the hands of our Operating Partnership (1) could cause us to be allocated lower amounts of depreciation deductions for tax purposes than would be allocated to us if any of the contributed properties were to have a tax basis equal to its respective fair market value at the time of the contribution and (2) could cause us to be allocated taxable gain in the event of a sale of such contributed interests or properties in excess of the economic or book income allocated to us as a result of such sale, with a corresponding benefit to the other partners in our Operating Partnership. An allocation described in clause (2) above might cause us or the other partners to recognize taxable income in excess of cash proceeds in the event of a sale or other disposition of property, which might adversely affect our ability to comply with the REIT distribution requirements. See “—Taxation of the Company—Requirements for Qualification as a REIT” and “—Taxation of the Company—Annual Distribution Requirements.”
Any property acquired by our Operating Partnership in a taxable transaction will initially have a tax basis equal to its fair market value, and Section 704(c) of the Code generally will not apply.
Tax Liabilities and Attributes Inherited from Other Entities
We have previously acquired, and from time to time we may acquire, C corporations or assets of C corporations in transactions in which the basis of the corporations’ assets in our hands is determined by reference to the basis of the assets in the hands of the acquired corporations, or carry-over basis transactions.
In the case of assets we acquire from a C corporation in a carry-over basis transaction, if we dispose of any such asset in a taxable transaction (including by deed in lieu of foreclosure) during the ten-year period beginning on the date of the carry-over basis transaction, then we will be required to pay tax at the highest regular corporate tax rate on the gain recognized to the extent of the excess of (1) the fair market value of the asset over (2) our adjusted tax basis in the asset, in each case determined as of the date of the carry-over basis transaction. The foregoing result with respect to the recognition of gain assumes that the C corporation will refrain from making an election to receive different treatment under applicable Treasury Regulations on its tax return for the year in which we acquire the asset from the C corporation. Any taxes we pay as a result of such gain would reduce the amount available for distribution to our stockholders.
Our tax basis in the assets we acquire in a carry-over basis transaction may be lower than the assets’ fair market values at the time of such acquisition. This lower tax basis could cause us to have lower depreciation
 
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deductions and more gain on a subsequent sale of the assets, and to have a correspondingly larger required distribution of income or gain to our stockholders, than would be the case if we had directly purchased the assets in a taxable transaction.
In addition, in such a carry-over basis transaction, we will succeed to any tax liabilities and earnings and profits of the acquired C corporation. To qualify as a REIT, we must distribute any such earnings and profits by the close of the taxable year in which such transaction occurs. Any adjustments to the acquired corporation’s income for taxable years ending on or before the date of the transaction, including as a result of an examination of the corporation’s tax returns by the IRS, could affect the calculation of the corporation’s earnings and profits. If the IRS were to determine that we acquired earnings and profits from a corporation that we failed to distribute prior to the end of the taxable year in which the carry-over basis transaction occurred, we could avoid disqualification as a REIT by using “deficiency dividend” procedures. Under these procedures, we generally would be required to distribute any such earnings and profits to our stockholders as a dividend within 90 days of the determination and pay a statutory interest charge at a specified rate to the IRS. Such a distribution would be in addition to the distribution of REIT taxable income necessary to satisfy the REIT distribution requirement.
In 2010, we acquired Cap Rock Holdings Corporation, a C corporation, in a stock purchase and then merged Cap Rock Holdings Corporation into the Company. This transaction was treated as a carry-over basis transaction and, thus, we would be subject to the built-in gains tax referred to above if we were to dispose of the assets of Cap Rock Holdings Corporation within ten years of such acquisition. Moreover, Cap Rock Holdings Corporation had non-REIT earnings and profits prior to such acquisition. As a result, prior to such acquisition, Cap Rock Holdings Corporation made a special distribution to its shareholders in an amount intended to constitute all of its accumulated earnings and profits. We believe that the special distribution satisfied the requirements relating to the distribution of any C corporation accumulated earnings and profits. However, the determination of the amount of Cap Rock Holdings Corporation’s accumulated earnings and profits that was required to be distributed prior to our acquisition involved a complex factual and legal determination. Moreover, there are substantial uncertainties relating to the computation of accumulated earnings and profits generally, including the possibility that the IRS could, in auditing tax years of Cap Rock Holdings Corporation prior to our acquisition, successfully assert that Cap Rock Holdings Corporation’s accumulated earnings and profits was higher than we calculated, or that Cap Rock Holdings Corporation’s taxable income should be increased for other reasons due to such an audit. Thus, it is possible that the IRS could disagree with our calculation of Cap Rock Holdings Corporation’s accumulated earnings and profits and assert that Cap Rock Holdings Corporation failed to distribute the full amount of its earnings and profits. In such a circumstance, Cap Rock Holdings Corporation would be obligated to indemnify us against any losses or claims. Moreover, it is uncertain whether we would be able to cure any such failure by complying with the procedures for paying a “deficiency dividend.” If the IRS were to successfully assert that we or Cap Rock Holdings Corporation failed to distribute all of Cap Rock Holdings Corporation’s accumulated earnings and profits and we were not able cure any such failure by complying with the procedures for paying a “deficiency dividend,” such failure could result in a loss of our REIT status.
Certain Tax Considerations Related to the Reorganization
As described under “Description of Our Capital Stock—Reorganization,” InfraREIT, L.L.C. will merge with and into us in a transaction that is intended to be treated as a “reorganization” within the meaning of Section 368(a) of the Code. If the Merger qualifies as a reorganization for U.S. federal income tax purposes, we will succeed to the earnings and profits, if any, of InfraREIT, L.L.C., and our tax basis in the assets we acquire from InfraREIT, L.L.C. will be determined by reference to the tax basis of the assets in the hands of InfraREIT, L.L.C. We will receive from our tax counsel, Baker Botts L.L.P., an opinion to the effect that, for U.S. federal income tax purposes, the Merger will constitute a reorganization within the meaning of Section 368(a) of the Code. Such opinion will be based on factual representations and covenants made by us and InfraREIT, L.L.C., and on customary assumptions. If any assumption or representation is inaccurate in any way, or any covenant is not complied with, the tax consequences of the Merger could differ from those described in such opinion. No ruling
 
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from the IRS has been or will be requested in connection with the Merger, and there can be no assurance that the IRS would not assert, or that a court would not sustain, a position contrary to the conclusions set forth in such opinion.
We believe that InfraREIT, L.L.C. has been organized and has operated in a manner that has allowed it to qualify for taxation as a REIT under the Code commencing with the taxable year ended December 31, 2010 and through the closing of the Merger. However, no ruling from the IRS will be requested and no opinion of counsel will be rendered regarding InfraREIT, L.L.C.’s qualification for taxation as a REIT. If InfraREIT, L.L.C. failed to qualify as a REIT, it would have been required to pay U.S. federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. As the successor-in-interest to InfraREIT, L.L.C., we would be required to pay any of InfraREIT, L.L.C.’s unpaid income tax liabilities (plus any interest and penalties imposed thereon).
In addition, to qualify as a REIT, any C corporation earnings and profits (i.e., earnings and profits accumulated in a non-REIT year) we were to acquire from InfraREIT, L.L.C. would have to be distributed as of the close of the taxable year in which we acquired such earnings and profits. We believe that InfraREIT, L.L.C has at all relevant times qualified as a REIT. However, if it failed to qualify as a REIT, it could have material earnings and profits accumulated in a non-REIT year. See “—Tax Liabilities and Attributes Inherited from Other Entities.”
Also, if we acquire any asset from a corporation that is or has been a C corporation (including InfraREIT, L.L.C., if it failed to qualify as a REIT) in a transaction in which the basis of the asset in our hands is less than the fair market value of the asset, in each case determined at the time we acquired the asset, and we subsequently recognize gain on the disposition of the asset during the ten-year period beginning on the date on which we acquired the asset, then we will be required to pay tax at the highest regular corporate tax rate on this gain to the extent of the excess of (1) the fair market value of the asset over (2) our adjusted basis in the asset, in each case determined as of the date on which we acquired the asset. See “—Tax Liabilities and Attributes Inherited from Other Entities.” Provided InfraREIT, L.L.C. has always qualified to be taxed as a REIT, as we believe to be the case, these rules would not apply to our disposition of the assets of InfraREIT, L.L.C. acquired by us in the Reorganization. Furthermore, our tax basis in the assets we acquire from InfraREIT, L.L.C. in the Merger will be lower than the assets’ fair market values. This lower tax basis could cause us to have lower depreciation deductions and more gain on a subsequent sale of the assets than would be the case if we had directly purchased the assets in a taxable transaction.
If InfraREIT, L.L.C. failed to qualify as a REIT and we are considered a “successor” to InfraREIT, L.L.C. under applicable Treasury Regulations , we would be ineligible to elect REIT status for the four taxable years following the year in which InfraREIT, L.L.C. ceased to qualify as a REIT. However, we would be considered a “successor” for these purposes only if, among other requirements, persons who own, directly or indirectly, 50% or more in value of our shares at any time during the taxable year ending after the Merger occurs owned, directly or indirectly, 50% or more in value of the shares of InfraREIT, L.L.C. during the first year in which it ceased to qualify as a REIT. We believe that we would not be a considered a “successor” to InfraREIT, L.L.C. for purposes of such provisions.
If the Merger with InfraREIT, L.L.C. does not qualify as a reorganization within the meaning of Section 368(a) of the Code, the Merger would be treated as a sale of the assets of InfraREIT, L.L.C. to us in a taxable transaction, followed by InfraREIT L.L.C.’s distribution of the merger consideration to its shareholders in liquidation of InfraREIT, L.L.C. InfraREIT, L.L.C. would recognize taxable gain in an amount equal to the excess of the cash and fair market value of our shares issued in the Merger over the adjusted tax basis of its assets at such time. In such a case, if InfraREIT, L.L.C. qualified as a REIT, any taxable gain from such deemed asset sale would be reduced by the fair market value of the Merger consideration deemed distributed in liquidation of InfraREIT, L.L.C., and we believe such deemed distribution would eliminate such taxable gain. However, if the Merger does not qualify as a reorganization under the Code, and InfraREIT, L.L.C. failed to qualify as a REIT at the time of the Merger, the Merger would cause InfraREIT, L.L.C. to recognize gain and be subject to tax at
 
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regular corporate rates. As the successor-in-interest to InfraREIT, L.L.C., we would be required to pay any unpaid tax liabilities of such entity. As described above, although we will receive from our tax counsel, Baker Botts L.L.P., an opinion to the effect that, for U.S. federal income tax purposes, the Merger will constitute a reorganization within the meaning of Section 368(a) of the Code, no assurance can be given that the IRS would not successfully take a contrary position.
Federal Income Tax Considerations for Our Common Stockholders
The following summary describes the principal federal income tax consequences to you of purchasing, owning and disposing of our common stock. This summary assumes you hold shares of our common stock as “capital assets” (generally, property held for investment within the meaning of Section 1221 of the Code). It does not address all the tax consequences that may be relevant to you in light of your particular circumstances. In addition, this discussion does not address the tax consequences relevant to persons who receive special treatment under the federal income tax law, except where specifically noted. Holders receiving special treatment include, without limitation:
 
 	•	 	financial institutions, banks and thrifts;	
 
 	•	 	insurance companies;	
 
 	•	 	tax-exempt organizations (except to the limited extent discussed in “—Taxation of Tax-Exempt Stockholders” below);	
 
 	•	 	“S” corporations;	
 
 	•	 	traders in securities that elect to mark to market;	
 
 	•	 	partnerships, pass-through entities and persons holding our common stock through a partnership or other pass-through entity;	
 
 	•	 	stockholders subject to the alternative minimum tax;	
 
 	•	 	regulated investment companies and REITs;	
 
 	•	 	stockholders who receive common stock through the exercise of employee stock options or otherwise as compensation;	
 
 	•	 	non-U.S. governments and international organizations;	
 
 	•	 	non-U.S. stockholders that are passive foreign investment companies or controlled foreign corporations;	
 
 	•	 	broker-dealers or dealers in securities or currencies;	
 
 	•	 	U.S. expatriates;	
 
 	•	 	persons holding our common stock as part of a hedge, straddle, conversion, integrated or other risk reduction or constructive sale transaction; or	
 
 	•	 	U.S. stockholders (as defined below) whose functional currency is not the U.S. dollar.	
If you are considering purchasing our common stock, you should consult your tax advisors concerning the application of federal income tax laws to your particular situation as well as any consequences of the purchase, ownership and disposition of our common stock arising under the laws of any state, local or non-U.S. taxing jurisdiction.
 
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When we use the term “U.S. stockholder,” we mean a holder of shares of our common stock who, for federal income tax purposes, is:
 
 	•	 	an individual who is a citizen or resident of the United States;	
 
 	•	 	a corporation, including an entity treated as a corporation for federal income tax purposes, created or organized in or under the laws of the United States or of any state thereof or in the District of Columbia;	
 
 	•	 	an estate the income of which is subject to federal income taxation regardless of its source; or	
 
 	•	 	a trust that (1) is subject to the primary supervision of a U.S. court and the control of one or more U.S. persons or (2) has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person.	
If you are an individual, corporation, estate or trust that holds shares of our common stock and you are not a U.S. stockholder, you are a “non-U.S. stockholder.”
If a partnership or other entity treated as a partnership for federal income tax purposes holds shares of our common stock, the tax treatment of a partner generally will depend on the status of the partner and on the activities of the partnership. Partners of partnerships holding shares of our common stock are encouraged to consult their tax advisors.
Taxation of Taxable U.S. Stockholders
Distributions Generally
Distributions out of our current or accumulated earnings and profits will be treated as dividends and, other than with respect to capital gain dividends and certain amounts that have previously been subject to corporate level tax, as discussed below, will be taxable to our taxable U.S. stockholders as ordinary income when actually or constructively received. See “—Tax Rates” below. As long as we qualify as a REIT, these distributions will not be eligible for the dividends-received deduction in the case of U.S. stockholders that are corporations or, except to the extent provided in “—Tax Rates” below, the preferential rates on qualified dividend income applicable to non-corporate U.S. stockholders, including individuals.
To the extent that we make distributions on our common stock in excess of our current and accumulated earnings and profits allocable to such stock, these distributions will be treated first as a tax-free return of capital to a U.S. stockholder. This treatment will reduce the U.S. stockholder’s adjusted tax basis in such shares of stock by the amount of the distribution, but not below zero. Distributions in excess of our current and accumulated earnings and profits and in excess of a U.S. stockholder’s adjusted tax basis in its shares will be taxable as capital gain. Such gain will be taxable as long-term capital gain if the shares have been held for more than one year. Dividends we declare in October, November or December of any year and which are payable to a stockholder of record on a specified date in any of these months will be treated as both paid by us and received by the stockholder on December 31 of that year, provided we actually pay the dividend on or before January 31 of the following year. U.S. stockholders may not include in their own income tax returns any of our net operating losses or capital losses.
Capital Gain Dividends and Retention of Capital Gains
Dividends that we properly designate as capital gain dividends will be taxable to our taxable U.S. stockholders as capital gain from the sale or disposition of a capital asset held for more than one year, to the extent that such gain does not exceed our actual net capital gain for the taxable year. See “—Tax Rates.” U.S. stockholders that are corporations may, however, be required to treat up to 20% of certain capital gain dividends as ordinary income.
 
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We may elect to retain, rather than distribute as a capital gain dividend, all or a portion of our net capital gains. If we make this election, we would pay tax on our retained net capital gains. In addition, to the extent we so elect, our earnings and profits (determined for federal income tax purposes) would be adjusted accordingly, and a U.S. stockholder generally would:
 
 	•	 	include its pro rata share of our undistributed net capital gains in computing its long-term capital gains in its return for its taxable year in which the last day of our taxable year falls, subject to certain limitations as to the amount that is includable;	
 
 	•	 	be deemed to have paid its share of the capital gains tax imposed on us on the designated amounts included in the U.S. stockholder’s income as long-term capital gain;	
 
 	•	 	receive a credit or refund for the amount of tax deemed paid by it; and	
 
 	•	 	increase the adjusted tax basis of its common stock by the difference between the amount of includable gains and the tax deemed to have been paid by it.	
Passive Activity Losses and Investment Interest Limitations
Distributions we make and gain arising from the sale or exchange by a U.S. stockholder of our shares will not be treated as passive activity income. As a result, U.S. stockholders generally will not be able to apply any “passive losses” against this income or gain. A U.S. stockholder may elect to treat capital gain dividends, capital gains from the disposition of our stock and income designated as qualified dividend income, described in “—Tax Rates” below, as investment income for purposes of computing the investment interest limitation, but in such case, the stockholder will be taxed at ordinary income rates on such amount. Other distributions made by us, to the extent they do not constitute a return of capital, generally will be treated as investment income for purposes of computing the investment interest limitation.
Dispositions of Our Common Stock
If a U.S. stockholder sells or disposes of shares of our common stock, it will recognize gain or loss for federal income tax purposes in an amount equal to the difference between the amount of cash and the fair market value of any property received on the sale or other disposition and the U.S. stockholder’s adjusted tax basis in the shares. This gain or loss, except as provided below, will be a long-term capital gain or loss if the U.S. stockholder has held such common stock for more than one year. However, if a U.S. stockholder recognizes a loss upon the sale or other disposition of common stock that it has held for six months or less, after applying certain holding period rules, the loss recognized will be treated as a long-term capital loss to the extent the U.S. stockholder received distributions from us that were required to be treated as long-term capital gains.
Tax Rates
The maximum tax rate for non-corporate taxpayers for (1) capital gains, including certain “capital gain dividends,” is currently 25% for capital gain dividends attributable to depreciation recapture on real property and 20% of all other capital gains and capital gain dividends, (2) “qualified dividend income” is currently 20%, and (3) all other dividend income is currently 39.6%. However, dividends payable by REITs are not eligible for the 20% tax rate on qualified dividend income, except to the extent that certain holding requirements have been met and the REIT’s dividends are attributable to dividends received from taxable corporations (such as its taxable REIT subsidiaries) or to income that was subject to tax at the corporate/REIT level (for example, if the REIT distributed taxable income that it retained and paid tax on in the prior taxable year) or to dividends properly designated by the REIT as “capital gain dividends.” The maximum tax rate for U.S. stockholders that are corporations is 35% for ordinary income and capital gains.
 
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Medicare Tax on Unearned Income
A U.S. person that is an individual or estate, or a trust that does not fall into a special class of trusts exempt from such tax, will generally be subject to an additional 3.8% tax on the lesser of (i) the U.S. person’s “net investment income” for a taxable year or (ii) the excess of the U.S. person’s modified adjusted gross income for such taxable year over $200,000 ($250,000 in the case of joint filers). For these purposes, “net investment income” will generally include interest, dividends (including dividends paid by us), annuities, royalties, rents, net gain attributable to the disposition of property not held in a trade or business, and certain other income, but will be reduced by any deductions properly allocable to such income or net gain.
Foreign Accounts
Certain payments made to “foreign financial institutions” in respect of accounts of U.S. stockholders at such financial institutions may be subject to withholding at a rate of 30%. U.S. stockholders should consult their tax advisors regarding the effect, if any, of this withholding provision on their ownership and disposition of our common stock and the effective date of such provision. See “—Taxation of Non-U.S. Stockholders—Foreign Accounts.”
Information Reporting and Backup Withholding
We are required to report to our U.S. stockholders and the IRS the amount of dividends paid during each calendar year, and the amount of any tax withheld. Under the backup withholding rules, a stockholder may be subject to backup withholding with respect to dividends paid unless the holder is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact, or provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding, and otherwise complies with applicable requirements of the backup withholding rules. A U.S. stockholder that does not provide us with its correct taxpayer identification number may also be subject to penalties imposed by the IRS. Backup withholding is not an additional tax. Any amount paid as backup withholding will be creditable against the stockholder’s federal income tax liability, provided the required information is timely furnished to the IRS. In addition, we may be required to withhold a portion of capital gain distributions to any stockholders who fail to certify their non-foreign status. See “—Taxation of Non-U.S. Stockholders.”
Taxation of Tax-Exempt Stockholders
Dividend income from us and gain arising upon a sale of our shares generally should not be unrelated business taxable income, or UBTI, to a tax-exempt stockholder, except as described below. This income or gain will be UBTI, however, if a tax-exempt stockholder holds its shares as “debt-financed property” within the meaning of the Code. Generally, “debt-financed property” is property the acquisition or holding of which was financed through a borrowing by the tax-exempt stockholder.
For tax-exempt stockholders that are social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, or qualified group legal services plans exempt from federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) or (c)(20) of the Code, respectively, income from an investment in our shares will constitute UBTI unless the organization is able to properly claim a deduction for amounts set aside or placed in reserve for specific purposes so as to offset the income generated by its investment in our shares. These prospective investors should consult their tax advisors concerning these “set aside” and reserve requirements.
Notwithstanding the above, however, a portion of the dividends paid by a “pension-held REIT” may be treated as UBTI as to certain pension trusts that hold more than 10%, by value, of the interests in the REIT. A REIT will not be a “pension-held REIT” if it is able to satisfy the “not closely held” requirement without relying on the “look-through” exception with respect to certain pension trusts or if such REIT is not “predominantly
 
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held” by “qualified trusts.” As a result of restrictions on ownership and transfer of our stock contained in our charter, we do not expect to be classified as a “pension-held REIT,” and as a result, the tax treatment described above should be inapplicable to our stockholders. However, because our common stock will be publicly traded, we cannot guarantee that this will always be the case.
Taxation of Non-U.S. Stockholders
The following discussion addresses the rules governing federal income taxation of the purchase, ownership and disposition of our common stock by non-U.S. stockholders. These rules are complex, and no attempt is made herein to provide more than a brief summary of such rules. Accordingly, the discussion does not address all aspects of federal income taxation and does not address state, local or non-U.S. tax consequences that may be relevant to a non-U.S. stockholder in light of its particular circumstances. We urge non-U.S. stockholders to consult their tax advisors to determine the impact of federal, state, local and non-U.S. income tax laws on the purchase, ownership and disposition of shares of our common stock, including any tax return filing and other reporting requirements.
Distributions Generally
Distributions (including any taxable stock dividends) that are neither attributable to gains from sales or exchanges by us of U.S. real property interests, or USRPIs, nor designated by us as capital gain dividends (except as described below) will be treated as dividends of ordinary income to the extent that they are made out of our current or accumulated earnings and profits. Such distributions ordinarily will be subject to withholding of federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty, unless the distributions are treated as effectively connected with the conduct by the non-U.S. stockholder of a U.S. trade or business. Under many treaties, however, lower withholding rates generally applicable to dividends do not apply to dividends from a REIT. Certain certification and disclosure requirements must be satisfied to be exempt from withholding under the effectively connected income exemption. Dividends that are treated as effectively connected with a U.S. trade or business will generally not be subject to withholding but will be subject to federal income tax on a net basis at graduated rates, in the same manner as dividends paid to U.S. stockholders are subject to federal income tax. Any such dividends received by a non-U.S. stockholder that is a corporation may also be subject to an additional branch profits tax at a 30% rate (applicable after deducting federal income taxes paid on such effectively connected income) or such lower rate as may be specified by an applicable income tax treaty.
Except as otherwise provided below, we expect to withhold federal income tax at the rate of 30% on any distributions made to a non-U.S. stockholder unless:
 
 	•	 	a lower treaty rate applies and the non-U.S. stockholder files with us an IRS Form W-8BEN or Form W-8BEN-E evidencing eligibility for that reduced treaty rate; or	
 
 	•	 	the non-U.S. stockholder files an IRS Form W-8ECI with us claiming that the distribution is income effectively connected with the non-U.S. stockholder’s trade or business.	
Distributions in excess of our current and accumulated earnings and profits will not be taxable to a non-U.S. stockholder to the extent that such distributions do not exceed the adjusted tax basis of the stockholder’s common stock, but rather will reduce the adjusted tax basis of such stock. To the extent that such distributions exceed the non-U.S. stockholder’s adjusted tax basis in such common stock, they will give rise to gain from the sale or exchange of such stock, the tax treatment of which is described below. For withholding purposes, because we generally cannot determine at the time we make a distribution whether the distribution will exceed our current and accumulated earnings and profits, we expect to treat all distributions as made out of our current or accumulated earnings and profits. However, amounts withheld may be refundable if it is subsequently determined that the distribution was, in fact, in excess of our current and accumulated earnings and profits, provided that the non-U.S. stockholder makes required filings with the IRS.
 
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Capital Gain Dividends and Distributions Attributable to a Sale or Exchange of U.S. Real Property Interests
Under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), a distribution made by us to a non-U.S. stockholder, to the extent that it is attributable to gains from dispositions of USRPIs held by us directly, by lower-tier REITs, or through pass-through subsidiaries (USRPI capital gains), will, except as discussed below, be considered effectively connected with a U.S. trade or business of the non-U.S. stockholder and will be subject to U.S. income tax at the rates applicable to U.S. individuals or corporations, without regard to whether the distribution is designated as a capital gain dividend. In addition, we will be required to withhold tax on the amount of a distribution at a rate currently equal to 35% to the extent the distribution is attributable to USRPI capital gains. The amount withheld is creditable against the non-U.S. stockholder’s U.S. federal income tax liability. Distributions subject to FIRPTA may also be subject to a branch profits tax at 30% (or a lower treaty rate) in the hands of a non-U.S. stockholder that is a corporation. A distribution is not a USRPI capital gain if we held the underlying USRPI asset solely as a creditor. Capital gain dividends received by a non-U.S. stockholder from a REIT that are attributable to dispositions by that REIT of assets other than USRPIs are generally not subject to U.S. income or withholding tax.
A capital gain dividend by us that would otherwise have been treated as a USRPI capital gain will not be subject to FIRPTA (or generally treated as income that is effectively connected with a U.S. trade or business), and will instead be treated the same as an ordinary dividend from us (see “—Distributions Generally” above), provided that (1) the capital gain dividend is received with respect to a class of stock that is regularly traded on an established securities market located in the United States, and (2) the recipient non-U.S. stockholder does not own more than 5% of that class of stock at any time during the one-year period ending on the date on which the capital gain dividend is received. We expect that our stock will be treated as regularly traded on an established securities market following this offering.
Dispositions of Our Stock
Unless our stock constitutes a USRPI, a sale of our stock by a non-U.S. stockholder generally will not be subject to U.S. taxation under FIRPTA. In general, stock of a domestic corporation that constitutes a “U.S. real property holding corporation,” or USRPHC, will constitute a USRPI. We expect that we will be a USRPHC. Our stock nonetheless will not constitute a USRPI if we are a “domestically controlled qualified investment entity.” A domestically controlled qualified investment entity includes a REIT in which, at all times during a specified testing period, less than 50% in value of its shares is held directly or indirectly by non-U.S. persons. We believe that we are currently a domestically controlled qualified investment entity and, therefore, the sale of our stock by a non-U.S. stockholder should not be subject to taxation under FIRPTA. Because our stock will be publicly-traded, however, no assurance can be given that we will continue to be a domestically controlled qualified investment entity.
In the event that we do not constitute a domestically controlled qualified investment entity, a non-U.S. stockholder’s sale or other disposition of our stock nonetheless will generally not be subject to tax under FIRPTA as a sale of a USRPI, provided that (1) the stock owned is of a class that is “regularly traded,” as defined by applicable Treasury Regulations, on an established securities market, and (2) the selling non-U.S. stockholder held 5% or less of our outstanding stock of that class at all times during a specified testing period. As noted above, we believe that our stock will be treated as regularly traded on an established securities market following this offering.
If gain on the sale of our stock were subject to taxation under FIRPTA, the non-U.S. stockholder would be subject to the same treatment as a U.S. stockholder with respect to such gain, subject to applicable alternative minimum tax and a special alternative minimum tax in the case of non-resident alien individuals, and, if shares of our stock were not “regularly traded” on an established securities market, the purchaser of the stock would be required to withhold 10% of the purchase price and remit such amount to the IRS. In addition, even if we are a domestically controlled qualified investment entity, upon disposition of our stock, a non-U.S. stockholder may be
 
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treated as having gain from the sale or exchange of a USRPI if the non-U.S. stockholder (1) disposes of our common stock within a 30-day period preceding the ex-dividend date of a distribution, any portion of which, but for the disposition, would have been treated as gain from the sale or exchange of a USRPI and (2) acquires, or enters into a contract or option to acquire, other shares of our common stock within 30 days after such ex-dividend date. The preceding sentence shall not apply to a non-U.S. stockholder if the non-U.S. stockholder did not own more than 5% of the stock at any time during the one-year period ending on the date of the distribution described in clause (1) of the preceding sentence and the class of stock is “regularly traded,” as defined by applicable Treasury Regulations.
Gain from the sale of our stock that would not otherwise be subject to FIRPTA will nonetheless be taxable in the United States to a non-U.S. stockholder in two cases: (1) if the non-U.S. stockholder’s investment in our stock is effectively connected with a U.S. trade or business conducted by such non-U.S. stockholder, the non-U.S. stockholder will be subject to the same treatment as a U.S. stockholder with respect to such gain, or (2) if the non-U.S. stockholder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and has a “tax home” in the United States, the nonresident alien individual will be subject to a 30% tax on the individual’s capital gain, subject to reduction or elimination by an applicable income tax treaty.
Information Reporting and Backup Withholding
Generally, we must report annually to the IRS the amount of dividends paid to a non-U.S. stockholder, such holder’s name and address, and the amount of tax withheld, if any. A similar report is sent to the non-U.S. stockholder. Pursuant to tax treaties or other agreements, the IRS may make its reports available to tax authorities in the non-U.S. stockholder’s country of residence.
Payments of dividends or of proceeds from the disposition of stock made to a non-U.S. stockholder may be subject to information reporting and backup withholding unless such holder establishes an exemption, for example, by properly certifying its non-U.S. status on an IRS Form W-8BEN, Form W-8BEN-E or another appropriate version of IRS Form W-8. Notwithstanding the foregoing, backup withholding and information reporting may apply if either we have or our paying agent has actual knowledge, or reason to know, that a non-U.S. stockholder is a U.S. person.
Backup withholding is not an additional tax. Rather, the federal income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund or credit may be obtained, provided that the required information is timely furnished to the IRS.
Foreign Accounts
Withholding taxes may apply to certain types of payments made to “foreign financial institutions” and certain other non-U.S. entities. Specifically, a 30% withholding tax will be imposed on U.S. source payments, such as dividends on our shares, and the gross proceeds from the disposition of such shares paid to (1) a foreign financial institution (as such term is defined in Section 1471(d)(4) of the Code) unless that foreign financial institution enters into an agreement with the U.S. Treasury Department to collect and disclose information regarding U.S. account holders of that foreign financial institution (including certain account holders that are non-U.S. entities that have U.S. owners) and satisfies other requirements (or otherwise qualifies for an exemption from these rules), and (2) specified other non-financial foreign entities unless such an entity either provides the payor with a certification identifying the direct and indirect U.S. owners of the entity and complies with other requirements (or otherwise qualifies for an exemption from these rules). An intergovernmental agreement between the United States and an applicable non-U.S. country may modify such requirements. The IRS and the U.S. Treasury Department have released regulations and other guidance that provide for the phased implementation of the tax, pursuant to which the tax applies to dividends paid with respect to our stock after
 
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June 30, 2014, and will apply to proceeds from the sale, exchange or other taxable disposition of shares of our stock occurring after December 31, 2016. You are encouraged to consult with your own tax advisor regarding the possible implications of this legislation on your investment in our shares.
Estate Tax
Common stock owned or treated as owned by an individual who is not a citizen or resident (as specially defined for U.S. federal estate tax purposes) of the United States at the time of death will be includable in the individual’s gross estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provides otherwise, and may therefore be subject to U.S. federal estate tax.
Other Tax Consequences
State, local and non-U.S. income tax laws may differ substantially from the corresponding federal income tax laws, and this discussion does not purport to describe any aspect of the tax laws of any state, local or non-U.S. jurisdiction. You should consult your tax advisor regarding the effect of state, local and non-U.S. tax laws with respect to our tax treatment as a REIT and an investment in our common stock.
 
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 ERISA CONSIDERATIONS
General
The following is a summary of certain material considerations arising under the Employee Retirement Income Security Act of 1974, as amended (ERISA) and the prohibited transaction provisions of Section 4975 of the Code that may be relevant to a prospective purchaser that is an employee benefit plan (as defined in Section 3(3) of ERISA) that is subject to Title I of ERISA (an ERISA Plan). The following summary may also be relevant to a prospective purchaser that is not an employee benefit plan subject to ERISA, but is a tax-qualified retirement plan or an individual retirement account, individual retirement annuity, medical savings account or education individual retirement account, which we refer to collectively as an “IRA,” that is subject to Section 4975 of the Code, a plan such as a “governmental plan” (as defined in Section 3(32) of ERISA), or a “church plan” (as defined in Section 3(33) of ERISA that has made no election under Section 410(d) of the Code) or any other arrangement that is exempt from all or certain provisions of ERISA and Section 4975 of the Code, but is subject to provisions under applicable federal, state, local, non-U.S. or other laws or regulations that are similar to such provisions of ERISA or the Code (each, a Plan). This discussion does not address these other federal, state, local, non-U.S. or other laws or regulations that are similar to the provisions of ERISA or the Code, nor does it address all aspects of ERISA or Section 4975 of the Code.
A fiduciary making the decision to invest in shares of our common stock on behalf of a prospective purchaser that is an ERISA Plan or Plan is advised to consult its legal and other advisors regarding the specific considerations arising under ERISA, Section 4975 of the Code, and other federal, state, local, non-U.S. or other laws or regulations, as applicable, with respect to the purchase, ownership or sale of shares of our common stock by such ERISA Plan or Plan.
ERISA Plans and Plans should also consider the entire discussion under the heading “Material Federal Income Tax Consequences,” as material contained in that section is relevant to any decision by a Plan to invest in shares of our common stock.
Each fiduciary of an ERISA Plan, should carefully consider whether an investment in shares of our common stock is consistent with its fiduciary responsibilities under ERISA. In particular, the fiduciary requirements of Part 4 of Subtitle B of Title I of ERISA require that:
 
 	•	 	an ERISA Plan make investments that are prudent and in the best interests of the ERISA Plan, its participants and beneficiaries;	
 
 	•	 	an ERISA Plan make investments that are diversified in order to reduce the risk of large losses, unless it is clearly prudent for the ERISA Plan not to do so;	
 
 	•	 	an ERISA Plan’s investments are authorized under ERISA and the terms of the governing documents of the ERISA Plan; and	
 
 	•	 	the fiduciary not cause the ERISA Plan to enter into transactions prohibited under Section 406 of ERISA (and certain corresponding provisions of the Code).	
In determining whether an investment in shares of our common stock is prudent for ERISA purposes, the appropriate fiduciary of an ERISA Plan should consider all of the facts and circumstances, including whether the investment is reasonably designed, as a part of the ERISA Plan’s portfolio for which the fiduciary has investment responsibility, to meet the objectives of the ERISA Plan, taking into consideration the risk of loss and opportunity for gain or other return from the investment, the diversification, cash flow and funding requirements of the ERISA Plan, and the liquidity and current return of the ERISA Plan’s portfolio. A fiduciary should also take into account the nature of our business, the length of our operating history and other matters described in the
 
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section entitled “Risk Factors.” In addition to the imposition of general fiduciary standards of investment prudence and diversification, ERISA, and the corresponding provisions of the Code, prohibit a wide range of transactions involving the assets of the plan and persons who have certain specified relationships to the plan (“parties in interest” within the meaning of Section 3(14) of ERISA, or “disqualified persons” within the meaning of the Code). Thus, an ERISA Plan fiduciary considering an investment in our common stock also should consider whether the acquisition or the continued holding of the shares might constitute or give rise to a direct or indirect prohibited transaction that is not subject to an exemption issued by the U.S. Department of Labor (DOL). Similarly, the fiduciary of an IRA or other Plan, when applicable, should consider that it may only make investments that are (i) either authorized or not prohibited by the appropriate governing documents, (ii) not prohibited under ERISA or Section 4975 of the Code and (iii) permitted under other applicable law.
Our Status Under ERISA
In some circumstances where an ERISA Plan or, when applicable, a Plan holds an interest in an entity, the assets of the entity are deemed to be “plan assets.” This is known as the “look-through rule.” Under those circumstances, the obligations and other responsibilities of sponsors, fiduciaries and administrators, and of parties in interest and disqualified persons with respect to such ERISA Plans and Plans, under Parts 1 and 4 of Subtitle B of Title I of ERISA and Section 4975 of the Code, as applicable, may be expanded, and there may be an increase in their liability under these and other provisions of ERISA and the Code (except to the extent (if any) that a favorable statutory or administrative exemption or exception applies). For example, a prohibited transaction may occur if (i) our assets are deemed to be assets of such investing ERISA Plans or Plans and (ii) parties in interest or disqualified persons deal with these assets. Further, if our assets are deemed to be assets of such an investing ERISA Plan or Plan, any person who exercises authority or control with respect to the management or disposition of the assets is a fiduciary with respect to the ERISA Plan and may, when applicable, be a fiduciary with respect to the Plan.
ERISA Section 3(42) and the DOL regulations and guidance thereunder (Plan Asset Rules) outline the circumstances under which an ERISA Plan’s or, when applicable, a Plan’s interest in an entity will be subject to the look-through rule. The Plan Asset Rules apply to the purchase by such an ERISA Plan or Plan of an “equity interest” in an entity, such as common stock of a REIT. However, the Plan Asset Rules provide an exception to the look-through rule for equity interests that are “publicly offered securities.”
Under the Plan Asset Rules, a “publicly offered security” is a security that is:
 
 	•	 	freely transferable;	
 
 	•	 	part of a class of securities that is widely held; and	
 
 	•	 	either part of a class of securities that is registered under section 12(b) or 12(g) of the Exchange Act or sold as part of an offering of securities to the public pursuant to an effective registration statement under the Securities Act, and the class of securities of which this security is a part is registered under the Exchange Act within 120 days, or longer if allowed by the SEC, after the end of the fiscal year of the issuer during which this offering of these securities to the public occurred.	
Whether a security is considered “freely transferable” depends on the facts and circumstances of each case. Under the Plan Asset Rules, if the security is part of an offering in which the minimum investment is $10,000 or less, then any restriction on or prohibition against any transfer or assignment of the security for the purposes of preventing a termination or reclassification of the entity for federal or state tax purposes will not ordinarily prevent the security from being considered freely transferable. Additionally, limitations or restrictions on the transfer or assignment of a security that are created or imposed by persons other than the issuer of the security or persons acting for or on behalf of the issuer will ordinarily not prevent the security from being considered freely transferable.
 
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A class of securities is considered “widely held” if it is a class of securities that is owned by 100 or more investors independent of the issuer and of one another. A security will not fail to be “widely held” because the number of independent investors falls below 100 subsequent to the initial public offering as a result of events beyond the issuer’s control.
The shares of our common stock offered in this prospectus may meet the criteria of the publicly offered securities exception to the look-through rule. First, the common stock could be considered to be freely transferable, as the minimum investment will be less than $10,000 and the only restrictions upon its transfer are those generally permitted under the Plan Asset Rules, those required under federal tax laws to maintain our status as a REIT, to prevent us from ceasing to be a domestically controlled qualified investment entity” for U.S. federal income tax purposes, resale restrictions under applicable federal securities laws with respect to securities not purchased pursuant to this prospectus and those owned by our officers, directors and other affiliates.
Second, we expect that our common stock will be held by 100 or more investors, as required by the Code to maintain our status as a REIT, and we expect that at least 100 or more of these investors will be independent of us and of one another.
Third, the shares of our common stock will be part of an offering of securities to the public pursuant to an effective registration statement under the Securities Act and the common stock will be registered under the Exchange Act.
In addition, the Plan Asset Rules provide independent exceptions to the look-through rule for equity interests in an entity that qualifies as either a “real estate operating company” or a “venture capital operating company.”
Another exception to the look-through rule may be satisfied in the event that our equity interests held by ERISA Plans and, when applicable, Plans, are within certain prescribed limits. We have not endeavored to determine whether we will satisfy these “venture capital operating company,” “real estate operating company” or limited equity investment exceptions.
If for any reason our assets are deemed to be “plan assets” because we do not qualify for any exception under the Plan Asset Rules, certain transactions that we might enter into, or may have entered into, in the ordinary course of our business might constitute non-exempt prohibited transactions under ERISA or the Code and might have to be rescinded and may give rise to prohibited transaction excise taxes and fiduciary liability, as described above. In addition, if our assets are deemed to be “plan assets,” our management may be considered to be fiduciaries under ERISA and the Code. Moreover, if our underlying assets are deemed to be “plan assets,” there are several other provisions of ERISA that could be implicated for an ERISA Plan if it were to acquire and hold our common stock either directly or by investing in an entity whose underlying assets are deemed to be assets of the ERISA Plan. With respect to an IRA that invests in our common stock, the occurrence of a prohibited transaction involving the individual who established the IRA, or his or her beneficiaries, would cause the IRA to lose its tax-exempt status.
Prior to making an investment in the shares offered by this prospectus, prospective ERISA Plan and Plan investors (whether or not subject to ERISA or Section 4975 of the Code) should consult with their legal and other advisors concerning the impact of ERISA and the Code (and, particularly in the case of Plans not subject to ERISA, any additional federal, state, local, non-U.S. or other laws or regulations, as applicable), as applicable, and the potential consequences in their specific circumstances of an investment in such shares.
Each holder of our common stock will be deemed to have represented and agreed that its purchase and holding of such shares (or any interest therein) will not constitute or result in a non-exempt prohibited transaction under ERISA or the Code.
 
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 UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global Markets Inc. are acting as representatives of each of the underwriters named below. Subject to the terms and conditions set forth in an underwriting agreement among us and the underwriters, we have agreed to sell to the underwriters, and each of the underwriters has agreed, severally and not jointly, to purchase from us, the number of shares of common stock set forth opposite its name below.

                           Underwriter	  	Number of
Shares	
Merrill Lynch, Pierce, Fenner & Smith
                      Incorporated	  		
Citigroup Global Markets Inc.	  		
RBC Capital Markets, LLC	  		
Morgan Stanley & Co. LLC	  		
	  	 	
                     Total	  		
	  	 	
Subject to the terms and conditions set forth in the underwriting agreement, the underwriters have agreed, severally and not jointly, to purchase all of the shares sold under the underwriting agreement if any of these shares are purchased. If an underwriter defaults, the underwriting agreement provides that the purchase commitments of the nondefaulting underwriters may be increased or the underwriting agreement may be terminated.
We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel, including the validity of the shares, and other conditions contained in the underwriting agreement, such as the receipt by the underwriters of officer’s certificates and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.
Commissions and Discounts
The representatives have advised us that the underwriters propose initially to offer the shares to the public at the public offering price set forth on the cover of this prospectus and to dealers at that price less a concession not in excess of $        per share. After the initial offering, the public offering price, concession or any other term of this offering may be changed.
The following table shows the public offering price, underwriting discount and proceeds before expenses to us. The information assumes either no exercise or full exercise by the underwriters of their option to purchase additional shares.

 	  	Per Share	 	  	Without Option	 	  	With Option	 	
Public offering price	  	$	 	  	  	$	 	  	  	$	 	  	
Underwriting discounts and commissions	  	$	 	  	  	$	 	  	  	$	 	  	
Proceeds, before expenses, to us	  	$	 	  	  	$	 	  	  	$	 	  	
In addition, we will pay Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc. and RBC Capital Markets, LLC a structuring fee equal to             % of the gross proceeds of this offering, or $             (or $             if the underwriters exercise their option to purchase up to an additional              shares of our common stock from us in full), for the evaluation, analysis and structuring of our company.
 
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The expenses of this offering, not including the underwriting discounts and commissions and the underwriter structuring fee, are estimated at $         and are payable by us.
Option to Purchase Additional Shares
We have granted an option to the underwriters, exercisable for 30 days after the date of this prospectus, to purchase up to             additional shares at the public offering price, less the underwriting discounts and commissions and the underwriter structuring fee. If the underwriters exercise this option, each will be obligated, subject to conditions contained in the underwriting agreement, to purchase a number of additional shares proportionate to that underwriter’s initial amount reflected in the above table.
No Sales of Similar Securities
We, our executive officers and directors, Hunt and certain of our other existing investors have agreed not to sell or transfer any common stock or securities convertible into, exchangeable for, exercisable for, or repayable with common stock, for 365 days (in the case of our executive officers and directors and Hunt) or 180 days (in the case of InfraREIT and the other existing investors) after the date of this prospectus without first obtaining the written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global Markets Inc. Specifically, we and these other persons have agreed, with certain limited exceptions, not to directly or indirectly
 
 	•	 	offer, pledge, sell or contract to sell any common stock,	
 
 	•	 	sell any option or contract to purchase any common stock,	
 
 	•	 	purchase any option or contract to sell any common stock,	
 
 	•	 	grant any option, right or warrant for the sale of any common stock,	
 
 	•	 	lend or otherwise dispose of or transfer any common stock,	
 
 	•	 	request or demand that we file a registration statement related to the common stock, or	
 
 	•	 	enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of any common stock whether any such swap or transaction is to be settled by delivery of shares or other securities, in cash or otherwise.	
This lock-up provision applies to common stock and to securities convertible into or exchangeable or exercisable for or repayable with common stock. It also applies to common stock owned now or acquired later by the person executing the agreement or for which the person executing the agreement later acquires the power of disposition.
NYSE Listing
We expect the shares to be approved for listing on the NYSE under the symbol “HIFR.” In order to meet the requirements for listing on that exchange, the underwriters have undertaken to sell a minimum number of shares to a minimum number of beneficial owners as required by that exchange.
Before this offering, there has been no public market for our common stock. The initial public offering price will be determined through negotiations between us and the representatives. In addition to prevailing market conditions, the factors to be considered in determining the initial public offering price are
 
 	•	 	the valuation multiples of publicly traded companies that the representatives believe to be comparable to us,	
 
 	•	 	our financial information,	
 
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 	•	 	the history of, and the prospects for, our company and the industry in which we compete,	
 
 	•	 	an assessment of our management, its past and present operations, and the prospects for, and timing of, our future revenues,	
 
 	•	 	the present state of our development, and	
 
 	•	 	the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours.	
An active trading market for the shares may not develop. It is also possible that after this offering the shares will not trade in the public market at or above the initial public offering price.
The underwriters do not expect to sell more than 5% of the shares in the aggregate to accounts over which they exercise discretionary authority.
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of the shares is completed, SEC rules may limit underwriters and selling group members from bidding for and purchasing our common stock. However, the representatives may engage in transactions that stabilize the price of the common stock, such as bids or purchases to peg, fix or maintain that price.
In connection with this offering, the underwriters may purchase and sell our common stock in the open market. These transactions may include short sales, purchases on the open market to cover positions created by short sales and stabilizing transactions. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in this offering. “Covered” short sales are sales made in an amount not greater than the underwriters’ option to purchase additional shares described above. The underwriters may close out any covered short position by either exercising their option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the option granted to them. “Naked” short sales are sales in excess of such option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of our common stock in the open market after pricing that could adversely affect investors who purchase in this offering. Stabilizing transactions consist of various bids for or purchases of shares of common stock made by the underwriters in the open market prior to the completion of this offering.
The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions.
Similar to other purchase transactions, the underwriters’ purchases to cover the syndicate short sales may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market. The underwriters may conduct these transactions on the NYSE, in the over-the-counter market or otherwise.
Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we nor any of the underwriters make any representation that the representatives will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.
 
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Electronic Distribution
In connection with this offering, certain of the underwriters or securities dealers may distribute prospectuses by electronic means, such as e-mail.
Conflicts of Interest
Bank of America, N.A., an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated, is the administrative agent and a lender, and affiliates of each of the other underwriters are lenders, under our Operating Partnership’s revolving credit facility. In addition, Royal Bank of Canada, an affiliate of RBC Capital Markets, LLC, is the administrative agent and a lender, and affiliates of each of the other underwriters are lenders, under SDTS’s revolving credit facility.
As described in this prospectus under “Use of Proceeds,” we expect our Operating Partnership will use the net proceeds from this offering that it receives from us to repay borrowings under our Operating Partnership’s revolving credit facility and SDTS’s revolving credit facility. Because affiliates of each of the underwriters are lenders under our Operating Partnership’s revolving credit facility and SDTS’s revolving credit facility, to the extent that net proceeds from this offering are applied to repay borrowings under our Operating Partnership’s revolving credit facility or SDTS’s revolving credit facility, such affiliates will receive proceeds of this offering through the repayment of those borrowings. The amount received by any underwriter and its affiliates, as applicable, from the repayment, if any, of those borrowings may exceed 5% of the proceeds of this offering (not including underwriting discounts). Nonetheless, in accordance with Rule 5121 of FINRA, the appointment of a qualified independent underwriter is not necessary in connection with this offering because REITs are excluded from that requirement.
Other Relationships
In addition to the matters discussed above under “—Conflicts of Interest,” some of the underwriters and their affiliates have engaged in, and may in the future engage in, investment banking and other commercial dealings in the ordinary course of business with us or our affiliates. They have received, or may in the future receive, customary fees and commissions for these transactions.
In addition, in the ordinary course of their business activities, the underwriters and their affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers. Such investments and securities activities may involve securities and/or instruments of ours or our affiliates. The underwriters and their affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or financial instruments and may hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.
Notice to Prospective Investors in Australia
No placement document, prospectus, product disclosure statement or other disclosure document has been lodged with the Australian Securities and Investments Commission (ASIC), in relation to this offering. This offering document does not constitute a prospectus, product disclosure statement or other disclosure document under the Corporations Act 2001 (the Corporations Act), and does not purport to include the information required for a prospectus, product disclosure statement or other disclosure document under the Corporations Act.
Any offer in Australia of the shares may only be made to persons (the Exempt Investors) who are “sophisticated investors” (within the meaning of section 708(8) of the Corporations Act), “professional investors” (within the meaning of section 708(11) of the Corporations Act) or otherwise pursuant to one or more exemptions contained in section 708 of the Corporations Act so that it is lawful to offer the shares without disclosure to investors under Chapter 6D of the Corporations Act.
 
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The shares applied for by Exempt Investors in Australia must not be offered for sale in Australia in the period of 12 months after the date of allotment under this offering, except in circumstances where disclosure to investors under Chapter 6D of the Corporations Act would not be required pursuant to an exemption under section 708 of the Corporations Act or otherwise or where the offer is pursuant to a disclosure document which complies with Chapter 6D of the Corporations Act. Any person acquiring shares must observe such Australian on-sale restrictions.
This offering document contains general information only and does not take account of the investment objectives, financial situation or particular needs of any particular person. It does not contain any securities recommendations or financial product advice. Before making an investment decision, investors need to consider whether the information in this offering document is appropriate to their needs, objectives and circumstances, and, if necessary, seek expert advice on those matters.
Notice to Prospective Investors in the Dubai International Financial Centre
This prospectus relates to an Exempt Offer in accordance with the Offered Securities Rules of the Dubai Financial Services Authority (DFSA). This prospectus is intended for distribution only to persons of a type specified in the Offered Securities Rules of the DFSA. It must not be delivered to, or relied on by, any other person. The DFSA has no responsibility for reviewing or verifying any documents in connection with Exempt Offers. The DFSA has not approved this prospectus nor taken steps to verify the information set forth herein and has no responsibility for the prospectus. The shares to which this prospectus relates may be illiquid and/or subject to restrictions on their resale. Prospective purchasers of the shares offered should conduct their own due diligence on the shares. If you do not understand the contents of this prospectus you should consult an authorized financial advisor.
Notice to Prospective Investors in Hong Kong
The shares have not been offered or sold and will not be offered or sold in Hong Kong, by means of any document, other than (a) to “professional investors” as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance; or (b) in other circumstances which do not result in the document being a “prospectus” as defined in the Companies Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of that Ordinance. No advertisement, invitation or document relating to the shares has been or may be issued or has been or may be in the possession of any person for the purposes of issue, whether in Hong Kong or elsewhere, which is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to shares which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” as defined in the Securities and Futures Ordinance and any rules made under that Ordinance.
Notice to Prospective Investors in Switzerland
We have not and will not register with the Swiss Financial Market Supervisory Authority (FINMA) as a foreign collective investment scheme pursuant to Article 119 of the Federal Act on Collective Investment Scheme of 23 June 2006, as amended (CISA), and accordingly the securities being offered pursuant to this prospectus have not and will not be approved, and may not be licenseable, with FINMA. Therefore, the securities have not been authorized for distribution by FINMA as a foreign collective investment scheme pursuant to Article 119 CISA and the securities offered hereby may not be offered to the public (as this term is defined in Article 3 CISA) in or from Switzerland. The securities may solely be offered to “qualified investors,” as this term is defined in Article 10 CISA, and in the circumstances set out in Article 3 of the Ordinance on Collective Investment Scheme of 22 November 2006, as amended (CISO), such that there is no public offer. Investors, however, do not benefit from protection under CISA or CISO or supervision by FINMA. This prospectus and any other materials relating to the securities are strictly personal and confidential to each offeree and do not constitute
 
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an offer to any other person. This prospectus may only be used by those qualified investors to whom it has been handed out in connection with the offer described herein and may neither directly or indirectly be distributed or made available to any person or entity other than its recipients. It may not be used in connection with any other offer and shall in particular not be copied and/or distributed to the public in Switzerland or from Switzerland. This prospectus does not constitute an issue prospectus as that term is understood pursuant to Article 652a and/or 1156 of the Swiss Federal Code of Obligations. We have not applied for a listing of the securities on the SIX Swiss Exchange or any other regulated securities market in Switzerland, and consequently, the information presented in this prospectus does not necessarily comply with the information standards set out in the listing rules of the SIX Swiss Exchange and corresponding prospectus schemes annexed to the listing rules of the SIX Swiss Exchange.
 
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 LEGAL MATTERS
Certain legal matters in connection with the common stock offered hereby, including certain tax matters will be passed upon for us by Baker Botts L.L.P., Dallas, Texas. Venable LLP, Baltimore, Maryland, will pass upon the validity of the shares of our common stock offered hereby and certain other matters under Maryland law. Certain legal matters in connection with the common stock offered hereby will be passed upon for the underwriters by Latham & Watkins LLP, Chicago, Illinois.
 EXPERTS
The financial statements of InfraREIT, Inc. as of December 31, 2013 and 2012, and for each of the years then ended, have been included herein and in the registration statement in reliance upon the report of KPMG LLP, independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.
The consolidated financial statements and Schedule III Electric Plant and Accumulated Depreciation of InfraREIT, L.L.C. and subsidiaries at December 31, 2013 and 2012, and for each of the two years in the period ended December 31, 2013, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Sharyland Utilities, L.P. and subsidiaries at December 31, 2013 and 2012, and for each of the two years in the period ended December 31, 2013, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
 WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-11, of which this prospectus is a part, including exhibits and schedule filed with this registration statement, under the Securities Act with respect to the shares of common stock to be sold in this offering. This prospectus does not contain all of the information found in the registration statement or exhibits and schedule filed with the registration statement. For further information regarding us and the common stock offered by this prospectus, you may desire to review the full registration statement, including its exhibits and schedule, filed under the Securities Act. The registration statement of which this prospectus forms a part, including its exhibits and schedule, may be inspected and copied at the public reference room maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Copies of the materials may also be obtained from the SEC at prescribed rates by writing to the public reference room maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330.
The SEC maintains a web site on the Internet at http://www.sec.gov . Our registration statement, of which this prospectus constitutes a part, can be downloaded from the SEC’s web site and can also be inspected and copied at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
Upon completion of this offering, we will become subject to the information and reporting requirements of the Exchange Act and, as a result, will be required to file periodic reports, proxy statements and other information with the SEC. These reports and other information may be inspected and copied at the public reference facilities maintained by the SEC or obtained from the SEC’s website as provided above. Our website is located at www.infrareitinc.com and we make our periodic reports and other information filed with or furnished to the SEC available, free of charge, through our website, as soon as reasonably practicable after those reports
 
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and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference into this prospectus and does not constitute a part of this prospectus.
We intend to furnish or make available to our stockholders annual reports containing our audited financial statements and furnish or make available to our stockholders quarterly reports containing our unaudited interim financial information, including the information required by Form 10-Q, for the first three fiscal quarters of each fiscal year.
 
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 INDEX TO FINANCIAL STATEMENTS
InfraREIT, Inc. and Subsidiaries:

Pro Forma Condensed Consolidated Financial Statements as of and for the Nine Months Ended September 30, 2014 and for the Year Ended December 31, 2013 (unaudited):	  				
Introduction	  	 	F-2	  	
Pro Forma Condensed Consolidated Balance Sheet as of September 30, 2014	  	 	F-5	  	
Pro Forma Condensed Consolidated Statement of Operations for the Nine Months Ended September 30, 2014	  	 	F-6	  	
Pro Forma Condensed Consolidated Statement of Operations for the Year Ended December 31, 2013	  	 	F-7	  	
Notes to the Pro Forma Condensed Consolidated Financial Statements	  	 	F-8	  	
		
InfraREIT, Inc.:	  				
		
Financial Statements as of September 30, 2014 (unaudited), December 31, 2013 and 2012:	  				
Report of Independent Registered Public Accounting Firm	  	 	F-12	  	
Balance Sheets as of September 30, 2014 (unaudited), December 31, 2013 and 2012	  	 	F-13	  	
Statements of Operations for the Nine Months Ended September 30, 2014 (unaudited) and the Years Ended December 31, 2013 and 2012	  	 	F-14	  	
Statements of Stockholder’s Equity for the Nine Months Ended September 30, 2014 (unaudited) and the Years Ended December 31, 2013 and 2012	  	 	F-15	  	
Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013 (unaudited) and the Years Ended December 31, 2013 and 2012	  	 	F-16	  	
Notes to Financial Statements	  	 	F-17	  	
 
InfraREIT, L.L.C. and Subsidiaries:
 	  				
Condensed Consolidated Financial Statements as of September 30, 2014 and December 31, 2013 (unaudited):	  				
Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013	  	 	F-18	  	
Condensed Consolidated Statements of Operations for the Nine Months Ended September 30, 2014 and 2013	  	 	F-19	  	
Condensed Consolidated Statements of Comprehensive Income for the Nine Months Ended September 30, 2014 and 2013	  	 	F-20	  	
Condensed Consolidated Statement of Members’ Capital for the Nine Months Ended September 30, 2014	  	 	F-21	  	
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013	  	 	F-22	  	
Notes to the Condensed Consolidated Financial Statements	  	 	F-23	  	
		
Consolidated Financial Statements as of December 31, 2013 and 2012:	  				
Report of Independent Registered Public Accounting Firm	  	 	F-39	  	
Consolidated Balance Sheets as of December 31, 2013 and 2012	  	 	F-40	  	
Consolidated Statements of Operations for the Years Ended December 31, 2013 and 2012	  	 	F-41	  	
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2013 and 2012	  	 	F-42	  	
Consolidated Statements of Members’ Capital for the Years Ended December 31, 2013 and 2012	  	 	F-43	  	
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013 and 2012	  	 	F-44	  	
Notes to the Consolidated Financial Statements	  	 	F-45	  	
Schedule III—Electric Plant and Accumulated Depreciation	  	 	F-66	  	
Sharyland Utilities, L.P. and Subsidiaries:

Condensed Consolidated Financial Statements as of September 30, 2014 and December 31, 2013 (unaudited):	  				
Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013	  	 	F-68	  	
Condensed Consolidated Statements of Operations for the Nine Months Ended September 30, 2014 and 2013	  	 	F-69	  	
Condensed Consolidated Statement of Partners’ Deficit for the Nine Months Ended September 30, 2014	  	 	F-70	  	
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013	  	 	F-71	  	
Notes to the Condensed Consolidated Financial Statements	  	 	F-72	  	
		
Consolidated Financial Statements as of December 31, 2013 and 2012:	  				
Report of Independent Auditors	  	 	F-80	  	
Consolidated Balance Sheets as of December 31, 2013 and 2012	  	 	F-81	  	
Consolidated Statements of Operations for the Years Ended December 31, 2013 and 2012	  	 	F-82	  	
Consolidated Statements of Partners’ Deficit for the Years Ended December 31, 2013 and 2012	  	 	F-83	  	
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013 and 2012	  	 	F-84	  	
Notes to the Consolidated Financial Statements	  	 	F-85	  	
 
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InfraREIT, Inc.
 Unaudited Pro Forma Condensed Consolidated Financial Statements
Summary
 Introduction
InfraREIT, Inc. (InfraREIT Inc.) was formed as a Delaware corporation in 2001 and converted into a Maryland corporation on September 29, 2014. InfraREIT, L.L.C. (InfraREIT LLC) (formerly known as Electric Infrastructure Alliance of America, L.L.C.) was organized on November 23, 2010 as a Delaware limited liability company and has elected under the Internal Revenue Code of 1986, as amended, to be taxed, and currently qualifies, as a real estate investment trust (REIT) for federal income tax purposes. InfraREIT LLC is the general partner of, and holds a controlling financial interest in, InfraREIT Partners, LP, a Delaware limited partnership (the Operating Partnership). As described below, on the date of, and immediately following, the consummation of this offering, InfraREIT LLC will be merged with and into InfraREIT Inc., with InfraREIT Inc. surviving as a Maryland corporation. We refer to this transaction as the “Merger.” Prior to the Merger, all substantive activities will have been conducted by InfraREIT LLC, as InfraREIT Inc. had limited activity. As a result, the Merger will be accounted for as a reverse acquisition using the acquisition method of accounting, with InfraREIT LLC as the accounting acquirer, and the historical financial information for the periods prior to the Merger will be that of InfraREIT LLC.
As used herein unless the context requires otherwise or except as otherwise noted, the words “we,” “our” and “us” refer to InfraREIT Inc. or InfraREIT LLC after giving effect to the Merger, as the context requires, together with its subsidiaries, including the Operating Partnership. References to our “existing investors” refer to the investors in InfraREIT LLC and/or the Operating Partnership, as the context requires, prior to the consummation of this offering and the reorganization transactions described below and under “Description of Our Capital Stock—Reorganization” on page 170 of this prospectus. “Hunt” refers to Hunt Consolidated, Inc. and its subsidiaries, including Hunt Utility Services, LLC, which we refer to as “Hunt Manager” and is our external manager, and Hunt-InfraREIT, L.L.C., which we refer to as “Hunt-InfraREIT” and holds Hunt’s equity in the Operating Partnership. Unless otherwise indicated or the context requires, all shares of InfraREIT Inc. common stock, units in the Operating Partnership (OP Units) or InfraREIT LLC common shares are based on a public offering price for InfraREIT Inc. common stock in this offering of $             per share, which is the midpoint of the range set forth on the cover of this prospectus.
The unaudited pro forma condensed consolidated financial statements of InfraREIT Inc. as of and for the nine months ended September 30, 2014 and for the year ended December 31, 2013 are derived from the historical financial statements of each of InfraREIT Inc. and InfraREIT LLC as of and for the nine months ended September 30, 2014 and for the year ended December 31, 2013 and are presented as if the following pro forma adjustments, which we refer to as the “Pro Forma Adjustments,” had occurred on September 30, 2014 for the pro forma condensed consolidated balance sheet and on January 1, 2013 for the pro forma condensed consolidated statements of operations:
 
 	•	 	the Operating Partnership’s termination of its existing revolving credit facility and entry into its new revolving credit facility and the amendment and restatement of its subsidiary’s revolving credit facility, as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Arrangements”;	
 
 	•	 	the transfer by subsidiaries of the Operating Partnership of the assets associated with the Cross Valley transmission line project and the GSEC interconnection project for a cash price of $             million to affiliates of Hunt;	
 
 	•	 	cash distributions in aggregate of $             million that the Operating Partnership made or intends to make before consummation of this offering. Of such distributions, an aggregate of $             million	
 
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 	will be made or has been made to InfraREIT LLC, which in turn has distributed or will distribute all of such amount to its shareholders, and an aggregate of $             million will be made or has been made to the limited partners of the Operating Partnership, including Hunt-InfraREIT;	
 
 	•	 	the sale by InfraREIT Inc. of                      shares of common stock in this offering at a public offering price of $             per share, which is the midpoint of the range set forth on the cover of this prospectus, resulting in net proceeds of $             million after deducting the related underwriting discounts and commissions and the underwriter structuring fee and the use of net proceeds from this offering as follows:	
 
 	•	 	the use of $             million, which is the expected proceeds of the sale of                      shares of InfraREIT Inc. common stock after deducting the related underwriting discounts and commissions, as cash consideration in the Merger;	
 
 	•	 	the repayment of $1.0 million of indebtedness to Hunt pursuant a promissory note;	
 
 	•	 	the repayment of an aggregate of $             million of revolving debt;	
 
 	•	 	the payment of $             of estimated offering expenses; and	
 
 	•	 	the retention of $             for general corporate purposes;	
 
 	•	 	the issuance by InfraREIT Inc. of                      shares of common stock to Hunt-InfraREIT in exchange for                      OP Units tendered for redemption by Hunt-InfraREIT;	
 
 	•	 	to effect an accelerated payment of a portion of the carried interest owed by our existing investors to Hunt-InfraREIT:	
 
 	•	 	the issuance by the Operating Partnership of                      OP Units to Hunt-InfraREIT; and	
 
 	•	 	the cancellation by InfraREIT LLC of                      common shares held by shareholders of InfraREIT LLC and the corresponding cancellation by the Operating Partnership of                      of OP Units held by InfraREIT LLC as a result of the cancellation of the InfraREIT LLC common shares; and	
 
 	•	 	the issuance by InfraREIT Inc. of                      shares to Hunt-InfraREIT as a reorganization advisory fee;	
 
 	•	 	the purchase by InfraREIT Inc. of                      InfraREIT LLC common shares held by a trust in exchange for an InfraREIT Inc. promissory note in the principal amount of $66.5 million. The trust is obligated to transfer the promissory note, immediately upon receipt, to Marubeni Corporation (together with its affiliates, Marubeni);	
 
 	•	 	the acquisition by MC Transmission Holdings, Inc. (MC Transmission), an affiliate of Marubeni, of                      OP Units in exchange for the contribution by Marubeni to the Operating Partnership of the $66.5 million promissory note, the transfer by the Operating Partnership of such promissory note to InfraREIT Inc. in exchange for the redemption of                      OP Units held by InfraREIT Inc. and the subsequent cancellation of such promissory note by InfraREIT Inc.;	
 
 	•	 	the issuance of                      OP Units to Hunt-InfraREIT in respect of the acceleration of a credit related to the CREZ construction project;	
 
 	•	 	the issuance of an aggregate of                      OP Units to certain members of the InfraREIT Inc. board of directors in compensation for service as a board member;	
 
 	•	 	to effect the calculation of the unaccelerated portion of the carried interest owed by our existing investors to Hunt-InfraREIT, the occurrence of the following, on or around the 32nd day following the completion of this offering, based on an assumed average closing price of InfraREIT Inc.	
 
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 	common stock during the 10 consecutive trading days prior to the end of the 30-day period following the completion of this offering equal to $            , which is the midpoint of the range set forth on the cover of this prospectus:	
 
 	•	 	the issuance of                      OP Units to Hunt-InfraREIT; and	
 
 	•	 	the cancellation of                  shares of InfraREIT Inc. common stock held by our existing investors and the corresponding cancellation of                  OP Units held by InfraREIT Inc. as a result of the cancellation of the shares of InfraREIT Inc. common stock; and	
 
 	•	 	the purchase by InfraREIT Inc. of $1.0 million of stock of publicly traded REITs; and	
 
 	•	 	the estimated net change in general and administrative fees that would have been incurred had the management agreement with Hunt Manager been in place throughout each of the periods presented, assuming we had completed this offering and given effect to the other Pro Forma Adjustments described above as of January 1, 2013.	
We have based the Pro Forma Adjustments on available information and assumptions that we believe are reasonable. The following unaudited pro forma condensed consolidated financial statements are presented for informational purposes only, are not necessarily indicative of what our actual financial position would have been as of September 30, 2014 assuming the Pro Forma Adjustments had occurred on September 30, 2014 or what actual results of operations would have been for the nine months ended September 30, 2014 and year ended December 31, 2013 assuming the Pro Forma Adjustments had occurred at the beginning of the respective period and should not be viewed as indicative of future results of operations or financial condition.
 
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InfraREIT Inc.
 Pro Forma Condensed Consolidated Balance Sheet
September 30, 2014
(In thousands except share amounts)
(Unaudited)

 	 	InfraREIT
Inc. (A)	 	 	InfraREIT
LLC (B)	 	 	Proceeds
from
Offering (C)	 	 	Other
Adjustments	 	 	 	    	Pro Forma	 	
Assets	 				 				 				 				 		    				
Current Assets	 				 				 				 				 		    				
Cash and cash equivalents	 	$	—  	  	 	$	24,655	  	 	$	                	  	 	$	                	  	 	(D)
(E)
(F)
(G)
(H)
(I)	    				
Restricted cash	 	 	—  	  	 	 	1,682	  	 				 				 		    				
Due from affiliates	 	 	—  	  	 	 	11,587	  	 				 				 		    				
Inventory	 	 	—  	  	 	 	6,285	  	 				 				 		    				
Prepaids and other current assets	 	 	—  	  	 	 	3,152	  	 				 				 	(H)	    				
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		    	 	 	 	
Total current assets	 	 	—  	  	 	 	47,361	  	 				 				 		    				
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		    	 	 	 	
Electric Plant—net	 	 	—  	  	 	 	1,224,749	  	 				 				 	(F)	    				
Goodwill	 	 	—  	  	 	 	138,384	  	 				 				 		    				
Deferred Assets and Other Regulatory Assets—net	 	 	—  	  	 	 	35,490	  	 				 				 	(I)	    				
Investments	 	 	—  	  	 	 	2,519	  	 				 				 		    				
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		    	 	 	 	
Total Assets	 	$	—  	  	 	$	1,448,503	  	 	$	 	  	 	$	 	  	 		    	$	 	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		    	 	 	 	
Equity and Liabilities	 				 				 				 				 		    				
Current Liabilities	 				 				 				 				 		    				
Accounts payable and accrued liabilities	 	$	67	  	 	$	12,496	  	 	$	 	  	 	$	 	  	 		    	$	 	  	
Short term borrowings	 	 	—  	  	 	 	193,500	  	 				 				 	(E)
(N)
(O)	    				
Current portion of long-term debt	 	 	—  	  	 	 	19,139	  	 				 				 		    				
Fair value of derivative liabilities	 	 	—  	  	 	 	—  	  	 				 				 		    				
Accrued taxes	 	 	—  	  	 	 	2,063	  	 				 				 		    				
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		    	 	 	 	
Total current liabilities	 	 	67	  	 	 	227,198	  	 				 				 		    				
							
Contingent Consideration	 	 	—  	  	 	 	10,171	  	 				 				 	(M)	    				
Long-term Debt	 	 	—  	  	 	 	615,367	  	 				 				 		    				
Commitment and Contingencies	 	 	—  	  	 	 	—  	  	 				 				 		    				
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		    	 	 	 	
Total liabilities	 	 	67	  	 	 	852,736	  	 				 				 		    				
Equity	 				 				 				 				 		    				
Members’ equity	 	 	—  	  	 	 	448,293	  	 				 				 	(G)
(K)
(N)
(D)	    				
Common stock, $0.01 par value; authorized, issued	 	 	1	  	 	 	—  	  	 				 				 	(D)	    				
Additional paid-in capital	 	 	384	  	 	 	—  	  	 				 				 	(J)
(Q)
(L)
(D)	    				
Accumulated deficit	 	 	(452	) 	 	 	—  	  	 				 				 	(L)	    				
	 				 				 				 				 	(I)
(M)
(D)
(P)
(R)	    				
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		    	 	 	 	
Members’ capital	 	 	—  	  	 	 	448,293	  	 				 				 		    				
Total stockholders’ equity	 	 	(67	) 	 	 	—  	  	 				 				 		    				
Noncontrolling interest	 	 	—  	  	 	 	147,474	  	 				 				 	(G)
(J)
(K)
(M)
(O)	    				
	 				 				 				 				 	(Q)
(P)
(R)	    				
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		    	 	 	 	
Total equity	 	 	(67	) 	 	 	595,767	  	 				 				 		    				
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		    	 	 	 	
Total Equity and Liabilities	 	$	—  	  	 	$	1,448,503	  	 	$	 	  	 	$	 	  	 		    	$	 	  	

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InfraREIT Inc.
 Pro Forma Condensed Consolidated Statement of Operations
Nine Months Ended September 30, 2014
(In thousands except per share amounts)
(Unaudited)

 	  	InfraREIT
Inc. (AA)	 	 	InfraREIT
LLC (BB)	 	 	Adjustments	 	 	Pro
Forma	 	
Lease revenue	  	$	—  	  	 	$	89,371	  	 	$	            	  	 	$	            	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating costs and expenses	  				 				 				 				
General and administrative expense	  	 	67	  	 	 	12,839	  	 	 

 	         

         	(CC) 
(DD) 
(EE) 
(FF) 	 				
Depreciation	  				 	 	25,825	  	 				 				
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total operating costs and expenses	  	 	67	  	 	 	38,664	  	 				 				
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income loss from operations	  	 	(67	) 	 	 	50,707	  	 				 				
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other income (expenses)	  				 				 				 				
Interest expenses, net	  	 	—  	  	 	 	(24,364	) 	 	 
 	 
         	(GG) 
(HH) 	 				
Other income, net	  	 	—  	  	 	 	333	  	 				 				
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total other income (expense)	  	 	—  	  	 	 	(24,031	) 	 				 				
Income tax expense	  	 	—  	  	 	 	656	  	 				 				
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	  	 	(67	) 	 	 	26,020	  	 				 				
Less: Net income attributable to noncontrolling interest	  	 	—  	  	 	 	6,046	  	 	 	         	(II) 	 				
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income attributable to InfraREIT	  	$	(67	) 	 	$	19,974	  	 	$	 	  	 	$	 	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Pro forma income (loss) per share—basic and diluted	  	$	(67.10	) 	 	$	0.53	  	 	$	 	  	 	$	 	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Pro forma weighted average shares outstanding—basic and diluted	  	 	1	  	 	 	37,348	  	 	 	         	(JJ) 	 				
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
See accompanying notes to the pro forma condensed consolidated financial statements.
 
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InfraREIT Inc.
 Pro Forma Condensed Consolidated Statement of Operations
Year Ended December 31, 2013
(In thousands except per share amounts)
(Unaudited)

 	  	InfraREIT
Inc. (AA)	 	  	InfraREIT
LLC (BB)	 	 	Adjustments	 	 	Pro Forma	 	
Lease revenue	  	$	—  	  	  	$	73,193	  	 	$	            	  	 	$	            	  	
	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	
Operating costs and expenses	  				  				 				 				
General and administrative expense	  	 	—  	  	  	 	13,691	  	 	 	       	(CC) 	 				
	  				  				 	 	       	(DD) 	 				

       	(EE) 
(FF) 	 				
Depreciation	  	 	—  	  	  	 	20,024	  	 				 				
	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	
Total operating costs and expenses	  	 	—  	  	  	 	33,715	  	 				 				
	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	
Income from operations	  	 	—  	  	  	 	39,478	  	 				 				
	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	
Other income (expenses)	  				  				 				 				
Interest expenses, net	  	 	—  	  	  	 	(17,384	) 	 	 
 	       
       	(GG) 
(HH) 	 				
Other income, net	  	 	—  	  	  	 	20,932	  	 	 	       	(KK) 	 				
	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	
Total other income (expense)	  	 	—  	  	  	 	3,548	  	 				 				
Income tax expense	  	 	—  	  	  	 	616	  	 				 				
	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	
Net income	  	 	—  	  	  	 	42,410	  	 				 				
Less: Net income attributable to noncontrolling interest	  	 	—  	  	  	 	10,288	  	 	 	       	(II) 	 				
	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	
Net income attributable to InfraREIT	  	$	—  	  	  	$	32,122	  	 	$	 	  	 	$	 	  	
	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	
Pro forma income per share—basic and diluted	  	$	0.00	  	  	$	1.01	  	 	$	 	  	 	$	 	  	
	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	
Pro forma weighted average shares outstanding—basic and diluted	  	 	1	  	  	 	31,840	  	 	 	       	(JJ) 	 				
	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	
See accompanying notes to the pro forma condensed consolidated financial statements.
 
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Table of Contents
InfraREIT Inc.
 Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
1. Adjustments to the Pro Forma Condensed Consolidated Balance Sheet
The adjustments to the pro forma condensed consolidated balance sheet as of September 30, 2014 are as follows:
 
 	(A)	Represents the balance sheet of InfraREIT Inc. as of September 30, 2014.	
 
 	(B)	Represents the balance sheet of InfraREIT LLC as of September 30, 2014.	
 
 	(C)	Reflects the sale by InfraREIT Inc. of                  shares of common stock in this offering at a public offering price of $             per share, which is the midpoint of the range set forth on the cover of this prospectus.	

Gross proceeds from this offering	  	$	                	  	
Underwriting discounts and commissions and the underwriter structuring fee payable by us	  				
Offering costs included on our balance sheet as of September 30, 2014	  				
	  	 	 	 	
Available proceeds	  	$	                	  	

 	(D)	Reflects the Merger and InfraREIT Inc.’s use of $             million of the net proceeds from this offering as cash merger consideration paid to the shareholders of InfraREIT LLC.	
 
 	(E)	Reflects our use of $             million of the net proceeds from this offering to repay $             million of indebtedness outstanding under the Operating Partnership’s revolving credit facility and $             million of indebtedness outstanding under SDTS’s revolving credit facility as of September 30, 2014.	
 
 	(F)	Reflects the transfer by subsidiaries of the Operating Partnership of the assets associated with the Cross Valley transmission line project and the GSEC interconnection for a cash price of $             million to affiliates of Hunt.	
 
 	(G)	Reflects an aggregate of $             million of cash distributions the Operating Partnership has made or intends to make before consummation of this offering. Of such distributions, an aggregate of $             million will be made or has been made to InfraREIT LLC, which in turn has distributed or will distribute all of such amount to its shareholders, and an aggregate of $             million will be made or has been made to the limited partners of the Operating Partnership, including Hunt-InfraREIT.	
 
 	(H)	Reflects the purchase of $1.0 million of publicly traded REIT shares with the proceeds of a $1.0 million note issued to Hunt in November of 2014, which will be repaid with the net proceeds of this offering.	
 
 	(I)	Reflects the addition of unamortized deferred financing costs associated with the Operating Partnership’s new revolving credit facility and the amendment and restatement of its subsidiary’s revolving credit facility, net of the reduction to unamortized deferred financing costs associated with the Operating Partnership’s termination of its existing credit facility.	
 
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 	(J)	Reflects the issuance by InfraREIT Inc. of                  shares of common stock in exchange for                  OP Units tendered for redemption by Hunt-InfraREIT.	
 
 	(K)	Reflects the issuance by the Operating Partnership of                  OP Units to Hunt-InfraREIT and the cancellation of                  InfraREIT common shares held by the shareholders of InfraREIT LLC and the corresponding cancellation of                  OP Units held by InfraREIT LLC as a result of the cancellation of the InfraREIT common shares to effect an accelerated payment of a portion of the carried interest owed by our existing investors to Hunt-InfraREIT.	
 
 	(L)	Reflects InfraREIT Inc.’s issuance of                  shares of common stock to Hunt-InfraREIT as a reorganization advisory fee.	
 
 	(M)	Reflects the issuance of                  OP Units to Hunt-InfraREIT in respect of the acceleration of a credit related to the CREZ construction project. This issuance will settle the Operating Partnership’s obligation to issue OP Units to Hunt-InfraREIT in respect of the project.	
 
 	(N)	Reflects the repurchase by InfraREIT Inc. of                  InfraREIT common shares held by a trust in exchange for an InfraREIT Inc. promissory note in the principal amount of $66.5 million. The trust is obligated to transfer the promissory note, immediately upon receipt, to Marubeni.	
 
 	(O)	Reflects the acquisition by MC Transmission of                  OP Units in exchange for the contribution by MC Transmission to the Operating Partnership of the $66.5 million promissory note, the transfer by the Operating Partnership of such promissory note to InfraREIT Inc. in exchange for the redemption of                  OP Units held by InfraREIT Inc. and the subsequent cancellation of such promissory note by InfraREIT Inc.	
 
 	(P)	Reflects the issuance of an aggregate of                  OP Units to certain members of the InfraREIT Inc. board of directors upon the consummation of this offering in compensation for service as a board member.	
 
 	(Q)	Reflects the effect of the calculation of the unaccelerated portion of the carried interest to Hunt-InfraREIT agreed to between Hunt-InfraREIT and our existing investors and included in the merger agreement related to the Merger and the Operating Partnership’s limited partnership agreement. To effect such carried interest allocation, on or around the 32nd day following the completion of this offering, the following will occur, assuming the average closing price of InfraREIT Inc. common stock during the 10 consecutive trading days prior to the end of the 30-day period following the completion of this offering is equal to $        , which is the midpoint of the range set forth on the cover of this prospectus: the Operating Partnership will issue                  OP Units to Hunt-InfraREIT; and InfraREIT Inc. will cancel                  shares of its common stock held by our existing investors and the Operating Partnership will cancel                  OP units held by InfraREIT Inc. as a result of the cancellation of the shares of InfraREIT Inc. common stock.	
The table below shows the effect of such allocation on total stockholders’ equity and noncontrolling interest:

Equity	  	Immediately
following the
completion of
this offering	 	  	32 nd day
following the
completion of
this offering	
Common stock issued	  	$	            	  	  		
Additional paid-in capital	  	$	 	  	  		
Noncontrolling interest	  	$	 	  	  		
 
 	(R)	Reflects a change to noncontrolling interest as a result of the Pro Forma Adjustments in Notes (I), (L) and (M). These Pro Forma Adjustments have been allocated between InfraREIT Inc.’s accumulated deficit and the noncontrolling interest based upon the noncontrolling interest of         % as shown in Note (II).	
 
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2. Adjustments to the Pro Forma Condensed Consolidated Statements of Operations
The adjustments to the pro forma condensed consolidated statements of operations for the nine months ended September 30, 2014 and for the year ended December 31, 2013 are as follows:
 
 	(AA)	Reflects the historical consolidated statements of operations of InfraREIT Inc. for the nine months ended September 30, 2014 and year ended December 31, 2013, respectively.	
 
 	(BB)	Reflects the historical consolidated statements of operations of lnfraREIT LLC for the nine months ended September 30, 2014 and year ended December 31, 2013, respectively.	
 
 	(CC)	Reflects the increase in the management fee we expect to pay Hunt Manager following the completion of this offering, assuming the sale of                  shares of InfraREIT Inc. common stock and giving effect to the other Pro Forma Adjustments described above. Effective April 1, 2015, the management fee payable to Hunt Manager will increase from $10 million, annually, to an amount equal to 1.50% of InfraREIT Inc.’s total equity (including noncontrolling interest) as of December 31, 2014, assuming we had completed this offering and the Reorganization transactions on December 31, 2014. Our management agreement also provides that we will pay Hunt Manager a cash incentive fee on the amount of quarterly distributions the Operating Partnership makes in excess of a threshold. Based on our management’s projections, we do not believe those thresholds will be exceeded in 2015, and, as a result, we have not included any related adjustment in the pro forma condensed consolidated statements of operations.	
 
 	(DD)	We expect to incur additional general and administrative expenses, including expenses that result from becoming a public company, including, but not limited to, board of directors’ fees and expenses, directors and officers insurance, legal compliance cost and incremental audit and tax fees. We estimate that these costs could result in general and administrative expenses of approximately $             per year, before additional non-cash compensation expenses of approximately $             per year. As we have not yet entered into contracts with third parties to provide all of the services included within this estimate, not all of the estimated expenses appear in the accompanying pro forma consolidated statements of operations. Amounts corresponding to services and expenses under contract have been reflected as an adjustment in the pro forma consolidated statements of operations as additional general and administrative expenses, without duplication, to the general and administrative expenses appearing in the historical operating statements.	
 
 	(EE)	Reflects a reversal of the effect that following SEC Staff Accounting Bulletin Topic 1.b had on our general and administrative expenses. In preparing the financial statements for the year ended December 31, 2013, we followed the guidance included in SEC Staff Accounting Bulletin Topic 1.b. Pursuant to this guidance, our general and administrative expenses included all costs incurred on our behalf by Hunt Manager, including compensation expenses, overhead costs related to the lease of Hunt Manager’s office space and software licenses. On June 24, 2014, InfraREIT LLC’s board of directors approved an increase in the annual management fee from $2.5 million to $10.0 million effective January 1, 2014. Accordingly, beginning with the quarter ended June 30, 2014, the guidance in Staff Accounting Bulletin Topic 1.b. no longer applied. In addition, following our entry into the management agreement, we have not been and will not be required to reimburse Hunt for those expenses previously allocated to us under the guidance in Staff Accounting Bulletin Topic 1.b.	
 
 	(FF)	The issuance of shares to Hunt-InfraREIT as a reorganization advisory fee will generate a charge to general and administrative expense of $             million, but this charge is nonrecurring and as such is not reflected in the pro forma condensed consolidated statements of operations.	
 
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 	(GG)	Reflects a reduction of interest expense of $             and $             for the nine months ended September 30, 2014 and year ended December 31, 2013, respectively, resulting from the repayment of indebtedness with the net proceeds of this offering.	
 
 	(HH)	Reflects a net addition of amortization of deferred financing costs of $         million and $         million for the nine months ended September 30, 2014 and year ended December 31, 2013, respectively, resulting from the elimination of amortized deferred financing costs in connection with the termination of the Operating Partnership’s existing revolving credit facility and the addition of amortized deferred financing costs in connection with the Operating Partnership’s entry into its new revolving credit facility and the amendment and restatement of its subsidiary’s revolving credit facility.	
 
 	(II)	Reflects a change to the allocation of income attributable to noncontrolling interest of             % to             % as a result of the Pro Forma Adjustments described above.	
 
 	(JJ)	Pro forma income per share—basic and diluted—are calculated by dividing pro forma consolidated net income allocable to InfraREIT Inc. by the number shares of common stock to be outstanding following the completion of this offering and after giving effect to the Pro Forma Adjustments described above. Set forth below is a reconciliation of pro forma weighted average shares outstanding:	

Number of shares held by existing investors prior to this offering	  		
Number of shares issued in this offering	  		
Net number of shares issued pursuant to the other Pro Forma Adjustments described above	  		
	  	 	
Pro forma weighted average shares outstanding	  		

 	(KK)	The acceleration of the issuance of OP Units to Hunt-InfraREIT will generate a charge to general and administrative expense of $             million, but this charge is nonrecurring and as such is not reflected in the pro forma condensed consolidated statements of operations.	
 
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 Report of Independent Registered Public Accounting Firm
Board of Directors
InfraREIT, Inc.:
We have audited the accompanying balance sheets of InfraREIT, Inc. as of December 31, 2013 and 2012, and the related statements of operations, stockholder’s equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of InfraREIT, Inc. as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Dallas, Texas
December 5, 2014
 
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Table of Contents
 InfraREIT, Inc.
Balance Sheets
September 30, 2014, December 31, 2013 and 2012
(US Dollars, except share amounts)

 	  	2014	 	 	2013	 	 	2012	 	
Assets	  	(unaudited)	 	 	 	 	 	 	 	
Total Assets	  	$	—  	  	 	$	—  	  	 	$	—  	  	

Liabilities and Stockholder’s Equity	  				 				 				
				
Accrued Liabilities	  	$	67,100	  	 	$	—  	  	 	$	—  	  	
	  	 	 	 	 	 	 	 	 	 	 	 	
Total Liabilities	  	$	67,100	  	 	$	—  	  	 	$	—  	  	

Common stock, $1 par, 3,000 shares authorized, 1,000 shares issued and outstanding	  	 	1,000	  	 	 	1,000	  	 	 	1,000	  	
Additional paid-in capital	  	 	383,720	  	 	 	383,720	  	 	 	383,720	  	
Accumulated deficit	  	 	(451,820	) 	 	 	(384,720	) 	 	 	(384,720	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Total Stockholder’s Equity	  	 	(67,100	) 	 	 	—  	  	 	 	—  	  	
	  	 	 	 	 	 	 	 	 	 	 	 	
Total Liabilities and Stockholder’s Equity	  	$	—  	  	 	$	—  	  	 	$	—  	  	
	  	 	 	 	 	 	 	 	 	 	 	 	
See accompanying notes to the financial statements.
 
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Table of Contents
 InfraREIT, Inc.
Statements of Operations
(US Dollars)

 	  	Nine Months
Ended
September 30,
2014	 	 	Nine Months
Ended
September 30,
2013	 	  	Year Ended
December 31,	 	
 	  			 			  	    2013    	 	  	    2012    	 	
 	  	(unaudited)	 	 	(unaudited)	 	  	 	 	  	 	 	
					
General and administrative expense	  	$	(67,100	) 	 	$	—  	  	  	$	—  	  	  	$	(70	) 	
	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	
Net Loss	  	$	(67,100	) 	 	$	—  	  	  	$	—  	  	  	$	(70	) 	
	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	
Net loss per share	  				 				  				  				
Basic & Diluted	  	$	(67.10	) 	 				  				  	$	(0.07	) 	

 
 
See accompanying notes to the financial statements.
 
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Table of Contents
 InfraREIT, Inc.
Statements of Stockholder’s Equity
(US Dollars, except share amounts)

 	  	Shares
Outstanding	 	  	Common
Stock	 	  	Additional
Paid-in
Capital	 	  	Retained
Deficit	 	 	Total	 	
Balance at December 31, 2011	  	 	1,000	  	  	$	1,000	  	  	$	383,720	  	  	$	(384,510	) 	 	$	210	  	
Net loss	  	 	—  	  	  	 	—  	  	  	 	—  	  	  	 	(70	) 	 	 	(70	) 	
Dividends	  	 	—  	  	  	 	—  	  	  	 	—  	  	  	 	(140	) 	 	 	(140	) 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
Balance at December 31, 2012	  	 	1,000	  	  	$	1,000	  	  	$	383,720	  	  	$	(384,720	) 	 	$	—  	  	
Net loss	  	 	—  	  	  	 	—  	  	  	 	—  	  	  	 	—  	  	 	 	—  	  	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
Balance at December 31, 2013	  	 	1,000	  	  	$	1,000	  	  	$	383,720	  	  	$	(384,720	) 	 	$	—  	  	
Net loss	  	 	—  	  	  	 	—  	  	  	 	—  	  	  	 	(67,100	) 	 	 	(67,100	) 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
Balance at September 30, 2014 (unaudited)	  	 	1,000	  	  	$	1,000	  	  	$	383,720	  	  	$	(451,820	) 	 	$	(67,100	) 	

 
 
See accompanying notes to the financial statements.
 
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Table of Contents
 InfraREIT, Inc.
Statements of Cash Flows
(US Dollars)

 	  	Nine Months
Ended
September 30,
2014	 	 	Nine Months
Ended
September 30,
2013	 	 	Year Ended
December 31,	 	
 	  			 			 	2013	 	  	2012	 	
Cash flows from operating activities:	  	 	(unaudited	) 	 	 	(unaudited	) 	 				  				
Net loss	  	$	(67,100	) 	 	$	—  	  	 	$	—  	  	  	$	(70	) 	
Increase (decrease) in accounts payable	  	 	67,100	  	 	 	—  	  	 	 	—  	  	  	 	(45	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Net cash used by operating activities	  	 	—  	  	 	 	—  	  	 	 	—  	  	  	 	(115	) 	

Net cash used by financing activities—dividends paid	  	 	—  	  	 	 	—  	  	 	 	—  	  	  	 	(140	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Net decrease in cash	  	 	—  	  	 	 	—  	  	 	 	—  	  	  	 	(255	) 	
					
Cash at beginning of year	  	 	—  	  	 	 	—  	  	 	 	—  	  	  	 	255	  	
	  	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Cash at end of year	  	$	—  	  	 	$	—  	  	 	$	—  	  	  	$	—  	  	
	  	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
See accompanying notes to the financial statements.
 
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Table of Contents
 InfraREIT, Inc.
Notes to Financial Statements
(1) Description of Business and Summary of Significant Accounting Policies
 
 	(a)	Description of Business	
InfraREIT, Inc. (the “Company”) was originally incorporated under the laws of Delaware in 2001 under the name of Hunt Capital Corporation (“HCC”) as a wholly owned subsidiary of Hunt Consolidated, Inc (“HCI”). In 2006, HCI contributed its ownership interest in HCC to one of its indirectly held wholly owned subsidiaries, Hunt Transmission Services, L.L.C. (“HTS”) at which time the Company’s name was changed to Hunt Electric Infrastructure Investments Corporation (“HEIIC”). In August 2014, HTS distributed its ownership of HEIIC to Hunt Equities Company (“HEC”). HEC is also an indirectly held wholly owned subsidiary of HCI. On September 29, 2014, the Company was converted to a Maryland corporation, and the Company changed its name to InfraREIT, Inc.
The Company has had virtually no activity since its formation except for accounting services provided during 2014. During 2006 HTS incurred external legal and other professional costs totaling $382,020 in connection with obtaining a Private Letter Ruling (“PLR”) from the Internal Revenue Service that affirmed the Company’s position that certain electric transmission and distribution assets are considered to be real estate. Those costs have been pushed down to the Company in the form of a capital contribution and were recognized as expenses.
 
 	(b)	Income Taxes	
The Company is not itself a taxable entity. Its operations are included in the consolidated federal income tax return of HCI’s parent company. Therefore, no provision for income taxes has been made.
(2) Subsequent Event
During November of 2014, the Company borrowed $1.0 million due on November 1, 2015 from an affiliate in order to purchase marketable securities. The Company has evaluated subsequent events from the balance sheet date through December 5, 2014, the date at which the financial statements were available to be issued, and determined there are no other items to disclose.
 
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Table of Contents
InfraREIT, L.L.C.
 Condensed Consolidated Balance Sheets
(In thousands except share amounts)
(Unaudited)

 	  	September 30,
2014	 	  	December 31,
2013	 	
Assets	  	 	 	  	 	 	
Current Assets	  				  				
Cash and cash equivalents	  	$	24,655	  	  	$	7,746	  	
Restricted cash	  	 	1,682	  	  	 	1,681	  	
Due from affiliates	  	 	11,587	  	  	 	20,547	  	
Inventory	  	 	6,285	  	  	 	6,577	  	
Prepaids and other current assets	  	 	3,152	  	  	 	1,864	  	
	  	 	 	 	  	 	 	 	
Total current assets	  	 	47,361	  	  	 	38,415	  	
	  	 	 	 	  	 	 	 	
Electric Plant—net	  	 	1,224,749	  	  	 	1,109,259	  	
Goodwill	  	 	138,384	  	  	 	138,384	  	
Deferred Assets and Other Regulatory Assets—net	  	 	35,490	  	  	 	37,786	  	
Investments	  	 	2,519	  	  	 	2,519	  	
	  	 	 	 	  	 	 	 	
Total Assets	  	$	1,448,503	  	  	$	1,326,363	  	
	  	 	 	 	  	 	 	 	
Members’ Capital and Liabilities	  				  				
Current Liabilities	  				  				
Accounts payable and accrued liabilities	  	$	12,496	  	  	$	39,628	  	
Short term borrowings	  	 	193,500	  	  	 	75,000	  	
Current portion of long-term debt	  	 	19,139	  	  	 	4,777	  	
Fair value of derivative liabilities	  	 	—  	  	  	 	844	  	
Accrued taxes	  	 	2,063	  	  	 	1,454	  	
	  	 	 	 	  	 	 	 	
Total current liabilities	  	 	227,198	  	  	 	121,703	  	
			
Contingent Consideration	  	 	10,171	  	  	 	12,554	  	
Long-term Debt	  	 	615,367	  	  	 	627,913	  	
Commitments and Contingencies	  	 	—  	  	  	 	—  	  	
	  	 	 	 	  	 	 	 	
Total liabilities	  	 	852,736	  	  	 	762,170	  	
Members’ Capital	  				  				
Members’ capital—37,348,159 shares issued and outstanding as of September 30, 2014 and December 31, 2013	  	 	448,293	  	  	 	428,319	  	
Accumulated other comprehensive loss	  	 	—  	  	  	 	(610	) 	
	  	 	 	 	  	 	 	 	
Total InfraREIT, L.L.C. members’ capital	  	 	448,293	  	  	 	427,709	  	
Noncontrolling interest	  	 	147,474	  	  	 	136,484	  	
	  	 	 	 	  	 	 	 	
Total members’ capital	  	 	595,767	  	  	 	564,193	  	
	  	 	 	 	  	 	 	 	
Total Members’ Capital and Liabilities	  	$	1,448,503	  	  	$	1,326,363	  	
	  	 	 	 	  	 	 	 	
See accompanying notes to the condensed consolidated financial statements.
 
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InfraREIT, L.L.C.
 Condensed Consolidated Statements of Operations
(In thousands except per share amounts)
(Unaudited)

 	  	Nine Months Ended
September 30,	 	
 	  	2014	 	 	2013	 	
Lease revenue	  	$	89,371	  	 	$	43,368	  	
	  	 	 	 	 	 	 	 	
Operating costs and expenses	  				 				
General and administrative expense	  	 	12,839	  	 	 	10,262	  	
Depreciation	  	 	25,825	  	 	 	12,417	  	
	  	 	 	 	 	 	 	 	
Total operating costs and expenses	  	 	38,664	  	 	 	22,679	  	
	  	 	 	 	 	 	 	 	
Income from operations	  	 	50,707	  	 	 	20,689	  	
	  	 	 	 	 	 	 	 	
Other (expense) income	  				 				
Interest expense, net	  	 	(24,364	) 	 	 	(10,764	) 	
Other income, net	  	 	333	  	 	 	19,571	  	
	  	 	 	 	 	 	 	 	
Total other (expense) income	  	 	(24,031	) 	 	 	8,807	  	
Income tax expense	  	 	656	  	 	 	289	  	
	  	 	 	 	 	 	 	 	
Net income	  	 	26,020	  	 	 	29,207	  	
Less: Net income attributable to noncontrolling interest	  	 	6,046	  	 	 	7,075	  	
	  	 	 	 	 	 	 	 	
Net income attributable to InfraREIT, L.L.C.	  	$	19,974	  	 	$	22,132	  	
	  	 	 	 	 	 	 	 	
Net income attributable to InfraREIT, L.L.C. common shareholders per share	  				 				
Basic	  	$	0.53	  	 	$	0.71	  	
	  	 	 	 	 	 	 	 	
Diluted	  	$	0.53	  	 	$	0.71	  	
	  	 	 	 	 	 	 	 	
See accompanying notes to the condensed consolidated financial statements.
 
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InfraREIT, L.L.C.
 Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)

 	  	Nine Months Ended
September 30,	 	
 	  	2014	 	 	2013	 	
Net income	  	$	26,020	  	 	$	29,207	  	
Change in fair value of cash flow hedging instrument	  	 	844	  	 	 	951	  	
	  	 	 	 	 	 	 	 	
Comprehensive income	  	 	26,864	  	 	 	30,158	  	
Comprehensive income attributable to noncontrolling interest	  	 	(6,280	) 	 	 	(7,308	) 	
	  	 	 	 	 	 	 	 	
Comprehensive income attributable to InfraREIT, L.L.C.	  	$	20,584	  	 	$	22,850	  	
	  	 	 	 	 	 	 	 	
See accompanying notes to the condensed consolidated financial statements.
 
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InfraREIT, L.L.C.
 Condensed Consolidated Statements of Members’ Capital
For the Nine Months Ended September 30, 2014
(In thousands)
(Unaudited)

 	 	Members’
Capital	 	 	Accumulated
Other
Comprehensive
Loss	 	 	Total
InfraREIT, L.L.C
Members’ Capital	 	 	Noncontrolling
Interest	 	 	Total
Members’
Capital	 	
Balance at December 31, 2013	 	$	428,319	  	 	$	(610	) 	 	$	427,709	  	 	$	136,484	  	 	$	564,193	  	
Equity based compensation	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	120	  	 	 	120	  	
Net income attributable to InfraREIT, L.L.C.	 	 	19,974	  	 	 	—  	  	 	 	19,974	  	 	 	—  	  	 	 	19,974	  	
Net income attributable to noncontrolling interest	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	6,046	  	 	 	6,046	  	
Change in fair value of cash flow hedging instrument	 	 	—  	  	 	 	610	  	 	 	610	  	 	 	234	  	 	 	844	  	
Non-cash noncontrolling interest equity issuance	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	4,590	  	 	 	4,590	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at September 30, 2014	 	$	448,293	  	 	$	—  	  	 	$	448,293	  	 	$	147,474	  	 	$	595,767	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
See accompanying notes to the condensed consolidated financial statements.
 
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InfraREIT, L.L.C.
 Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

 	  	Nine Months Ended
September 30,	 	
 	  	2014	 	 	2013	 	
Cash Flows from Operating Activities	  				 				
Net income	  	$	26,020	  	 	$	29,207	  	
Adjustments to reconcile net income to net cash provided by operating activities:	  				 				
Depreciation	  	 	25,825	  	 	 	12,417	  	
Amortization of deferred financing cost	  	 	3,193	  	 	 	2,658	  	
Allowance for funds used during construction—equity	  	 	(1,432	) 	 	 	(19,556	) 	
Change in fair value of contingent consideration	  	 	1,110	  	 	 	—  	  	
Equity based compensation	  	 	120	  	 	 	—  	  	
Changes in assets and liabilities:	  				 				
Due from affiliates	  	 	8,960	  	 	 	(6,838	) 	
Inventory	  	 	292	  	 	 	(215	) 	
Prepaids and other current assets	  	 	(1,625	) 	 	 	(108	) 	
Accounts payable and accrued liabilities	  	 	5,228	  	 	 	378	  	
	  	 	 	 	 	 	 	 	
Net cash provided by operating activities	  	 	67,691	  	 	 	17,943	  	
	  	 	 	 	 	 	 	 	
Cash Flows from Investing Activities	  				 				
Additions to electric plant	  	 	(170,200	) 	 	 	(286,284	) 	
	  	 	 	 	 	 	 	 	
Net cash used in investing activities	  	 	(170,200	) 	 	 	(286,284	) 	
	  	 	 	 	 	 	 	 	
Cash Flows from Financing Activities	  				 				
Members’ contributions	  	 	—  	  	 	 	90,858	  	
Noncontrolling interest contributions	  	 	—  	  	 	 	1,576	  	
Proceeds from short-term borrowings	  	 	123,500	  	 	 	65,500	  	
Repayments of short-term borrowings	  	 	(5,000	) 	 	 	(15,000	) 	
Proceeds from borrowings of long-term debt	  	 	11,000	  	 	 	166,000	  	
Repayments of long-term debt	  	 	(9,184	) 	 	 	(7,195	) 	
Net change in restricted cash	  	 	(1	) 	 	 	—  	  	
Deferred financing costs	  	 	(897	) 	 	 	(1,942	) 	
Dividends paid	  	 	—  	  	 	 	(9,252	) 	
Distributions to noncontrolling interest	  	 	—  	  	 	 	(2,923	) 	
	  	 	 	 	 	 	 	 	
Net cash provided by financing activities	  	 	119,418	  	 	 	287,622	  	
	  	 	 	 	 	 	 	 	
Net increase in cash and cash equivalents	  	 	16,909	  	 	 	19,281	  	
Cash and cash equivalents at beginning of period	  	 	7,746	  	 	 	16,442	  	
	  	 	 	 	 	 	 	 	
Cash and Cash Equivalents at End of Period	  	$	24,655	  	 	$	35,723	  	
	  	 	 	 	 	 	 	 	
See accompanying notes to the condensed consolidated financial statements.
 
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InfraREIT, L.L.C.
 Notes to the Condensed Consolidated Financial Statements
September 30, 2014
(Unaudited)
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
InfraREIT, L.L.C. (formerly known as Electric Infrastructure Alliance of America, L.L.C.) (the Company or InfraREIT) was organized on November 23, 2010 as a Delaware limited liability company and has elected under the Internal Revenue Code of 1986, as amended (the Code), to be taxed, and currently qualifies, as a real estate investment trust (REIT) for federal income tax purposes. The Company is the General Partner of InfraREIT Partners, LP (the Operating Partnership or InfraREIT LP) and holds a controlling financial investment in InfraREIT LP and, therefore, includes the accounts of this partnership and its subsidiaries in these condensed consolidated financial statements.
The Company is owned by Marubeni Corporation, John Hancock Life Insurance Company (U.S.A.), Teachers Insurance and Annuity Association of America, OpTrust Infrastructure N.A. Inc. and other private investors. The Company is externally managed and advised by Hunt Utility Services, LLC, formerly known as InfraREIT Capital Partners, LLC (the Manager), a Delaware limited liability company. The Manager is responsible for overseeing the Company’s day-to-day affairs.
Sharyland Distribution & Transmission Services, L.L.C. (SDTS), a subsidiary of InfraREIT LP, and its wholly owned subsidiaries, SDTS FERC, L.L.C. (SDTS FERC) and Sharyland Projects, L.L.C. (SPLLC), are the owners of electric transmission and distribution assets (T&D assets) throughout Texas, including the Texas Panhandle near Amarillo (Panhandle assets), the Permian Basin in and around Stanton, Central Texas around Brady, Northeast Texas in and around Celeste (S/B/C assets) and South Texas near McAllen (McAllen assets). The T&D assets include over 50,000 electricity delivery points, approximately 620 miles of transmission lines, approximately 10,500 miles of distribution lines, approximately 40 substations and a 300 megawatt (MW) high-voltage direct current interconnection between Texas and Mexico (Railroad DC Tie). SDTS and its subsidiaries lease the T&D assets to Sharyland Utilities, L.P. (SULP) and its wholly-owned subsidiary, SU FERC, L.L.C. (SU FERC), a Texas based utility, under several lease agreements, which operate and maintain the T&D assets. SDTS and its subsidiaries are subject to regulation as an electric utility by the Public Utility Commission of Texas (PUCT).
On January 29, 2009, the PUCT selected SULP as one of the transmission service providers (TSPs) to construct and operate the transmission facilities necessary to deliver the electricity generated from renewable energy sources to population centers as part of the Texas Competitive Renewable Energy Zone (CREZ) initiative. SULP was awarded five line segments and four substations in the Texas Panhandle and South Plains (the CREZ Project). As part of the applications to the PUCT for amendments to its Certificate of Convenience and Necessity (CCN) for the CREZ Project, SULP stated that it would construct, operate and maintain the CREZ Project and SPLLC would hold legal title to the CREZ Project. SPLLC owns the CREZ Project and leases it to SULP under a CREZ master lease agreement.
SPLLC funded all costs and expenses of constructing the CREZ Project. SPLLC used outside contractors and engineers under the supervision of SULP’s engineers and staff to construct the CREZ Project. SPLLC completed and placed in service the CREZ Project during the year ended December 31, 2013. While the CREZ Project has been completed and placed in service, power generators have requested from time to time for SULP to construct interconnections into the CREZ Project. The Company has been funding the costs and expenses associated with such interconnections and related transmission facilities to accommodate such interconnections.
 
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(b) Principles of Consolidation and Presentation
The condensed consolidated financial statements include the Company’s accounts and the accounts of all other entities in which the Company has a controlling financial interest with noncontrolling interest of consolidated subsidiaries reported separately. All significant intercompany balances and transactions have been eliminated. SDTS and its subsidiaries maintain accounting records in accordance with the uniform system of accounts, as prescribed by the Federal Energy Regulatory Commission (FERC). In accordance with the applicable consolidation guidance, the Company’s condensed consolidated financial statements reflect the effects of the different rate making principles mandated by the FERC and the PUCT which regulate its subsidiaries’ operations.
The Company and the Manager are parties to a management agreement under which the Manager provides certain services to the Company for a management fee. Historically, the Company followed the guidance included in SEC Staff Accounting Bulletin Topic 1.b. Pursuant to this guidance, the Company’s Condensed Consolidated Statements of Operations included the costs incurred on the Company’s behalf by its Manager. These costs include compensation, rent expense and other costs included in general and administrative expense on the Condensed Consolidated Statements of Operations totaling $8.9 million for the nine months ended September 30, 2013. The historical financial information is not necessarily indicative of the Company’s results of operations, financial position and cash flows had it operated on a standalone basis, and may not be reflective of amounts that will be incurred in future operations. On June 24, 2014, the Company’s board of directors agreed to increase the annual management fee from $2.5 million to $10.0 million effective January 1, 2014. As a result, general and administrative expenses for the nine months ended September 30, 2014 include management fees paid to the Manager as well as additional costs the Company incurs directly, such as professional services costs and direct reimbursement of third-party costs paid to outside service providers. As a result of the increased management fee, the Company, through its subsidiary InfraREIT LP, incurred costs associated with management fees of approximately $7.5 million during the nine months ended September 30, 2014.
The accompanying historical condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and with instructions to Article 10 of the SEC Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals), considered necessary for a fair presentation have been included. The historical financial information is not necessarily indicative of the Company’s future results of operations, financial position and cash flows. These historical condensed consolidated financial statements and related notes should be read in conjunction with the historical consolidated financial statements included elsewhere in this prospectus.
(c) Use of Estimates
The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
 
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(2) Leases
The following table shows the composition of our lease revenue for the periods presented:

 	  	Nine months ended
September 30,	 	
 	  	2014	 	  	2013	 	
(In thousands)	  	 	 	  	 	 	
Base rent (straight-line)	  	$	76,399	  	  	$	35,714	  	
Percentage rent	  	 	12,972	  	  	 	7,654	  	
	  	 	 	 	  	 	 	 	
Total lease revenue	  	$	89,371	  	  	$	43,368	  	
	  	 	 	 	  	 	 	 	
The Company, through its subsidiaries SDTS, SDTS FERC and SPLLC, is the owner of the T&D assets and recognizes lease revenue over the terms of lease agreements with SULP and SU FERC. The Company’s lease revenue comprises annual base rent and additional percentage rents based upon a percentage of revenue earned by SULP on the leased assets in excess of an annual specified breakpoint. In accordance with the lease agreements, SULP and SU FERC, the lessees and operators of the T&D assets, are responsible for the maintenance and operation of the T&D assets and for compliance with all regulatory requirements of the PUCT, the FERC and any other regulatory entity with jurisdiction over the T&D assets. Each of the lease agreements with SULP and SU FERC is a net lease that obligates the lessee to pay all property-related expenses, including maintenance, repairs, taxes and insurance, and to comply with the terms of the secured credit facilities and secured-term loan, if any, affecting the leased assets.
The lease agreements provide for periodic and determinable increases of base rent based upon capital expenditures made by SDTS and its subsidiaries if certain circumstances are met. The Company recognizes base rent under these leases on a straight-line basis over the applicable lease term. The Company recognizes percentage rent under these leases once the revenue earned by SULP on the leased assets exceeds the annual specified breakpoint.
On December 31, 2009, SDTS and SULP entered into a master lease agreement, as amended, for the T&D assets located in and around McAllen, Texas, including our Railroad DC Tie, and our transmission operation center in Amarillo, Texas (McAllen lease). The term of the agreement expires on December 31, 2029. The agreement includes annual base rent and additional percentage rents based upon a percentage of revenue earned by SULP on the leased assets in excess of specified annual base amount, which percentage decreases over the life of the lease. The rate used for percentage rent will vary from 37% to 18% over the term of the agreement. Base rent was approximately $5.7 million and $4.4 million during the nine months ended September 30, 2014 and 2013, respectively. The rate used to calculate the percentage rent component was 37% of SULP’s revenue above the annual breakpoint during the nine months ended September 30, 2014 and 2013. The Company recognized percentage rent of $1.3 million and $1.8 million during the nine months ended September 30, 2014 and 2013, respectively, associated with the McAllen lease in the Condensed Consolidated Statements of Operations.
On July 13, 2010, SDTS and SULP entered into a lease agreement, as amended, for the T&D assets located mainly in and around the cities of Stanton, Brady and Celeste (S/B/C lease). The term of the agreement expires on December 31, 2015. The agreement includes annual base rent and additional percentage rents based upon a percentage of revenue earned by SULP on the leased assets in excess of specified annual breakpoint amounts, which percentage decreases over the life of the lease. The rate used for percentage rent will vary from 29% to 23% over the term of the agreement. During the nine months ended September 30, 2014 and 2013, base rent was approximately $20.1 million and $16.0 million, respectively. The percentage rent component was 24% and 25% of SULP’s revenue above the annual breakpoint during the nine months ended September 30, 2014 and 2013, respectively. The Company recognized percentage rent of $7.9 million and $5.8 million during the nine months ended September 30, 2014 and 2013, respectively, associated with the S/B/C lease in the Condensed Consolidated Statements of Operations.
 
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On July 13, 2010, SDTS FERC and SU FERC also entered into a lease agreement, as amended, for the lease of our 138 kV transmission line that loops around our Stanton, Texas territory in the Permian Basin regulated by the FERC (Stanton Transmission Loop lease). The lease agreement expires on December 31, 2021 and includes annual base rent that varies over the term of the agreement. During the nine months ended September 30, 2014 and 2013, lease revenue was approximately $4.0 million and $5.0 million, respectively.
On June 20, 2011, SPLLC and SULP entered into a CREZ master system lease agreement, as amended, to lease the CREZ Project (CREZ lease). The term of the agreement expires on December 31, 2020. On April 29, 2013, August 27, 2013 and November 14, 2013, significant portions of the CREZ Project subject to the CREZ lease were completed and placed in service. As a result, consistent with the lease, SPLLC and SULP negotiated a rent supplement to provide for annual base rent and additional percentage rents based upon a percentage of revenue earned by SULP on the leased assets in excess of specified annual breakpoint amounts, which percentage varies over the life of the lease from 32% to 27%. During the nine months ended September 30, 2014 and 2013, base rent was approximately $46.6 million and $10.3 million, respectively. The rate used to calculate the percentage rent component was 32% and 29% of SULP’s revenue above the annual breakpoint during the nine months ended September 30, 2014 and 2013, respectively. The Company recognized percentage rent of $3.8 million during the nine months ended September 30, 2014 associated with the CREZ lease in the Condensed Consolidated Statements of Operations. The Company did not recognize percentage rent during the nine months ended September 30, 2013 associated with the CREZ lease in the Condensed Consolidated Statements of Operations.
Future minimum rentals expected in accordance with these lease agreements are as follows:

(In thousands)	  	Total	 	
Year Ending December 31:	  				
2014	  	$	110,403	  	
2015	  	 	116,310	  	
2016	  	 	81,345	  	
2017	  	 	77,673	  	
2018	  	 	73,523	  	
	  	 	 	 	
	  	$	459,254	  	
	  	 	 	 	
(3) Goodwill
Goodwill represents the excess of costs of an acquired business over the fair value of the assets acquired, less liabilities assumed. The Company conducts an impairment test of goodwill annually. As of September 30, 2014 and December 31, 2013, approximately $138.4 million was recorded in goodwill in the Company’s Condensed Consolidated Balance Sheets.
(4) Noncontrolling Interest
The Company presents as a noncontrolling interest the portion of any equity in entities that it controls and consolidates but does not own. Holders of Class A Partnership units in InfraREIT LP have the right to put those units to InfraREIT LP after satisfying a one-year holding period. The Class A Partnership units are redeemable at the option of the holder and essentially have the same characteristics as common shares of the Company, participating in net income allocations and distributions. Subject to the terms of InfraREIT LP’s partnership agreement, these Class A Partnership units may be redeemed for cash or, at the Company’s option, exchanged for shares of the Company on a one-for-one basis. On May 1, 2014, the limited partnership agreement of InfraREIT LP was amended in order to incorporate a long-term incentive plan (LTIP). Additionally, certain independent members of the board of directors have elected to receive LTIP units as part of their compensation, which were fully vested upon grant.
 
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As of September 30, 2014, the Operating Partnership has issued 12,000 LTIP units with an aggregate value of $120,000 at the grant date. Compensation expense of $120,000 was recognized as general and administrative expense in our Condensed Consolidated Statements of Operations during the nine months ended September 30, 2014.
The Company follows the guidance issued by the FASB regarding the classification and measurement of redeemable securities. Accordingly, the Company has determined that the Class A Partnership Units meet the requirements to be classified as permanent equity. During the nine months ended September 30, 2014 and 2013, the Company did not redeem any Class A Partnership Units.
(5) Prepaids and Other Current Assets
Prepaids and other current assets at September 30, 2014 and December 31, 2013 are as follows:

 	  	September 30,
2014	 	  	December 31,
2013	 	
(In thousands)	  	 	 	  	 	 	
Offering costs	  	$	2,863	  	  	$	1,250	  	
Field service agent for right of way acquisition	  	 	—  	  	  	 	373	  	
Other	  	 	289	  	  	 	241	  	
	  	 	 	 	  	 	 	 	
Total Prepaids and Other Current Assets	  	$	3,152	  	  	$	1,864	  	
	  	 	 	 	  	 	 	 	
Offering costs consisted of incremental costs directly attributable to future registration of the Company’s securities with the SEC in accordance with ASC 340-10-S99-1.
(6) Electric Plant and Depreciation
The major classes of electric plant at September 30, 2014 and December 31, 2013 are as follows:

 	  	September 30,
2014	 	 	December 31,
2013	 	
(In thousands)	  	 	 	 	 	 	
Electric Plant:	  				 				
Transmission plant	  	$	941,889	  	 	$	882,230	  	
Distribution plant	  	 	377,461	  	 	 	304,691	  	
General plant	  	 	10,227	  	 	 	9,312	  	
	  	 	 	 	 	 	 	 	
Total plant in service	  	 	1,329,577	  	 	 	1,196,233	  	
	  	 	 	 	 	 	 	 	
Construction Work in Progress:	  	 	69,993	  	 	 	70,477	  	
	  	 	 	 	 	 	 	 	
Total Electric Plant	  	 	1,399,570	  	 	 	1,266,710	  	
Accumulated Depreciation	  	 	(211,939	) 	 	 	(194,569	) 	
Electric Plant Held for Future Use	  	 	37,118	  	 	 	37,118	  	
	  	 	 	 	 	 	 	 	
Electric Plant—Net	  	$	1,224,749	  	 	$	1,109,259	  	
	  	 	 	 	 	 	 	 	
General plant primarily consisted of a warehouse, buildings, and associated assets. Construction work in progress (CWIP) relates to various transmission and distribution projects underway. The capitalized amounts of CWIP consist primarily of route development expenditures, labor and materials expenditures, right of way acquisitions, engineering services and legal fees.
 
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Electric plant held for future use includes approximately 66 miles of existing transmission lines and two substations located near Stanton, Texas purchased on December 30, 2013 from Southwestern Public Service Company. SDTS holds legal title to the assets and will lease those facilities to SULP once they are placed into service. SULP will have the responsibility for operating these T&D assets and complying with all applicable regulatory requirements.
As a result of the settlement of SULP’s rate case approved by the PUCT under Docket No. 41474, effective May 1, 2014, provision for depreciation on electric plant is computed using composite straight-line rates as follows:

Transmission plant	  	 	1.69% — 3.15%	  	
Distribution plant	  	 	1.74% — 5.96%	  	
General plant	  	 	0.80% — 5.12%	  	
(7) Deferred Assets and Other Regulatory Assets
Deferred financing costs primarily consist of costs incurred in connection with the establishment of the InfraREIT LP revolving credit facility and the issuance of $25.0 million aggregate principal amount of 8.5% per annum senior notes, see Notes 9 and 10.
Other regulatory assets consist of deferred financing costs within the Company’s regulated entities. These assets are classified as regulatory assets and amortized over the length of the related loan. These costs will be included in the costs to be recovered in connection with a future rate case. Deferred financing costs primarily consist of debt issuance costs incurred in connection with the construction credit agreement entered into by SPLLC on June 20, 2011 and refinancing costs incurred in connection with the amended and restated revolving credit facility entered into by SDTS on June 28, 2013, see Notes 9 and 10.
Deferred costs recoverable in future years of $23.8 million at September 30, 2014 and December 31, 2013 represent operating costs incurred from inception of SULP through December 31, 2007. The Company has determined that these costs are probable of recovery through future rates based on orders of the PUCT in SULP’s prior rate cases and regulatory precedent.
Deferred assets and other regulatory assets as of September 30, 2014 and December 31, 2013 are as follows:

 	  	September 30, 2014	 	  	December 31, 2013	 	
 	  	Gross
Carrying
Amount	 	  	Accumulated
Amortization	 	 	Net
Carrying
Amount	 	  	Gross
Carrying
Amount	 	  	Accumulated
Amortization	 	 	Net
Carrying
Amount	 	
(In thousands)	  	 	 	  	 	 	 	 	 	  	 	 	  	 	 	 	 	 	
Deferred financing costs	  	$	1,333	  	  	$	(827	) 	 	$	506	  	  	$	546	  	  	$	(102	) 	 	$	444	  	
Other regulatory assets	  				  				 				  				  				 				
Deferred financing costs	  	 	23,028	  	  	 	(11,837	) 	 	 	11,191	  	  	 	22,918	  	  	 	(9,369	) 	 	 	13,549	  	
Deferred costs recoverable in future years	  	 	23,793	  	  	 	—  	  	 	 	23,793	  	  	 	23,793	  	  	 	—  	  	 	 	23,793	  	
	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
Deferred financing costs and other regulatory assets, net	  	$	48,154	  	  	$	(12,664	) 	 	$	35,490	  	  	$	47,257	  	  	$	(9,471	) 	 	$	37,786	  	

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(8) Related-Party Transactions
The Company’s subsidiaries, SDTS, SDTS FERC and SPLLC, are parties to several lease agreements with SULP and SU FERC, through which the Company leases the T&D assets, including the CREZ Project, and agrees to fund capital expenditures for improvements.
The Company earned lease revenues under these agreements of approximately $89.4 million and $43.4 million from SULP during the nine months ended September 30, 2014 and 2013, respectively.
As of September 30, 2014 and December 31, 2013, amounts due from affiliates on the Company’s Condensed Consolidated Balance Sheets included approximately $11.6 million, related to amounts owed by SULP associated with the lease of the T&D assets.
The Company through its subsidiary SDTS made payments to SULP to reimburse SULP for costs of gross plant and equipment related to the build out of the T&D assets as provided in the leases. For the nine months ended September 30, 2014 and 2013, those amounts were approximately $144.8 million and $82.1 million, respectively. As of September 30, 2014 and December 31, 2013, accounts payable and accrued expenses on the Company’s Condensed Consolidated Balance Sheets included approximately $3.9 million and $19.2 million, respectively, related to amounts owed to SULP as reimbursements for acquisition of gross plant and equipment related to the build out of the T&D assets.
The Company through its subsidiary SPLLC made payments to SULP to reimburse SULP for costs of gross plant and equipment related to the build out of the CREZ Project and interconnections as provided in the leases. For the nine months ended September 30, 2014, SPLLC made payments to reimburse SULP for costs related to the build out of the CREZ Project and interconnections for approximately $3.6 million. For the nine months ended September 30, 2013, SPLLC made payments to reimburse SULP for costs related to the build out of the CREZ assets for approximately $2.1 million. All of SPLLC’s payments to SULP were capitalized in line with the CREZ Project and interconnections and were included as electric plant—net on the Company’s Condensed Consolidated Balance Sheets. As of September 30, 2014, accounts payable and accrued liabilities on the Company’s Condensed Consolidated Balance Sheet included approximately $274,000 related to amounts owed to SULP as reimbursements for interconnection assets. As of December 31, 2013, accounts payable and accrued liabilities on the Company’s Condensed Consolidated Balance Sheet included approximately $275,000 related to amounts owed to SULP as reimbursements for the CREZ Project and interconnections.
Under the limited partnership agreement of InfraREIT LP, a limited partner (Hunt-InfraREIT) contributed its rights to certain identified development projects. Hunt-InfraREIT will receive partnership account credits deemed to be capital contributions equal to 5% of all costs and expenses incurred and included in the regulatory rate base by or on behalf of InfraREIT LP or any of its subsidiaries with respect to an approved identified development project. During the nine months ended September 30, 2014 and 2013, InfraREIT LP issued approximately 110,000 Class A Partnership units and 79,000 Class A Partnership units, respectively, at $10 per unit to Hunt-InfraREIT with respect to an approved identified development project. As of September 30, 2014, InfraREIT LP had issued to Hunt-InfraREIT $2.1 million in deemed capital credits in respect to this obligation.
The Company also issued deemed capital in connection with its acquisition of InfraREIT LP to Hunt-InfraREIT, for further information, see Note 15.
The Company and the Manager are parties to a management agreement under which the Manager provides certain services to the Company for a management fee. Historically, the Company followed the guidance included in SEC Staff Accounting Bulletin Topic 1.b. Pursuant to this guidance, general and administrative expenses included the costs incurred on the Company’s behalf by its Manager. On June 24, 2014, the Company’s board of directors agreed to increase the annual management fee from $2.5 million to $10.0 million effective January 1, 2014. As a result, general and administrative expenses for the nine months
 
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ended September 30, 2014 include management fees paid to the Manager as well as additional costs the Company incurs directly, such as professional services costs and direct reimbursement of third-party costs paid to outside service providers. The Company, through its subsidiary InfraREIT LP, incurred costs associated with management fees of approximately $7.5 million during the nine months ended September 30, 2014. As of September 30, 2014 and December 31, 2013, there were no amounts prepaid or accrued associated with management fees on the Company’s Condensed Consolidated Balance Sheets.
The Company and one member of the Company were parties to a secondee agreement under which employees of the member provide services to the Company for a secondment fee. The Company incurred costs associated with secondment fees of approximately $23,000 and $125,000 during the nine months ended September 30, 2014 and 2013, respectively. These fees are included in general and administrative expense in the accompanying Condensed Consolidated Statements of Operations. As of September 30, 2014 and December 31, 2013, there were no amounts owed to the member included in accounts payable and accrued liabilities on the Company’s Condensed Consolidated Balance Sheets related to the secondee agreement. The secondee agreement will terminate upon the consummation of the offering to which this prospectus relates.
(9) Borrowings under Credit Facilities
On January 3, 2014, InfraREIT LP entered into a credit agreement, as amended, led by Bank of America, N.A. as administrative agent, which established a revolving credit facility of $130.0 million that includes a letter of credit facility and matures upon the earlier of (a) January 1, 2015 or (b) upon the consummation of this offering. The revolving credit facility is collateralized by InfraREIT LP’s interest in Transmission and Distribution Company (TDC), a subsidiary of the Company, and certain accounts of InfraREIT LP. TDC is providing a secured guaranty. The interest rate for the revolving facility is based upon the Alternative Base Rate (ABR) plus 1.50% or London Interbank Offered Rate (LIBOR) plus 2.50%. The agreement requires maintenance of certain financial ratios and imposes certain restrictive covenants. At September 30, 2014, InfraREIT LP was in compliance with all debt covenants under this agreement. At September 30, 2014, InfraREIT LP had $118.5 million outstanding at a 2.66% interest rate under the revolving credit facility and no letters of credit outstanding. As of September 30, 2014, InfraREIT LP has $11.5 million of remaining capacity under this revolving credit facility.
On June 28, 2013, SDTS entered into a second amended and restated credit agreement led by Royal Bank of Canada (RBC) as administrative agent. The second amended and restated credit agreement established a revolving credit facility of $75.0 million that matures on June 28, 2018 and includes a letter of credit facility. The revolving credit facility is collateralized by SDTS’s T&D assets and the equity interests of SDTS and SDTS FERC. The interest rate for the revolving credit facility is based upon the ABR plus 1.00% or LIBOR plus 2.00%. LIBOR resets at each selected interest period (one month, two month, three month, or six month), at SDTS’s discretion, or, if requested by SDTS and agreed to by all lenders under the facility, a period of nine or twelve months. The agreement requires maintenance of certain financial ratios and imposes certain restrictive covenants. At September 30, 2014 and December 31, 2013, SDTS was in compliance with all debt covenants under this agreement. At September 30, 2014 and December 31, 2013, SDTS had $75.0 million outstanding at a 2.15% and 2.17% interest rate, respectively, under the revolving credit facility and no letters of credit outstanding. SDTS has no remaining capacity under this revolving credit facility as of September 30, 2014.
 
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(10) Long-term Debt
As of September 30, 2014 and December 31, 2013, long-term debt consisted of the following:

 	  	September 30, 2014	 	 	December 31, 2013	 	
 	  	Amount
Outstanding	 	 	Interest
Rate	 	 	Amount
Outstanding	 	 	Interest
Rate	 	
(In thousands)	  	 	 	 	 	 	 	 	 	 	 	 	
Senior secured notes—$53.5 Million	  	$	46,717	  	 	 	7.25	% 	 	$	47,947	  	 	 	7.25	% 	
Senior secured notes—$110.0 Million	  	 	106,581	  	 	 	6.47	% 	 	 	107,493	  	 	 	6.47	% 	
Senior secured notes—$25.0 Million	  	 	20,313	  	 	 	8.50	% 	 	 	21,250	  	 	 	8.50	% 	
Senior secured notes—$60.0 Million	  	 	60,000	  	 	 	5.04	% 	 	 	60,000	  	 	 	5.04	% 	
Senior secured credit facilities—$407.0 Million	  	 	400,895	  	 	 	2.41	%* 	 	 	396,000	  	 	 	2.17	%* 	
	  	 	 	 	 				 	 	 	 	 				
	  	 	634,506	  	 				 	 	632,690	  	 				
Less current portion of long-term debt	  	 	(19,139	) 	 				 	 	(4,777	) 	 				
	  	 	 	 	 				 	 	 	 	 				
Debt classified as long-term debt	  	$	615,367	  	 				 	$	627,913	  	 				

*	Interest based on LIBOR at September 30, 2014 and December 31, 2013, respectively, plus an applicable margin	
Senior Secured Notes —On December 31, 2009, SDTS issued $53.5 million aggregate principal amount of 7.25% per annum senior secured notes to The Prudential Insurance Company of America and affiliates. The senior secured notes mature on December 30, 2029 with principal and interest, as defined, payable quarterly. The senior secured notes are collateralized by SDTS’s T&D assets and the equity interests of SDTS and SDTS FERC. The senior secured note purchase agreement contains certain default triggers, including without limitation: failure to maintain compliance with financial and other covenants contained in the agreement, limitation on liens, investments and the incurrence of additional indebtedness. At September 30, 2014 and December 31, 2013, SDTS was in compliance with all debt covenants under this agreement. The carrying amount of the senior secured notes at September 30, 2014 and December 31, 2013 was $46.7 million and $47.9 million, respectively.
On July 13, 2010, in connection with the acquisition of Cap Rock Holding Corporation (CRHC), SDTS issued $110.0 million aggregate principal amount of 6.47% per annum senior secured notes to The Prudential Insurance Company of America. The senior secured notes mature on September 30, 2030 with principal and interest, as defined, payable quarterly. The senior secured notes are collateralized by SDTS’s T&D assets and the equity interests of SDTS and SDTS FERC. The senior secured note purchase agreement contains certain default triggers, including without limitation: failure to maintain compliance with financial and other covenants contained in the agreement, limitation on liens, investments and the incurrence of additional indebtedness. At September 30, 2014 and December 31, 2013, SDTS was in compliance with all debt covenants under this agreement. The carrying amount of the senior secured notes at September 30, 2014 and December 31, 2013 was $106.6 million and $107.5 million, respectively.
On July 13, 2010, in connection with the acquisition of CRHC, TDC issued $25.0 million aggregate principal amount of 8.5% per annum senior secured notes to The Prudential Insurance Company of America and affiliates. The senior secured notes mature on December 30, 2020 with principal and interest, as defined, payable quarterly. The senior secured notes are collateralized by the equity interest of TDC and certain accounts of TDC. The senior secured note purchase agreement contains certain default triggers, including without limitation: failure to maintain compliance with financial and other covenants contained in the agreement, limitation on liens, investments and the incurrence of additional indebtedness. At September 30, 2014 and December 31, 2013, TDC was in compliance with all debt covenants under this agreement. The carrying amount of the senior secured notes at September 30, 2014 and December 31, 2013 was $20.3 million and $21.3 million, respectively.
Senior Secured Credit Facilities— On June 20, 2011, SPLLC entered into a construction-term loan agreement consisting of a $667.0 million construction-term loan, reduced to $447.0 million on March 8, 2013,
 
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syndicated broadly to a group of 14 international banks, and $60.0 million in fixed rate notes issued to The Prudential Insurance Company of America and affiliates. RBC, Royal Bank of Scotland (RBS), and Societe Generale acted as joint lead arrangers and joint bookrunners for the construction-term loan. The senior secured credit facility is collateralized by SPLLC’s assets and SDTS’s interest in SPLLC.
The $447.0 million construction-term loan accrued interest at LIBOR plus 2.00%. LIBOR resets at each selected interest period (one month, two month, three month, or six month), at SPLLC’s discretion, at the current market rate. Interest is payable the last day of the selected interest period for interest periods of three months or less, and every three months for interest periods greater than three months. The outstanding borrowing under the construction-term loan at December 31, 2013 was $396.0 million.
On May 16, 2014, the construction-term loan outstanding was converted into a term loan with a balance of $407.0 million. After this conversion, interest accrues at LIBOR plus 2.25% for a period of three years, at which point the interest rate will increase to LIBOR plus 2.50%. Interest is payable the last day of the selected interest period for interest periods of three months or less, and every three months for interest periods greater than three months. Amortized principal amounts of the term loan are payable quarterly after the conversion.
The term loan matures on June 20, 2018. The carrying amount of the term loan at September 30, 2014 was $400.9 million. The term loan agreement contains certain default triggers, including without limitation: failure to maintain compliance with financial and other covenants contained in the agreement, limitation on liens, investments and the incurrence of additional indebtedness. SPLLC was in compliance with all debt covenants for the term loan at September 30, 2014 and December 31, 2013.
The $60.0 million fixed rate notes accrue interest at 5.04% per annum. The fixed rate notes mature on September 20, 2018 with interest payable quarterly. The fixed rate notes do not provide for any principal amortization. The fixed rate notes were issued under the construction-term loan agreement and contain the same default triggers as the construction-term loan, including without limitation: failure to maintain compliance with financial and other covenants for the fixed rate notes contained in the agreement, limitation on liens, investments and the incurrence of additional indebtedness. SPLLC was in compliance with all debt covenants for the fixed rate notes at September 30, 2014 and December 31, 2013. The carrying amount of the fixed rate notes at September 30, 2014 and December 31, 2013 was $60.0 million.
Future maturities of the total long-term debt at September 30, 2014, are as follows:

(In thousands)	  	Total	 	
Year Ending December 31:	  				
2014	  	$	4,750	  	
2015	  	 	19,234	  	
2016	  	 	19,633	  	
2017	  	 	20,059	  	
2018	  	 	429,518	  	
Thereafter	  	 	141,312	  	
	  	 	 	 	
	  	$	634,506	  	
	  	 	 	 	
(11) Dividends
On December 21, 2012, the Company’s board of directors approved a cash dividend of $0.38 per share to the shareholders of record at December 28, 2012 for a total of approximately $12.2 million. The dividend included a distribution from InfraREIT LP to the Company’s noncontrolling interest of approximately $2.9 million. The dividend was paid on January 28, 2013. The Company did not declare a dividend during the year ended December 31, 2013 or the nine months ended September 30, 2014.
 
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The Company is required to distribute at least 90% of its taxable income (excluding net capital gains) to maintain its status as a REIT. Management believes that the Company has distributed at least 100% of its taxable income.
(12) Earnings per share
Basic earnings per share is calculated by dividing net earnings after noncontrolling interest by weighted average shares of common shares outstanding. Diluted earnings per share is calculated similarly, except that it includes the dilutive effect of the assumed exercise of convertible dilutive units. Due to the anti-dilutive effect of such shares, none were dilutive during the nine months ended September 30, 2014 and 2013.
Earnings per share are calculated as follows:

 	  	Nine months ended
September 30,	 	
(In thousands except per share data)	  	2014	 	  	2013	 	
Basic net income per share:	  				  				
Net income attributable to InfraREIT, L.L.C.	  	$	19,974	  	  	$	22,312	  	
Weighted average common shares outstanding	  	 	37,348	  	  	 	31,226	  	
	  	 	 	 	  	 	 	 	
Basic net income per share:	  	$	0.53	  	  	$	0.71	  	
	  	 	 	 	  	 	 	 	
Diluted net income per share:	  				  				
Net income attributable to InfraREIT, L.L.C.	  	$	19,974	  	  	$	22,132	  	
Weighted average common shares outstanding	  	 	37,348	  	  	 	31,226	  	
Weighted average dilutive shares outstanding	  	 	—  	  	  	 	—  	  	
	  	 	 	 	  	 	 	 	
Diluted net income per share:	  	$	0.53	  	  	$	0.71	  	
	  	 	 	 	  	 	 	 	
Due to the anti-dilutive effect, the computation of diluted earnings per share does not reflect the following adjustments:	  				  				
Net income attributable to noncontrolling interest to operating partnership units	  	$	6,046	  	  	$	7,075	  	
	  	 	 	 	  	 	 	 	
Effect of assumed conversion of the operating partnership units	  	 	11,237	  	  	 	9,436	  	
	  	 	 	 	  	 	 	 	
(13) Derivative Instruments
Interest —On October 13, 2011, SPLLC entered into an interest rate swap agreement that has been designated as a cash flow hedge against variable interest rate exposure on a portion of the construction-term loan with the objective of minimizing the impact of interest rate fluctuations and stabilizing cash flows in future periods. This swap agreement protects against interest rate fluctuations on the SPLLC construction term-loan by establishing a fixed rate on the LIBOR interest rates specified in the SPLLC construction term-loan at 0.832% per annum until June 30, 2014. Notional amounts reset on a monthly basis and did not exceed $261.0 million at any given time. There were no notional amounts as of September 30, 2014 as this swap agreement terminated on June 30, 2014. Notional amounts were approximately $261.0 million as of December 31, 2013.
This cash flow hedging instrument was recorded as a liability in the Company’s Condensed Consolidated Balance Sheets at fair value, with an offset to accumulated other comprehensive income to the extent the cash flow hedging instrument was effective. The cash flow hedging instrument gains and losses included in other comprehensive income were reclassified into earnings as the underlying transaction occured. There was no cash flow hedging instrument ineffectiveness recorded during the nine months ended September 30, 2014 and 2013, respectively.
 
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The fair value of derivative liabilities relating to interest rate swaps are as follows:

 	  	Balance Sheet
Location	 	  	September 30,
2014	 	  	December 31,
2013	 	
(In thousands)	  	 	 	  	 	 	  	 	 	
Fair value of derivative liabilities—current	  	 	Current liabilities	  	  	$	—  	  	  	$	844	  	
Fair value of derivative liabilities—non current	  	 	Long-term liabilities	  	  	 	—  	  	  	 	—  	  	
	  				  	 	 	 	  	 	 	 	
Fair value of derivative liabilities	  				  	$	—  	  	  	$	844	  	
	  				  	 	 	 	  	 	 	 	
The Company reclassified approximately $893,000 and $1.1 million, included in other comprehensive income during the nine months ended September 30, 2014 and 2013, respectively, to interest expense, net on the Condensed Consolidated Statements of Operations.
As of December 31, 2013, unrealized derivative fair value losses of approximately $610,000 related to the cash flow hedges was recorded in accumulated other comprehensive loss in the Company’s Condensed Consolidated Balance Sheets. As of December 31, 2013, unrealized derivative fair value losses attributable to the noncontrolling interest of approximately $234,000 was recorded as noncontrolling interest in the Company’s Condensed Consolidated Balance Sheets.
(14) Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss associated with an interest rate swap designated as cash flow hedges were as follows:

 	  	Accumulated
Other
Comprehensive
Loss
attributable to
InfraREIT, L.L.C.	 	 	Accumulated
Other
Comprehensive
Loss
attributable to
noncontrolling
interest	 	 	Accumulated
Other
Comprehensive
Loss	 	
(In thousands)	  	 	 	 	 	 	 	 	 	
Nine months ended September 30, 2014	  				 				 				
Balance, December 31, 2013	  	$	(610	) 	 	$	(234	) 	 	$	(844	) 	
Other comprehensive loss before reclassifications	  	 	(77	) 	 	 	28	  	 	 	(49	) 	
Amounts reclassified from accumulated other comprehensive loss	  	 	687	  	 	 	206	  	 	 	893	  	
	  	 	 	 	 	 	 	 	 	 	 	 	
Net period other comprehensive loss	  	 	610	  	 	 	234	  	 	 	844	  	
	  	 	 	 	 	 	 	 	 	 	 	 	
Balance, September 30, 2014	  	$	—  	  	 	$	—  	  	 	$	—  	  	
	  	 	 	 	 	 	 	 	 	 	 	 	
Nine months ended September 30, 2013	  				 				 				
Balance, December 31, 2012	  	$	(1,610	) 	 	$	(557	) 	 	$	(2,167	) 	
Other comprehensive loss before reclassifications	  	 	(133	) 	 	 	(41	) 	 	 	(174	) 	
Amounts reclassified from accumulated other comprehensive loss	  	 	851	  	 	 	274	  	 	 	1,125	  	
	  	 	 	 	 	 	 	 	 	 	 	 	
Net period other comprehensive loss	  	 	718	  	 	 	233	  	 	 	951	  	
	  	 	 	 	 	 	 	 	 	 	 	 	
Balance, September 30, 2013	  	$	(892	) 	 	$	(324	) 	 	$	(1,216	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	
(15) Contingent Consideration
In connection with the Company’s acquisition of InfraREIT LP in 2010, the Company agreed to contingent consideration in the form of future deemed capital credits in an amount up to $82.5 million to Hunt-InfraREIT. The capital account credits of up to $82.5 million, which are generated pro rata with the cash
 
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expenditures of the Company on the CREZ Project and related interconnections up to $737.0 million, are issued to Hunt-InfraREIT in the form of Class A Partnership units at the agreed upon deemed issue price of $10 per unit on the first day of each quarter following the actual expenditures. In accordance with ASC 815 and 480, the future deemed capital credits have been determined to be contingent consideration and were assessed a fair value of $78.6 million at the date of acquisition and included as a component of long term liabilities in the Company’s Condensed Consolidated Balance Sheets.
As of September 30, 2014, InfraREIT LP has issued as described above approximately 7.1 million of Class A Partnership units at an agreed value of $10 per unit to Hunt-InfraREIT, in partial settlement of the Company’s contingent consideration in accordance with its acquisition agreement. Approximately 349,000 and 2.7 million of Class A Partnership units were issued during the nine months ended September 30, 2014 and 2013, respectively. Through September 30, 2014, the deemed issue price of $10 per unit approximated the estimated fair value of InfraREIT LP Class A Partnership units.
Approximately $1.1 million was recognized as other expense due to changes in the fair value of the Company’s contingent consideration in accordance with its acquisition agreement during the nine months ended September 30, 2014. There were no amounts recognized as other expense due to changes in the fair value of the Company’s contingent consideration in accordance with its acquisition agreement during the nine months ended September 30, 2013. As of September 30, 2014 and December 31, 2013, approximately $10.2 million and $12.6 million was recorded as a long-term liability in the form of contingent consideration in the Company’s Condensed Consolidated Balance Sheets, respectively.
(16) Fair Value of Financial Instruments
In accordance with ASC Topic 820, Fair Value Measurements and Disclosures, the Company is required to assess the fair value of its financial instruments and disclose the level of inputs used for that estimate set forth in ASC 820.
The carrying amounts of the Company’s cash and cash equivalents, restricted cash, due from affiliates, and accounts payable approximate fair value due to the short-term nature of these assets and liabilities.
The Company’s derivative contracts consist of cash flow hedging instruments which are not traded on a public exchange. The fair values of the cash flow hedging instrument contracts were determined using discounted cash flow techniques. The techniques incorporated Level 2 inputs and quotes from the counterparty to the interest swap contract. These market inputs were utilized in a discounted cash flow calculation considering the cash flow hedging instrument term, credit risk, notional amount and discount rate and were classified as Level 2 in the fair value hierarchy.
As of September 30, 2014 and December 31, 2013, the Company had approximately $400.9 million and $396.0 million, respectively, of borrowings under the construction-term loan which accrued interest under floating interest rate structures. Accordingly, the carrying value of such indebtedness approximated fair value for the amounts outstanding.
The Company also had borrowings totaling $233.6 million and $236.7 million under senior secured notes with a weighted average rate of 6.43% and 6.45% per annum as of September 30, 2014 and December 31, 2013, respectively. The fair value of these borrowings is estimated using discounted cash flow analysis based on current market rates.
The Company assesses the fair market value of its contingent consideration associated with the acquisition of InfraREIT LP using level 3 inputs. The fair market value is based on the probability of expected future cash flows over the period during which the obligation is expected to be settled, applies a discount rate that approximates the Company’s total weighted average cost of debt and the estimated fair value of the InfraREIT LP Class A Partnership units used to settle the obligation.
 
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The fair value measurement of the Company’s contingent consideration encompasses the following significant unobservable inputs:

 	  	Nine months ended
September 30,	 	
 	  	2014	 	 	2013	 	
Unobservable inputs	  	 	 	 	 	 	
Weighted average cost of debt	  	 	3.57	% 	 	 	3.66	% 	
Timing of cash flows	  	 	19 months	  	 	 	9 months	  	
InfraREIT LP Class A Partnership unit	  	$	10.00	  	 	$	10.00	  	
Significant increases or decreases in any of the inputs in isolation would result in a significantly lower or higher fair value measurement.
Financial instruments, measured at fair value as defined by ASC 820, by level within the fair value hierarchy were as follows:

 	  	Carrying
Value	 	  	Fair Value	 	
 	  			  	Level 1	 	  	Level 2	 	  	Level 3	 	
(In thousands)	  	 	 	  	 	 	  	 	 	  	 	 	
September 30, 2014	  				  				  				  				
Long-term debt	  	$	634,506	  	  	$	—  	  	  	$	646,385	  	  	$	—  	  	
Contingent consideration	  	 	10,171	  	  	 	—  	  	  	 	—  	  	  	 	10,171	  	
					
December 31, 2013	  				  				  				  				
Fair value of derivative liabilities	  	$	844	  	  	$	—  	  	  	$	844	  	  	$	—  	  	
Long-term debt	  	 	632,690	  	  	 	—  	  	  	 	636,683	  	  	 	—  	  	
Contingent consideration	  	 	12,554	  	  	 	—  	  	  	 	—  	  	  	 	12,554	  	
ASC Topic 820 requires a company to disclose changes during the year for financial instruments that are classified as level 3 financial instruments in the fair value hierarchy. Changes in level 3 financial instruments were as follows:

 	  	Nine months ended
September 30,	 	
Contingent Consideration	  	2014	 	 	2013	 	
(In thousands)	  	 	 	 	 	 	
Beginning Balance	  	$	12,554	  	 	$	42,713	  	
Non-cash noncontrolling interest equity issuance	  	 	(3,493	) 	 	 	(26,761	) 	
Change in fair value of contingent consideration	  	 	1,110	  	 	 	—  	  	
	  	 	 	 	 	 	 	 	
Ending Balance	  	$	10,171	  	 	$	15,952	  	

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(17) Supplemental Cash Flow Information
Supplemental cash flow information and non-cash investing and financing activities for the nine months ended September 30 are as follows:

 	  	Nine months ended
September 30,	 	
 	  	2014	 	  	2013	 	
(In thousands)	  	 	 	  	 	 	
Supplemental cash flow information	  				  				
Cash paid during the period for interest	  	$	22,367	  	  	$	19,524	  	
Cash paid during the period for taxes	  	 	75	  	  	 	36	  	
Cash paid for capitalized cost of removal of electric plant	  	 	2,700	  	  	 	1,596	  	
Non-cash investing and financing activities	  				  				
Non-cash right of way additions to electric plant	  	 	337	  	  	 	1,331	  	
Accrued additions to electric plant	  	 	31,421	  	  	 	13,337	  	
Allowance for funds used during construction—debt	  	 	1,197	  	  	 	11,361	  	
Non-cash members’ contributions	  	 	—  	  	  	 	267	  	
Non-cash noncontrolling interests contributions	  	 	—  	  	  	 	86	  	
Non-cash noncontrolling interests equity issuance	  	 	4,590	  	  	 	27,546	  	
Equity based compensation	  	 	120	  	  	 	—  	  	
(18) Contingencies
The amounts reported as regulatory assets as of September 30, 2014 and December 31, 2013, respectively, are subject to the review by the PUCT and as with all utility assets may change at a later date based on that review, see Note 7.
(19) Subsequent Events
On October 1, 2014, InfraREIT LP issued approximately 3,824 of Class A Partnership units at $10 per unit to Hunt-InfraREIT, in partial settlement of the Company’s contingent consideration in accordance with its acquisition agreement, see Note 15. On October 1, 2014, InfraREIT LP also issued approximately 1,956 of Class A Partnership units at $10 per unit to Hunt-InfraREIT, with respect to an approved identified development project in accordance with the limited partnership agreement of InfraREIT LP, see Note 8.
On November 3, 2014, the Company entered in to a Memorandum of Understanding (MOU) with the Company’s founding investors, InfraREIT LP and InfraREIT, Inc. (InfraREIT Inc.), which is currently a wholly owned subsidiary of Hunt Consolidated, Inc. (HCI). The MOU contains provisions that are binding on the Company, which are described below, and also obligates the Company and the other MOU parties to negotiate in good faith to finalize and execute various other definitive agreements implementing the MOU provisions (Definitive Agreements). Under the MOU, these Definitive Agreements are to relate to, among other things, the initial public offering of InfraREIT Inc. (IPO) and the merger of the Company with and in to InfraREIT Inc. immediately following the IPO, with InfraREIT Inc. surviving (the Merger).
The binding provisions of the MOU relate to, among other things, the application of provisions of the Company’s limited liability company agreement (LLC Agreement) designed to protect against rent received from SULP being deemed rent from a related party, which could have caused the Company to fail to qualify as a REIT (Excess Share Provisions). The Excess Share Provisions were triggered by the formation of a tax partnership unrelated to the Company between an affiliate of HCI and an affiliate of a shareholder of the Company (Shareholder) in 2011. As a result of the application of these provisions, 6,651,748 common shares of the Company (Excess Shares) previously held by such Shareholder were automatically deemed to have been transferred to a trust (Trust) for the benefit of a charitable beneficiary on various dates between 2011 and 2013.
 
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Pursuant to the LLC Agreement, the Trust is deemed to have offered the Excess Shares to the Company at a price of $10.00 per share. Under the MOU, upon the earlier of January 27, 2015 and the closing of the Merger, the Company is required to notify the Trust that the Company accepts this offer. If the Merger does not occur before January 22, 2016, the Company is required to acquire the Excess Shares from the Trust in exchange for a cash purchase price of $66.5 million. Pursuant to the applicable provisions of the limited partnership agreement of InfraREIT LP, the cash utilized by the Company to effect this cash purchase will come from InfraREIT LP’s purchase of 6,651,748 Class A Partnership Units held by the Company for a cash purchase price of $66.5 million.
The Company has evaluated subsequent events from the Condensed Consolidated Balance Sheet date through November 7, 2014, the date at which the condensed consolidated financial statements were available to be issued, and determined there are no other items to disclose.
 
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 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
InfraREIT, L.L.C.
We have audited the accompanying consolidated balance sheets of InfraREIT, L.L.C. and subsidiaries (the Company) as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, members’ capital, and cash flows for each of the two years in the period ended December 31, 2013. Our audits also included the financial statement schedule—Schedule III Electric Plant and Accumulated Depreciation. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of InfraREIT, L.L.C. and subsidiaries at December 31, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ Ernst & Young LLP
Dallas, Texas
March 5, 2014
 
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InfraREIT, L.L.C.
 Consolidated Balance Sheets
(In thousands except share amounts)

 	  	December 31,
2013	 	 	December 31,
2012	 	
Assets	  				 				
Current Assets	  				 				
Cash and cash equivalents	  	$	7,746	  	 	$	16,442	  	
Restricted cash	  	 	1,681	  	 	 	1,681	  	
Due from affiliates	  	 	20,547	  	 	 	3,111	  	
Inventory	  	 	6,577	  	 	 	2,163	  	
Prepaids and other current assets	  	 	1,864	  	 	 	1,751	  	
	  	 	 	 	 	 	 	 	
Total current assets	  	 	38,415	  	 	 	25,148	  	
	  	 	 	 	 	 	 	 	
Electric Plant—net	  	 	1,109,259	  	 	 	723,074	  	
Goodwill	  	 	138,384	  	 	 	138,384	  	
Deferred Assets and Other Regulatory Assets—net	  	 	37,786	  	 	 	39,851	  	
Investments	  	 	2,519	  	 	 	2,519	  	
	  	 	 	 	 	 	 	 	
Total Assets	  	$	1,326,363	  	 	$	928,976	  	
	  	 	 	 	 	 	 	 	
Members’ Capital and Liabilities	  				 				
Current Liabilities	  				 				
Accounts payable and accrued liabilities	  	$	39,628	  	 	$	49,401	  	
Short term borrowings	  	 	75,000	  	 	 	5,000	  	
Current portion of long-term debt	  	 	4,777	  	 	 	6,303	  	
Dividends and distributions payable	  	 	—  	  	 	 	12,175	  	
Fair value of derivative liabilities	  	 	844	  	 	 	1,456	  	
Accrued taxes	  	 	1,454	  	 	 	874	  	
	  	 	 	 	 	 	 	 	
Total current liabilities	  	 	121,703	  	 	 	75,209	  	
			
Contingent Consideration	  	 	12,554	  	 	 	42,713	  	
Fair Value of Derivative Liabilities	  	 	—  	  	 	 	711	  	
Long-term Debt	  	 	627,913	  	 	 	461,565	  	
Commitments and Contingencies	  	 	—  	  	 	 	—  	  	
	  	 	 	 	 	 	 	 	
Total liabilities	  	 	762,170	  	 	 	580,198	  	
Members’ Capital	  				 				
Members’ capital—37,348,159 and 24,348,153 shares issued and outstanding as of December 31, 2013 and December 31, 2012, respectively	  	 	428,319	  	 	 	258,942	  	
Accumulated other comprehensive loss	  	 	(610	) 	 	 	(1,610	) 	
	  	 	 	 	 	 	 	 	
Total InfraREIT, L.L.C. members’ capital	  	 	427,709	  	 	 	257,332	  	
Noncontrolling interest	  	 	136,484	  	 	 	91,446	  	
	  	 	 	 	 	 	 	 	
Total members’ capital	  	 	564,193	  	 	 	348,778	  	
	  	 	 	 	 	 	 	 	
Total Members’ Capital and Liabilities	  	$	1,326,363	  	 	$	928,976	  	
	  	 	 	 	 	 	 	 	
See accompanying notes to the consolidated financial statements.
 
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InfraREIT, L.L.C.
 Consolidated Statements of Operations
(In thousands except per share amounts)

 	  	Years Ended
December 31,	 	
 	  	2013	 	 	2012	 	
Lease revenue	  	$	73,193	  	 	$	42,782	  	
	  	 	 	 	 	 	 	 	
Operating costs and expenses	  				 				
General and administrative expense	  	 	13,691	  	 	 	12,521	  	
Depreciation	  	 	20,024	  	 	 	10,563	  	
	  	 	 	 	 	 	 	 	
Total operating costs and expenses	  	 	33,715	  	 	 	23,084	  	
	  	 	 	 	 	 	 	 	
Income from operations	  	 	39,478	  	 	 	19,698	  	
	  	 	 	 	 	 	 	 	
Other income (expense)	  				 				
Interest expense, net	  	 	(17,384	) 	 	 	(17,314	) 	
Other income, net	  	 	20,932	  	 	 	14,520	  	
	  	 	 	 	 	 	 	 	
Total other income (expense)	  	 	3,548	  	 	 	(2,794	) 	
			
Income tax expense	  	 	616	  	 	 	336	  	
	  	 	 	 	 	 	 	 	
Net income	  	 	42,410	  	 	 	16,568	  	
Less: Net income attributable to noncontrolling interest	  	 	10,288	  	 	 	4,151	  	
	  	 	 	 	 	 	 	 	
Net income attributable to InfraREIT, L.L.C.	  	$	32,122	  	 	$	12,417	  	
	  	 	 	 	 	 	 	 	
Net income attributable to InfraREIT, L.L.C. common shareholders per share	  				 				
Basic	  	$	1.01	  	 	$	0.66	  	
	  	 	 	 	 	 	 	 	
Diluted	  	$	1.01	  	 	$	0.66	  	
	  	 	 	 	 	 	 	 	
See accompanying notes to the consolidated financial statements.
 
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InfraREIT, L.L.C.
 Consolidated Statements of Comprehensive Income
(In thousands)

 	  	Years Ended
December 31,	 	
 	  	2013	 	 	2012	 	
Net income	  	$	42,410	  	 	$	16,568	  	
Change in fair value of cash flow hedging instrument	  	 	1,323	  	 	 	(1,174	) 	
	  	 	 	 	 	 	 	 	
Comprehensive income	  	 	43,733	  	 	 	15,394	  	
Comprehensive income attributable to noncontrolling interest	  	 	(10,611	) 	 	 	(3,869	) 	
	  	 	 	 	 	 	 	 	
Comprehensive income attributable to InfraREIT, L.L.C.	  	$	33,122	  	 	$	11,525	  	
	  	 	 	 	 	 	 	 	
See accompanying notes to the consolidated financial statements.
 
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InfraREIT, L.L.C.
 Consolidated Statements of Members’ Capital
For the Years Ended December 31, 2013 and 2012
(In thousands)

 	  	Members’
Capital	 	 	Accumulated
Other
Comprehensive
Loss	 	 	Total
InfraREIT, L.L.C
Members’
Capital	 	 	Noncontrolling
Interest	 	 	Total
Members’
Capital	 	
Balance at December 31, 2011	  	$	125,229	  	 	$	(718	) 	 	$	124,511	  	 	$	57,090	  	 	$	181,601	  	
Members’ contributions	  	 	130,548	  	 	 	—  	  	 	 	130,548	  	 	 	—  	  	 	 	130,548	  	
Noncontrolling interest contributions	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	2,460	  	 	 	2,460	  	
Dividends	  	 	(9,252	) 	 	 	—  	  	 	 	(9,252	) 	 	 	(2,923	) 	 	 	(12,175	) 	
Change in fair value of cash flow hedging instrument	  	 	—  	  	 	 	(892	) 	 	 	(892	) 	 	 	(282	) 	 	 	(1,174	) 	
Net income attributable to InfraREIT, L.L.C.	  	 	12,417	  	 	 	—  	  	 	 	12,417	  	 	 	—  	  	 	 	12,417	  	
Net income attributable to noncontrolling interest	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	4,151	  	 	 	4,151	  	
Non-cash noncontrolling interest equity issuance	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	30,950	  	 	 	30,950	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at December 31, 2012	  	$	258,942	  	 	$	(1,610	) 	 	$	257,332	  	 	$	91,446	  	 	$	348,778	  	
Members’ contributions	  	 	137,255	  	 	 	—  	  	 	 	137,255	  	 	 	—  	  	 	 	137,255	  	
Noncontrolling interest contributions	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	2,375	  	 	 	2,375	  	
Net income attributable to InfraREIT, L.L.C.	  	 	32,122	  	 	 	—  	  	 	 	32,122	  	 	 	—  	  	 	 	32,122	  	
Net income attributable to noncontrolling interest	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	10,288	  	 	 	10,288	  	
Change in fair value of cash flow hedging instrument	  	 	—  	  	 	 	1,000	  	 	 	1,000	  	 	 	323	  	 	 	1,323	  	
Non-cash noncontrolling interest equity issuance	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	32,052	  	 	 	32,052	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at December 31, 2013	  	$	428,319	  	 	$	(610	) 	 	$	427,709	  	 	$	136,484	  	 	$	564,193	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
See accompanying notes to the consolidated financial statements.
 
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InfraREIT, L.L.C.
 Consolidated Statements of Cash Flows
(In thousands)

 	  	For the Years Ended
December 31,	 	
 	  	2013	 	 	2012	 	
Cash Flows from Operating Activities	  				 				
Net income	  	$	42,410	  	 	$	16,568	  	
Adjustments to reconcile net income to net cash provided by operating activities:	  				 				
Depreciation	  	 	20,024	  	 	 	10,563	  	
Amortization of deferred financing cost	  	 	3,588	  	 	 	3,409	  	
Allowance for funds used during construction—equity	  	 	(21,655	) 	 	 	(15,273	) 	
Change in fair value of contingent consideration	  	 	841	  	 	 	753	  	
Changes in assets and liabilities:	  				 				
Due from affiliates	  	 	(17,436	) 	 	 	54	  	
Inventory	  	 	(4,414	) 	 	 	100	  	
Prepaids and other current assets	  	 	(1,388	) 	 	 	569	  	
Accounts payable and accrued liabilities	  	 	(649	) 	 	 	(1,394	) 	
	  	 	 	 	 	 	 	 	
Net cash provided by operating activities	  	 	21,321	  	 	 	15,349	  	
	  	 	 	 	 	 	 	 	
Cash Flows from Investing Activities	  				 				
Additions to electric plant	  	 	(390,283	) 	 	 	(361,340	) 	
	  	 	 	 	 	 	 	 	
Net cash used in investing activities	  	 	(390,283	) 	 	 	(361,340	) 	
	  	 	 	 	 	 	 	 	
Cash Flows from Financing Activities	  				 				
Members’ contributions	  	 	136,886	  	 	 	130,420	  	
Noncontrolling interest contributions	  	 	2,256	  	 	 	2,418	  	
Dividends paid	  	 	(9,252	) 	 	 	—  	  	
Proceeds from short-term borrowings	  	 	85,000	  	 	 	5,000	  	
Repayments of short-term borrowings	  	 	(15,000	) 	 	 	(3,000	) 	
Proceeds from borrowings of long-term debt	  	 	173,000	  	 	 	208,000	  	
Repayments of long-term debt	  	 	(8,178	) 	 	 	(5,977	) 	
Deferred financing costs	  	 	(1,523	) 	 	 	(189	) 	
Distributions to noncontrolling interest	  	 	(2,923	) 	 	 	—  	  	
	  	 	 	 	 	 	 	 	
Net cash provided by financing activities	  	 	360,266	  	 	 	336,672	  	
	  	 	 	 	 	 	 	 	
Net decrease in cash and cash equivalents	  	 	(8,696	) 	 	 	(9,319	) 	
Cash and cash equivalents at beginning of year	  	 	16,442	  	 	 	25,761	  	
	  	 	 	 	 	 	 	 	
Cash and Cash Equivalents at end of year	  	$	7,746	  	 	$	16,442	  	
	  	 	 	 	 	 	 	 	
See accompanying notes to the consolidated financial statements.
 
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InfraREIT, L.L.C.
 Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
InfraREIT, L.L.C. (formerly known as Electric Infrastructure Alliance of America, L.L.C.) (the Company or InfraREIT LLC) was organized on November 23, 2010 as a Delaware limited liability company and has elected under the Internal Revenue Code of 1986, as amended (the Code), to be taxed, and currently qualifies, as a real estate investment trust (REIT) for federal income tax purposes. The Company is the General Partner of InfraREIT Partners, LP (InfraREIT LP) and holds a controlling financial investment in InfraREIT LP and therefore, includes the accounts of this partnership and its subsidiaries in these consolidated financial statements.
The Company is owned by Marubeni Corporation, John Hancock Life Insurance Company (U.S.A.), Teachers Insurance and Annuity Association of America, OpTrust N.A. Holdings Trust and Sponsor Employee Investors (collectively the Founding Investors). The Company is externally managed and advised by Hunt Utility Services, LLC, or Hunt Manager, formerly known as InfraREIT Capital Partners, LLC, a Delaware limited liability company. Hunt Manager is responsible for overseeing the Company’s day-to-day affairs.
Sharyland Distribution & Transmission Services, L.L.C. (SDTS), a subsidiary of InfraREIT LP, and its wholly owned subsidiaries, SDTS FERC, L.L.C. (SDTS FERC) and Sharyland Projects, L.L.C. (SPLLC) are the owners of electric distribution and transmission assets (the System) throughout Texas, including the Texas Panhandle near Amarillo, the Permian Basin in and around Stanton, Central Texas around Brady, Northeast Texas in and around Celeste and South Texas near McAllen. The System assets include approximately 50,000 electricity delivery points, approximately 620 miles of transmission lines, approximately 9,900 miles of distribution lines, 34 substations and a 150 megawatt (MW) high-voltage direct current interconnection between Texas and Mexico that the Company is currently expanding to 300 MW (Mission DC Tie). SDTS and its subsidiaries lease the System to Sharyland Utilities, L.P. (SULP) and its wholly-owned subsidiary, SU FERC, L.L.C. (SU FERC), a Texas based utility, under several lease agreements, which operates and maintains the System. SDTS and its subsidiaries are subject to regulation as an electric utility by the Public Utility Commission of Texas (PUCT).
On January 29, 2009, the PUCT selected SULP as one of the transmission service providers (TSPs) to construct and operate the transmission facilities necessary to deliver the electricity generated from renewable energy sources to population centers as part of the Texas Competitive Renewable Energy Zone (CREZ) initiative. SULP was awarded five line segments and four substations in the Texas Panhandle and South Plains (the CREZ Project). As part of the applications to the PUCT for amendments to its Certificate of Convenience and Necessity (CCN) for the CREZ Project, SULP stated that it would construct, operate and maintain the CREZ Project and SPLLC would hold legal title to the CREZ Project and lease it to SULP, which will have responsibility for operating the CREZ Project. SPLLC owns the CREZ Project and leases it to SULP under a CREZ master lease agreement.
SPLLC funded all costs and expenses of constructing the CREZ Project. SPLLC used outside contractors and engineers under the supervision of SULP’s engineers and staff to construct the CREZ Project. SPLLC completed and placed in service the CREZ Project during the year ended December 31, 2013. While the CREZ Project has been completed and placed in service, power generators have requested from time to time for SULP to construct interconnections into the CREZ Project. SDTS has been funding and will continue to fund the costs and expenses associated with such interconnections and related transmission facilities to accommodate such interconnections.
 
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(b) Principles of Consolidation and Presentation
The consolidated financial statements include the Company’s accounts and the accounts of all other entities in which the Company has a controlling financial interest with noncontrolling interest of consolidated subsidiaries reported separately. All significant intercompany balances and transactions have been eliminated. SDTS and its subsidiaries maintain accounting records in accordance with the uniform system of accounts, as prescribed by the Federal Energy Regulatory Commission (FERC). In accordance with the applicable consolidation guidance, the Company’s consolidated financial statements reflect the effects of the different rate making principles mandated by the FERC and the PUCT which regulate its subsidiaries’ operations.
The accompanying consolidated financial statements include the costs incurred on the Company’s behalf by Hunt Manager, its external manager. Hunt Manager’s sole operations relate to the affairs of the Company. These costs include compensation, rent expense and other costs included in general and administrative expense on the Consolidated Statements of Operations totaling $11.6 million and $10.7 million for the years ended December 31, 2013 and 2012, respectively. The historical financial information is not necessarily indicative of the Company’s results of operations, financial position and cash flows had it operated on a standalone basis, and may not be reflective of amounts that will be incurred in future operations.
(c) Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
(d) Regulatory
For regulatory purposes, including regulatory reporting, the electric transmission and distribution assets (T&D assets) owned by SDTS and its subsidiaries and the operations of SULP are viewed on a combined basis. As a result, regulatory principles applicable to the utility industry also apply to SDTS and its subsidiaries. Accordingly, SDTS and its subsidiaries capitalize allowance for funds used during construction (AFUDC) during the construction of its T&D assets, and SDTS and its subsidiaries’ lease agreements with SULP rely on FERC definitions and accepted standards regarding capitalization of expense to define key terms in the lease such as improvements, which are the amounts SDTS and its subsidiaries are obligated to fund pursuant to the leases. The amounts SDTS and its subsidiaries fund for these improvements include allocations of SULP employees’ time and overhead allocations consistent with FERC policies and generally accepted accounting principles (GAAP).
SULP cannot be removed as lessee without prior approval from the PUCT. SDTS and its subsidiaries transact with their lessee through several lease arrangements covering the System. These lease agreements include provisions for annual additions and retirements to the System in the form of new construction or other capitalized projects.
(e) Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments with original maturities of three months or less to be cash equivalents. The Company’s account balances at one or more institutions periodically exceed the Federal Deposit Insurance Corporation (FDIC) insurance coverage and, as a result, there could be a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. The Company has not experienced any losses and believes that the risk is not significant.
(f) Restricted Cash
Restricted cash represents the principal and interest payable for two consecutive periods associated with the $25.0 million senior secured notes described in Note 11.
 
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(g) Inventory
Inventory on-hand consists primarily of transmission parts and materials used in the construction of electric plant. Inventory is valued at average costs when it is acquired and when used.
(h) Electric Plant, net
Electric plant equipment is stated at the original cost of acquisition or construction, which includes the cost of contracted services, direct labor, materials, acquisition adjustments, capitalized interest and overhead items. In accordance with the FERC uniform system of accounts guidance, SDTS and its subsidiaries recognize as a cost to construction work in progress an AFUDC on other funds classified as other income, net and an AFUDC on borrowed funds classified as a reduction of the interest expense, net in the Company’s Consolidated Statements of Operations.
The AFUDC blended rate utilized was 9.1% and 9.7% in 2013 and 2012, respectively.
Electric plant held for future use is included in electric plant, net.
Gains or losses resulting from retirement or other disposition of utility property in the normal course of business are credited or charged to accumulated depreciation.
Repairs are the responsibility of SULP as the lessee under the lease agreements. Betterments and improvements generally are the responsibility of SDTS and its subsidiaries and are capitalized.
Provision for depreciation of electric plant is computed using composite straight-line rates as follows:

Transmission plant	  	 	2.75% - 3.00%	  	
Distribution plant	  	 	2.50% - 3.10%	  	
General plant	  	 	2.50% - 33.33%	  	
(i) Impairment of Long-lived Assets
The Company evaluates impairment of its long-lived assets annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized only if the carrying amount of a long-lived asset is not recoverable through expected future cash flows. Regulatory assets are charged to expense in the period in which they are no longer probable of future recovery.
(j) Goodwill
Goodwill represents the excess of costs of an acquired business over the fair value of the assets acquired, less liabilities assumed. Goodwill is not amortized and is tested for impairment annually or more frequently if events or changes in circumstances arise. As of December 31, 2013 and 2012, approximately $138.4 million, respectively, was recorded in goodwill in the Company’s Consolidated Balance Sheets.
(k) Investments
In connection with the acquisition of Cap Rock Holding Corporation (CRHC), the Company received a participation in the National Rural Utilities Cooperative Finance Corporation (NRUCFC). The Company accounts for this investment under the cost method of accounting. The value of the Company’s investment in NRUCFC was approximately $2.5 million as of December 31, 2013 and 2012, respectively.
 
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An investment is considered impaired if the fair value of the investment is less than its cost. Generally, an impairment is considered other-than-temporary unless (i) the Company has the ability and intent to hold an investment for a reasonable period of time sufficient for an anticipated recovery of fair value up to (or beyond) the cost of the investment; and (ii) evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. If impairment is determined to be other than temporary, then an impairment loss is recognized equal to the difference between the investment’s cost and its fair value.
(l) Income Taxes
As mentioned in Note 1(a), the Company has elected to be treated as a REIT under Sections 856 through 860 of the Code commencing with its taxable year ended December 31, 2010. The Company believes that it has satisfied the requirements to qualify as a REIT and intends to continue to qualify as a REIT for federal tax purposes.
A REIT is a taxable C corporation and thus calculates its taxable income in a manner similar to other domestic corporations. In this respect a REIT cannot pass tax credits, tax losses or other tax benefits to its shareholders. Thus, a REIT is not a pass-through entity like a partnership or an S corporation.
A REIT is, generally, required to distribute each year at least 90% of its taxable income (excluding net capital gain) to maintain its status as a REIT. If it chooses to retain the additional 10% of its taxable income or all or part of its net capital gain, it may do so, and it will be liable for a corporate tax on such income. Generally, a REIT may be subject, among other requirements, to the following entity-level taxes:
 
 	•	 	A REIT is taxable at regular corporate rates on its net taxable income (NTI). NTI is defined as taxable income, including net capital gains, less the deduction for dividends paid.	
 
 	•	 	If a REIT has a net capital gain, the REIT’s tax is the lower of: (i) the tax imposed on NTI at regular corporate rates; or (ii) the sum of (A) the tax at regular corporate rates on NTI computed without regard to the net capital gain and the deduction for capital gain dividends, and (B) a tax on undistributed net capital gain at the rate provided in Section 1201(a) of the Code.	
 
 	•	 	A REIT is subject to the alternative minimum tax (AMT).	
 
 	•	 	If a REIT has “net income from foreclosure property”, it is subject to a tax on such income at the highest corporate rate.	
 
 	•	 	If a REIT has net income from “prohibited transactions,” it is subject to a 100% tax on such net income.	
 
 	•	 	If a REIT fails to satisfy the 75% of gross income test (excluding gross income from prohibited transactions) or 95% gross income test and, by satisfying the conditions of Section 856(c)(6) of the Code, has maintained its qualification as a REIT, it is subject to 100% tax on the taxable income attributable to the gross income that caused it to fail the income test.	
 
 	•	 	If a REIT fails to satisfy the asset tests (e.g. at least 75% of the value of the assets must be represented by cash or cash items, government securities, real estate assets), but meets the conditions of Section 856(c)(7) of the Code, a tax may be imposed equal to the greater of $50,000 or the amount determined by multiplying the net income generated by the nonqualifying asset by the highest marginal corporate tax rate.	
 
 	•	 	A REIT is subject to a 4% excise tax if it fails to make certain minimum distributions each calendar year.	
 
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 	•	 	A REIT is subject to a tax equal to 100% of re-determined rents, re-determined deductions, and excess interest between a REIT and its taxable REIT subsidiary.	
 
 	•	 	A 35% tax is imposed on the excess inclusions allocable to disqualified entities that hold interests in the REIT.	
 
 	•	 	A REIT is subject to Section 1374 built-in gains tax at regular corporate rates on assets inherited from a C corporation in a carryover basis transaction.	
 
 	•	 	A REIT is subject to the personal holding company tax if the REIT qualifies as a personal holding company and has undistributed personal holding company income.	
 
 	•	 	A REIT is subject to state and local taxes on income, capital and property.	
If an entity fails to qualify as a REIT in a particular taxable year, it is taxable as a regular corporation for that year and for subsequent years. Unless certain conditions are satisfied, a disqualified REIT may not reelect to be taxed as a REIT until its fifth taxable year after the year of disqualification. The REIT will pay corporate tax for all five years irrespective of any dividends paid.
The Company generally will not accrue a federal corporate income tax in the financial statements due to anticipated distributions to its shareholders. The Company’s policy is to distribute at least 100% of its taxable income. The Company believes that it has distributed at least 100% of its taxable income and that it meets all other applicable tests to qualify as a REIT. Accordingly, there is no provision for federal income taxes in the consolidated financial statements. Even as a REIT the Company may be subject to certain state and local taxes on its income and property, federal AMT, and federal income taxes and excise taxes on its undistributed taxable income. For financial statement purposes, the Company has no deferred tax assets or liabilities as of December 31, 2013 and 2012, respectively.
Certain assets that were held by the Company on the date of the REIT election are subject to a company level tax if disposed of during a ten year period from the date they were acquired. The Company has no plans to dispose of its assets during the ten year term and therefore has not provided for any tax associated with their disposal.
At December 31, 2012, the Company had net operating loss carry-forwards for federal income tax purposes of approximately $4.3 million, which will expire between 2023 and 2024. Of this amount approximately $3.6 million is available to be used for the year ended December 31, 2013, and is expected to offset an equivalent amount of regular taxable earnings. The net operating loss carry-forwards for AMT are generally limited to offsetting 90% of the alternative minimum taxable income (AMTI) for a given year.
The Company expects to be subject to the AMT provision of the Code which limits the use of net operating loss carry-forwards and has accrued an estimated AMT liability for the year ended December 31, 2013 of approximately $83,000. These provisions generally result in 10% of the Company’s AMTI being subject to the 20% AMT assessed on corporations. This amounts to 2% effective tax rate on the Company’s AMTI.
The Company recognizes the impact of tax return positions that are more likely than not to be sustained upon audit. Significant judgment is required to evaluate uncertain tax positions. The evaluation of uncertain tax positions is based upon a number of factors, including changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of audits and effective settlement of audit issues.
 
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A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2013 and 2012 is as follows:

 	  	Years Ended
December 31,	 	
 	  	2013	 	  	2012	 	
(In thousands)	  	 	 	  	 	 	
Balance at January 1	  	$	758	  	  	$	458	  	
Additions based on tax positions related to the current year	  	 	480	  	  	 	300	  	
Additions for tax positions of prior years	  	 	—  	  	  	 	—  	  	
Reductions for tax positions of prior years	  	 	—  	  	  	 	—  	  	
Settlements	  	 	—  	  	  	 	—  	  	
	  	 	 	 	  	 	 	 	
Balance at December 31	  	$	1,238	  	  	$	758	  	
	  	 	 	 	  	 	 	 	
The balance of unrecognized tax benefits relates to state taxes, all of which would impact the effective tax rate if recognized. The Company does not expect the total amount of unrecognized tax benefits to significantly change within the next twelve months. The Company recognizes interest and penalties related to unrecognized tax benefits as income tax expense in the Consolidated Statements of Operations.
During the year ended December 31, 2013, the Company recognized interest and penalties of approximately $53,000. The Company did not recognize interest and penalties during the year ended December 31, 2012. The Company had accrued interest and penalties of approximately $133,000 and $80,000 at December 31, 2013 and December 31, 2012, respectively. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2010.
(m) Revenue Recognition
The Company, through its subsidiaries SDTS, SDTS FERC and SPLLC, is the owner of the System and recognizes lease revenue over the term of lease agreements with SULP and SU FERC. The Company’s lease revenue is comprised of annual payments and additional rents based upon a percentage of revenue earned by SULP on the leased assets in excess of specified base amount. In accordance with the lease agreements, SULP and SU FERC, the lessees and operators of the System, are responsible for the maintenance and operation of the System and for compliance with all regulatory requirements of the PUCT, the FERC or any other regulatory entity with jurisdiction over the System. Each of the lease agreements with SULP and SU FERC is a net lease that obligates the lessee to pay all property-related expenses, including maintenance, repairs, taxes, insurance, and to comply with the terms of the secured credit facilities and secured-term loan, if any, affecting the leased assets. The Company recognizes base rent under these leases on a straight-line basis over the applicable lease term.
The lease agreements provide for periodic supplemental adjustments of base rent based upon additional capital expenditures made by SDTS and its subsidiaries. The Company recognizes supplemental adjustments of base rent as a modification under these leases on a prospective straight-line basis over the applicable lease term.
(n) Deferred Financing Costs
Amortization of deferred financing costs associated with the issuance of the $25.0 million senior secured notes and the borrowing of the revolving credit facilities is computed using the straight-line method over the life of the loan which approximates the effective interest method. Amortization of deferred financing costs associated with the Company’s regulated subsidiaries is computed using the straight-line method over the life of the loan in accordance with the applicable regulatory guidance.
(o) Asset Retirement Obligations
The Company has identified, but not recognized, asset retirement obligation liabilities related to the T&D assets, as a result of certain easements on property on which the Company has assets. Generally, such
 
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easements are perpetual and require only the retirement and removal of the assets upon cessation of the property’s use. Management has not estimated and recorded a retirement liability for such easements because the Company plans to use the facilities indefinitely.
(p) Interest Expense, net
The Company’s interest expense, net is primarily comprised of interest expense from the senior notes and credit facilities, see Notes 10 and 11. AFUDC on borrowed funds of approximately $12.6 million and $9.2 million was recognized as a reduction of the Company’s interest expense during the years ended December 31, 2013 and 2012, respectively.
(q) Other Income, net
AFUDC on other funds of approximately $21.7 million and $15.3 million was recognized in other income during the years ended December 31, 2013 and 2012, respectively.
(r) Derivative Instruments
The Company uses derivatives to hedge against changes in cash flows related to interest rate risk (cash flow hedging instrument). Accounting Standard Codification (ASC) Topic 815, Derivatives and Hedging , requires all derivatives be recorded on the consolidated balance sheet at fair value. The Company determines the fair value of the cash flow hedging instrument based on the difference between the cash flow hedging instrument’s fixed contract price and the underlying market price at the determination date. The asset or liability related to the cash flow hedging instrument is recorded on the Company’s Consolidated Balance Sheet at its fair value.
Unrealized gains and losses on the effective cash flow hedging instrument are recorded as components of accumulated other comprehensive income. Realized gains and losses on the cash flow hedging instrument are recorded as adjustments to interest expense. Settlements of derivatives are included within operating activities on the consolidated cash flow statement. Any ineffectiveness in the cash flow hedging instrument is recorded as an adjustment to interest expense in the current period.
(s) Comprehensive Income
Comprehensive income includes net income and other comprehensive income, which is comprised of unrealized gains and losses on derivative financial instruments. Pursuant to ASC 815, the Company records deferred hedge gains and losses on its derivative financial instruments that qualify as cash flow hedging instrument as other comprehensive income.
(t) Fair Value of Financial Instruments
ASC Topic 820, Fair Value Measurements and Disclosures , sets forth a framework for measuring fair value and required disclosures about fair value measurements of assets and liabilities in accordance with accounting principles generally accepted in the United States.
Level 1 —Quoted prices in active markets for identical assets and liabilities.
Level 2 —Valuations based on one or more quoted prices in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs that are observable other than quoted prices for the asset or the liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 —Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
 
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(u) Recently Issued Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2013-2, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASU 2013-2). ASU 2013-2 amended the disclosure requirements regarding the reporting of amounts reclassified out of accumulated other comprehensive income by component. The Company adopted this standard effective January 1, 2013. The adoption of additional disclosure requirements were the only impact to the Company’s consolidated financial statements, see Note 15.
(2) Acquisition
On December 30, 2013, SDTS purchased from Southwestern Public Service Company, a subsidiary of Xcel Energy Services, Inc., approximately 66 miles of existing transmission lines and two substations located near Stanton, Texas for approximately $37.1 million. The application for sale, transfer or merger (STM) was approved by the PUCT under the Docket No. 41430. SDTS holds legal title to the assets and will lease those facilities to SULP once they are placed into service. SULP will have the responsibility for operating these T&D assets and complying with all applicable regulatory requirements. As of December 31, 2013, these transmission lines and substations are classified as electric plant, net on the Company’s Consolidated Balance Sheet.
(3) Leases
The following table shows the composition of our lease revenue for the periods presented:

 	  	Years Ended
December 31,	 	
 	  	2013	 	  	2012	 	
(In thousands)	  	 	 	  	 	 	
Base rent (straight-line)	  	$	57,979	  	  	$	30,961	  	
Percentage rent	  	 	15,214	  	  	 	11,821	  	
	  	 	 	 	  	 	 	 	
Total lease revenue	  	$	73,193	  	  	$	42,782	  	
	  	 	 	 	  	 	 	 	
The Company, through its subsidiaries SDTS, SDTS FERC and SPLLC, is the owner of the System and recognizes lease revenue over the term of lease agreements with SULP and SU FERC. The Company’s lease revenue is comprised of annual payments and additional rents based upon a percentage of revenue earned by SULP on the leased assets in excess of a specified base amount. In accordance with the lease agreements, SULP and SU FERC, the lessee and operator of the System, are responsible for the maintenance and operation of the System and for compliance with all regulatory requirements of the PUCT, the FERC and any other regulatory entity with jurisdiction over the System. Each of the lease agreements with SULP and SU FERC is a net lease that obligates the lessee to pay all property-related expenses, including maintenance, repairs, taxes, insurance, and to comply with the terms of the secured credit facilities and secured-term loan, if any, affecting the leased assets.
The lease agreements provide for periodic and determinable increases of base rent based upon capital expenditures made by SDTS and its subsidiaries if certain circumstances are met. The Company recognizes base rent under these leases on a straight-line basis over the applicable lease term. The Company recognizes percentage rent under these leases once the revenue earned by SULP on the leased assets exceed the annual specified threshold.
On December 31, 2009, SDTS and SULP entered into a master lease agreement, as amended, for the System assets located in and around McAllen, Texas (McAllen assets). The term of the agreement expires on December 31, 2029. The agreement includes annual fixed payments and additional rents based upon a percentage of revenue earned by SULP on the leased assets in excess of specified annual base amount, which percentage
 
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decreases over the life of the lease. The rate used for additional rent will decrease from 37% to 25% over the term of the agreement. Base rent was approximately $6.2 million and $5.4 million during the years ended December 31, 2013 and 2012, respectively, and the percentage component was 37% of SULP’s revenues above the base amount for both years presented.
On July 13, 2010, SDTS and SULP entered into a lease agreement, as amended, for the System assets located mainly in and around the cities of Stanton, Celeste and Brady (the Stanton, Celeste and Brady assets). The term of the agreement expires on December 31, 2015. The agreement includes annual fixed payments and additional rents based upon a percentage of revenue earned by SULP on the leased assets in excess of specified annual base amounts, which percentage over the life of the lease. The rate used for additional rent will vary from 29% to 24% over the term of the agreement. During the years ended December 31, 2013 and 2012, base rent was approximately $21.9 million and $19.1 million, respectively, and the percentage rent component was 25% and 24% of SULP’s revenues above a base amount, respectively.
On July 13, 2010, SDTS FERC and SU FERC also entered into a lease agreement, as amended, for the lease of certain transmission assets that are regulated by the FERC. The lease agreement expires on December 31, 2015. Under the agreement, annual fixed payments are $6.5 million. During each of the years ended December 31, 2013 and 2012, lease revenue was approximately $6.5 million, respectively.
On June 20, 2011, SPLLC and SULP entered into a CREZ master system lease agreement, as amended, to lease the CREZ Project. The term of the agreement expires on December 31, 2020. On April 29, 2013, August 27, 2013 and November 14, 2013, significant portions of the CREZ Project subject to the CREZ lease were completed and placed in service. As a result, consistent with the lease, SPLLC and SULP negotiated a rent supplement to provide for annual fixed payments and additional rents based upon a percentage of revenue earned by SULP on the leased assets in excess of specified annual base amounts, which percentage decreases over the life of the lease from 37% to 29%. During the year ended December 31, 2013, base rent was approximately $23.3 million, and the percentage rent component was 29% of SULP’s revenues above a base amount.
Future minimum rentals expected in accordance with these lease agreements are as follows:

(In thousands)	  	Total	 	
Year Ending December 31:	  				
2014	  	$	111,622	  	
2015	  	 	114,738	  	
2016	  	 	73,263	  	
2017	  	 	70,218	  	
2018	  	 	66,223	  	
	  	 	 	 	
	  	$	436,064	  	
	  	 	 	 	
(4) Goodwill
Goodwill represents the excess of costs of an acquired business over the fair value of the assets acquired, less liabilities assumed. The Company conducts an impairment test of goodwill annually. As of December 31, 2013 and 2012, approximately $138.4 million, was recorded in goodwill in the Company’s Consolidated Balance Sheets.
(5) Noncontrolling Interest
The Company presents the portion of any equity that it does not own in entities that it controls and consolidates as a noncontrolling interest. A holder of Class A Partnership units in InfraREIT LP has the right to put those units to InfraREIT LP after satisfying a one-year holding period. Subject to the terms of InfraREIT LP’s partnership agreement, these Class A Partnership units may be redeemed for cash or, at the Company’s option, exchanged for shares of the Company on a one-for-one basis.
 
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The Company follows the guidance issued by the FASB regarding the classification and measurement of redeemable securities. The Class A Partnership units are redeemable at the option of the holder and essentially have the same characteristics as common units of the Company, participating in net income allocations and distributions. Accordingly, the Company has determined that the Class A Partnership Units meet the requirements to be classified as permanent equity. During the years ended December 31, 2013 and 2012, respectively, the Company did not redeem any Class A Partnership Units.
(6) Prepaids and Other Current Assets
Prepaids and other current assets at December 31, 2013 and 2012, are as follows:

 	  	December 31,	 	  	December 31,	 	
 	  	2013	 	  	2012	 	
(In thousands)	  	 	 	  	 	 	
Field service agent for right of way acquisition	  	$	373	  	  	$	1,648	  	
Other	  	 	1,491	  	  	 	103	  	
	  	 	 	 	  	 	 	 	
Total Prepaids and Other Current Assets	  	$	1,864	  	  	$	1,751	  	
	  	 	 	 	  	 	 	 	
(7) Electric Plant and Depreciation
The major classes of electric plant at December 31, 2013 and 2012, are as follows:

(In thousands)	  	December 31,
2013	 	 	December 31,
2012	 	
Electric Plant:	  				 				
Transmission plant	  	$	882,230	  	 	$	140,341	  	
Distribution plant	  	 	304,691	  	 	 	267,821	  	
General plant	  	 	9,312	  	 	 	9,497	  	
	  	 	 	 	 	 	 	 	
Total plant in service	  	 	1,196,233	  	 	 	417,659	  	
	  	 	 	 	 	 	 	 	
Construction Work in Progress:	  	 	70,477	  	 	 	482,785	  	
	  	 	 	 	 	 	 	 	
Total Electric Plant	  	 	1,266,710	  	 	 	900,444	  	
Accumulated Depreciation	  	 	(194,569	) 	 	 	(177,370	) 	
Electric Plant Held for Future Use	  	 	37,118	  	 	 	—  	  	
	  	 	 	 	 	 	 	 	
Net Electric Plant	  	$	1,109,259	  	 	$	723,074	  	
	  	 	 	 	 	 	 	 	
General plant primarily consisted of a warehouse, buildings, and associated assets. Construction work in progress (CWIP) relates to various transmission and distribution projects throughout the System. The capitalized amounts of CWIP consist primarily of route development expenditures, labor and materials expenditures, right of way acquisitions, engineering services and legal fees. As of December 31, 2012, CWIP included approximately $439.0 million related to the lines and substations of the CREZ Project.
Electric plant held for future use includes the T&D assets purchased on December 30, 2013 from Southwestern Public Service Company, see Note 2.
(8) Deferred Assets and Other Regulatory Assets
Deferred financing costs and other deferred assets are primarily comprised of debt issuance costs incurred in connection with the issuance of the $25.0 million aggregate principal amount of 8.5% per annum senior notes, see Note 11.
 
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Other regulatory assets are comprised of deferred financing costs within the Company’s regulated entities and a prepayment penalty incurred in connection with a debt refinancing. In both cases, these assets are classified as regulatory assets and amortized over the length of the related loan. These costs will be included in the costs to be recovered in connection with a future rate case. Deferred financing costs are primarily comprised of debt issuance costs incurred in connection with the construction credit agreement entered into by SPLLC on June 20, 2011 and refinancing costs incurred in connection with the amended and restated revolving credit facility entered into by SDTS on June 28, 2013, see Notes 10 and 11.
Deferred costs recoverable in future years of $23.8 million at December 31, 2013 and 2012 represent operating costs incurred from inception of SULP through December 31, 2007. The Company has determined that these costs are probable of recovery through future rates based on orders of the PUCT in SULP’s prior rate cases and regulatory precedent.
Deferred assets and other regulatory assets as of December 31, 2013 and 2012, are as follows:

 	  	December 31, 2013	 	  	December 31, 2012	 	
 	  	Gross
Carrying
Amount	 	  	Accumulated
Amortization	 	 	Net
Carrying
Amount	 	  	Gross
Carrying
Amount	 	  	Accumulated
Amortization	 	 	Net
Carrying
Amount	 	
(In thousands)	  	 	 	  	 	 	 	 	 	  	 	 	  	 	 	 	 	 	
Deferred financing costs and other deferred assets	  	$	546	  	  	$	(102	) 	 	$	444	  	  	$	315	  	  	$	(72	) 	 	$	243	  	
Other regulatory assets	  				  				 				  				  				 				
Deferred financing costs	  	 	22,918	  	  	 	(9,369	) 	 	 	13,549	  	  	 	21,626	  	  	 	(6,216	) 	 	 	15,410	  	
Debt prepayment penalty	  	 	2,842	  	  	 	(2,842	) 	 	 	—  	  	  	 	2,842	  	  	 	(2,437	) 	 	 	405	  	
Deferred costs recoverable in future years	  	 	23,793	  	  	 	—  	  	 	 	23,793	  	  	 	23,793	  	  	 	—  	  	 	 	23,793	  	
	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
Deferred financing costs and other regulatory assets, net	  	$	50,099	  	  	$	(12,313	) 	 	$	37,786	  	  	$	48,576	  	  	$	(8,725	) 	 	$	39,851	  	
	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
(9) Related Party Transactions
The Company’s subsidiaries, SDTS, SDTS FERC and SPLLC, are parties to several lease agreements with SULP and SU FERC, through which the Company leases the System, including the CREZ Project, and agrees to fund capital expenditures for improvements.
The Company earned lease revenues under these agreements of approximately $73.2 million and $42.8 million from SULP during the years ended December 31, 2013 and 2012, respectively, including approximately $6.5 million associated with the lease of SDTS FERC’s transmission assets during each of the years ended December 31, 2013 and 2012, respectively.
As of December 31, 2013 and 2012, amounts due from affiliates on the Company’s Consolidated Balance Sheets included approximately $20.5 million and $3.1 million, respectively, related to amounts owed by SULP associated with the lease of the System and the CREZ Project placed in service. There were no amounts owed by SU FERC associated with the lease of SDTS FERC’s transmission assets as of December 31, 2013 and 2012, respectively, on the Company’s Consolidated Balance Sheets.
The Company through its subsidiary SDTS made payments to SULP to reimburse SULP for costs of gross plant and equipment related to the build out of the System as provided in the leases. For the years ended December 31, 2013 and 2012, those amounts were approximately $133.5 million and $31.8 million, respectively. As of December 31, 2013 and 2012, accounts payable and accrued expenses on the Company’s Consolidated Balance Sheets included approximately $19.2 million and $1.7 million, respectively, related to amounts owed to SULP as reimbursements for acquisition of gross plant and equipment.
 
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Under the construction management agreement between SPLLC and SULP dated June 20, 2011, SPLLC incurred costs for contracted services, direct labor, materials and supervision associated with the construction of the CREZ Project to SULP of approximately $3.1 million and $3.2 million during the years ended December 31, 2013 and 2012, respectively. All of SPLLC’s payments to SULP were capitalized in line with the CREZ Project and included as construction work in progress on the Company’s Consolidated Balance Sheets. As of December 31, 2013 and 2012, accounts payable and accrued liabilities on the Company’s Consolidated Balance Sheets included approximately $275,000 and $300,000, respectively, related to amounts owed to SULP as reimbursements under the construction management agreement.
Under the limited partnership agreement of InfraREIT LP, the limited partner at the time of the formation contributed its rights to certain identified development projects. The limited partner will receive partnership account credit deemed to be capital contributions equal to 5% of all costs and expenses incurred and included in the regulatory rate base by or on behalf of InfraREIT LP or any of its subsidiaries with respect to an approved identified development project. During the year ended December 31, 2013, InfraREIT LP issued approximately 105,000 Class A Partnership units at $10 per unit to the limited partner with respect to an approved identified development project. Through December 31, 2013, InfraREIT LP had issued to the limited partner $1.1 million in deemed capital credits in respect to this obligation.
The Company and one member of the Company are parties to a secondee agreement under which employees of the member provide services to the Company for a secondment fee. The Company incurred costs associated with secondment fees of approximately $160,000 and $280,000 during the years ended December 31, 2013 and 2012, respectively. These fees are included in general and administrative expense in the accompanying Consolidated Statements of Operations. As of December 31, 2013 and 2012, respectively, there were no amounts owed to the member included in accounts payable and accrued liabilities on the Company’s Consolidated Balance Sheets related to the secondee agreement.
(10) Borrowings under Credit Facilities
On June 28, 2013, SDTS entered into a second amended and restated credit agreement with Royal Bank of Canada (RBC), Bank of America, N.A., Mizuho Corporate Bank, Ltd., and Société Generale. The second amended and restated credit agreement established a revolving credit facility of $75.0 million that matures on June 28, 2018 and includes a letter of credit facility. The revolving credit facility is collateralized by SDTS’s T&D assets and the equity interests of SDTS and SDTS FERC. The interest rate for the revolving credit facility is based upon the Alternative Base Rate (ABR) plus 1.00% or London Interbank Offered Rate (LIBOR) plus 2.00%. LIBOR resets at each selected interest period (one month, two month, three month, or six month), at SDTS’s discretion, or, if requested by SDTS and agreed to by all lenders under the facility, a period of nine or twelve months. The agreement requires maintenance of certain financial ratios and imposes certain restrictive covenants. At December 31, 2013, SDTS was in compliance with all debt covenants under this agreement. At December 31, 2013, SDTS had $75.0 million outstanding at a 2.17% interest rate under the revolving credit facility and no letters of credit outstanding. SDTS has no remaining capacity under this revolving credit facility as of December 31, 2013.
On July 13, 2010, in connection with the acquisition of CRHC, SDTS established a revolving credit facility of $10.0 million with RBC, which included a letter of credit facility. This revolving credit facility was amended and restated on June 28, 2013, with all terms superseded by the second amended and restated credit agreement described above. The 2010 revolving credit facility was collateralized by SDTS’s distribution and transmission utility assets and the equity interests of SDTS and SDTS FERC. The interest rate for the revolving credit facility re-priced quarterly, at a rate of LIBOR plus 3.25% or prime plus 2.25%, at SDTS’s discretion. LIBOR was defined as the greater of 1.5% or the three month market LIBOR rate. The agreement required maintenance of certain financial ratios and imposed certain restrictive covenants. At December 31, 2012, SDTS was in compliance with all debt covenants under this agreement. At December 31, 2012, SDTS had $5.0 million outstanding at a 3.75% interest rate related to the 2010 revolving credit facility, which was repaid on January 28, 2013.
 
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(11) Long-term Debt
As of December 31, 2013 and 2012, long-term debt consisted of the following:

 	  	December 31, 2013	 	 	December 31, 2012	 	
(In thousands)	  	Amount
Outstanding	 	 	Interest
Rate	 	 	Amount
Outstanding	 	 	Interest
Rate	 	
Senior secured notes—$53.5 Million	  	$	47,947	  	 	 	7.25	% 	 	$	49,488	  	 	 	7.25	% 	
Senior secured notes—$110.0 Million	  	 	107,493	  	 	 	6.47	% 	 	 	108,505	  	 	 	6.47	% 	
Senior secured notes—$25.0 Million	  	 	21,250	  	 	 	8.50	% 	 	 	22,500	  	 	 	8.50	% 	
Senior secured term loan—$10.0 Million	  	 	—  	  	 	 	—  	  	 	 	4,375	  	 	 	3.75	%* 	
Senior secured notes—$60.0 Million	  	 	60,000	  	 	 	5.04	% 	 	 	60,000	  	 	 	5.04	% 	
Senior secured credit facilities—$447.0 Million	  	 	396,000	  	 	 	2.17	%* 	 	 	223,000	  	 	 	2.22	%* 	
	  	 	 	 	 				 	 	 	 	 				
	  	 	632,690	  	 				 	 	467,868	  	 				
Less current portion of long-term debt	  	 	(4,777	) 	 				 	 	(6,303	) 	 				
	  	 	 	 	 				 	 	 	 	 				
Debt classified as long-term debt	  	$	627,913	  	 				 	$	461,565	  	 				

*	Interest based on LIBOR at December 31, 2013 and 2012, respectively plus an applicable margin	
Senior Secured Notes— On December 31, 2009, SDTS issued $53.5 million aggregate principal amount of 7.25% per annum senior secured notes to The Prudential Insurance Company of America and affiliates. The senior secured notes mature on December 30, 2029 with principal and interest, as defined, payable quarterly. The senior secured notes are collateralized by SDTS’s distribution and transmission utility assets and the equity interests of SDTS and SDTS FERC. The senior secured note purchase agreement contains certain default triggers, including without limitation: failure to maintain compliance with financial and other covenants contained in the agreement, limitation on liens, investments and the incurrence of additional indebtedness. At December 31, 2013 and 2012, respectively, SDTS was in compliance with all debt covenants under this agreement. The carrying amount of the senior secured notes at December 31, 2013 and 2012 was $47.9 million and $49.5 million, respectively.
On July 13, 2010, in connection with the acquisition of CRHC, SDTS issued $110.0 million aggregate principal amount of 6.47% per annum senior secured notes to The Prudential Insurance Company of America. The senior secured notes mature on September 30, 2030 with principal and interest, as defined, payable quarterly. The senior secured notes are collateralized by SDTS’s distribution and transmission utility assets and the equity interests of SDTS and SDTS FERC. The senior secured note purchase agreement contains certain default triggers, including without limitation: failure to maintain compliance with financial and other covenants contained in the agreement, limitation on liens, investments and the incurrence of additional indebtedness. At December 31, 2013 and 2012, respectively, SDTS was in compliance with all debt covenants under this agreement. The carrying amount of the senior secured notes at December 31, 2013 and 2012 was $107.5 million and $108.5 million, respectively.
On July 13, 2010, in connection with the acquisition of CRHC, Transmission and Distribution Company (TDC), a subsidiary of the Company, issued $25.0 million aggregate principal amount of 8.5% per annum senior notes to The Prudential Insurance Company of America and affiliates. The senior secured notes mature on December 30, 2020 with principal and interest, as defined, payable quarterly. The senior secured notes are collateralized by the equity interest of TDC and certain accounts of TDC. The senior secured note purchase agreement contains certain default triggers, including without limitation: failure to maintain compliance with financial and other covenants contained in the agreement, limitation on liens, investments and the incurrence of additional indebtedness. At December 31, 2013 and 2012, respectively, TDC was in compliance with all debt covenants under this agreement. The carrying amount of the senior secured notes at December 31, 2013 and 2012 was $21.3 million and $22.5 million, respectively.
 
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Senior Secured Term Loan— On July 13, 2010, also in connection with the acquisition of CRHC, SDTS established a term loan facility of $10.0 million and a revolving credit facility of $10.0 million with RBC described in Note 10. Interest on the term loan re-priced quarterly, at a rate of LIBOR plus 2.25% or prime plus 1.25%, at SDTS’s discretion. LIBOR was defined as the greater of 1.5% or the three month market LIBOR rate. At December 31, 2012, SDTS had $4.4 million outstanding related to the term loan at an interest rate of 3.75% (LIBOR of 1.5% plus 2.25%). Payments of principal and interest were due quarterly, with principal payments of $625,000. The term loan was collateralized by SDTS’s T&D assets and the equity interests of SDTS and SDTS FERC. The agreement also required maintenance of certain financial ratios and imposes certain restrictive covenants. At December 31, 2012, SDTS was in compliance with all debt covenants under this agreement. SDTS entered into the second amended and restated credit agreement on June 28, 2013 as described in Note 10. The term loan facility was refinanced and repaid in full with proceeds from the second amended and restated credit agreement during the second quarter of 2013 described in Note 10 at which time the term loan facility was terminated.
Senior Secured Credit Facilities— On June 20, 2011, SPLLC entered into a construction-term loan agreement consisting of a $667.0 million construction-term loan, reduced to $447.0 million on March 8, 2013, syndicated broadly to a group of 14 international banks and $60.0 million in fixed rate notes issued to The Prudential Insurance Company of America and affiliates. RBC, Royal Bank of Scotland (RBS), and Société Generale acted as joint lead arrangers and joint bookrunners for the construction-term loan. The senior secured credit facility is collateralized by SPLLC’s assets and SDTS’s interest in SPLLC.
The $447.0 million construction-term loan accrues interest at LIBOR plus 2.00%. LIBOR resets at each selected interest period (one month, two month, three month, or six month), at SPLLC’s discretion, at the current market rate. Interest is payable monthly, with a principal conversion from a construction loan to a term loan upon completion. Currently, interest on the construction-term loan is payable the last day of the selected interest period for interest periods of three month or less, and every three months for interest periods that are greater than three months, and interest on the $60.0 million fixed rate notes is payable at the end of each quarter. Neither the construction-term loan nor the fixed rate notes provide for any current principal amortization. Principal conversion is expected to happen once all of the CREZ Project is placed in service and the TCOS rates are approved by the PUCT. Principal conversion must occur no later than June 30, 2014. However, after this conversion, interest will accrue at LIBOR plus 2.25% for a period of three years, at which point the interest rate will increase to LIBOR plus 2.50%. Interest payments will continue in the same manner as described above; however amortized principal amounts of the term loan will be payable quarterly. The total of outstanding construction-term loan commitment, letters of credit and debt drawn cannot exceed $447.0 million in aggregate. The outstanding borrowing under the construction-term loan at December 31, 2013 and 2012 was $396.0 million and $223.0 million, respectively. The construction-term loan agreement contains certain default triggers, including without limitation: failure to maintain compliance with financial and other covenants contained in the agreement, limitation on liens, investments and the incurrence of additional indebtedness.
A $50.0 million letters of credit sub-limit was available under the facility from June 20, 2011 until January 31, 2013. Issued letters of credit were applied to the total construction-term loan capacity. As of December 31, 2013, SPLLC had no letters of credit outstanding under the construction-term loan agreement. As of December 31, 2012, SPLLC had $15.0 million letters of credit outstanding under the letter of credit sub-limit with RBS. SPLLC was in compliance with all debt covenants for the construction-term loan agreement at December 31, 2013 and 2012, respectively. The construction-term loan matures on June 20, 2018.
The $60.0 million fixed rate notes accrue interest at 5.04% per annum. The fixed rate notes mature on June 20, 2018 with interest payable quarterly. The fixed rate notes were issued under the construction-term loan agreement and contain the same default triggers as the construction-term loan, including without limitation: failure to maintain compliance with financial and other covenants for the fixed rate notes contained in the agreement, limitation on liens, investments and the incurrence of additional indebtedness. SPLLC was in compliance with all debt covenants for the fixed rate notes at December 31, 2013 and 2012, respectively. The carrying amount of the fixed rate notes at December 31, 2013 and 2012 was $60.0 million, respectively.
 
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In connection with the construction-term loan agreement, the Company’s Founding Investors entered into an equity commitment with the lenders to provide equity commitments to support borrowing under the construction-term loan agreement. The Founding Investors have severally agreed to contribute equity to the Company, which equity was contributed down to SPLLC and used to maintain the SPLLC debt to total capitalization ratio at not greater than 70%. Through December 31, 2013, the Founding Investors have contributed approximately $168.8 million of equity and have remaining aggregate several equity commitment of approximately $48.5 million.
Future maturities of the total long-term debt at December 31, 2013, are as follows:

(In thousands)	  	Total	 	
Year Ending December 31:	  				
2014	  	$	4,777	  	
2015	  	 	7,024	  	
2016	  	 	7,423	  	
2017	  	 	7,849	  	
2018	  	 	464,305	  	
Thereafter	  	 	141,312	  	
	  	 	 	 	
	  	$	632,690	  	
	  	 	 	 	
(12) Dividends
On December 21, 2012, the Company’s board of directors approved a cash dividend of $0.38 per share to the shareholders on record at December 28, 2012 for a total of approximately $12.2 million. The dividend includes a distribution to noncontrolling interest of approximately $2.9 million. The dividend was paid on January 28, 2013. The Company did not declare a dividend during the year ended December 31, 2013.
The Company is required to distribute at least 90% of its taxable income (excluding net capital gains) to maintain its status as a REIT. Management believes that the Company has distributed at least 100% of its taxable income.
 
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(13) Earnings per Share
Basic earnings per share is calculated by dividing net earnings after noncontrolling interest by weighted average shares of common units outstanding. Diluted earnings per share is calculated similarly, except that it includes the dilutive effect of the assumed exercise of convertible dilutive units. Earnings per share are calculated as follows:

 	  	Years ended
December 31,	 	
(In thousands except per share data)	  	2013	 	  	2012	 	
Basic net income per share:	  				  				
Net income attributable to InfraREIT, L.L.C.	  	$	32,122	  	  	$	12,417	  	
Weighted average common shares outstanding	  	 	31,840	  	  	 	18,719	  	
	  	 	 	 	  	 	 	 	
Basic net income per share:	  	$	1.01	  	  	 	0.66	  	
	  	 	 	 	  	 	 	 	
Diluted net income per share:	  				  				
Net income attributable to InfraREIT, L.L.C.	  	$	32,122	  	  	$	12,417	  	
Weighted average common shares outstanding	  	 	31,840	  	  	 	18,719	  	
Weighted average dilutive shares outstanding	  	 	—  	  	  	 	—  	  	
	  	 	 	 	  	 	 	 	
Diluted net income per share:	  	$	1.01	  	  	$	0.66	  	
	  	 	 	 	  	 	 	 	
Due to the anti-dilutive effect, the computation of diluted earnings per share does not reflect the following adjustments:	  				  				
Net income attributable to noncontrolling interest to operating partnership units	  	$	10,288	  	  	$	4,151	  	
	  	 	 	 	  	 	 	 	
Effect of assumed conversion of the operating partnership units	  	 	9,782	  	  	 	6,100	  	
	  	 	 	 	  	 	 	 	
(14) Derivative Instruments
Interest— On October 13, 2011, SPLLC entered into an interest rate swap agreement that has been designated as a cash flow hedge against variable interest rate exposure on a portion of the construction-term loan with the objective of minimizing the impact of interest rate fluctuations and stabilizing cash flows in future periods. This swap agreement protects against interest rate fluctuations on the SPLLC construction term-loan by establishing a fixed rate on the LIBOR interest rates specified in the SPLLC construction term-loan at 0.832% per annum until June 30, 2014. Notional amounts reset on a monthly basis and will not exceed $261.0 million at any given time. Notional amounts were approximately $261.0 million and $214.3 million as of December 31, 2013 and 2012, respectively.
This cash flow hedging instrument is recorded as a liability in the Company’s Consolidated Balance Sheets at fair value, with an offset to accumulated other comprehensive income to the extent the cash flow hedging instrument is effective. The cash flow hedging instrument gains and losses included in other comprehensive income are reclassified into earnings as the underlying transaction occurs. There was no cash flow hedging instrument ineffectiveness recorded during the years ended December 31, 2013 and 2012, respectively.
The fair value of derivative liabilities relating to interest rate swaps are as follows:

(In thousands)	  	Balance Sheet Location	  	December 31,
2013	 	  	December 31,
2012	 	
Fair value of derivative liabilities—current	  	Current liabilities	  	$	844	  	  	$	1,456	  	
Fair value of derivative liabilities—non current	  	Long-term liabilities	  	 	—  	  	  	 	711	  	
	  		  	 	 	 	  	 	 	 	
Fair value of derivative liabilities	  		  	$	844	  	  	$	2,167	  	

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The Company reclassified approximately $1.6 million and $680,000, included in other comprehensive income during the years ended December 31, 2013 and 2012, respectively, to interest expense, net on the Consolidated Statements of Operations.
As of December 31, 2013 and 2012, unrealized derivative fair value losses of approximately $610,000 and $1.6 million, respectively, related to the cash flow hedges was recorded in accumulated other comprehensive loss in the Company’s Consolidated Balance Sheets. As of December 31, 2013 and 2012, unrealized derivative fair value losses attributable to the noncontrolling interest of approximately $234,000 and $557,000, respectively, was recorded as noncontrolling interest in the Company’s Consolidated Balance Sheets. As of December 31, 2013, approximately $844,000 of unrealized derivative loss is expected to be reclassified into earnings during the next twelve months.
(15) Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss associated with interest rate swap designated as cash flow hedges during the twelve months ended December 31, 2013, were as follows:

 	  	Accumulated Other
Comprehensive Loss
attributable to
InfraREIT, L.L.C.	 	 	Accumulated
Other
Comprehensive
Loss
attributable to
noncontrolling
interest	 	 	Accumulated
Other
Comprehensive
Loss	 	
(In thousands)	  	 	 	 	 	 	 	 	 	
Balance, December 31, 2012	  	$	(1,610	) 	 	$	(557	) 	 	$	(2,167	) 	
Other comprehensive loss before reclassifications	  	 	(180	) 	 	 	(56	) 	 	 	(236	) 	
Amounts reclassified from accumulated other comprehensive loss	  	 	1,180	  	 	 	379	  	 	 	1,559	  	
	  	 	 	 	 	 	 	 	 	 	 	 	
Net period other comprehensive loss	  	 	1,000	  	 	 	323	  	 	 	1,323	  	
	  	 	 	 	 	 	 	 	 	 	 	 	
Balance, December 31, 2013	  	$	(610	) 	 	$	(234	) 	 	$	(844	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	
(16) Contingent Consideration
In connection with the Company’s acquisition of InfraREIT LP in 2010, the Company agreed to contingent consideration in the form of future deemed capital credits up to $82.5 million to Hunt-InfraREIT, L.L.C. (formerly known as Hunt EIAA, L.L.C. or InfraREIT EIAA, L.L.C.) (Hunt-InfraREIT). The capital account credits of up to $82.5 million, which are generated pro rata with the cash expenditures of the Company on the CREZ Project and related interconnections up to $737.0 million, are issued to Hunt-InfraREIT in the form of Class A Partnership units at the agreed upon deemed issue price of $10 per unit on the first day of each quarter following the actual expenditures. In accordance with ASC 815 and 480, the future deemed capital credits have been determined to be contingent consideration and were assessed a fair value of $78.6 million at the date of acquisition and included as a component of long term liabilities in the Consolidated Balance Sheets.
As of December 31, 2013, InfraREIT LP has issued as described above approximately 6.8 million of Class A partnership units at an agreed value of $10 per unit to Hunt-InfraREIT, in partial settlement of the Company’s contingent consideration in accordance with its acquisition agreement. Approximately 3.1 million of Class A Partnership units were issued during each of the years ended December 31, 2013 and 2012. Through December 31, 2013, the deemed issue price of $10 per unit has approximated the estimated fair value of InfraREIT LP Class A Partnership units.
Approximately $841,000 and $753,000 was recognized as expense due to change in fair value of the Company’s contingent consideration in accordance with its acquisition agreement during the years ended
 
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December 31, 2013 and 2012, respectively. As of December 31, 2013 and 2012, approximately $12.6 million and $42.7 million was recorded as a long-term liability in the form of contingent consideration in the Company’s Consolidated Balance Sheets, respectively.
(17) Fair Value of Financial Instruments
In accordance with ASC Topic 820, Fair Value Measurements and Disclosures , the Company is required to assess the fair value of its financial instruments and disclose the level of inputs used for that estimate set forth in ASC 820.
The carrying amounts of the Company’s cash and cash equivalents, restricted cash, due from affiliates, and accounts payable approximate fair value due to the short-term nature of these assets and liabilities.
The Company’s derivative contracts consist of cash flow hedging instruments which are not traded on a public exchange. The fair values of the cash flow hedging instrument contracts are determined using discounted cash flow techniques. The techniques incorporate Level 2 inputs and quotes from the counterparty to the interest swap contract. These market inputs are utilized in a discounted cash flow calculation considering the cash flow hedging instrument term, credit risk, notional amount and discount rate and are classified as Level 2 in the fair value hierarchy.
As of December 31, 2013, the Company had approximately $396.0 million of borrowings under the construction-term loan which accrued interest under floating interest rate structures. Accordingly, the carrying value of such indebtedness approximated fair value for the amounts outstanding.
The Company’s long-term debt at December 31, 2012 was comprised in part of approximately $4.4 million and $223.0 million of borrowings under its senior secured notes and borrowings under the construction-term loan, respectively, both of which accrued interest under floating interest rate structures. Accordingly, the carrying value of such indebtedness approximates fair value for the amounts outstanding.
The Company also had borrowings totaling $236.7 million and $240.5 million under senior secured notes with a weighted average rate of 6.45% and 6.47% per annum as of December 31, 2013 and 2012, respectively. The fair value of these borrowings is estimated using discounted cash flow analysis based on current market rates.
The Company assesses the fair market value of its contingent consideration associated with the acquisition of InfraREIT LP using level 3 inputs. The fair market value of the liability is based on the probability of expected future cash flows over the period during which the obligation is expected to be settled using a discount rate that approximates the Company’s total weighted average cost of debt and the estimated fair value of the InfraREIT LP Class A Partnership units used to settle the obligation.
The fair value measurement of the Company’s contingent consideration encompasses the following significant unobservable inputs:

 	  	December 31,	 	
 	  	2013	 	 	2012	 	
Unobservable inputs	  				 				
Weighted average cost of debt	  	 	3.60	% 	 	 	4.41	% 	
Timing of cash flows	  	 	28 months	  	 	 	15 months	  	
InfraREIT LP Class A Partnership unit	  	$	10.00	  	 	$	10.00	  	
Significant increases or decreases in any of the inputs in isolation would result in a significantly lower or higher fair value measurement.
 
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Financial instruments, measured at fair value as defined by ASC 820, by level within the fair value hierarchy were as follows:

 	  	Carrying
Value	 	  	Fair Value	 	
	  			  	Level 1	 	  	Level 2	 	  	Level 3	 	
(In thousands)	  	 	 	  	 	 	  	 	 	  	 	 	
December 31, 2013	  				  				  				  				
Fair value of derivative liabilities	  	$	844	  	  	$	—  	  	  	$	844	  	  	$	—  	  	
Long-term debt	  	 	632,690	  	  	 	—  	  	  	 	636,683	  	  	 	—  	  	
Contingent consideration	  	 	12,554	  	  	 	—  	  	  	 	—  	  	  	 	12,554	  	
					
December 31, 2012	  				  				  				  				
Fair value of derivative liabilities	  	$	2,167	  	  	$	—  	  	  	$	2,167	  	  	$	—  	  	
Long-term debt	  	 	467,868	  	  	 	—  	  	  	 	492,536	  	  	 	—  	  	
Contingent consideration	  	 	42,713	  	  	 	—  	  	  	 	—  	  	  	 	42,713	  	
ASC Topic 820 requires a company to disclose changes during the year for financial instruments that are classified as level 3 financial instruments in the fair value hierarchy. Changes in level 3 financial instruments were as follows:

 	  	Years Ended
December 31,	 	
Contingent Consideration	  	2013	 	 	2012	 	
(in thousands)	  	 	 	 	 	 	
Beginning Balance	  	$	42,713	  	 	$	72,910	  	
Non-cash noncontrolling interest equity issuance	  	 	(31,000	) 	 	 	(30,950	) 	
Change in fair value of contingent consideration	  	 	841	  	 	 	753	  	
	  	 	 	 	 	 	 	 	
Ending Balance	  	$	12,554	  	 	$	42,713	  	
	  	 	 	 	 	 	 	 	
(18) Supplemental Cash Flow Information
Supplemental cash flow information and non-cash investing and financing activities for the years ended December 31 are as follows:

 	  	Years Ended
December 31,	 	
 	  	2013	 	  	2012	 	
(In thousands)	  	 	 	  	 	 	
Supplemental cash flow information	  				  				
Cash paid during the year for interest	  	$	26,403	  	  	$	24,274	  	
Cash paid during the year for taxes	  	 	36	  	  	 	43	  	
Cash paid for capitalized cost of removal of electric plant	  	 	2,337	  	  	 	296	  	
Non-cash investing and financing activities	  				  				
Non-cash right of way additions to electric plant	  	 	1,275	  	  	 	9,293	  	
Accrued additions to electric plant	  	 	8,876	  	  	 	29,341	  	
Allowance for funds used during construction—debt	  	 	12,579	  	  	 	9,234	  	
Non-cash members’ contributions	  	 	369	  	  	 	128	  	
Non-cash noncontrolling interests contributions	  	 	119	  	  	 	42	  	
Non-cash noncontrolling interests equity issuance	  	 	32,052	  	  	 	30,950	  	
Dividends payable	  	 	—  	  	  	 	9,252	  	
Distribution to noncontrolling interest payable	  	 	—  	  	  	 	2,923	  	
 
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(19) Contingencies
The amount reported as regulatory assets as of December 31, 2013 and 2012, respectively, are subject to the review by the PUCT and as with all utility assets may change at a later date based on that review, see Note 8.
SDTS is involved in various legal and regulatory proceedings associated with right-of way acquisitions. While the Company is unable to predict the outcome of these proceedings, the Company does not believe that the ultimate resolution of these proceedings will have a materially adverse effect on the Company’s consolidated results of operations, cash flows or financial position.
(20) Quarterly Financial Information (Unaudited)
Summarized unaudited consolidated quarterly information for the years ended December 31, 2013 and 2012 are as follows:

 	  	Three months ended	 	 	Year Ended
December 31,	 	
 	  	March 31,	 	 	June 30,	 	 	September 30,	 	 	December 31,	 	 			
(In thousands except per share amounts)	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
2013	  				 				 				 				 				
Lease revenue	  	$	8,124	  	 	$	11,794	  	 	$	23,450	  	 	$	29,825	  	 	$	73,193	  	
Total operating costs and expenses	  	 	(6,531	) 	 	 	(6,913	) 	 	 	(9,235	) 	 	 	(11,036	) 	 	 	(33,715	) 	
Interest expense, net	  	 	(3,027	) 	 	 	(3,046	) 	 	 	(4,691	) 	 	 	(6,620	) 	 	 	(17,384	) 	
Other income	  	 	7,361	  	 	 	6,927	  	 	 	5,283	  	 	 	1,361	  	 	 	20,932	  	
Income tax expense	  	 	(77	) 	 	 	(93	) 	 	 	(119	) 	 	 	(327	) 	 	 	(616	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	  	 	5,850	  	 	 	8,669	  	 	 	14,688	  	 	 	13,203	  	 	 	42,410	  	
Less: Net income attributable to noncontrolling interest	  	 	1,494	  	 	 	2,045	  	 	 	3,536	  	 	 	3,213	  	 	 	10,288	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income attributable to InfraREIT, L.L.C.	  	$	4,356	  	 	$	6,624	  	 	$	11,152	  	 	$	9,990	  	 	$	32,122	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic EPS	  	$	0.15	  	 	$	0.21	  	 	$	0.34	  	 	$	0.30	  	 	$	1.01	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted EPS	  	$	0.15	  	 	$	0.21	  	 	$	0.34	  	 	$	0.30	  	 	$	1.01	  	

																					
 	  	Three months ended	 	 	Year Ended
December 31,	 	
 	  	March 31,	 	 	June 30,	 	 	September 30,	 	 	December 31,	 	 			
(In thousands except per share amounts)	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
2012	  				 				 				 				 				
Lease revenue	  	$	7,430	  	 	$	8,370	  	 	$	14,183	  	 	$	12,799	  	 	$	42,782	  	
Total operating costs and expenses	  	 	(5,322	) 	 	 	(5,871	) 	 	 	(5,609	) 	 	 	(6,282	) 	 	 	(23,084	) 	
Interest expense, net	  	 	(5,263	) 	 	 	(4,608	) 	 	 	(4,047	) 	 	 	(3,396	) 	 	 	(17,314	) 	
Other income	  	 	1,508	  	 	 	2,556	  	 	 	4,036	  	 	 	6,420	  	 	 	14,520	  	
Income tax expense	  	 	(71	) 	 	 	(73	) 	 	 	(83	) 	 	 	(109	) 	 	 	(336	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	  	 	(1,718	) 	 	 	374	  	 	 	8,480	  	 	 	9,432	  	 	 	16,568	  	
Less: Net income (loss) attributable to noncontrolling interest	  	 	(420	) 	 	 	97	  	 	 	2,131	  	 	 	2,343	  	 	 	4,151	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss) attributable to InfraREIT, L.L.C.	  	$	(1,298	) 	 	$	277	  	 	$	6,349	  	 	$	7,089	  	 	$	12,417	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic EPS	  	$	(0.08	) 	 	$	0.02	  	 	$	0.32	  	 	$	0.30	  	 	$	0.66	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted EPS	  	$	(0.08	) 	 	$	0.02	  	 	$	0.32	  	 	$	0.30	  	 	$	0.66	  	

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(21) Subsequent Events
On January 1, 2014, InfraREIT LP issued approximately 214,000 of Class A Partnership units at $10 per unit to Hunt-InfraREIT, in partial settlement of the Company’s contingent consideration in accordance with its acquisition agreement, see Note 16. On January 1, 2014, InfraREIT LP also issued approximately 33,000 of Class A Partnership units at $10 per unit to Hunt-InfraREIT, with respect to an approved identified development project in accordance with the limited partnership agreement of InfraREIT LP, see Note 9.
On January 2, 2014, SULP made a TCOS filing, which was approved by the PUCT on February 25, 2014, in order to include the remainder of the CREZ Project. SPLLC and SULP intend to negotiate amendments to the rents supplement of the CREZ lease to provide for adjustments to fixed rent and percentage rent related to the remainder of the CREZ Project placed-in-service.
On January 3, 2014, InfraREIT LP entered into a credit agreement with Bank of America, N.A. which established a revolving credit facility of $65.0 million that matures on January 1, 2015 and includes a letter of credit facility. The revolving credit facility is collateralized by InfraREIT LP’s interest in TDC and certain accounts of InfraREIT LP. TDC is providing a secured guaranty. The interest rate for the revolving facility is based upon the ABR plus 1.50% or LIBOR plus 2.50%. At February 28, 2014, InfraREIT LP had $56.0 million outstanding under the revolving credit facility.
On January 23, 2014, the PUCT approved SULP’s settlement of its rate case under the Docket No. 41474. The application was based on a test year ended December 31, 2012, with an effective date of May 1, 2014. The settlement also established that SULP may seek recovery in a future rate case, pursuant to the mechanism established in Docket Nos. 21591 and 27556, of the $23.8 million deferred costs included in other regulatory assets, see Note 8 for more information.
The Company has evaluated subsequent events from the Consolidated Balance Sheet date through March 5, 2014, the date at which the consolidated financial statements were available to be issued, and determined there are no other items to disclose.
 
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InfraREIT, L.L.C
 SCHEDULE III—Electric Plant and Accumulated Depreciation

Col. A	  	Col. B	 	  	Col. C	 	  	Col. D	 	  	 	 	  	Col. E	 	  	Col. F	 	 	Col. G	 	Col. H	  	Col. I	
Description (1)	  	Encumbrances	 	  	Initial Cost to
Company (2)	 	  	Cost Subsequent to Acquisition	 	  	Gross Amount
of Which
Carried at
Close of
Period (3)	 	  	Accumulated
Depreciation	 	 	Date of
Construction (4)	 	Date
Acquired	  	Life on Which
Depreciation
In latest
Income
Statements is
Computed (5)	
 	  	 	 	  	Electric
Plant	 	  	Improvements	 	  	Carrying
Costs	 	  	Electric Plant
Total	 	  	 	 	 	 	 	 	  	 	
(Dollars in thousands)	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	 	 	 	 	  	 	
Stanton, Brady, Celeste Assets	  	$	182,493	  	  	$	405,046	  	  	$	—  	  	  	$	—  	  	  	$	405,046	  	  	$	(113,173	) 	 	(4)	 	(4)	  	(5)	
McAllen Assets	  	 	47,947	  	  	 	146,487	  	  	 	—  	  	  	 	—  	  	  	 	146,487	  	  	 	(15,521	) 	 	(4)	 	(4)	  	(5)	
CREZ Assets	  	 	456,000	  	  	 	656,972	  	  	 	—  	  	  	 	—  	  	  	 	656,972	  	  	 	(58,685	) 	 	(4)	 	(4)	  	(5)	
SDTS FERC Assets	  	 	—  	  	  	 	95,323	  	  	 	—  	  	  	 	—  	  	  	 	95,323	  	  	 	(7,190	) 	 		 		  		

(1)	Asset descriptions correspond to asset groups under individual leases.	
(2)	Because the Company’s assets consist entirely of electric plant assets, which are regulated by the Public Utility Commission of Texas, electric plant is stated at the original cost, which includes the cost of contracted services, direct labor, materials, acquisition adjustments, capitalized interest and overhead items.	
(3)	See reconciliation on next page.	
(4)	Because additions and improvements to the System are ongoing, construction and acquisition dates are not applicable.	
(5)	Provision for depreciation of electric plant is computed using composite straight-line rates as follows:	

TransmissionPlant	  	 	2.75%- 3.00%	  	
DistributionPlant	  	 	2.50%- 3.10%	  	
GeneralPlant	  	 	2.50%- 33.33%	  	
 
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Fixed Asset Reconciliation

(In thousands)	  	2013	 	 	2012	 	
Electric Plant:	  				 				
Beginning balance	  	$	900,444	  	 	$	487,015	  	
Additions	  	 	404,433	  	 	 	414,392	  	
Retirements	  	 	(1,049	) 	 	 	(963	) 	
	  	 	 	 	 	 	 	 	
Ending balance	  	 	1,303,828	  	 	 	900,444	  	
	  	 	 	 	 	 	 	 	
Accumulated Depreciation	  				 				
Beginning balance	  	 	177,370	  	 	 	168,795	  	
Depreciation expense	  	 	19,566	  	 	 	10,393	  	
Retirements	  	 	(1,049	) 	 	 	(963	) 	
Cost of removal	  	 	(1,318	) 	 	 	(855	) 	
	  	 	 	 	 	 	 	 	
Ending balance	  	 	194,569	  	 	 	177,370	  	
	  	 	 	 	 	 	 	 	
Electric Plant—Net	  	$	1,109,259	  	 	$	723,074	  	

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SHARYLAND UTILITIES, L.P.
 Consolidated Balance Sheets
(In Thousands)
(Unaudited)

 	  	September 30,
2014	 	 	December 31,
2013	 	
Assets	  				 				
Property, Plant and Equipment—net	  	$	1,185,503	  	 	$	1,076,219	  	
Current Assets	  				 				
Cash and cash equivalents	  	 	9,365	  	 	 	8,379	  	
Accounts receivable, net	  	 	32,323	  	 	 	28,240	  	
Due from affiliates	  	 	15,527	  	 	 	31,256	  	
Prepayments and other current assets	  	 	1,244	  	 	 	1,108	  	
	  	 	 	 	 	 	 	 	
Total current assets	  	 	58,459	  	 	 	68,983	  	
	  	 	 	 	 	 	 	 	
Goodwill	  	 	1,100	  	 	 	1,100	  	
Deferred Charges—Regulatory Assets, net	  	 	42,216	  	 	 	37,345	  	
	  	 	 	 	 	 	 	 	
Total Assets	  	$	1,287,278	  	 	$	1,183,647	  	
	  	 	 	 	 	 	 	 	
Partners’ Capital (Deficit) and Liabilities	  				 				
			
Partners’ Capital (Deficit)	  				 				
General partner	  	$	(3	) 	 	$	(131	) 	
Limited partner	  	 	4,557	  	 	 	(8,145	) 	
	  	 	 	 	 	 	 	 	
Total partners’ capital (deficit)	  	 	4,554	  	 	 	(8,276	) 	
	  	 	 	 	 	 	 	 	
Long Term Financing Obligation	  	 	1,177,166	  	 	 	1,074,316	  	
OPEB and Other Liabilities	  	 	12,199	  	 	 	10,881	  	
	  	 	 	 	 	 	 	 	
Total Capitalization	  	 	1,193,919	  	 	 	1,076,921	  	
	  	 	 	 	 	 	 	 	
Commitments and Contingencies	  	 	—  	  	 	 	—  	  	
	  	 	 	 	 	 	 	 	
Current Liabilities	  				 				
Accounts payable and accrued liabilities	  	 	41,604	  	 	 	51,317	  	
Purchased power payable	  	 	—  	  	 	 	8,241	  	
Revolving line of credit	  	 	5,000	  	 	 	—  	  	
Current portion of financing obligation	  	 	28,493	  	 	 	33,974	  	
Due to affiliates	  	 	16,540	  	 	 	11,879	  	
Current state margin tax payable	  	 	1,722	  	 	 	1,315	  	
	  	 	 	 	 	 	 	 	
Total current liabilities	  	 	93,359	  	 	 	106,726	  	
	  	 	 	 	 	 	 	 	
Total Partners’ Capital (Deficit) and Liabilities	  	$	1,287,278	  	 	$	1,183,647	  	
	  	 	 	 	 	 	 	 	
See accompanying notes to the consolidated financial statements.
 
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SHARYLAND UTILITIES, L.P.
 Consolidated Statements of Operations
(In Thousands)
(Unaudited)

 	  	Nine Months Ended
September 30,	 	
 	  	2014	 	 	2013	 	
Revenues	  	$	227,555	  	 	$	151,351	  	
Operating Expenses	  				 				
Purchased power	  	 	58,123	  	 	 	75,679	  	
Distribution expense	  	 	19,410	  	 	 	16,421	  	
Transmission expense	  	 	12,050	  	 	 	1,652	  	
General and administrative expense	  	 	26,423	  	 	 	13,508	  	
Depreciation and amortization	  	 	21,513	  	 	 	13,230	  	
	  	 	 	 	 	 	 	 	
Total operating expenses	  	 	137,519	  	 	 	120,490	  	
	  	 	 	 	 	 	 	 	
Operating Income	  	 	90,036	  	 	 	30,861	  	
Other Income (Expense)	  				 				
Interest expense, net	  	 	(77,265	) 	 	 	(35,658	) 	
Other income	  	 	310	  	 	 	556	  	
Tax reimbursements for CIAC	  	 	1,299	  	 	 	1,114	  	
	  	 	 	 	 	 	 	 	
Total other expense	  	 	(75,656	) 	 	 	(33,988	) 	
Net Income (Loss) Before Income Taxes	  	 	14,380	  	 	 	(3,127	) 	
Income Tax Expense	  	 	1,550	  	 	 	942	  	
	  	 	 	 	 	 	 	 	
Net Income (Loss)	  	$	12,830	  	 	$	(4,069	) 	
	  	 	 	 	 	 	 	 	
See accompanying notes to the consolidated financial statements.
 
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SHARYLAND UTILITIES, L.P.
 Consolidated Statements of Partners’ Capital (Deficit)
Nine Months Ended September 30, 2014
(In Thousands)
(Unaudited)

 	  	General
Partner	 	 	Limited
Partner	 	 	Total
Partners’
Capital
(Deficit)	 	
Balance at December 31, 2013	  	$	(131	) 	 	$	(8,145	) 	 	$	(8,276	) 	
Net Income	  	 	128	  	 	 	12,702	  	 	 	12,830	  	
	  	 	 	 	 	 	 	 	 	 	 	 	
Balance at September 30, 2014	  	$	(3	) 	 	$	4,557	  	 	$	4,554	  	
	  	 	 	 	 	 	 	 	 	 	 	 	
See accompanying notes to the consolidated financial statements.
 
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SHARYLAND UTILITIES, L.P.
 Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)

 	  	Nine Months Ended
September 30,	 	
 	  	2014	 	 	2013	 	
Cash Flows from Operating Activities	  				 				
Net Income (Loss)	  	$	12,830	  	 	$	(4,069	) 	
Adjustments to reconcile net income (loss) to net cash provided by operating activities:	  				 				
Depreciation and amortization	  	 	21,203	  	 	 	13,230	  	
Amortization of deferred costs	  	 	310	  	 	 	41	  	
Changes in assets and liabilities:	  				 				
Short-term investments	  	 	—  	  	 	 	623	  	
Prepayments and other current assets	  	 	(136	) 	 	 	(396	) 	
Accounts receivable	  	 	(4,083	) 	 	 	(7,029	) 	
Due from affiliates	  	 	15,729	  	 	 	(17,741	) 	
Purchased power payable	  	 	(8,241	) 	 	 	2,028	  	
Accounts payable, accrued liabilities and other	  	 	(8,395	) 	 	 	22,681	  	
Due to affiliates	  	 	4,661	  	 	 	5,690	  	
State margin tax payable	  	 	407	  	 	 	195	  	
Deferred charges—regulatory assets	  	 	(5,181	) 	 	 	(3,436	) 	
	  	 	 	 	 	 	 	 	
Net cash provided by operating activities	  	 	29,104	  	 	 	11,817	  	
	  	 	 	 	 	 	 	 	
Cash Flows from Investing Activities	  				 				
Additions to general plant	  	 	(2,993	) 	 	 	(2,172	) 	
	  	 	 	 	 	 	 	 	
Net cash used in investing activities	  	 	(2,993	) 	 	 	(2,172	) 	
	  	 	 	 	 	 	 	 	
Cash Flows from Financing Activities	  				 				
Partners’ distributions	  	 	—  	  	 	 	(20	) 	
Proceeds from borrowing	  	 	5,000	  	 	 	—  	  	
Repayments of financing obligation	  	 	(30,125	) 	 	 	(6,717	) 	
	  	 	 	 	 	 	 	 	
Net cash used in financing activities	  	 	(25,125	) 	 	 	(6,737	) 	
	  	 	 	 	 	 	 	 	
Net increase in cash and cash equivalents	  	 	986	  	 	 	2,908	  	
Cash and cash equivalents at beginning of period	  	 	8,379	  	 	 	7,192	  	
	  	 	 	 	 	 	 	 	
Cash and Cash Equivalents at end of period	  	$	9,365	  	 	$	10,100	  	
	  	 	 	 	 	 	 	 	
Supplemental disclosure of cash flow information	  				 				
Cash paid for interest	  	$	72,075	  	 	$	31,890	  	
	  	 	 	 	 	 	 	 	
Cash paid for margin taxes	  	$	1,143	  	 	$	800	  	
	  	 	 	 	 	 	 	 	
Noncash financing obligations incurred	  	$	127,494	  	 	$	280,929	  	
	  	 	 	 	 	 	 	 	
See accompanying notes to the consolidated financial statements.
 
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SHARYLAND UTILITIES, L.P.
 Notes to the Consolidated Financial Statements
September 30, 2014
(Unaudited)
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
Sharyland Utilities, L.P. (the Partnership or SULP) was organized as a Texas limited partnership on November 3, 1998, as an electrical distribution utility located in Hidalgo County, Texas.
The Partnership currently serves over 50,000 metered and unmetered accounts in 29 counties throughout Texas. The Partnership’s customers are principally residential, commercial and irrigation customers located in the cities of Mission and McAllen, Texas in the outlying areas of Hidalgo County in south Texas, in the Midland-Stanton area of west Texas, in the central Texas area around Brady, and in northeast Texas in Hunt, Collin and Fannin Counties. The Partnership is also engaged in the transmission of electricity throughout Texas. Those transmission activities include: a 138 Kilovolt (kV) looped system 305 miles in length through SU FERC, L.L.C. (SU FERC) (the sole subsidiary) and through a 300 megawatt (MW) high-voltage direct current transmission interconnection between Texas and Mexico (Railroad DC Tie); and a 298 mile 345 kV transmission loop in the Texas Panhandle and South Plains near Amarillo, Texas.
On August 17, 2012, the Public Utility Commission of Texas (PUCT) approved the retail competition plan filed by the Partnership that transitioned its Stanton, Brady, and Celeste service territories to retail electric competition starting on May 1, 2014. The Partnership’s retail customers in these service territories previously did not have the option to purchase their power in the competitive retail electric markets. Their electric rates were regulated and set by the PUCT. In order to receive new “wires only” rates to serve these customers, the Partnership filed a Rate Case using 2012 “test year” data on May 31, 2013 under the Docket No. 41474. During the balance of 2013 the rate case was litigated, and a final settlement was reached and rates were approved by the PUCT at its meeting held on January 23, 2014. These new rates went into effect as each customer’s meters were read after May 1, 2014. In addition, to achieve this movement of customers, the Partnership constructed various interconnections with the Electric Reliability Council of Texas (ERCOT) System and disconnected from the Southwest Power Pool (SPP) System in December of 2013.
The Partnership leases all of its transmission and distribution assets from a related party, Sharyland Distribution & Transmission Services (SDTS) and its subsidiaries SDTS FERC, L.L.C. (SDTS FERC) and Sharyland Projects, L.L.C. (SPLLC), under Master Lease Agreements. See Note 2.
(b) Principles of Consolidation and Presentation
All significant intercompany balances and transactions have been eliminated. The Partnership maintains accounting records in accordance with the uniform system of accounts, as prescribed by the Federal Energy Regulatory Commission (FERC). The Partnership’s consolidated financial statements reflect the effects of the different rate making principles mandated by the FERC and PUCT regulating its operations.
The interim financial information presented in the consolidated financial statements included in this report is unaudited and, in the opinion of management, includes all adjustments of a normal recurring nature necessary to present fairly the consolidated financial position as of September 30, 2014, the consolidated statements of Partners’ Capital (Deficit), Statements of Operations, and Cash Flows for the nine months ended September 30, 2014 and 2013. The results of the interim periods shown in this report are not necessarily indicative of the final results to be expected for the full year. The consolidated financial statements were prepared in accordance with Generally Accepted Accounting Principles (GAAP). These consolidated financial statements and the accompanying notes should be read in conjunction with the Partnership’s audited financial statements for the year ended December 31, 2013.
 
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(c) Use of Estimates
The preparation of the Partnership’s consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates.
(d) Recently issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers . The ASU is effective for annual reporting periods (including interim reporting periods within those periods) beginning January 1, 2017. Early application is not permitted. The amendment creates a new Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers , which supersedes revenue recognition requirements in ASC 605, Revenue Recognition . ASU 2014-09 requires that an entity recognize revenues as performance obligations embedded in sales agreements with customers are satisfied by the entity. The Partnership is assessing the effects of the application of the new guidance and has not determined the impact this standard may have on its financial statements.
(2) Master Lease Agreements
The Partnership leases all of its Transmission and Distribution (T&D) assets from related parties, SDTS and its subsidiaries, under Master Lease Agreements (MLA). Also under these same MLAs, SDTS is responsible for funding all prudently incurred electric plant capital expenditures deemed necessary to serve customers by the Partnership. In accordance with the lease agreements, the Partnership is responsible for the maintenance and the operation of the T&D assets and for the compliance with all regulatory requirements of the PUCT, the FERC, and any other regulatory entity with jurisdiction over the T&D assets. The lease agreements obligate the Partnership to pay all property-related expenses, including maintenance, repairs, taxes on equipment in service, insurance, and to comply with the terms of the secured credit facilities and secured-term loan, if any, affecting the leased assets.
On December 31, 2009, the Partnership and SDTS entered into a master lease agreement, as amended, for the T&D assets located in and around McAllen, Texas including the Railroad DC Tie. The term of the agreement expires on December 31, 2029. The agreement includes annual fixed payments and additional payments based upon a percentage of revenue earned by the Partnership on the leased assets in excess of a specified annual fixed amount, which the percentage decreases over the life of the lease. In accordance with the agreement, annual fixed payments are approximately $8.4 million and the rate used for additional payments will decrease from 37% to 18% over the term of the agreement. Fixed payments were approximately $5.6 million and $4.7 million during the nine month periods ended September 30, 2014 and 2013, respectively. The rate used to calculate the percentage component was 37% of the Partnership’s revenues above the base amount during each of the nine month periods ended September 30, 2014 and 2013.
On July 13, 2010, the Partnership and SDTS entered into a lease agreement, as amended, for the T&D assets located mainly in and around the cities of Stanton, Brady, and Celeste. The term of the agreement expires on December 31, 2015. The agreement includes annual fixed payments and additional payments based upon a percentage of revenue earned by the Partnership on the leased assets in excess of specified fixed amounts, which percentage decreases over the life of the lease. In accordance with the agreement, annual fixed payments are approximately $29.3 million, and the rate used for additional payments will vary from 29% to 23% over the term of the agreement. Fixed payments were approximately $21.8 million and $16.0 million during the nine month periods ended September 30, 2014 and 2013, respectively. The rate used to calculate the percentage component was 24% of the Partnership’s revenues above the base amount during each of the nine month period ended September 30, 2014 and 2013.
 
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On July 13, 2010, SU FERC and SDTS FERC, L.L.C. (SDTS FERC) also entered into a lease agreement, as amended, for the lease of the 138 kV transmission line that loops around our Stanton, Texas territory in the Permian Basin regulated by the FERC. The lease agreement expires on December 31, 2021 and includes annual fixed payments of approximately $5.4 million. For each of the nine month periods ended September 30, 2014 and 2013, payments were $4.9 million.
On June 20, 2011, the Partnership and SPLLC entered into a master system lease agreement (CREZ lease), as amended, to construct and lease the 345kV transmission loop in the Texas panhandle around Amarillo, Texas. The term of the agreement expires on December 31, 2020. On April 29, 2013, August 27, 2013 and November 14, 2013, significant portions of the transmission loop subject to the CREZ lease were completed and placed in service. As a result, consistent with the lease, the Partnership and SPLLC negotiated a rent supplement to provide for annual fixed payments and additional payments based upon a percentage of revenue earned by the Partnership on the leased assets in excess of specified annual base amounts. In accordance with the agreement, annual fixed payments are approximately $67.3 million, and the rate used for additional payments will vary from 32% to 27% over the term of the agreement. Fixed payments were approximately $49.7 million and $6.0 million during the nine month periods ended September 30, 2014 and 2013, respectively. The rate used to calculate the percentage component was 32% and 24% of the Partnership’s revenues above the base amount during the nine month periods ended September 30, 2014 and 2013, respectively.
The leases are subject to failed sale-leaseback accounting. See Note 3.
The Partnership is also subject to certain restrictive covenants, including indebtedness limits, contained in the lease agreements. The Partnership was in compliance with all covenants as of September 30, 2014 and December 31, 2013.
(3) Failed Sale Leaseback—Financing Obligation
The Partnership leases all of its T&D assets from a related party, SDTS. SDTS has legal title to the T&D assets. The Partnership, as a managing member of SDTS, has the exclusive power and authority on behalf of SDTS to manage, control, administer, and operate the T&D assets, and business affairs of SDTS in accordance with the limited liability company agreement governing SDTS. These rights and obligations constitute continuing involvement, which results in failed sale-leaseback (financing accounting). Under failed sale-leaseback accounting, the Partnership is deemed owner of the assets under all master lease agreements, including assets currently under construction. Consequently, the T&D assets, including assets currently under construction and corresponding financial obligations are included in the Partnership’s Consolidated Balance Sheets. The leases are considered a failed sale-leaseback (financing) due to the Partnership’s continuing involvement in SDTS and due to the ongoing involvement in the construction of the T&D assets as defined by ASC Topic 840, Accounting for Leases .
Approximately $1.2 billion and $1.1 billion are included in long-term financing obligation liabilities related to the failed sale-leaseback (financing), as of September 30, 2014 and December 31, 2013, respectively. Approximately $28.5 million and $34.0 million of the failed sale-leaseback (financing) obligation are included in current liabilities as of September 30, 2014 and December 31, 2013, respectively.
Included in interest expense is interest on the failed sale-leaseback (financing). Interest expense on failed sale-leaseback (financing) was $77.1 million for the nine month period ended September 30, 2014. The fixed portion of the failed sale-leaseback interest expense was $56.0 million for the nine month period ended September 30, 2014. The variable portion of the failed sale-leaseback (financing) interest expense was $21.1 million for the nine month period ended September 30, 2014. Interest expense on failed sale-leaseback (financing) was $35.5 million for the nine month period ended September 30, 2013. The fixed portion of the failed sale-leaseback interest expense was $25.0 million for the nine month period ended September 30, 2013. The variable portion of the failed sale-leaseback (financing) interest expense was $10.5 million for the nine month period ended September 30, 2013.
 
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As a result of the failed sale-leaseback (financing) transaction, the Partnership accounts for lease payments to the lessor as a financing obligation. Payments on the long-term financing obligation for the nine month periods ended September 30, 2014 and 2013 were approximately $30.1 million and $6.7 million, respectively.
Future payments of the financing obligation as of September 30, 2014 are as follows:

(In thousands)	  	Total	 	
Year Ending December 31:	  				
2014—Q4	  	$	3,468	  	
2015	  	 	38,020	  	
2016	  	 	26,088	  	
2017	  	 	22,329	  	
2018	  	 	21,006	  	
Thereafter	  	 	965,579	  	
	  	 	 	 	
Total financing obligation	  	 	1,076,490	  	
Less current portion of financing obligation	  	 	(28,493	) 	
Construction Obligation	  	 	105,376	  	
Lease Deferral	  	 	23,793	  	
	  	 	 	 	
Long-term lease obligation	  	$	1,177,166	  	
	  	 	 	 	
The Partnership recorded depreciation expense of approximately $19.7 million and $11.9 million during the nine months ended September 30, 2014 and 2013, respectively, related to the assets accounted for in accordance with failed sale-leaseback.
(4) Property, Plant and Equipment—net
The major classes of property, plant and equipment at September 30, 2014 and December 31, 2013 are as follows:

(In thousands)	  	September 30,
2014	 	 	December 31,
2013	 	
Property, plant and equipment	  				 				
Leased system—SULP	  	$	1,172,231	  	 	$	1,043,927	  	
Leased system—SU FERC	  	 	90,433	  	 	 	89,024	  	
General plant	  	 	22,838	  	 	 	20,802	  	
	  	 	 	 	 	 	 	 	
	  	 	1,285,502	  	 	 	1,153,753	  	
Construction Work in Progress:	  				 				
Leased system under construction	  	 	68,258	  	 	 	70,477	  	
Leased system held for future use	  	 	37,118	  	 	 	37,118	  	
General plant	  	 	1,051	  	 	 	612	  	
	  	 	 	 	 	 	 	 	
	  	 	106,427	  	 	 	108,207	  	
Other	  	 	78	  	 	 	148	  	
	  	 	 	 	 	 	 	 	
Total Property, plant and equipment	  	 	1,392,007	  	 	 	1,262,108	  	
Accumulated Depreciation—Leased system	  	 	(193,227	) 	 	 	(173,495	) 	
Accumulated Depreciation—General plant	  	 	(13,277	) 	 	 	(12,394	) 	
	  	 	 	 	 	 	 	 	
Property, Plant, and Equipment—net	  	$	1,185,503	  	 	$	1,076,219	  	
	  	 	 	 	 	 	 	 	
See Note 3 in regards to leased system and leased system under construction.
General plant consists of a warehouse, furniture, fixtures, equipment, and vehicles.
 
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As a result of the settlement of the Partnership’s rate case approved by the PUCT under Docket No. 41474, effective May 1, 2014, provision for depreciation on electric plant is computed using composite straight-line rates as follows:

Transmission plant	  	 	1.69%-3.15%	  	
Distribution plant	  	 	1.74%-5.96%	  	
General plant	  	 	0.80%-5.12%	  	
(5) Regulatory Assets—Liabilities
Deferred Charges—Regulatory Assets, Net
Regulatory assets represent probable future revenues associated with costs that are expected to be recovered from customers through the regulatory ratemaking process. In addition to the regulatory assets that are specially disclosed on the face of the Consolidated Balance Sheet, the table below provide detail of other deferred charges that are included on the Partnership’s Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013.
Net deferred costs recoverable in future years as of September 30, 2014 and December 31, 2013 are comprised of:

 	 	September 30, 2014	 	 	December 31, 2013	 	
(In thousands)	 	Gross
Carrying
Amount	 	 	Accumulated
Amortization	 	 	Net
Carrying
Amount	 	 	Gross
Carrying
Amount	 	 	Accumulated
Amortization	 	 	Net
Carrying
Amount	 	
Deferred financing costs	 	$	1,069	  	 	$	(254	) 	 	$	815	  	 	$	1,069	  	 	 	(214	) 	 	$	855	  	
Deferred costs recoverable in future years	 				 				 				 				 				 				
Inception operating costs	 	 	23,793	  	 	 	—  	  	 	 	23,793	  	 	 	23,793	  	 	 	—  	  	 	 	23,793	  	
Rate case costs	 	 	5,234	  	 	 	—  	  	 	 	5,234	  	 	 	5,249	  	 	 	—  	  	 	 	5,249	  	
Postretirement benefit costs	 	 	4,194	  	 	 	—  	  	 	 	4,194	  	 	 	4,194	  	 	 	—  	  	 	 	4,194	  	
Study costs	 	 	3,574	  	 	 	(220	) 	 	 	3,354	  	 	 	3,106	  	 	 	—  	  	 	 	3,106	  	
Under-recovered TCRF	 	 	3,191	  	 	 	—  	  	 	 	3,191	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	
Transition to competition	 	 	1,661	  	 	 	(50	) 	 	 	1,611	  	 	 	148	  	 	 	—  	  	 	 	148	  	
Advanced metering costs	 	 	24	  	 	 	—  	  	 	 	24	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net deferred charges and regulatory assets	 	$	42,740	  	 	$	(524	) 	 	$	42,216	  	 	$	37,559	  	 	$	(214	) 	 	$	37,345	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
The Partnership filed a rate case with the PUCT under Docket No. 41474 (2013 rate case) to adjust the retail delivery tariff for the Stanton, Brady, and Celeste customers. The application was based on a test year ended December 31, 2012, with an effective date of May 1, 2014. The final order was issued January 23, 2014. The final order of the 2013 rate case addressed recovery for costs associated with the transition to competition and certain study costs. Recovery of those costs began when the new tariff went into effect on May 1, 2014. In addition to those costs, the recovery of the 2013 rate case expenses was proposed under a separate docket—PUCT Docket No. 41723.
The inception operating costs of approximately $23.8 million at September 30, 2014 and December 31, 2013 represent operating costs incurred from inception through December 31, 2007. The 2013 rate case settlement established that the Partnership may seek recovery in a future rate case, pursuant to the mechanism established in Docket Nos. 21591 and 27556, of the inception operating costs plus related return on rate base. If the Partnership is successful in recovery of such costs in future rates, provisions of the master lease agreement with SDTS will be adjusted to compensate SDTS for cost recovery. Consequently, the Partnership has recorded a corresponding liability in financing obligation.
 
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Regulatory Liabilities
Regulatory liabilities represent probable future refunds associated with the over-recovery of costs recovered from customers through the regulatory ratemaking process. As of September 30, 2014 and December 31, 2013, approximately $3.4 million and $673,000, respectively, are included in accounts payable and accrued liabilities on the Consolidated Balance Sheets. The following table provides a detail of the regulatory liabilities.

 	  	September 30,
2014	 	  	December 31,
2013	 	
(In thousands)	  	Carrying
Amount	 	  	Carrying
Amount	 	
Power cost recovery factor (Note 9)	  	$	2,168	  	  	$	—  	  	
Energy efficiency cost recovery factor	  	 	1,204	  	  	 	673	  	
	  	 	 	 	  	 	 	 	
Regulatory liabilities	  	$	3,372	  	  	$	673	  	
	  	 	 	 	  	 	 	 	
The PUCT has designated certain tariffs Transmission Cost Recovery Factor (TCRF) and Energy Efficiency Cost Recovery Factor (EECRF) as reconcilable, which means the differences between amounts billed under these tariffs and the related incurred costs are, deferred as either a regulatory asset or liability. Accordingly, at prescribed intervals, future tariffs are adjusted to repay regulatory liabilities or collect the regulatory assets.
(6) Related-Party Transactions
The Partnership made payments associated with the lease of the T&D assets to SDTS of approximately $102.3 million and $37.1 million during the nine month periods ended September 30, 2014 and 2013, respectively. Accrued interest included in due to affiliates on the Partnership Consolidated Balance Sheets related to the leases was approximately $16.2 million and $11.1 million as of September 30, 2014 and December 31, 2013, respectively, see Notes 2 and 3.
The Partnership received payments throughout the period related to the acquisition of gross electric plant and equipment related to its existing asset build out on the T&D assets from SDTS of approximately $144.1 million and $81.5 million for the nine month periods ended September 30, 2014 and 2013, respectively.
The Partnership received payments of approximately $3.6 million and $2.1 million during the nine months ended September 30, 2014 and 2013, respectively, for contracted services, direct labor, materials and supervision associated with the construction of the 345 kV transmission loop project in the panhandle of Texas and interconnections from SPLLC. These costs for this project are included on the Consolidated Balance Sheet under property, plant and equipment—net as leased system.
An affiliate of the Partnership provides services to the Partnership at contractually agreed upon rates per hour and set amounts for infrastructure support. Charges for such services included in general and administrative expense in the accompanying Consolidated Statements of Operations amounted to approximately $2.3 million and $1.6 million for the nine month periods ended September 30, 2014 and 2013, respectively. Accrued fees included in due to affiliates on the Partnership Consolidated Balance Sheets related to these charges were approximately $274,000 and $738,000 as of September 30, 2014 and December 31, 2013, respectively.
(7) Allocation of Partners’ Capital
Revenues, income, gains, losses, expenditures, deductions, credits and distributions, as defined in the partnership agreement, are allocated 1 percent to the general partner and 99 percent to the limited partner.
 
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(8) Credit Facility
On May 15, 2014, the Partnership entered into an unsecured revolving credit facility of $5.0 million with Amegy Bank. The credit facility accrues interest on the outstanding balance at the Prime Rate. Currently Prime Rate is at 3.25%. In addition to the interest on the outstanding balance, interest is accrued at 0.35% for the unused portion of the credit facility. The revolving credit facility expires on May 15, 2017.
As of September 30, 2014, the partnership had $5.0 million outstanding on the revolving credit facility which was repaid on October 2, 2014. The interest expense and fees for the revolving credit facility were approximately $40,000 and $87,000 for the nine month periods ended September 30, 2014 and 2013, respectively.
The agreement requires maintenance of certain financial ratios and imposes certain restricted covenants. The Partnership was in compliance with all covenants as of September 30, 2014.
On March 23, 2012, the Partnership entered into a revolving credit facility of $5.0 million, as amended, with PlainsCapital Bank which was set to expire on May 31, 2014. On May 15, 2014, the Partnership cancelled the credit facility with PlainsCapital Bank. The bank returned the letter of credit provided by the affiliate to the Partnership upon cancellation.
(9) Purchased Power
Prior to May 31, 2014, the last day before competition of the move to competition, the Partnership purchased all of its electric power pursuant to long-term wholesale electric power contracts with Lower Colorado River Authority (LCRA) and Garland Power and Light (Garland).
The contracts for power covered kWh usage, kW demand levels, and transmission, scheduling and ancillary services along with energy and fuel costs. The Partnership’s purchased power costs fluctuate primarily with the price of the fuel and usage. All costs associated with the purchased power were passed through to the end use customer.
The Partnership had a contract with the Southwest Public Service Company (SPS) to purchase power prior to December 31, 2013. The contract with SPS was terminated effective December 31, 2013. The Garland contract and the LCRA contract were terminated on May 31, 2014 upon moving to competition.
After the move to competition and reconciliation of revenue received with costs incurred, the Partnership has an over-recovery balance of $2.2 million. The over-recovery balance is included in accounts payable and accrued liabilities on the Consolidated Balance Sheets as of September 30, 2013.
(10) Transmission Cost of Service
All Transmission service providers (TSP) within the Electric Reliability Council of Texas (ERCOT) provide open access transmission service and the costs are ultimately passed through to end-use customers. The PUCT regulates the transmission rates that are charged by the ERCOT TSPs. The Partnership is billed based on the Partnership’s pro rata share, during the prior year, of the average of ERCOT coincident peak demand for the months of June, July, August, and September (ERCOT 4CP), excluding the portion of coincident peak demand attributable to wholesale storage load. Each TSP files a tariff for transmission service to establish its rates, calculated as the TSP’s commission-approved transmission cost of service, or revenue requirement, divided by the aggregate ERCOT 4CP during the prior year. Therefore, the monthly transmission service charge to be paid by the Partnership is the product of each TSP’s monthly rate as specified in its tariff and the Partnership’s previous year’s share of the aggregate ERCOT 4CP.
Taking power over the ERCOT network requires the Partnership to pay fees regulated by the PUCT. The annual charges to use the ERCOT transmission network cover the period from January 1 through December 31 of each year. Because the use of the network is governed by ERCOT and falls under the jurisdiction of the PUCT, a contract is not required with each ERCOT TSP.
 
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(11) Postretirement Benefits
The Partnership provides continued major medical and dental coverage to retired employees and their dependents meeting certain eligibility requirements. The Partnership’s postretirement health care benefit plan provides prescription drug coverage. The Medicare Prescription Drug Improvement and Modernization Act of 2003 includes a federal subsidy for plans that offer prescription drug benefits that are actuarially equivalent to Medicare Part D. The Partnership and the actuarial advisors have determined that the prescription drug coverage provided by the Partnership’s postretirement health care benefit plan is actuarially equivalent to Medicare Part D, and accordingly, the subsidy provides some relief for ongoing retiree medical costs.
The Partnership is required to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability on its balance sheet. Financial Accounting Standards Board (FASB) guidance requires an entity to include items that have not yet been recognized as net periodic postretirement benefit cost as a component of accumulated other comprehensive income. However, for a regulated utility this cost is allowed to be recorded as a regulatory asset if: (i) the utility has historically recovered and currently recovers postretirement benefit plan expenses in its electric rates; and (ii) there is no negative evidence that the existing regulatory treatment will change. The Partnership has recorded the unrecognized components of net periodic postretirement benefit cost as a regulatory asset as these expenses are probable of future recovery.
(12) Commitments and Contingencies
Leases
The Partnership has various obligations under operating leases pertaining to equipment, facilities and office space. The following is a schedule of future minimum lease payments required under operating leases with a term of greater than 12 months at inception as of September 30, 2014:

(In thousands)	  	 	 	
Year Ending December 31:	  				
2014—Q4	  	$	76	  	
2015	  	 	368	  	
2016	  	 	297	  	
2017	  	 	67	  	
2018	  	 	27	  	
	  	 	 	 	
	  	$	835	  	
	  	 	 	 	
Regulatory proceedings
The Partnership is involved in various legal and regulatory proceedings. While management is unable to predict the outcome of these proceedings, management does not believe that the ultimate resolution will have a materially adverse effect on the Partnership’s results of operation, cash flows or financial position.
(13) Subsequent Events
On October 17, 2014, the PUCT approved Docket No. 41723 regarding rate case costs for the 2013 rate case. The Partnership will begin recovery of those costs with a rider in the distribution tariff effective on December 1, 2014.
The Partnership has evaluated subsequent events from the Consolidated Balance Sheets date through November 12, 2014, the date at which the Consolidated Financial Statements were made available to be issued, and determined there are no other items to disclose.
 
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 REPORT OF INDEPENDENT AUDITORS
The Partners
Sharyland Utilities, L.P.
We have audited the accompanying balance sheets of Sharyland Utilities, L.P. as of December 31, 2013 and 2012, and the related statements of operations, partners’ capital and cash flows for the years then ended. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sharyland Utilities, L.P. as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Ernst & Young LLP
Dallas, Texas
April 15, 2014
 
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SHARYLAND UTILITIES, L.P.
 Consolidated Balance Sheets
(In thousands)

 	  	December 31,	 	
 	  	2013	 	 	2012	 	
Assets	  				 				
Property, Plant and Equipment—net	  	$	1,076,219	  	 	$	719,569	  	
Current Assets	  				 				
Cash and cash equivalents	  	 	8,379	  	 	 	7,192	  	
Short-term investments	  	 	—  	  	 	 	623	  	
Prepayments and other current assets	  	 	1,108	  	 	 	961	  	
Accounts receivable, net	  	 	28,240	  	 	 	16,741	  	
Due from affiliates	  	 	31,256	  	 	 	8,598	  	
	  	 	 	 	 	 	 	 	
Total current assets	  	 	68,983	  	 	 	34,115	  	
	  	 	 	 	 	 	 	 	
Goodwill	  	 	1,100	  	 	 	1,100	  	
Deferred Charges—Regulatory Assets, net	  	 	37,345	  	 	 	37,735	  	
	  	 	 	 	 	 	 	 	
Total Assets	  	$	1,183,647	  	 	$	792,519	  	
	  	 	 	 	 	 	 	 	
Partners’ Deficit and Liabilities	  				 				
Partners’ Deficit	  				 				
General partner	  	$	(131	) 	 	$	(127	) 	
Limited partner	  	 	(8,145	) 	 	 	(9,681	) 	
	  	 	 	 	 	 	 	 	
Total partners’ deficit	  	 	(8,276	) 	 	 	(9,808	) 	
	  	 	 	 	 	 	 	 	
Long Term Financing Obligation	  	 	1,074,316	  	 	 	741,443	  	
OPEB and Other Liabilities	  	 	10,881	  	 	 	13,521	  	
	  	 	 	 	 	 	 	 	
Total Capitalization	  	 	1,076,921	  	 	 	745,156	  	
	  	 	 	 	 	 	 	 	
Commitments and Contingencies	  	 	—  	  	 	 	—  	  	
	  	 	 	 	 	 	 	 	
Current Liabilities	  				 				
Accounts payable and accrued liabilities	  	 	51,317	  	 	 	29,595	  	
Purchased power payable	  	 	8,241	  	 	 	7,213	  	
Current portion of financing obligation	  	 	33,974	  	 	 	6,350	  	
Due to affiliates	  	 	11,879	  	 	 	3,356	  	
Current state margin tax payable	  	 	1,315	  	 	 	849	  	
	  	 	 	 	 	 	 	 	
Total current liabilities	  	 	106,726	  	 	 	47,363	  	
	  	 	 	 	 	 	 	 	
Total Partners’ Deficit and Liabilities	  	$	1,183,647	  	 	$	792,519	  	
	  	 	 	 	 	 	 	 	
See accompanying notes to the financial statements.
 
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SHARYLAND UTILITIES, L.P.
 Consolidated Statements of Operations
(In thousands)

 	  	Years Ended
December 31,	 	
	  			
 	  	2013	 	 	2012	 	
Revenues	  	$	217,523	  	 	$	150,199	  	
			
Operating Expenses	  				 				
Purchased power	  	 	100,207	  	 	 	73,336	  	
Distribution expense	  	 	22,394	  	 	 	19,782	  	
Transmission expense	  	 	4,721	  	 	 	1,837	  	
General and administrative expense	  	 	18,064	  	 	 	14,990	  	
Depreciation and amortization	  	 	21,360	  	 	 	11,943	  	
	  	 	 	 	 	 	 	 	
Total operating expenses	  	 	166,746	  	 	 	121,888	  	
	  	 	 	 	 	 	 	 	
Operating Income	  	 	50,777	  	 	 	28,311	  	
			
Other Income (Expense)	  				 				
Interest and dividend income	  	 	1	  	 	 	23	  	
Interest expense, net	  	 	(50,098	) 	 	 	(36,959	) 	
Other income	  	 	671	  	 	 	199	  	
Tax reimbursements for Contributions In Aid of Construction	  	 	1,488	  	 	 	1,653	  	
	  	 	 	 	 	 	 	 	
Total other expense	  	 	(47,938	) 	 	 	(35,084	) 	
			
Net Income (Loss) Before Income Taxes	  	 	2,839	  	 	 	(6,773	) 	
Income Tax Expense	  	 	1,287	  	 	 	702	  	
	  	 	 	 	 	 	 	 	
Net Income (Loss)	  	$	1,552	  	 	$	(7,475	) 	
	  	 	 	 	 	 	 	 	
See accompanying notes to the financial statements.
 
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SHARYLAND UTILITIES, L.P.
 Consolidated Statements of Partners’ Deficit
Years ended December 31, 2013 and 2012
(In thousands)

 	  	General
Partner	 	 	Limited
Partner	 	 	Total
Partners’
Deficit	 	
Balance at December 31, 2011	  	$	(52	) 	 	$	(2,281	) 	 	$	(2,333	) 	
Net loss	  	 	(75	) 	 	 	(7,400	) 	 	 	(7,475	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Balance at December 31, 2012	  	 	(127	) 	 	 	(9,681	) 	 	 	(9,808	) 	
Partners distributions	  	 	(20	) 	 	 	—  	  	 	 	(20	) 	
Net income	  	 	16	  	 	 	1,536	  	 	 	1,552	  	
	  	 	 	 	 	 	 	 	 	 	 	 	
Balance at December 31, 2013	  	$	(131	) 	 	$	(8,145	) 	 	$	(8,276	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	
See accompanying notes to the financial statements.
 
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SHARYLAND UTILITIES, L.P.
 Consolidated Statements of Cash Flows
(In thousands)

 	  	Years Ended
December 31,	 	
 	  	2013	 	 	2012	 	
Cash Flows from Operating Activities	  				 				
Net Income (Loss)	  	$	1,552	  	 	$	(7,475	) 	
Adjustments to reconcile net loss to net cash provided by operating activities:	  				 				
Depreciation and amortization	  	 	21,360	  	 	 	11,943	  	
Amortization of deferred financing costs	  	 	54	  	 	 	53	  	
Expensing of 2006 rate case costs (See note 5)	  	 	931	  	 	 	—  	  	
Changes in assets and liabilities:	  				 				
Short-term investments	  	 	623	  	 	 	(5	) 	
Prepayments and other current assets	  	 	(147	) 	 	 	(16	) 	
Accounts receivable	  	 	(11,499	) 	 	 	(2,320	) 	
Due from affiliates	  	 	(22,658	) 	 	 	(4,588	) 	
Accounts payable, accrued liabilities and other	  	 	23,239	  	 	 	18,043	  	
Purchased power payable	  	 	1,028	  	 	 	662	  	
Due to affiliates	  	 	8,523	  	 	 	233	  	
State margin tax payable	  	 	466	  	 	 	(121	) 	
Deferred charges—regulatory assets	  	 	(4,752	) 	 	 	(4,200	) 	
	  	 	 	 	 	 	 	 	
Net cash provided by operating activities	  	 	18,720	  	 	 	12,209	  	
	  	 	 	 	 	 	 	 	
Cash Flows from Investing Activities	  				 				
Additions to general plant	  	 	(3,206	) 	 	 	(3,934	) 	
	  	 	 	 	 	 	 	 	
Net cash used in investing activities	  	 	(3,206	) 	 	 	(3,934	) 	
	  	 	 	 	 	 	 	 	
Cash Flows from Financing Activities	  				 				
Partners’ distributions	  	 	(20	) 	 	 	—  	  	
Repayments of financing obligation	  	 	(14,307	) 	 	 	(6,211	) 	
	  	 	 	 	 	 	 	 	
Net cash used in financing activities	  	 	(14,327	) 	 	 	(6,211	) 	
	  	 	 	 	 	 	 	 	
Net increase in cash and cash equivalents	  	 	1,187	  	 	 	2,064	  	
Cash and cash equivalents at beginning of period	  	 	7,192	  	 	 	5,128	  	
	  	 	 	 	 	 	 	 	
Cash and Cash Equivalents at end of period	  	$	8,379	  	 	$	7,192	  	
	  	 	 	 	 	 	 	 	
Supplemental disclosure of cash flow information	  				 				
Cash paid for interest	  	$	41,447	  	 	$	37,486	  	
	  	 	 	 	 	 	 	 	
Cash paid for margin taxes	  	$	795	  	 	$	769	  	
	  	 	 	 	 	 	 	 	
Noncash change in regulatory pension costs	  	$	4,157	  	 	$	(2,333	) 	
	  	 	 	 	 	 	 	 	
Noncash financing obligations incurred	  	$	374,804	  	 	$	385,595	  	
	  	 	 	 	 	 	 	 	
See accompanying notes to the financial statements.
 
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SHARYLAND UTILITIES, L.P.
 Notes to the Consolidated Financial Statements
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
Sharyland Utilities, L.P. (the Partnership or SULP) was organized as a Texas limited partnership on November 3, 1998, as an electrical distribution utility located in Hidalgo County, Texas. The Partnership currently serves approximately 50,000 metered and unmetered accounts in 29 counties throughout Texas. In addition, the Partnership also serves approximately 1,625 metered accounts and unmetered street lights as the official agent and operator for the City of Farmersville municipal electric utility system. The Partnership’s customers are principally residential, commercial and irrigation customers located in the cities of Mission and McAllen, Texas in the outlying areas of Hidalgo County in south Texas, in the Midland-Stanton area of west Texas, in the central Texas area around Brady, and in northeast Texas in Hunt, Collin and Fannin Counties. The Partnership is also engaged in the transmission of electricity throughout Texas. Those transmission activities include: a 138 kV looped system 305 miles in length through SU FERC, L.L.C. (SU FERC) (the sole subsidiary) and through a 150 MW high voltage direct current transmission interconnection called the Sharyland DC Tie with Mexico and a 298 mile 345 kV transmission loop in the Texas panhandle around Amarillo, Texas.
The Partnership leases all of its transmission and distribution assets from a related party, Sharyland Distribution & Transmission Services (SDTS) and its subsidiaries, under Master Lease Agreements. See Note 1 (q).
On January 29, 2009, the Public Utility Commission of Texas (PUCT) designated the Partnership as one of the Transmission Service Providers (TSPs) to construct and operate the transmission facilities necessary to deliver the electricity generated from renewable energy sources in the Texas Panhandle and South Plains as part of the Competitive Renewable Energy Zone (CREZ) initiative. In 2013 this project was completed in phases with the facilities being energized in April, August and the final segments in November. After each phase, the Partnership filed for a rate recovery (i.e. Interim Transmission Cost of Service (TCOS) filing) on segments energized. The first interim TCOS filing was submitted to the PUCT on April 30, 2013 (Docket 41438) with approval received on June 19, 2013, the second was filed on August 27, 2013 (Docket 41794) with approval received on October 17, 2013 and the final interim TCOS filing for major CREZ related assets was made on January 2, 2014 (Docket 42133) with approval received from the PUCT on February 25, 2014.
On August 17, 2012, the PUCT approved the retail competition plan filed by the Partnership that will transition its Stanton, Brady, and Celeste service territories to retail electric competition starting on May 1, 2014. The Partnership’s retail customers in these service territories currently do not have the option to purchase their power in the competitive retail electric markets. Their electric rates are still regulated and set by the PUCT. In order to receive new “wire only” rates to serve these customers in the future, the Partnership filed a Rate Case using 2012 “test year” data on May 31, 2013 (Docket 41474). During the balance of 2013 the rate case was litigated, and a final settlement was reached and rates were approved by the PUCT at its meeting held on January 23, 2014. These new rates go into effect as each customer’s meters are read after May 1, 2014. In addition, to achieve this movement of customers, the Partnership constructed various interconnections with the Electric Reliability Council of Texas (ERCOT) system and disconnected from the Southwest Power Pool (SPP) system in December of 2013.
On March 29, 2013, SDTS purchased from Southwestern Public Service Company, a subsidiary of Xcel Energy, approximately 66 miles of existing 345 kV transmission lines and two substations located near Stanton, Texas for approximately $37.1 million. The application for sale, transfer or merger (STM) was approved by the PUCT under Docket No. 41430. The Partnership began making plans to move this asset into operations,
 
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scheduled for mid-2015, at which time it will be incorporated in the existing lease agreements. As of December 31, 2013 these transmission lines are included on the Consolidated Balance Sheet under Property, plant and equipment, net as leased system held for future use.
In 2012, ERCOT instructed the Partnership to move forward on the construction an additional 150 MW high voltage direct current transmission interconnection at its original Sharyland DC Tie site in Hidalgo County, Texas. This project is scheduled for completion in mid-2014. These transmission interconnections are included on the Consolidated Balance Sheet under Property, plant and equipment, net as leased system under construction.
(b) Principles of Consolidation and Presentation
All significant intercompany balances and transactions have been eliminated. The Partnership maintains accounting records in accordance with the uniform system of accounts, as prescribed by the Federal Energy Regulatory Commission (FERC). The Partnership’s financial statements reflect the effects of the different rate making principles mandated by the FERC and PUCT regulating its operations.
(c) Use of Estimates
The preparation of the Partnership’s consolidated financial statements in accordance with accounting principles generally accepted in the United States (GAAP) require management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from these estimates.
(d) Regulatory
The Partnership accounts for its regulated operations in accordance with applicable regulatory accounting guidance under Accounting Standards Codification (ASC) Topic 980 – Regulated Operations. The economic effects of regulation can result in a regulated Partnership recording assets for costs that have been or are expected to be approved for recovery from customers in a future period or recording liabilities for amounts that are expected to be returned to customers in the rate-making process in a period different from the period in which the amounts would be recorded by an unregulated enterprise. Accordingly, the Partnership records assets and liabilities that result from the regulated ratemaking process that would not be recorded under GAAP for non-regulated entities. Regulatory assets and liabilities are amortized consistent with the treatment of the related cost in the ratemaking process. Management continually assesses whether regulatory assets are probable of future recovery by considering factors such as applicable regulatory changes, recent rate orders applicable to other regulated entities and the status of any pending or potential legislation. Additionally, management continually assesses whether any regulatory liabilities have been incurred. Based on this continual assessment, management believes the existing regulatory assets are probable of recovery and that no regulatory liabilities, other than those recorded, have been incurred. These regulatory assets and liabilities are primarily classified in the Consolidated Balance Sheets as Regulatory Assets and Other Current Assets, respectively. The Partnership periodically evaluates the applicability of regulatory accounting treatment by considering factors such as regulatory changes and the impact of competition. See Note 5.
For regulatory purposes the operations of SULP and the assets of SDTS are viewed as one set for regulatory reporting. The Partnership cannot be removed from an operational capacity without prior approval from the PUCT.
(e) Cash and Cash Equivalents
The Partnership considers all short-term, highly liquid investments with original maturities of three months or less to be cash equivalents.
 
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(f) Property, plant, equipment, and depreciation—net
Property, plant and equipment is stated at the original cost of acquisition or construction, which may include the cost of contracted services, direct labor, materials, acquisition adjustments, capitalized interest and overhead items. The Partnership leases transmission and distribution assets from SDTS. See Note 2.
When property is retired, the cost of such property, less salvage, is credited to property, plant and equipment and charged to accumulated depreciation.
Maintenance and repairs are charged to expense. Betterments and improvements of assets subject to leases are billed to the lessor and reimbursed in accordance with the lease agreements. Betterments and improvements not subject to leases are capitalized. See Note 1(q) for more information.
Provision for depreciation of property, plant, and equipment is computed using composite straight-line rates as follows:

Property, Plant and Equipment	  		
Transmission and distribution	  	2.50% - 3.10%	
Transportation and equipment	  	14.00% -33.00%	
Software	  	20.00%	
Other	  	3.00%	
(g) Impairment of Long-lived Assets
The Partnership evaluates impairment of its long-lived assets (including regulatory assets) and certain intangible assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss shall be recognized only if the carrying amount of a long-lived asset is not recoverable through the expected future cash flows. Regulatory assets are charged to expense in the period in which they are no longer probable of future recovery.
(h) Goodwill
Goodwill at December 31, 2013 is $1.1 million. The Partnership annually evaluates its goodwill balances for impairment or more frequently as impairment indicators arises. The Partnership performed impairment testing at December 31, 2013, noting no impairment.
(i) Investments
The Partnership accounts for its 10 percent investment in SDTS using the cost method. The Partnership has no value assigned to this investment. At this time, the Partnership has the right of distribution only after the majority owner’s return of capital.
(j) Presentation of CREZ Expenses
The Partnership provides certain services to Sharyland Projects L.L.C (SPLLC), a subsidiary of SDTS, for the CREZ Project. The recovery for subsequent reimbursement of costs is without any profit mechanism. The costs for the CREZ project are included on the Consolidated Balance Sheet under Property, plant and equipment, net as Leased System.
(k) Income Taxes
The Partnership records no federal income taxes since these taxes are the responsibility of individual partners. Effective January 1, 2007, the Partnership is subject to the gross margin tax enacted by the State of
 
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Texas. The Partnership recorded a margin tax expense of approximately $1.3 million and approximately $702,000 during the years ended December 31, 2013 and 2012, respectively. The Partnership has no deferred tax assets or liabilities at December 31, 2013 or 2012.
(l) Revenue Recognition
The Partnership records revenue based on amounts billed to customers and unbilled amounts based upon an estimate of the revenues to be received for service delivered from the latest billing through the end of the period.
(m) Fair Value of Financial Instruments
Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures , defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. The Partnership follows ASC 820 in its valuation of its marketable securities. ASC 820 defines fair value as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 classifies the levels used to measure fair value into the following hierarchy:
Level 1 —Quoted prices in active markets for identical assets and liabilities.
Level 2 —Valuations based on one or more quoted prices in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs that are observable other than quoted prices for the asset or the liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 —Valuations based on inputs that are unobservable and significant to the overall fair value measurement. See Note 4.
(n) Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consist primarily of trade receivables from customers. In the normal course of business, credit is extended to customers on a short-term basis. The Partnership provides an allowance for doubtful accounts receivable that are estimated to be uncollectible based on our collection experience.
As of December 31, 2013 and 2012, the allowance for doubtful accounts was approximately $84,000 and approximately $89,000, respectively. Bad debt expense for the year ended December 31, 2013 and 2012 was approximately $162,000 and approximately $104,000, respectively.
Unbilled accounts receivable is comprised of estimated amounts of energy and services delivered from the latest billing through the end of the period. Unbilled revenue of approximately $3.7 million and $3.4 million is included in accounts receivable as of December 31, 2013 and 2012, respectively.
(o) Asset Retirement Obligation
The Partnership has identified, but not recognized, asset retirement obligation liabilities related to electric transmission and distribution assets, as a result of certain easements on property on which the Partnership has assets. Generally, such easements are perpetual and require only the retirement and removal of the assets upon cessation of the property’s use. Management does not estimate the retirement for such easements because the Partnership plans to use the facilities indefinitely. The retirement obligation would only be recognized if and when use of the easements are abandoned or ceased, which is not expected. The Partnership does not currently collect funds related to asset removal costs through rates.
 
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(p) Purchased Power Costs
The Partnership accrues for its purchased power costs based on actual usage for the period. The Partnership’s current tariffs for electric service include power cost recovery clauses under which electric rates charged to retail customers are adjusted monthly to collect actual purchased power costs incurred in providing service.
(q) Master Lease Agreements
The Partnership leases all of its transmission and distribution assets from a related party, SDTS and its subsidiaries, under Master Lease Agreements (MLA). Also under these same MLAs, SDTS is responsible for funding all prudently incurred electric plant capital expenditures deemed necessary to serve customers by the Partnership. In accordance with the lease agreements, the Partnership is responsible for the maintenance and the operation of the System and for the compliance with all regulatory requirements of the PUCT, the FERC, and any other regulatory entity with jurisdiction over the system. The lease agreements obligate the Partnership to pay all property-related expenses, including maintenance, repairs, taxes on equipment in service, insurance, and to comply with the terms of the secured credit facilities and secured-term loan, if any, affecting the leased assets.
On December 31, 2009, the Partnership and SDTS entered into a master lease agreement, as amended, for the transmission and distribution assets located in and around McAllen, Texas. The term of the agreement expires on December 31, 2029. The agreement includes annual fixed payments and additional payments based upon a percentage of revenue earned by the Partnership on the leased assets in excess of a specified annual base amount, which the percentage decreases over the life of the lease. The rate used for additional payments will decrease from 37% to 25% over the term of the agreement. Base payments were approximately, $6.5 million and $5.5 million during the years ended December 31, 2013 and 2012, respectively, and the percentage component was 37% of the Partnership’s revenues above the base amount for both years.
On July 13, 2010, the Partnership and SDTS entered into a lease agreement, as amended, for the transmission and distribution assets located mainly in and around the cities of Stanton, Brady, and Celeste. The term of the agreement expires on December 31, 2015. The agreement includes annual fixed payments and additional payments based upon a percentage of revenue earned by the Partnership on the leased assets in excess of specified base amounts, which percentage decreases over the life of the lease. The rate used for additional payments will vary from 29% to 24% over the term of the agreement. During the years ended December 31, 2013 and 2012, annual base payments were approximately $21.9 million and $18.6 million, and the percentage rent component was 25% and 24% respectively of the Partnership’s revenues above the base amount, respectively.
On July 13, 2010, the Partnership’s consolidated subsidiary, SU FERC, and SDTS FERC, L.L.C. (SDTS FERC) also entered into a lease agreement, as amended, for the lease of certain transmission assets that are regulated by the FERC. The lease agreement expires on December 31, 2015. During the years ended December 31, 2013 and 2012, annual payments were approximately $6.6 million.
On June 20, 2011, the Partnership and SPLLC entered into a CREZ master system lease agreement, as amended, to construct and lease the CREZ Project. The term of the agreement expires on December 31, 2020. On April 29, 2013, August 27, 2013 and November 14, 2013, significant portions of the CREZ Project subject to the CREZ lease were completed and placed in service. As a result, consistent with the lease, the Partnership and SPLLC negotiated a rent supplement to provide for annual fixed payments and additional payments based upon a percentage of revenue earned by the Partnership on the leased assets in excess of specified annual base amounts, which percentage varies over the life of the lease term from 37% to 29%. During the year ended December 31, 2013, the fixed base payments were approximately $21.8 million, and the percentage payment component was 29% of the Partnership’s revenues above the base amount.
The leases are subject to failed sale-leaseback accounting. See Note 2.
 
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The Partnership is also subject to certain restrictive covenants, including indebtedness limits, contained in the lease agreements. The Partnership was in compliance with all covenants at December 31, 2013.
(2) Failed Sale-Leaseback—Financing Obligation
As noted in significant accounting policies Note 1(q), the Partnership leases all of its transmission and distribution facilities (the System) from a related party, SDTS. SDTS has legal title to the System. The Partnership, as a managing member of SDTS, has the exclusive power and authority on behalf of SDTS to manage, control, administer, and operate the properties, and business affairs of SDTS in accordance with the limited liability company agreement governing SDTS. These rights and obligations constitute continuing involvement, which results in failed sale-leaseback (financing accounting). Under failed sale-leaseback accounting, the Partnership is deemed owner of the assets under all master lease agreements, including assets currently under construction. Consequently, the System assets, including assets currently under construction and corresponding financial obligations are included in the Partnership’s Consolidated Balance Sheet. The leases are considered a failed sale-leaseback (financing) due to the Partnership’s continuing involvement in SDTS and due to the ongoing involvement in the construction of the System as defined by ASC Topic 840, Accounting for Leases.
Approximately $1.1 billion and $741 million are included in long-term financing obligation liabilities related to the failed sale-leaseback (financing), as of December 31, 2013 and 2012, respectively. Approximately $33.9 million and $6.4 million of the failed sale-leaseback (financing) is included in current liabilities due to affiliates as of December 31, 2013 and 2012, respectively.
Included in interest expense is interest on the failed sale-leaseback (financing). Total interest expense on failed sale-leaseback (financing) was $49.6 million and $36.9 million, for the years ended December 31, 2013 and 2012, respectively. The fixed portion of the failed sale-leaseback interest expense was $34.3 million and $24.9 million for the years ended December 31, 2013 and 2012, respectively. The variable portion of the failed sale-leaseback interest expense was $15.3 million and $12.0 million for the years ended December 31, 2013 and 2012, respectively.
As a result of the failed sale-leaseback (financing) transaction, the Partnership accounts for lease payments to the lessor as a financing obligation. Future payments of the financing obligation are as follows:

Fiscal year	  	(In thousands)	 	
2014	  	$	33,974	  	
2015	  	 	28,646	  	
2016	  	 	20,999	  	
2017	  	 	20,453	  	
2018	  	 	18,804	  	
Thereafter	  	 	854,027	  	
	  	 	 	 	
Total financing obligation	  	 	976,903	  	
Less current portion of financing obligation	  	 	(33,974	) 	
Construction Obligation	  	 	107,594	  	
Lease Deferral	  	 	23,793	  	
	  	 	 	 	
Long-term lease obligation	  	$	1,074,316	  	
	  	 	 	 	
The Partnership recorded depreciation expense of approximately $19.3 million and $10.2 million during the years ended December 31, 2013 and 2012, respectively, related to the assets accounted for in accordance with failed sale-leaseback.
 
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(3) Property, plant and equipment—net
The major classes of property, plant and equipment at December 31, 2013 and 2012 are as follows:

 	  	2013	 	 	2012	 	
Property, plant and equipment	  				 				
Leased system—SULP	  	$	1,043,927	  	 	$	338,543	  	
Leased system—SU FERC	  	 	89,024	  	 	 	77,495	  	
General plant	  	 	20,802	  	 	 	17,096	  	
	  	 	 	 	 	 	 	 	
	  	 	1,153,753	  	 	 	433,134	  	
Construction Work in Progress:	  				 				
Leased system under construction	  	 	70,477	  	 	 	449,704	  	
Leased system held for future use	  	 	37,118	  	 	 	—  	  	
General Plant	  	 	612	  	 	 	1,337	  	
	  	 	 	 	 	 	 	 	
	  	 	108,207	  	 	 	451,041	  	
Other	  	 	148	  	 	 	78	  	
	  	 	 	 	 	 	 	 	
Total Property, plant and equipment	  	 	1,262,108	  	 	 	884,253	  	
Accumulated Depreciation—leased system	  	 	(173,495	) 	 	 	(154,113	) 	
Accumulated Depreciation—general plant	  	 	(12,394	) 	 	 	(10,571	) 	
	  	 	 	 	 	 	 	 	
Property, Plant, and Equipment—net	  	$	1,076,219	  	 	$	719,569	  	
	  	 	 	 	 	 	 	 	
See Note 2 in regards to leased system and leased system under construction.
General plant consists of a warehouse, furniture, fixtures, equipment, and vehicles.
(4) Investments
The Partnership’s investments at December 31, 2012 were measured at fair value and primarily consisted of a one year certificate of deposit.
Investments measured at fair value, by level within the hierarchy were as follows: (In thousands)

 	  	December 31, 2012	 	  	December 31, 2012	 	
 	  	Carrying
Value	 	  	Fair
Value	 	  	Carrying
Value	 	  	Fair
Value	 	
 	  	Level 1	 	  	Level 1	 	
Assets	  				  				  				  				
Short-term investments	  	$	—  	  	  	$	—  	  	  	$	623	  	  	$	623	  	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total Assets	  	$	—  	  	  	$	—  	  	  	$	623	  	  	$	623	  	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
(5) Deferred Charges—Regulatory Assets
Regulatory assets represent probable future revenues associated with costs that are expected to be recovered from customers through the regulatory ratemaking process. In addition to the regulatory assets that are specially disclosed on the face of the balance sheet, the tables below provide detail of “Other deferred charges” that are included on the Partnership’s Consolidated Balance Sheet as of December 31, 2013 and 2012.
 
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Net deferred costs recoverable in future years as of December 31, 2013 and 2012 are comprised of:

 	  	December 31, 2013	 	  	December 31, 2012	 	
(In thousands)	  	Gross
Carrying
Amount	 	  	Accumulated
Amortization	 	 	Net
Carrying
Amount	 	  	Gross
Carrying
Amount	 	  	Accumulated
Amortization	 	 	Net
Carrying
Amount	 	
Deferred financing costs	  	$	1,069	  	  	$	(214	) 	 	$	855	  	  	$	1,069	  	  	 	(160	) 	 	$	909	  	
Deferred costs recoverable in future years	  				  				 				  				  				 				
Inception operating costs	  	 	23,793	  	  	 	—  	  	 	 	23,793	  	  	 	23,793	  	  	 	—  	  	 	 	23,793	  	
Rate case costs	  	 	5,249	  	  	 	—  	  	 	 	5,249	  	  	 	1,787	  	  	 	—  	  	 	 	1,787	  	
Postretirement benefit costs	  	 	4,194	  	  	 	—  	  	 	 	4,194	  	  	 	8,370	  	  	 	—  	  	 	 	8,370	  	
Study Costs	  	 	2,580	  	  	 	—  	  	 	 	2,580	  	  	 	2,580	  	  	 	—  	  	 	 	2,580	  	
SPS Transmission Project	  	 	526	  	  	 	—  	  	 	 	526	  	  	 	—  	  	  	 	—  	  	 	 	—  	  	
Transition to Competition	  	 	148	  	  	 	—  	  	 	 	148	  	  	 	—  	  	  	 	—  	  	 	 	—  	  	
Energy Efficiency	  	 	—  	  	  	 	—  	  	 	 	—  	  	  	 	120	  	  	 	—  	  	 	 	120	  	
Cross Valley	  	 	—  	  	  	 	—  	  	 	 	—  	  	  	 	176	  	  	 	—  	  	 	 	176	  	
	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
Total deferred charges and regulatory assets	  	$	37,559	  	  	$	(214	) 	 	$	37,345	  	  	$	37,895	  	  	$	(160	) 	 	$	37,735	  	
	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
During 2013, the Partnership filed a rate case with the PUCT under Docket No. 41474 (2013 rate case) to adjust the retail delivery tariff for the Stanton, Brady, and Celeste customers. The application was based on a test year ended December 31, 2012, with an effective date of May 1, 2014. The final order was issued January 23, 2014.
The inception operating costs of approximately $23.8 million at December 31, 2013 and 2012 represent operating costs incurred from inception through December 31, 2007. The 2013 rate case settlement established that the Partnership may seek recovery in a future rate case, pursuant to the mechanism established in Docket Nos. 21591 and 27556, of the inception operating costs. If the Partnership is successful in recovery of such costs in future rates, provisions of the master lease agreement with SDTS will be adjusted to compensate SDTS for cost recovery. Consequently, the Partnership has recorded a corresponding liability in financing obligation.
The final order for the 2013 rate case severed recovery of rate case expenses into a separate docket—PUCT Docket No. 41723. During 2014, supporting testimony and schedules will be filed seeking recovery of rate case expenses.
As a result of the 2013 rate case, the Partnership recognized a write off of approximately $931,000 in regulatory assets. The management of the Partnership deemed these assets unrecoverable. The assets were unrecovered costs from a 2006 rate case conducted by a previous owner of the Partnership’s current west Texas system. The costs of the rate case are included in general and administrative expenses in the Consolidated Statement of Operations.
The Partnership was ordered by the PUCT to conduct certain studies that are intended to be for the benefit of the customers of Stanton, Brady, and Celeste that the Partnership plans to seek recovery for in future rates.
(6) Related-Party Transactions
The Partnership made payments associated with the lease of the System to SDTS of approximately $56.7 million and $42.8 million during the years ended December 31, 2013 and 2012, respectively. Accrued fixed and variable interest included in Due to Affiliates related to the leases was approximately $11.1 million and $3.1 million at December 31, 2013 and 2012, respectively. (See Notes 2 and 3)
 
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The Partnership received payments throughout the year related to the acquisition of gross electric plant and equipment related to its existing asset build out on the System from SDTS. For the years ended December 31, 2013 and 2012, those amounts were approximately $132.9 million and $53.3 million, respectively.
The Partnership received payments for contracted services, direct labor, materials and supervision associated with the construction of the CREZ project from SPLLC of approximately $3.1 million and $3.3 million during the years ended December 31, 2013 and 2012, respectively. These costs for the CREZ project are included on the Consolidated Balance Sheet under Property, Plant and Equipment—net as leased system.
An affiliate of the Partnership provides services to the Partnership at contractually agreed upon rates per hour and set amounts for infrastructure support. Charges for such services are included in general and administrative expense in the accompanying Consolidated Statements of Operations amounted to approximately $2.0 million and $1.8 million for the years ended December 31, 2013 and 2012, respectively. Accrued fees included in Due to Affiliates related to these charges were approximately $738,000 and $260,000 at December 31, 2013 and 2012, respectively.
(7) Allocation of Partners’ Capital
Revenues, income, gains, losses, expenditures, deductions, credits and distributions, as defined in the partnership agreement, are allocated 1 percent to the general partner and 99 percent to the limited partner.
(8) Credit Facility
On March 23, 2012, the Partnership entered into an unsecured revolving credit facility of $5.0 million with PlainsCapital Bank. The facility accrues interest at a rate of 3 percent plus the greater of the one month London Interbank Offered Rate (LIBOR) or 2 percent.
As of December 31, 2013, the partnership has no amount outstanding on the revolving credit facility. The interest expense and fees for the revolving credit facility were approximately $121,000 and $69,000 for the years ended December 31, 2013 and 2012.
The agreement requires maintenance of certain financial ratios and imposes certain restrictive covenants. The Partnership amended the revolving credit facility in June 2013 with a letter of credit from an affiliate, and received a waiver of the financial covenants for each of the fiscal quarters ending June 30, 2013, September 30, 2013, and December 31, 2013. The interest rate was modified to 1.75 percent plus the greater of the one month LIBOR or 2 percent. The amendment requires the Partnership, to present future covenant proposals to the bank by April 30, 2014. The revolving credit facility expires on May 31, 2014.
(9) Purchased Power
The Partnership purchases all of its electric power pursuant to long-term wholesale electric power contracts with Southwestern Public Service Company (SPS), Lower Colorado River Authority (LCRA) and Garland Power and Light (Garland). The following table presents purchased power by contract as a percentage of totals power purchased:

 	  	2013	 	 	2012	 	
SPS	  	 	51	% 	 	 	62	% 	
LCRA	  	 	8	% 	 	 	12	% 	
Garland	  	 	41	% 	 	 	26	% 	
	  	 	 	 	 	 	 	 	
	  	 	100	% 	 	 	100	% 	

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The contracts for power cover kWh usage, kW demand levels, and transmission, scheduling and ancillary services along with energy and fuel costs. The Partnership’s purchased power costs fluctuate primarily with the price of fuel and usage. Management believes that in the event the contracts are terminated, the Partnership’s operations will not be severely affected as new contracts can be secured at competitive rates with other electric power providers. All costs associated with the purchased power are passed through to the end use customer.
The Partnership’s West Texas service areas are supplied power through contracts with SPS and Garland. The SPS contract has no minimum kWh usage requirements, but does have a minimum charge for kW demand. The Partnership must pay a minimum of 65 percent of the prior 11 month’s highest monthly kW demand usage multiplied by a fixed rate.
The SPS contract allowed the Partnership to purchase all power needed. Energy, demand, ancillary services and scheduling charges are based on fixed factors charged against usage. The Partnership also pays for transmission charges based on its pro rata share of the regulated transmission charges in its applicable zone. Fuel costs paid to SPS are based on SPS’s actual cost of fuel used to generate electricity. The Partnership terminated the SPS contract effective December 31, 2013 and the Partnership will purchase additional power from Garland. The LCRA contract covers all power utilized by the central Texas service areas of the Partnership and permits the Partnership to purchase 100 percent of the power needed to supply the native load of the central Texas service area. LCRA charges the Partnership fixed factors for energy and scheduling services applied to usage. LCRA’s transmission charges are fixed monthly charges regulated by PUCT. Fuel costs paid to LCRA are the Partnership’s pro rata share of the amounts that LCRA actually pays for fuel to generate electricity. The Partnership is required to purchase power from LCRA for its central Texas service area, but has no minimum usage levels. The contract between LCRA and the Partnership expires in 2041; however the Partnership has given notice that the contract is cancelled upon the Partnership moving to competition. Transmission agreements between LCRA and the Partnership will remain in effect, as they are separate from the power supply contract.
Garland provides all power supply requirements, including ancillary and scheduling services, for the service areas in northeast Texas and the City of Farmersville and the ERCOT loads moved from SPP in the West Texas service area. The Partnership is not required to purchase a minimum amount of capacity. The base price per kWh fluctuates with the price of natural gas or other fuel. Fuel costs paid to Garland are based on Garland’s actual cost of fuel used to generate electricity. The Garland contract has been extended through May 31, 2014 or the last day of the month of the implementation of retail competition, whichever is later.
All TSPs within the Electric Reliability Council of Texas (ERCOT) provide open access transmission service and costs are ultimately passed through to end-use customers. The PUCT regulates the transmission rates that are charged by the ERCOT TSPs. The Partnership pays a fixed monthly fee based on the estimated usage submitted prior to the beginning of each year. Taking power over the ERCOT network requires the Partnership to pay fees regulated by the PUCT. The annual charges to use the ERCOT transmission network cover the period from January 1 through December 31 of each year. Because the use of the network is governed by ERCOT and falls under the jurisdiction of the PUCT, a contract is not required with each ERCOT TSP.
(10) Postretirement Benefits
The Partnership provides continued major medical and dental coverage to retired employees and their dependents meeting certain eligibility requirements. The Partnership’s cost to maintain such benefits for the year ended December 31, 2013 and 2012 totaled approximately $1.7 million and $1.3 million respectively. The cost is included in general and administrative expense in the Consolidated Statements of Operations. Retiree contributions to the plan totaled approximately $205,000 and $237,000 for the year ended December 31, 2013 and 2012, respectively. The Partnership expects contributions to fund the benefit plan to be approximately $1.1 million in 2014.
 
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The Partnership’s postretirement health care benefit plan provides prescription drug coverage. The Medicare Prescription Drug Improvement and Modernization Act of 2003 includes a federal subsidy for plans that offer prescription drug benefits that are actuarially equivalent to Medicare Part D. The Partnership and the actuarial advisors have determined that the prescription drug coverage provided by the Partnership’s postretirement health care benefit plan is actuarially equivalent to Medicare Part D, and accordingly, the subsidy provides some relief for ongoing retiree medical costs.
The Partnership is required to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability on its balance sheet. Financial Accounting Standards Board (FASB) guidance requires an entity to include items that have not yet been recognized as net periodic postretirement benefit cost as a component of accumulated other comprehensive income. However, for a regulated utility this information is allowed to be recorded as a regulatory asset if: (i) the utility has historically recovered and currently recovers postretirement benefit plan expenses in its electric rates; and (ii) there is no negative evidence that the existing regulatory treatment will change. The Partnership has recorded the unrecognized components of net periodic postretirement benefit cost as a regulatory asset as these expenses are probable of future recovery.
The components of the postretirement benefit obligation regulatory asset are as follows:

(In thousands)	  	2013	 	  	2012	 	
Defined benefit postretirement plan:	  				  				
Net loss	  	$	4,194	  	  	$	8,370	  	
Prior service costs	  	 	—  	 	  	 	—  	 	
	  	 	 	 	  	 	 	 	
Total	  	$	4,194	  	  	$	8,370	  	
	  	 	 	 	  	 	 	 	
In the postretirement benefit obligation regulatory asset at December 31, 2013, there is a $443,000 net loss that is expected to be recognized as a component of net periodic postretirement benefit cost in 2014.
The following sets forth the obligations, fair value of plan assets and funded status of the postretirement health care plan at December 31, 2013 and 2012:

(In thousands)	  	2013	 	 	2012	 	
Benefit obligation, beginning of year	  	$	18,609	  	 	$	15,305	  	
Service cost	  	 	185	  	 	 	149	  	
Interest cost	  	 	732	  	 	 	651	  	
Benefits paid	  	 	(401	) 	 	 	(365	) 	
Actuarial (gains) losses	  	 	(3,310	) 	 	 	2,869	  	
	  	 	 	 	 	 	 	 	
Benefit obligation, end of year	  	 	15,815	  	 	 	18,609	  	
Fair value of plan assets	  	 	6,452	  	 	 	5,088	  	
	  	 	 	 	 	 	 	 	
Funded status—underfunded	  	 	9,363	  	 	 	13,521	  	
Unrecognized actuarial amounts	  	 	—  	 	 	 	—  	 	
	  	 	 	 	 	 	 	 	
Accumulated postretirement benefit obligation	  	$	9,363	  	 	$	13,521	  	
	  	 	 	 	 	 	 	 	
The following sets forth the assumptions used to determine benefit obligations and net periodic benefit cost:

 	  	2013	 	 	2012	 	
Discount rate used for year-end obligation	  	 	4.93	% 	 	 	4.03	% 	
Discount rate used for net periodic benefit cost	  	 	4.03	% 	 	 	4.38	% 	
Current medical cost trend rate for year-end obligation	  	 	7.50	% 	 	 	8.00	% 	
Current medical cost trend rate for net periodic benefit cost	  	 	8.00	% 	 	 	8.50	% 	
Rate to which the costs trend rate is assumed to decline	  	 	5.00	% 	 	 	5.00	% 	
Rate of return on assets	  	 	3.75	% 	 	 	0.00	% 	
 
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Net benefits paid during the year ended December 31, 2013 approximated $450,000. The following table provides estimates of future benefit payments, which reflect expected future service, as applicable:

(In thousands)	  	 	 	
2014	  	$	483	  	
2015	  	 	520	  	
2016	  	 	556	  	
2017	  	 	593	  	
2018—2023	  	 	3,465	  	
	  	 	 	 	
	  	$	5,617	  	
	  	 	 	 	
The Partnership’s summary of the fair value of plan assets held by the trust as of December 31, 2013 and 2012:

 	  	December 31, 2013	 	  	December 31, 2012	 	
(In thousands)	  	Level 1	 	  	Level 2	 	  	Level 3	 	  	Level 1	 	  	Level 2	 	  	Level 3	 	
Cash and money balances	  	$	—  	  	  	$	1,026	  	  	$	—  	  	  	$	—  	  	  	$	5,088	  	  	$	—  	  	
Equities	  	 	—  	  	  	 	1,399	  	  	 	—  	  	  	 	—  	  	  	 	—  	  	  	 	—  	  	
Fixed income	  	 	—  	  	  	 	3,533	  	  	 	—  	  	  	 	—  	  	  	 	—  	  	  	 	—  	  	
Other	  	 	—  	  	  	 	494	  	  	 	—  	  	  	 	—  	  	  	 	—  	  	  	 	—  	  	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total	  	$	—  	  	  	$	6,452	  	  	$	—  	  	  	$	—  	  	  	$	5,088	  	  	$	—  	  	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
The plan assets are being held in a trust account that is classified as a Level 2 on the fair value hierarchy discussed in Note 1(m). During 2013, the Partnership shifted its asset allocation to include some equities and fixed income investments. The Partnership has adopted a very conservative investment strategy, with the primary objective of capital preservation and modest returns.
(11) Commitments and Contingencies
Leases
The Partnership has various obligations under operating leases pertaining to equipment, facilities and office space. The following is a schedule of future minimum lease payments required under operating leases with a term of greater than 12 months at inception as of December 31, 2013:

(In thousands)	  	 	 	
Year Ending December 31:	  				
2014	  	$	454	  	
2015	  	 	368	  	
2016	  	 	297	  	
2017	  	 	67	  	
2018	  	 	27	  	
	  	 	 	 	
	  	$	1,213	  	
	  	 	 	 	
Regulatory proceedings
The Partnership is involved in various legal and regulatory proceedings. While management is unable to predict the outcome of these proceedings, management does not believe that the ultimate resolution will have a materially adverse effect on the Partnership’s results of operation, cash flows or financial position.
 
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(12) Subsequent Events
On January 2, 2014, the Partnership made a TCOS filing with the PUCT, which was approved on February 25, 2014, in order to include the remainder of the CREZ project. The Partnership and SPLLC are negotiating amendments to the CREZ lease to provide adjustments to fixed payments and percentage payments related to the remainder of the CREZ Project placed-in-service.
On January 23, 2014, the final order for the 2013 rate case was approved by the PUCT under Docket No. 41474. The final order severed as recovery of rate case expenses included in Deferred Charges—Regulatory Assets into a separate docket—PUCT Docket No. 41723. During 2014, supporting testimony and schedules will be filed seeking recovery of rate case expenses. The settlement also established that the Partnership may seek recovery in a future rate case, pursuant to the mechanism established in Docket Nos. 21591 and 27556, of the $23.8 million inception operating costs included in Deferred Charges—Regulatory Assets. See Note 5 for more information.
On April 16, 2014, the Partnership will cease to be the official agent and operator for the City of Farmersville municipal electric utility system and the operational control will be transferred back to the City. The Partnership expects that there will be no material impact to the financial statements in 2014.
The Partnership has evaluated subsequent events from the Consolidated Balance Sheet date through April 15, 2014, the date at which the Consolidated Financial Statements were made available to be issued, and determined there are no other items to disclose.
 
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Through and including                      (the 25th day after the date of this prospectus), all dealers effecting transactions in the Common Stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.
             Shares

Common Stock

PROSPECTUS
 
BofA Merrill Lynch
Citigroup
RBC Capital Markets
Morgan Stanley
                    , 2015

 

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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 31. Other Expenses of Issuance and Distribution.
Set forth below are the expenses (other than underwriting discounts and commissions and the underwriter structuring fee) expected to be incurred in connection with the issuance and distribution of the securities registered hereby. With the exception of the SEC registration fee, the FINRA filing fee and the NYSE listing fee, the amounts set forth below are estimates.

SEC registration fee	  	$	46,480  	  	
FINRA filing fee	  	$	60,500  	  	
NYSE listing fee	  	 	            *	  	
Printing expenses	  	 	            *	  	
Fees and expenses of legal counsel	  	 	            *	  	
Accounting fees and expenses	  	 	            *	  	
Transfer agent and registrar fees	  	 	            *	  	
Miscellaneous	  	 	            *	  	
	  	 	 	 	
Total	  	$	            *	  	

*	To be filed by amendment.	
Item 32. Sales to Special Parties.
See response to Item 33.
Item 33. Recent Sales of Unregistered Securities.
In connection with capital calls due November 23, 2010, January 5, 2011, April 14, 2011, January 11, 2012, June 28, 2012, September 14, 2012, December 13, 2012, January 25, 2013, May 22, 2013 and December 6, 2013, John Hancock Life Insurance Company (U.S.A.), Marubeni Corporation, OpTrust Infrastructure N.A. Inc. and Teachers Insurance and Annuity Association of America and other investors in InfraREIT, L.L.C.’s common shares made aggregate capital contributions of $373,214,090 in exchange for an aggregate of                      common shares. On each such date, InfraREIT, L.L.C. further contributed the additional equity investment to InfraREIT Partners, LP (the Operating Partnership) in exchange for an aggregate of 37,321,409 Class A OP Units of our Operating Partnership and the Operating Partnership issued an equivalent number of Class B OP Units to Hunt-InfraREIT.
On November 23, 2010, January 1, 2011, April 1, 2011, July 1, 2011, October 1, 2011, January 1, 2012, April 1, 2012, July 1, 2012, October 1, 2012, January 1, 2013, April 1, 2013, July 1, 2013, October 1, 2013, January 1, 2014, April 1, 2014, July 1, 2014 and October 1, 2014, the Operating Partnership issued an aggregate of                      Class A OP Units to Hunt-InfraREIT as capital account credits for deemed capital contributions having an aggregate value of approximately $113,623,623. In connection therewith, the Operating Partnership also issued an equivalent number of Class B OP Units to Hunt-InfraREIT. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contingent Consideration and Deemed Capital Contributions.”
On May 1, 2014, the Operating Partnership issued an aggregate of                  LTIP Units as equity incentive awards to certain of our independent directors, who did not pay any cash consideration for the LTIP Units.
 
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The issuances of securities set forth above were made in reliance on the exemptions provided by Section 4(a)(2) of the Securities Act of 1933.
In addition, InfraREIT, Inc. has irrevocably agreed to issue shares of common stock, Class A common stock, redeemable Class A common stock and Class C common stock and the Operating Partnership has irrevocably agreed to issue common units in connection with the Reorganization transactions described in the prospectus contained in this registration statement under the heading “Description of Our Capital Stock—Reorganization.” The issuances of such securities will be made in reliance on the exemptions provided by Section 4(a)(2) of the Securities Act of 1933.
There were no underwriters employed in connection with any of the transactions described in this Item 33.
Item 34. Indemnification of Directors and Officers.
The Maryland General Corporation Law (“MGCL”) permits a Maryland corporation to include in its charter a provision eliminating the liability of its directors and officers to the corporation and its stockholders for money damages, except for liability resulting from (1) actual receipt of an improper benefit or profit in money, property or services or (2) active and deliberate dishonesty that is established by a final judgment and is material to the cause of action. Our charter contains a provision that eliminates such liability to the maximum extent permitted by Maryland law.
Our charter and bylaws provide for indemnification of our officers and directors against liabilities to the maximum extent permitted by the MGCL, as amended from time to time.
The MGCL requires a Maryland corporation (unless its charter provides otherwise, which our charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service in that capacity. The MGCL permits a Maryland corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made, or threatened to be made, a party by reason of their service in those or other capacities unless it is established that:
 
 	•	 	the act or omission of the director or officer was material to the matter giving rise to the proceeding and (1) was committed in bad faith or (2) was the result of active and deliberate dishonesty;	
 
 	•	 	the director or officer actually received an improper personal benefit in money, property or services; or	
 
 	•	 	in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful.	
However, under the MGCL, a Maryland corporation may not indemnify a director or officer for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis that personal benefit was improperly received by such director or officer, unless in either case a court orders indemnification if it determines that the director or officer is fairly and reasonably entitled to indemnification, and then only for expenses. In addition, the MGCL permits a Maryland corporation to advance reasonable expenses to a director or officer upon its receipt of:
 
 	•	 	a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation; and	
 
 	•	 	a written undertaking by the director or officer or on the director’s or officer’s behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that the director or officer did not meet the standard of conduct.	
 
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Our charter authorizes us to obligate ourselves, and our bylaws obligate us, to the maximum extent permitted by Maryland law in effect from time to time, to indemnify and pay or reimburse reasonable expenses in advance of final disposition of such a proceeding to:
 
 	•	 	any present or former director or officer of our company who is made, or threatened to be made, a party to, or witness in, the proceeding by reason of his or her service in that capacity; or	
 
 	•	 	any individual who, while a director or officer of our company and at our request, serves or has served as a director, officer, partner, trustee, member or manager of another corporation, real estate investment trust, limited liability company, partnership, joint venture, trust, employee benefit plan or other enterprise and who is made, or threatened to be made, a party, or witness in, to the proceeding by reason of his or her service in that capacity.	
Our charter and bylaws also permit us to indemnify and advance expenses to any individual who served any predecessor of us or any entity acquired by us or any partnership controlled by us, or an “acquired entity,” or any predecessor to an acquired entity in any of the capacities described above and to any employee or agent of our company or any predecessor of us or of any acquired entity or any predecessor of an acquired entity.
We intend to enter into indemnification agreements with each of our directors and executive officers that will obligate us to indemnify and advance expenses to them to the maximum extent permitted by Maryland law. The indemnification agreements will provide that, if a director or executive officer is a party or is threatened to be made a party to or a witness in any proceeding by reason of his or her service as a director, officer, employee or agent of our company or as a director, officer, partner, managing member, manager, fiduciary, employee, agent or trustee of any other corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise that he or she is or was serving in such capacity at our request, we must indemnify the director or executive officer for all expenses and liabilities actually and reasonably incurred by him or her, or on his or her behalf, to the maximum extent permitted under Maryland law, including in any proceeding brought by the director or executive officer to enforce his or her rights under the indemnification agreement, to the extent provided by the agreement. The indemnification agreements will also require us to advance reasonable expenses incurred by the indemnitee within ten days of the receipt by us of a statement from the indemnitee requesting the advance, provided the statement evidences the expenses and is accompanied or preceded by:
 
 	•	 	a written affirmation of the indemnitee’s good faith belief that he or she has met the standard of conduct necessary for indemnification; and	
 
 	•	 	a written undertaking, which may be unsecured, by the indemnitee or on his or her behalf to repay the amount paid if it shall ultimately be established that the standard of conduct has not been met.	
The indemnification agreements will also provide for procedures for the determination of entitlement to indemnification, including requiring such determination be made by independent counsel after a change of control of us.
Item 35. Treatment of Proceeds from Stock Being Registered.
None of the proceeds of this offering will be credited to an account other than the appropriate capital share account.
 
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Item 36. Exhibits and Financial Statement Schedules.
The following documents are filed as exhibits to this registration statement:

Number	  	Description	
			
  1.1*	  	—	  	Form of Underwriting Agreement	
			
  2.1*	  	—	  	Form of Merger and Transaction Agreement among InfraREIT, L.L.C., InfraREIT, Inc. and InfraREIT Partners, LP (which will become a subsidiary of the Registrant) (to be effective immediately following the completion of this offering)	
			
  3.1	  	—	  	Articles of Incorporation of the Registrant	
			
  3.2*	  	—	  	Articles of Amendment of the Registrant	
			
  3.3*	  	—	  	Form of Articles of Amendment and Restatement of the Registrant (to be effective immediately prior to the completion of this offering)	
			
  3.4*	  	—	  	Form of Articles of Restatement of the Registrant (to be effective approximately 33 days following the completion of this offering)	
			
  3.5	  	—	  	Amended and Restated Bylaws of the Registrant	
			
  4.1*	  	—	  	Form of Certificate of Common Stock of the Registrant	
			
  5.1*	  	—	  	Opinion of Venable LLP as to the legality of the securities being registered	
			
  8.1*	  	—	  	Opinion of Baker Botts L.L.P. relating to tax matters	
			
10.1*	  	—	  	Form of Second Amended and Restated Agreement of Limited Partnership of InfraREIT Partners, LP (which will become a subsidiary of the Registrant) (to be effective upon the completion of this offering)	
			
10.2*	  	—	  	Form of Third Amended and Restated Agreement of Limited Partnership of InfraREIT Partners, LP (which will become a subsidiary of the Registrant) (to be effective approximately 33 days following the completion of this offering)	
			
10.3	  	—	  	Form of Third Amended and Restated Company Agreement of Sharyland Distribution & Transmission Services, L.L.C. (which will become a subsidiary of the Registrant) (to be effective upon the completion of this offering)	
			
10.4	  	—	  	Form of Development Agreement, dated to be effective upon the closing of this offering, among the Registrant, InfraREIT Partners, LP (which will become a subsidiary of the Registrant), Hunt-InfraREIT, L.L.C. and Hunt Transmission Services, L.L.C.	
			
10.5	  	—	  	Form of Management Agreement, dated to be effective upon the closing of this offering, among the Registrant, InfraREIT Partners, LP (which will become a subsidiary of the Registrant), Hunt-InfraREIT, L.L.C. and Hunt Utility Services, L.L.C.	
			
10.6	  	—	  	Form of Delegation Agreement, dated to be effective upon the closing of this offering, between the Registrant and Sharyland Utilities, L.P., delegating certain authority that Sharyland Utilities, L.P. holds as managing member of Sharyland Distribution & Transmission Services, L.L.C. (which will become a subsidiary of the Registrant)	
			
10.7	  	—	  	Third Amended and Restated Master System Lease Agreement (McAllen Lease), dated December 1, 2014, between Sharyland Distribution & Transmission Services, L.L.C. (which will become a subsidiary of the Registrant) and Sharyland Utilities, L.P.	
			
10.8*	  	—	  	Sixth Amended and Restated Rent Supplement (McAllen Lease), dated January 1, 2015, between Sharyland Distribution & Transmission Services, L.L.C. (which will become a subsidiary of the Registrant) and Sharyland Utilities, L.P.	
			
10.9	  	—	  	Second Amended and Restated Lease Agreement (Stanton/Brady/Celeste Lease), dated December 1, 2014, between Sharyland Distribution & Transmission Services, L.L.C. (which will become a subsidiary of the Registrant) and Sharyland Utilities, L.P.	
 
II-4

Table of Contents

Number	  	Description	
			
10.10*	  	—	  	Sixth Amended and Restated Rent Supplement (Stanton/Brady/Celeste Lease), dated January 1, 2015, between Sharyland Distribution & Transmission Services, L.L.C. (which will become a subsidiary of the Registrant) and Sharyland Utilities, L.P.	
			
10.11	  	—	  	Third Amended and Restated Lease Agreement (Stanton Transmission Loop Lease), dated December 1, 2014, between SDTS FERC, L.L.C. (which will become a subsidiary of the Registrant) and SU FERC, L.L.C.	
			
10.12*	  	—	  	Fourth Amended and Restated Rent Supplement (Stanton Transmission Loop Lease), dated January 1, 2015, between SDTS FERC, L.L.C. (which will become a subsidiary of the Registrant) and SU FERC, L.L.C.	
			
10.13	  	—	  	Second Amended and Restated Lease Agreement (CREZ Lease), dated December 1, 2014, between Sharyland Projects, L.L.C. (which will become a subsidiary of the Registrant) and Sharyland Utilities, L.P.	
			
10.14*	  	—	  	Fourth Amended and Restated Rent Supplement (CREZ Lease), dated January 1, 2015, between Sharyland Projects, L.L.C. (which will become a subsidiary of the Registrant) and Sharyland Utilities, L.P.	
			
10.15	  	—	  	Lease Agreement (ERCOT Transmission Lease), dated December 1, 2014, between Sharyland Distribution & Transmission Services, L.L.C. (which will become a subsidiary of the Registrant) and Sharyland Utilities, L.P.	
			
10.16*	  	—	  	Amended and Restated Rent Supplement (ERCOT Transmission Lease), dated January 1, 2015, between Sharyland Distribution & Transmission Services, L.L.C. (which will become a subsidiary of the Registrant) and Sharyland Utilities, L.P.	
			
10.17	  	—	  	Third Amended and Restated Credit Agreement, dated December 10, 2014, among Sharyland Distribution & Transmission Services, L.L.C. (which will become a subsidiary of the registrant), the several lenders from time to time parties thereto and Royal Bank of Canada, as administrative agent	
			
10.18	  	—	  	Credit Agreement related to the CREZ project (“CREZ Credit Agreement”), dated June 20, 2011, among Sharyland Projects, L.L.C. (which will become a subsidiary of the registrant), the several lenders from time to time parties thereto and Société Generale, as administrative agent and collateral agent	
			
10.19	  	—	  	Amendment No. 1 and Omnibus Amendment, dated October 11, 2011, to the CREZ Credit Agreement	
			
10.20	  	—	  	Amendment No. 2 to CREZ Credit Agreement, and Omnibus Amendment, dated October 1, 2013, to the CREZ Credit Agreement	
			
10.21	  	—	  	Amendment No. 3, dated May 29, 2014, to the CREZ Credit Agreement	
			
10.22	  	—	  	Amendment No. 4 and Consent to Credit Agreement and Amendment No. 1 to Security Agreement, dated December 11, 2014, amending the CREZ Credit Agreement	
			
10.23	  	—	  	Credit Agreement, dated December 10, 2014, among InfraREIT Partners, LP (which will become a subsidiary of the registrant), Bank of America, N.A., as administrative agent and L/C issuer and the other lenders party thereto	
			
10.24	  	—	  	Amended and Restated Note Purchase Agreement, dated July 13, 2010 (the “2010 SDTS NPA”), between Sharyland Distribution & Transmission Services, L.L.C. (which will become a subsidiary of the registrant) and The Prudential Insurance Company of America	
			
10.25	  	—	  	First Amendment, dated June 9, 2011, to the 2010 SDTS NPA	
			
10.26	  	—	  	Second Amendment, dated October 15, 2013, to the 2010 SDTS NPA	
 
II-5

Table of Contents

Number	  	Description	
			
10.27	  	—	  	Third Amendment, Direction and Waiver, dated December 10, 2014, to the 2010 SDTS NPA	
			
10.28	  	—	  	Amended and Restated Note Purchase Agreement, dated July 13, 2010 (the “TDC NPA”), among Transmission and Distribution Company, L.L.C. (which will become a subsidiary of the registrant), The Prudential Insurance Company of America, PRUCO Life Insurance Company and Prudential Retirement Insurance and Annuity Company	
			
10.29	  	—	  	First Amendment, dated June 9, 2011, to the TDC NPA	
			
10.30	  	—	  	Second Amendment, dated December 10, 2014, to the TDC NPA	
			
10.31	  	—	  	Amended and Restated Note Purchase Agreement, dated September 14, 2010 (the “2009 SDTS NPA”), among Sharyland Distribution & Transmission Services, L.L.C. (which will become a subsidiary of the registrant), The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company	
			
10.32	  	—	  	First Amendment, dated June 9, 2011, to the 2009 SDTS NPA	
			
10.33	  	—	  	Second Amendment, dated October 15, 2013, to the 2009 SDTS NPA	
			
10.34	  	—	  	Third Amendment, Direction and Waiver, dated December 10, 2014, to the 2009 SDTS NPA	
			
10.35	  	—	  	Form of Amended and Restated Registration Rights and Lock-Up Agreement, among the Registrant and each of the persons listed on Schedule A thereto (to be effective upon completion of this offering)	
			
10.36*	  	—	  	Form of Lock-Up Agreement, dated to be effective upon the closing of this offering, among the Registrant, InfraREIT Partners, LP (which will become a subsidiary of the Registrant), Hunt-InfraREIT, L.L.C. and Hunt Consolidated, Inc.	
			
10.37	  	—	  	License Agreement, dated November 23, 2010, between Hunt Utility Services, LLC (formerly known as Energy Infrastructure Alliance of America, L.L.C.), InfraREIT, L.L.C. (formerly known as Electric Infrastructure Alliance of America, L.L.C.) and InfraREIT Partners, LP (formerly known as Electric Infrastructure Alliance of America, L.P.) (which will become a subsidiary of the Registrant)	
			
10.38	  	—	  	Intellectual Property Assignment Agreement, dated December 1, 2014, between the Registrant and Hunt Utility Services, LLC	
			
10.39*	  	—	  	Form of Director and Officer Indemnification Agreement	
			
10.40*	  	—	  	Form of Trust Share Purchase Agreement, dated to be effective immediately prior to the effectiveness of this registration statement, among the Registrant and Westwood Trust	
			
10.41*	  	—	  	Form of Structuring Fee Agreement, dated to be effective upon the closing of this offering, among the Registrant, InfraREIT Partners, LP (which will become a subsidiary of the Registrant) and Hunt-InfraREIT, L.L.C.	
			
10.42*	  	—	  	Form of Redemption Agreement, dated to be effective upon the closing of this offering, among the Registrant, InfraREIT Partners, LP (which will become a subsidiary of the Registrant) and Hunt-InfraREIT, L.L.C.	
			
10.43*	  	—	  	Form of Redemption Agreement, dated to be effective upon the closing of this offering, among the Registrant and InfraREIT Partners, LP (which will become a subsidiary of the Registrant)	
			
10.44*	  	—	  	Form of Unit Subscription Agreement, dated to be effective upon the closing of this offering, among the Registrant and MC Transmission Holdings, Inc.	
 
II-6

Table of Contents

Number	 	Description	
			
10.45*	 	—	  	Form of Release Agreement, dated to be effective upon the closing of this offering, among the
Registrant, InfraREIT, L.L.C., InfraREIT Partners, LP (which will become a subsidiary of the Registrant), Hunt Transmission Services, L.L.C., Marubeni Corporation, John Hancock Life Insurance Company (U.S.A.), OpTrust Infrastructure N.A. Inc., OpTrust N.A. Holdings Trust and Teachers Insurance and Annuity Association of America	
			
10.46	 	—	  	Promissory Note, dated November 20, 2014, between InfraREIT, Inc. and Hunt Consolidated, Inc.	
			
10.47	 	—	  	InfraREIT, Inc. 2015 Equity Incentive Plan	
			
10.48*	 	—	  	Form of InfraREIT, Inc. Restricted Stock Unit Agreement	
			
10.49*	 	—	  	Form of InfraREIT Partners, LP LTIP Unit Award Agreement	
			
10.50*	 	—	  	InfraREIT, Inc. 2015 Non-Qualified Employee Stock Purchase Plan	
			
21.1	 	—	  	List of Subsidiaries of the Registrant	
			
23.1	 	—	  	Consent of KPMG LLP	
			
23.2	 	—	  	Consent of Ernst & Young LLP	
			
23.3*	 	—	  	Consent of Venable LLP (contained in Exhibit 5.1)	
			
23.4*	 	—	  	Consent of Baker Botts L.L.P. (contained in Exhibit 8.1)	
			
24.1**	 	—	  	Powers of Attorney (included on the signature page of the initial filing of the Registration Statement)	

*	To be filed by amendment.	
**	Previously filed.	
Item 37. Undertakings.
The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
 
 	(1)	For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.	
 
 	(2)	For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.	
 
II-7

Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-11 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on December 31, 2014.

InfraREIT, Inc.	
		
By:	 	/s/ David Campbell	
	 	Name: David Campbell
Title: President and Chief Executive Officer	
Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities on the 31st day of December, 2014.

Signature	  	Title	
		
*
W. Kirk Baker	  	Chairman of the Board of Directors	
		
/s/ David Campbell
David Campbell	  	President, Chief Executive Officer and Director
(Principal Executive Officer)	
		
*
Brant Meleski	  	Senior Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)	
		
*
Hunter L. Hunt	  	Director	

* By:	 	/s/ David Campbell	
	 	David Campbell
Attorney-in-Fact	

Table of Contents
INDEX TO EXHIBITS

Number	  	Description	
			
  1.1*	  	—	  	Form of Underwriting Agreement	
			
  2.1*	  	—	  	Form of Merger and Transaction Agreement among InfraREIT, L.L.C., InfraREIT, Inc. and InfraREIT Partners, LP (which will become a subsidiary of the Registrant) (to be effective immediately following the completion of this offering)	
			
  3.1	  	—	  	Articles of Incorporation of the Registrant	
			
  3.2*	  	—	  	Articles of Amendment of the Registrant	
			
  3.3*	  	—	  	Form of Articles of Amendment and Restatement of the Registrant (to be effective immediately prior to the completion of this offering)	
			
  3.4*	  	—	  	Form of Articles of Restatement of the Registrant (to be effective approximately 33 days following the completion of this offering)	
			
  3.5	  	—	  	Amended and Restated Bylaws of the Registrant	
			
  4.1*	  	—	  	Form of Certificate of Common Stock of the Registrant	
			
  5.1*	  	—	  	Opinion of Venable LLP as to the legality of the securities being registered	
			
  8.1*	  	—	  	Opinion of Baker Botts L.L.P. relating to tax matters	
			
10.1*	  	—	  	Form of Second Amended and Restated Agreement of Limited Partnership of InfraREIT Partners, LP (which will become a subsidiary of the Registrant) (to be effective upon the completion of this offering)	
			
10.2*	  	—	  	Form of Third Amended and Restated Agreement of Limited Partnership of InfraREIT Partners, LP (which will become a subsidiary of the Registrant) (to be effective approximately 33 days following the completion of this offering)	
			
10.3	  	—	  	Form of Third Amended and Restated Company Agreement of Sharyland Distribution & Transmission Services, L.L.C. (which will become a subsidiary of the Registrant) (to be effective upon the completion of this offering)	
			
10.4	  	—	  	Form of Development Agreement, dated to be effective upon the closing of this offering, among the Registrant, InfraREIT Partners, LP (which will become a subsidiary of the Registrant), Hunt-InfraREIT, L.L.C. and Hunt Transmission Services, L.L.C.	
			
10.5	  	—	  	Form of Management Agreement, dated to be effective upon the closing of this offering, among the Registrant, InfraREIT Partners, LP (which will become a subsidiary of the Registrant), Hunt-InfraREIT, L.L.C. and Hunt Utility Services, L.L.C.	
			
10.6	  	—	  	Form of Delegation Agreement, dated to be effective upon the closing of this offering, between the Registrant and Sharyland Utilities, L.P., delegating certain authority that Sharyland Utilities, L.P. holds as managing member of Sharyland Distribution & Transmission Services, L.L.C. (which will become a subsidiary of the Registrant)	
			
10.7	  	—	  	Third Amended and Restated Master System Lease Agreement (McAllen Lease), dated December 1, 2014, between Sharyland Distribution & Transmission Services, L.L.C. (which will become a subsidiary of the Registrant) and Sharyland Utilities, L.P.	
			
10.8*	  	—	  	Sixth Amended and Restated Rent Supplement (McAllen Lease), dated January 1, 2015, between Sharyland Distribution & Transmission Services, L.L.C. (which will become a subsidiary of the Registrant) and Sharyland Utilities, L.P.	
			
10.9	  	—	  	Second Amended and Restated Lease Agreement (Stanton/Brady/Celeste Lease), dated December 1, 2014, between Sharyland Distribution & Transmission Services, L.L.C. (which will become a subsidiary of the Registrant) and Sharyland Utilities, L.P.	

Table of Contents

Number	  	Description	
			
10.10*	  	—	  	Sixth Amended and Restated Rent Supplement (Stanton/Brady/Celeste Lease), dated January 1, 2015, between Sharyland Distribution & Transmission Services, L.L.C. (which will become a subsidiary of the Registrant) and Sharyland Utilities, L.P.	
			
10.11	  	—	  	Third Amended and Restated Lease Agreement (Stanton Transmission Loop Lease), dated December 1, 2014, between SDTS FERC, L.L.C. (which will become a subsidiary of the Registrant) and SU FERC, L.L.C.	
			
10.12*	  	—	  	Fourth Amended and Restated Rent Supplement (Stanton Transmission Loop Lease), dated January 1, 2015, between SDTS FERC, L.L.C. (which will become a subsidiary of the Registrant) and SU FERC, L.L.C.	
			
10.13	  	—	  	Second Amended and Restated Lease Agreement (CREZ Lease), dated December 1, 2014, between Sharyland Projects, L.L.C. (which will become a subsidiary of the Registrant) and Sharyland Utilities, L.P.	
			
10.14*	  	—	  	Fourth Amended and Restated Rent Supplement (CREZ Lease), dated January 1, 2015, between Sharyland Projects, L.L.C. (which will become a subsidiary of the Registrant) and Sharyland Utilities, L.P.	
			
10.15	  	—	  	Lease Agreement (ERCOT Transmission Lease), dated December 1, 2014, between Sharyland Distribution & Transmission Services, L.L.C. (which will become a subsidiary of the Registrant) and Sharyland Utilities, L.P.	
			
10.16*	  	—	  	Amended and Restated Rent Supplement (ERCOT Transmission Lease), dated January 1, 2015, between Sharyland Distribution & Transmission Services, L.L.C. (which will become a subsidiary of the Registrant) and Sharyland Utilities, L.P.	
			
10.17	  	—	  	Third Amended and Restated Credit Agreement, dated December 10, 2014, among Sharyland Distribution & Transmission Services, L.L.C. (which will become a subsidiary of the registrant), the several lenders from time to time parties thereto and Royal Bank of Canada, as administrative agent	
			
10.18	  	—	  	Credit Agreement related to the CREZ project (“CREZ Credit Agreement”), dated June 20, 2011, among Sharyland Projects, L.L.C. (which will become a subsidiary of the registrant), the several lenders from time to time parties thereto and Société Generale, as administrative agent and collateral agent	
			
10.19	  	—	  	Amendment No. 1 and Omnibus Amendment, dated October 11, 2011, to the CREZ Credit Agreement	
			
10.20	  	—	  	Amendment No. 2 to CREZ Credit Agreement, and Omnibus Amendment, dated October 1, 2013, to the CREZ Credit Agreement	
			
10.21	  	—	  	Amendment No. 3, dated May 29, 2014, to the CREZ Credit Agreement	
			
10.22	  	—	  	Amendment No. 4 and Consent to Credit Agreement and Amendment No. 1 to Security Agreement, dated December 11, 2014, amending the CREZ Credit Agreement	
			
10.23	  	—	  	Credit Agreement, dated December 10, 2014, among InfraREIT Partners, LP (which will become a subsidiary of the registrant), Bank of America, N.A., as administrative agent and L/C issuer and the other lenders party thereto	
			
10.24	  	—	  	Amended and Restated Note Purchase Agreement, dated July 13, 2010 (the “2010 SDTS NPA”), between Sharyland Distribution & Transmission Services, L.L.C. (which will become a subsidiary of the registrant) and The Prudential Insurance Company of America	
			
10.25	  	—	  	First Amendment, dated June 9, 2011, to the 2010 SDTS NPA	
			
10.26	  	—	  	Second Amendment, dated October 15, 2013, to the 2010 SDTS NPA	

Table of Contents

Number	  	Description	
			
10.27	  	—	  	Third Amendment, Direction and Waiver, dated December 10, 2014, to the 2010 SDTS NPA	
			
10.28	  	—	  	Amended and Restated Note Purchase Agreement, dated July 13, 2010 (the “TDC NPA”), among Transmission and Distribution Company, L.L.C. (which will become a subsidiary of the registrant), The Prudential Insurance Company of America, PRUCO Life Insurance Company and Prudential Retirement Insurance and Annuity Company	
			
10.29	  	—	  	First Amendment, dated June 9, 2011, to the TDC NPA	
			
10.30	  	—	  	Second Amendment, dated December 10, 2014, to the TDC NPA	
			
10.31	  	—	  	Amended and Restated Note Purchase Agreement, dated September 14, 2010 (the “2009 SDTS NPA”), among Sharyland Distribution & Transmission Services, L.L.C. (which will become a subsidiary of the registrant), The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company	
			
10.32	  	—	  	First Amendment, dated June 9, 2011, to the 2009 SDTS NPA	
			
10.33	  	—	  	Second Amendment, dated October 15, 2013, to the 2009 SDTS NPA	
			
10.34	  	—	  	Third Amendment, Direction and Waiver, dated December 10, 2014, to the 2009 SDTS NPA	
			
10.35	  	—	  	Form of Amended and Restated Registration Rights and Lock-Up Agreement, among the Registrant and each of the persons listed on Schedule A thereto (to be effective upon completion of this offering)	
			
10.36*	  	—	  	Form of Lock-Up Agreement, dated to be effective upon the closing of this offering, among the Registrant, InfraREIT Partners, LP (which will become a subsidiary of the Registrant), Hunt-InfraREIT, L.L.C. and Hunt Consolidated, Inc.	
			
10.37	  	—	  	License Agreement, dated November 23, 2010, between Hunt Utility Services, LLC (formerly known as Energy Infrastructure Alliance of America, L.L.C.), InfraREIT, L.L.C. (formerly known as Electric Infrastructure Alliance of America, L.L.C.) and InfraREIT Partners, LP (formerly known as Electric Infrastructure Alliance of America, L.P.) (which will become a subsidiary of the Registrant)	
			
10.38	  	—	  	Intellectual Property Assignment Agreement, dated December 1, 2014, between the Registrant and Hunt Utility Services, LLC	
			
10.39*	  	—	  	Form of Director and Officer Indemnification Agreement	
			
10.40*	  	—	  	Form of Trust Share Purchase Agreement, dated to be effective upon the closing of this offering, among the Registrant and Westwood Trust	
			
10.41*	  	—	  	Form of Structuring Fee Agreement, dated to be effective immediately prior to the effectiveness of this registration statement, among the Registrant, InfraREIT Partners, LP (which will become a subsidiary of the Registrant) and Hunt-InfraREIT, L.L.C.	
			
10.42*	  	—	  	Form of Redemption Agreement, dated to be effective upon the closing of this offering, among the Registrant, InfraREIT Partners, LP (which will become a subsidiary of the Registrant) and Hunt-InfraREIT, L.L.C.	
			
10.43*	  	—	  	Form of Redemption Agreement, dated to be effective upon the closing of this offering, among the Registrant and InfraREIT Partners, LP (which will become a subsidiary of the Registrant)	
			
10.44*	  	—	  	Form of Unit Subscription Agreement, dated to be effective upon the closing of this offering, among the Registrant and MC Transmission Holdings, Inc.	
			
10.45*	  	—	  	Form of Release Agreement, dated to be effective upon the closing of this offering, among the
Registrant, InfraREIT, L.L.C., InfraREIT Partners, LP (which will become a subsidiary of the Registrant), Hunt Transmission Services, L.L.C., Marubeni Corporation, John Hancock Life Insurance Company (U.S.A.), OpTrust Infrastructure N.A. Inc., OpTrust N.A. Holdings Trust and Teachers Insurance and Annuity Association of America	

Table of Contents

Number	 	Description	
			
10.46	 	—	  	Promissory Note, dated November 20, 2014, between InfraREIT, Inc. and Hunt Consolidated, Inc.	
			
10.47	 	—	  	InfraREIT, Inc. 2015 Equity Incentive Plan	
			
10.48*	 	—	  	Form of InfraREIT, Inc. Restricted Stock Unit Agreement	
			
10.49*	 	—	  	Form of InfraREIT Partners, LP LTIP Unit Award Agreement	
			
10.50*	 	—	  	InfraREIT, Inc. 2015 Non-Qualified Employee Stock Purchase Plan	
			
21.1	 	—	  	List of Subsidiaries of the Registrant	
			
23.1	 	—	  	Consent of KPMG LLP	
			
23.2	 	—	  	Consent of Ernst & Young LLP	
			
23.3*	 	—	  	Consent of Venable LLP (contained in Exhibit 5.1)	
			
23.4*	 	—	  	Consent of Baker Botts L.L.P. (contained in Exhibit 8.1)	
			
24.1**	 	—	  	Powers of Attorney (included on the signature page of the initial filing of the Registration Statement)	

*	To be filed by amendment.	
**	Previously filed.	

Exhibit 3.1
INFRAREIT, INC.
ARTICLES OF INCORPORATION
THIS IS TO CERTIFY THAT:
FIRST : The undersigned, Greg Imhoff, whose address is c/o InfraREIT, Inc., 1807 Ross Avenue, 4th Floor, Dallas, Texas 75201, being at least 18 years of age, by these Articles of Incorporation and by Articles of Conversion filed for record herewith, does hereby convert Hunt Electrical Infrastructure Investments Corporation, a Delaware corporation formed on April 16, 2001 under the name of “Hunt Capital Corporation,” into a corporation formed under the general laws of the State of Maryland.
SECOND : The name of the corporation (which is hereinafter called the “Corporation”) is:
InfraREIT, Inc.
THIRD : The Corporation is formed for the purpose of carrying on any lawful business.
FOURTH : The address of the principal office of the Corporation in this State is c/o The Corporation Trust Incorporated, 351 West Camden Street, Baltimore, Maryland 21201.
FIFTH : The name and address of the resident agent of the Corporation are The Corporation Trust Incorporated, 351 West Camden Street, Baltimore, Maryland 21201. The resident agent is a Maryland corporation.
SIXTH : The total number of shares of stock which the Corporation has authority to issue is 3,000 shares, $1.00 par value per share, all of one class. The aggregate par value of all authorized shares having a par value is $3,000.00. The Board of Directors, with the approval of a majority of the entire Board of Directors and without any action by the stockholders of the Corporation, may amend the charter of the Corporation (the “Charter”) from time to time to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that the Corporation has authority to issue.
SEVENTH : The business and affairs of the Corporation shall be managed under the direction of the Board of Directors. The number of directors of the Corporation initially shall be three, which number may be increased or decreased only by the Board of Directors pursuant to the Bylaws of the Corporation (the “Bylaws”), but shall never be less than the minimum number required by the Maryland General Corporation Law (the “MGCL”).

The names of the directors who shall serve until the next annual meeting of stockholders and until their successors are duly elected and qualify are:
W. Kirk Baker
David Campbell
Hunter L. Hunt
The directors may fill any vacancy, whether resulting from an increase in the number of directors or otherwise, on the Board of Directors in the manner provided in the Bylaws.
EIGHTH : (a) The Corporation reserves the right from time to time to make any amendment to the Charter, now or hereafter authorized by law, including any amendment altering the terms or contract rights, as expressly set forth in the Charter, of any shares of outstanding stock. The rights of all stockholders and the terms of all stock are subject to the provisions of the Charter and the Bylaws. The Board of Directors of the Corporation shall have the exclusive power to make, alter, amend or repeal the Bylaws.
(b) The Board of Directors may authorize the issuance from time to time of shares of stock of the Corporation of any class or series, whether now or hereafter authorized, or securities or rights convertible into shares of its stock of any class or series, whether now or hereafter authorized, for such consideration as the Board of Directors may deem advisable (or without consideration in the case of a stock split or stock dividend), subject to such restrictions or limitations, if any, as may be set forth in the Charter or the Bylaws.
(c) The Board of Directors may classify or reclassify any unissued shares of stock of the Corporation from time to time into one or more classes or series of stock by setting or changing the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms or conditions of redemption. If shares of one class of stock are classified or reclassified into shares of another class of stock pursuant to this Article EIGHTH(c), the number of authorized shares of the former class shall be automatically decreased and the number of shares of the latter class shall be automatically increased, in each case by the number of shares so classified or reclassified, so that the aggregate number of shares of stock of all classes that the Corporation has authority to issue shall not be more than the total number of shares of stock set forth in the first sentence of Article SIXTH.
(d) The determination as to any of the following matters, made in good faith by or pursuant to the direction of the Board of Directors consistent with the Charter, shall be final and conclusive and shall be binding upon the Corporation and every holder of shares of its stock: the amount of the net income of the Corporation for any period and the amount of assets at any time legally available for the payment of dividends, redemption of its stock or the payment of other distributions on its stock; the amount of paid in surplus, net assets, other surplus, annual or other cash flow, net profit, net assets in excess of capital, undivided profits or excess of profits over losses on sales of assets; the amount, purpose, time of creation, increase or decrease, alteration or cancellation of any reserves or charges and the propriety thereof (whether or not any obligation or liability for which such reserves or charges shall have been created shall have been paid or discharged); any interpretation of the preferences,
 
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conversion or other rights, voting powers or rights, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption of any class or series of stock of the Corporation; the fair value, or any sale, bid or asked price to be applied in determining the fair value, of any asset owned or held by the Corporation or of any shares of stock of the Corporation; the number of shares of stock of any class of the Corporation; any matter relating to the acquisition, holding and disposition of any assets by the Corporation; or any other matter relating to the business and affairs of the Corporation or required or permitted by applicable law, the Charter or Bylaws or otherwise to be determined by the Board of Directors.
NINTH : No holder of shares of stock of any class shall have any preemptive right to subscribe for or to purchase any additional shares of any class, or any bonds or convertible securities of any nature; provided, however, that the Board of Directors may, in authorizing the issuance of shares of stock of any class, confer any preemptive right that the Board of Directors may deem advisable in connection with such issuance. Holders of shares of stock shall not be entitled to exercise any rights of an objecting stockholder provided for under Title 3, Subtitle 2 of the MGCL or any successor statute unless the Board of Directors, upon the affirmative vote of a majority of the Board of Directors, shall determine that such rights apply, with respect to all or any classes or series of stock, to one or more transactions occurring after the date of such determination in connection with which holders of such shares would otherwise be entitled to exercise such rights.
TENTH : To the maximum extent that Maryland law in effect from time to time permits limitation of the liability of directors and officers, no director or officer of the Corporation shall be liable to the Corporation or its stockholders for money damages. Neither the amendment nor repeal of this Article, nor the adoption or amendment of any other provision of the Charter or Bylaws inconsistent with this Article, shall apply to or affect in any respect the applicability of the preceding sentence with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption.
ELEVENTH : The Corporation shall have the power, to the maximum extent permitted by Maryland law in effect from time to time, to obligate itself to indemnify, and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to, (a) any individual who is a present or former director or officer of the Corporation or (b) any individual who, while a director or officer of the Corporation and at the request of the Corporation, serves or has served as a director, officer, partner, member, manager or trustee of another corporation, real estate investment trust, partnership, limited liability company, joint venture, trust, employee benefit plan or any other enterprise from and against any claim or liability to which such person may become subject or which such person may incur by reason of his or her service in such capacity. The Corporation shall have the power, with the approval of the Board of Directors, to provide such indemnification and advancement of expenses to a person who served a predecessor of the Corporation in any of the capacities described in (a) or (b) above and to any employee or agent of the Corporation or a predecessor of the Corporation.
- Signature Page Follows -
 
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IN WITNESS WHEREOF, I have signed these Articles of Incorporation and acknowledge the same to be my act on this 26th day of September, 2014.

/s/ Greg Imhoff	
Greg Imhoff	
Incorporator	

Exhibit 3.5

INFRAREIT, INC.
AMENDED AND RESTATED BYLAWS

Dated as of December 1, 2014

TABLE OF CONTENTS

 	 	 	 	 	  	Page	 	
		
ARTICLE I OFFICES	  	 	1	  	
				
	 	Section 1.	 	PRINCIPAL OFFICE	  	 	1	  	
	 	Section 2.	 	ADDITIONAL OFFICES	  	 	1	  	
		
ARTICLE II MEETINGS OF STOCKHOLDERS	  	 	1	  	
				
	 	Section 1.	 	PLACE	  	 	1	  	
	 	Section 2.	 	ANNUAL MEETING	  	 	1	  	
	 	Section 3.	 	SPECIAL MEETINGS	  	 	1	  	
	 	Section 4.	 	NOTICE	  	 	4	  	
	 	Section 5.	 	ORGANIZATION AND CONDUCT	  	 	5	  	
	 	Section 6.	 	QUORUM	  	 	5	  	
	 	Section 7.	 	VOTING	  	 	6	  	
	 	Section 8.	 	PROXIES	  	 	6	  	
	 	Section 9.	 	VOTING OF STOCK BY CERTAIN HOLDERS	  	 	6	  	
	 	Section 10.	 	INSPECTORS	  	 	7	  	
	 	Section 11.	 	ADVANCE NOTICE OF STOCKHOLDER NOMINEES FOR DIRECTOR AND OTHER STOCKHOLDER PROPOSALS	  	 	7	  	
	 	Section 12.	 	TELEPHONE MEETINGS	  	 	12	  	
	 	Section 13.	 	CONTROL SHARE ACQUISITION ACT	  	 	12	  	
	 	Section 14.	 	STOCKHOLDERS’ CONSENT IN LIEU OF MEETING	  	 	12	  	
		
ARTICLE III DIRECTORS	  	 	12	  	
				
	 	Section 1.	 	GENERAL POWERS	  	 	12	  	
	 	Section 2.	 	NUMBER, TENURE AND RESIGNATION	  	 	13	  	
	 	Section 3.	 	ANNUAL AND REGULAR MEETINGS	  	 	13	  	
	 	Section 4.	 	SPECIAL MEETINGS	  	 	13	  	
	 	Section 5.	 	NOTICE	  	 	13	  	
	 	Section 6.	 	QUORUM	  	 	14	  	
	 	Section 7.	 	VOTING	  	 	14	  	
	 	Section 8.	 	ORGANIZATION	  	 	14	  	
	 	Section 9.	 	TELEPHONE MEETINGS	  	 	14	  	
	 	Section 10.	 	CONSENT BY DIRECTORS WITHOUT A MEETING	  	 	14	  	
	 	Section 11.	 	VACANCIES	  	 	14	  	
	 	Section 12.	 	COMPENSATION	  	 	15	  	
	 	Section 13.	 	RELIANCE	  	 	15	  	
	 	Section 14.	 	LEAD DIRECTOR	  	 	15	  	
	 	Section 15.	 	RATIFICATION	  	 	15	  	
 
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	 	Section 16.	 	CERTAIN RIGHTS OF DIRECTORS AND OFFICERS	  	 	16	  	
	 	Section 17.	 	EMERGENCY PROVISIONS	  	 	16	  	
		
ARTICLE IV COMMITTEES	  	 	16	  	
				
	 	Section 1.	 	NUMBER, TENURE AND QUALIFICATIONS	  	 	16	  	
	 	Section 2.	 	POWERS	  	 	16	  	
	 	Section 3.	 	MEETINGS	  	 	16	  	
	 	Section 4.	 	TELEPHONE MEETINGS	  	 	17	  	
	 	Section 5.	 	CONSENT BY COMMITTEES WITHOUT A MEETING	  	 	17	  	
	 	Section 6.	 	VACANCIES	  	 	17	  	
		
ARTICLE V OFFICERS	  	 	17	  	
				
	 	Section 1.	 	GENERAL PROVISIONS	  	 	17	  	
	 	Section 2.	 	REMOVAL AND RESIGNATION	  	 	17	  	
	 	Section 3.	 	VACANCIES	  	 	18	  	
	 	Section 4.	 	CHAIRMAN OF THE BOARD	  	 	18	  	
	 	Section 5.	 	CHIEF EXECUTIVE OFFICER	  	 	18	  	
	 	Section 6.	 	CHIEF OPERATING OFFICER	  	 	18	  	
	 	Section 7.	 	CHIEF FINANCIAL OFFICER	  	 	18	  	
	 	Section 8.	 	PRESIDENT	  	 	18	  	
	 	Section 9.	 	VICE PRESIDENTS	  	 	18	  	
	 	Section 10.	 	SECRETARY	  	 	19	  	
	 	Section 11.	 	TREASURER	  	 	19	  	
	 	Section 12.	 	ASSISTANT SECRETARIES AND ASSISTANT TREASURERS	  	 	19	  	
	 	Section 13.	 	COMPENSATION	  	 	19	  	
		
ARTICLE VI CONTRACTS, CHECKS AND DEPOSITS	  	 	19	  	
				
	 	Section 1.	 	CONTRACTS	  	 	19	  	
	 	Section 2.	 	CHECKS AND DRAFTS	  	 	20	  	
	 	Section 3.	 	DEPOSITS	  	 	20	  	
		
ARTICLE VII STOCK	  	 	20	  	
				
	 	Section 1.	 	CERTIFICATES	  	 	20	  	
	 	Section 2.	 	TRANSFERS	  	 	20	  	
	 	Section 3.	 	REPLACEMENT CERTIFICATE	  	 	21	  	
	 	Section 4.	 	FIXING OF RECORD DATE	  	 	21	  	
	 	Section 5.	 	STOCK LEDGER	  	 	21	  	
	 	Section 6.	 	FRACTIONAL STOCK; ISSUANCE OF UNITS	  	 	21	  	
		
ARTICLE VIII ACCOUNTING YEAR	  	 	21	  	
		
ARTICLE IX DISTRIBUTIONS	  	 	22	  	
				
	 	Section 1.	 	AUTHORIZATION	  	 	22	  	
	 	Section 2.	 	CONTINGENCIES	  	 	22	  	
 
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ARTICLE X INVESTMENT POLICY	  	 	22	  	
		
ARTICLE XI SEAL	  	 	22	  	
				
	 	Section 1.	 	SEAL	  	 	22	  	
	 	Section 2.	 	AFFIXING SEAL	  	 	22	  	
		
ARTICLE XII INDEMNIFICATION AND ADVANCE OF EXPENSES	  	 	22	  	
		
ARTICLE XIII WAIVER OF NOTICE	  	 	23	  	
		
ARTICLE XIV EXCLUSIVE FORUM FOR CERTAIN LITIGATION	  	 	23	  	
		
ARTICLE XV AMENDMENT OF BYLAWS	  	 	24	  	
 
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INFRAREIT, INC.
AMENDED AND RESTATED BYLAWS
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE . The principal office of the Corporation in the State of Maryland shall be located at such place as the Board of Directors may designate.
Section 2. ADDITIONAL OFFICES . The Corporation may have additional offices, including a principal executive office, at such places as the Board of Directors may from time to time determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. PLACE . All meetings of stockholders shall be held at the principal executive office of the Corporation or at such other place as shall be set in accordance with these Bylaws and stated in the notice of the meeting.
Section 2. ANNUAL MEETING . An annual meeting of stockholders for the election of directors and the transaction of any business within the powers of the Corporation shall be held on the date and at the time and place set by the Board of Directors.
Section 3. SPECIAL MEETINGS .
(i) General . Each of the chairman of the board, lead director, if any, chief executive officer, president and Board of Directors may call a special meeting of stockholders. Except as provided in subsection (ii)(D) of this Section 3, a special meeting of stockholders shall be held on the date and at the time and place set by the chairman of the board, lead director, if any, chief executive officer, president or Board of Directors, as applicable, who has called the meeting. Subject to subsection (ii) of this Section 3, a special meeting of stockholders shall also be called by the secretary of the Corporation to act on any matter that may properly be considered at a meeting of stockholders upon the written request of stockholders entitled to cast not less than a majority of all the votes entitled to be cast on such matter at such meeting.
(ii) Stockholder-Requested Special Meetings .
(A) Any stockholder of record seeking to have stockholders request a special meeting shall, by sending written notice to the secretary (the “Record Date Request Notice”) by registered mail, return receipt requested, request the Board of Directors to fix a record date to determine the stockholders entitled to request a special meeting (the “Request Record Date”). The Record Date Request Notice shall set forth the purpose of the meeting and the matters proposed to be acted on at it, shall be signed by one or more stockholders of record as of the date of signature (or their agents duly

authorized in a writing accompanying the Record Date Request Notice), shall bear the date of signature of each such stockholder (or such agent) and shall set forth all information relating to each such stockholder, each individual whom the stockholder proposes to nominate for election or reelection as a director and each matter proposed to be acted on at the meeting that would be required to be disclosed in connection with the solicitation of proxies for the election of directors or the election of each such individual, as applicable, in an election contest (even if an election contest is not involved), or would otherwise be required in connection with such a solicitation, in each case pursuant to Regulation 14A (or any successor provision) under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder (the “Exchange Act”). Upon receiving the Record Date Request Notice, the Board of Directors may fix a Request Record Date. The Request Record Date shall not precede and shall not be more than ten days after the close of business on the date on which the resolution fixing the Request Record Date is adopted by the Board of Directors. If the Board of Directors, within ten days after the date on which a valid Record Date Request Notice is received, fails to adopt a resolution fixing the Request Record Date, the Request Record Date shall be the close of business on the tenth day after the first date on which a Record Date Request Notice is received by the secretary.
(B) In order for any stockholder to request a special meeting to act on any matter that may properly be considered at a meeting of stockholders, one or more written requests for a special meeting (collectively, the “Special Meeting Request”) signed by stockholders of record (or their agents duly authorized in a writing accompanying the request) as of the Request Record Date entitled to cast not less than a majority of all of the votes entitled to be cast on such matter at such meeting (the “Special Meeting Percentage”) shall be delivered to the secretary. In addition, the Special Meeting Request shall (1) set forth the purpose of the meeting and the matters proposed to be acted on at it (which shall be limited to those lawful matters set forth in the Record Date Request Notice received by the secretary), (2) bear the date of signature of each such stockholder (or such agent) signing the Special Meeting Request, (3) set forth (a) the name and address, as they appear in the Corporation’s books, of each stockholder signing such request (or on whose behalf the Special Meeting Request is signed), (b) the class, series and number of all shares of stock of the Corporation which are owned (beneficially or of record) by each such stockholder and (c) the nominee holder for, and number of, shares of stock of the Corporation owned beneficially but not of record by such stockholder, (4) be sent to the secretary by registered mail, return receipt requested, and (5) be received by the secretary within 60 days after the Request Record Date. Any requesting stockholder (or agent duly authorized in a writing accompanying the revocation of the Special Meeting Request) may revoke his, her or its request for a special meeting at any time by written revocation delivered to the secretary.
(C) The secretary shall inform the requesting stockholders of the reasonably estimated cost of preparing and mailing or delivering the notice of the meeting (including the Corporation’s proxy materials). The secretary shall not be required to call a special meeting upon stockholder request and such meeting shall not be held unless, in addition to the documents required by paragraph (B) of this Section 3(ii), the secretary receives payment of such reasonably estimated cost prior to the preparation and mailing or delivery of such notice of the meeting.
 
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(D) In the case of any special meeting called by the secretary upon the request of stockholders (a “Stockholder-Requested Meeting”), such meeting shall be held at such place, date and time as may be designated by the Board of Directors; provided , however, that the date of any Stockholder-Requested Meeting shall be not more than 90 days after the record date for such meeting (the “Meeting Record Date”); and provided further that if the Board of Directors fails to designate, within ten days after the date that a valid Special Meeting Request is actually received by the secretary (the “Delivery Date”), a date and time for a Stockholder-Requested Meeting, then such meeting shall be held at 2:00 p.m., local time, on the 90th day after the Meeting Record Date or, if such 90 th day is not a Business Day (as defined below), on the first preceding Business Day; and provided further that in the event that the Board of Directors fails to designate a place for a Stockholder-Requested Meeting within ten days after the Delivery Date, then such meeting shall be held at the principal executive office of the Corporation. In fixing a date for a Stockholder-Requested Meeting, the Board of Directors may consider such factors as it deems relevant, including, without limitation, the nature of the matters to be considered, the facts and circumstances surrounding any request for the meeting and any plan of the Board of Directors to call an annual meeting or a special meeting. In the case of any Stockholder-Requested Meeting, if the Board of Directors fails to fix a Meeting Record Date that is a date within 30 days after the Delivery Date, then the close of business on the 30th day after the Delivery Date shall be the Meeting Record Date. The Board of Directors may revoke the notice for any Stockholder-Requested Meeting in the event that the requesting stockholders fail to comply with the provisions of paragraph (C) of this Section 3(ii).
(E) If written revocations of the Special Meeting Request have been delivered to the secretary and the result is that stockholders of record (or their agents duly authorized in writing), as of the Request Record Date, entitled to cast less than the Special Meeting Percentage have delivered, and not revoked, requests for a special meeting on the matter to the secretary: (1) if the notice of meeting has not already been delivered, the secretary shall refrain from delivering the notice of the meeting and send to all requesting stockholders who have not revoked such requests written notice of any revocation of a request for a special meeting on the matter, or (2) if the notice of meeting has been delivered and if the secretary first sends to all requesting stockholders who have not revoked requests for a special meeting on the matter written notice of any revocation of a request for the special meeting and written notice of the Corporation’s intention to revoke the notice of the meeting or for the chairman of the meeting to adjourn the meeting without action on the matter, (a) the secretary may revoke the notice of the meeting at any time before ten days before the commencement of the meeting or (b) the chairman of the meeting may call the meeting to order and adjourn the meeting without acting on the matter. Any request for a special meeting received after a revocation by the secretary of a notice of a meeting shall be considered a request for a new special meeting.
 
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(F) The chairman of the board, lead director, if any, chief executive officer, president or Board of Directors may appoint regionally or nationally recognized independent inspectors of elections to act as the agent of the Corporation for the purpose of promptly performing a ministerial review of the validity of any purported Special Meeting Request received by the secretary. For the purpose of permitting the inspectors to perform such review, no such purported Special Meeting Request shall be deemed to have been received by the secretary until the earlier of (1) five Business Days after actual receipt by the secretary of such purported request and (2) such date as the independent inspectors certify to the Corporation that the valid requests received by the secretary represent, as of the Request Record Date, stockholders of record entitled to cast not less than the Special Meeting Percentage. Nothing contained in this paragraph (F) shall in any way be construed to suggest or imply that the Corporation or any stockholder shall not be entitled to contest the validity of any request, whether during or after such five Business Day period, or to take any other action (including, without limitation, the commencement, prosecution or defense of any litigation with respect thereto, and the seeking of injunctive relief in such litigation).
(G) For purposes of these Bylaws, “Business Day” shall mean any day other than a Saturday, a Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close.
Section 4. NOTICE . Not less than ten nor more than 90 days before each meeting of stockholders, the secretary shall give to each stockholder entitled to vote at such meeting and to each stockholder not entitled to vote who is entitled to notice of the meeting notice in writing or by electronic transmission stating the time and place of the meeting and, in the case of a special meeting or as otherwise may be required by any statute, the purpose for which the meeting is called, by mail, by presenting it to such stockholder personally, by leaving it at the stockholder’s residence or usual place of business, by electronic transmission or by any other means permitted by Maryland law. If mailed, such notice shall be deemed to be given when deposited in the United States mail addressed to the stockholder at the stockholder’s address as it appears on the records of the Corporation, with postage thereon prepaid. If transmitted electronically, such notice shall be deemed to be given when transmitted to the stockholder by an electronic transmission to any address or number of the stockholder at which the stockholder receives electronic transmissions. The Corporation may give a single notice to all stockholders who share an address, which single notice shall be effective as to any stockholder at such address, unless such stockholder objects to receiving such single notice or revokes a prior consent to receiving such single notice. Failure to give notice of any meeting to one or more stockholders, or any irregularity in such notice, shall not affect the validity of any meeting fixed in accordance with this Article II or the validity of any proceedings at any such meeting.
Subject to Section 11(i) of this Article II, any business of the Corporation may be transacted at an annual meeting of stockholders without being specifically designated in the notice, except such business as is required by any statute to be stated in such notice. No business shall be transacted at a special meeting of stockholders except as specifically designated in the notice. The Corporation may postpone or cancel a meeting of stockholders by making a public announcement (as defined in Section 11(iii)(C) of this Article II) of such postponement or cancellation prior to the meeting. Notice of the date, time and place to which the meeting is postponed shall be given not less than ten days prior to such date and otherwise in the manner set forth in this section.
 
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Section 5. ORGANIZATION AND CONDUCT . Every meeting of stockholders shall be conducted by an individual appointed by the Board of Directors to be chairman of the meeting or, in the absence of such appointment or appointed individual, by the chairman of the board or, in the case of a vacancy in the office or absence of the chairman of the board, by the lead director, if any, or by one of the following officers present at the meeting in the following order: the vice chairman of the board, if there is one, the chief executive officer, the president, the vice presidents in their order of rank and seniority, the secretary, or, in the absence of such officers, a chairman chosen by the stockholders by the vote of a majority of the votes cast by stockholders present in person or by proxy. The secretary, or, in the secretary’s absence, an assistant secretary, or, in the absence of both the secretary and assistant secretaries, an individual appointed by the Board of Directors or, in the absence of such appointment, an individual appointed by the chairman of the meeting shall act as secretary. In the event that the secretary presides at a meeting of stockholders, an assistant secretary, or, in the absence of all assistant secretaries, an individual appointed by the Board of Directors or the chairman of the meeting, shall record the minutes of the meeting. The order of business and all other matters of procedure at any meeting of stockholders shall be determined by the chairman of the meeting. The chairman of the meeting may prescribe such rules, regulations and procedures and take such action as, in the discretion of the chairman and without any action by the stockholders, are appropriate for the proper conduct of the meeting, including, without limitation, (i) restricting admission to the time set for the commencement of the meeting; (ii) limiting attendance at the meeting to stockholders of record of the Corporation, their duly authorized proxies and such other individuals as the chairman of the meeting may determine; (iii) limiting participation at the meeting on any matter to stockholders of record of the Corporation entitled to vote on such matter, their duly authorized proxies and other such individuals as the chairman of the meeting may determine; (iv) limiting the time allotted to questions or comments; (v) determining when and for how long the polls should be opened and when the polls should be closed; (vi) maintaining order and security at the meeting; (vii) removing any stockholder or any other individual who refuses to comply with meeting procedures, rules or guidelines as set forth by the chairman of the meeting; (viii) concluding a meeting or recessing or adjourning the meeting, whether or not a quorum is present, to a later date and time and at a place announced at the meeting; and (ix) complying with any state and local laws and regulations concerning safety and security. Unless otherwise determined by the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure.
Section 6. QUORUM . At any meeting of stockholders, the presence in person or by proxy of stockholders entitled to cast a majority of all the votes entitled to be cast at such meeting on any matter shall constitute a quorum; but this section shall not affect any requirement under any statute or the charter of the Corporation (the “Charter”) for the vote necessary for the approval of any matter. If such quorum is not established at any meeting of the stockholders, the chairman of the meeting may adjourn the meeting sine die or from time to time to a date not more than 120 days after the original record date without notice other than announcement at the meeting. At such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified.
The stockholders present either in person or by proxy, at a meeting which has been duly called and at which a quorum has been established, may continue to transact business until adjournment, notwithstanding the withdrawal from the meeting of enough stockholders to leave fewer than would be required to establish a quorum.
 
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Section 7. VOTING . A plurality of all the votes cast at a meeting of stockholders duly called and at which a quorum is present shall be sufficient to elect a director. Each share entitles the holder thereof to vote for as many individuals as there are directors to be elected and for whose election the holder is entitled to vote. A majority of the votes cast at a meeting of stockholders duly called and at which a quorum is present shall be sufficient to approve any other matter which may properly come before the meeting, unless more than a majority of the votes cast is required by statute or by the Charter. Unless otherwise provided by statute or by the Charter, each outstanding share, regardless of class, entitles the holder thereof to cast one vote on each matter submitted to a vote at a meeting of stockholders. Voting on any question or in any election may be viva voce unless the chairman of the meeting shall order that voting be by ballot or otherwise.
Section 8. PROXIES . A holder of record of shares of stock of the Corporation may cast votes in person or by proxy executed by the stockholder or by the stockholder’s duly authorized agent in any manner permitted by law. Such proxy or evidence of authorization of such proxy shall be filed with the secretary of the Corporation before or at the meeting. No proxy shall be valid more than eleven months after its date unless otherwise provided in the proxy.
Section 9. VOTING OF STOCK BY CERTAIN HOLDERS . Stock of the Corporation registered in the name of a corporation, partnership, trust, limited liability company, joint venture or other entity, if entitled to be voted, may be voted by the chief executive officer, the president or a vice president, managing director, director, general partner, trustee, managing member or manager thereof, as the case may be, or a proxy appointed by any of the foregoing individuals, unless some other person who has been appointed to vote such stock pursuant to a bylaw or a resolution of the governing body of such corporation or other entity or agreement of the partners of a partnership or managing members or managers, as applicable, of a limited liability company presents a certified copy of such bylaw, resolution or agreement, in which case such person may vote such stock. Any director or fiduciary, in such capacity, may vote stock registered in such director’s or fiduciary’s name, either in person or by proxy.
Shares of stock of the Corporation directly or indirectly owned by it shall not be voted at any meeting and shall not be counted in determining the total number of outstanding shares entitled to be voted at any given time, unless they are held by it in a fiduciary capacity, in which case they may be voted and shall be counted in determining the total number of outstanding shares at any given time.
The Board of Directors may adopt by resolution a procedure by which a stockholder may certify in writing to the Corporation that any shares of stock registered in the name of the stockholder are held for the account of a specified person other than the stockholder. The resolution shall set forth the class of stockholders who may make the certification, the purpose for which the certification may be made, the form of certification and the information to be contained in it; if the certification is with respect to a record date, the time after the record date within which the certification must be received by the Corporation; and any other provisions with respect to the procedure which the Board of Directors considers necessary or desirable. On receipt by the Corporation of such certification, the person specified in the certification shall be regarded as, for the purposes set forth in the certification, the holder of record of the specified stock in place of the stockholder who makes the certification.
 
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Section 10. INSPECTORS . The Board of Directors or the chairman of the meeting may appoint, before or at the meeting, one or more inspectors for the meeting and any successor to the inspector. Except as otherwise provided by the chairman of the meeting, the inspectors, if any, shall (i) determine the number of shares of stock represented at the meeting, in person or by proxy, and the validity and effect of proxies, (ii) receive and tabulate all votes, ballots or consents, (iii) report such tabulation to the chairman of the meeting, (iv) hear and determine all challenges and questions arising in connection with the right to vote and (v) do such acts as are proper to fairly conduct the election or vote. Each such report shall be in writing and signed by the inspector or by a majority of them if there is more than one inspector acting at such meeting. If there is more than one inspector, the report of a majority shall be the report of the inspectors. The report of the inspector or inspectors on the number of shares represented at the meeting and the results of the voting shall be prima facie evidence thereof.
Section 11. ADVANCE NOTICE OF STOCKHOLDER NOMINEES FOR DIRECTOR AND OTHER STOCKHOLDER PROPOSALS .
(i) Annual Meetings of Stockholders.
(A) Nominations of individuals for election to the Board of Directors and the proposal of other business to be considered by the stockholders may be made at an annual meeting of stockholders (1) pursuant to the Corporation’s notice of meeting, (2) by or at the direction of the Board of Directors or (3) by any stockholder of the Corporation who was a stockholder of record both at the time of giving of notice by the stockholder as provided for in this Section 11(i) and at the time of the annual meeting, who is entitled to vote at the meeting in the election of each individual so nominated or on any such other business and who has complied with this Section 11(i).
(B) For any nomination or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (3) of paragraph (i)(a) of this Section 11, the stockholder must have given timely notice thereof in writing to the secretary of the Corporation and any such other business must otherwise be a proper matter for action by the stockholders. To be timely, a stockholder’s notice shall set forth all information required under this Section 11 of this Article II and shall be delivered to the secretary at the principal executive office of the Corporation not earlier than the 150th day nor later than 5:00 p.m., Eastern Time, on the 120th day prior to the first anniversary of the date of the proxy statement (as defined in Section 11(iii)(C) of this Article II) for the preceding year’s annual meeting; provided, however, that in connection with the Corporation’s first annual meeting or in the event that the date of the annual meeting is advanced or delayed by more than 30 days from the first anniversary of the date of the preceding year’s annual meeting, in order for notice by the stockholder to be timely, such notice must be so delivered not earlier than the 150th day prior to the date of such annual meeting and not later than 5:00 p.m., Eastern Time, on the later of the 120th day prior to the date of such annual meeting, as originally convened, or the tenth day following the
 
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day on which public announcement of the date of such meeting is first made. The public announcement of a postponement or adjournment of an annual meeting shall not commence a new time period for the giving of a stockholder’s notice as described above.
(C) Such stockholder’s notice shall set forth:
(1) as to each individual whom the stockholder proposes to nominate for election or reelection as a director (each, a “Proposed Nominee”), all information relating to the Proposed Nominee that would be required to be disclosed in connection with the solicitation of proxies for the election of the Proposed Nominee as a director in an election contest (even if an election contest is not involved), or would otherwise be required in connection with such solicitation, in each case pursuant to Regulation 14A (or any successor provision) under the Exchange Act;
(2) as to any other business that the stockholder proposes to bring before the meeting, a reasonably detailed description of such business, the stockholder’s reasons for proposing such business at the meeting and any material interest in such business of such stockholder or any Stockholder Associated Person (as defined below), individually or in the aggregate, including any anticipated benefit to the stockholder or the Stockholder Associated Person therefrom;
(3) as to the stockholder giving the notice, any Proposed Nominee and any Stockholder Associated Person,
a. the class, series and number of all shares of stock or other securities of the Corporation or any affiliate thereof (collectively, the “Company Securities”), if any, which are owned (beneficially or of record) by such stockholder, Proposed Nominee or Stockholder Associated Person, the date on which each such Company Security was acquired and the investment intent of such acquisition, and any short interest (including any opportunity to profit or share in any benefit from any decrease in the price of such stock or other security) in any Company Securities of any such person,
b. the nominee holder for, and number of, any Company Securities owned beneficially but not of record by such stockholder, Proposed Nominee or Stockholder Associated Person,
c. whether and the extent to which such stockholder, Proposed Nominee or Stockholder Associated Person, directly or indirectly (through brokers, nominees or otherwise), is subject to or during the last six months has engaged in any hedging, derivative or other transaction or series of transactions or entered into any other agreement, arrangement or understanding (including any short interest, any borrowing or lending of securities or any proxy or voting agreement), the effect or
 
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intent of which is to (I) manage risk or benefit of changes in the price of Company Securities for such stockholder, Proposed Nominee or Stockholder Associated Person or (II) increase or decrease the voting power of such stockholder, Proposed Nominee or Stockholder Associated Person in the Corporation or any affiliate thereof disproportionately to such person’s economic interest in the Company Securities, and
d. any substantial interest, direct or indirect (including, without limitation, any existing or prospective commercial, business or contractual relationship with the Corporation), by security holdings or otherwise, of such stockholder, Proposed Nominee or Stockholder Associated Person, in the Corporation or any affiliate thereof, other than an interest arising from the ownership of Company Securities where such stockholder, Proposed Nominee or Stockholder Associated Person receives no extra or special benefit not shared on a pro rata basis by all other holders of the same class or series;
(4) as to the stockholder giving the notice, any Stockholder Associated Person with an interest or ownership referred to in clauses (2) or (3) of this paragraph (C) of this Section 11(i) and any Proposed Nominee,
a. the name and address of such stockholder, as they appear on the Corporation’s stock ledger, and the current name and business address, if different, of each such Stockholder Associated Person and any Proposed Nominee; and
b. the investment strategy or objective, if any, of such stockholder and each such Stockholder Associated Person who is not an individual and a copy of the prospectus, offering memorandum or similar document, if any, provided to investors or potential investors in such stockholder and each such Stockholder Associated Person;
(5) the name and address of any person who contacted or was contacted by the stockholder giving the notice or any Stockholder Associated Person about the Proposed Nominee or other business proposal prior to the date of such stockholder’s notice; and
(6) to the extent known by the stockholder giving the notice, the name and address of any other stockholder supporting the nominee for election or reelection as a director or the proposal of other business on the date of such stockholder’s notice.
(D) Such stockholder’s notice shall, with respect to any Proposed Nominee, be accompanied by a certificate executed by the Proposed Nominee (1) certifying that such Proposed Nominee (a) is not, and will not become a party to, any agreement, arrangement or understanding with any person or entity other than the Corporation in connection with service or action as a director that has not been disclosed
 
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to the Corporation and (b) will serve as a director of the Corporation if elected; and (2) attaching a completed Proposed Nominee questionnaire (which questionnaire shall be provided by the Corporation, upon request, to the stockholder providing the notice and shall include all information relating to the Proposed Nominee that would be required to be disclosed in connection with the solicitation of proxies for the election of the Proposed Nominee as a director in an election contest (even if an election contest is not involved), or would otherwise be required in connection with such solicitation, in each case pursuant to Regulation 14A (or any successor provision) under the Exchange Act and the rules thereunder, or would be required pursuant to the rules of any national securities exchange on which any securities of the Corporation are listed or over-the-counter market on which any securities of the Corporation are traded).
(E) Notwithstanding anything in this subsection (i) of this Section 11 to the contrary, in the event that the number of directors to be elected to the Board of Directors is increased, and there is no public announcement of such action at least 130 days prior to the first anniversary of the date of the proxy statement (as defined in Section 11(iii)(C) of this Article II) for the preceding year’s annual meeting, a stockholder’s notice required by this Section 11(i) shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the secretary at the principal executive office of the Corporation not later than 5:00 p.m., Eastern Time, on the tenth day following the day on which such public announcement is first made by the Corporation.
(F) For purposes of this Section 11, “Stockholder Associated Person” of any stockholder shall mean (1) any person acting in concert with such stockholder, (2) any beneficial owner of shares of stock of the Corporation owned of record or beneficially by such stockholder (other than a stockholder that is a depositary) and (3) any person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such stockholder or such Stockholder Associated Person.
(ii) Special Meetings of Stockholders . Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation’s notice of meeting. Nominations of individuals for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected only (A) by or at the direction of the Board of Directors, (B) by a stockholder that has requested that a special meeting be called for the purpose of electing directors in compliance with Section 3 of this Article II and that has supplied the information required by Section 3 of this Article II about each individual whom the stockholder proposes to nominate for election of directors or (C) provided that the special meeting has been called in accordance with Section 3(a) of this Article II for the purpose of electing directors, by any stockholder of the Corporation who is a stockholder of record both at the time of giving of notice provided for in this Section 11 and at the time of the special meeting, who is entitled to vote at the meeting in the election of each individual so nominated and who has complied with the notice procedures set forth in this Section 11. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more individuals to the Board of Directors, any stockholder may nominate an individual or individuals (as the case may be) for election as a director as specified in the
 
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Corporation’s notice of meeting, if the stockholder’s notice, containing the information required by paragraphs (i)(C) and (D) of this Section 11, is delivered to the secretary at the principal executive office of the Corporation not earlier than the 120th day prior to such special meeting and not later than 5:00 p.m., Eastern Time, on the later of the 90th day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. The public announcement of a postponement or adjournment of a special meeting shall not commence a new time period for the giving of a stockholder’s notice as described above.
(iii) General.
(A) If information submitted pursuant to this Section 11 by any stockholder proposing a nominee for election as a director or any proposal for other business at a meeting of stockholders shall be inaccurate in any material respect, such information may be deemed not to have been provided in accordance with this Section 11. Any such stockholder shall notify the Corporation of any inaccuracy or change (within two Business Days of becoming aware of such inaccuracy or change) in any such information. Upon written request by the secretary or the Board of Directors, any such stockholder shall provide, within five Business Days of delivery of such request (or such other period as may be specified in such request), (1) written verification, satisfactory, in the discretion of the Board of Directors or any authorized officer of the Corporation, to demonstrate the accuracy of any information submitted by the stockholder pursuant to this Section 11, and (2) a written update of any information (including, if requested by the Corporation, written confirmation by such stockholder that it continues to intend to bring such nomination or other business proposal before the meeting) submitted by the stockholder pursuant to this Section 11 as of an earlier date. If a stockholder fails to provide such written verification or written update within such period, the information as to which written verification or a written update was requested may be deemed not to have been provided in accordance with this Section 11.
(B) Only such individuals who are nominated in accordance with this Section 11 shall be eligible for election by stockholders as directors, and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with this Section 11. The chairman of the meeting shall have the power to determine whether a nomination or any other business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with this Section 11.
(C) For purposes of this Section 11, “the date of the proxy statement” shall have the same meaning as “the date of the company’s proxy statement released to shareholders” as used in Rule 14a-8(e) promulgated under the Exchange Act, as interpreted by the Securities and Exchange Commission from time to time. “Public announcement” shall mean disclosure (1) in a press release reported by the Dow Jones News Service, Associated Press, Business Wire, PR Newswire or other widely circulated news or wire service or (2) in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to the Exchange Act.
 
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(D) Notwithstanding the foregoing provisions of this Section 11, a stockholder shall also comply with all applicable requirements of state law and of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 11. Nothing in this Section 11 shall be deemed to affect any right of a stockholder to request inclusion of a proposal in, or the right of the Corporation to omit a proposal from, any proxy statement filed by the Corporation with the Securities and Exchange Commission pursuant to Rule 14a-8 (or any successor provision) under the Exchange Act. Nothing in this Section 11 shall require disclosure of revocable proxies received by the stockholder or Stockholder Associated Person pursuant to a solicitation of proxies after the filing of an effective Schedule 14A by such stockholder or Stockholder Associated Person under Section 14(a) of the Exchange Act.
Section 12. TELEPHONE MEETINGS . The Board of Directors or chairman of the meeting may permit one or more stockholders to participate in a meeting by means of a conference telephone or other communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means constitutes presence in person at the meeting.
Section 13. CONTROL SHARE ACQUISITION ACT . Notwithstanding any other provision of the Charter or these Bylaws, Title 3, Subtitle 7 of the Maryland General Corporation Law, or any successor statute (the “MGCL”), shall not apply to any acquisition by any person of shares of stock of the Corporation. This section may be repealed, in whole or in part, at any time, by the Board of Directors whether before or after an acquisition of control shares and, upon such repeal, may, to the extent provided by any successor bylaw, apply to any prior or subsequent control share acquisition.
Section 14. STOCKHOLDERS’ CONSENT IN LIEU OF MEETING . Any action required or permitted to be taken at any meeting of stockholders may be taken without a meeting (i) if a unanimous consent setting forth the action is given in writing or by electronic transmission by each stockholder entitled to vote on the matter and filed with the minutes of proceedings of the stockholders or (ii) if the action is advised, and submitted to the stockholders for approval, by the Board of Directors and a consent in writing or by electronic transmission of stockholders entitled to cast not less than the minimum number of votes that would be necessary to authorize or take the action at a meeting of stockholders is delivered to the Corporation in accordance with the MGCL. The Corporation shall give notice of any action taken by less than unanimous consent to each stockholder not later than ten days after the effective time of such action.
ARTICLE III
DIRECTORS
Section 1. GENERAL POWERS . The business and affairs of the Corporation shall be managed under the direction of its Board of Directors.
 
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Section 2. NUMBER, TENURE AND RESIGNATION .
(i) At any regular meeting or at any special meeting called for that purpose, a majority of the entire Board of Directors may establish, increase or decrease the number of directors, provided that the number thereof shall never be less than the minimum number required by the MGCL, nor more than 15, and further provided that the tenure of office of a director shall not be affected by any decrease in the number of directors.
(ii) Any director of the Corporation may resign at any time by delivering his or her resignation to the Board of Directors, the chairman of the board or the secretary. Any resignation shall take effect immediately upon its receipt or at such later time specified in the resignation. The acceptance of a resignation shall not be necessary to make it effective unless otherwise stated in the resignation.
Section 3. ANNUAL AND REGULAR MEETINGS . An annual meeting of the Board of Directors shall be held immediately after and at the same place as the annual meeting of stockholders, no notice other than this Bylaw being necessary. In the event such meeting is not so held, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors. The Board of Directors may provide, by resolution, the time and place for the holding of regular meetings of the Board of Directors without other notice than such resolution.
Section 4. SPECIAL MEETINGS . Special meetings of the Board of Directors may be called by or at the request of the chairman of the board, the lead director, if any, the chief executive officer, the president or a majority of the directors then in office. The person or persons authorized to call special meetings of the Board of Directors may fix any place as the place for holding any special meeting of the Board of Directors called by them. The Board of Directors may provide, by resolution, the time and place for the holding of special meetings of the Board of Directors without other notice than such resolution.
Section 5. NOTICE . Notice of any special meeting of the Board of Directors shall be delivered personally or by telephone, electronic mail, facsimile transmission, courier or United States mail to each director at his or her business or residence address. Notice by personal delivery, telephone, electronic mail or facsimile transmission shall be given at least 24 hours prior to the meeting. Notice by United States mail shall be given at least three days prior to the meeting. Notice by courier shall be given at least two days prior to the meeting. Telephone notice shall be deemed to be given when the director or his or her agent is personally given such notice in a telephone call to which the director or his or her agent is a party. Electronic mail notice shall be deemed to be given upon transmission of the message to the electronic mail address given to the Corporation by the director. Facsimile transmission notice shall be deemed to be given upon completion of the transmission of the message to the number given to the Corporation by the director and receipt of a completed answer-back indicating receipt. Notice by United States mail shall be deemed to be given when deposited in the United States mail properly addressed, with postage thereon prepaid. Notice by courier shall be deemed to be given when deposited with or delivered to a courier properly addressed. Neither the business to be transacted at, nor the purpose of, any annual, regular or special meeting of the Board of Directors need be stated in the notice, unless specifically required by statute or these Bylaws.
 
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Section 6. QUORUM . A majority of the directors shall constitute a quorum for transaction of business at any meeting of the Board of Directors, provided that, if less than a majority of such directors is present at such meeting, a majority of the directors present may adjourn the meeting from time to time without further notice, and provided further that if, pursuant to applicable law, the Charter or these Bylaws, the vote of a majority or other percentage of a particular group of directors is required for action, a quorum must also include a majority or such other percentage of such group.
The directors present at a meeting which has been duly called and at which a quorum has been established may continue to transact business until adjournment, notwithstanding the withdrawal from the meeting of enough directors to leave fewer than required to establish a quorum.
Section 7. VOTING . The action of a majority of the directors present at a meeting at which a quorum is present shall be the action of the Board of Directors, unless the concurrence of a greater proportion is required for such action by applicable law, the Charter or these Bylaws. If enough directors have withdrawn from a meeting to leave fewer than required to establish a quorum, but the meeting is not adjourned, the action of the majority of that number of directors necessary to constitute a quorum at such meeting shall be the action of the Board of Directors, unless the concurrence of a greater proportion is required for such action by applicable law, the Charter or these Bylaws.
Section 8. ORGANIZATION . At each meeting of the Board of Directors, the chairman of the board or, in the absence of the chairman, the lead director, if any, or the vice chairman of the board, if any, shall act as chairman of the meeting. In the absence of the chairman, the lead director and vice chairman of the board, the chief executive officer or, in the absence of the chief executive officer, the president or, in the absence of the president, a director chosen by a majority of the directors present, shall act as chairman of the meeting. The secretary or, in his or her absence, an assistant secretary of the Corporation, or, in the absence of the secretary and all assistant secretaries, an individual appointed by the chairman of the meeting, shall act as secretary of the meeting.
Section 9. TELEPHONE MEETINGS . Directors may participate in a meeting by means of a conference telephone or other communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting.
Section 10. CONSENT BY DIRECTORS WITHOUT A MEETING . Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting, if a consent in writing or by electronic transmission to such action is given by each director and is filed with the minutes of proceedings of the Board of Directors.
Section 11. VACANCIES . If for any reason any or all of the directors cease to be directors, such event shall not terminate the Corporation or affect these Bylaws or the powers of the remaining directors hereunder. Until such time as the Corporation becomes subject to Section 3-804(c) of the MGCL, any vacancy on the Board of Directors for any cause other than an increase in the number of directors may be filled by a majority of the remaining directors,
 
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even if such majority is less than a quorum; any vacancy in the number of directors created by an increase in the number of directors may be filled by a majority vote of the entire Board of Directors; and any individual so elected as director shall serve until the next annual meeting of stockholders and until his or her successor is elected and qualifies. At such time as the Corporation becomes subject to Section 3-804(c) of the MGCL and except as may be provided by the Board of Directors in setting the terms of any class or series of preferred stock, any vacancy on the Board of Directors may be filled only by a majority of the remaining directors, even if the remaining directors do not constitute a quorum, and any director elected to fill a vacancy shall serve for the remainder of the full term of the directorship in which the vacancy occurred and until a successor is elected and qualifies.
Section 12. COMPENSATION . Directors shall not receive any stated salary for their services as directors but, by resolution of the Board of Directors, may receive compensation per year and/or per meeting and/or per visit to real property or other facilities owned or leased by the Corporation and for any service or activity they performed or engaged in as directors. Directors may be reimbursed for expenses of attendance, if any, at each annual, regular or special meeting of the Board of Directors or of any committee thereof and for their expenses, if any, in connection with each property visit and any other service or activity they perform or engage in as directors; but nothing herein contained shall be construed to preclude any directors from serving the Corporation in any other capacity and receiving compensation therefor.
Section 13. RELIANCE . Each director and officer of the Corporation shall, in the performance of his or her duties with respect to the Corporation, be entitled to rely on any information, opinion, report or statement, including any financial statement or other financial data, prepared or presented by an officer or employee of the Corporation whom the director or officer reasonably believes to be reliable and competent in the matters presented, by a lawyer, certified public accountant or other person, as to a matter which the director or officer reasonably believes to be within the person’s professional or expert competence, or, with respect to a director, by a committee of the Board of Directors on which the director does not serve, as to a matter within its designated authority, if the director reasonably believes the committee to merit confidence.
Section 14. LEAD DIRECTOR . The Board of Directors shall have the authority to elect a lead director with the responsibilities set forth herein and as established from time to time by the Board of Directors.
Section 15. RATIFICATION . The Board of Directors or the stockholders may ratify and make binding on the Corporation any action or inaction by the Corporation or its officers to the extent that the Board of Directors or the stockholders could have originally authorized the matter. Moreover, any action or inaction questioned in any stockholders’ derivative proceeding or any other proceeding on the ground of lack of authority, defective or irregular execution, adverse interest of a director, officer or stockholder, non-disclosure, miscomputation, the application of improper principles or practices of accounting or otherwise, may be ratified, before or after judgment, by the Board of Directors or by the stockholders, and if so ratified, shall have the same force and effect as if the questioned action or inaction had been originally duly authorized, and such ratification shall be binding upon the Corporation and its stockholders and shall constitute a bar to any claim or execution of any judgment in respect of such questioned action or inaction.
 
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Section 16. CERTAIN RIGHTS OF DIRECTORS AND OFFICERS . A director who is not also an officer of the Corporation shall have no responsibility to devote his or her full time to the affairs of the Corporation. Any director or officer, in his or her personal capacity or in a capacity as an affiliate, employee, or agent of any other person, or otherwise, may have business interests and engage in business activities similar to, in addition to or in competition with those of or relating to the Corporation.
Section 17. EMERGENCY PROVISIONS . Notwithstanding any other provision in the Charter or these Bylaws, this Section 17 shall apply during the existence of any catastrophe, or other similar emergency condition, as a result of which a quorum of the Board of Directors under Article III of these Bylaws cannot readily be obtained (an “Emergency”). During any Emergency, unless otherwise provided by the Board of Directors, (i) a meeting of the Board of Directors or a committee thereof may be called by any director or officer by any means feasible under the circumstances; (ii) notice of any meeting of the Board of Directors during such an Emergency may be given less than 24 hours prior to the meeting to as many directors and by such means as may be feasible at the time, including publication, television or radio; and (iii) the number of directors necessary to constitute a quorum shall be one-third of the entire Board of Directors.
ARTICLE IV
COMMITTEES
Section 1. NUMBER, TENURE AND QUALIFICATIONS . The Board of Directors may appoint from among its members an Executive Committee, an Audit Committee, a Compensation, Nominating and Corporate Governance Committee and one or more other committees, composed of one or more directors, to serve at the pleasure of the Board of Directors.
Section 2. POWERS . The Board of Directors may delegate to committees appointed under Section 1 of this Article any of the powers of the Board of Directors, except as prohibited by law.
Section 3. MEETINGS . Notice of committee meetings shall be given in the same manner as notice for special meetings of the Board of Directors. A majority of the members of the committee shall constitute a quorum for the transaction of business at any meeting of the committee. Unless otherwise agreed by a majority of the members of a committee, the act of a majority of the committee members present at a meeting shall be the act of such committee. The Board of Directors may designate a chairman of any committee, and such chairman or, in the absence of a chairman, any two members of any committee (if there are at least two members of the committee) may fix the time and place of its meeting unless the Board shall otherwise provide. In the absence of any member of any such committee, the members thereof present at any meeting, whether or not they constitute a quorum, may appoint another director to act in the place of such absent member.
 
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Section 4. TELEPHONE MEETINGS . Members of a committee of the Board of Directors may participate in a meeting by means of a conference telephone or other communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting.
Section 5. CONSENT BY COMMITTEES WITHOUT A MEETING . Any action required or permitted to be taken at any meeting of a committee of the Board of Directors may be taken without a meeting, if a consent in writing or by electronic transmission to such action, is given by each member of the committee and is filed with the minutes of proceedings of such committee.
Section 6. VACANCIES . Subject to the provisions hereof, the Board of Directors shall have the power at any time to change the membership of any committee, to fill any vacancy, to designate an alternate member to replace any absent or disqualified member or to dissolve any such committee.
ARTICLE V
OFFICERS
Section 1. GENERAL PROVISIONS . The officers of the Corporation shall include a president, a secretary and a treasurer and may include a chairman of the board, a vice chairman of the board, a chief executive officer, one or more vice presidents, a chief operating officer, a chief financial officer, one or more assistant secretaries and one or more assistant treasurers. In addition, the Board of Directors may from time to time elect such other officers with such powers and duties as it shall deem necessary or desirable. The officers of the Corporation shall be elected annually by the Board of Directors, except that the chief executive officer or president may from time to time appoint one or more vice presidents, assistant secretaries and assistant treasurers or other officers. Each officer shall serve until his or her successor is elected and qualifies or until his or her death, or his or her resignation or removal in the manner hereinafter provided. Any two or more offices except president and vice president may be held by the same person. Election of an officer or agent shall not of itself create contract rights between the Corporation and such officer or agent.
Section 2. REMOVAL AND RESIGNATION . Any officer or agent of the Corporation may be removed, with or without cause, by the Board of Directors if in its judgment the best interests of the Corporation would be served thereby. Further, the chief executive officer or president, respectively, may remove any officer appointed thereby at any time at his or her discretion with or without cause. Any such removal shall be without prejudice to the contract rights, if any, of the person so removed. Any officer of the Corporation may resign at any time by delivering his or her resignation to the Board of Directors, the chairman of the board, the chief executive officer, the president or the secretary. Any resignation shall take effect immediately upon its receipt or at such later time specified in the resignation. The acceptance of a resignation shall not be necessary to make it effective unless otherwise stated in the resignation. Such resignation shall be without prejudice to the contract rights, if any, of the Corporation.
 
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Section 3. VACANCIES . A vacancy in any office may be filled by the Board of Directors for the balance of the term.
Section 4. CHAIRMAN OF THE BOARD . The Board of Directors may designate from among its members a chairman of the board, who shall not, solely by reason of these Bylaws, be an officer of the Corporation. The Board of Directors may designate the chairman of the board as an executive or non-executive chairman. The chairman of the board shall preside over the meetings of the Board of Directors. The chairman of the board shall perform such other duties as may be assigned to him or her by these Bylaws or the Board of Directors.
Section 5. CHIEF EXECUTIVE OFFICER . The Board of Directors may designate a chief executive officer. In the absence of such designation, the president shall be the chief executive officer of the Corporation. The chief executive officer shall have general responsibility for implementation of the policies of the Corporation, as determined by the Board of Directors, and for the management of the business and affairs of the Corporation. He or she may execute any deed, mortgage, bond, contract or other instrument, except in cases where the execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of the Corporation or shall be required by law to be otherwise executed; and in general shall perform all duties incident to the office of chief executive officer and such other duties as may be prescribed by the Board of Directors from time to time.
Section 6. CHIEF OPERATING OFFICER . The Board of Directors may designate a chief operating officer. The chief operating officer shall have the responsibilities and duties as determined by the Board of Directors or the chief executive officer.
Section 7. CHIEF FINANCIAL OFFICER . The Board of Directors may designate a chief financial officer. The chief financial officer shall have the responsibilities and duties as determined by the Board of Directors or the chief executive officer.
Section 8. PRESIDENT . In the absence of a chief executive officer, the president shall in general supervise and control all of the business and affairs of the Corporation. In the absence of a designation of a chief executive officer and/or chief operating officer by the Board of Directors, the president shall be the chief executive officer and/or chief operating officer, as the case may be. He or she may execute any deed, mortgage, bond, contract or other instrument, except in cases where the execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of the Corporation or shall be required by law to be otherwise executed; and in general shall perform all duties incident to the office of president and such other duties as may be prescribed by the Board of Directors from time to time.
Section 9. VICE PRESIDENTS . The Board of Directors, the chief executive officer or the president may designate one or more vice presidents. In the absence of the president or in the event of a vacancy in such office, the vice president (or in the event there be more than one vice president, the vice presidents in the order designated at the time of their election or, in the absence of any designation, then in the order of their election) shall perform the duties of the president and when so acting shall have all the powers of and be subject to all the restrictions upon the president; and shall perform such other duties as from time to time may be assigned to such vice president by the chief executive officer, the president or the Board of Directors. The Board of Directors may designate one or more vice presidents as executive vice president, senior vice president, or vice president for particular areas of responsibility.
 
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Section 10. SECRETARY . The secretary shall (i) keep the minutes of the proceedings of the stockholders, the Board of Directors and committees of the Board of Directors in one or more books provided for that purpose; (ii) see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law; (iii) be custodian of the corporate records and of the seal of the Corporation; (iv) keep a register of the post office address of each stockholder which shall be furnished to the secretary by such stockholder; (v) have general charge of the stock transfer books of the Corporation; and (vi) in general perform such other duties as from time to time may be assigned to him or her by the chief executive officer, the president or the Board of Directors.
Section 11. TREASURER . The treasurer shall have the custody of the funds and securities of the Corporation, shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation, shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors and in general perform such other duties as from time to time may be assigned to him or her by the chief executive officer, the president or the Board of Directors. In the absence of a designation of a chief financial officer by the Board of Directors, the treasurer shall be the chief financial officer of the Corporation.
The treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the president and Board of Directors, at the regular meetings of the Board of Directors or whenever it may so require, an account of all his or her transactions as treasurer and of the financial condition of the Corporation.
Section 12. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS . The Board of Directors, the chief executive officer or the president may designate one or more assistant secretaries and assistant treasurers. The assistant secretaries and assistant treasurers, in general, shall perform such duties as shall be assigned to them by the secretary or treasurer, respectively, or by the chief executive officer, the president or the Board of Directors.
Section 13. COMPENSATION . The compensation of the officers shall be fixed from time to time by or under the authority of the Board of Directors and no officer shall be prevented from receiving such compensation by reason of the fact that he or she is also a director.
ARTICLE VI
CONTRACTS, CHECKS AND DEPOSITS
Section 1. CONTRACTS . The Board of Directors may authorize any officer or agent to enter into any contract or to execute and deliver any instrument in the name of and on behalf of the Corporation and such authority may be general or confined to specific instances. Any agreement, deed, mortgage, lease or other document shall be valid and binding upon the Corporation when duly authorized or ratified by action of the Board of Directors and executed by an authorized person.
 
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Section 2. CHECKS AND DRAFTS . All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by such officer or agent of the Corporation in such manner as shall from time to time be determined by the Board of Directors.
Section 3. DEPOSITS . All funds of the Corporation not otherwise employed shall be deposited or invested from time to time to the credit of the Corporation as the Board of Directors, the chief executive officer, the president, the chief financial officer, or any other officer designated by the Board of Directors may determine.
ARTICLE VII
STOCK
Section 1. CERTIFICATES . Except as may be otherwise provided by the Board of Directors, stockholders of the Corporation are not entitled to certificates representing the shares of stock held by them. In the event that the Corporation issues shares of stock represented by certificates, such certificates shall be in such form as prescribed by the Board of Directors or a duly authorized officer, shall contain the statements and information required by the MGCL and shall be signed by the officers of the Corporation in any manner permitted by the MGCL. In the event that the Corporation issues shares of stock without certificates, to the extent then required by the MGCL, the Corporation shall provide to the record holders of such shares a written statement of the information required by the MGCL to be included on stock certificates. There shall be no differences in the rights and obligations of stockholders based on whether or not their shares are represented by certificates.
Section 2. TRANSFERS . All transfers of shares of stock shall be made on the books of the Corporation, by the holder of the shares, in person or by his or her attorney, in such manner as the Board of Directors or any officer of the Corporation may prescribe and, if such shares are certificated, upon surrender of certificates duly endorsed. The issuance of a new certificate upon the transfer of certificated shares is subject to the determination of the Board of Directors that such shares shall no longer be represented by certificates. Upon the transfer of any uncertificated shares, the Corporation shall provide to the record holders of such shares, to the extent then required by the MGCL, a written statement of the information required by the MGCL to be included on stock certificates.
The Corporation shall be entitled to treat the holder of record of any share of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise expressly provided by the laws of the State of Maryland.
Notwithstanding the foregoing, transfers of shares of any class or series of stock will be subject in all respects to the Charter and all of the terms and conditions contained therein.
 
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Section 3. REPLACEMENT CERTIFICATE . Any officer of the Corporation may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, destroyed, stolen or mutilated, upon the making of an affidavit of that fact by the person claiming the certificate to be lost, destroyed, stolen or mutilated; provided, however, if such shares have ceased to be certificated, no new certificate shall be issued unless requested in writing by such stockholder and the Board of Directors has determined that such certificates may be issued. Unless otherwise determined by an officer of the Corporation, the owner of such lost, destroyed, stolen or mutilated certificate or certificates, or his or her legal representative, shall be required, as a condition precedent to the issuance of a new certificate or certificates, to give the Corporation a bond in such sums as it may direct as indemnity against any claim that may be made against the Corporation.
Section 4. FIXING OF RECORD DATE . The Board of Directors may set, in advance, a record date for the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders or determining stockholders entitled to receive payment of any dividend or the allotment of any other rights, or in order to make a determination of stockholders for any other proper purpose. Such date, in any case, shall not be prior to the close of business on the day the record date is fixed and shall be not more than 90 days and, in the case of a meeting of stockholders, not less than ten days, before the date on which the meeting or particular action requiring such determination of stockholders of record is to be held or taken.
When a record date for the determination of stockholders entitled to notice of and to vote at any meeting of stockholders has been set as provided in this section, such record date shall continue to apply to the meeting if adjourned or postponed, except if the meeting is adjourned or postponed to a date more than 120 days after the record date originally fixed for the meeting, in which case a new record date for such meeting may be determined as set forth herein.
Section 5. STOCK LEDGER . The Corporation shall maintain at its principal office or at the office of its counsel, accountants or transfer agent, an original or duplicate stock ledger containing the name and address of each stockholder and the number of shares of each class held by such stockholder.
Section 6. FRACTIONAL STOCK; ISSUANCE OF UNITS . The Board of Directors may authorize the Corporation to issue fractional stock or authorize the issuance of scrip, all on such terms and under such conditions as it may determine. Notwithstanding any other provision of the Charter or these Bylaws, the Board of Directors may issue units consisting of different securities of the Corporation. Any security issued in a unit shall have the same characteristics as any identical securities issued by the Corporation, except that the Board of Directors may provide that for a specified period securities of the Corporation issued in such unit may be transferred on the books of the Corporation only in such unit.
ARTICLE VIII
ACCOUNTING YEAR
The Board of Directors shall have the power, from time to time, to fix the fiscal year of the Corporation by a duly adopted resolution.
 
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ARTICLE IX
DISTRIBUTIONS
Section 1. AUTHORIZATION . Dividends and other distributions upon the stock of the Corporation may be authorized by the Board of Directors, subject to the provisions of law and the Charter. Dividends and other distributions may be paid in cash, property or stock of the Corporation, subject to the provisions of law and the Charter.
Section 2. CONTINGENCIES . Before payment of any dividends or other distributions, there may be set aside out of any assets of the Corporation available for dividends or other distributions such sum or sums as the Board of Directors may from time to time, in its absolute discretion, think proper as a reserve fund for contingencies, for equalizing dividends, for repairing or maintaining any property of the Corporation or for such other purpose as the Board of Directors shall determine, and the Board of Directors may modify or abolish any such reserve.
ARTICLE X
INVESTMENT POLICY
Subject to the provisions of the Charter, the Board of Directors may from time to time adopt, amend, revise or terminate any policy or policies with respect to investments by the Corporation as it shall deem appropriate in its sole discretion.
ARTICLE XI
SEAL
Section 1. SEAL . The Board of Directors may authorize the adoption of a seal by the Corporation. The seal shall contain the name of the Corporation and the year of its incorporation and the words “Incorporated Maryland.” The Board of Directors may authorize one or more duplicate seals and provide for the custody thereof.
Section 2. AFFIXING SEAL . Whenever the Corporation is permitted or required to affix its seal to a document, it shall be sufficient to meet the requirements of any law, rule or regulation relating to a seal to place the word “(SEAL)” adjacent to the signature of the person authorized to execute the document on behalf of the Corporation.
ARTICLE XII
INDEMNIFICATION AND ADVANCE OF EXPENSES
To the maximum extent permitted by Maryland law in effect from time to time, the Corporation shall indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, shall pay or reimburse reasonable expenses in advance of final disposition of a proceeding to, (a) any individual who is a present or former director or officer of the Corporation and who is made or threatened to be made a party to, or witness in, the proceeding by reason of his or her service in that capacity or (b) any individual who, while a
 
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director or officer of the Corporation and at the request of the Corporation, serves or has served as a director, officer, partner, trustee, member or manager of another corporation, real estate investment trust, limited liability company, partnership, joint venture, trust, employee benefit plan or other enterprise and who is made or threatened to be made a party to, or witness in, the proceeding by reason of his or her service in that capacity. The rights to indemnification and advance of expenses provided by the Charter and these Bylaws shall vest immediately upon election of a director or officer. The Corporation may, with the approval of its Board of Directors, provide such indemnification and advance for expenses to an individual who served a predecessor of the Corporation or any entity acquired by the Corporation or any partnership controlled by the Corporation (an “Acquired Entity”) or any predecessor entity to an Acquired Entity in any of the capacities described in (a) or (b) above and to any employee or agent of the Corporation or a predecessor of the Corporation or of any Acquired Entity or any predecessor of an Acquired Entity. The indemnification and payment or reimbursement of expenses provided in these Bylaws shall not be deemed exclusive of or limit in any way other rights to which any person seeking indemnification or payment or reimbursement of expenses may be or may become entitled under any bylaw, resolution, insurance, agreement or otherwise.
Neither the amendment nor repeal of this Article, nor the adoption or amendment of any other provision of the Charter or these Bylaws inconsistent with this Article, shall apply to or affect in any respect the applicability of the preceding paragraph with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption.
ARTICLE XIII
WAIVER OF NOTICE
Whenever any notice of a meeting is required to be given pursuant to the Charter or these Bylaws or pursuant to applicable law, a waiver thereof in writing or by electronic transmission, given by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at nor the purpose of any meeting need be set forth in the waiver of notice of such meeting, unless specifically required by statute. The attendance of any person at any meeting shall constitute a waiver of notice of such meeting, except where such person attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting has not been lawfully called or convened.
ARTICLE XIV
EXCLUSIVE FORUM FOR CERTAIN LITIGATION
Unless the Corporation consents in writing to the selection of an alternative forum, the Circuit Court for Baltimore City, Maryland, or, if that Court does not have jurisdiction, the United States District Court for the District of Maryland, Baltimore Division, shall be the sole and exclusive forum for (a) any derivative action or proceeding brought on behalf of the Corporation, (b) any action asserting a claim of breach of any duty owed by any director or officer or other employee of the Corporation to the Corporation or to the stockholders of the Corporation, (c) any action asserting a claim against the Corporation or any director or officer or
 
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other employee of the Corporation arising pursuant to any provision of the MGCL or the Charter or these Bylaws, or (d) any action asserting a claim against the Corporation or any director or officer or other employee of the Corporation that is governed by the internal affairs doctrine.
ARTICLE XV
AMENDMENT OF BYLAWS
The Board of Directors shall have the exclusive power to adopt, alter or repeal any provision of these Bylaws and to make new Bylaws.
 
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Exhibit 10.3

THIRD AMENDED AND RESTATED
COMPANY AGREEMENT
SHARYLAND DISTRIBUTION
&
TRANSMISSION SERVICES, L.L.C.

TABLE OF CONTENTS

ARTICLE I. THE COMPANY	  	 	1	  	
		
Section 1.1 Organization as Limited Liability Company	  	 	1	  	
		
Section 1.2 Names and Addresses of Members	  	 	2	  	
		
Section 1.3 Name	  	 	2	  	
		
Section 1.4 Registered Office; Registered Agent	  	 	2	  	
		
Section 1.5 Principal Place of Business	  	 	2	  	
		
Section 1.6 Purpose	  	 	2	  	
		
Section 1.7 Duration	  	 	3	  	
		
Section 1.8 Right of Competition	  	 	3	  	
		
ARTICLE II. CERTAIN DEFINITIONS	  	 	3	  	
		
Section 2.1 Definitions	  	 	3	  	
		
Section 2.2 References to this Agreement; Interpretation	  	 	13	  	
		
ARTICLE III. THE MEMBERS; CAPITAL CONTRIBUTIONS	  	 	13	  	
		
Section 3.1 Identification	  	 	13	  	
		
Section 3.2 Capital Contributions	  	 	13	  	
		
Section 3.3 Capital Accounts	  	 	14	  	
		
Section 3.4 Additional Provisions Regarding Capital Accounts	  	 	15	  	
		
ARTICLE IV. ALLOCATIONS OF NET PROFIT AND NET LOSS; DISTRIBUTIONS	  	 	16	  	
		
Section 4.1 Allocations of Net Profit and Net Loss	  	 	16	  	
		
Section 4.2 Distributions of Available Cash	  	 	17	  	
		
Section 4.3 Distributions of Net Proceeds from a Capital Transaction	  	 	18	  	
		
Section 4.4 In Kind Distributions	  	 	18	  	
		
Section 4.5 Tax Distributions	  	 	18	  	
		
Section 4.6 Special Allocation Rules	  	 	19	  	
		
Section 4.7 Allocations for Tax Purposes	  	 	20	  	
 
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ARTICLE V. THE SHARYLAND MEMBER	  	 	21	  	
		
Section 5.1 Power and Authority of Sharyland Member	  	 	21	  	
		
Section 5.2 Restrictions on Sharyland Member	  	 	26	  	
		
Section 5.3 Reimbursement and Fees	  	 	28	  	
		
Section 5.4 Performance of Sharyland Member	  	 	28	  	
		
Section 5.5 Purchase of Sharyland Interest	  	 	28	  	
		
ARTICLE VI. THE MEMBERS	  	 	29	  	
		
Section 6.1 Rights of the Members	  	 	29	  	
		
Section 6.2 Liability for the Company’s Obligations	  	 	30	  	
		
Section 6.3 Use of Affiliates	  	 	30	  	
		
ARTICLE VII. INDEMNIFICATION	  	 	30	  	
		
Section 7.1 Liability of the Covered Persons	  	 	30	  	
		
Section 7.2 Indemnification	  	 	30	  	
		
ARTICLE VIII. COMPANY OPERATIONS	  	 	32	  	
		
Section 8.1 Annual Business Plan; Capital Expenditures Budget	  	 	32	  	
		
Section 8.2 Insurance	  	 	34	  	
		
ARTICLE IX. ACCOUNTING AND RECORDS	  	 	34	  	
		
Section 9.1 Books and Records	  	 	34	  	
		
Section 9.2 Reports	  	 	35	  	
		
Section 9.3 Annual Audit	  	 	35	  	
		
Section 9.4 Exchange Act Reporting	  	 	36	  	
		
Section 9.5 Fiscal Year	  	 	36	  	
		
Section 9.6 Bank Accounts	  	 	36	  	
		
Section 9.7 Quarterly Meetings	  	 	36	  	
		
Section 9.8 Appointment of Representatives	  	 	36	  	
		
ARTICLE X. TAX MATTERS	  	 	37	  	
		
Section 10.1 Preparation of Tax Returns	  	 	37	  	
		
Section 10.2 Tax Elections	  	 	37	  	
		
Section 10.3 Tax Matters Member	  	 	37	  	
		
Section 10.4 Organizational Expenses	  	 	38	  	
		
Section 10.5 Withholding	  	 	38	  	
		
Section 10.6 Code Section 83 Safe Harbor Election	  	 	39	  	
 
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ARTICLE XI. REPRESENTATIONS AND WARRANTIES	  	 	40	  	
		
Section 11.1 Sharyland Member	  	 	40	  	
		
Section 11.2 TDC Member	  	 	40	  	
		
ARTICLE XII. TRANSFER OF INTERESTS	  	 	41	  	
		
Section 12.1 Restrictions on Transfer	  	 	41	  	
		
Section 12.2 General Transfer Provisions	  	 	41	  	
		
Section 12.3 Compliance	  	 	41	  	
		
ARTICLE XIII. TERMINATION OF THE COMPANY	  	 	41	  	
		
Section 13.1 Events of Winding Up	  	 	41	  	
		
Section 13.2 Effect of Winding Up	  	 	42	  	
		
Section 13.3 Sale or Distribution of Assets Resulting from Liquidation	  	 	43	  	
		
ARTICLE XIV. MISCELLANEOUS	  	 	43	  	
		
Section 14.1 Notices	  	 	43	  	
		
Section 14.2 Confidentiality	  	 	44	  	
		
Section 14.3 Successors and Assigns	  	 	44	  	
		
Section 14.4 Amendments; No Oral Modifications	  	 	44	  	
		
Section 14.5 Captions	  	 	44	  	
		
Section 14.6 Terms	  	 	44	  	
		
Section 14.7 Severability	  	 	45	  	
		
Section 14.8 Further Assurances	  	 	45	  	
		
Section 14.9 Complete Agreement	  	 	45	  	
		
Section 14.10 Attorneys’ Fees	  	 	45	  	
		
Section 14.11 Governing Law	  	 	45	  	
		
Section 14.12 No Third Party Beneficiary	  	 	45	  	
		
Section 14.13 Approvals	  	 	46	  	
		
Section 14.14 Drafting Conventions	  	 	46	  	
		
Section 14.15 Counterparts	  	 	46	  	
		
Section 14.16 Telecopy Execution and Delivery	  	 	46	  	
 
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THIRD AMENDED AND RESTATED COMPANY AGREEMENT
OF SHARYLAND DISTRIBUTION & TRANSMISSION SERVICES, L.L.C.
THIS THIRD AMENDED AND RESTATED COMPANY AGREEMENT (herein called this “ Agreement ”) is made and entered into on                     , 2015 to be effective as of the Effective Date (as hereinafter defined), by and between Sharyland Utilities, L.P., a Texas limited partnership (“ Sharyland Utilities ” or the “ Sharyland Member ”), and Transmission and Distribution Company, L.L.C., a Texas limited liability company (formerly known as Texas T&D Company, L.L.C., the “ TDC Member ”).
Certain capitalized terms used in this Agreement have the meaning assigned to them in Article II .
WITNESSETH :
WHEREAS, the Members entered into the Second Amended and Restated Company Agreement of Sharyland Distribution & Transmission Services, L.L.C. (the “ Company ”) as of November 23, 2010 (the “ Company Agreement ”);
WHEREAS, the TDC Member is owned by InfraREIT Partners, LP (the “ Operating Partnership ”);
WHEREAS, immediately following the consummation of the initial public offering of InfraREIT (the “ REIT IPO ”), the current general partner of the Operating Partnership will merge with and into InfraREIT, with InfraREIT surviving the merger and succeeding to all of the rights, powers, authority, duties and obligations as general partner of the Operating Partnership; and
WHEREAS, in connection with the foregoing, the Members desire to amend the terms of the Company Agreement in certain respects and restate the Company Agreement as so amended, effective as of the date the REIT IPO is consummated (the “ Effective Date ”).
NOW, THEREFORE, in consideration of the mutual covenants set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby amend and restate the Company Agreement in its entirety to read as follows:
ARTICLE I.
THE COMPANY
Section 1.1 Organization as Limited Liability Company . The Sharyland Member and the TDC Member organized, created and formed the Company as a limited partnership under the Texas Limited Partnership Law (which has the meaning set forth in the Texas Business Organizations Code) on June 28, 2006, by filing with the Secretary of State of the State of Texas a certificate of limited partnership that complied with the requirements of the Texas Limited Partnership Law for the formation of a limited partnership thereunder. Pursuant to a plan of conversion duly adopted by the Members and a certificate of conversion and a certificate of formation (the “ Certificate ”) filed with the Secretary of State of the State of Texas on December 14, 2009, the Company converted from a limited partnership to a limited liability company
 
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formed under the Act. The Company shall continue uninterrupted as a limited liability company under the Act, and the Members agree that this Agreement replaces and supersedes in its entirety the Company Agreement. The Members further agree and obligate themselves to execute, acknowledge, file, record and/or publish, as necessary, such amendments to the Certificate and such other certificates and documents and to take all other action required by law to perfect and maintain the Company as a limited liability company under the Act and in all other jurisdictions in which the Company may elect to conduct business.
Section 1.2 Names and Addresses of Members . The name and address of the Sharyland Member is Sharyland Utilities, L.P., 1807 Ross Avenue, Dallas, Texas 75201. The name and the address of the TDC Member is Transmission and Distribution Company, L.L.C., 1807 Ross Avenue, 4th Floor, Dallas, Texas 75201.
Section 1.3 Name . The name of the Company is Sharyland Distribution & Transmission Services, L.L.C., a Texas limited liability company (formerly known as Sharyland Distribution & Transmission Services, L.P., a Texas limited partnership), and all business of the Company shall be conducted in such name unless under the law of some jurisdiction in which the Company does business such business must be conducted under another name. In such a case, the business of the Company in such jurisdiction may be conducted under such other name or names (except the name of the TDC Member or any Person or Entity that is a member of the TDC Member or that is otherwise associated with the TDC Member) as the Sharyland Member shall determine to be necessary. The Sharyland Member shall cause to be filed on behalf of the Company such assumed or fictitious name certificate or certificates or similar instruments as may from time to time be required by law.
Section 1.4 Registered Office; Registered Agent . The registered office of the Company in the State of Texas is located at CT Corporation System, 350 North St. Paul Street, Dallas, Texas 75201, and the registered agent for service of process on the Company is CT Corporation System. The registered office and registered agent for service of process may be changed if Approved by the Members.
Section 1.5 Principal Place of Business . The principal place of business of the Company is located at 1807 Ross Avenue, Dallas, Texas 75201 or at such other place as may be Approved by the Members.
Section 1.6 Purpose . Subject to the other provisions of this Agreement, the Members intend that the Company will own the Systems owned by the Company as of the date hereof and from time to time consider and provide for any improvements to and expansions of any System then owned by the Company and/or acquire or construct electrical transmission or distribution facilities, in each case, as may be consistent with an Approved Annual Business Plan, and to take all such other actions incident to any of the foregoing as are necessary or desirable pursuant to the terms of this Agreement. Except as otherwise provided in this Agreement or in the Approved Annual Business Plan, the Company shall not engage in any other activity or business, and no Member shall have any authority to hold itself out as a general agent of the other Member in connection with these or any other businesses or activities.
 
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Section 1.7 Duration . The Company commenced on June 28, 2006 and shall continue unless terminated pursuant to Article XIII .
Section 1.8 Right of Competition .
(a) The Members hereby expressly agree that, except as set forth in any Lease Agreement, the Development Agreement or as otherwise may be agreed by both Members, (i) there is no duty or obligation of a Member or its Affiliates to offer to the Company or its other Members or their Affiliates any particular business opportunity, project or property which may become available to such Member or its Affiliates, and (ii) to the extent permitted by Applicable Law and subject to the foregoing, the Members waive any duties or obligations of the other Members and their Affiliates under Applicable Law to offer to the Company or such Members or their Affiliates any such business opportunity, project or property.
(b) Subject to (x) a Member’s obligations under this Agreement, (y) any other agreement to which a Member or any of its Affiliates may be a party or by which it may be bound and (z) Applicable Laws, it is understood and agreed that (i) each of the Members shall devote its time to the Company’s business as may be necessary to carry out its duties and obligations set forth herein and (ii) any Member and its Affiliates may engage in and possess interests in other business ventures of any and every type and description, independently or with others, including the ownership, acquisition, development, operation and management of Systems and/or any other business venture which may be in direct or indirect competition with the business and assets of the Company (subject to the obligations and restrictions set forth in Section 1.8(a) or as may otherwise be agreed by the Members). Subject to (x) a Member’s obligations under this Agreement, (y) any other agreement to which such Member or any of its Affiliates may be a party or by which it may be bound and (z) Applicable Laws, (A) neither the Company nor any other Members or their Affiliates shall have any right, title or interest in or to such independent ventures or to any profits therefrom, (B) to the extent permitted by Applicable Laws, no Member or any of its Affiliates shall be in breach of its duties or obligations to the Company or other Members or their Affiliates under Applicable Laws by engaging in such independent ventures and (C) each Member and the Company hereby waives any right or claim it may have against a Member or any of its Affiliates or any of their successors with respect to any such independent ventures or the income or profits therefrom.
ARTICLE II.
CERTAIN DEFINITIONS
Section 2.1 Definitions . When used in this Agreement, the following terms will have the meanings respectively indicated:
“ 704(c) Value ” of any Contributed Property shall mean the fair market value of such property at the time of contribution as determined by the Sharyland Member using such reasonable method of valuation as it may adopt; provided, however, subject to Article IV , the Sharyland Member shall, in its sole and absolute discretion, use such method as it deems reasonable and appropriate to allocate the aggregate of the 704(c) Value of Contributed Properties in a single or integrated transaction among each separate property on a basis proportional to its fair market values.
 
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“ Accountants ” shall mean such firm of nationally-recognized independent certified public accountants as may be Approved by the Members.
“ Act ” shall mean the Texas Limited Liability Company Law as set forth in the Texas Business Organizations Code, as the same may be amended from time to time.
“ Adjusted Capital Account ” shall mean the Capital Account maintained for each Member as of the end of each Fiscal Year (i) increased by any amounts which such Member is obligated to restore pursuant to any provision of this Agreement or is deemed to be obligated to restore pursuant to the penultimate sentences of Regulations Sections 1.704-2(g)(l) and 1.704-2(i)(5) and (ii) decreased by the items described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) and 1.704-l(b)(2)(ii)(d)(6). The foregoing definition of Adjusted Capital Account is intended to comply with the provisions of Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.
“ Adjusted Capital Account Deficit ” shall mean, with respect to any Member, the deficit balance, if any, in such Member’s Adjusted Capital Account as of the end of the relevant Fiscal Year.
“ Adjusted Property ” shall mean any property the Carrying Value of which has been adjusted pursuant to Section 3.4 .
“ Affiliate ” shall mean (a) any Person directly or indirectly Controlling, Controlled by or under common Control with the Person in question, and (b) any officer, director, member, or partner of the Person in question or of any Person described in subsection (a) or (b) of this paragraph.
“ Agreed Value ” shall mean (i) in the case of any Contributed Property, the 704(c) Value of such property as of the time of its contribution to the Company, reduced by any liabilities either assumed by the Company upon such contribution or to which such property is subject when contributed, as the same is reflected in the books and records of the Company; and (ii) in the case of any property distributed to a Member by the Company, the Company’s Carrying Value of such property at the time such property is distributed, reduced by any indebtedness either assumed by such Member upon such distribution or to which such property is subject at the time of distribution as determined under Section 752 of the Code and the regulations thereunder.
“ Agreement ” shall have the meaning assigned to such term in the preamble of this Agreement.
“ Annual Business Plan ” shall have the meaning assigned to such term in Section 8.1(a) .
“ Applicable Laws ” shall mean all laws, ordinances, statutes, orders and regulations of any federal, state, or local government, regulatory or administrative authority, any agency or commission thereof, or any court or tribunal, including without limitation all requirements of any Regulatory Authority, applicable to the Company, its subsidiaries or their properties.
 
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“ Approval of ,” “ Approved by ,” “ Approved ” and derivations thereof, when used in reference to a Member, shall mean the written consent or approval of the matter in question by an authorized officer or partner of the Member.
“ Approved Annual Business Plan ” shall mean an Annual Business Plan that has been submitted by the Sharyland Member and Approved by the TDC Member in accordance with Section 8.1 .
“ Approved by the Members ” shall mean that the matter in question has been Approved by all of the Members pursuant to a request by one of the Members, submitted in accordance with Section 5.2(a) or such other provision of this Agreement as may be applicable.
“ Available Cash ” shall mean all Company cash funds on hand from time to time (including but not limited to cash derived from operations), but excluding: (i) cash funds obtained as contributions to the capital of the Company by the Members that are being held temporarily pending investment in Footprint Projects that have been Approved by the Members; (ii) cash funds obtained from loans to the Company unless such cash funds are the result, in whole or in part, of a decision by the Company, with the Approval of the TDC Member, to use excess financing proceeds as Available Cash; (iii) cash funds which use is restricted by third parties and (iv) Net Proceeds of any Capital Transaction; after, without duplication of any amounts, (a) payment of all expenses of operations payable as of the date in question, (b) provision for the Working Capital Reserve in such amount as is included in the then applicable Approved Annual Business Plan or is otherwise Approved by the Members, and (c) provision for any other reserves Approved by the Members.
“ Bank ” shall mean such financial institution as may be Approved by the Members.
“ Book-Tax Disparities ” shall mean, with respect to any item of Contributed Property or Adjusted Property, as of the date of any determination, the difference between the Carrying Value of such Contributed Property or Adjusted Property and the adjusted basis thereof for federal income tax purposes as of such date. A Member’s share of the Company’s Book-Tax Disparities in all of its Contributed Property and Adjusted Property will be reflected by the difference between such Member’s Capital Account balance as maintained pursuant to Section 3.3 and Section 3.4 and the hypothetical balance of such Member’s Capital Account computed as if it had been maintained strictly in accordance with federal income tax accounting principles.
“ Business Day ” shall mean any day on which the Bank is open for the purpose of conducting business and receiving deposits in Dallas, Texas.
“ Capital Account ” shall have the meaning assigned to such term in Section 3.3 .
“ Capital Expenditure Budget ” shall have the meaning assigned to such term in Section 8.1(a) .
“ Capital Transaction ” shall mean (a) a sale, condemnation, exchange, abandonment, or other actual or deemed disposition of a System, which is of all or substantially all of such asset, (b) an insurance recovery relating to all or substantially all of such asset, or (c) any other transaction that is considered capital in nature.
 
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“ Capital Transaction Post-Payout Percentage ” of (i) the Sharyland Member shall mean one percent (1%) and (ii) the TDC Member shall mean ninety-nine percent (99%).
“ Carrying Value ” shall mean (i) with respect to a Contributed Property or Adjusted Property, the 704(c) Value of such property reduced (but not below zero) by all Depreciation with respect to such Contributed Property or Adjusted Property, as the case may be, charged to the Members’ Capital Accounts and (ii) with respect to any other Company property, the adjusted basis of such property for federal income tax purposes, all as of the time of determination. The Carrying Value of any property shall be adjusted from time to time in accordance with Section 3.4 , and to reflect changes, additions (including capital improvements thereto) or other adjustments to the Carrying Value for dispositions and acquisitions of Company properties, as deemed appropriate by the Sharyland Member.
“ Certificate ” shall have the meaning assigned to such term in Section 1.1 .
“ Code ” shall mean the Internal Revenue Code of 1986, as amended from time to time. All references herein to sections of the Code shall include any corresponding provision or provisions of succeeding law.
“ Company ” shall mean the limited liability company governed by this Agreement, as such limited liability company may from time to time be constituted and amended.
“ Company Agreement ” shall have the meaning assigned to such term in the recitals to this Agreement.
“ Company Minimum Gain ” has the meaning ascribed to “Partnership Minimum Gain” set forth in Regulations Section 1.704-2(b)(2), and the amount of Company Minimum Gain, as well as any net increase or decrease in Company Minimum Gain, for a Fiscal Year shall be determined in accordance with the rules of Regulations Section 1.704-2(d).
“ Contributed Property ” shall mean each property or other asset contributed to the Company, in such form as may be permitted by the Act, but excluding cash contributed or deemed contributed to the Company. Once the Carrying Value of a Contributed Property is adjusted pursuant to Section 3.4 , such property shall no longer constitute a Contributed Property for purposes of Article IV , but shall be deemed an Adjusted Property for such purposes.
“ Control ” and all derivations thereof shall mean the direct or indirect ability or power to either (i) vote (or direct the vote of) 50% or more of the voting interests in any Person or (ii) direct or cause the direction of the management and policies of another, whether through voting power, contract or otherwise.
“ Covered Person ” shall mean (i) a Member, (ii) an officer, director, partner, member or shareholder of such Member, (iii) an officer of the Company, or (iv) any Person serving at the request of the Company or the Sharyland Member as an officer, director, partner, member, trustee, employee or agent of any Entity in which the Company holds an interest.
 
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“ Depreciation ” shall mean, for each fiscal year, an amount equal to the U.S. federal income tax depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such year, except that, if the Carrying Value of an asset differs from its adjusted basis for U.S. federal income tax purposes at the beginning of such year or other period, Depreciation shall be an amount which bears the same ratio to such beginning Carrying Value as the U.S. federal income tax depreciation, amortization, or other cost recovery deduction for such year bears to such beginning adjusted tax basis; provided, however, that if the U.S. federal income tax depreciation, amortization, or other cost recovery deduction for such year is zero, Depreciation shall be determined with reference to such beginning Carrying Value using any reasonable method selected by the Sharyland Member.
“ Development Agreement ” shall mean that certain Development Agreement entered into by Hunt Transmission Services, L.L.C., a Delaware limited liability company, Sharyland Utilities, the Operating Partnership and InfraREIT, pursuant to which the parties thereto evidenced their understanding with respect to business opportunities and assets of the parties.
“ Disclosing Party ” shall have the meaning assigned to such term in Section 14.2 .
“ Effective Date ” shall have the meaning assigned to such term in the recitals to this Agreement.
“ Emergency ” shall mean a sudden or unexpected event or act of God that causes or risks causing (i) material damage to the environment, (ii) material damage to the System, (iii) material damage to other property, equipment or facilities relating to or affecting the System, or (iv) serious injury to any Person.
“ Entity ” shall mean a Person other than an individual.
“ Event of Bankruptcy ” as to the Company or a Member shall mean:
(a) filing a voluntary petition in bankruptcy or for reorganization or for the adoption of an arrangement under Title 11 of the United States Code (or any corresponding provision or provisions of succeeding law) or an admission seeking the relief therein provided or the taking of similar action under the laws of any state or local jurisdiction;
(b) making a general assignment for the benefit of its creditors;
(c) consenting to the appointment of a receiver for all or a substantial part of its property;
(d) in the case of the filing of an involuntary petition in bankruptcy, the failure to have such filing dismissed by the earlier of (i) ninety (90) days after filing or (ii) the date of an entry of an order for relief;
(e) the entry of a court order appointing a receiver or trustee for all or a substantial part of its property without its consent; or
(f) the assumption of custody or sequestration by a court of competent jurisdiction of all or substantially all of its property.
 
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“ Exchange Act ” shall mean the Securities Exchange Act of 1934, as amended.
“ FERC ” shall mean the Federal Energy Regulatory Commission.
“ Final Adjustment ” shall have the meaning assigned to such term in Section 10.3(b)(ii) .
“ Fiscal Year ” shall have the meaning assigned to such term in Section 9.5 .
“ Footprint Project(s) ” shall have the meaning assigned to such term in the Lease Agreements, as amended from time to time in accordance with the Lease Agreements.
“ For Cause Event ” shall mean the occurrence of (i) a material breach by the Sharyland Member of (x) the then current Approved Annual Business Plan, or (y) this Agreement and such breach of this Agreement constitutes fraud or a violation of a fiduciary duty owed to the Company or the TDC Member, or (ii) any act or omission of the Sharyland Member that constitutes gross negligence or willful misconduct.
“ GAAP ” shall mean generally accepted accounting principles of the United States of America, consistently applied.
“ Good Utility Practices ” shall mean the practices, methods and acts engaged in or approved by a significant portion of the electric utility industry during the relevant time period, or any of the practices, methods and acts that, in the exercise of reasonable judgment in light of the facts known at the time the decision was made, could have been expected to accomplish the desired result at a reasonable cost consistent with good business practices, reliability, safety and expedition. Good Utility Practices are not intended to be limited to the optimum practice, method or act, to the exclusion of all others, but rather is intended to include practices, methods and acts generally accepted in the region.
“ InfraREIT ” shall mean InfraREIT, Inc., a Maryland corporation, or any other entity that succeeds such entity as the general partner of the Operating Partnership and elects to be taxed as a REIT.
“ Interest ” shall mean the entire ownership interest (which may be segmented into and/or expressed as a percentage of various rights and/or liabilities) of a Member in the Company at any particular time, including the right of such Member to any and all benefits to which a Member may be entitled as provided in this Agreement and in the Act, together with the obligations of such Member to comply with all the terms and provisions of this Agreement and of the Act. For purposes of this definition, an Interest shall also include the Sharyland Interest or the TDC Interest, as applicable.
“ IRS ” shall mean the Internal Revenue Service, which administers the internal revenue laws of the United States.
“ Lease Agreement ” shall mean any lease agreement between the Sharyland Member or its Affiliates, on the one hand, and the TDC Member or its Affiliates, on the other, as the same may be amended or supplemented from time to time.
 
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“ Liquidating Trustee ” shall have the meaning assigned to such term in Section 13.3(a) .
“ Management Agreement ” shall mean that certain Management Agreement entered into by Hunt Utility Services, L.L.C., a Delaware limited liability company (the “ Manager ”), the Operating Partnership and InfraREIT, pursuant to which the Manager manages the business of the Operating Partnership and InfraREIT.
“ Member(s) ” shall mean the TDC Member and the Sharyland Member, and such successors, assigns, or additional members as may be admitted to the Company, from time to time, pursuant to the terms and provisions of this Agreement.
“ Member Nonrecourse Debt ” shall have the meaning ascribed to “Partner Nonrecourse Debt” set forth in Regulations Section 1.704-2(b)(4).
“ Member Nonrecourse Debt Minimum Gain ” shall mean an amount, with respect to each Member Nonrecourse Debt, equal to the Company Minimum Gain that would result if such Member Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Regulations Section 1.704-2(i)(3).
“ Member Nonrecourse Deductions ” shall have the meaning ascribed to “Partner Nonrecourse Deductions” set forth in Regulations Section 1.704-2(i), and the amount of Member Nonrecourse Deductions with respect to a Member Nonrecourse Debt for a Fiscal Year shall be determined in accordance with the rules of Regulations Section 1.704-2(i)(2).
“ Net Loss ” shall mean, for any taxable period, the excess, if any, of the Company’s items of loss and deduction for such taxable period over the Company’s items of income and gain for such taxable period. The items included in the calculation of Net Loss shall be determined in accordance with Article IV . If an item of income, gain, loss or deduction that has been included in the initial computation of Net Loss is subjected to the special allocation rules in Section 4.6 , Net Loss or the resulting Net Profit, whichever the case may be, shall be recomputed without regard to such item.
“ Net Proceeds ” shall mean, with respect to any Capital Transaction, the proceeds received by the Company in connection with such Capital Transaction reduced by (a) the payment of all costs and expenses incurred by the Company with respect to such Capital Transaction including, without limitation, brokers’ commissions payable to non-Affiliates, title insurance fees, commitment fees, professional fees and other closing costs necessitated or incurred in connection with such Capital Transaction, (b) if the Capital Transaction is a financing or refinancing, or requires payment of indebtedness or fees in connection therewith, the payment by the Company of indebtedness required or intended to be repaid in connection with the transaction in question, and (c) any deposits into the Working Capital Reserve made in accordance with the provisions of this Agreement (without duplication of any amounts in the Working Capital Reserve or other reserve).
“ Net Profit ” shall mean, for any taxable period, the excess, if any, of the Company’s items of income and gain for such taxable period over the Company’s items of loss and deduction for such taxable period. The items included in the calculation of Net Profit shall be determined in accordance with Article IV . If an item of income, gain, loss or deduction that has been included in the initial computation of Net Profit is subjected to the special allocation rules in Section 4.6 , Net Profit or the resulting Net Loss, whichever the case may be, shall be recomputed without regard to such item.
 
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“ Non-Public Information ” shall have the meaning assigned to such term in Section 14.2 .
“ Nonrecourse Built-in Gain ” shall mean, with respect to any Contributed Properties or Adjusted Properties that are subject to a mortgage or negative pledge securing a Nonrecourse Liability, the amount of any taxable gain that would be allocated to the Members pursuant to Section 4.7(b) if such properties were disposed of in a taxable transaction in full satisfaction of such liabilities and for no other consideration.
“ Nonrecourse Deductions ” shall have the meaning set forth in Regulations Section 1.704-2(b)(l), and the amount of Nonrecourse Deductions for a Fiscal Year shall be determined in accordance with the rules of Regulations Section 1.704-2(c).
“ Nonrecourse Liability ” shall have the meaning set forth in Regulations Section 1.752- l(a)(2).
“ Notice ” shall have the meaning assigned to such term in Section 10.6 .
“ Operating Partnership ” shall have the meaning assigned to such term in the recitals to this Agreement.
“ Person ” shall mean an individual, an estate, a corporation, a partnership, an association, a limited liability company, a joint stock company, a trust or any other Entity.
“ Post-Payout Percentage ” of (i) the Sharyland Member shall mean ten percent (10%) and (ii) the TDC Member shall mean ninety percent (90%).
“ Prior Unpaid Preference Amount ” of the TDC Member, as of the end of any other day during the term hereof, shall mean an amount equal to (a) the Unpaid Preference Amount of the TDC Member as of the end of the immediately preceding day, plus (b) the product of the Unpaid Preference Amount of the TDC Member as of the end of the immediately preceding day multiplied by 0.000310538 (i.e., the equivalent daily interest factor for an interest rate of twelve percent (12%) per annum, compounded annually).
“ PUCT ” shall mean the Public Utility Commission of Texas.
“ Purchase Offer ” shall have the meaning assigned to such term in Section 13.3(d) .
“ Recapture Income ” shall mean any gain recognized by the Company (computed without regard to any adjustment required by Section 734 or Section 743 of the Code) upon the disposition of any property or asset of the Company, which gain is characterized either as ordinary income or as “unrecaptured Section 1250 gain” (as defined in Section 1(h)(7) of the Code) because it represents the recapture of deductions previously taken with respect to such property or asset.
 
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“ Receiving Party ” shall have the meaning assigned to such term in Section 14.2 .
“ Recourse Liabilities ” shall mean the amount of liabilities owed by the Company (other than Nonrecourse Liabilities and liabilities to which Member Nonrecourse Deductions are attributable in accordance with Section 1.704-(2)(i) of the Regulations).
“ Regulations ” shall mean the regulations promulgated by the United States Department of the Treasury pursuant to and in respect of provisions of the Code. All references herein to sections of the Regulations shall include any corresponding provision or provisions of succeeding, similar, substitute proposed or final Regulations.
“ Regulatory Allocations ” shall have the meaning assigned to such term in Section 4.6(h) . “Regulatory Approvals” shall mean the approval of all Regulatory Authorities applicable to the transaction and/or the parties for which the approval is required to be obtained.
“ Regulatory Authority(ies) ” shall mean the PUCT, the Electric Reliability Council of Texas, the Texas Regional Entity, any governmental agency having jurisdiction over the Company or its assets (including a System) and any self-regulatory organization, including, without limitation, a national securities exchange registered with the Securities and Exchange Commission.
“ REIT ” shall mean a real estate investment trust within the meaning of the Code.
“ REIT IPO ” shall have the meaning assigned to such term in the recitals to this Agreement.
“ REIT Requirements ” shall have the meaning assigned to such term in Section 5.1(d) .
“ Representatives ” shall have the meaning assigned to such term in Section 14.2 .
“ Residual Gain ” or “ Residual Loss ” shall mean any item of gain or loss, as the case may be, of the Company recognized for U.S. federal income tax purposes resulting from a sale, exchange or other disposition of Contributed Property or Adjusted Property, to the extent such item of gain or loss is not allocated pursuant to Section 4.7(b)(i)(A) or 4.7(b)(ii)(A) to eliminate Book-Tax Disparities.
“ Securities Act ” shall mean the Securities Act of 1933, as amended.
“ Sharyland Interest ” shall mean the Interest of the Sharyland Member.
“ Sharyland Member ” shall have the meaning assigned to such term in the preamble to this Agreement.
“ System ” shall mean the electric transmission and/or distribution systems that are owned by the Company at the time of reference.
 
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“ Taxable Year ” shall mean the Company’s taxable year ending December 31 (or part thereof, in the case of the Company’s last taxable year), or such other year as is determined by the Board in compliance with Section 706 of the Code.
“ Tax Matters Member ” shall have the meaning assigned to such term in Section 10.3(a) .
“ T&D Project ” shall mean a business, project or assets relating primarily to the transmission and/or distribution of electricity.
“ TDC Interest ” shall mean the Interest of the TDC Member.
“ TDC Member ” shall have the meaning assigned to such term in the preamble of this Agreement.
“ Transfer ” shall have the meaning assigned to such term in Section 12.1 .
“ Unpaid Preference Amount ” of the TDC Member, as of the end of any other day during the term hereof, shall mean an amount equal to the Prior Unpaid Preference Amount plus (a) the product of the Unreturned Cash Capital Amount of the TDC Member as of the end of the immediately preceding day multiplied by 0.000310538 (i.e., the equivalent daily interest factor for an interest rate of twelve percent (12%) per annum, compounded annually), minus (b) any distributions made to the TDC Member during the day in question pursuant to Section 4.2(a)(i) or Section 4.3(a) . The “Unpaid Preference Amount” of the TDC Member shall never be less than zero (0).
“ Unrealized Gain ” attributable to any item of Company property shall mean, as of any date of determination, the excess, if any, of (i) the fair market value of such property (as determined under Article IV ) as of such date, over (ii) the Carrying Value of such property (prior to any adjustment to be made pursuant to Article IV ) as of such date.
“ Unrealized Loss ” attributable to any item of Company property means, as of any date of determination, the excess, if any, of (i) the Carrying Value of such property (prior to any adjustment to be made pursuant to Article IV ) as of such date, over (ii) the fair market value of such property (as determined under Article IV ) as of such date.
“ Unreturned Cash Capital Amount ” of the Sharyland Member, as of the date hereof, shall be zero ($0), and of the TDC Member, as of the date hereof, shall be the amount of capital and property contributed by the TDC Member as of the date hereof plus the Agreed Value of the Contributed Property contributed by the TDC Member, in each case as set forth in the Company’s books and records. The “Unreturned Cash Capital Amount” of any Member, as of the end of any other day during the term hereof, shall mean an amount equal to (a) the Unreturned Cash Capital Amount of such Member as of the end of the immediately preceding day, plus (b) the amount of any cash contributions of capital made to the Company by, and the Agreed Value of any Contributed Property from, such Member during the day in question pursuant to Section 3.2(b) (to the extent not made on the date hereof) or Section 3.2(c) , minus (c) any distributions actually made to such Member during the day in question pursuant to Section 4.2(a)(ii) and Section 4.3(b) . The Unreturned Cash Capital Amount of each Member shall never be less than zero (0).
 
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“ Working Capital Reserve ” shall mean a reasonable working capital reserve of funds (including any Working Capital Reserve for Required Footprint Projects) established pursuant to Section 4.2 .
“ Working Capital Reserve for Required Footprint Projects ” shall have the meaning assigned to such term in Section 4.2
Section 2.2 References to this Agreement; Interpretation . Numbered or lettered articles, sections and subsections herein contained refer to articles, sections and subsections of this Agreement unless otherwise expressly stated. The words “herein,” “hereof,” “hereunder,” “hereby,” “this Agreement” and other similar references shall be construed to mean and include this Agreement and all amendments thereof and supplements thereto unless the context shall clearly indicate or require otherwise. The use of the words “include,” “including,” and derivations thereof in this Agreement shall be deemed to have the phrase “without limitation” attached thereto unless otherwise expressly stated.
ARTICLE III.
THE MEMBERS; CAPITAL CONTRIBUTIONS
Section 3.1 Identification . The Sharyland Member and the TDC Member shall be the Members of the Company. No other Person may become a Member except by means of a Transfer of an Interest specifically permitted under and effected in compliance with this Agreement or as otherwise Approved by the Members.
Section 3.2 Capital Contributions .
(a) Except as set forth in Section 3.2(d) , the Members shall not have any obligation to make contributions to the capital of the Company until such time as any such capital contributions shall have been Approved by the Members.
(b) Each Member has made Capital Contributions to the Company, and the Sharyland Member and the TDC Member own the Sharyland Interest and the TDC Interest, respectively.
(c) The Sharyland Member may request cash capital contributions from the TDC Member upon not less than ten (10) Business Days prior written notice, such notice setting forth the details regarding the amount of the capital and purpose; provided, however, the TDC Member shall have no duty to provide such additional capital to the Company except to the extent such capital is associated with Footprint Projects set forth in the Approved Annual Business Plan or otherwise Approved by the TDC Member. All capital contributions shall be used by the Company for the purposes contemplated in the written notice to the TDC Member or as set forth in the Approved Annual Business Plan. The Sharyland Member may not contribute cash to the Company unless Approved by the TDC Member.
(d) Notwithstanding the foregoing or anything else to the contrary in this Agreement, if the Company is obligated to provide for Footprint Projects (i) required by Regulatory Authorities or (ii) reasonably necessary to satisfy Sharyland Utilities’ or another lessee’s obligation as a regulated utility to serve its customers or to maintain the safety or
 
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reliability of a System, and the Working Capital Reserve for Required Footprint Projects is insufficient for such Footprint Projects, the TDC Member shall either (A) contribute to the Company such capital in cash required to make the Working Capital Reserve for the Required Footprint Projects be sufficient for such Footprint Projects or (B) allow, in the Sharyland Member’s sole discretion, (x) the Sharyland Member to contribute such necessary capital in cash or (y) the Sharyland Member to seek and obtain reasonable alternative capital sources for the Company, including, without limitation, admitting additional members.
(e) On each occasion on which any Member is required to make capital contributions to the Company pursuant to this Section 3.2 (including pursuant to an Approved Annual Business Plan), such Member shall deposit its required capital contribution, by wire transfer of immediately available funds, in the account designated by the Sharyland Member maintained at the Bank.
(f) Notwithstanding anything in this Agreement to the contrary, no Member shall have any obligation whatsoever to make any capital or other contributions or loan any funds to the Company except (i) as expressly provided in this Article III , or (ii) as contemplated with respect to any Approved Annual Business Plan. The capital contribution commitments of the Members under this Agreement are solely for the benefit of the Members, as among themselves, and may not be enforced by or for the benefit of any other Person (including any creditor, receiver, or trustee of, or for the benefit of any one or more creditors of, the Company).
Section 3.3 Capital Accounts . A separate “Capital Account” (herein so called) shall be maintained for each Member for the full term of the Agreement in accordance with the capital account rules of section 1.704-l(b)(2)(iv) of the Regulations. Pursuant to the basic rules of section 1.704-1(b)(2)(iv) of the Regulations, the balance of each Member’s Capital Account shall be:
(a) Increased by the amount of cash contributed by such Member (or such Member’s predecessor in interest) to the capital of the Company pursuant to Section 3.2 and decreased by the amount of cash distributed to such Member (or such Member’s predecessor in interest) pursuant to Article IV ;
(b) Increased by the Agreed Value of each property (other than cash) contributed by such Member (or such Member’s predecessor in interest) to the capital of the Company pursuant to Section 3.2 and decreased by the Agreed Value of each property (other than cash) distributed to such Member (or such Member’s predecessor in interest) by the Company pursuant to Article IV ;
(c) Increased by the amount of each item of Company Net Profit allocated to such Member (or such Member’s predecessor in interest) pursuant to Section 4.1 hereto;
(d) Decreased by the amount of each item of Company Net Loss allocated to such Member (or such Member’s predecessor in interest) pursuant to Section 4.1 ; and
(e) Otherwise adjusted in accordance with the other capital account maintenance rules of section 1.704-1(b)(2)(iv) of the Regulations.
 
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Section 3.4 Additional Provisions Regarding Capital Accounts .
(a) If a Member pays any Company indebtedness, such payment shall be treated as a contribution by that Member to the capital of the Company, and the Capital Account of such Member shall be increased by the amount so paid by such Member.
(b) Except as otherwise provided herein, no Member may contribute capital to, or withdraw capital from, the Company. To the extent any monies which any Member is entitled to receive pursuant to Article IV or any other provision of this Agreement would constitute a return of capital, each Member consents to the withdrawal of such capital.
(c) A loan by a Member to the Company shall not be considered a contribution of money to the capital of the Company, and the balance of such Member’s Capital Account shall not be increased by the amount so loaned. No repayment of principal or interest on any such loan, reimbursement made to a Member with respect to advances or other payments made by such Member on behalf of the Company, or payments of fees to a Member which are made by the Company shall be considered a return of capital or in any manner affect the balance of such Member’s Capital Account. The Sharyland Member shall not make a loan to the Company unless such loan is approved by the TDC Member.
(d) No Member with a deficit balance in its Capital Account shall have any obligation to the Company, the other Member or any creditor of the Company or Members to restore said deficit balance. In addition, no venturer or partner in any Member shall have any liability to the Company, the other Member or any creditor of the Company or Members for any deficit balance in such venturer’s or partner’s capital account in the Member in which it is a partner or venturer. Furthermore, a deficit Capital Account balance of a Member (or a capital account of a partner or venturer in a Member) shall not be deemed to be a liability of such Member (or of such venturer or partner in such Member) or a Company asset or property.
(e) Except as otherwise provided herein, no interest will be paid on any capital contributed to the Company or the balance in any Member’s Capital Account.
(f) (i) Consistent with the provisions of Regulations Section 1.704-1(b)(2)(iv)(f), and as provided in Section 3.4(f)(ii) , the Carrying Values of all Company assets shall be adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to such Company property, as of the times of the adjustments provided in Section 3.4.(f)(ii) hereof, as if such Unrealized Gain or Unrealized Loss had been recognized on an actual sale of each such property and allocated pursuant to Section 4.1 and Section 4.7 .
(ii) Such adjustments shall be made as of the following times: (a) immediately prior to the acquisition of an additional interest in the Company by any new or existing Member in exchange for more than a de minimis Capital Contribution; (b) immediately prior to the distribution by the Company to a Member of more than a de minimis amount of property as consideration for an interest in the Company; and (c) immediately prior to the liquidation of the Company within the meaning of Regulations Section 1.704-l(b)(2)(ii)(g); and (d) in connection with the grant of an interest in the Company (other than a de minimis interest) as consideration for the provision of services
 
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to or for the benefit of the Company by an existing Member acting in a Member capacity, or by a new Member acting in a Member capacity in anticipation of being a Member, provided, however, that adjustments pursuant to clauses (a), (b) and (d) above shall be made only if the Sharyland Member determines that such adjustments are necessary or appropriate to reflect the relative economic interests of the Members in the Company.
(iii) In accordance with Regulations Section 1.704-l(b)(2)(iv)(e), the Carrying Value of Company assets distributed in kind shall be adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to such Company property, as of the time any such asset is distributed.
(iv) In determining Unrealized Gain or Unrealized Loss for purposes of this Section 3.4 , the aggregate cash amount and fair market value of all Company assets (including cash or cash equivalents) shall be determined by the Sharyland Member using such reasonable method of valuation as it may adopt, or in the case of a liquidating distribution pursuant to Article XIII , shall be determined and allocated by the Liquidating Trustee using such reasonable methods of valuation as it may adopt. The Sharyland Member, or the Liquidating Trustee, as the case may be, shall allocate such aggregate fair market value among the assets of the Company in such manner as it determines in its sole and absolute discretion to arrive at a fair market value for individual properties.
(g) The provisions of the Agreement (including this Section 3.4 ) relating to the maintenance of Capital Accounts are intended to comply with Regulations Section 1.704- l(b), and shall be interpreted and applied in a manner consistent with such Regulations. In the event the Sharyland Member shall determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto (including, without limitation, debits or credits relating to liabilities which are secured by contributed or distributed property or which are assumed by the Company, the Sharyland Member, or the TDC Member) are computed in order to comply with such Regulations, the Sharyland Member may make such modification without regard to Section 14.4 , provided that it is not likely to have a material effect on the amounts distributable to any Person pursuant to Article XIII upon an event requiring winding up of the Company. The Sharyland Member also shall (i) make any adjustments that are necessary or appropriate to maintain equality between the Capital Accounts of the Members and the amount of Company capital reflected on the Company’s balance sheet, as computed for book purposes, in accordance with Regulations Section 1.704-l(b)(2)(iv)(q), and (ii) make any appropriate modifications in the event unanticipated events might otherwise cause this Agreement not to comply with Regulations Section 1.704-1(b).
ARTICLE IV.
ALLOCATIONS OF NET PROFIT AND NET LOSS; DISTRIBUTIONS
Section 4.1 Allocations of Net Profit and Net Loss .
(a) Except as otherwise provided in this Article IV , for any allocation period in which the Company has Net Profit or Net Loss, such Net Profit or Net Loss (and any item of income, gain, loss or deduction thereof) shall be allocated to the Members in a manner such that, as nearly as possible, immediately after such allocation each Member has a positive balance in its
 
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Capital Account equal to the amount such Member would be entitled to receive if the Company were liquidated as of such date, its affairs wound up and its assets distributed to the Members pursuant to Section 4.2 , taking into account the Member’s share of Company Minimum Gain and Member Nonrecourse Debt Minimum Gain before the hypothetical liquidation. Prior to the liquidation of the Company, the assets of the Company on any date shall be deemed to have a value equal to their Carrying Value.
(b) Allocation of Nonrecourse Debt. For purposes of Regulation Section 1.752-3(a), the Members agree that Nonrecourse Liabilities of the Company in excess of the sum of (i) the amount of Company Minimum Gain and (ii) the total amount of Nonrecourse Built-in Gain shall be allocated 100% to the TDC Member.
(c) Recapture Income. Any gain allocated to the Members upon the sale or other taxable disposition of any Company asset shall, to the extent reasonably practicable after taking into account other required allocations of gain pursuant to Sections 4.6 and 4.7 , be characterized as Recapture Income in the same proportions and to the same extent as such Members have been allocated any deductions directly or indirectly giving rise to the treatment of such gains as Recapture Income.
Section 4.2 Distributions of Available Cash . Periodically, but not less frequently than quarterly, Available Cash (if any) shall be distributed among the Members in accordance with the provisions of this Section 4.2 . For any period, funds that would otherwise constitute Available Cash need not be so treated and distributed to the extent that such funds are required for, set aside and retained in the Working Capital Reserve, the amount of such reserve to be determined, with the Approval of the TDC Member (which Approval shall not be unreasonably withheld), by the Sharyland Member using reasonable business judgment. The purpose of the establishment and maintenance of the Working Capital Reserve is to avoid a depletion of the Company’s money resources to be used for operations or working capital, but not for capital expenditures with respect to Footprint Projects (other than with respect to any capital expenditure for any Footprint Projects either (i) required by Regulatory Authorities or (ii) reasonably necessary to satisfy Sharyland Utilities’ or another lessee’s obligation as a regulated utility to serve its customers or to maintain the safety or reliability of a System) (“ Working Capital Reserve for Required Footprint Projects ”). The establishment or maintenance of the Working Capital Reserve is not intended to and will not alter or diminish the rights of the Members to Available Cash except if such funds are retained and used for the purpose for which they were reserved. When and to the extent the Sharyland Member, with the Approval of the TDC Member (which Approval shall not be unreasonably withheld), no longer regards funds set aside and retained in the Working Capital Reserve as reasonably necessary to the efficient conduct of the affairs of the Company, such funds shall be treated as additions to Available Cash.
(a) For each Fiscal Year, Available Cash which is to be distributed among the Members pursuant to this Section 4.2 shall be distributed among the Members as follows and in the following order of priority:
(i) First : Available Cash shall be distributed one hundred percent (100%) to the TDC Member to the least extent necessary to cause the TDC Member’s Unpaid Preference Amount to equal zero (0);
 
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(ii) Second : Available Cash shall be distributed one hundred percent (100%) to the TDC Member to the least extent necessary to cause the TDC Member’s Unreturned Cash Capital Amount to equal zero (0); and
(iii) Third : All remaining Available Cash shall be distributed among both of the Members, pro rata in accordance with their respective Post-Payout Percentages.
Section 4.3 Distributions of Net Proceeds from a Capital Transaction . Promptly following the collection of the Net Proceeds of a Capital Transaction and after payment of the Company’s debts and liabilities and the expenses of such Capital Transaction and/or the establishment of a reasonable reserve for the Company’s debts and liabilities (contingent or otherwise) if deemed necessary by the Sharyland Member, the amount of all such proceeds and cash held by the Company shall be distributed to each of the Members as follows and in the following order of priority:
(a) First : Proceeds shall be distributed one hundred percent (100%) to the TDC Member to the least extent necessary to cause the TDC Member’s Unpaid Preference Amount to equal zero (0);
(b) Second : Proceeds shall be distributed one hundred percent (100%) to the TDC Member to the least extent necessary to cause the TDC Member’s Unreturned Cash Capital Amount to equal zero (0); and
(c) Third : All remaining Proceeds shall be distributed to both of the Members, pro rata in accordance with their respective Capital Transaction Post-Payout Percentages.
Section 4.4 In Kind Distributions . Assets of the Company (other than cash) shall not be distributed in kind to either Member unless Approved by the Members. If any assets of the Company are distributed among the Members in kind, such assets shall be valued on the basis of the fair market value thereof on the date of the distribution, and each distributee shall receive such distribution in kind in lieu of distributions of cash. The fair market value of such assets shall be determined by an independent appraiser Approved by the Members.
Section 4.5 Tax Distributions . Unless otherwise Approved by the TDC Member, the Sharyland Member shall cause the Company to distribute from its funds to each Member with respect to each Taxable Year (within 60 days after the close of such Taxable Year, or on a quarterly or more frequent basis) an amount of cash equal to the taxable income of the Company allocated to such Member with respect to such Taxable Year. Any distribution to a Member pursuant to this Section 4.5 shall be treated as an advance distribution under the appropriate provisions of Section 4.2 or 4.3 that resulted in the allocation of income pursuant to Section 4.1 to which such distribution relates.
 
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Section 4.6 Special Allocation Rules . Notwithstanding any other provision of this Agreement, the following special allocations shall be made in the following order:
(a) Minimum Gain Chargeback . Notwithstanding the provisions of Section 4.1 or any other provisions of this Section 4.6 or Section 4.7 , if there is a net decrease in Company Minimum Gain during any Fiscal Year, each Member shall be specially allocated items of Company income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Member’s share of the net decrease in Company Minimum Gain, as determined under Regulations Section 1.704-2(g). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant thereto.
The items to be so allocated shall be determined in accordance with Regulations Section 1.704-2(f)(6). This Section 4.6(a) is intended to comply with the minimum gain chargeback requirements in Regulations Section 1.704-2(f) and for purposes of this Section 4.6(a) only, each Member’s Adjusted Capital Account Deficit shall be determined prior to any other allocations pursuant to Article IV of this Agreement with respect to such Fiscal Year.
(b) Member Minimum Gain Chargeback . Notwithstanding any other provision of Section 4.1 of this Agreement or any other provisions of this Section 4.6 or Section 4.7 (except Section 4.6(a) hereof), if there is a net decrease in Member Nonrecourse Debt Minimum Gain attributable to a Member Nonrecourse Debt during any Fiscal Year, each Member who has a share of the Member Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(5), shall be specially allocated items of Company income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Member’s share of the net decrease in Member Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(5). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Sharyland Member and TDC Member pursuant thereto. The items to be so allocated shall be determined in accordance with Regulations Section 1.704-2(i)(4). This Section 4.6(b) is intended to comply with the minimum gain chargeback requirement in such Section of the Regulations and shall be interpreted consistently therewith. Solely for purposes of this Section 4.6(b) , each Member’s Adjusted Capital Account Deficit shall be determined prior to any other allocations pursuant to Article IV with respect to such Fiscal Year, other than allocations pursuant to Section 4.6(b) hereof.
(c) Qualified Income Offset . In the event any Member unexpectedly receives any adjustments, allocations or distributions described in Regulations Sections 1.704- l(b)(2)(ii)(d)(4), 1.704-l(b)(2)(ii)(d)(5), or 1.704-l(b)(2)(ii)(d)(6), and after giving effect to the allocations required under Sections 4.6(a) and 4.6(b) hereof with respect to such Fiscal Year, such Member has an Adjusted Capital Account Deficit, items of Company income and gain (consisting of a pro rata portion of each item of Company income, including gross income and gain for the Fiscal Year) shall be specifically allocated to such Member in an amount and manner sufficient to eliminate, to the extent required by the Regulations, its Adjusted Capital Account Deficit created by such adjustments, allocations or distributions as quickly as possible. This Section 4.6(c) is intended to constitute a “qualified income offset” under Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.
(d) Gross Income Allocation . In the event that any Member has an Adjusted Capital Account Deficit at the end of any Fiscal Year (after taking into account allocations to be made under the preceding paragraphs hereof with respect to such Fiscal Year), each such Member shall be specially allocated items of Company income and gain (consisting of a pro rata portion of each item of Company income, including gross income and gain for the Fiscal Year) in an amount and manner sufficient to eliminate, to the extent required by the Regulations, its Adjusted Capital Account Deficit.
 
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(e) Nonrecourse Deductions . Nonrecourse Deductions for any Fiscal Year shall be allocated to the Members in accordance with their respective Interests. If the Sharyland Member determines in its good faith discretion that the Company’s Nonrecourse Deductions must be allocated in a different ratio to satisfy the safe harbor requirements of the Regulations promulgated under Section 704(b) of the Code, the Sharyland Member is authorized, upon notice to the TDC Member, to revise the prescribed ratio for such Fiscal Year to the numerically closest ratio which would satisfy such requirements.
(f) Member Nonrecourse Deductions . Any Member Nonrecourse Deductions for any Fiscal Year shall be specially allocated to the Member who bears the economic risk of loss with respect to the Member Nonrecourse Debt to which such Member Nonrecourse Deductions are attributable in accordance with Regulations Sections 1.704-2(b)(4) and 1.704-2(i).
(g) Code Section 754 Adjustments . To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Section 734(b) or 743(b) of the Code is required, pursuant to Regulations Section 1.704-l(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis), and such item of gain or loss shall be specially allocated to the Members in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of the Regulations.
(h) Curative Allocations . The allocations set forth in this Section 4.6 (the “ Regulatory Allocations ”) are intended to comply with certain requirements of Treasury Regulations Sections 1.704-l(b) and 1.704-2. Notwithstanding any other provision of this Section 4.1 (other than the Regulatory Allocations), the Sharyland Member is authorized to make offsetting special allocations of Company income, gain, loss or deduction in whatever manner it deems appropriate so that, after such offsetting allocations are made, each Member’s Capital Account balance is, to the extent possible, equal to the Capital Account balance such Member would have had if the Regulatory Allocations were not part of this Agreement and all Company items were allocated pursuant to Section 4.1 .
Section 4.7 Allocations for Tax Purposes .
(a) Except as otherwise provided in this Section 4.7 , for federal income tax purposes, each item of income, gain, loss and deduction shall be allocated among the Members in the same manner as its correlative item of “book” income, gain, loss or deduction is allocated pursuant to Section 4.1 and Section 4.6 hereof.
 
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(b) In an attempt to eliminate Book-Tax Disparities attributable to a Contributed Property or Adjusted Property, items of income, gain, loss, and deduction shall be allocated for federal income tax purposes among the Members as follows:
(i) (A) In the case of a Contributed Property, such items attributable thereto shall be allocated among the Members consistent with the principles of Section 704(c) of the Code to take into account the variation between the 704(c) Value of such property and its adjusted basis at the time of contribution (taking into account Section 4.7(c) ); and (B) any item of Residual Gain or Residual Loss attributable to a Contributed Property shall be allocated among the Members in the same manner as its correlative item of “book” gain or loss is allocated pursuant to Section 4.1 and Section 4.6 hereof.
(ii) In the case of an Adjusted Property, such items shall:
(A) first, be allocated among the Members in a manner consistent with the principles of Section 704(c) of the Code to take into account the Unrealized Gain or Unrealized Loss attributable to such property and the allocations thereof pursuant to Section 3.4 ;
(B) second, in the event such property was originally a Contributed Property, be allocated among the Members in a manner consistent with Section 4.7(b)(i) ; and
(iii) any item of Residual Gain or Residual Loss attributable to an Adjusted Property shall be allocated among the Members in the same manner its correlative item of “book” gain or loss is allocated pursuant to Section 4.1 and Section 4.6 hereof.
(iv) all other items of income, gain, loss and deduction shall be allocated among the Members in the same manner as their correlative item of “book” gain or loss is allocated pursuant to Section 4.1 and Section 4.6 hereof.
(c) To the extent Regulations promulgated pursuant to Section 704(c) of the Code permit the Company to utilize alternative methods to eliminate the disparities between the Carrying Value of property and its adjusted basis, the Sharyland Member shall, subject to the following, have the authority to elect the method to be used by the Company and such election shall be binding on all Members; provided that, to the extent that the Sharyland Member has agreed to use a particular method with respect to a Contributed Property, the Sharyland Member shall be bound by such agreement pursuant to the terms thereof.
ARTICLE V.
THE SHARYLAND MEMBER
Section 5.1 Power and Authority of Sharyland Member .
(a) (i) Except as provided in Section 5.2 and elsewhere in this Agreement and except as otherwise provided by applicable law, the Sharyland Member shall have full and exclusive power and authority on behalf of the Company to manage, control, administer and operate the properties, business and affairs of the Company in accordance with this Agreement and to do or cause to be done any and all acts deemed by the Sharyland Member to be necessary or appropriate thereto, and (except as aforesaid in this Section 5.1 ) the scope of such power and authority shall encompass all matters in any way connected with such business or incident thereto, including property and asset management, compliance with governmental regulations
 
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and registration requirements and operational activities of the Company and the authority to bind the Company in making contracts and incurring obligations in the Company’s name in the course of the Company’s business, including, without limitation, causing the Company to enter into, and be bound by the terms of, the Lease Agreements. Without limiting the generality of the foregoing, the Sharyland Member shall have the power and authority to cause the Company to timely perform all of its obligations under all agreements binding upon the Company or its assets, including without limitation, all obligations under the Lease Agreements (including specifically the obligations for Footprint Projects (x) required by Regulatory Authorities or (y) reasonably necessary to satisfy Sharyland Utilities’ or another lessee’s obligation as a regulated utility to serve its customers or to maintain the safety or reliability of a System) and the loan agreements and related documents, including promissory notes and security documents, to which the Company is a party. Further, the Sharyland Member may in its reasonable discretion contract with third-party service providers to perform any of the services it is obligated to provide to the Company under this Agreement.
(ii) Notwithstanding the limitations in Section 5.2 or any other provision of this Agreement, the Sharyland Member shall have the power and authority on behalf of the Company, without the Approval of the TDC Member, to:
(A) make any filing of changes in the Company’s or any of its subsidiaries’ rates or charges that are required to be filed by Applicable Laws; and
(B) consistent with the Lease Agreements, (x) initiate regulatory proceedings with Regulatory Authorities in accordance with Good Utility Practice, including rate proceedings, interim transmission cost of service filings and distribution cost recovery factor filings, (y) initiate, prosecute, defend and participate in any administrative or judicial proceeding reasonably necessary or advisable to operate the System in an economical and efficient manner, provided that the Sharyland Member shall consult with the TDC Member prior to initiating any rate proceeding with the PUCT to change the rates the Sharyland Member can lawfully charge, but, with or without the Approval of the TDC Member, the Sharyland Member shall be authorized to initiate any such rate proceeding.
Furthermore, upon the TDC Member’s request, the Sharyland Member shall file a rate proceeding before the PUCT, and, in such circumstances, the Company or the TDC Member shall be responsible for reimbursing the Sharyland Member for all costs associated with prosecution of such proceeding to the extent that such costs are not recoverable in the Sharyland Member’s PUCT-approved rates.
(iii) The Sharyland Member may elect officers of the Company, who will have the powers and authority and will be governed by the terms and provisions set forth below:
(A) Each officer of the Company shall be a natural person. An officer need not be a resident of the State of Texas, a Member or an employee of the Company.
 
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(B) The officers of the Company, if any, shall have such powers and authority, subject to the direction and control of the Sharyland Member and shall perform such duties in connection with the management of the business and affairs of the Company as are provided in this Company Agreement, or as may be determined from time to time by resolution of the Sharyland Member. In addition, except as otherwise expressly provided herein, each officer shall have such powers and authority as would be incident to his or her office if he or she served as a comparable officer of a Texas corporation.
(C) The officers of the Company, if any, shall consist of a President, a Secretary and a Treasurer, each of whom shall be elected by the Sharyland Member. In addition, the Sharyland Member shall have the authority to elect such other officers, including Vice Presidents and assistant officers, as it may from time to time determine. Any two or more offices may be held by the same person.
(D) Any vacancy occurring in an office may be filled by the Sharyland Member.
(E) Any officer of the Company may be removed by the Sharyland Member whenever in its judgment the best interests of the Company will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the officer so removed. Election as an officer of the Company shall not of itself create any contract rights.
(F) President . The President shall be the chief executive officer of the Company, and, under the direction and subject to the control of the Sharyland Member, the President in general shall supervise and control all of the business and affairs of the Company and shall see that all orders and resolutions of the Sharyland Member are carried into effect. The President may execute any deeds, mortgages, bonds, contracts or other instruments that the Sharyland Member has authorized to be executed and delivered, except in cases where the execution and delivery thereof shall be expressly and exclusively delegated to another officer of the Company by the Sharyland Member or this Company Agreement, or where the execution and delivery thereof shall be required by law to be carried out by another person. In general, the President shall perform all duties incident to the office of President and such other duties as may be prescribed from time to time by the Sharyland Member.
(G) Vice Presidents . Each Vice President, if there be any, shall report to the President. Each Vice President may perform the usual and customary duties that pertain to such office (but not unusual or extraordinary duties or the duties conferred by the Sharyland Member upon the President) and, under the direction and subject to the control of the Sharyland Member and the President, such other duties as may be assigned to him or her from time to time by the Sharyland Member or the President. Any Vice President may be designated by the Sharyland Member as an Executive Vice President.
 
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(H) Secretary . It shall be the duty of the Secretary to attend all meetings of the Company and to record correctly the proceedings of such meetings and record all votes in a book suitable for such purposes. The Secretary shall give, or cause to be given, notice of all meetings of the Company. It shall also be the duty of the Secretary to keep a register in which all transactions pertaining to the Membership Interests shall be correctly recorded. The Secretary shall also perform, under the direction and subject to the control of the Sharyland Member and the President, such other duties as may be assigned to him or her from time to time.
(I) Treasurer . The Treasurer shall have the care and custody of all the funds and securities of the Company that may come into his or her hands as Treasurer. The Treasurer may endorse checks, drafts and other instruments for the payment of money for deposit or collection when necessary or proper and may deposit the same to the credit of the Company in such banks or depositories as the Sharyland Member may designate from time to time, and the Treasurer may endorse all commercial documents requiring endorsements for or on behalf of the Company. The Treasurer may sign all receipts and vouchers for the payments made to the Company. The Treasurer shall render an account of his or her transactions to the Sharyland Member or the President as often as the Sharyland Member or the President shall require from time to time. The Treasurer shall enter regularly in the books to be kept by him or her for that purpose, a full and adequate account of all monies received and paid by him or her on account of the Company. The Treasurer shall also perform, under the direction and subject to the control of the Sharyland Member and the President, such other duties as may be assigned to him or her from time to time.
(J) Delegation of Authority . In the case of any absence of any officer of the Company or for any other reason that the Sharyland Member may deem sufficient, the Sharyland Member may delegate some or all of the powers or duties of such officer to any other officer for whatever period of time the Sharyland Member deems appropriate.
(K) No Initial Officers . There shall be no officers until such time as the Sharyland Member elects such officers as provided in this Section 5.1(a)(iii) .
(b) The Sharyland Member shall, subject to the provisions of this Agreement and the availability of cash funds of the Company, use reasonable efforts to implement the then applicable Approved Annual Business Plan, and, subject to the provisions of this Agreement, shall have all right, power and authority to do so.
(c) In exercising its authority under this Section 5.1 , the Sharyland Member shall have the power and authority to act alone, and in the name and on behalf of the Company, including the power to execute for and on behalf of the Company any and all documents and instruments which may be necessary to carry on the business of the Company, in connection with the affairs of the Company, except to the extent that (i) the prior Approval of the TDC Member
 
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is required pursuant to this Agreement, including but not limited to those described in Section 5.2 hereof, or (ii) any such action is otherwise prohibited, restricted or limited under the provisions of this Agreement, in which case the Sharyland Member may exercise only such authority for which Approval has been given by the TDC Member or which is expressly permitted under this Agreement. Any third party conducting business with the Company shall be entitled to rely on the authority of the Sharyland Member to conduct Company business solely by the execution of any documents or instruments by the Sharyland Member, and such third party shall not be required to determine the authority of the Sharyland Member under this Agreement or to otherwise determine any fact or circumstance bearing upon the existence of the Sharyland Member’s authority to obligate or bind the Company or any fact relating to the Approved Annual Business Plan.
(d) InfraREIT has elected or expects to elect to be treated as a REIT. In order to maintain its status as a REIT, InfraREIT will be required to comply with numerous and complex rules and regulations set forth in the Code and the Regulations, many of which are applied on a quarterly and/or annual basis (the “ REIT Requirements ”), and the management and operation of the Company by the Sharyland Member will have a material effect on the ability of InfraREIT to continue to maintain its status as a REIT. Accordingly, notwithstanding any other provision of this Agreement or any non-mandatory provision of the Act, the Sharyland Member shall not permit the Company to take any action which (or omit to take any action, the omission of which) would result in (A) less than seventy-five percent (75%) of the assets of the Company at the close of any calendar quarter qualifying as “real estate assets” under Section 856(c)(4)(A) of the Code, (B) more than twenty-five percent (25%) of the assets of the Company at the close of any calendar quarter to consist of assets described in Section 856(c)(4)(B) of the Code, (C) any of the assets of the Company at the close of any calendar quarter to violate or exceed the limitations described in Section 856(c)(4)(B)(iii) of the Code, (D) less than 75% of the gross income of the Company in any calendar year qualifying as income described in Section 856(c)(3) of the Code and less than 95% of gross income in any calendar year qualifying as income described in Section 856(c)(2) of the Code, (E) any portion of the gross revenues or net income of the Company in any calendar year constituting income from a “prohibited transaction” as defined in Section 857(b)(6)(B)(iii) of the Code, or (F) any material amount of the Company’s assets to be property described in Section 1221(a)(l) of the Code (other than “foreclosure property” as defined in Section 856(e) of the Code), (clauses (A), (B), (C), (D), (E) and (F) are collectively referred to herein as the “ REIT Restriction Covenants ”).
The foregoing provisions are intended to ensure that the assets, income and operations of the Company are such that they will satisfy the various provisions of the Code that restrict the assets, income and operations of REITs and thereby ensure that the REIT status of InfraREIT will not be jeopardized by its direct or indirect ownership of an interest in the Company. In the event that any additional restrictions on the assets, income or operations of REITs are imposed by any new provisions of the Code or Regulations, any amendments to the Code or Regulations or by any judicial precedent or any notice, ruling or release of the U.S. Treasury Department or the IRS, then upon written advice of InfraREIT’s counsel, the Sharyland Member shall agree to amend the provisions of this Section 5.1(d) as required to ensure that the assets, income or operations of the Company will not jeopardize the REIT status of InfraREIT. Notwithstanding any other provision of this Agreement to the contrary, any expenses related to any amendment made pursuant to this Section 5.1(d) or to maintain compliance by the Company with the REIT Requirements or the REIT Restriction Covenants or to continue InfraREIT’s maintenance of its REIT status shall be borne solely by InfraREIT.
 
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Section 5.2 Restrictions on Sharyland Member .
(a) Notwithstanding anything in this Agreement to the contrary, including without limitation Section 5.1 , except to the extent required by Applicable Laws, the Sharyland Member shall have no authority to do or permit any of the following acts on behalf of the Company or any of its subsidiary entities without the Approval of the TDC Member (it being recognized that the Approval for any particular act may be contemplated by an Approved Annual Business Plan):
(i) doing any act in contravention of this Agreement or which would make it impossible or unreasonably burdensome to carry on the business of the Company;
(ii) confess a judgment against the Company in any material amount;
(iii) borrow any money from the Company;
(iv) do any other act which the Act specifically requires to be Approved by the Members;
(v) Any acquisition or exchange (including by way of merger, consolidation, business combination or similar transaction) involving the Company or any of its subsidiaries of any assets or the development and construction of any Footprint Projects;
(vi) Any sale, exchange or other Transfer of any assets of the Company or any of its subsidiaries;
(vii) Any incurrence of indebtedness other than in the ordinary course of the Company’s or any of its subsidiaries’ business, or any change in the repayment (including making any voluntary prepayment) or maturity of such indebtedness;
(viii) Any issuance of equity interests, options, warrants, or other similar convertible securities of the Company or any of its subsidiaries to third parties (including, without limitation, their employees and consultants pursuant to equity awards under any equity incentive program), including any material modification thereof, except as provided in Section 3.2(d) ;
(ix) Any open market purchases of publicly traded securities;
(x) Approval of the Company’s or any of its subsidiaries’ annual budget (construction or operating) or business plan and any related material business policies and any material amendments to the foregoing other than an Approved Annual Business Plan or an amendment thereto, as provided in Section 8.1 ;
 
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(xi) Expenditures in excess of 5% of the amounts set forth in the then current Approved Annual Business Plan, except (A) to the extent necessary to comply with Applicable Laws or in the case of emergencies so long as such expenditure is reasonable and prudent and consistent with Good Utility Practices or (B) as otherwise expressly provided in Section 8.1(b) or Section 8.1(c) ;
(xii) Any appointment or removal of outside auditors;
(xiii) Any change to accounting methods (other than as required to comply with the FERC Chart of Accounts or in accordance with an order of the PUCT) or Fiscal Year;
(xiv) Except as provided in Section 5.1(a)(ii) , any (w) initiation or settlement of any material litigation, arbitration or administrative proceeding related to the System, (x) settle any rate case or rate proceeding related to the Company or any of its subsidiaries, (y) material changes in the Company’s or any of its subsidiaries’ rates or charges from those in effect on the date hereof, or (z) arrangement or consent, whether written or oral, with respect to such a material change in charges or rates;
(xv) Entry into any lease or any material amendment, waiver, renewal, termination or modification of the Lease Agreements;
(xvi) Any agreement or transaction, directly or indirectly, between the Company or any of its subsidiaries, on the one hand, and the Sharyland Member, on the other hand, other than any transactions described in or contemplated by this Agreement;
(xvii) Any actions pursuant Section 4.7(c) or Article X ;
(xviii) Effecting any consolidation of the Company or any of its subsidiaries with another Entity or any merger of the Company or any of its subsidiaries with or into another Entity, or causing the Company to be converted into an Entity other than a Texas limited liability company; or
(xix) Filing any petition seeking to reorganize the Company or any of its subsidiaries pursuant to, or to obtain relief under, any federal or state bankruptcy or insolvency law.
(b) (i) Notwithstanding the provisions set forth in Section 5.2(a) , the Sharyland Member shall have the right to take such actions as it, in its reasonable judgment, deems (i) necessary to comply with any order or mandate of a Regulatory Authority; (ii) reasonable and prudent and consistent with Good Utility Practice, or (iii) necessary in an Emergency if, under the circumstances, in the good faith estimation of the Sharyland Member, there is insufficient time to allow the Sharyland Member to obtain the Approval of the TDC Member to such action and any delay would cause the Company to violate such order or mandate of a Regulatory Authority, materially increase the risk to life or health or preservation of assets or cause the Company not to exercise reasonable, prudent, and consistent Good Utility Practices. The Sharyland Member shall notify the TDC Member of each such action or as soon as reasonably practicable thereafter.
 
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(ii) The Sharyland Member and the TDC Member each agree that they will cooperate to assure compliance with all Applicable Laws and lawful requests of any Regulatory Authorities. The TDC Member agrees to provide such information to any Regulatory Authority as the Sharyland Member or such Regulatory Authority may reasonably request in connection therewith. The TDC Member further agrees to use its best efforts to cooperate and promptly respond to any reasonable requests from the Sharyland Member relating to its efforts to comply with any regulatory requirements or to participate in any necessary or advisable legal proceedings, whether judicial or administrative.
Section 5.3 Reimbursement and Fees . Subject to the extent contemplated by the Approved Annual Business Plan, the Sharyland Member shall be reimbursed promptly by the Company for third-party, out-of-pocket administrative costs and expenses reasonably incurred by it in connection with the performance of its duties to the Company. Neither the Sharyland Member nor any of its Affiliates shall be entitled to reimbursement for any internal (i.e., not third party) general or administrative costs or expenses.
Section 5.4 Performance of Sharyland Member . The Sharyland Member, as its continuing covenant, agrees to perform all of its duties and obligations under this Agreement in accordance with the terms and provisions of this Agreement.
Section 5.5 Purchase of Sharyland Interest .
(a) Subject to the provisions of Section 5.5(c) , upon the occurrence of any of the following events, the TDC Member may cause the Company to purchase the Sharyland Interest and upon the completion of such purchase the Sharyland Member shall be deemed to have withdrawn from the Company and shall no longer have any authority or power to act on behalf of the Company:
(i) (A) If the Management Agreement is terminated in a manner that requires InfraREIT to pay a Termination Fee (as defined therein), and, in connection with such termination, the TDC Member elects by written notice to the Sharyland Member to cause the Company to purchase the Sharyland Interest pursuant hereto;
(B) If, within a period of thirty (30) days from the date on which the Sharyland Member gives written notice to the TDC Member stating that a For Cause Event has occurred and setting forth in reasonable detail a description of such For Cause Event (it being understood that the Sharyland Member shall give such notice to the TDC Member promptly after the occurrence thereof), (x) the TDC Member elects by written notice to the Sharyland Member to cause the Company to purchase the Sharyland Interest, and (y) within such thirty (30) day period the Sharyland Member has not cured or corrected such For Cause Event or, if such For Cause Event is not reasonably capable of being cured or corrected within such thirty (30) day period, the Sharyland Member has not commenced to cure or correct such For Cause Event during such thirty (30) day period and thereafter diligently proceeded to complete such cure or correction; or
 
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(C) If within a period of ninety (90) days of the occurrence of an Event of Bankruptcy with respect to the Sharyland Member such Event of Bankruptcy is not discharged or stayed and the Company is not reconstituted pursuant to the provisions of this Agreement; and
(ii) Upon payment to the Sharyland Member for the Sharyland Interest of an amount equal to the Sharyland Member’s Capital Account, which shall be calculated as of (A) the date the TDC Member gives notice of its election to cause the Company to purchase the Sharyland Interest if such purchase is pursuant to clause (i)(A) or (i)(B) of this Section 5.5(a) , or (B) as of the date of such Event of Bankruptcy if such purchase is made pursuant to clause (i)(C) of this Section 5.5(a) .
(b) Subject to the provisions of Section 5.5(c) , at any time and for any reason or for no reason, the TDC Member, in its discretion, may cause the Company to purchase the Sharyland Interest by written notice to the Sharyland Member and payment of an amount which is the greater of (i) twenty-five million dollars ($25,000,000), and (ii) five (5) times the Sharyland Member’s Capital Account, calculated as of the notice date.
(c) Notwithstanding anything in this Agreement to the contrary, in the event the TDC Member exercises its rights under Sections 5.5(a) or (b) , (i) the Sharyland Interest cannot be purchased and (ii) the Sharyland Member shall not, and cannot be forced to, surrender, resign, transfer, assign or otherwise cease its authority and power under this Agreement unless and until all necessary Regulatory Approvals have been obtained. The parties shall use reasonable best efforts to obtain all such necessary Regulatory Approvals as soon as reasonably practicable. During such time period, the Sharyland Member shall continue to own the Sharyland Interest and shall exercise all of its authority and power pursuant to the terms and conditions of this Agreement and under the Act, including carrying out its obligations in a reasonable and prudent manner and consistent with Good Utility Practices. The Sharyland Member shall continue to have its rights and obligations under this Agreement and the Act during this period, including without limitation, allocations of Net Profit and Net Loss and distributions of Available Cash with respect to the Sharyland Interest.
ARTICLE VI.
THE MEMBERS
Section 6.1 Rights of the Members . In addition to the other rights specifically set forth herein, each Member shall have the right to: (a) have the books and records of the Company and each subsidiary entity (including without limitation those required in the Act) kept at the principal United States office of the Company and at all reasonable times to inspect and copy any of them, (b) have on demand true and full information of all things affecting the Company and any subsidiary Entity and a formal account of the affairs of the Company and any subsidiary Entity, (c) have winding up of the Company by decree of court as provided for in the Act, (d) exercise all rights of a member under the Act (except to the extent otherwise specifically provided for herein) and (e) take, consent to, waive and/or approve all actions and requirements, vote and make all elections permitted or required under or pursuant to this Agreement.
 
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Section 6.2 Liability for the Company’s Obligations . Except as otherwise required by the Act, the debts, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the Company, and the Members shall not be obligated personally for any such debt, obligation or liability solely by reason of being a Member of the Company. Each Member shall be obligated to make payment of its contributions of capital as and when due hereunder and other payments as provided in this Agreement.
Section 6.3 Use of Affiliates . Any right, power, circumstance or situation wherein a Member may take or require certain actions may be undertaken through an Affiliate of such Member.
ARTICLE VII.
INDEMNIFICATION
Section 7.1 Liability of the Covered Persons . Notwithstanding anything to the contrary set forth in this Agreement, no Covered Person shall be liable for monetary damages to the Company, or any other Member for losses sustained, liabilities incurred or benefits not derived as a result of errors in judgment or mistakes of fact or law or of any act or omission unless such Covered Person acted in bad faith and the act or omission was material to the matter giving rise to the loss, liability or benefit not derived.
Section 7.2 Indemnification .
(a) The Company shall indemnify each Covered Person to the fullest extent provided by the Act from and against any and all losses, claims, damages, liabilities, joint or several, expenses (including, without limitation, attorneys’ fees and other legal fees and expenses), judgments, fines, settlements and other amounts arising from or in connection with any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, incurred by such Covered Person and relating to the Company or a Member or the operation of, or the ownership of property by, the Company or such Member as set forth in this Agreement in which any such Covered Person may be involved, or is threatened to be involved, as a party or otherwise, unless it is established by a final determination of a court of competent jurisdiction that: (i) the act or omission of such Covered Person was material to the matter giving rise to the proceeding and either was committed in bad faith or was the result of active and deliberate dishonesty, (ii) such Covered Person actually received an improper personal benefit in money, property or services or (iii) in the case of any criminal proceeding, such Covered Person had reasonable cause to believe that the act or omission was unlawful. Without limitation, the foregoing indemnity shall extend to any liability of any Covered Person, pursuant to a loan guarantee, contractual obligation for any indebtedness or other obligation or otherwise, for any indebtedness of the Company (including, without limitation, any indebtedness which the Company has assumed or taken subject to), and the Sharyland Member is hereby authorized and empowered, on behalf of the Company, to enter into one or more indemnity agreements consistent with the provisions of this Section 7.2 in favor of any Covered Person having or potentially having liability for any such indebtedness. The termination of any proceeding by judgment, order or settlement does not create a presumption that the Covered Person did not meet the requisite standard of conduct set forth in this Section 7.2.(a) . The termination of any
 
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proceeding by conviction or upon a plea of nolo contendere or its equivalent, or an entry of an order of probation prior to judgment, creates a rebuttable presumption that the Covered Person acted in a manner contrary to that specified in this Section 7.2 with respect to the subject matter of such proceeding. Any indemnification pursuant to this Section 7.2 shall be made only out of the assets of the Company, and any insurance proceeds from the liability policy covering a Member and any Covered Person, and neither the Sharyland Member nor any TDC Member shall have any obligation to contribute to the capital of the Company or otherwise provide funds to enable the Company to fund its obligations under this Section 7.2 .
(b) Reasonable expenses paid or expected to be incurred by a Covered Person shall be paid or reimbursed by the Company in advance of the final disposition of any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative made or threatened against a Covered Person upon receipt by the Company of (i) a written affirmation by the Covered Person of the Covered Person’s good faith belief that the standard of conduct necessary for indemnification by the Company as authorized in this Section 7.2 has been met and (ii) a written undertaking by or on behalf of the Covered Person to repay the amount if it shall ultimately be determined that the standard of conduct has not been met.
(c) The indemnification provided by this Section 7.2 shall be in addition to any other rights to which a Covered Person or any other Person may be entitled under any agreement, pursuant to any vote of the Members, as a matter of law or otherwise, and shall continue as to a Covered Person who has ceased to serve in such capacity unless otherwise provided in a written agreement pursuant to which such Covered Person is indemnified.
(d) The Company may purchase and maintain insurance on behalf of the Covered Persons and such other Persons as the Sharyland Member shall determine against any liability that may be asserted against or expenses that may be incurred by such Person in connection with the Company’s activities, regardless of whether the Company would have the power to indemnify such Person against such liability under the provisions of this Agreement.
(e) In no event may a Covered Person subject any of the Members to personal liability by reason of the indemnification provisions set forth in this Agreement.
(f) A Covered Person shall not be denied indemnification in whole or in part under this Section 7.2 because the Covered Person had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement.
(g) The provisions of this Section 7.2 are for the benefit of the Covered Persons, their employees, officers, directors, trustees, partners, members, heirs, successors, assigns and administrators and shall not be deemed to create any rights for the benefit of any other Persons. Any amendment, modification or repeal of this Section 7.2 , or any provision hereof, shall be prospective only and shall not in any way affect the limitation on the Company’s liability to any Covered Person under this Section 7.2 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or related to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted.
 
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(h) If and to the extent any payments to a Member pursuant to this Section 7.2 constitute gross income to such Member (as opposed to the repayment of advances made on behalf of the Company), such amounts shall constitute guaranteed payments within the meaning of Section 707(c) of the Code, shall be treated consistently therewith by the Company and all Members, and shall not be treated as distributions for purposes of computing the Members’ Capital Accounts.
ARTICLE VIII.
COMPANY OPERATIONS
Section 8.1 Annual Business Plan; Capital Expenditures Budget .
(a) No later than November 15th of each Fiscal Year, the Sharyland Member shall prepare and submit to the TDC Member for its Approval a proposed Annual Business Plan for the next Fiscal Year (each, an “ Annual Business Plan ”). The parties agree that any annual business plan of InfraREIT that includes forecasted expenditures for the Company may be deemed an Annual Business Plan hereunder. The Annual Business Plan shall, as a separate line item, specify (without limitation) (i) each category of the operating expenses of the Company and any of its subsidiaries, and (ii) the Capital Expenditure Budget. Except as otherwise contemplated by Section 5.2(a)(xi) , Section 8.1(b) or Section 8.1(c) , no increases from any category of operating expenses or capital expenditure item in an Approved Annual Business Plan shall be made (and no expenditures shall be made for any such increased amounts therein) without the prior Approval of the TDC Member. With respect to the portion of the Annual Business Plan that is comprised of the Capital Expenditure Budget, the Sharyland Member has provided to the TDC Member the approximate amounts of capital expenditures that the Sharyland Member expects will be needed for purposes of funding Footprint Projects in each Fiscal Year through 2016. No later than October 15th of each calendar year, the Sharyland Member shall review and revise the Capital Expenditure Budget on a rolling three-year basis, taking into account any changed circumstances that (i) make it no longer feasible to incur one or more of the costs reflected on the prevailing Capital Expenditure Budget, (ii) make it necessary to amend the nature or amounts reflected for a particular Footprint Project or (iii) dictate that additional Footprint Projects be added (such budget, as so updated and revised, is referred to herein as the “ Capital Expenditure Budget ”) and shall submit the Capital Expenditure Budget to the TDC Member for its Approval. The parties envision that the Capital Expenditure Budgets will be the aggregate of all capital expenditures included in CapEx Budgets (as such term is defined in the Lease Agreements) delivered pursuant to the Lease Agreements.
(b) As soon as practicable after any proposed Annual Business Plan is submitted to the TDC Member but no later than forty-five (45) days after receipt by the TDC Member, the TDC Member shall Approve or disapprove such proposed Annual Business Plan. If the proposed Annual Business Plan is Approved by the TDC Member, then such proposed Annual Business Plan shall be deemed thereafter to constitute the Approved Annual Business Plan for the Fiscal Year in question for all purposes hereof, subject to amendment from time to time. If the TDC Member does not Approve the proposed Annual Business Plan, it shall notify the Sharyland Member of its reason(s) for not granting such Approval. The Members shall use their best efforts to resolve any questions with respect to revisions to the proposed Annual Business Plan and to agree upon an Annual Business Plan for the Fiscal Year in question prior to
 
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the beginning of the Fiscal Year to which such Annual Business Plan relates. In the event an Annual Business Plan for any Fiscal Year is not Approved by the TDC Member prior to the commencement thereof, the Sharyland Member shall continue to manage, maintain, supervise and direct the Company in accordance with the applicable Approved Annual Business Plan for the previous Fiscal Year dealing solely with maintaining and preserving the assets of the Company in accordance with reasonable, prudent and consistent Good Utility Practices, such as the payment of taxes, insurance, debt service and other expenses necessary to maintain the essential day-to-day operations of the assets of the Company until a new Annual Business Plan is Approved by the TDC Member; provided, however, the Sharyland Member shall be authorized during any interim period to reasonably exceed the budgeted amounts for taxes, insurance, debt service and other costs if the cost of such items has increased above the amounts budgeted therefor for the prior Fiscal Year and such payments are required to preserve the value of the assets.
(c) The Sharyland Member shall have the right from time to time during each Fiscal Year to prepare and submit to the TDC Member for its Approval proposed amendments to the Approved Annual Business Plan for such Fiscal Year. The TDC Member shall, within ten (10) days, Approve, disapprove or make such revision thereto as the TDC Member may deem necessary and proper, which Approval may be withheld by the TDC Member in its sole discretion. The TDC Member shall use its reasonable best efforts to provide some form of response within such ten (10) day period, but a failure of the TDC Member to respond within such ten (10) day period shall constitute disapproval of such amendment. Once Approved by the TDC Member, or so revised by the TDC Member and Approved by the Sharyland Member, such amendments shall be incorporated into and become part of the Approved Annual Business Plan for the Fiscal Year in question. Notwithstanding anything to the contrary contained in this Agreement, amendments or modifications of the Approved Annual Business Plan which reflect changes as a result of an increase in Working Capital Reserve for Required Footprint Projects shall be submitted to the TDC Member but shall not require the Approval of the TDC Member.
(d) Any modifications made to an Annual Business Plan at the request of the TDC Member after submission by the Sharyland Member must also be Approved by the Sharyland Member before the Annual Business Plan is Approved by the Members. It is possible that an Annual Business Plan, or an amendment thereto, may be partially Approved and partially disapproved, in which event, the Sharyland Member shall proceed to conduct business on the basis of the Annual Business Plan to the extent that it is so Approved.
(e) The TDC Member agrees that a Capital Expenditure Budget may contain Footprint Project(s) that require multi-year commitments of funds, capital or credit enhancement. If the TDC Member Approves a multi-year commitment of funds, capital or credit enhancement for such Footprint Projects, the Sharyland Member shall not be required to obtain the re-Approval of the TDC Member for such expenditures or commitments in subsequent years, and such commitments and expenditures shall remain Approved by the TDC Member for purposes of this Agreement whether or not the TDC Member Approves subsequent Annual Business Plans and/or Capital Expenditure Budgets proposed by the Sharyland Member provided that, other than as contemplated by Section 5.2(a)(xi) , Section 8.1(b) or Section 8.1(c) , any increase in expenditures or commitments for such Footprint Projects does not exceed 105% of the amounts set forth in the then current Approved Annual Business Plan for the year in question and there
 
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has been no material increase in time for completion of such Footprint Projects in the current schedule compared to the schedule previously Approved by the TDC Member. Any Footprint Projects with a multi-year commitment must be so designated in the applicable Capital Expenditure Budget and must be the type of Footprint Projects that in the ordinary course of business would be conducted on an extended or multi-year basis as opposed to an annual basis to qualify for the special continuation of funding or commitment without re-Approval provisions of this Section 8.1(e) . Continuing Approval of multi-year projects is conditioned upon the cost of the applicable Footprint Project being within 105% of the amounts set forth in the then current Approved Annual Business Plan with no material increase in time for completion in the current schedule compared to the schedule presented when the Footprint Project was previously Approved by the TDC Member. If the Footprint Project budget is in excess of 105% of the amounts set forth in the then current Approved Annual Business Plan or there has been a material increase in the time for completion compared to the schedule previously Approved by the TDC Member, then the increase in the cost of the Footprint Project must be again presented to the TDC Member for Approval with such revised budgets and project schedules as the Sharyland Member shall reasonably determine.
Section 8.2 Insurance . Insurance with respect to the affairs, activities, operations, business, Footprint Projects and other assets of the Company shall be maintained as reasonably required for ownership and prudent operation of electric transmission and distribution facilities as determined by the Sharyland Member from time to time, or any specific provision of an Approved Annual Business Plan.
ARTICLE IX.
ACCOUNTING AND RECORDS
Section 9.1 Books and Records .
(a) The Sharyland Member, at the Company’s expense, shall keep at the Company’s principal office separate books of account for the Company which shall show a true and accurate record of all costs and expenses incurred, all charges made, all credits made and received and all income derived in connection with the operation of the Company’s business in accordance with GAAP as to the Company’s financial position and results of operations. The Sharyland Member shall maintain or cause to be maintained all logs, drawings, manuals, specifications and data and inspection, modification and maintenance records and other materials required to be maintained in respect of the Company’s assets by Applicable Laws or by reasonable and prudent Good Utility Practices.
(b) Each Member shall, at its sole expense, have the right, at any time upon reasonable prior written notice to the other, to examine, copy and audit the Company’s books and records during normal business hours.
 
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Section 9.2 Reports .
(a) The Sharyland Member, at the expense of the Company, shall cause to be prepared and distributed to the TDC Member the following reports:
(i) Unless waived by the TDC Member, monthly: a balance sheet, income statement and statement of cash flows within fifteen (15) days after the last day of each month.
(ii) Quarterly: portfolio reporting forms in such form and containing such information regarding the performance of the Company and its subsidiaries, as the TDC Member may request from time to time within forty-five (45) days following the last day of each calendar quarter.
(iii) Periodically: at least ten (10) days prior to each estimated tax payment date of the TDC Member, an estimate of the taxable income of the Company allocable to the TDC Member for the period for which such estimated tax payment relates, provided that the TDC Member shall furnish the Sharyland Member with notice as to each such estimated tax payment date and applicable period.
(iv) Quarterly: (x) financial statements and other information required under Applicable Laws and by Good Utility Practices, and (y) such additional information, as may be necessary or desirable for an entity subject to the reporting requirements of the Exchange Act, including the Sarbanes-Oxley Act of 2002.
(v) Other: such other financial statements, budgets, plans and schedules as are from time to time reasonably requested by the TDC Member.
(b) The foregoing, to the extent applicable, shall be prepared using GAAP and shall cover the immediately preceding month or quarter, as the case may be, plus the current Fiscal Year through the end of such preceding month or quarter, as the case may be, on both an actual and year-to-date budgeted basis.
Section 9.3 Annual Audit . Within ninety (90) days after the end of each Fiscal Year, a general accounting and audit of the Company in accordance with GAAP shall be completed by the Accountants at the expense of the Company and delivered to the TDC Member by the Sharyland Member. The audit shall be conducted in accordance with the auditing standards of the Public Company Accounting Oversight Board and shall include a balance sheet, statement of operations, statement of members’ capital and statement of cash flows as of and for the Fiscal Year ended as well as appropriate disclosures as required by GAAP and the auditing standards of the Public Company Accounting Oversight Board. The Company shall prepare or cause the Accountants to prepare, such additional information as may be necessary or desirable for an entity subject to the reporting requirements of the Exchange Act, including the Sarbanes-Oxley Act of 2002. In addition, the Sharyland Member, at the expense of the Company, will cause supplemental schedules to the audit report to be included for items or information, such as an audit of Available Cash, as the TDC Member may request. If the additional information requested by the TDC Member cannot be adequately presented as part of the audit report, the Sharyland Member, at the expense of the Company, will engage the Accountants to perform additional attestation services sufficient to comply with the TDC Member’s request.
 
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Section 9.4 Exchange Act Reporting . Notwithstanding anything to the contrary in Section 9.2 or Section 9.3 , the Company shall prepare or cause the Accountants to prepare, such additional information relating to the Company, its assets and operations as may be necessary or desirable in order to allow InfraREIT to comply with the reporting requirements of the Exchange Act and any other applicable laws or exchange listing requirements.
Section 9.5 Fiscal Year . The “ Fiscal Year ” (herein so called) of the Company shall be the calendar year, unless otherwise Approved by the Members. As used in this Agreement, a Fiscal Year shall include any partial calendar year at the beginning and end of the Company term.
Section 9.6 Bank Accounts .
(a) The Sharyland Member shall exercise its commercially reasonable best efforts for the safekeeping and use of all funds and assets of the Company, whether or not in its immediate possession or control. The funds of the Company shall not be commingled with the funds of any other Person and the Sharyland Member shall not employ, or permit any other Person to employ, such funds in any manner except for the benefit of the Company. At the Company’s expense, all signatories on Company bank accounts shall be bonded in an amount and by a fidelity insurance carrier Approved by the TDC Member in the exercise of its reasonable discretion.
(b) The bank accounts of the Company shall be maintained in the Bank and withdrawals shall be made only in the regular course of Company business and as otherwise authorized in this Agreement on such signature or signatures as the Sharyland Member may determine.
Section 9.7 Quarterly Meetings . At least once during each calendar quarter, the Members shall meet in Dallas, Texas or at such other place as may be mutually agreed upon by the Members, at which time the Sharyland Member shall report on the affairs of the Company and the progress being made under the then applicable Approved Annual Business Plan. The meeting of the Members during the last calendar quarter of each Fiscal Year shall be for the purpose of reviewing and approving the Annual Business Plan for the next succeeding year. The Sharyland Member shall be responsible for scheduling the quarterly meetings and shall give at least ten (10) days prior written notice to the other Member of the time and place of the meeting. The costs and expenses of each quarterly meeting shall be borne by the Company.
Section 9.8 Appointment of Representatives . Each of the Sharyland Member and the TDC Member shall appoint a natural Person to be the agent of and for such Member. On the date of this Agreement, the agent of the Sharyland Member is Hunter Hunt, and the agent of the TDC Member is David Campbell. Either Member desiring to change the identity of its agent shall execute and deliver to the other Member a written instrument in which it shall designate the identity of the new agent, provided that no change in a Member’s agent shall be effective until such written notice is provided to the other Member. Such agent shall be responsible for exercising all rights, votes, consents, approvals and consultation rights and privileges of the Sharyland Member and the TDC Member, respectively, under this Agreement. Each of the agents shall be authorized to bind its principal.
 
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ARTICLE X.
TAX MATTERS
Section 10.1 Preparation of Tax Returns . The Sharyland Member shall arrange for the preparation and timely filing of all returns of Company income, gains, deductions, losses and other items required of the Company for federal and state income tax purposes and shall use all reasonable efforts to furnish, within one hundred and fifty (150) days of the close of each Taxable Year, the tax information reasonably required by the TDC Member for federal and state income tax reporting purposes.
Section 10.2 Tax Elections . Except as otherwise provided herein, the Sharyland Member shall, in its sole and absolute discretion, determine whether to make any available election pursuant to the Code; provided, however, that the Sharyland Member shall make the election under Section 754 of the Code in accordance with applicable regulations thereunder. The Sharyland Member shall have the right to seek to revoke any such election (including, without limitation, the election under Section 754 of the Code) upon the Sharyland Member’s determination in its sole and absolute discretion that such revocation is in the best interests of the Members.
Section 10.3 Tax Matters Member .
(a) General . The Sharyland Member shall be the “tax matters partner” of the Company for federal income tax purposes as defined in Section 6231 of the Code (the “ Tax Matters Member ”). Pursuant to Section 6223(c)(3) of the Code, upon receipt of notice from the IRS of the beginning of an administrative proceeding with respect to the Company, the Tax Matters Member shall furnish the IRS with the name, address, taxpayer identification number and profit interest of each Member and any of its assignees; provided, however, that such information is provided to the Company by such Member.
(b) Powers . The Tax Matters Member is authorized, but not required:
(i) to enter into any settlement with the IRS with respect to any administrative or judicial proceedings for the adjustment of Company items required to be taken into account by a Member for income tax purposes (such administrative proceedings being referred to as a “tax audit” and such judicial proceedings being referred to as “judicial review”), and in the settlement agreement the Tax Matters Member may expressly state that such agreement shall bind all Members, except that such settlement agreement shall not bind any Member (A) who (within the time prescribed pursuant to the Code and Regulations) files a statement with the IRS providing that the Tax Matters Member shall not have the authority to enter into a settlement agreement on behalf of such Member or (B) who is a “notice partner” (as defined in Section 6231(a)(8) of the Code) or a member of a “notice group” (as defined in Section 6223(b)(2) of the Code);
 
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(ii) if a notice of a final administrative adjustment at the Company level of any item required to be taken into account by a Member for tax purposes (a “ Final Adjustment ”) is mailed to the Tax Matters Member, to seek judicial review of such final adjustment, including the filing of a petition for readjustment with the Tax Court or the filing of a complaint for refund with the United States Claims Court or the District Court of the United States for the district in which the Company’s principal place of business is located;
(iii) to intervene in any action brought by any other Member for judicial review of a Final Adjustment;
(iv) to file a request for an administrative adjustment with the IRS at any time and, if any part of such request is not allowed by the IRS, to file an appropriate pleading (petition or complaint) for judicial review with respect to such request;
(v) to enter into an agreement with the IRS to extend the period for assessing any tax which is attributable to any item required to be taken into account by a Member for tax purposes, or an item affected by such item; and
(vi) to take any other action on behalf of the Members of the Company in connection with any tax audit or judicial review proceeding to the extent permitted by applicable law or regulations.
The taking of any action and the incurring of any expense by the Tax Matters Member in connection with any such proceeding, except to the extent required by law, is a matter in the sole and absolute discretion of the Tax Matters Member and the provisions relating to indemnification of the Sharyland Member set forth in Article VII shall be fully applicable to the Tax Matters Member in its capacity as such.
(c) Reimbursement . The Tax Matters Member shall receive no compensation for its services. All third party costs and expenses incurred by the Tax Matters Member in performing its duties as such (including legal and accounting fees and expenses) shall be borne by the Company. Nothing herein shall be construed to restrict the Company from engaging an accounting firm and/or law firm to assist the Tax Matters Member in discharging its duties hereunder, so long as the compensation paid by the Company for such services is reasonable.
Section 10.4 Organizational Expenses . The Company shall elect to deduct expenses, if any, incurred by it in organizing the Company ratably over a one hundred eighty (180) month period as provided in Section 709 of the Code.
Section 10.5 Withholding . Each Member hereby authorizes the Company to withhold from or pay on behalf of or with respect to such Member any amount of federal, state, local, or foreign taxes that the Sharyland Member determines the Company is required to withhold or pay with respect to any amount distributable or allocable to such Member pursuant to this Agreement, including, without limitation, any taxes required to be withheld or paid by the Company pursuant to Section 1441, 1442, 1445, or 1446 of the Code. Any amount paid on behalf of or with respect to a Member shall constitute a loan by the Company to such Member, which loan shall be repaid by such Member within fifteen (15) days after notice from the Sharyland Member that such payment must be made unless (i) the Company withholds such payment from a distribution which would otherwise be made to the Member or (ii) the Sharyland Member determines, in its sole and absolute discretion, that such payment may be satisfied out of
 
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the available funds of the Company which would, but for such payment, be distributed to the Member. Any amounts withheld pursuant to the foregoing clauses (i) or (ii) shall be treated as having been distributed to such Member. Each Member hereby unconditionally and irrevocably grants to the Company a security interest in its Interest to secure such Member’s obligation to pay to the Company any amounts required to be paid pursuant to this Section 10.5 . If a Member fails to pay any amounts owed to the Company pursuant to this Section 10.5 when due, the Sharyland Member may, in its’ sole and absolute discretion, elect to make the payment to the Company on behalf of such defaulting Member, and in such event shall be deemed to have loaned such amount to such defaulting Member and shall succeed to all rights and remedies of the Company as against such defaulting Member (including, without limitation, the right to receive distributions). Any amounts payable by a Member hereunder shall bear interest at the base rate on corporate loans at large United States money center commercial banks, as published from time to time in the Wall Street Journal, plus four (4) percentage points per annum (but not higher than the maximum lawful rate under the laws of the State of Texas) from the date such amount is due (i.e., fifteen (15) days after demand) until such amount is paid in full. Each Member shall take such actions as the Company or the Sharyland Member shall request to perfect or enforce the security interest created hereunder.
Section 10.6 Code Section 83 Safe Harbor Election . By executing this Agreement, each Member authorizes and directs the Company to elect to have the “Safe Harbor” described in the proposed Revenue Procedure set forth in Internal Revenue Service Notice 2005-43 (the “ Notice ”) apply to any interest in the Company transferred to a service provider by the Company on or after the effective date of such Revenue Procedure in connection with services provided to the Company. For purposes of making such Safe Harbor election, the Tax Matters Member is hereby designated as the “partner who has responsibility for federal income tax reporting” by the Company and, accordingly, execution of such Safe Harbor election by the Tax Matters Member constitutes execution of a “Safe Harbor Election” in accordance with Section 3.03(1) of the Notice. The Company and each Member hereby agree to comply with all requirements of the Safe Harbor described in the Notice, including, without limitation, the requirement that each Member shall prepare and file all federal income tax returns reporting the income tax effects of each “Safe Harbor Partnership Interest”) (as described in Section 3.02 of the Notice) issued by the Company in a manner consistent with the requirements of the Notice. Each Member authorizes the Tax Matters Member to amend this Section 10.6 to the extent necessary to achieve substantially the same tax treatment with respect to any interest in the Company transferred to a service provider by the Company in connection with services provided to the Company as set forth in Section 4 of the Notice (e.g., to reflect changes from the rules set forth in the Notice in subsequent Internal Revenue Service guidance), provided that such amendment is not materially adverse to any Member (as compared with the after-tax consequences that would result if the provisions of the Notice applied to all interests in the Company transferred to a service provider by the Company in connection with services provided to the Company).
 
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ARTICLE XI.
REPRESENTATIONS AND WARRANTIES
Section 11.1 Sharyland Member . As of the date hereof each of the statements in this Section 11.1 shall be a true, accurate and full disclosure of all facts relevant to the matters contained therein, and such warranties and representations shall survive the execution of this Agreement. The Sharyland Member hereby represents and warrants that:
(a) The Sharyland Member is a duly organized and validly existing Texas limited partnership and has the requisite right, power and authority to enter into and carry out the terms and provisions of this Agreement.
(b) All formal action required to be taken by the Sharyland Member to execute and deliver and perform its obligations under, this Agreement has been taken by the Sharyland Member and no further approval of any board, court, or other body is necessary in order to permit the Sharyland Member to execute, deliver or perform this Agreement.
(c) The Sharyland Member understands that its right to Transfer all or any portion of its Interest is restricted by the terms and provisions of this Agreement and that it therefore must be prepared to bear the economic risks of its investment for an indefinite period of time.
(d) There are no oral agreements between the Members, and this Agreement may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements of the Members or their agents.
Section 11.2 TDC Member . As of the date hereof each of the statements in this Section 11.2 shall be a true, accurate and full disclosure of all facts relevant to the matters contained therein, and such warranties and representations shall survive the execution of this Agreement. The TDC Member hereby represents and warrants that:
(a) The TDC Member is a duly organized and validly existing Texas limited liability company and has the requisite right, power and authority to enter into and carry out the terms and provisions of this Agreement.
(b) All action required to be taken by the TDC Member to execute and deliver and perform its obligations under, this Agreement has been taken and that no further approval of any board, court, or other body is necessary in order to permit the TDC Member to execute, deliver or perform this Agreement.
(c) The TDC Member understands that its right to Transfer all or any portion of its Interest is restricted by the terms and provisions of this Agreement and that it therefore must be prepared to bear the economic risks of its investment for an indefinite period of time.
(d) There are no oral agreements between the Members, and this Agreement may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements of the Members or their agents.
 
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ARTICLE XII.
TRANSFER OF INTERESTS
Section 12.1 Restrictions on Transfer . Except as expressly provided for in this Agreement, no Member may, without the Approval of the other Member, sell, convey, transfer, assign, mortgage, pledge, hypothecate or otherwise encumber in any way (“ Transfer ”) all or any portion of or interest in its Interest or any interest it may have in any property of the Company, or withdraw or retire from the Company. Any such attempted Transfer, withdrawal or retirement not permitted hereunder shall be null and void. Notwithstanding anything herein to the contrary, no Transfer of an Interest shall be valid unless and until all necessary Regulatory Approvals applicable to such Transfer have been obtained.
Section 12.2 General Transfer Provisions .
(a) All Transfers shall be by instrument in form and substance satisfactory to counsel for the Company and shall contain an agreement by the assignee to accept the assignment and to accept and agree to all of the terms and provisions of this Agreement, as the same may have been amended, and shall provide for the payment by the assignor of all reasonable expenses incurred by the Company in connection with such assignment, including, without limitation, the necessary amendments to this Agreement to reflect such Transfer (including, without limitation, reasonable attorneys’ fees). The transferor shall execute and acknowledge all such instruments, in form and substance reasonably satisfactory to the Company’s counsel, as may be necessary or desirable to effectuate such Transfer.
(b) In no event shall the Company terminate (other than for tax purposes) upon the admission of any Member to the Company or upon any permitted assignment of an Interest by any Member. Each Member hereby waives its right to liquidate or terminate the Company in such event.
(c) Upon completion of a Transfer in compliance with this Agreement, the transferor shall be released from all future obligations occurring under this Agreement, after the date of such Transfer, provided the assignee of such transferor assumes, by written instrument reasonably acceptable to the Company, all such obligations of the transferor. Notwithstanding the immediately preceding sentence, the transferor shall remain liable for its obligations under this Agreement accruing or occurring on or prior to the date of such Transfer.
(d) Notwithstanding anything to the contrary in this Section 12.2 , the TDC Member may mortgage, pledge or otherwise Transfer its Interest to a third party as collateral in connection with a bona fide financing transaction.
Section 12.3 Compliance . Notwithstanding anything to the contrary in this Agreement, at law or in equity, no Partner shall Transfer or otherwise deal with any Interest in a way that would cause a default under any agreement to which the Company is a party or by which it is bound.
ARTICLE XIII.
TERMINATION OF THE COMPANY
Section 13.1 Events of Winding Up . The Company shall commence to wind up upon the first to occur of the following events:
 
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(a) the sale or other disposition (including, without limitation, taking by eminent domain) of all or substantially all of the assets of the Company (subject to any required Regulatory Approvals) unless such sale or other disposition involves any deferred payment of the consideration for such sale or disposition, in which case the Company shall not commence to wind up until the last day of the calendar year during which the Company shall receive the balance of such deferred payment;
(b) the agreement of the Members in writing to wind up the Company;
(c) the occurrence of an Event of Bankruptcy with respect to the Sharyland Member, unless within ninety (90) days after such Event of Bankruptcy the TDC Member consents in writing to continue the business of the Company and to the appointment effective as of the date of such Event of Bankruptcy, of a substitute Sharyland Member;
(d) the issuance of a decree of winding up by a court of competent jurisdiction; or
(e) the occurrence of any other event or action which requires winding up of the Company under Applicable Laws.
Section 13.2 Effect of Winding Up . Upon an event requiring winding up of the Company pursuant to Section 13.1 , the Company shall not terminate but shall continue for the purposes (i) of obtaining any necessary Regulatory Approvals required as result of the occurrence of any of the events described in Section 13.1 ; (ii) as may be required by any Regulatory Agency; and (iii) of distributing or liquidating all of the assets owned by the Company and, if liquidating, collecting the proceeds from such sales and all receivables of the Company until the same has been written off as uncollectible. Upon an event requiring winding up of the Company, the Company shall continue to operate its business in the ordinary course consistent with reasonable and prudent Good Utility Practices, until such time as all necessary Regulatory Approvals relating to the liquidation of the Company have been obtained, but otherwise engage in no further business thereafter other than as necessary for the Company to collect its receivables, liquidate and/or distribute its assets and pay or discharge its liabilities. The liquidating distribution of assets, whether in cash or in kind as hereinafter provided, shall occur in accordance with Section 4.3 hereof. It is intended that the foregoing distributions to each Member will be equal to each Member’s respective positive Capital Account balance as determined after giving effect to all adjustments attributable to allocations of items of income, gain, loss and deduction realized by the Company during the Fiscal Year in question (including items of gain and loss realized on the sale of all properties and assets of the Company pursuant to this Section 13.2 and all adjustments attributable to contributions and distributions of money and property effected prior to such distribution) as described in Section 4.1 . To the extent that any such Member’s positive Capital Account balance does not correspond to such distribution, the allocations provided for in Section 4.1 shall be adjusted, to the least extent necessary, to produce a Capital Account balance for the Member which corresponds to the amount of such distribution.
 
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Section 13.3 Sale or Distribution of Assets Resulting from Liquidation .
(a) Unless the Company is continued pursuant to Section 13.1(c) , upon an event requiring winding up of the Company, the Sharyland Member or, if the winding up is caused by an Event of Bankruptcy of the Sharyland Member, a third party appointed by the TDC Member, shall act as liquidator trustee (the “ Liquidating Trustee ”) of the Company and shall diligently proceed to wind up the affairs of the Company in accordance with a plan of liquidation approved by the Members, or, in the case of winding up of the Company caused by an Event of Bankruptcy, by the TDC Member. Such plan of liquidation shall provide that the Company shall continue to operate its business in the ordinary course consistent with reasonable and prudent Good Utility Practices, until such time as all necessary Regulatory Approvals relating to the liquidation of the Company have been obtained. Another Person may be selected by a majority vote of the Interests to succeed the original Liquidating Trustee, or to succeed any subsequently selected successor, whenever the Person originally selected or any such subsequently selected successor, as the case may be, fails for any reason to carry out such purpose. The Liquidating Trustee may be an individual, corporation or general or limited partnership or other Entity.
(b) The Liquidating Trustee shall promptly after an event requiring winding up obtain an appraisal of the assets of the Company by an appraiser with appropriate experience in valuing the types of assets and properties then owned by the Company as selected by the Liquidating Trustee. All of the assets of the Company remaining after any required distributions of such assets in kind as Approved by Members under the terms of this Agreement, other than cash, shall be offered (either as an entirety or on an asset-by-asset basis) promptly for sale, upon such terms as the Liquidating Trustee shall determine using the foregoing appraisal as a guide.
(c) The Members and their Affiliates shall have the right to negotiate or bid for any or all of the remaining assets being offered for sale from and after the date of an event requiring winding up of the Company, but not before such date.
(d) The decision to accept or reject an offer to purchase any remaining assets of the Company (a “ Purchase Offer ”) shall be made solely by the Liquidating Trustee; provided that, if the Sharyland Member is the Liquidating Trustee and proposes to sell such remaining assets to itself or an Affiliate, the terms of such sale must be Approved by the TDC Member.
(e) In winding up the affairs of the Company, the Liquidating Trustee shall pay the liabilities of the Company in such order of priority as provided by law.
ARTICLE XIV.
MISCELLANEOUS
Section 14.1 Notices . All notices required or permitted by this Agreement shall be in writing, and shall be served personally or by depositing same in the United States mail, addressed to the Member to be notified, by registered or certified mail, with postage prepaid, return receipt requested, or may be transmitted by facsimile or electronic transmission, and addressed to the Members at their respective addresses set forth in Section 1.2 , or to such other address as shall from time to time be supplied in writing by either Member to the other Member in accordance with the procedures of this Section 14.1 . Notice sent by registered or certified mail, postage paid, with return receipt requested, receipt addressed as above provided, shall be deemed given upon actual receipt or upon the date such notice is tendered and refused delivery at the address provided for herein or the date of failure of delivery by reason of changed address of which no notice was given. If any notice is transmitted by facsimile or electronic transmission, the same shall be deemed served or delivered upon actual receipt. Any notice or other document sent or delivered in any other manner shall be effective only if and when received.
 
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Section 14.2 Confidentiality . Each Member agrees to use all information received by it (the “ Receiving Party ”) or its Representatives from the other Member, the Company or its Representatives (the “ Disclosing Party ”) in connection with the business and activities of the Company (“ Non-Public Information ”) solely for the purpose of the Company’s business and activities, and shall treat confidentially all such Non-Public Information; provided, that this Section 14.2 shall not restrict the Receiving Party from disclosing any Non-Public Information (a) to the extent such Non-Public Information is or becomes generally available to the public other than as a result of a disclosure by the Receiving Party or its Representatives in violation of the provisions of this Section 14.2 ; (b) was or becomes available on a non-confidential basis to the Receiving Party or its Representatives from a source other than the Disclosing Party or its Representatives, provided that, to the Receiving Party’s knowledge, such source is not prohibited from disclosing such information to the Receiving Party by a contractual, legal or fiduciary obligation; (c) was already in the possession of the Receiving Party or its Representatives prior to the date hereof and was not obtained directly or indirectly from the Disclosing Party or its Representatives; (d) in any legal, judicial or administrative proceeding or otherwise as required by Applicable Laws (in which case the Receiving Party, as applicable, shall promptly notify the Disclosing Party to the extent permitted by law), (e) upon the request or demand of any Regulatory Authority having jurisdiction over the Receiving Party or any of their respective Affiliates (in which case the Receiving Party, as applicable, shall promptly notify the Disclosing Party to the extent permitted by law); or (f) to respective partners, members, directors, officers, employees, Affiliates, advisors, consultants, representatives, and other experts or agents (“ Representatives ”) of the Receiving Party who need to know such information and are informed of the confidential nature of such information and are or have been advised of their obligation to keep information of this type confidential; and the Receiving Party, as applicable shall be responsible for its Affiliate’s compliance with this Section 14.2 ).
Section 14.3 Successors and Assigns . Subject to the restrictions on Transfer set forth herein, this Agreement shall bind and inure to the benefit of the parties hereto and their respective legal representatives, successors and assigns.
Section 14.4 Amendments; No Oral Modifications . No oral modification or amendment of this Agreement shall be binding on either Member. This Agreement may be modified or amended only by a written instrument executed by both of the Members.
Section 14.5 Captions . Any article, section or paragraph titles or captions contained in this Agreement are for convenience of reference only and shall not be deemed a part of this Agreement.
Section 14.6 Terms . Common nouns and pronouns shall be deemed to refer to the masculine, feminine, neuter, singular and plural, as the identity of the Person or Entity may in the context require. Any reference to the Code, Act or other statutes or laws shall include all amendments, modifications or replacements of the specific sections and provisions concerned. All plurals used in this Agreement shall, where appropriate, be deemed to be singular, and vice versa.
 
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Section 14.7 Severability . Should any provision of this Agreement be held unenforceable or invalid under the laws of the United States of America or the State of Texas or under any other applicable laws of any other jurisdiction, then the parties hereto agree that such provision shall be deemed modified for purposes of performance of this Agreement in such jurisdiction to the extent necessary to render it lawful and enforceable, or if such a modification is not possible without materially altering the intention of the parties hereto, then such provision shall be severed herefrom for purposes of performance of this Agreement in such jurisdiction. The validity of the remaining provisions of this Agreement shall not be affected by any such modification or severance, except that if any severance materially alters the intentions of the parties hereto as expressed herein (a modification being permitted only if there is no material alteration), then the parties hereto shall use their best reasonable efforts to agree to appropriate equitable amendments to this Agreement in light of such severance, and if no such agreement can be reached within a reasonable time, any party hereto may initiate arbitration under the then current commercial arbitration rules of the American Arbitration Association to determine and effect such appropriate equitable amendments.
Section 14.8 Further Assurances . The parties hereto agree that they will cooperate with each other and will execute and deliver, or cause to be delivered, all such other instruments, and will take all such other actions, as either party hereto may reasonably request from time to time in order to effectuate the provisions and purposes hereof, provided that such action is within the reasonable control of the party upon whom the request is made and that such action will not increase the liability or obligation of the party upon whom the request is made unless such increase is specifically required hereunder.
Section 14.9 Complete Agreement . This Agreement constitutes the complete and exclusive statement of the agreement between the Members. It supersedes all prior written and oral statements and no representation, statement, condition or warranty not contained in this Agreement shall be binding on the Members or have any force or effect whatsoever.
Section 14.10 Attorneys’ Fees . If any proceeding is brought by one Member against the other Member to enforce, or for breach of, any of the provisions in this Agreement, the prevailing Member shall be entitled in such proceeding to recover reasonable attorneys’ fees together with the costs of such proceeding therein incurred.
Section 14.11 Governing Law . This Agreement shall be construed and enforced in accordance with the laws of the State of Texas without reference to the principles of conflicts of laws.
Section 14.12 No Third Party Beneficiary . Any agreement to pay any amount and any assumption of liability herein contained, express or implied, shall be only for the benefit of the Members, Covered Persons and their respective heirs, successors and assigns, and such agreements and assumption shall not inure to the benefit of the obligees of any indebtedness or any other party, whomsoever, it being the intention of the Members that, except as otherwise provided in Section 7.2 or this Section 14.12 , no one shall be deemed to be a third party beneficiary of this Agreement.
 
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Section 14.13 Approvals . Whenever the Approval of a Member is required by this Agreement, such Member shall have the right to give or withhold such Approval in its sole discretion, unless otherwise specified.
Section 14.14 Drafting Conventions . The language in all parts of this Agreement shall in all cases be construed according to its fair meaning and not against the drafting party. Section headings are for convenience only and are not intended to be a part of this Agreement nor shall they in any way limit, define or amplify the provisions hereof. Time shall be of the essence with respect to any time periods prescribed herein.
Section 14.15 Counterparts . This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which, when taken together, shall constitute one and the same instrument, binding on the Members, and the signature of any party to any counterpart shall be deemed a signature to, and may be appended to, any other counterpart.
Section 14.16 Telecopy Execution and Delivery . A facsimile, telecopy or other reproduction of this Agreement may be executed by one or more parties hereto, and an executed copy of this Agreement may be delivered by one or more parties hereto by facsimile or similar electronic transmission device pursuant to which the signature of or on behalf of such party can be seen, and such execution and delivery shall be considered valid, binding and effective for all purposes. At the request of either party hereto, all parties hereto agree to execute an original of this Agreement as well as any facsimile, telecopy or other reproduction hereof.
* * * * *
[Remainder of Page Intentionally Left Blank]
 
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IN WITNESS WHEREOF, this Agreement has been signed by each of the parties as of the date hereof.

SHARYLAND UTILITIES, L.P.	
		
By:	 	 	
Name:	 	 	
Title:	 	 	
	
TRANSMISSION AND DISTRIBUTION	
COMPANY, L.L.C.	
		
By:	 	 	
Name:	 	 	
Title:	 	 	
Signature Page to SDTS Company Agreement

Exhibit 10.4
DEVELOPMENT AGREEMENT
This DEVELOPMENT AGREEMENT (this “ Agreement ”) is made and entered into as of                     , 2015, by and between Hunt Transmission Services, L.L.C., a Delaware limited liability company (“ Hunt ”), Sharyland Utilities, L.P., a Texas limited partnership (“ Sharyland ”), InfraREIT Partners, LP, a Delaware limited partnership (the “ Operating Partnership ”), InfraREIT, Inc., the general partner of the Operating Partnership (the “ REIT ” and, together with the Operating Partnership and all direct and indirect subsidiaries of the REIT, “ InfraREIT ”). Hunt, Sharyland, the Operating Partnership and the REIT are sometimes referred to in this Agreement individually as a “ Party ” or collectively as the “ Parties .” Capitalized terms used herein but not otherwise defined have the meaning set forth in Article I .
RECITALS:
WHEREAS, Hunt has informed the REIT that Hunt currently intends for a REIT Entity to be the primary owner of all T&D Projects that Hunt or an Affiliate thereof develops (once those T&D Projects become Operating T&D Assets); and
WHEREAS, in connection with the initial public offering of the REIT, the Parties desire to enter into this Agreement in order to evidence their understanding with respect to, among other things, the procedures whereby ROFO Projects (as defined below) are to be offered to InfraREIT and accepted or declined and ROFL Assets (as defined below) are to be offered to Sharyland (as defined below) and accepted or declined.
NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, the Parties hereby agree as follows:
ARTICLE I
DEFINITIONS
Capitalized terms used in this Agreement (including exhibits, schedules and amendments) shall have the meanings set forth below or in the Section of this Agreement referred to below, except as otherwise expressly indicated or limited by the context in which they appear in this Agreement.
“ Affiliate ” means, with regard to a Person, a Person that controls, is controlled by, or is under common control with such original Person. For purposes of this definition, “control,” when used with respect to any Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms “affiliated,” “controlling” and “controlled” have meanings correlative to the foregoing. Notwithstanding the foregoing, for purposes of this Agreement, the REIT Entities shall not be deemed to be Affiliates of Hunt. For the avoidance of doubt, a Person holding direct or indirect Equity Interests in a ROFO Entity shall not be deemed to be an Affiliate of the other holders of direct or indirect Equity Interests in such ROFO Entity solely as a result of such common ownership.

“ Agreement ” has the meaning set forth in the Preamble.
“ Arbitration Panel ” has the meaning set forth in Section 4.7(a) .
“ Confidential Information ” has the meaning set forth in Section 4.8(a) .
“ Drag-able Equity Interests ” are Equity Interests that comprise 100% of the Equity Interests in the ROFO Entity, other than such Equity Interests held by (a) Sharyland or another regulated utility necessary under the regulatory regime of the jurisdiction(s) in which the related ROFO Project is located and (b) another third-party utility for strategic purposes, in each case as determined by Hunt in its good faith discretion.
“ Drag-Along Right ” is the right, subject to the Drag-Along Conditions, to either (a) cause all or substantially all of the T&D Assets that comprise the ROFO Project to be Transferred to a REIT Entity or (b) cause 100% of the Drag-able Equity Interests to be Transferred to a REIT Entity.
“ Drag-Along Conditions ” means the requirement that each holder of Equity Interests (other than Hunt and its Affiliates) receive cash consideration with a value equal to at least 1.5 multiplied by the amount of cash invested in such Equity Interests upon issuance and in connection with any subsequent capital contributions to the ROFO Entity.
“ Effective Date ” means the closing date of the REIT’s initial public offering of its Common Stock pursuant to the Registration Statement on Form S-11 (Reg. No. 333-            ) and the effectiveness of the merger of InfraREIT, L.L.C. with and into the REIT.
“ Entity ” means any partnership, limited partnership, proprietorship, corporation, joint venture, joint stock company, limited liability company, limited liability partnership, business trust, estate, governmental entity, cooperative, association or other foreign or domestic enterprise.
“ Equity Interests ” means any shares of capital stock, membership interests, partnership interests or other equity interests and options or warrants to acquire, or securities convertible or exchangeable into, capital stock, membership interests, partnership interests or other equity securities of an Entity.
“ FERC ” means the Federal Energy Regulatory Commission.
“ Footprint Projects ” means T&D Projects that (a) are located in the distribution service territory of an electric distribution utility that is leasing T&D Assets from a REIT Entity that are being used in that distribution service territory, (b) constitute a Transmission Addition to the transmission assets owned by a REIT Entity or (c) are Reclassified Projects. For purposes of the definition of Footprint Projects, the distribution service territory in part (a) of the definition and the transmission assets in part (b) of the definition will be deemed to include the distribution service territory and transmission assets of any T&D Projects acquired by the REIT Entities after
 
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the date of this Agreement; provided, however, that to the extent that Hunt or an Affiliate thereof is actively developing a T&D Project in the distribution service territory of any T&D Projects or Operating T&D Assets acquired by the REIT after the date of this Agreement at the time of such acquisition (including any ROFO Project), the T&D Project being actively developed by Hunt or such Affiliate will not be characterized as a Footprint Project. For avoidance of doubt, if a REIT Entity acquires a ROFO Project or other T&D Assets, then any such acquisition will expand the definition of Footprint Project hereunder such that, after the related T&D Project is acquired by a REIT Entity, Transmission Additions to any such T&D Assets will constitute Footprint Projects.
“ Hunt ” has the meaning set forth in the Preamble.
“ Hunt Panel Member ” has the meaning set forth in Section 4.7(b) .
“ Indirect Owners ” has the meaning set forth in Section 3.1(a)(ii) .
“ InfraREIT ” has the meaning given to it in the Preamble.
“ InfraREIT Panel Member ” has the meaning set forth in Section 4.7(b) .
“ Initial Term ” has the meaning set forth in Section 4.1 .
“ IRS ” means the Internal Revenue Service.
“ Lease Offer ” has the meaning set forth in Section 3.7(a) .
“ Lien ” means any mortgage, pledge, hypothecation, assignment, encumbrance, lien, charge, preference or other security interest or preferential arrangement in the nature of a security interest of any kind or nature whatsoever.
“ Management Agreement ” means the Management Agreement, of even date herewith, among Hunt Utility Services, LLC, the Operating Partnership and the REIT, as the same may be amended from time to time.
“ Merchant Project ” means a project for which the recovery on and of capital invested is expected to be based on negotiated rates with a third party such as a generator, a consumer of electricity or a regulated utility, and not based on the inclusion of such invested capital in the regulated rate base of an invested utility.
“ Negotiation Period ” has the meaning set forth in Section 3.4 .
“ Non-Breaching Party ” has the meaning set forth in Section 4.8(a) .
“ Operating Partnership ” has the meaning set forth in the Preamble.
 
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“ Operating T&D Asset ” means a T&D Project once one of the following has occurred: (a) with respect to a T&D Project that is not a Merchant Project, the related T&D Assets have been “placed in service” by the utility whose customers are served by such assets (with “placed in service” determined based on such utility’s accounting records applied in a manner consistent with the FERC Uniform System of Accounts); and (b) with respect to a T&D Project that is a Merchant Project, at least a significant portion of the related T&D Assets are used and useful by generators, a consumer of electricity or a regulated utility.
“ Party ” or “ Parties ” has the meaning set forth in the Preamble.
“ Person ” means any individual, corporation, proprietorship, firm, partnership, limited partnership, limited liability company, trust, association or other Entity.
“ Reclassified Project ” means any T&D Project that does not otherwise meet the definition of Footprint Project but Hunt and the REIT jointly agree, in their sole discretion, to classify such T&D Project as a Footprint Project based upon such factors that the Parties deem relevant, including: (a) the expected rate base of the T&D Project, it being understood that the Parties generally expect that only T&D Projects with an expected rate base of less than $25 million could constitute a Reclassified Project; (b) whether the T&D Project is physically connected to the T&D Assets owned by a REIT Entity; and (c) whether the T&D Project is necessary to serve distribution customers situated in the service territories of the REIT Entities. As of the date of this Agreement, the Parties have agreed that the T&D Project described on Schedule II constitutes a Reclassified Project.
“ REIT ” has the meaning set forth in the Preamble.
“ REIT Entity ” or “ REIT Entities ” means the REIT, the Operating Partnership and any other Subsidiary of the REIT.
“ Renewal Term ” has the meaning set forth in Section 4.1 .
“ Restricted Indirect Owners ” has the meaning set forth in Section 3.1(a)(ii) .
“ ROFL Assets ” means T&D Assets acquired or developed by any REIT Entity other than: (a) T&D Assets acquired in connection with the acquisition by any REIT Entity of an investor-owned utility, (b) T&D Assets for which a utility other than Sharyland has or retains a license or other right to operate such asset or has a right of first refusal to build in connection with such asset, (c) T&D assets that the REIT determines in good faith should be leased to a third party other than Sharyland for strategic reasons, (d) T&D Assets that were previously subject to a lease between a REIT Entity and Sharyland (or an Affiliate thereof), (e) T&D Assets that were previously subject to a lease between a REIT Entity and a Third Party, or (f) T&D Assets that were, at the time acquired by the REIT Entity, subject to a lease with a Third Party (other than leases established in connection with such acquisition).
“ ROFO ” means the obligation to offer ROFO Projects to the REIT in accordance with Article III .
“ ROFO Entity ” means an Entity that holds title to the T&D Assets comprising a ROFO Project.
 
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“ ROFO Offer ” means a written offer to the REIT to acquire a ROFO Project or 100% of the Drag-able Equity Interests therein, provided that the written offer includes the following information with respect to such ROFO Project:
(a) a description of the ROFO Project, including its location and the T&D Assets which make up such ROFO Project;
(b) the expected rate base of such T&D Project at the time it becomes an Operating T&D Asset, together with the underlying data supporting such calculation;
(c) a summary description of the terms of any lease entered into with respect to the ROFO Project together with a copy of any such lease agreement and, if there is no lease, a summary of the reasons why no lease exists and a description of how a REIT Entity will generate qualifying income with respect to the T&D Assets which make up such ROFO Project;
(d) a summary of, and copies of any definitive documentation relating to, any outstanding project-level indebtedness related to such ROFO Project;
(e) copies of any environmental, engineering or other third party reports received by Hunt or its Affiliates that are material to an understanding or due diligence of such ROFO Project;
(f) a schedule showing all of the outstanding Equity Interests in the ROFO Entity, if applicable;
(g) Hunt’s proposed terms of the Transfer of the ROFO Project to the REIT Entities, including the purchase price, form of consideration, the expected timing of closing, proposed conditions to the consummation of the Transfer and all other material transaction terms;
(h) market data related to the use of the T&D Asset that is the subject of the ROFO Offer; and
(i) such other information as is reasonably requested by the REIT, including all relevant financial statements, as applicable.
“ ROFO Project ” means any T&D Project described on Schedule I to this Agreement, as such Schedule may be updated from time to time upon the mutual agreement of Hunt and the REIT.
“ Sharyland ” has the meaning set forth in the Preamble.
 
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“ Sharyland Lease ” means any lease agreement for the lease of T&D Assets between the Operating Partnership or any of its Subsidiaries, on the one hand, and Sharyland or a Subsidiary thereof, on the other hand, as may be in effect from time to time.
“ Subsidiary ” means, with respect to any Person, any corporation, limited liability company, trust, partnership or joint venture, or other Entity of which a majority of (i) the voting power of the voting equity securities or (ii) the outstanding Equity Interests is owned, directly or indirectly, by such Person; provided , however , that Sharyland Distribution & Transmission Services, L.L.C., a Texas limited liability company, and its Subsidiaries will not be considered to be Subsidiaries of Sharyland.
“ T&D Assets ” means electric transmission and/or distribution assets.
“ T&D Project ” means the construction or development of T&D Assets.
“ Third Panel Member ” has the meaning set forth in Section 4.7(b) .
“ Third Party ” means any Person other than a Party or an Affiliate of a Party. For the avoidance of doubt, Sharyland and its Subsidiaries shall not be considered Third Parties.
“ Transfer ” means any assignment, sale, offer to sell, pledge, mortgage, hypothecation, encumbrance, disposition of or any like transfer or encumbering; provided that, Transfer shall not include the granting of any Liens under any project-level indebtedness in respect of any ROFO Project that is incurred from time to time and any disposition of assets resulting from the enforcement of such Liens.
“ Transmission Addition ” means transmission assets that (a) are added to an existing transmission substation owned by a REIT Entity or (b) hang from transmission towers owned by a REIT Entity.
“ Unrestricted Period ” has the meaning set forth in Section 3.4 .
 
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ARTICLE II
FOOTPRINT AND ROFO PROJECTS
Section 2.1 Right to Fund Footprint Projects . During the term of this Agreement, except as otherwise described in this Section 2.1 or the Sharyland Leases, the REIT Entities shall have the exclusive right to own and fund all Footprint Projects. Hunt and its Affiliates shall not fund any construction costs or take any ownership interests in a Footprint Project without the prior written consent of the REIT. The REIT Entities shall fund Footprint Projects in the manner set forth in the Sharyland Leases. Notwithstanding the foregoing, if the REIT Entities decline to fund a Footprint Project, Sharyland will have the right to fund such Footprint Project in accordance with the terms of the Sharyland Leases.
Section 2.2 Right to Fund ROFO Projects . Subject to the obligations set forth in Article III , during the term of this Agreement, Hunt shall have the exclusive right to own and fund all ROFO Projects.
ARTICLE III
RIGHT OF FIRST OFFER
Section 3.1 General .
(a) Subject to the other provisions of this Section 3.1 , Hunt will not:
(i) Transfer or permit any ROFO Entity to Transfer a material portion of any of the T&D Assets that comprise part of a ROFO Project; or
(ii) Transfer, or permit any Hunt Affiliate to Transfer, any direct or indirect Equity Interest in a ROFO Entity; provided , however , such restriction will not apply to Transfers of Equity Interests in Hunt Affiliates that are direct or indirect owners of a ROFO Entity (“ Indirect Owners ”) unless the ROFO Entity and its assets comprise all or substantially all of the assets of such Indirect Owner (“ Restricted Indirect Owners ”);
in any case, without first complying with the requirements of this Article III .
(b) Section 3.1(a) and the ROFO will not apply to Transfers to Affiliates of Hunt (including Sharyland), nor will they affect the right of any Affiliate of Hunt (including Sharyland) to abandon a ROFO Project.
(c) Hunt will ensure that a Hunt Affiliate retains the Drag-Along Rights with respect to all ROFO Projects until such time as the ROFO Projects are, following compliance with Section 3.2 and (if applicable) Section 3.3 , Transferred to a REIT Entity or a Third Party. Furthermore, Hunt will not permit the ROFO Entity and the Restricted Indirect Owners to issue Equity Interests unless all net proceeds of such Equity Interest issuances are either (i) retained by the Restricted Indirect Owner or ROFO Entity or contributed to the ROFO Entity, or (ii) paid to a Hunt Affiliate to reimburse the Hunt Affiliate for its development expenses incurred in connection with the related ROFO Project. Subject to the restrictions set forth above in this Section 3.1(c) , nothing in this Agreement will prohibit the ROFO Entity or any other Hunt Affiliate from issuing Equity Interests.
 
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Section 3.2 Pre-Energization Offer . Hunt shall deliver a ROFO Offer at least 90 days prior to the date on which a ROFO Project becomes an Operating T&D Asset regardless of whether Hunt intends to Transfer such ROFO Project to a Third Party.
Section 3.3 Pre-Transfer Offers . Hunt shall deliver a ROFO Offer to the REIT prior to engaging in any negotiation regarding any proposed Transfer of any ROFO Project (or any portion thereof) to any Third Party (other than, for avoidance of doubt, Hunt Affiliates), unless such negotiation occurs during an Unrestricted Period.
Section 3.4 Offer Process . Following delivery of a ROFO Offer under Section 3.2 , Section 3.3 or Section 3.6 , Hunt and the REIT shall enter into non-binding discussions and negotiate in good faith the definitive terms of the acquisition by a REIT Entity of the ROFO Project that is the subject of the ROFO Offer (or direct or indirect Equity Interests therein) for a period of 75 days from the date on which the REIT receives the ROFO Offer (the “ Negotiation Period ”). If Hunt and the REIT have not agreed in writing to definitive terms for the Transfer of the ROFO Project to a REIT Entity by the end of the Negotiation Period, then, during the 18-month period (the “ Unrestricted Period ”) from the end of the Negotiation Period, this Agreement will not impose any restrictions on the Transfer of such ROFO Project (or direct or indirect Equity Interests therein) to a Third Party, as long as such Transfer is on terms that are not more favorable to the Third Party than those offered to the REIT during the Negotiation Period. If such Transfer does not occur within the Unrestricted Period, Hunt will thereafter remain subject to the restrictions contained in this Article III with respect to such ROFO Project (and direct and indirect Equity Interests therein).
Section 3.5 Negotiations with Third Parties . Neither Hunt nor any of its representatives, agents or Affiliates shall solicit offers from, or negotiate with, any Third Party for the Transfer of any ROFO Project (or the direct or indirect Equity Interests therein) until the expiration of the Negotiation Period related to such ROFO Project. If no agreement has been reached between Hunt and the REIT during the Negotiation Period, then, during the Unrestricted Period, Hunt shall have the right to solicit offers from, negotiate with, and enter into agreements with, any Third Party to Transfer such ROFO Project, as long as such Transfer is on terms no more favorable to the Third Party than those offered to the REIT during the Negotiation Period.
Section 3.6 Structure of ROFO Projects . Hunt shall use its commercial best efforts to structure ROFO Projects so that they can be acquired by a REIT Entity prior to becoming Operating T&D Assets without jeopardizing the REIT’s status as a real estate investment trust under applicable IRS rules. If, notwithstanding Hunt’s commercial best efforts, a ROFO Project is not qualified to be held by a REIT Entity prior to becoming Operating T&D Assets, the ROFO included in Section 3.3 shall continue to apply until such time as the Operating T&D Assets qualify to be held by a REIT Entity. Within 30 days of the date on which such Operating T&D Assets qualify to be held by a REIT Entity, Hunt shall deliver a ROFO Offer to the REIT.
 
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Section 3.7 Right of First Offer to Lease ROFL Assets .
(a) During the term of this Agreement, no REIT Entity may lease to any Third Party any ROFL Assets unless such REIT Entity has first presented in writing to Sharyland the right to act as the tenant under a lease of such ROFL Assets (each, a “ Lease Offer ”). The Lease Offer shall include the material proposed lease terms, along with any other information reasonably requested by Sharyland to evaluate the Lease Offer.
(b) Upon receipt of a Lease Offer, Sharyland shall have 75 days to review such Lease Offer and take one of the following actions:
(i) accept the Lease Offer, in which case such REIT Entity and Sharyland will proceed to negotiate a final lease agreement in good faith for a period of 75 days from the date on which Sharyland receives the Lease Offer; or
(ii) reject the Lease Offer, in which case such REIT Entity may lease the subject ROFL Assets to a third party on terms that are not materially more favorable to the lessee than those offered to Sharyland in the Lease Offer;
provided , however , that if Sharyland fails to take one of the foregoing actions within such period, Sharyland will be deemed to have rejected the Lease Offer and the REIT Entity will have the right to lease the subject ROFL Assets to a third party on terms that are not materially more favorable to the lessee than those offered to Sharyland in the Lease Offer.
ARTICLE IV
MISCELLANEOUS
Section 4.1 Term and Termination . The Parties’ obligations under this Agreement shall become effective on the Effective Date and shall remain in effect until December 31, 2019 (the “ Initial Term ”) and shall be automatically renewed for a five-year term (a “ Renewal Term ”) upon the expiration of the Initial Term and upon the expiration of each Renewal Term. Notwithstanding the foregoing, this Agreement shall automatically terminate upon the expiration or termination of the Management Agreement.
Section 4.2 Notices . All notices, offers or other communications required or permitted to be given pursuant to this Agreement shall be in writing and may be personally served, sent via facsimile or sent by United States mail or by commercial courier and shall be deemed to have been given when received at the address set forth below:
If to Hunt:
Hunt Transmission Services, L.L.C.
Attn: Hunter L. Hunt, President
1900 North Akard Street
Dallas, TX 75201
E-Mail: HHunt@huntoil.com
 
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with a copy to:
Hunt Transmission Services, L.L.C.
Attn: General Counsel
1900 North Akard Street
Dallas, TX 75201
E-Mail: DHernandez@huntoil.com
If to Sharyland:
Sharyland Utilities, L.P.
Attn: Hunter L. Hunt, President
1900 North Akard Street
Dallas, TX 75201
Facsimile: HHunt@huntoil.com
with a copy to:
Sharyland Utilities, L.P.
Attn: General Counsel
1900 North Akard Street
Dallas, TX 75201
Facsimile: SFrenzel@huntoil.com
If to the REIT or the Operating Partnership:
InfraREIT, Inc.
Attn: Chairman of the Conflicts Committee
1807 Ross Avenue, 4th Floor
Dallas, TX 75201
E-Mail: conflictscommittee@Huntutility.com
with a copy to:
InfraREIT, Inc.
Attn: General Counsel
1807 Ross Avenue, 4th Floor
Dallas, TX 75201
E-Mail: Legal@Huntutility.com
The address of any party hereto may be changed by a notice in writing given in accordance with the provisions of this Section 4.2 .
Section 4.3 Third Party Beneficiaries . This Agreement shall be binding upon and inure solely to the benefit of each Party hereto, and nothing in this Agreement, express or implied, is intended to or shall confer upon any Person other than the Parties and their respective successors and permitted assigns any legal or equitable right, benefit or remedy of any nature whatsoever under or by reason of this Agreement, except with respect to the provisions of Section 3.7 , which shall inure to the benefit of Sharyland, who is intended to be a third-party beneficiary thereof.
 
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Section 4.4 Assignment; Successors and Assigns . Neither this Agreement nor any of the rights, interests or obligations under this Agreement may be assigned or delegated, in whole or in part, by operation of law or otherwise, by any Party without the prior written consent of the other Parties, and any such assignment without such prior written consent shall be null and void. Subject to the preceding sentence, and except as expressly herein otherwise provided, this Agreement and all of the terms and provisions hereof shall be binding upon and shall inure to the benefit of all Parties, and their legal representatives, heirs, successors and permitted assigns.
Section 4.5 Complete Agreement; Amendments . This Agreement contains the entire understanding of the parties with respect to the transactions contemplated hereby and supersedes all prior arrangements or understandings with respect thereto. This Agreement shall not be modified or amended except in a writing signed by all Parties. No purported modifications or amendments, including without limitation any oral agreement (even if supported by new consideration), course of conduct or absence of a response to a unilateral communication, shall be binding on any Party.
Section 4.6 Governing Law . This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware.
Section 4.7 Arbitration .
(a) Any dispute under or relating to this Agreement shall, if not resolved by the Parties within 60 days after notice of such dispute is served by one Party to the other (or, if different, the period provided for resolution by the Parties in the provision of this Agreement under which such dispute is brought), be submitted to an “ Arbitration Panel ” comprised of three members. No more than one panel member may be with the same firm (which shall not be deemed to prohibit the panel members from being members of the same organization such as the American Arbitration Association or Judicial Arbitration and Mediations Services), and no panel member may have an economic interest in the outcome of the arbitration.
(b) The Arbitration Panel shall be selected as follows: Within five business days after the expiration of the period referenced above, Hunt shall select a panel member meeting the criteria of the above paragraph (the “ Hunt Panel Member ”) and the independent directors of the general partner of the Operating Partnership shall select its panel member meeting the criteria of the above paragraph (the “ InfraREIT Panel Member ”). If a Party fails to timely select its respective panel member, the other Party may notify such Party in writing of such failure, and if such Party fails to select its respective panel member within three business days from such notice, then the other Party may select such panel member on such Party’s behalf. Within five business days after the selection of the Hunt Panel Member and the InfraREIT Panel Member, the Hunt Panel Member and the InfraREIT Panel Member shall jointly select a third panel member meeting the criteria of the above paragraph (the “ Third Panel Member ”). If the Hunt Panel Member and the InfraREIT Panel Member fail to timely select the Third Panel Member and such failure continues for more than three business days after written notice of such failure is delivered to the Hunt Panel Member and the InfraREIT Panel Member by either Hunt or the Operating Partnership, either Hunt or the Operating Partnership may request the managing officer of the American Arbitration Association to appoint the Third Panel Member.
 
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(c) Within ten business days after the selection of the Arbitration Panel, each Party shall submit to the Arbitration Panel a written statement identifying its summary of the issues and claims. Any Party may also request an evidentiary hearing on the merits in addition to the submission of written statements. The Arbitration Panel shall make its decision within 20 days after the later of (i) the submission of such written statements of particulars, and (ii) the conclusion of any evidentiary hearing on the merits, and shall take into consideration the relative risks and rewards undertaken and capital invested by each Party. The Arbitration Panel shall reach its decision by majority vote and shall communicate its decision by written notice to the Parties.
(d) The decision by the Arbitration Panel shall be final, binding and conclusive and shall be non-appealable and enforceable in any court having jurisdiction. All hearings and proceedings held by the Arbitration Panel shall take place in Dallas, Texas.
(e) The resolution procedure described herein shall be governed by the Commercial Rules of the American Arbitration Association and the Procedures for Large, Complex Commercial Disputes in effect as of the date hereof and subject to the Texas General Arbitration Act to the extent such act is applicable hereto.
(f) The Parties shall bear equally the fees, costs and expenses of the Arbitration Panel in conducting the arbitration.
Section 4.8 Confidentiality and Non-Disclosure .
(a) The Parties each acknowledge and agree that, in connection with this Agreement, a Party and its employees or agents may, directly or indirectly, receive or be provided with certain information relating to the business and operations of the other Party and the other Party’s Affiliates, including information relating to the technology, clients, customers, suppliers, vendors, employees, consultants, projects, financial information and status, methodologies, know-how, processes, practices, approaches, projections, forecasts, formats, systems, data gathering methods and/or strategies, assets, collateral and reports of the other Party and the other Party’s Affiliates (“ Confidential Information ”); provided, however, that Confidential Information shall not include information which has previously become publicly available through the actions of a person not resulting from the violation of this Section 4.8 . Each Party acknowledges that the other Party considers all such information valuable, confidential and proprietary. Therefore, each Party expressly agrees that, except as otherwise required by applicable law, court or governmental order:
(i) Such Party, and its employees and agents, will not, without the other Party’s express, written permission, use or disclose any Confidential Information of the other Party or its Affiliates other than for the purpose of performing its duties and obligations under this Agreement, and any use or disclosure of Confidential Information shall be limited to the specific purposes for which the permission was given or for which the use or disclosure is necessary to perform duties and obligations under this Agreement;
 
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(ii) Such Party will take all steps reasonably necessary to protect the Confidential Information of the other Party and its Affiliates, including, at a minimum, any such steps that the Party would take to protect its own Confidential Information; provided , however , that in no event will the Party exercise less than reasonable care to protect the Confidential Information;
(iii) Such Party agrees to advise the other Party in writing of any misappropriation or misuse by any person of such Confidential Information of which such Party may become aware; and
(iv) Such Party agrees to return the Confidential Information of the other Party and its Affiliates to the other Party at the earlier of the other Party’s request for return of the Confidential Information or the termination of this Agreement. At the option of the other Party, such Party may instead destroy the Confidential Information, with such Party providing written certification of such destruction. Such Party will not be obligated to return any of its own internally prepared documents, notes, copies or other associated materials containing any Confidential Information. However, such Party must, at the other Party’s request, collect and destroy such internally prepared documents, with such Party providing written certification of such destruction.
Each Party expressly acknowledges and agrees that the remedy of the other Party (the “ Non-Breaching Party ”) at law for a breach or threatened breach of any of the provisions of this Section 4.8 by such Party would be inadequate. In recognition of that fact, in the event of a breach or threatened breach by a Party of the provisions of this Section, it is agreed that, in addition to its remedy at law and without posting any bond, the Non-Breaching Party shall be entitled to equitable relief in the form of a temporary restraining order, temporary or permanent injunction or other equitable available relief. If the Non-Breaching Party establishes that a breach or a threatened breach of any provisions of this Section 4.8 has occurred by the other Party, the other Party agrees not to oppose the Non-Breaching Party’s request for equitable relief in the form of a temporary restraining order or a temporary injunction. Nothing herein contained shall be construed as prohibiting the Non-Breaching Party from pursuing any other remedies available to it for such breach or threatened breach.
(b) Hunt acknowledges that it is aware that the United States securities laws prohibit any person who has received from an issuer material non-public information from purchasing or selling securities of such issuer and from communicating such information to any other person under circumstances in which it is reasonably foreseeable that such person is likely to purchase or sell such securities.
Section 4.9 Cure of Invalid Provisions . If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws, such provision shall be fully severable, and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof, and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance from this Agreement; provided, however, that if such illegal, invalid or unenforceable provision may be made legal, valid and enforceable by limitation thereof, then the provision shall be revised and reformed to make it legal, valid and enforceable to the maximum extent permitted by law.
 
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Section 4.10 Construction of Agreement . As used herein, the singular shall be deemed to include the plural, and the plural shall be deemed to include the singular, and all pronouns shall include the masculine, feminine and neuter, whenever the context and facts require such construction. The headings, captions, titles and subtitles herein are inserted for convenience of reference only and are to be ignored in any construction of the provisions hereof. Except as otherwise indicated herein, all section, schedule and exhibit references in this Agreement shall be deemed to refer to the sections, schedules and exhibits of and to this Agreement, and the terms “herein”, “hereof”, “hereto”, “hereunder” and similar terms refer to this Agreement generally rather than to the particular provision in which such term is used. Whenever the words “including”, “include” or “includes” are used in this Agreement, they shall be interpreted in a non-exclusive manner as though the words “but [is] not limited to” immediately followed the same. Time is of the essence for this Agreement. The language in all parts of this Agreement shall in all cases be construed simply according to the fair meaning thereof and not strictly against the party that drafted such language. Except as otherwise provided herein, references in this Agreement to any agreement, articles, by-laws, instrument or other document are to such agreement, articles, by-laws, instrument or other document as amended, modified or supplemented from time to time.
Section 4.11 Multiple Counterparts . This Agreement may be executed in multiple counterparts, each of which shall constitute an original hereof and all of which taken together shall constitute one and the same agreement. If any signature is delivered by facsimile transmission or by PDF, such signature shall create a valid and binding obligation of the party executing (or on whose behalf the signature is executed) with the same force and effect as if such facsimile or PDF signature were an original thereof.
* * *
[ Signature page follows ]
 
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IN WITNESS WHEREOF, the Parties have executed this Agreement to be effective as of the date first above written.

HUNT TRANSMISSION SERVICES, L.L.C.,	
	 	a Delaware limited liability company	
		
By:	 	 	
	 	Name: Hunter L. Hunt	
	 	Title: President	
	
SHARYLAND UTILITIES, L.P.,	
	 	a Texas limited partnership	
	
By: Shary Holdings, L.L.C., its general partner	
		
	 	    By:                                                                                      	
	 	    Name:	
	 	    Title:	
	
INFRAREIT PARTNERS, LP,	
	 	a Delaware limited partnership	
		
	 	By: InfraREIT, Inc., its general partner	
		
By:	 	 	
	 	Name:	
	 	Title:	
	
INFRAREIT, INC.,	
	 	a Maryland corporation	
		
By:	 	 	
	 	Name:	
	 	Title:	
 
Signature Page to Development Agreement

SCHEDULE I
ROFO PROJECTS
 
 	1)	Cross Valley	
 
 	2)	Golden Spread	
 
 	3)	All generation inter-connections to the CREZ Panhandle Transmission Lines (other than those that would be classified as Footprint Projects under the definition thereof)	
 
 	4)	Southline Transmission Project	
 
 	5)	Verde Transmission Project	
 
 	6)	South Plains Reinforcement	
 
 	7)	Indiana to Illinois Transmission Project	
 
 	8)	ERCOT Southeast Loop Transmission Line	
 
 	9)	All DC Ties (defined below) that Hunt or an Affiliate thereof is currently developing between U.S.-based grids or between a U.S.-based grid and Mexico (CFE)	
 
 	10)	All Southern California electricity import projects that Hunt or an Affiliate thereof is currently developing	
“ DC Ties ” are high-voltage direct current interconnections necessary to provide for electricity flow between asynchronous electric grids.
 
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SCHEDULE II
RECLASSIFIED PROJECTS
 
1.	Andrews 345kV substation project (with a projected rate base of $8.5 million)	
 
2.	White River substation	
 
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Exhibit 10.5
MANAGEMENT AGREEMENT
This MANAGEMENT AGREEMENT (this “ Agreement ”), is made and entered into effective as of the Effective Date (as hereinafter defined), by and between Hunt Utility Services, LLC, a Delaware limited liability company (the “ Manager ”), InfraREIT Partners, LP, a Delaware limited partnership (the “ Operating Partnership ”), and InfraREIT, Inc., a Maryland corporation and the general partner of the Operating Partnership (the “ Company ”). The Manager, the Operating Partnership and the Company are sometimes referred to in this Agreement individually as a “ Party ” or collectively as the “ Parties .”
RECITALS:
WHEREAS, the Company is a corporation that intends to elect to be taxed as a real estate investment trust (“ REIT ”) and intends to continue to qualify to be taxed as a REIT for federal income tax purposes;
WHEREAS, the Manager is an indirect subsidiary of Hunt Consolidated, Inc. (“ Hunt ”); and
WHEREAS, the Company, the Operating Partnership and each of the Subsidiaries (as defined below) desire to retain the Manager to provide management and advisory service on the terms and conditions set forth herein, and the Manager wishes to be retained to provide such services.
NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, the Parties hereby agree as follows:
Section 1. Definitions . Capitalized terms used in this Agreement (including exhibits, schedules and amendments) shall have the meanings set forth below or in the section of this Agreement referred to below, except as otherwise expressly indicated or limited by the context in which they appear in this Agreement.
“ Adjustments ” means additions or subtractions to the Company’s Cash Available for Distribution related to the following: (i) the effect of the Company’s percentage rent calculation method, which represents the difference between the quarterly cash payments due on percentage rent and the revenue included in net income; (ii) the effect of straight-line rents, which represents the difference between the timing of cash based rent payments and the recognition of base rent revenue in accordance with GAAP; (iii) the fair value adjustment of balance sheet items such as contingent consideration and hedges; (iv) non-cash equity compensation; (v) goodwill impairment; and (vi) subject to the approval of the Independent Directors, such other adjustments as the Manager may recommend from time to time to give effect to the intent of the Parties in the calculation of Cash Available for Distribution under this Agreement or to reflect changes in the public reporting practices of the Company.

“ Affiliate ” means, with regard to a Person, a Person that controls, is controlled by, or is under common control with such original Person. For purposes of this definition, “control,” when used with respect to any Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms “affiliated,” “controlling” and “controlled” have meanings correlative to the foregoing. By way of example, and not limitation, Affiliates of the Manager include, and are not limited to, Hunt Consolidated, Inc., Hunt Investment Company, L.P., Hunt Equities, Inc., Hunt Transmission Services, LLC, and Hunt Power, L.P.
“ AFUDC ” means allowance for funds used during construction.
“ AFUDC on Other Funds ” means the portion of AFUDC that relates to the cost of equity, as determined in accordance with the electric plant instructions found in the Federal Energy Regulatory Commission regulations.
“ Agreement ” has the meaning set forth in the Preamble.
“ Arbitration Panel ” has the meaning set forth in Section 24(a) .
“ Assets ” means the assets of the Company Entities.
“ Audit Committee ” means the audit committee of the Board of Directors.
“ Bankruptcy ” means, with respect to any Person, (a) the filing by such Person of a voluntary petition seeking liquidation, reorganization, arrangement or readjustment, in any form, of its debts under Title 11 of the United States Code or any other federal, state or foreign insolvency law, or such Person’s filing an answer consenting to or acquiescing in any such petition, (b) the making by such Person of any assignment for the benefit of its creditors, (c) the expiration of 60 days after the filing of an involuntary petition under Title 11 of the United States Code, an application for the appointment of a receiver for a material portion of the assets of such Person, or an involuntary petition seeking liquidation, reorganization, arrangement or readjustment of its debts under any other federal, state or foreign insolvency law, provided that the same shall not have been vacated, set aside or stayed within such 60-day period or (d) the entry against it of a final and non-appealable order for relief under any bankruptcy, insolvency or similar law now or hereinafter in effect.
“ Base Fee ” means (a) for the period from January 1, 2014 through March 31, 2015, an annual amount equal to $10,000,000 (prorated for partial periods), and (b) for each 12 month Base Fee Period thereafter, an amount equal to 1.50% of Total Equity as of the end of the immediately preceding calendar year; provided that, in no event shall the Base Fee be more than $30,000,000 unless a greater amount is approved by a majority of the Independent Directors (or a committee consisting entirely of Independent Directors). By way of example, the Base Fee for the Base Fee Period from April 1, 2016 through March 31, 2017 will be an amount equal to 1.50% of Total Equity as of December 31, 2015.
“ Base Fee Period ” shall mean each 12-month period beginning on April 1 and ending on March 31 of the following year.
 
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“ Board of Directors ” means the Board of Directors of the Company.
“ Cash Available for Distribution ” means, for any calendar quarter, an amount equal to (i) (A) Net Income Before Noncontrolling Interest, plus (B) depreciation, plus (C) amortization of deferred financing costs, if any, minus (D) AFUDC on Other Funds, minus (E) capital expenditures to maintain net assets, (ii) as adjusted by the Adjustments. The Parties intend that Cash Available for Distribution will be calculated in a manner consistent with the Company’s public reporting of Cash Available for Distribution from time to time. Capital expenditures to maintain net assets means, for any calendar quarter, an amount equal to the depreciation expense recognized by the Company. For the avoidance of doubt, Cash Available for Distribution does not include the proceeds of any debt recapitalization.
“ Code ” means the Internal Revenue Code of 1986, as amended.
“ Company ” has the meaning set forth in the Preamble.
“ Company Account ” has the meaning set forth in Section 6 .
“ Company Entity ” or “ Company Entities ” means the Company, the Operating Partnership and any of their Subsidiaries.
“ Company Indemnified Party ” has the meaning set forth in Section 13(b) .
“ Company Panel Member ” has the meaning set forth in Section 24(b) .
“ Damages ” has the meaning set forth in Section 13(a) .
“ Development Agreement ” means the Development Agreement, of even date herewith, among the Company, the Operating Partnership, Sharyland Utilities, L.P. and Hunt Transmission Services L.L.C.
“ Effective Date ” means the closing date of the Initial Public Offering and the effectiveness of the merger of InfraREIT, L.L.C. with and into the Company.
“ Entity ” means any partnership, limited partnership, proprietorship, corporation, joint venture, joint stock company, limited liability company, limited liability partnership, business trust, estate, governmental entity, cooperative, association or other foreign or domestic enterprise, including accounts or funds managed by an investor or any of its Subsidiaries.
“ Equity Interests ” means any shares of capital stock, membership interests, partnership interests or other equity interests and options or warrants to acquire, or securities convertible or exchangeable into, capital stock, membership interests, partnership interests or other equity securities of an Entity.
“ Exchange Act ” means the Securities Exchange Act of 1934, as amended.
“ Expenses ” has the meaning set forth in Section 10 .
 
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“ GAAP ” means generally accepted accounting principles in the United States, consistently applied.
“ Governing Instruments ” means, with regard to any entity, the articles or certificate of incorporation and bylaws in the case of a corporation, certificate of limited partnership (if applicable) and the partnership agreement in the case of a general or limited partnership, the articles or certificate of formation and the operating agreement in the case of a limited liability company, or similar governing documents, in each case as amended from time to time.
“ Hunt ” has the meaning set forth in the Recitals.
“ Incentive Fee ” means, for any calendar quarter an amount equal to the Per Unit Incentive Fee for such calendar quarter multiplied by the aggregate number of OP Units outstanding as of the record date for the payment of Quarterly Distributions during such calendar quarter.
“ Indemnitee ” has the meaning set forth in Section 13(b) .
“ Indemnitor ” has the meaning set forth in Section 13(c) .
“ Independent Directors ” means the members of the Board of Directors who are not officers or employees of the Manager, Hunt or any of their Affiliates, and who are otherwise “independent” in accordance with the Company’s Governing Instruments and policies and, if applicable, the rules of any national securities exchange on which the Company’s common stock is listed.
“ Initial Public Offering ” means the initial public offering of the Company’s common stock under the Securities Act pursuant to the Registration Statement.
“ Initial Term ” means a period commencing on the date hereof and ending on the earlier of (i) December 31, 2019 and (ii) a Successful Challenge.
“ Intellectual Property ” means all work product, documents, code, works of authorship, programs, manuals, developments, processes, formulae, data, specifications, fixtures, tooling, equipment, supplies, processes, inventions, discoveries, improvements, trade secrets, and know-how or similar rights.
“ Intellectual Property Rights ” means the worldwide right, title, and interest in any Intellectual Property and any goodwill appurtenant thereto, including, without limitation, all copyrights, copyright renewals or reversions, trademarks, trade names, trade dress rights, inventions, priority rights, patent rights, patents, and any other rights or protections in connection therewith or related thereto.
“ Investment Company Act ” means the Investment Company Act of 1940, as amended.
“ Manager ” has the meaning set forth in the Preamble.
“ Manager Indemnified Party ” has the meaning set forth in Section 13(a) .
 
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“ Manager Panel Member ” has the meaning set forth in Section 24(b) .
“ Net Income Before Noncontrolling Interest ” means the Company’s consolidated net income, calculated in accordance with GAAP, before any deduction or reduction thereto as a result of net income attributable to a noncontrolling interest.
“ Operating Partnership ” has the meaning set forth in the Preamble.
“ OP Unit ” means a partnership unit in the Operating Partnership.
“ Party ” or “ Parties ” has the meaning set forth in the Preamble.
“ Person ” means any individual, corporation, proprietorship, firm, partnership, limited partnership, limited liability company, trust, association or other Entity.
“ Per Unit Incentive Fee ” means, for any calendar quarter, an amount equal to 20% of the amount by which (a) the Quarterly Distributions made by the Operating Partnership during such quarter plus the amount of the Per Unit Incentive Fee exceed (b) the Threshold Distribution Amount. By way of example, assuming a Threshold Distribution Amount of $0.20, if the Quarterly Distributions during a quarter are $0.24, the Per Unit Incentive Fee for such quarter will be $0.01 (i.e., 20% multiplied by ($0.24 of Quarterly Distributions, plus the $0.01 Per Unit Incentive Fee, minus the $0.20 Threshold Distribution Amount).
“ Quarterly Distributions ” means the amount of per OP Unit distributions made by the Operating Partnership during a particular calendar quarter; provided, however , that any distributions in excess of 100% of quarterly Cash Available for Distribution shall not be considered distributions for purposes of calculating the amount of Quarterly Distributions; provided, further , any such OP Unit distributions made to the Company will only be considered distributions for purposes of this definition to the extent they are subsequently distributed by the Company to its shareholders. For purposes of this definition, quarterly Cash Available for Distribution will be measured based on the most recent quarterly results that, at the time of declaration of the applicable OP Unit distributions by the Board of Directors or a committee thereof, have been publicly disclosed or, if no quarterly results have been publicly disclosed in the preceding 90 days, the results from the Company’s most recently completed quarter that have been reviewed by the Company’s independent auditors and certified by an officer of the Company.
“ Registration Statement ” means the Registration Statement on Form S-11 (file no. 333-            ) filed by the Company.
“ REIT ” has the meaning set forth in the Recitals.
“ Renewal Term ” means a period commencing on the expiration of the Initial Term or a Renewal Term and ending on the earlier of (i) the date that is five years from the commencement of such Renewal Term and (ii) a Successful Challenge.
“ SEC ” means the United States Securities and Exchange Commission.
 
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“ Securities Act ” means the Securities Act of 1933, as amended.
“ Subsidiary ” means, with respect to any Person, any corporation, limited liability company, trust, partnership or joint venture, or other Entity of which a majority of (i) the voting power of the voting equity securities or (ii) the outstanding Equity Interests is owned, directly or indirectly, by such Person.
“ Successful Challenge ” means the date a court of competent jurisdiction has determined in a final, non-appealable order that this Agreement, or any term or provision hereof, after giving effect to Section 27, caused a termination of the Company’s REIT election under Section 856(g) of the Code.
“ Termination Fee ” has the meaning set forth in Section 16(b) .
“ Third Panel Member ” has the meaning set forth in Section 24(b) .
“ Threshold Distribution Amount ” means an amount per OP Unit equal to $        , as adjusted for recapitalizations, reclassifications, stock splits, stock dividends or other similar events.
“ Total Equity ” means, as of a particular date, the amount of total equity reflected on the Company’s consolidated balance sheet as of such date (before any reduction or deduction therefrom as a result of noncontrolling interest) prepared in accordance with GAAP; provided that, Total Equity as of December 31, 2014 shall be calculated on a pro forma basis giving effect to the consummation of the Initial Public Offering, calculated in a manner consistent with Total Equity reflected on the Company’s unaudited Pro Forma Condensed Consolidated Balance Sheet as of September 30, 2014 included in the Registration Statement. For reference, the “Total Equity” line is not included in the Company’s audited Consolidated Balance Sheets included in the Registration Statement (such line item is entitled “Total Members’ Capital” on such balance sheets), but is included in the Company’s unaudited Pro Forma Condensed Consolidated Balance Sheet as of September 30, 2014 included in the Registration Statement. The Company expects that such line item will continue to be included in the Company’s balance sheet data following the completion of the Initial Public Offering.
Section 2. Appointment and Duties of the Manager .
(a) The Company and the Operating Partnership (in each case, on its own behalf and on behalf of its Subsidiaries) hereby appoint the Manager to manage the Assets and the day-to-day operations of the Company Entities subject to the further terms and conditions set forth in this Agreement, and the Manager hereby agrees to use its reasonable best efforts to perform each of the duties set forth herein except where a higher standard of care is specified in this Agreement. The appointment of the Manager shall be exclusive to the Manager except to the extent that the Manager otherwise agrees, in its sole and absolute discretion, and except to the extent that the Manager elects, pursuant to the terms of this Agreement, to cause the duties of the Manager hereunder to be provided by third parties.
(b) The Parties acknowledge that (i) the Manager is an Affiliate of Hunt; and (ii) the Manager may perform its services for the Company Entities in part through the personnel and facilities of Hunt or other Hunt Affiliates.
 
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(c) The Manager, in its capacity as manager of the Assets and the day-to-day operations of the Company Entities, at all times will be subject to the supervision and oversight of the Company’s Board of Directors and will have only such functions and authority as the Company may delegate to it, including the functions and authority identified herein and delegated to the Manager hereby. The Manager will be responsible for the day-to-day operations of the Company Entities and will perform (or cause to be performed) in accordance with the guidelines that may be adopted from time to time by the Board of Directors, and subject to the budget limitations set forth in Section 11(a) , such services and activities relating to the Assets and operations of the Company Entities as set forth herein, including:
(i) administering the day-to-day business and performing and supervising the performance of such other administrative functions necessary or appropriate for the Company Entities’ management, including the collection of revenues and the payment of debts and obligations;
(ii) providing executive and administrative personnel, office space and office services required in rendering services to the Company Entities;
(iii) engaging, retaining and supervising, on behalf of a Company Entity, such services of accountants, legal counsel, appraisers, insurers, brokers, transfer agents, registrars, investment banks, valuation firms, financial advisors, due diligence firms, underwriting review firms and banks as the Manager deems necessary or advisable in connection with the management and operations of such Company Entity;
(iv) communicating with the holders of any of the securities of a Company Entity as required to satisfy the reporting and other requirements of any governmental bodies or agencies or trading markets and to maintain effective relations with such holders, including website maintenance, logo design, analyst presentations, investor conferences and annual meeting arrangements;
(v) preparing for the review and approval of the Board of Directors and filing on behalf of the Company Entities current reports on Form 8-K, quarterly reports on Form 10-Q and annual reports on Form 10-K, proxy statements and other reports required to be filed by the Exchange Act with the SEC and otherwise satisfying reporting and compliance obligations under applicable securities laws or the rules of the New York Stock Exchange and any exchange on which securities of a Company Entity are listed;
(vi) arranging marketing materials, advertising, industry group activities (such as conference participation and industry organization memberships) and other promotional efforts designed to promote the business of the Company Entities;
(vii) communicating with analysts and the investment community generally;
(viii) sourcing, evaluating, submitting for Board of Director approval, and, subject to obtaining such Board of Director approval, directing the issuance of any common or preferred stock issuances or other equity issuances;
 
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(ix) drawing on existing lines of credit at such times as the Manager deems appropriate to support the business of the Company Entities and sourcing, facilitating, evaluating and submitting for Board of Director approval any other loan, indebtedness, guaranty or other financing arrangements necessary or appropriate in connection with the business of the Company Entities and managing the Company’s and the Company Entities’ relationships with existing or potential lenders;
(x) evaluating and recommending to the Board of Directors hedging strategies and engaging in hedging activities, consistent with such strategies as modified from time to time, while maintaining the Company’s qualification as a REIT;
(xi) opening and managing Company Accounts and treasury/cash management activities on behalf of the Company Entities;
(xii) investing and reinvesting any money and securities in short-term investments pending investment in other investments; paying related fees, costs and expenses;
(xiii) advising the Board of Directors on capital structure and capital raising;
(xiv) negotiating with tenants any new leases, lease amendments, lease supplements or lease renewals, all in accordance with leasing standards promulgated by the Board of Directors from time to time, and causing the applicable Company Entity to perform its obligations under any such agreements and enforcing any related rights; provided, however, the negotiation and execution of any operating lease of a transmission and distribution Asset to an operator thereof (e.g., Sharyland Utilities, L.P.), and any amendments thereto, shall be subject to the direction and, subject to procedures approved by the Board of Directors, approval of the Board of Directors;
(xv) evaluating, negotiating, submitting for Board of Director approval, and, subject to receipt of such Board of Director approval, entering into, any project acquisitions from a Hunt Affiliate in accordance with the terms of the Development Agreement or from third parties;
(xvi) working with tenants or other third parties to construct transmission and distribution projects, including causing a Company Entity to negotiate, enter into and perform its obligations under any related construction contracts, engineering, procurement and construction (EPC) contracts or other contracts related to such construction activities;
(xvii) preparing annual budgets, and any related amendments, for Board of Director approval and causing the Company Entities to perform and implement then-effective annual budgets;
(xviii) preparing financial statements;
 
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(xix) coordinating the relationship with external auditors, subject to oversight from the Audit Committee or other appropriate governing body when appropriate;
(xx) administering bookkeeping and accounting functions as are required for the management and operation of the Company Entities;
(xxi) evaluating and recommending and, subject to obtaining approval of the Board of Directors, making any accounting policy changes;
(xxii) designing, preparing, updating and monitoring internal control over financial reporting and disclosure controls and procedures, subject to oversight from the Audit Committee or other appropriate governing body when applicable;
(xxiii) managing any internal audit function required by securities laws, exchange rules or the Board of Directors, including, if appropriate, engaging a third party firm on behalf of a Company Entity to provide such function, and managing the relationship with that firm, subject to oversight from the Audit Committee or other appropriate governing body when appropriate;
(xxiv) sourcing, evaluating and submitting for Board of Director approval, and, subject to receipt of such Board of Director approval, entering into, any potential merger, acquisition, joint venture, financing, development, refinancing or disposition opportunities;
(xxv) coordinating and managing the business of any joint venture or co-investment interests a Company Entity holds directly or indirectly and conducting all matters with the joint venture or co-investment partners;
(xxvi) sourcing and evaluating relationships with potential project developers;
(xxvii) monitoring the insurance required under the Company’s leases and sourcing and evaluating any insurance, such as director and officer insurance, and, subject to obtaining Board of Director or other appropriate approvals when applicable, causing a Company Entity to obtain any such insurance;
(xxviii) enforcing the rights of Company Entities under any applicable insurance policies when and as appropriate, subject to oversight and direction from the Board of Directors or a committee thereof, when appropriate;
(xxix) assisting the Company regarding the maintenance of its qualification as a REIT and monitoring compliance with the various REIT qualification tests and other tax laws and regulations, and, in accordance with Section 8(b)(ii) hereof, causing the Company to qualify as a REIT for U.S. federal income tax purposes;
 
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(xxx) managing all tax matters, including making necessary tax filings and causing each Company Entity to make any related payments that are owed to taxing authorities and filing appropriate tax appeals;
(xxxi) scheduling, managing and preparing materials for all meetings of the Board of Directors or committees thereof;
(xxxii) counseling the Board of Directors in connection with any policy decisions;
(xxxiii) subject to obtaining Board of Director or other appropriate Company approvals, handling and resolving all claims, disputes or controversies between Company Entities and third parties;
(xxxiv) furnishing the Board of Directors with reports and statistical and economic research regarding activities and services performed by the Manager on behalf of a Company Entity, as appropriate;
(xxxv) assisting the Company Entities in complying with all regulatory requirements applicable to the Company Entities with respect to the Company Entities’ business;
(xxxvi) keeping the Board of Directors apprised of material events affecting the assets of the Company Entities, and, from time to time, at the request of the Board of Directors, making reports to the Company of its performance of the services set forth herein;
(xxxvii) performing the functions and tasks delegated to the Company pursuant to that certain Delegation Agreement dated on or around the date hereof between Sharyland Utilities, L.P. and the Company related to responsibilities and rights under the Third Amended and Restated Company Agreement of Sharyland Distribution & Transmission Services, L.L.C.; and
(xxxviii) performing such other services as may be required from time to time for the management of, and other activities relating to, the Assets and business and operations of the Company Entities as the Board of Directors shall reasonably request or as Manager deems appropriate under the particular circumstances.
(d) The Manager shall have the right and power to establish an employee stock purchase plan (as such term is defined in section 423 of the Code) at the Company for the benefit of employees of the Manager, Hunt and their Affiliates; provided that , the Manager shall fund all costs associated with any such plan, including the funds necessary to purchase shares of the Company’s stock in the open market pursuant to the plan.
(e) In performing its duties under this Section 2 , the Manager shall be entitled to rely reasonably on qualified experts and professionals (including accountants, legal counsel and other service providers) hired by the Manager at the Company Entities’ sole cost and expense (subject to the last paragraph of Section 10 ).
 
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Section 3. Devotion of Time; Additional Activities .
(a) The Manager and its Affiliates will provide the Company Entities with a management team, including a Chief Executive Officer, President and Chief Financial Officer, as well as other support personnel, to provide the management services to be provided by the Manager to the Company Entities hereunder, the members of which team shall devote such portion of their time to the management of the Company Entities as is necessary and appropriate to operate the businesses of the Company Entities. The Manager shall not be obligated to dedicate itself exclusively to the management of the Company Entities nor shall the Manager’s personnel be obligated to dedicate any specific portion of their time to the Company Entities; provided, however , that the Manager devotes sufficient resources to the business of the Company Entities as is necessary and appropriate, commensurate with its level of activity, to discharge Manager’s obligations under this Agreement. The Manager shall dedicate sufficient time and shall engage and make available sufficient personnel (including personnel of the Manager’s Affiliates) to perform the tasks and activities that typically would be performed internally (and not outsourced to third parties) by a manager rendering management and advisory services similar to those to be rendered by the Manager hereunder, and the Manager shall engage third parties to perform such tasks and activities only in accordance with the budget limitations set forth in Section 11(a) hereof. For clarity, nothing in this Section 3(a), Section 2 or any other provision of this Agreement will require the Manager or any Affiliate thereof to bear or incur any Expenses (except as described in the last paragraph of Section 10 ).
(b) Subject to the provisions of Section 3(a) and the Development Agreement, nothing in this Agreement shall (i) prevent the Manager, Hunt or any of their Affiliates, officers, directors, employees or personnel, from engaging in other businesses or from rendering services of any kind (including the services to be provided to the Company Entities hereunder) to any other Person, including investing in, or rendering advisory services to others investing in, any type of business (including acquisitions of assets that meet the principal investment objectives of the Company), whether or not the investment objectives or policies of any such other Person or Entity are similar to those of the Company or (ii) in any way bind or restrict the Manager, Hunt or any of their Affiliates, officers, directors, employees or personnel from buying, selling or trading any securities or investments for their own accounts or for the account of others for whom Hunt or any of its Affiliates (other than the Manager), officers, directors, employees or personnel may be acting. For the avoidance of doubt, the foregoing shall not limit any of the Company Entities’ rights under the Development Agreement.
(c) Managers, partners, officers, employees, personnel and agents of the Manager or Affiliates of the Manager may serve as directors, officers, employees, personnel, agents, nominees or signatories for the Company Entities, to the extent permitted by their Governing Instruments or by any resolutions duly adopted by the applicable governing entities pursuant to the Company Entities’ Governing Instruments. When executing documents or otherwise acting in such capacities for the Company Entities, such persons shall use their respective titles in the applicable Company Entity.
Section 4. Development Activities and Rights of First Offer . On the date hereof, the Company, the Operating Partnership, Sharyland Utilities, L.P. and Hunt Transmission Services, L.L.C. have entered into the Development Agreement, which, among other things, governs (a)
 
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the rights of the Company Entities to develop and construct Footprint Projects (as defined in the Development Agreement) and (b) the circumstances under which Hunt must offer to the Company the opportunity to acquire a ROFO Project (as defined in the Development Agreement).
Section 5. Agency . Without expanding in any way the Manager’s powers or authorities in Section 2 , the Manager may act as agent of the Company Entities in acquiring, financing, leasing, managing and disposing of Assets, disbursing and collecting the funds of the Company Entities, paying the debts and fulfilling the obligations of the Company Entities, supervising the performance of professionals engaged by or on behalf of the Company Entities and handling, prosecuting and settling any claims of or against the Company Entities, the Board of Directors, holders of the Company Entities’ securities or representatives or properties of the Company Entities.
Section 6. Bank Accounts . The Manager may establish and maintain one or more bank accounts in the name of any Company Entity (any such account, a “ Company Account ”), and may collect and deposit funds into any such Company Account or Company Accounts, and disburse funds from any such Company Account or Company Accounts in accordance herewith; and the Manager shall, on a quarterly basis or upon request of the Board of Directors or a committee thereof from time to time, render appropriate accountings of such collections and payments to the Board of Directors and, upon request, to the auditors of the Company Entities. All funds collected by Manager on behalf of Company Entities shall be deposited by Manager in Company Accounts.
Section 7. Records; Confidentiality . The Manager shall maintain appropriate books of accounts and records relating to services performed under this Agreement, and such books of account and records shall be accessible for inspection by representatives of the Company Entities at any time during normal business hours upon reasonable advance notice. The Manager shall keep confidential any and all information obtained in connection with the services rendered under this Agreement and shall not disclose any such information (or use the same except in furtherance of its duties under this Agreement) to unaffiliated third parties except (i) with the prior written consent of the Board of Directors; (ii) to legal counsel, accountants and other professional advisors to the Company; (iii) to appraisers, financing sources and others in the ordinary course of the Company’s business; (iv) pursuant to the order of governmental officials having jurisdiction over any Company Entity; (v) in connection with any governmental or regulatory filings of the Company Entities or disclosure or presentations to the Company’s stockholders or prospective stockholders; (vi) as required by law or legal process to which the Manager or any Person to whom disclosure is permitted hereunder is a party; or (vii) to the extent reasonably required to perform the services under this Agreement or otherwise in connection with the business or assets of the Company Entities. The foregoing shall not apply to information which has previously become publicly available through the actions of a Person other than the Manager not resulting from the Manager’s violation of this Section 7 . The provisions of this Section 7 shall survive the expiration or earlier termination of this Agreement for a period of three years. The Manager shall cause its agents, representatives and subcontractors to keep confidential any such information to the same degree set forth in this Section 7 .
 
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Section 8. Obligations of Manager; Restrictions .
(a) The Manager shall require each seller or transferor of assets to the Company Entities to make such representations and warranties regarding such assets as may, in the commercially reasonable judgment of the Manager, be necessary and appropriate. In addition, the Manager shall take such other action as it deems necessary or appropriate in its commercially reasonable discretion with regard to the protection of the Assets.
(b) The Manager shall use its reasonable best efforts to monitor relationships among the Company Entities, any tenant that leases the assets of the Company Entities, the Manager and its Affiliates and holders of equity interests in the Company to ensure compliance with REIT rules and regulations related to related party rents.
(c) The Manager shall refrain from any action that, in its sole but reasonable judgment made in good faith, (i) is not in compliance with the guidelines and policies of the Board of Directors, (ii) would adversely affect the status of the Company as a REIT under the Code, (iii) would adversely affect the Company Entities’ status as an entity intended to be exempted or excluded from investment company status under the Investment Company Act or (iv) would violate any law, rule or regulation of any governmental body or agency having jurisdiction over any Company Entity or that would otherwise not be permitted by the Company Entities’ Governing Instruments, code of conduct or other compliance policies. If the Manager is ordered to take any such action by the Board of Directors, the Manager shall promptly notify the Board of Directors of the Manager’s judgment that such action would adversely affect such status or violate any such law, rule or regulation or the Governing Instruments.
Section 9. Compensation .
(a) During the Initial Term and any Renewal Term, the Operating Partnership shall pay the Manager an annual Base Fee. The annual Base Fee shall be payable in cash in quarterly installments in arrears on the last day of each calendar quarter (or the first business day that follows such day, if the last day of the calendar quarter is not a business day). Within 10 days of the receipt by the Company of its audited financial statements with respect to the most recently completed fiscal year, the Manager shall deliver to the Board of Directors for informational purposes only its computation of the Base Fee (and the identification of the applicable quarterly installments in which the Base Fee will be paid by the Company) based on the amount of Total Equity reflected in such financial statements (or, in the case of Total Equity as of December 31, 2014, derived from such financial statements). If the Company does not have audited financial statements within 90 days of the end of the most recently completed fiscal year, the Manager shall calculate and send to the Board of Directors its computation of Total Equity as of the end of the most recent fiscal year and the resulting Base Fee, in which case the Audit Committee shall review and approve or disapprove the calculation of the Base Fee within 10 days of receipt thereof from the Manager. If the Manager and the Audit Committee are unable to agree on the calculations during such 10 day period, the dispute will be submitted to arbitration pursuant to Section 24 of this Agreement (however, if the audited financial statements are received before the arbitration is completed, then the calculation shall be based on such financial statements).
 
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(b) During the Initial Term and any Renewal Term, the Operating Partnership shall pay the Manager the Incentive Fee in cash. The Incentive Fee shall be payable within five days of the actual payment of Quarterly Distributions by the Operating Partnership. In connection with its recommendation regarding the amount of the Quarterly Distribution the Operating Partnership should make in a calendar quarter, the Manager shall deliver to the Board of Directors its computation of the Incentive Fee based on the amount of such recommended Quarterly Distribution during such quarter. If the Audit Committee determines that the amount of Quarterly Distributions will be different than the amount recommended by the Manager, then the Manager will re-calculate the Incentive Fee payment based on the Audit Committee’s determination of Quarterly Distributions. In connection with approving the amount of Quarterly Distribution, the Audit Committee will also approve or disapprove the amount of the Incentive Fee. If the Audit Committee does not approve the amount of the Incentive Fee in connection with any such approval of the amount of Quarterly Distributions, the Manager may submit the determination of the amount of the Incentive Fee to arbitration pursuant to Section 24 of this Agreement.
(c) In the event that the Company’s or the Operating Partnership’s financial statements with respect to any period during the Initial Term or any Renewal Term are restated, and such restatement results in a change to the calculation of Total Equity or Cash Available for Distribution that would have caused the amount of the Base Fee or Incentive Fee paid in any period or the amount of the Termination Fee to have been less than the amount actually paid, the Manager shall re-pay to the Company any such excess fee amounts it received. To the extent the Board of Directors or a committee thereof determines a portion of the Base Fee, Incentive Fee or Termination Fee is recoverable from the Manager pursuant to this Section 9(c) , the Board of Directors or committee thereof may (1) require the Manager to re-pay such amount in cash directly to the Operating Partnership within 30 days of the determination that excess fees have been paid, (2) reduce future payments of the Base Fee, Incentive Fee or Termination Fee by such amounts or (3) recover such amounts through any combination of (1) and (2). This Section 9(c) shall survive the expiration or earlier termination of this Agreement.
Section 10. Expenses of the Company . The Company Entities shall bear and be responsible for all expenses related to the conduct of the business of the Company Entities (collectively, the “ Expenses ”), including any such Expenses initially incurred by the Manager, and including the following:
(a) expenses in connection with the acquisition, disposition and financing of other entities and Assets on behalf of the Company;
(b) costs of legal, tax, accounting, third party administrators for the establishment and maintenance of the books and records, consulting, auditing, administrative, and other similar services rendered for the Company Entities by third parties retained by a Company Entity or by the Manager on behalf of a Company Entity;
(c) the compensation and expenses of the Company’s directors and the cost of liability insurance related to the officers, directors, consultants or agents of any Company Entity and any obligations to indemnify any such persons;
 
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(d) costs associated with the establishment and maintenance of any of the Company Entities’ secured and unsecured forms of borrowings (including commitment fees, accounting fees, legal fees, closing and other similar costs) or any of the Company Entities’ securities offerings (including the Initial Public Offering);
(e) expenses connected with communications to holders of any Company Entities’ securities and other bookkeeping and clerical work necessary in maintaining relations with holders of such securities and in complying with the continuous reporting and other requirements of governmental bodies or agencies, including all costs of preparing and filing required reports with the SEC, the costs payable by a Company Entity to any transfer agent and registrar in connection with the listing and/or trading of the Company’s stock on any exchange, the fees payable by a Company Entity to any such exchange in connection with its listing, and costs of preparing, printing and mailing any annual report to stockholders and proxy materials with respect to any stockholder meetings;
(f) costs associated with any computer software or hardware, electronic equipment or purchased information technology services from third party vendors that is used for the Company Entities; provided that , if such software, hardware, equipment or services also benefit the businesses of Affiliates of the Manager or activities of the Manager that are unrelated to those of the Company Entities, the Expenses shall only include an amount reasonably allocated to the Company Entities by the Manager;
(g) costs and expenses incurred with respect to market information systems and publications, pricing and valuation services, research publications and materials, including financial analytics and market data, and settlement, clearing and custodial fees and expenses, relevant to the business of a Company Entity;
(h) compensation and expenses of the Company’s custodian and transfer agent, if any;
(i) the costs of maintaining the Company’s compliance with all federal, state and local rules and regulations or any other regulatory agency;
(j) all taxes and license fees payable by any Company Entity;
(k) all insurance costs incurred in connection with the operation of the business of the Company Entities;
(l) all other costs and expenses relating to the business and investment operations of the Company Entities, including the costs and expenses of acquiring, owning, protecting, maintaining, developing and disposing of Assets, including appraisal, valuation, reporting, audit and legal fees;
(m) expenses relating to any office(s) or office facilities, including disaster backup recovery sites and facilities, maintained for the Company Entities or Assets separate from the office or offices of the Manager;
 
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(n) expenses connected with the payments of interest, dividends or distributions in cash or any other form authorized or caused to be made by the Board of Directors to or on account of holders of the Company Entities’ securities, including in connection with any dividend reinvestment plan;
(o) any judgment or settlement of pending or threatened proceedings (whether civil, criminal or otherwise) against any Company Entity, or against any trustee, director or officer of any Company Entity in his capacity as such for which any Company Entity is required to indemnify such trustee, director or officer by any court or governmental agency;
(p) all costs and expenses relating to the development and management of the Company’s website; and
(q) all other third-party expenses actually incurred by the Manager that are reasonably necessary for the performance by the Manager of its duties and functions under this Agreement.
Notwithstanding the foregoing or anything to the contrary herein, Expenses will not include the following, which will be the responsibility of (and paid directly by) the Manager or another Affiliate thereof: (1) compensation expenses related to the Manager’s and its Affiliates’ personnel, including officers of the Company, (2) occupancy costs incurred by the Manager related to its place of business, (3) time or project-based billing for work done by Affiliates of the Manager, (4) office-related costs, travel and entertainment costs or costs associated with professional service organizations, publications, professional development or related matters for the Manager’s or any of its Affiliate’s employees, or (5) income or franchise taxes payable by the Manager. The provisions of this Section 10 shall survive the expiration or earlier termination of this Agreement to the extent such Expenses have previously been incurred or are incurred in connection with such expiration or termination. For the avoidance of doubt, if a particular item of expense is described in this paragraph, it will be the obligation of Manager or an Affiliate thereof, and not the obligation of a Company Entity, even if such item of expense falls within one of the enumerated list of Expenses set forth in Section 10(a)-(q)  above.
Section 11. Preparation of Expense Budget; Calculation and Payment of Expenses .
(a) The Manager shall, in connection with the annual budgeting process established by the Board of Directors, submit to the Board of Directors its estimate of the general and administrative Expenses (“ G&A Expenses ”) to be incurred on behalf of the Company Entities for each annual budgeting period. The Manager shall use reasonable best efforts to cause the G&A Expenses for such annual period not to materially exceed the estimates submitted to the Board of Directors, and shall promptly notify the Board of Directors of any expected material deviations from the estimates and the reasons for such deviations. Upon receipt of such notice of expected material deviations from the budget, the Board of Directors may instruct the Manager that any or all additional expenses in excess of the budget shall be subject to approval of the Board of Directors.
 
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(b) The Manager may prepare and deliver to the Company a statement documenting the unreimbursed Expenses incurred by the Manager on behalf of a Company Entity in accordance herewith, which shall be reimbursed by the Operating Partnership to the Manager on or before the 30th day following the date of delivery of such statement. Expenses incurred by the Manager on behalf of a Company Entity in accordance herewith shall be reimbursed by the Operating Partnership to the Manager. The provision of this Section 11 shall survive the expiration or earlier termination of this Agreement with respect to Expenses that have previously been incurred or are incurred in connection with such expiration or termination. All obligations of the Company under this Agreement to pay any fees, reimbursements, indemnities or other amounts to the Manager shall be paid by the Operating Partnership.
Section 12. Insurance .
(a) The Company will cover the Manager and its Affiliates under the Company’s directors and officers insurance policy, including professional liability coverage with limits no less than $50,000,000. The Manager may also request that additional professional liability insurance be purchased and added to the Company policy, and the Manager shall bear any premium costs over and above the cost of coverage limits of $50,000,000. The Manager and the Company shall review all such policies annually and shall mutually agree upon the terms and conditions of such policies.
(b) Manager (or an Affiliate of Manager, on Manager’s behalf), shall maintain, at its expense and at all times during the term of this Agreement, insurance as follows:
(i) Commercial General Liability Insurance including Umbrella Liability Insurance, written on occurrence basis, with limits of not less than $50,000,000 combined for bodily injury and property damage liability.
(ii) Workers Compensation Insurance, as required by the law of the State where the Assets are located, covering all Manager’s employees, and Employer’s Liability Insurance with limits of not less than $1,000,000 for bodily injury by accident and $1,000,000 for bodily injury by disease.
(iii) Commercial Crime and/or Employee Dishonesty Insurance, covering the activities of all of its employees who may handle or be responsible for monies or other property of Company, with limits of not less than $5,000,000.
Upon request by the Company, the Manager shall furnish to the Company certificates of insurance evidencing the insurance coverage required hereunder. The Company Entities shall be included as additional insureds on the Manager’s insurance policies.
(c) Notwithstanding any other provision in this Agreement to the contrary, each of the Company and the Manager hereby waives any and all rights of recovery, claim, action or cause of action, and release all claims against the other party, and the other party’s Affiliates, agents, employees, officers, partners, servants and shareholders, for any loss or damage to such party’s property by reason of any casualty which is covered by insurance, regardless of the cause or origin thereof, including, without limitation, the negligence, gross negligence or willful misconduct of the other party or the other party’s Affiliates, agents, employees, officers, partners, servants or shareholders. Each party also covenants that all property insurance policies carried by such party shall contain provisions under which such party’s insurer waives its right of subrogation against the other party (and such policies shall be so endorsed), unless such waiver is illegal or against public policy or such waiver renders such policy void or voidable, or is not available at a reasonable cost.
 
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Section 13. Limits of Manager Responsibility; Indemnification .
(a) The Manager assumes no responsibility under this Agreement other than to render the services in the manner called for under this Agreement and shall not be responsible for any action of the Board of Directors in following or declining to follow any advice or recommendations of the Manager, including as set forth in Section 8(b) of this Agreement. The Manager, its Affiliates, their respective officers, directors, stockholders and employees and any Person providing sub-advisory services to the Manager will not be liable to the Company, to the Board of Directors, the Company’s stockholders or the Operating Partnership’s partners for any acts or omissions by any such Person, pursuant to or in accordance with this Agreement, except by reason of acts or omissions constituting gross negligence, willful misconduct, bad faith or reckless disregard of their duties under this Agreement, as determined by a final non-appealable order of a court of competent jurisdiction. The Operating Partnership shall, to the full extent lawful, reimburse, indemnify and hold the Manager, its Affiliates, their respective officers, directors, stockholders and employees and any Person providing sub-advisory services to the Manager (each a “ Manager Indemnified Party ”), harmless of and from any and all expenses, losses, damages, liabilities, demands, charges and claims of any nature whatsoever (including reasonable attorneys’ fees) (“ Damages ”) in respect of or arising from any acts or omissions of such Manager Indemnified Party, unless it has been determined in a final non-appealable decision pursuant to Section 24 or non-appealable order of a court of competent jurisdiction that such Damages result from such Manager Indemnified Party’s gross negligence, willful misconduct, bad faith or reckless disregard of duties under this Agreement.
(b) The Manager shall, to the full extent lawful, reimburse, indemnify and hold the Company Entities and their respective officers, directors, employees and agents (each, a “ Company Indemnified Party ” and together with a Manager Indemnified Party, the “ Indemnitee ”), harmless of and from any and all Damages in respect of or arising from (i) acts or omissions of the Manager constituting gross negligence, willful misconduct, bad faith or reckless disregard of its duties under this Agreement, as determined in a final non-appealable decision pursuant to Section 24 or non-appealable order of a court of competent jurisdiction or (ii) any claims by or relating to the Manager’s or its Affiliates’ employees relating to the terms and conditions of their employment by the Manager or such Affiliate (including, without limitation, any liability with respect to severance or withdrawal liability).
(c) The Indemnitee will promptly notify the party against whom indemnity is claimed (the “ Indemnitor ”) of any claim for which it seeks indemnification; provided , however , that the failure to so notify the Indemnitor will not relieve the Indemnitor from any liability which it may have hereunder, except to the extent such failure actually prejudices the Indemnitor. The Indemnitor shall have the right to assume the defense and settlement of such claim; provided , that the Indemnitor notifies the Indemnitee of its election to assume such defense and settlement within 30 days after the Indemnitee gives the Indemnitor notice of the claim. In such case, the Indemnitor will not settle or compromise such claim, and the Indemnitee
 
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will not be liable for any such settlement made by Indemnitor without Indemnitee’s prior written consent. If the Indemnitor is entitled to, and does, assume such defense by delivering the aforementioned notice to the Indemnitee, the Indemnitee will (i) have the right to approve the Indemnitor’s counsel (which approval will not be unreasonably withheld, delayed or conditioned), (ii) be obligated to cooperate in furnishing evidence and testimony and in any other manner in which the Indemnitor may reasonably request and (iii) be entitled to participate in (but not control) the defense of any such action, with its own counsel and at its own expense.
(d) The Operating Partnership shall be required to advance funds to a Manager Indemnified Party for legal expenses and other costs incurred as a result of any legal action or proceeding if a claim in respect thereof is to be made pursuant hereto and if requested by such Manager Indemnified Party if (i) such suit, action or proceeding relates to or arises out of, or is alleged to relate to or arise out of or has been caused or alleged to have been caused in whole or in part by, any action or inaction on the part of the Manager Indemnified Party in the performance of its duties or provision of its services on behalf of the Company Entities; and (ii) the Manager Indemnified Party affirms in writing that such person in good faith believes that it has met the standard of conduct necessary for indemnification under this Section 13 and undertakes to promptly repay any funds advanced pursuant to this Section 13(d) in cases in which such Manager Indemnified Party would not be entitled to indemnification under Section 13(a) . If advances are required under this Section 13(d) , the Manager Indemnified Party shall furnish the Operating Partnership with an affirmation and undertaking as set forth in clause (ii) of the preceding sentence and shall thereafter have the right to bill the Operating Partnership for, or otherwise require the Operating Partnership to pay, at any time and from time to time after such Manager Indemnified Party shall become obligated to make payment therefor, any and all reasonable amounts for which such Manager Indemnified Party is entitled to indemnification under this Section 13 , and the Operating Partnership shall pay the same within thirty (30) days after request for payment. In the event that a determination is made by a final non-appealable decision pursuant to Section 24 or non-appealable order of a court of competent jurisdiction that the Operating Partnership is not so obligated in respect of any amount paid by it to a particular Manager Indemnified Party, such Manager Indemnified Party will refund such amount within sixty (60) days of such determination, and in the event that a determination is made by a final non-appealable decision pursuant to Section 24 or non-appealable order of a court of competent jurisdiction that the Operating Partnership is so obligated in respect to any amount not paid by the Operating Partnership to a particular Manager Indemnified Party, the Operating Partnership will pay such amount to such Manager Indemnified Party within thirty (30) days of such final determination, in either case together with interest at the current prime rate plus two percent (2%) from the date paid until repaid or the date it was obligated to be paid until the date actually paid.
(e) Any Manager Indemnified Party entitled to indemnification under this Agreement must seek recovery under any insurance policies by which such Manager Indemnified Party is covered and must obtain the Company’s written consent prior to entering into any compromise or settlement which would result in the Operating Partnership having an obligation to indemnify such Manager Indemnified Party. Any amounts actually recovered under any applicable Company-funded insurance policies will offset any amounts that the Operating Partnership owes pursuant to the Operating Partnership’s indemnification obligations under this Agreement. If the
 
19

amounts for which indemnification is sought arise out of the conduct of the Company’s or the Company Entities’ business and affairs and also of any other person for which a Manager Indemnified Party was then acting in a similar capacity, the amount of the indemnification to be provided by the Operating Partnership may be limited to its proportionate share thereof if so determined by the Operating Partnership in good faith.
Section 14. Intellectual Property; License .
(a) All Intellectual Property created or developed in connection with the Manager’s performance of this Agreement or otherwise and the Intellectual Property Rights associated therewith shall be the sole and exclusive property of the Manager. The Company and Operating Partnership (on behalf of themselves and any Subsidiary) shall assign and do hereby assign to the Manager all Intellectual Property Rights in such Intellectual Property. The Manager hereby grants the Company Entities a non-exclusive, perpetual, worldwide, fully paid up, royalty-free, non-sub-licensable, non-transferable license and right to use the Intellectual Property made in connection with the Manager’s performance of this Agreement for their business purposes. The Company and the Operating Partnership will, or will cause their Subsidiaries to, upon request of the Manager, do, execute, acknowledge and deliver or cause to be done, executed, acknowledged and delivered all such further acts, deeds, assignments, transfers, conveyances, powers of attorney and assurances as may be requested by the Manager to carry out the intent of this Agreement or to otherwise perfect, record, confirm, or enforce the Manager’s rights in and to the Intellectual Property.
(b) The Manager hereby grants to the Company Entities a non-transferable, non-assignable, non-exclusive royalty-free right and license to use the logo described on Exhibit A during the term of this Agreement.
Section 15. No Joint Venture . Nothing in this Agreement shall be construed to make the Company (or any Subsidiary) and the Manager partners or joint venturers or impose any liability as such on either of them.
Section 16. Term; Termination .
(a) Until this Agreement is terminated in accordance with its terms, this Agreement shall be in effect during the Initial Term, and, subject to Section 16(b) and Section 16(c) , shall be automatically renewed for a Renewal Term upon the expiration of the Initial Term and upon the expiration of each Renewal Term. Notwithstanding the foregoing, in connection with the renewal of this Agreement, at least 15 months prior to the expiration of the Initial Term or a Renewal Term, a Party may request changes to this Agreement or the Development Agreement to address market changes, changes in the relationship between the Parties or such other changes in circumstances that a Party determines in good faith warrant revisions to this Agreement (including, without limitation, a request that the list of ROFO Projects included in the Development Agreement be updated to include the transmission and development projects in the then-current pipeline of Hunt and its Affiliates); provided, however , that the Parties do not generally expect to change the manner in which the Base Fee, Incentive Fee or Termination Fee are calculated unless such amounts are determined to be, in consultation with a nationally recognized investment banking firm, materially less favorable to the Manager or the Company,
 
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as the case may be, than other similar compensation arrangements for externally managed vehicles in the same or comparable industries. Without limiting the generality of the foregoing, the Parties shall negotiate any such requested changes in good faith prior to the renewal of this Agreement, but neither Party shall be obligated to agree to any such changes.
(b) Notwithstanding any other provision of this Agreement to the contrary, the Independent Directors may elect not to renew this Agreement by delivering notice of such election to the Manager at least 365 days prior to the end of the Initial Term or any Renewal Term. In the event of such election, on the last day of the Initial Term or Renewal Term, as applicable, the Operating Partnership shall pay a termination fee (the “ Termination Fee ”) equal to three times the sum of (i) the amount of the Base Fee paid with respect to the four full calendar quarters preceding the date on which the termination notice is given and (ii) the amount of the Incentive Fee paid with respect to the four full calendar quarters preceding the date on which the termination notice is given. At the Company’s election, the Termination Fee may be paid in cash or in OP Units (in whole or in part). If the Company elects to pay the Termination Fee in OP Units, such OP Units will be issued five days after the effective date of termination, with the number of OP Units equal to the Termination Fee divided by the volume weighted average price of the Company’s common stock on the New York Stock Exchange (or such other national exchange on which the Company’s stock is then traded) during the 10 trading day period that precedes the termination date. If the Company’s common stock is not then traded on the New York Stock Exchange or other national exchange, the Company will pay the Termination Fee in cash. For the avoidance of doubt, the Termination Fee applies to terminations of this Agreement pursuant to this Section 16(b) only and is not required to be paid in the event of a termination of this Agreement pursuant to any other provision hereof or for any other reason.
(c) Notwithstanding any other provision of this Agreement to the contrary, the Manager may terminate this Agreement at any time upon 365 days’ prior written notice to the Company and the Operating Partnership; provided, however , that the Manager may not deliver notice of its termination of this Agreement prior to December 31, 2018. In the event of a termination of this Agreement pursuant to this Section 16(c) , no Termination Fee shall be payable.
(d) Upon the expiration or termination of this Agreement for any reason, the Manager shall: (i) immediately pay over to the Company Entities any and all monies collected and held by the Manager for the account or on behalf of the Company Entities, without deduction or offset; (ii) promptly turn over to the Company Entities all books, papers, leases, agreements, documents, records, keys and other items relating to the management and operation of the Assets; and (iii) within thirty (30) days thereafter, render to the Company Entities a final accounting with respect to the management and operation of the Assets through the date of termination. In connection with any expiration or termination of this Agreement for any reason, the Manager shall, prior to and following such expiration or termination, cooperate with the Company Entities and provide reasonable assistance to support a transition of the management duties to the Company Entities or the Company’s designee.
(e) If this Agreement is terminated pursuant to this Section 16 or Section 18 of this Agreement, such termination shall be without any further liability or obligation of either party to the other, except that Sections 7 , 9(c) , 10 , 11(b) , 12(c) , 13 , and 19 through 28 will survive any such termination.
 
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Section 17. Assignment . This Agreement shall terminate automatically in the event of its assignment, in whole or in part, by the Manager, unless such assignment is consented to in writing by the Company after the approval of a majority of the Board of Directors, including a majority of the Independent Directors; provided, however, that the Manager may assign this Agreement to an Affiliate of Hunt without the consent of the Company. Any such permitted assignment shall bind the assignee under this Agreement in the same manner as the Manager is bound, and the Manager shall be liable to the Company and the Operating Partnership for all errors or omissions of the assignee under any such assignment. In addition, the assignee shall execute and deliver to the Company and the Operating Partnership a counterpart of this Agreement naming such assignee as Manager. This Agreement shall not be assigned by the Company or the Operating Partnership without the prior written consent of the Manager, except in the case of assignment by the Company or Operating Partnership to another REIT or other organization which is a successor (by merger, consolidation, purchase of assets, or other transaction) to the Company or the Operating Partnership, in which case such successor organization shall be bound under this Agreement and by the terms of such assignment in the same manner as the Company and Operating Partnership are bound under this Agreement.
Section 18. Termination for Cause . Notwithstanding anything to the contrary contained in Section 16 , the Company, with the approval of a majority of the Independent Directors, may terminate this Agreement effective upon 30 days’ prior written notice of termination (or, with respect to clauses (iv) through (vii) below, effective immediately upon written notice of termination) from the Company to the Manager, without payment of any Termination Fee or any accrued and unpaid Base Fee or Incentive Fee, if (i) the Manager materially breaches any provision of this Agreement and, if such breach is capable of being cured, such breach shall continue for a period of 30 days after written notice thereof specifying such breach and requesting that the same be remedied in such 30-day period, (ii) the Manager engages in any act of fraud, misappropriation of funds, or embezzlement against any Company Entity, other than an immaterial misapplication of funds that is promptly corrected, (iii) there is an event of any bad faith, willful misconduct or gross negligence on the part of the Manager in the performance of its duties under this Agreement that results in material harm to any Company Entity, (iv) there is a commencement of any voluntary proceeding relating to the Manager’s Bankruptcy or insolvency or an order for relief in an involuntary Bankruptcy case, (v) there is a dissolution of the Manager, (vi) the Manager is convicted of a felony (including a plea of nolo contendere ) or (vii) there is a Manager Change of Control (provided that, in the case of (vii), any termination under this Section 18 must occur within 90 days after the date the Independent Directors receive written notice from the Manager of such Manager Change of Control, which Manager agrees to provide promptly). For purposes of this Agreement, “ Manager Change of Control ” shall be deemed to have occurred if members of the Hunt Group cease to both (1) own, directly or indirectly, at least 51% of the Equity Interests in Manager or its successor hereunder and (2) Control Manager or its successor hereunder. For purposes of this Agreement: (A) “ Control ” means the possession, directly or indirectly, of the power to direct or cause the direction of the management, policies or activities of a Person, whether through ownership of voting securities, by contract or otherwise; and (B)
 
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“ Hunt Group ” means (a) Ray L. Hunt and Hunter L. Hunt; (b) any lineal descendent of the foregoing (including by adoption); (c) any spouse of the foregoing; (d) any trust established primarily for the benefit of any one or more of the foregoing; and (e) any entity controlled, individually or collectively, by any of the foregoing Persons identified in the preceding clauses (a) through (d) (including Hunt and its Subsidiaries).
Section 19. Action Upon Termination . From and after the effective date of termination of this Agreement, pursuant to Sections 16 or 18 of this Agreement, the Manager shall not be entitled to compensation for further services under this Agreement, but shall be paid (i) if terminated pursuant to Section 16 , all compensation accruing to the date of termination, (ii) if terminated pursuant to Section 16(b) , the applicable Termination Fee, and (iii) as provided in Section 10 and Section 11 .
Section 20. Notices . All notices, offers or other communications required or permitted to be given pursuant to this Agreement shall be in writing and may be personally served, sent via facsimile, sent via electronic mail or sent by United States mail or by commercial courier and shall be deemed to have been given when received at the address set forth below:
If to the Manager:
Hunt Utility Services, LLC
Attn: Hunter L. Hunt, President
1900 North Akard Street
Dallas, TX 75201
Facsimile: 214-978-8989
E-mail: HHunt@huntoil.com
If to the Company:
InfraREIT, Inc.
Attn: Chief Executive Officer
1807 Ross Avenue, 4th Floor
Dallas, TX 75201
E-mail: DCampbell@huntutility.com
With a copy to:
InfraREIT, Inc.
Attn: General Counsel
1807 Ross Avenue, 4th Floor
Dallas, TX 75201
E-Mail: Legal@Huntutility.com
The address of any party hereto may be changed by a notice in writing given in accordance with the provisions of this Section 20 .
 
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Section 21. Binding Nature of Agreement; Third Party Beneficiaries; Successors and Assigns . This Agreement shall be binding upon and inure solely to the benefit of each Party hereto and, with respect to Section 13 of this Agreement, the Indemnitees, and nothing in this Agreement, express or implied, is intended to or shall confer upon any Person other than the Parties and their respective successors and permitted assigns any legal or equitable right, benefit or remedy of any nature whatsoever under or by reason of this Agreement.
Section 22. Complete Agreement; Amendments . This Agreement contains the entire understanding of the parties with respect to the transactions contemplated hereby and supersedes all prior arrangements or understandings with respect thereto. This Agreement shall not be modified or amended except in a writing signed by all Parties. No purported modifications or amendments, including without limitation any oral agreement (even if supported by new consideration), course of conduct or absence of a response to a unilateral communication, shall be binding on any Party.
Section 23. Governing Law . THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF DELAWARE WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES TO THE CONTRARY.
Section 24. Arbitration .
(a) Any dispute under or relating to this Agreement shall, if not resolved by the Parties within 60 days after notice of such dispute is served by one Party to the other (or, if different, the period provided for resolution by the Parties in the provision of this Agreement under which such dispute is brought), be submitted to an “ Arbitration Panel ” comprised of three members. No more than one panel member may be with the same firm (which shall not be deemed to prohibit the panel members from being members of the same organization such as the American Arbitration Association or Judicial Arbitration and Mediations Services), and no panel member may have an economic interest in the outcome of the arbitration.
(b) The Arbitration Panel shall be selected as follows: Within five business days after the expiration of the period referenced above, the Manager shall select a panel member meeting the criteria of the above paragraph (the “ Manager Panel Member ”) and the Company shall select its panel member meeting the criteria of the above paragraph (the “ Company Panel Member ”). If a Party fails to timely select its respective panel member, the other Party may notify such Party in writing of such failure, and if such Party fails to select its respective panel member within three business days from such notice, then the other Party may select such panel member on such Party’s behalf. Within five business days after the selection of the Manager Panel Member and the Company Panel Member, the Manager Panel Member and the Company Panel Member shall jointly select a third panel member meeting the criteria of the above paragraph (the “ Third Panel Member ”). If the Manager Panel Member and the Company Panel Member fail to timely select the Third Panel Member and such failure continues for more than three business days after written notice of such failure is delivered to the Manager Panel Member and Company Panel Member by either the Manager or the Company, either the Manager or the Company may request the managing officer of the American Arbitration Association to appoint the Third Panel Member.
 
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(c) Within ten business days after the selection of the Arbitration Panel, each Party shall submit to the Arbitration Panel a written statement identifying its summary of the issues and claims. Any Party may also request an evidentiary hearing on the merits in addition to the submission of written statements. The Arbitration Panel shall make its decision within 20 days after the later of (i) the submission of such written statements of particulars, and (ii) the conclusion of any evidentiary hearing on the merits, and shall take into consideration the relative risks and rewards undertaken and capital invested by each Party. The Arbitration Panel shall reach its decision by majority vote and shall communicate its decision by written notice to the Parties.
(d) The decision by the Arbitration Panel shall be final, binding and conclusive and shall be non-appealable and enforceable in any court having jurisdiction. All hearings and proceedings held by the Arbitration Panel shall take place in Dallas, Texas.
(e) The resolution procedure described herein shall be governed by the Commercial Rules of the American Arbitration Association and the Procedures for Large, Complex Commercial Disputes in effect as of the date hereof and subject to the Texas General Arbitration Act to the extent such act is applicable hereto.
(f) The Parties shall bear equally the fees, costs and expenses of the Arbitration Panel in conducting the arbitration.
Section 25. No Waiver; Cumulative Remedies . No failure to exercise and no delay in exercising, on the part of any party hereto, any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. No waiver of any provision hereunder shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver.
Section 26. Headings . The headings of the sections of this Agreement have been inserted for convenience of reference only and shall not be deemed part of this Agreement.
Section 27. Cure of Invalid Provisions . If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws, such provision shall be fully severable, and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof, and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance from this Agreement; provided, however, that if such illegal, invalid or unenforceable provision may be made legal, valid and enforceable by limitation thereof, then the provision shall be revised and reformed to make it legal, valid and enforceable to the maximum extent permitted by law. Without limiting the foregoing, if, due to an amendment to any provision of the Code or the Treasury Regulations, the issuance of a
 
25

court opinion in any tax litigation, or the issuance of an IRS revenue ruling or revenue procedure, it is determined by tax counsel for the Company, or if a court of competent jurisdiction determines with respect to the Company, that one or more provisions of this Agreement cause or will cause the Company to fail to meet one or more of the requirements that are required to be met in order for the Company to continue to qualify as a REIT, then the provision or provisions that caused or will cause such failure shall be fully severable, and this Agreement shall be construed and enforced as if such provision or provisions that caused such failure had never comprised a part hereof.
Section 28. Construction of Agreement . As used herein, the singular shall be deemed to include the plural, and the plural shall be deemed to include the singular, and all pronouns shall include the masculine, feminine and neuter, whenever the context and facts require such construction. The headings, captions, titles and subtitles herein are inserted for convenience of reference only and are to be ignored in any construction of the provisions hereof. Except as otherwise indicated herein, all section, schedule and exhibit references in this Agreement shall be deemed to refer to the sections, schedules and exhibits of and to this Agreement, and the terms “herein”, “hereof”, “hereto”, “hereunder” and similar terms refer to this Agreement generally rather than to the particular provision in which such term is used. Whenever the words “including”, “include” or “includes” are used in this Agreement, they shall be interpreted in a non-exclusive manner as though the words “but [is] not limited to” immediately followed the same. Time is of the essence for this Agreement. The language in all parts of this Agreement shall in all cases be construed simply according to the fair meaning thereof and not strictly against the party that drafted such language. Except as otherwise provided herein, references in this Agreement to any agreement, articles, by-laws, instrument or other document are to such agreement, articles, by-laws, instrument or other document as amended, modified or supplemented from time to time.
Section 29. Multiple Counterparts . This Agreement may be executed in multiple counterparts, each of which shall constitute an original hereof and all of which taken together shall constitute one and the same agreement. If any signature is delivered by facsimile transmission or by PDF, such signature shall create a valid and binding obligation of the party executing (or on whose behalf the signature is executed) with the same force and effect as if such facsimile or PDF signature were an original thereof.
* * *
[Signature page follows]
 
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IN WITNESS WHEREOF, the parties have executed this Agreement to be effective as of the Effective Date.

HUNT UTILITY SERVICES, LLC, a Delaware limited liability company	
		
By:	 	 	
	 	Name:	
	 	Title:	
	
INFRAREIT, INC., a Maryland corporation	
		
By:	 	 	
	 	Name:	
	 	Title:	
	
INFRAREIT PARTNERS, LP, a Delaware limited partnership	
	
By: InfraREIT, Inc., its general partner	
		
By:	 	 	
	 	Name:	
	 	Title:	

Exhibit A
(logo)

Exhibit 10.6
DELEGATION AGREEMENT
between
SHARYLAND UTILITIES, L.P.
and
INFRAREIT, INC.

TABLE OF CONTENTS

ARTICLE 1.	  	DEFINITIONS; GENERAL REFERENCES	  	 	1	  	
1.1	  	Definitions	  	 	1	  	
1.2	  	Rules of Construction	  	 	4	  	
1.3	  	Precedence	  	 	4	  	
			
ARTICLE 2.	  	DELEGATION OF POWER	  	 	4	  	
2.1	  	Delegation of Power	  	 	4	  	
2.2	  	Amendments to Delegation	  	 	6	  	
2.3	  	Corporate Affiliates and Contractors	  	 	7	  	
			
ARTICLE 3.	  	SHARYLAND RESERVATION OF POWER AND ADDITIONAL RESPONSIBILITIES	  	 	7	  	
3.1	  	Reservation of Power	  	 	7	  	
3.2	  	No Delegation of Power Prohibited by Applicable Law or Regulatory Authorities	  	 	7	  	
3.3	  	Sharyland’s Responsibilities	  	 	8	  	
			
ARTICLE 4.	  	COMPENSATION	  	 	8	  	
4.1	  	No Internal Expenses	  	 	8	  	
4.2	  	Third Party Expenses	  	 	8	  	
			
ARTICLE 5.	  	INDEMNIFICATION	  	 	8	  	
5.1	  	Indemnification By Delegatee	  	 	8	  	
5.2	  	Indemnification by Sharyland	  	 	8	  	
5.3	  	Limitation of Liability	  	 	9	  	
			
ARTICLE 6.	  	TERM AND TERMINATION	  	 	9	  	
6.1	  	Term	  	 	9	  	
6.2	  	Termination	  	 	9	  	
6.3	  	Rights Upon Termination	  	 	9	  	
			
ARTICLE 7.	  	REPRESENTATIONS AND WARRANTIES	  	 	10	  	
7.1	  	Representations and Warranties by Both Parties	  	 	10	  	
			
ARTICLE 8.	  	DISPUTE RESOLUTION	  	 	10	  	
8.1	  	Arbitration	  	 	10	  	
8.2	  	Continued Performance	  	 	11	  	
			
ARTICLE 9.	  	MISCELLANEOUS	  	 	12	  	
9.1	  	Confidentiality and Non-Disclosure	  	 	12	  	
9.2	  	Assignment	  	 	13	  	
9.3	  	Not for Benefit of Third Parties	  	 	13	  	
9.4	  	Amendments	  	 	13	  	
9.5	  	Survival	  	 	13	  	
9.6	  	No Waiver	  	 	13	  	
9.7	  	Notices	  	 	13	  	
 
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9.8	  	Counterparts	  	 	14	  	
9.9	  	Governing Law	  	 	14	  	
9.10	  	Captions	  	 	14	  	
9.11	  	Severability	  	 	14	  	
9.12	  	Entire Agreement	  	 	14	  	
9.13	  	Further Assurances	  	 	15	  	
 
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DELEGATION AGREEMENT
This DELEGATION AGREEMENT (this “ Agreement ”), entered into on             , 2015 to be effective as of the Effective Date (as hereinafter defined), is by and between Sharyland Utilities, L.P., a Texas limited partnership (“ Sharyland ”), and InfraREIT, Inc., a Maryland corporation (“ Delegatee ”). Each of Sharyland and Delegatee may be referred to herein as a “ Party ” and together as the “ Parties .”
RECITALS
WHEREAS, Sharyland and Transmission and Distribution Company, L.L.C., a Texas limited liability company (the “ TDC Member ”, together with Sharyland, the “ Members ”) formed Sharyland Transmission Services, L.P. as a Texas limited partnership (the “ Company ”) and entered into an Agreement of Limited Partnership as of June 28, 2006 and subsequently changed the name of the Company to “Sharyland Distribution & Transmission Services, L.P.”;
WHEREAS, the Members converted the Company from a Texas limited partnership to a Texas limited liability company as provided for under the Act and the Company became “Sharyland Distribution & Transmission Services, L.L.C.”;
WHEREAS, Sharyland is the managing member of the Company and has the power and authority on behalf of the Company to manage, control, administer and operate the properties, business and affairs of the Company subject to, and in accordance with, the Third Amended and Restated Company Agreement of the Company, effective as of the Effective Date (as amended from time to time, the “ Company Agreement ”);
WHEREAS, pursuant to Section 5.1(a) of the Company Agreement, Sharyland has the right to delegate such power and authority to a third party;
WHEREAS, consistent with the power and authority granted to Sharyland under the Company Agreement, Sharyland desires to enter into this Agreement with Delegatee pursuant to which Sharyland will delegate certain of its power and authority to perform duties in connection with the management of the business and affairs of the Company; and
WHEREAS, notwithstanding anything to the contrary herein, Sharyland shall reserve for itself and shall not delegate any power or authority (i) to operate any of the T&D Assets; (ii) to cause the Company to fund necessary Footprint Projects (as defined in the Company Agreement) in order to maintain the safety or reliability of the T&D Assets; or (iii) to take certain other actions as more fully described herein.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and other valuable consideration, the Parties hereby agree as follows:
ARTICLE 1. DEFINITIONS; GENERAL REFERENCES
1.1 Definitions . For all purposes of this Agreement (including the preceding recitals) unless otherwise required by the context in which any defined term appears, capitalized terms have the meanings specified in this Article 1 .
 
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“ Act ” shall mean the Texas Limited Liability Company Law as set forth in the Texas Business Organizations Code, as the same may be amended from time to time.
“ Affiliate ” means, with respect to any Person, any other Person that, directly or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such first Person. The term “ control ” (including correlative terms such as “ controlled by ” and “ under common control with ”) means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise; provided , however , that the Affiliates of Delegatee shall not include Sharyland, Sharyland’s subsidiaries and parent companies with ownership interests in Sharyland, and the Affiliates of Sharyland shall not include Delegatee or Delegatee’s subsidiaries.
“ Agreement ” has the meaning set forth in the preamble.
“ Annual Business Plan ” has the meaning ascribed to such term in the Company Agreement.
“ Applicable Law ” means any and all laws, ordinances, statutes, orders and regulations of any Governmental Authorities, including any securities exchange listing requirements.
“ Approved Annual Business Plan ” has the meaning ascribed to such term in the Company Agreement.
“ Approved Capital Expenditure Budget ” means a Capital Expenditure Budget that has been submitted by Sharyland and Approved (as defined in the Company Agreement) by the Delegatee in accordance with Section 8.1 of the Company Agreement.
“ Arbitration Panel ” has the meaning set forth in Section 8.1(a) .
“ Bankruptcy ” means a situation in which a Person (i) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes corporate action for the purpose of any of the foregoing.
“ Capital Expenditure Budget ” shall mean the rolling three-year capital expenditure budget that Sharyland provides to the Delegatee, the provisions of which are reflected in the Company Agreement.
“ Company ” has the meaning set forth in the recitals.
“ Company Agreement ” has the meaning set forth in the recitals.
 
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“ Confidential Information ” has the meaning set forth in Section 9.1(a) .
“ Delegatee ” has the meaning set forth in the preamble and shall be deemed to include any successor by operation of law or any permitted assign pursuant to Section 9.2 .
“ Delegatee Indemnitees ” has the meaning set forth in Section 5.2 .
“ Delegatee Panel Member ” has the meaning set forth in Section 8.1(b) .
“ Effective Date ” means the date on which the initial public offering of the Delegatee is consummated.
“ ERCOT ” means the Electric Reliability Council of Texas.
“ Footprint Project(s) ” has the meaning set forth in the recitals.
“ Good Utility Practice ” shall be as defined from time to time by the PUCT and, as of the date hereof, means any of the practices, methods, and acts engaged in or approved by a significant portion of the electric utility industry during the relevant time period, or any of the practices, methods, and acts that, in the exercise of reasonable judgment in light of the facts known at the time the decision was made, could have been expected to accomplish the desired result at a reasonable cost consistent with good business practices, reliability, safety, and expedition. Good Utility Practice is not intended to be limited to the optimum practice, method, or act, to the exclusion of all others, but rather is intended to include acceptable practices, methods, and acts generally accepted in the region.
“ Governmental Authority ” means any federal, state, or local government, regulatory or administrative authority, any agency or commission thereof, or any court or tribunal and any self-regulatory organization, including, but not limited to, a national securities exchange registered with the Securities and Exchange Commission.
“ Liabilities ” has the meaning set forth in Section 5.1 .
“ Members ” has the meaning set forth in the recitals.
“ New Project ” has the meaning ascribed to such term in the Company Agreement.
“ Non-Breaching Party ” has the meaning set forth in Section 9.1(b) .
“ Party ” or “ Parties ” has the meaning set forth in the preamble.
“ Person ” means any Party, individual, partnership, corporation, association, limited liability company, business trust, government or political subdivision thereof, governmental agency or other entity.
“ PUCT ” means the Public Utility Commission of Texas.
“ PURA ” means the Public Utility Regulatory Act, as amended.
 
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“ Regulatory Authority(ies) ” means the PUCT, ERCOT, the Texas Regional Entity, FERC and any similar Governmental Authority having jurisdiction over the T&D Assets.
“ Sharyland ” has the meaning set forth in the preamble.
“ Sharyland Indemnitees ” has the meaning set forth in Section 5.1 .
“ Sharyland Panel Member ” has the meaning set forth in Section 8.1(b) .
“ T&D Assets ” shall mean all electric transmission and/or distribution assets that are owned by the Company at the time of reference.
“ TDC Member ” has the meaning set forth in the recitals.
“ Term ” has the meaning set forth in Section 6.1 .
“ Third Panel Member ” has the meaning set forth in Section 8.1(b) .
1.2 Rules of Construction . As used in this Agreement, the terms “herein” and “hereof” are references to this Agreement, taken as a whole; the term “includes” or “including” shall mean “including, without limitation”; and references to a “Section” or “Article” shall mean a Section or Article of this Agreement, as the case may be, unless in any such case the context requires otherwise. All references to a given agreement, instrument or other document shall be a reference to that agreement, instrument or other document as modified, amended, supplemented and restated through the date as of which such reference is made, and reference to a law includes any amendment or modification thereof. The singular shall include the plural, as the context requires, and the masculine shall include the feminine and neuter, and vice versa.
1.3 Precedence . In the event of a conflict or discrepancy between this Agreement and the Company Agreement, the interpretation of this Agreement or any amendment thereof shall have precedence over the provisions of the Company Agreement or any amendment thereof.
ARTICLE 2. DELEGATION OF POWER
2.1 Delegation of Power . During the Term, Sharyland irrevocably delegates to Delegatee, to the fullest extent permitted under the Company Agreement and Applicable Law, the power and authority to perform the duties of managing the business and affairs of the Company that are set below:
(a) sourcing, evaluating and obtaining on the Company’s or any of its subsidiaries’ behalf any loan, indebtedness or other financing arrangements necessary or appropriate in connection with the Company’s or such subsidiary’s business;
(b) causing the Company or any subsidiary thereof to negotiate and enter into any such loan, indebtedness or other financing arrangements, and any amendments thereto, and causing the Company to enter into and perform any obligations under any related financing documents;
 
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(c) causing the Company or any subsidiary thereof to provide any contractual or other support for any loan, indebtedness or equity financing arrangements obtained by the TDC Member or Affiliate thereof;
(d) causing the Company or any subsidiary thereof to provide any necessary information or support related to communications, compliance or other matters related to equity capital that the TDC Member or any Affiliate thereof has raised;
(e) conducting the business of the Company or any subsidiary thereof (or any of their respective joint ventures or co-investments) under its name or such other names as may be determined as necessary by Delegatee;
(f) causing the Company and its subsidiaries to comply with all Applicable Laws of any Governmental Authorities (other than the Applicable Laws (x) of any Regulatory Authorities and (y) related to the operation of the T&D Assets);
(g) causing the Company or any subsidiary thereof to negotiate and enter into contracts (including any leases), to incur and be bound by any related obligations thereto, and to enforce any rights therein, including, but not limited to, determining any breach of contract and seeking and enforcing any remedies available under contract, law or equity;
(h) participating with Sharyland in the preparation of the Capital Expenditure Budget and any amendments thereto;
(i) preparing the portions of the Annual Business Plan that relate to matters other than capital expenditures;
(j) monitoring the insurance required under any lease of the T&D Assets and enforcing the Company’s and any subsidiary’s rights under the applicable insurance policies; provided that , Sharyland shall determine from time to time the amount of insurance coverage with respect to the operations and Footprint Projects and other assets of the Company as reasonably required for ownership and prudent operation of the T&D Assets;
(k) causing the Company or any subsidiary thereof to negotiate and enter into any renewals or supplements of any leases with Sharyland, any Affiliate thereof or any other third party;
(l) keeping the books of accounts and other financial and corporate records of the Company and any subsidiary thereof; provided that , Sharyland shall continue to maintain, or cause to be maintained, all logs, drawings, manuals, specifications and data and inspection, modification and maintenance records and other materials required to be maintained in respect of the T&D Assets required by Applicable Laws or consistent with Good Utility Practices;
(m) preparing and distributing any periodic financial reports and annual audits of the Company and any subsidiary thereof and coordinating with Sharyland in preparing those reports;
 
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(n) preparing, documenting and updating any accounting or other internal controls of the Company and any subsidiary thereof, including internal controls over financial reporting;
(o) assisting any Affiliate of the Company in satisfying reporting and compliance obligations under applicable securities laws or the rules of any exchange on which the securities of such Affiliate may trade;
(p) opening and managing bank accounts and Treasury/cash management activities on behalf of the Company or any subsidiary thereof;
(q) managing all tax matters and administration thereof on behalf of the Company and any subsidiary thereof;
(r) planning, sourcing and managing all capital needs of the Company and any subsidiary thereof, including but not limited to, forecasting the needs for capital (subject to Sharyland’s participation), determining uses for capital, and raising capital;
(s) managing all investor communications and relations and preparing the annual reports of the Company or any subsidiary thereof;
(t) causing the Company or a subsidiary thereof to acquire or dispose of transmission, distribution or other assets and negotiating and causing the Company or any such subsidiary to perform its obligations under any related acquisition or disposition agreements; provided that , the delegation of Sharyland’s power to Delegatee will not affect Sharyland’s authority to cause the Company to take such actions, subject to the negative control rights of the TDC Member in the Company Agreement;
(u) causing the Company or a subsidiary thereof to negotiate, enter into and perform its obligations under contracts for the construction of transmission and distribution projects and related engineering, procurement and construction (EPC) or other contracts;
(v) electing, removing and replacing officers and managing the corporate minute books of the Company and any subsidiary thereof; provided that , in all circumstances at least one designated employee of Sharyland will remain as a senior vice president or other officer of the Company;
(w) directing Sharyland to file a rate case proceeding with the PUCT with respect to the T&D Assets pursuant to the leases between the Company or any subsidiary thereof and Sharyland or any subsidiary thereof; and
(x) any other responsibilities, rights or duties to manage the affairs of the Company other than those reserved for Sharyland as set forth below.
2.2 Amendments to Delegation . If the power and/or authority of Sharyland as the managing member of the Company are modified pursuant to a subsequent amendment and/or restatement to the Company Agreement, changes in Applicable Law or otherwise, then the power and authority delegated to the Delegatee shall be modified on the same basis.
 
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2.3 Corporate Affiliates and Contractors . Delegatee shall be authorized to utilize the services of its Affiliates or third-party contractors, in each case, that are necessary or appropriate for the exercise of the powers and authorities delegated to it hereunder.
ARTICLE 3. SHARYLAND RESERVATION OF POWER AND ADDITIONAL RESPONSIBILITIES .
3.1 Reservation of Power . Notwithstanding anything to the contrary herein, subject to any limitation set forth in the Company Agreement, Sharyland expressly reserves the following powers, rights and responsibilities:
(a) operational control over the T&D Assets, including but not limited to, maintenance, planning Footprint Projects, 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 T&D Assets;
(b) compliance with all Applicable Laws (x) of any Regulatory Authorities and (y) related to the operation of the T&D Assets and managing all regulatory matters and relationships with any such Regulatory Authorities;
(c) rights under Section 3.2(d) of the Company Agreement to either contribute capital to fund certain Footprint Projects or to seek and obtain reasonable alternative capital sources for such Footprint Projects in accordance with the terms of Section 3.2(d) of the Company Agreement;
(d) rights under Section 5.2(b) of the Company Agreement to take certain actions on behalf of the Company in its reasonable judgment in accordance with Section 5.2(b) of the Company Agreement, notwithstanding the approval rights of the TDC Member;
(e) participation and coordination with Delegatee in forecasting the capital needs of the Company and preparing the Capital Expenditure Budget and any amendments thereto;
(f) rights (i) to propose amendments to an Approved Capital Expenditure Budget or Approved Annual Business Plan or (ii) to exceed an Approved Capital Expenditure Budget or Approved Annual Business Plan in certain circumstances in accordance with the Company Agreement; and
(g) all other rights under the Company Agreement requiring the express consent or approval of Sharyland.
3.2 No Delegation of Power Prohibited by Applicable Law or Regulatory Authorities . Sharyland does not delegate any power, authority or right that would in any manner be contrary or inconsistent with any order or rule of the PUCT or PURA. To the extent that any inconsistency exists, it shall be deemed that Sharyland has not delegated any such power, authority or right to Delegatee.
 
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3.3 Sharyland’s Responsibilities . Sharyland shall render to Delegatee all reasonably necessary assistance and cooperate with Delegatee for Delegatee to exercise the power and authority delegated to it under this Agreement, including providing reasonable access to premises and information, if any, under the control of Sharyland or any of its Affiliates and not in the possession of Delegatee. All such items shall be made available at such times and in such manner as may be reasonably required by Delegatee.
ARTICLE 4. COMPENSATION
4.1 No Internal Expenses . The Parties acknowledge that other valuable consideration has been provided to each other to induce the Parties to enter into this Agreement. Neither Delegatee nor any of its Affiliates shall be entitled to compensation or reimbursement from Sharyland with respect to any internal general or administration costs or expenses in connection with this Agreement.
4.2 Third Party Expenses . Pursuant to Section 5.3 of the Company Agreement, Delegatee shall be reimbursed promptly by the Company for any third-party, out-of-pocket administrative costs and expenses reasonably incurred by it in connection with this Agreement. Delegatee shall directly seek reimbursement for any such cost from the Company.
ARTICLE 5. INDEMNIFICATION
5.1 Indemnification By Delegatee . SUBJECT TO THE LIMITATIONS OF LIABILITY IN SECTION 5.3 , DELEGATEE SHALL INDEMNIFY AND HOLD HARMLESS SHARYLAND AND ITS AFFILIATES, AND THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS AND REPRESENTATIVES (THE “ SHARYLAND INDEMNITEES ”) FROM AND AGAINST, AND NO SHARYLAND INDEMNITEE WILL BE RESPONSIBLE HEREUNDER FOR, ANY AND ALL CLAIMS, ASSERTIONS, DEMANDS, SUITS, DAMAGES, JUDGMENTS, LOSSES, OBLIGATIONS, LIABILITIES, ACTIONS AND CAUSES OF ACTION, FEES (INCLUDING REASONABLE ATTORNEY’S FEES AND DISBURSEMENTS), COSTS (INCLUDING COURT COSTS), EXPENSES, INVESTIGATIONS, INQUIRIES, ADMINISTRATIVE PROCEEDINGS, PENALTIES, FINES AND SANCTIONS (COLLECTIVELY, “ LIABILITIES ”) SUSTAINED OR SUFFERED BY ANY SHARYLAND INDEMNITEE IN CONNECTION WITH INJURY OR DEATH TO THIRD PARTIES OR LOSS OF OR DAMAGE TO THE PROPERTY OF THIRD PARTIES, TO THE EXTENT ARISING OUT OF OR RELATED TO THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF DELEGATEE OR ITS EMPLOYEES, AGENTS, OFFICERS OR DIRECTORS.
5.2 Indemnification by Sharyland . SUBJECT TO THE LIMITATIONS OF LIABILITY IN SECTION 5.3 , SHARYLAND SHALL INDEMNIFY AND HOLD HARMLESS DELEGATEE AND ITS AFFILIATES, AND THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS AND REPRESENTATIVES (THE “ DELEGATEE INDEMNITEES ”), FROM AND AGAINST, AND NO DELEGATEE INDEMNITEE WILL BE RESPONSIBLE HEREUNDER FOR, ANY AND ALL LIABILITIES SUSTAINED OR SUFFERED BY ANY DELEGATEE INDEMNITEE IN CONNECTION WITH INJURY OR DEATH TO THIRD PARTIES OR LOSS OF OR DAMAGE TO PROPERTY OF THIRD PARTIES, TO THE EXTENT ARISING OUT OF OR RELATED TO THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SHARYLAND OR ITS EMPLOYEES, AGENTS, OFFICERS OR DIRECTORS.
 
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5.3 Limitation of Liability . NOTWITHSTANDING ANY PROVISION IN THIS AGREEMENT TO THE CONTRARY, NEITHER PARTY SHALL BE LIABLE HEREUNDER FOR ANY CONSEQUENTIAL, INCIDENTAL, SPECIAL OR INDIRECT LOSS OR DAMAGE WHATSOEVER NO MATTER HOW CLAIMED, CALCULATED OR CHARACTERIZED, WHETHER IN CONTRACT, TORT (INCLUDING, WITHOUT LIMITATION, STRICT LIABILITY AND NEGLIGENCE OF ANY KIND) OR OTHERWISE.
ARTICLE 6. TERM AND TERMINATION
6.1 Term . This Agreement shall become effective on the Effective Date and shall continue until the earlier of (a) the expiration or termination of the Company Agreement or (b) such time as Sharyland is no longer the managing member of the Company, unless earlier terminated in accordance with this Agreement (the “Term” ).
6.2 Termination .
(a) Termination by Sharyland . Sharyland is permitted to terminate this Agreement if any of the following events occur: (a) the Bankruptcy of Delegatee or (b) a material default by Delegatee in performance of its obligations under this Agreement after written notice of such default by Sharyland; provided , however , that Delegatee shall have up to sixty (60) days after Delegatee has received written notice of such default to cure the default or make substantial progress (in the reasonable opinion of Sharyland) towards curing the default.
(b) Termination by Delegatee . Delegatee is permitted to terminate this Agreement if any of the following events occur: (a) the Bankruptcy of Sharyland, (b) a material default by Sharyland of any other obligation under this Agreement after written notice by Delegatee; provided , however , that Sharyland shall have up to sixty (60) days after Sharyland has received written notice of such default to cure the default or make substantial progress (in the reasonable opinion of Delegatee) towards curing the default, or (c) Sharyland is no longer a member of the Company.
6.3 Rights Upon Termination . Upon any expiration or termination of this Agreement, Delegatee shall as soon as practicable deliver to Sharyland at Sharyland’s principal place of business all records, documents, accounts, files and other materials of the Company or pertaining to the Company’s business as Sharyland may reasonably request. Expiration or termination of this Agreement shall not relieve any Party hereto of liability which has accrued or arisen prior to the date of such expiration or termination.
 
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ARTICLE 7. REPRESENTATIONS AND WARRANTIES
7.1 Representations and Warranties by Both Parties . Each Party represents and warrants to the other Party that, as of the Effective Date:
(a) Existence . It is duly organized and validly existing under the laws of the state of its organization and has all requisite power and authority to own its property and assets and conduct its business as presently conducted or proposed to be conducted under this Agreement.
(b) Authority . It has the power and authority to execute and deliver this Agreement, to consummate the transactions contemplated hereby and to perform its obligations hereunder.
(c) Validity . It has taken all necessary action to authorize its execution, delivery and performance of this Agreement, and this Agreement constitutes the valid, legal and binding obligation of such Party enforceable against it in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency, moratorium or similar laws affecting the rights of creditors or by general equitable principles (whether considered in a proceeding in equity or at law).
(d) No Conflict . None of the execution or delivery of this Agreement, the performance by such Party of its obligations in connection with the transactions contemplated hereby, or the fulfillment of the terms and conditions hereof, materially conflicts with or violates any provision of its constituting documents or the other agreements to which it is a party.
(e) No Consent . No consent or approval (including any Permit that such warranting Party is required to obtain) is required from any third party (including any Governmental Authority) for either the valid execution and delivery of this Agreement, or the performance by such Party of its obligations under this Agreement, except such as have been duly obtained or will be obtained in the ordinary course of business.
(f) No Breach . None of the execution or delivery of this Agreement, the performance by such Party of its obligations in connection with the transactions contemplated hereby, or the fulfillment of the terms and conditions hereof either conflicts with, violates or results in a breach of, any Applicable Law currently in effect, or conflicts with, violates or results in a breach of, or constitutes a default under or results in the imposition or creation of, any lien or encumbrance under any agreement or instrument to which it is a party or by which it or any of its properties or assets are bound.
(g) No Material Claims . No claim, allegation, suit, action, demand, cause of action, or legal, administrative, arbitral or other proceeding, investigation or controversy is pending or threatened against it that would adversely affect such Party’s ability to perform its material obligations under this Agreement.
ARTICLE 8. DISPUTE RESOLUTION
8.1 Arbitration .
(a) Any dispute under this Agreement shall, if not resolved by the Parties within sixty (60) days after notice of such dispute is served by one Party to the other (or, if different, the period provided for resolution by the Parties in the provision of this Agreement under which such dispute is brought), be submitted to an “ Arbitration Panel ” comprised of three members. No more than one panel member may be with the same firm, and no panel member may have an economic interest in the outcome of the arbitration.
 
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(b) The Arbitration Panel shall be selected as follows: Within five business days after the expiration of the period referenced above, Sharyland shall select a panel member meeting the criteria of the above paragraph (the “ Sharyland Panel Member ”) and Delegatee shall select its panel member meeting the criteria of the above paragraph (the “ Delegatee Panel Member ”). If a Party fails to timely select its respective panel member, the other Party may notify such Party in writing of such failure, and if such Party fails to select its respective panel member within three business days from such notice, then the other Party may select such panel member on such Party’s behalf. Within five business days after the selection of the Sharyland Panel Member and the Delegatee Panel Member, the Sharyland Panel Member and the Delegatee Panel Member shall jointly select a third panel member meeting the criteria of the above paragraph (the “ Third Panel Member ”). If the Sharyland Panel Member and the Delegatee Panel Member fail to timely select the Third Panel Member and such failure continues for more than three business days after written notice of such failure is delivered to the Sharyland Panel Member and Delegatee Panel Member by either Sharyland or Delegatee, either Sharyland or Delegatee may request the managing officer of the American Arbitration Association to appoint the Third Panel Member.
(c) Within ten business days after the selection of the Arbitration Panel, each Party shall submit to the Arbitration Panel a written statement identifying its summary of the issues and claims. Any Party may also request an evidentiary hearing on the merits in addition to the submission of written statements. The Arbitration Panel shall make its decision within twenty (20) days after the later of (i) the submission of such written statements of particulars, and (ii) the conclusion of any evidentiary hearing on the merits, and shall take into consideration the relative risks and rewards undertaken and capital invested by each Party. The Arbitration Panel shall reach its decision by majority vote and shall communicate its decision by written notice to the Parties.
(d) The decision by the Arbitration Panel shall be final, binding and conclusive and shall be non-appealable and enforceable in any court having jurisdiction. All hearings and proceedings held by the Arbitration Panel shall take place in Dallas, Texas.
(e) The resolution procedure described herein shall be governed by the Commercial Rules of the American Arbitration Association and subject to the Texas General Arbitration Act to the extent such act is applicable hereto.
(f) The Parties shall bear equally the fees, costs and expenses of the Arbitration Panel in conducting the arbitration.
8.2 Continued Performance . Pending the resolution of a Dispute in accordance with this Article 8 , the Parties may continue to exercise their rights and must continue to perform their obligations under this Agreement to the extent that those rights and obligations are not the subject of the Dispute.
 
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ARTICLE 9. MISCELLANEOUS
9.1 Confidentiality and Non-Disclosure .
(a) The Parties each acknowledge and agree that, in connection with this Agreement, a Party and its employees or agents may, directly or indirectly, receive or be provided with certain information relating to the business and operations of the other Party and the other Party’s Affiliates, including information relating to the technology, clients, customers, suppliers, vendors, employees, consultants, projects, financial information and status, methodologies, know-how, processes, practices, approaches, projections, forecasts, formats, systems, data gathering methods and/or strategies, assets, collateral and reports of the other Party and the other Party’s Affiliates (“ Confidential Information ”). Each Party acknowledges that the other Party considers all such information valuable, confidential and proprietary. Therefore, each Party expressly agrees that, except as otherwise required by applicable law, court or governmental order:
(i) Such Party, and its employees and agents, will not, without the other Party’s express, written permission, use or disclose any Confidential Information of the other Party or its Affiliates other than for the purpose of performing its duties and obligations under this Agreement, and any use or disclosure of Confidential Information shall be limited to the specific purposes for which the permission was given or for which the use or disclosure is necessary to perform duties and obligations under this Agreement;
(ii) Such Party will take all steps reasonably necessary to protect the Confidential Information of the other Party and its Affiliates, including, at a minimum, any such steps that the Party would take to protect its own Confidential Information; provided , however , that in no event will the Party exercise less than reasonable care to protect the Confidential Information;
(iii) Such Party agrees to advise the other Party in writing of any misappropriation or misuse by any person of such Confidential Information of which such Party may become aware; and
(iv) Such Party agrees to return the Confidential Information of the other Party and its Affiliates to the other Party at the earlier of the other Party’s request for return of the Confidential Information or the termination of this Agreement. At the option of the other Party, such Party may instead destroy the Confidential Information, with such Party providing written certification of such destruction. Such Party will not be obligated to return any of its own internally prepared documents, notes, copies or other associated materials containing any Confidential Information. However, such Party must, at the other Party’s request, collect and destroy such internally prepared documents, with such Party providing written certification of such destruction.
 
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(b) Each Party expressly acknowledges and agrees that the remedy of the other Party (the “ Non-Breaching Party ”) at law for a breach or threatened breach of any of the provisions of this Section 9.1 by such Party would be inadequate. In recognition of that fact, in the event of a breach or threatened breach by a Party of the provisions of this Section, it is agreed that, in addition to its remedy at law and without posting any bond, the Non-Breaching Party shall be entitled to equitable relief in the form of a temporary restraining order, temporary or permanent injunction or other equitable available relief. If the Non-Breaching Party establishes that a breach or a threatened breach of any provisions of this Section 9.1 has occurred by the other Party, the other Party agrees not to oppose the Non-Breaching Party’s request for equitable relief in the form of a temporary restraining order or a temporary injunction. Nothing herein contained shall be construed as prohibiting the Non-Breaching Party from pursuing any other remedies available to it for such breach or threatened breach.
9.2 Assignment . This Agreement is not assignable by any Party without the prior written consent of the other Party, which consent will not be unreasonably withheld, and may be freely assignable by either Party to such Party’s Affiliates. This Agreement will be binding upon and will inure to the benefit of the successors and permitted assigns of the Parties.
9.3 Not for Benefit of Third Parties . This Agreement and each and every provision hereof are for the exclusive benefit of the Parties that executed this Agreement and not for the benefit of any third party.
9.4 Amendments . No amendments or modifications of this Agreement are valid unless evidenced in writing and signed by duly authorized representatives of the Parties.
9.5 Survival . Notwithstanding any provisions herein to the contrary, the obligations set forth in Articles 5 and 8 , this Section 9.5 , Sections 9.1 , 9.4 , 9.6 , 9.7 , 9.9 , 9.10 , 9.11 , 9.12 and 9.13 , and the limitations on liabilities set forth in Article 5 , will survive, in full force and effect, the expiration or termination of this Agreement.
9.6 No Waiver . A waiver of a provision or of a right arising under this Agreement may only be given in writing by the Party granting the waiver. A waiver is effective only in the specific instance and for the specific purpose for which it is given. A single or partial exercise of a right by a Party does not preclude another or further exercise or attempted exercise of that right or the exercise of another right. Failure by a Party to exercise or delay in exercising a right does not prevent its exercise or operate as a waiver.
9.7 Notices . Any written notice required or permitted under this Agreement will be deemed to have been duly given on the date of receipt, and will be either delivered personally to the Party to whom notice is given, or mailed to the Party to whom notice is to be given, by facsimile, courier service or first class registered or certified mail, return receipt requested, postage prepaid, and addressed to the addressee at the address set forth below, or at the most recent address specified by written notice given to the other Parties in the manner provided in this Section 9.7 .

If to Sharyland:	  	Sharyland Utilities, L.P.
1807 Ross Avenue
Dallas, TX 75201
Attention: President	
 
13

			
		
with copy to:	  	 
Sharyland Utilities, L.P.
1807 Ross Avenue
Dallas, TX 75201
Attention: General Counsel	
		
If to Delegatee:	  	 
InfraREIT, Inc.
1807 Ross Avenue, 4 th Floor
Dallas, TX 75201
Attention: President	
		
with copy to:	  	 
InfraREIT, Inc.
1807 Ross Avenue, 4 th Floor
Dallas, TX 75201
Attention: General Counsel	
9.8 Counterparts . This Agreement may be signed in counterparts and all counterparts taken together constitute one document. Once all counterparts have been executed, each counterpart is an effective instrument.
9.9 Governing Law . This Agreement is governed by and to be construed in accordance with the laws of the State of Texas without regard to its conflicts of law principles.
9.10 Captions . Titles or captions contained in this Agreement are inserted only as a matter of convenience and for reference, and in no way define, limit, extend, describe or otherwise affect the scope or meaning of this Agreement or the intent of any provision hereof.
9.11 Severability . If any provision of this Agreement, or the application of any such provision to any Person or circumstance, is held invalid by any court or other forum of competent jurisdiction, the remainder of this Agreement, or the application of such provision to Persons or circumstances other than those as to which it is held invalid, will nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any Party. Upon any such determination of invalidity, the Parties will negotiate in good faith to modify this Agreement so as to affect the original intent of the Parties as closely as possible in an acceptable manner in order that this Agreement is consummated as originally contemplated to the greatest extent possible.
9.12 Entire Agreement . This Agreement and any other documents referred to in this Agreement or executed in connection with this Agreement comprise the entire agreement of the parties about the subject matter of this Agreement and supersede any prior representations, negotiations, arrangements, understandings or agreements and all other communications.
 
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9.13 Further Assurances . Each Party must, at its own expense, whenever requested by another Party, promptly do or cause to be done everything reasonably necessary to give full effect to this Agreement and the delegation and other transactions contemplated by this Agreement.
[Remainder of Page Intentionally Left Blank.]
 
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IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly executed by their officers as of the day and year first above written.

SHARYLAND:	 		 	SHARYLAND UTILITIES, L.P.	
					
	 		 		 	By:	 	 	
	 		 		 	Name:	 	 	
	 		 		 	Title:	 	 	

DELEGATEE:	 		 	INFRAREIT, INC.	
					
	 		 		 	By:	 	 	
	 		 		 	Name:	 	 	
	 		 		 	Title:	 	 	
Signature Page to Delegation Agreement

Exhibit 10.7
Execution Version
THIRD AMENDED AND RESTATED
MASTER SYSTEM LEASE AGREEMENT
(M C ALLEN SYSTEM)
between
SHARYLAND DISTRIBUTION & TRANSMISSION SERVICES, L.L.C.
and
SHARYLAND UTILITIES, L.P.
as of December 1, 2014
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TABLE OF CONTENTS

 	  	 	  	Page	 	
		
ARTICLE I LEASE	  	 	1	  	
			
1.1.	  	Lease of System	  	 	1	  	
1.2.	  	Exclusive Rights	  	 	2	  	
1.3.	  	Absolute Net Lease	  	 	3	  	
1.4.	  	Waiver by Lessee	  	 	3	  	
1.5.	  	Quiet Enjoyment	  	 	3	  	
		
ARTICLE II TERM OF LEASE	  	 	3	  	
			
2.1.	  	Term	  	 	3	  	
2.2.	  	Approvals upon Expiration or Termination	  	 	3	  	
2.3.	  	Purchase Option upon Expiration or Termination	  	 	4	  	
		
ARTICLE III RENT	  	 	4	  	
			
3.1.	  	Rent	  	 	4	  	
3.2.	  	Rent Supplements	  	 	8	  	
3.3.	  	Confirmation of Percentage Rent	  	 	10	  	
3.4.	  	Additional Rent	  	 	11	  	
3.5.	  	No Set Off	  	 	11	  	
3.6.	  	Late Payment Penalty	  	 	12	  	
3.7.	  	Credit Support	  	 	12	  	
3.8.	  	Other Revenue	  	 	12	  	
		
ARTICLE IV LESSEE’S REPRESENTATIONS, WARRANTIES AND COVENANTS	  	 	12	  	
			
4.1.	  	Maintenance, Operation and Repair of the System	  	 	12	  	
4.2.	  	Licenses and Permits	  	 	13	  	
4.3.	  	Property Taxes, and other Assessments and Fees	  	 	13	  	
4.4.	  	Requirements of Governmental Agencies and Regulatory Authorities	  	 	14	  	
4.5.	  	Liens	  	 	14	  	
4.6.	  	Hazardous Materials	  	 	14	  	
4.7.	  	Indebtedness	  	 	15	  	
4.8.	  	Records	  	 	15	  	
4.9.	  	Surrender	  	 	15	  	
4.10.	  	Cooperation; Transition Services	  	 	16	  	
4.11.	  	Lessee’s Authority	  	 	16	  	
4.12.	  	Litigation	  	 	16	  	
4.13.	  	Financing	  	 	16	  	
 
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TABLE OF CONTENTS

 	  	 	  	Page	 	
		
ARTICLE V LESSOR’S REPRESENTATIONS, WARRANTIES AND COVENANTS	  	 	18	  	
			
5.1.	  	Lessor’s Authority	  	 	18	  	
5.2.	  	Liens and Tenants	  	 	18	  	
5.3.	  	Condition of Assets	  	 	18	  	
5.4.	  	Requirements of Governmental Agencies	  	 	18	  	
5.5.	  	Hazardous Materials	  	 	19	  	
5.6.	  	Litigation	  	 	19	  	
5.7.	  	Limitation	  	 	19	  	
		
ARTICLE VI LOSS AND DAMAGE; INSURANCE	  	 	19	  	
			
6.1.	  	Loss and Damage to the System	  	 	19	  	
6.2.	  	Insurance	  	 	20	  	
		
ARTICLE VII REPORTING	  	 	21	  	
			
7.1.	  	Private Financing Arrangements	  	 	21	  	
7.2.	  	Public Company and Regulatory Information and Cooperation	  	 	22	  	
7.3.	  	Mutual Obligations	  	 	23	  	
		
ARTICLE VIII ASSIGNMENT	  	 	23	  	
		
ARTICLE IX DEFAULT	  	 	24	  	
			
9.1.	  	Lessee Default	  	 	24	  	
9.2.	  	Lessor Default	  	 	25	  	
9.3.	  	Right to Cure	  	 	25	  	
9.4.	  	Remedies	  	 	25	  	
		
ARTICLE X CAPITAL EXPENDITURES	  	 	25	  	
			
10.1.	  	Capital Expenditures Generally	  	 	25	  	
10.2.	  	Capital Expenditures Funded by Lessor	  	 	26	  	
10.3.	  	Capital Expenditures Funded by Lessee	  	 	26	  	
10.4.	  	Footprint Project Construction Activities	  	 	27	  	
10.5.	  	Ownership of Footprint Projects	  	 	27	  	
10.6.	  	Asset Acquisitions	  	 	27	  	
10.7.	  	Reimbursements	  	 	28	  	
		
ARTICLE XI REGULATORY COOPERATION	  	 	28	  	
			
11.1.	  	Jurisdiction	  	 	28	  	
11.2.	  	Cooperation	  	 	28	  	
		
ARTICLE XII INDEMNITY	  	 	29	  	
			
12.1.	  	General Indemnity	  	 	29	  	
12.2.	  	Environmental Indemnity	  	 	29	  	

TABLE OF CONTENTS

 	  	 	  	Page	 	
		
ARTICLE XIII MISCELLANEOUS	  	 	30	  	
			
13.1.	  	Limitation of Damages	  	 	30	  	
13.2.	  	Condemnation	  	 	30	  	
13.3.	  	Confidentiality	  	 	30	  	
13.4.	  	Successors and Assigns	  	 	31	  	
13.5.	  	Rent Obligations Not Excused by Force Majeure, Etc.	  	 	31	  	
13.6.	  	Further Assurances; Policies and Procedures	  	 	31	  	
13.7.	  	Arbitration	  	 	31	  	
13.8.	  	Notices	  	 	33	  	
13.9.	  	Entire Agreement; Amendments	  	 	33	  	
13.10.	  	Legal Matters	  	 	34	  	
13.11.	  	Partial Invalidity	  	 	34	  	
13.12.	  	Recording	  	 	34	  	
13.13.	  	Intention of Parties; True Lease	  	 	34	  	
APPENDICES:
Appendix A — Definitions
EXHIBITS:

Exhibit A —     System Area	
Exhibit B —     Amarillo Operation Center Legal Description	
Exhibit C —     Subordinated Debt Terms	
Exhibit D —     Insurance	
SCHEDULES:

Schedule 3.2(b)	  	Form – Rent Supplement	

THIRD AMENDED AND RESTATED
MASTER SYSTEM LEASE AGREEMENT
This THIRD AMENDED AND RESTATED MASTER SYSTEM LEASE AGREEMENT (this “ Agreement ”) is entered into on December 1, 2014 (the “ Effective Date ”), between Sharyland Distribution & Transmission Services, L.L.C. (together with its transferees, successors and assigns, “ Lessor ”), and Sharyland Utilities, L.P. (together with its transferees, successors and assigns, “ Lessee ”), and in connection herewith, Lessor and Lessee agree, covenant and contract as set forth in this Agreement. Lessor and Lessee are sometimes referred to in this Agreement as a “ Party ” or collectively as the “ Parties ”.
Certain capitalized terms used in this Agreement have the meaning assigned to them in Appendix A attached hereto.
WITNESSETH:
WHEREAS, Lessor and Lessee entered into that certain Second Amended and Restated Master System Lease Agreement dated as of July 1, 2012, as amended (as amended, restated, supplemented or otherwise modified from time to time, the “ Second Amended and Restated Lease ”), pursuant to which Lessee leases the Leased System from Lessor; and
WHEREAS, Lessor is an indirect subsidiary of InfraREIT Partners, LP, whose general partner (the “ REIT ”) intends to raise equity capital through an initial public offering (the “ REIT IPO ”), and, in connection with the REIT IPO, Lessor and Lessee desire to amend the terms of the Second Amended and Restated Lease in certain respects and restate the Second Amended and Restated Lease as so amended;
NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Parties hereto hereby amend and restate the terms of the Second Amended and Restated Lease as follows:
ARTICLE I
LEASE
1.1. Lease of System .
(a) Upon the terms and conditions set forth in this Agreement, Lessor hereby grants to Lessee the exclusive right to use and operate the Leased System. Subject to necessary regulatory approvals and the penultimate sentence of this Section 1.1, this Agreement is intended by Lessor and Lessee to be a master lease of the Leased System, as it existed as of December 31, 2009 (the “ Original Lease Date ”), and as it has been or may continue to be altered or expanded thereafter by Footprint Projects in which Lessor has an interest.
(b) The System shall consist of (x) the original assets leased by Lessor to Lessee as of the Original Lease Date (the “ Original Assets ”), (y) assets that constitute Footprint Projects, other than any such Footprint Projects funded by Lessee pursuant to Section 10.3, and (z) any components of the System that are repaired or replaced pursuant to Section 6.1. The System shall consist of each of the following components which are owned or leased by Lessor as of the Original Lease Date (or that are described within clause (y) or clause (z) above) and that are located within the area depicted on Exhibit A and Exhibit B :
 
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(i) towers and poles affixed to the land, and all necessary and proper foundations, footings, crossarms and other appliances and fixtures for use in connection with said towers, poles and lines;
(ii) overhead, underground and underwater electrical distribution, transmission and communications lines, together with related ductwork and insulators;
(iii) distribution transformers mounted on towers or poles and/or anchored to concrete pads;
(iv) electric substation and switching facilities, including all associated transformers, circuit breakers, resistors, capacitors, buses, interconnection and switching facilities, control and protection equipment which monitors the System, and the building housing the foregoing items;
(v) all facilities associated with any high-voltage direct current interconnections (“ HVDC Ties ”), including alternating current (“ AC ”) / direct current (“ DC ”) converter stations;
(vi) electric meters affixed to buildings or residences or otherwise required to operate the System;
(vii) real estate assets, including real property, interests in real property or real property rights (as defined in Section 856(c)(5)(B) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder, and not otherwise included in Sections 1.1(b)(i) – 1.1(b)(vi) above) owned or leased by Lessor;
(viii) all other systems or property owned or leased by Lessor, as identified in the uniform system of accounts for major electric utilities, 18 C.F.R. Part 101, as adopted and amended from time to time by FERC (not otherwise included in Sections 1.1(b)(i) – 1.1(b)(vii) above).
The System will also include, as a Footprint Project, the premises described on Exhibit B along with all leasehold improvements constructed thereon that are funded by Lessor as Footprint Projects pursuant hereto. Notwithstanding anything to the contrary in this Agreement, the parties do not intend or agree to enter into a lease with respect to any Footprint Project or other alteration, expansion or addition to the System (and the Lessee shall not be authorized to use or operate such Footprint Project, alteration, expansion or addition to the System) unless and until such time as the parties first execute a Rent Supplement for the underlying Footprint Project and such Footprint Project is placed in service, and such Rent Supplement together with this Agreement shall be treated as a new lease with respect to such Footprint Project. The parties further agree and acknowledge that a Rent Supplement will be executed with respect to each Footprint Project before such Footprint Project is placed in service, and references in this Agreement to the “System” rely on the assumption that this is the case.
 
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2

1.2. Exclusive Rights . Throughout the Term of this Agreement, Lessee shall have the exclusive right (i) to operate and use the Leased System for the transmission and distribution of electricity in accordance with applicable rules and regulations of all regulatory agencies having regulatory jurisdiction over the System, including without limitation, the PUCT, as well as applicable rules and regulations of ERCOT, TRE, NERC and other Regulatory Authorities, and (ii) to utilize the Leased System (and the associated easements, rights of way and similar rights) for other opportunities and uses (provided that such other uses do not interfere with the current or future transmission and delivery of electricity), subject to the approval of the Lessor, such approval not to be unreasonably withheld, conditioned or delayed. Throughout the Term of this Agreement, Lessor shall have access to the System at all reasonable times for purposes of inspection and for the purposes of improving, expanding or modernizing the System in accordance with Article X. Except in the case of emergency, prior to Lessor’s access of the System, Lessor will provide written notification to Lessee’s operations personnel.
1.3. Absolute Net Lease . This Agreement is intended by the Parties to be an absolute net lease (and, except as otherwise specified herein, the expenses associated with the lease, servicing, insuring, maintenance, repair and operation of the System shall be for the account of the Lessee, unless expressly stated that such expenses are for the account of Lessor or some other person or entity). Other than as expressly provided herein, (a) Lessee’s obligation to make all payments of Rent as and when the same shall become due and payable in accordance with the terms of this Agreement shall be absolute, irrevocable and unconditional and shall not be affected by any circumstance or subject to any abatement or diminution by set-off, deduction, counterclaim, recoupment, agreement, defense, suspension, deferment, interruption or otherwise, and (b) until such time as all Rent required to be paid has been paid, Lessee shall have no right to terminate this Agreement or to be released, relieved or discharged from its obligation to make, and shall not suspend or discontinue, any payment of Rent for any reason whatsoever.
1.4. Waiver by Lesse e . Lessee hereby waives, to the extent permitted by Applicable Law, any and all rights which it may now have or which at any time hereafter may be conferred upon it, by statute or otherwise, to modify, terminate, cancel, quit or surrender this Agreement except in accordance with the express terms hereof.
1.5. Quiet Enjoyment . Lessee shall be entitled to the peaceful and quiet enjoyment of the System, subject to the terms of this Agreement, so long as Lessee is not in default of this Agreement beyond applicable notice and cure periods.
 
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3

ARTICLE II
TERM OF LEASE
2.1. Term . Subject to the provisions of Section 2.2 of this Agreement, or as otherwise stated herein, this Agreement became effective on the Original Lease Date and shall continue through December 31, 2019 unless otherwise terminated in a manner consistent herewith (the “ Initial Term ”). Thereafter, this Agreement may be renewed for subsequent terms (each, a “ Renewal Term ” and, collectively with the Initial Term, the “ Term ”) by mutual agreement of the Parties; provided, however, that the Rent for any Renewal Term shall be targeted to provide the Lessor with a Comparable Rate of Return on the then-current Rate Base of the System.
2.2. Approvals upon Expiration or Termination
(a) Notwithstanding any provisions to the contrary herein, Lessee shall not surrender, resign, transfer, assign or otherwise cease to be the operator of the System at any time, including upon the termination of this Agreement or at the expiration of the Term, without first acquiring any necessary regulatory approvals from the PUCT or other Regulatory Authorities regarding such surrender, resignation, transfer, assignment or cessation of such operatorship; provided that, in the event of expiration or termination, the Parties shall use commercially reasonable efforts to obtain all necessary regulatory approvals of the transfer of such operatorship as soon as reasonably practicable.
(b) During such extended period of operatorship, Lessee shall continue to operate the System and shall continue to pay all Extended Period Rent; provided, however, that if regulatory approval is not obtained within twelve (12) months of initiation of the approval process and such delay is (a) due to Lessor’s failure to reasonably pursue such approval, then the amounts payable as Rent will be eighty percent (80%) of such amount, or (b) due to Lessee’s failure to reasonably pursue such approval, then the amounts payable as Rent will be one hundred five percent (105%) of such amount.
(c) Upon the expiration of the Term or termination of this Agreement, Lessee shall use commercially reasonable efforts to obtain all necessary regulatory approvals as soon as reasonably practicable from the PUCT or other Regulatory Authorities to transfer or assign the CCNs for the System to Lessor or a third party designated by Lessor and acceptable to the PUCT or other Regulatory Authorities.
2.3. Purchase Option upon Expiration or Termination . Upon the expiration of the Term or termination of this Agreement, Lessor shall have the option to purchase from Lessee any equipment or other property, tangible or intangible, owned by Lessee and principally used in connection with and necessary for the operation of the System (including any Nonseverable Footprint Projects owned by Lessee, if any), subject to any required regulatory approvals. The purchase price for such property or equipment shall be the greater of (i) the net book value thereof plus 10% and (ii) the fair market value thereof as determined by mutual agreement of Lessor and Lessee. If the Parties fail to agree on the amount of the purchase price, the purchase price shall be determined by arbitration pursuant to Section 13.7. In the event Lessor purchases such equipment, Lessee shall have the right to continue to use such equipment for no cost during the period of any extended operations by Lessee under Section 2.2.
 
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ARTICLE III
RENT
3.1. Rent . Lessee will pay to Lessor in lawful money of the United States of America which shall be legal tender for the payment of public and private debts, at Lessor’s address set forth in Section 13.8 hereof or at such other place or to such other Person, as Lessor from time to time may designate in a Notice, all Rent contemplated hereby during the Term on the basis hereinafter set forth. If there is a dispute as to the amount of Rent to be paid by Lessee, either Party may submit the dispute to arbitration pursuant to Section 13.7. However, Lessee shall be required to pay, as and when Rent is due and payable hereunder, the Undisputed Rent until such time as the dispute is resolved by agreement between the Parties or by arbitration pursuant to Section 13.7.
(a) Base Rent: Lessee shall pay to Lessor an amount of base rent equal to the amount set forth on the then effective Rent Supplement, which shall be payable monthly in arrears 45 days after the conclusion of the month. The amount of base rent owed pursuant to this Section 3.1(a) may be supplemented by the Parties from time to time in accordance with Section 3.2. The amount of base rent payable pursuant to this Section 3.1(a), as supplemented from time to time pursuant to Section 3.2, is referred to as “ Base Rent .”
(b) Percentage Rent: In addition to the Base Rent set forth above, Lessee covenants and agrees to pay to Lessor, as percentage rent, an annual amount equal to the percent of Gross Revenues during the applicable Lease Year in excess of the Annual Percentage Rent Breakpoint for such Lease Year, all as set forth on the then-effective Rent Supplement. The percentage amounts used for the calculation of percentage rent owed pursuant to this Section 3.1(b) (the “ Percentage Rent Percentages ”) may be supplemented by the Parties from time to time in accordance with Section 3.2 to account for additions to the System. The percentage rent payable pursuant to this Section 3.1(b), as supplemented from time to time pursuant to Section 3.2, is referred to as “ Percentage Rent .”
(c) Percentage Rent Breakpoints: With respect to the Annual Percentage Rent Breakpoint for each Lease Year: (1) the “First Lease Quarter Percentage Rent Breakpoint” shall be 25% of the Annual Percentage Rent Breakpoint for such Lease Year; (2) the “Second Lease Quarter Percentage Rent Breakpoint” shall be 50% of the Annual Percentage Rent Breakpoint for such Lease Year; and (3) the “Third Lease Quarter Percentage Rent Breakpoint” shall be 75% of the Annual Percentage Rent Breakpoint for such Lease Year.
(d) Gross Revenues:
(i) As used in this Agreement, subject to Section 3.1(d)(ii), the “ Gross Revenues ” of the System shall mean and include all fees, charges and other revenues generated by or otherwise (x) received by or payable to Lessee in connection with or which are the result of the operation of the System (and any assets related to the System owned by Lessee), as set forth in Account Nos. 440, 442, 444, 445, 449, 451, and 456 (but excluding any fees, charges or other revenues set forth in Account No. 555) of the FERC Uniform System of Accounts for electric utilities or such other accounts as may be applicable from time to time in which Lessee records its revenues from operation of the System; (y) received by or payable to Lessee from other opportunities and
 
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uses of the System pursuant to Section 1.2 hereof; or (z) that are insurance proceeds for business income lost from an insured event related to the System Assets; provided that, “ Gross Revenues ” shall not include (1) any payment received by Lessee as CIAC; (2) any items which are of a pure pass-through nature where such items are charged to and collected from customers of Lessee but which carry regulatory responsibility to remit such collections without offset or deduction to a third party, including, but not limited to, items such as: (A) sales taxes or other charges collected by Lessee on behalf of a taxing authority; (B) fees, charges and other revenues collected by Lessee that can be specifically traced to any regulatory approved costs incurred by Lessee that have been ordered or permitted by the PUCT to be recovered through Lessee’s rates such as system benefit fund, purchase power costs, wheeling charges, Purchase Power Cost Recovery Factor and Transmission Cost Recovery Factor; (C) fees, charges and other revenues collected by Lessee that can be specifically traced to any deferred costs funded by Lessee that have been ordered or permitted by the PUCT to be recovered through a tariff rider; and (D) such other items that Lessor and Lessee agree to in good faith are consistent with the foregoing and should be included prospectively in the list set forth in this clause (2) and in the event the Lessor and Lessee cannot agree on what items should be included on such list after 60 days of negotiating in good faith, then either Lessor or Lessee may submit such matter to arbitration pursuant to Section 13.7 of this Agreement, pursuant to which the Arbitration Panel shall be empowered to determine which such items shall be included on such list, based on submissions by each of the Lessee and the Lessor; and (3) Revenues Attributable to Lessee CapEx. The term “ Unadjusted Gross Revenues ” means the amount of Gross Revenue, calculated in accordance with this Section 3.1(d)(i), without giving effect to the offset set forth in clause (3), above, related to Revenues Attributable to Lessee CapEx.
(ii) Except as set forth below, all ERCOT Transmission Revenues will be allocated to the System covered by this Agreement based upon the following formula: Multiply (x) total ERCOT Transmission Revenues received by Lessee by (y) a fraction, the numerator of which is the Transmission Net Plant in Service for the System covered by this Agreement and the denominator of which is the total Transmission Net Plant in Service for all regulated electric transmission systems owned by Lessor or an affiliate thereof and operated by Lessee or a subsidiary thereof within ERCOT (the “ TCOS Allocation ”). As of the Effective Date, all regulated electric transmission systems operated by Lessee or a subsidiary thereof within ERCOT are owned by Lessor or a subsidiary or parent entity thereof. As long as that is the case, Transmission Net Plant in Service and Transmission Gross Plant in service shall be derived exclusively from the financial statements of Lessor and agreed to by Lessee. If Lessee operates any electric transmission systems within ERCOT that are not leased from Lessor or an affiliate thereof, then the Parties will negotiate in good faith an equitable and appropriate mechanism for allocating ERCOT Transmission Revenues based on the Transmission Net Plant in Service of the respective electric transmission systems and in the event the Parties cannot agree on an equitable and appropriate mechanism after 60 days of negotiating in good faith, then either Party may submit such matter to arbitration pursuant to Section 13.7 of this Agreement, pursuant to which the Arbitration Panel shall be empowered to determine such equitable and appropriate mechanism, based on submissions by each of the Lessee and the Lessor. The most recent TCOS Allocation agreed to by Lessor and Lessee will govern the allocation described in this Section 3.1(d)(ii), which TCOS Allocation may be set forth in a Rent Supplement, but will not be required to be included in a Rent Supplement to be effective. Either Party may request a revision to such TCOS Allocation, based on the most recent available monthly balance sheet, no more
 
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frequently than once every sixty (60) days or in connection with any Rent Supplement or Rent Validation executed and delivered by the Parties. If the Parties are unable to agree to an allocation, such matter will be submitted to arbitration pursuant to Section 13.7. “Gross Revenues,” for purposes hereof, will consist of the amount of such ERCOT Transmission Revenues allocated to the System pursuant to this Section 3.1(d)(ii), plus any other amounts, such as distribution revenue, that constitute Gross Revenues pursuant hereto, minus Revenues Attributable to Lessee CapEx.
(iii) The Parties contemplate that there may be Capital Expenditures for assets that are placed in service and that are related and fairly allocable to the System and are classified as Lessee CapEx. Unless the Parties agree otherwise based on appropriate factors at the time of the negotiation, Capital Expenditures that qualify as Lessee CapEx will qualify as Lessee CapEx on the date that the assets developed with such Capital Expenditures are placed in service. In such a case, Revenues Attributable to Lessee CapEx shall be determined and such portion shall be excluded from Unadjusted Gross Revenues. For these purposes, Revenues Attributable to Lessee CapEx shall be targeted to equal that portion of the Unadjusted Gross Revenues collected by Lessee which equals the amount needed to provide Lessee with the equivalent of a Comparable Rate of Return on any such Lessee CapEx (except that, in determining such Comparable Rate of Return, the Parties will not consider Lessee’s creditworthiness and there will be no Agreed-to-Discount). It is understood and agreed that such determinations of the Revenues Attributable to Lessee CapEx are intended to provide an accurate and reasonably administrable means of ensuring that the Lessee (and not the Lessor) will receive a Comparable Rate of Return attributable to the capital invested by Lessee in the Lessee CapEx. The Revenues Attributable to Lessee CapEx shall be determined solely to provide a Comparable Rate of Return on such Lessee CapEx and shall not be determined with reference to, or with any intention to true up, the effect of any difference between the initially anticipated and the actual return of or on prior Lessee CapEx. The Parties understand that there may be Capital Expenditures that relate to both the System and to other transmission and/or distribution systems owned or operated by Lessee or an affiliate thereof, and, in such circumstance, the Parties will negotiate in good faith to determine the portion of such Capital Expenditures that constitute Lessee CapEx hereunder and in the event the Parties cannot determine such portion after 60 days of negotiating in good faith, then either Party may submit such matter to arbitration pursuant to Section 13.7 of this Agreement, pursuant to which the Arbitration Panel shall be empowered to determine such portion of Capital Expenditures that constitute Lessee CapEx hereunder, based on submissions by each of the Lessee and the Lessor. Lessee agrees to provide Lessor with sufficient information regarding Lessee CapEx so that Lessor can monitor amounts actually spent on Lessee CapEx. If Lessee expects there will be any Lessee CapEx, Lessee may request, no more frequently than annually, that the Parties determine the Revenues Attributable to Lessee CapEx which relate to such Lessee CapEx for each subsequent Lease Year. Lessee will use reasonable efforts to make such request coincide with a Rent Supplement pursuant to Section 3.2(a). Each supplement and related determination of Revenues Attributable to Lessee CapEx for any Lease Year which is specified in this Section 3.1(d)(iii) shall be memorialized in the manner specified in Section 3.2(b).
(e) Payment of Percentage Rent: Percentage Rent shall be paid by Lessee to Lessor not later than the date forty-five (45) days after the end of each Lease Quarter as herein provided. Lessee shall record Gross Revenues in order to provide an audit trail for the Gross Revenues.
 
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Lessee shall deliver a written statement to Lessor, accompanied by a CFO Certificate, within forty-five (45) days after the end of each Lease Quarter, stating (1) the Gross Revenues for that Lease Quarter, (2) the cumulative total through the end of that Lease Quarter of Gross Revenues for such Lease Year, (3) the Percentage Rent Breakpoint (the First Lease Quarter Percentage Rent Breakpoint, the Second Lease Quarter Percentage Rent Breakpoint, the Third Lease Quarter Percentage Rent Breakpoint or the Annual Percentage Rent Breakpoint for such Lease Year, as applicable), utilized by Lessee and applicable to Lessee’s calculation of Percentage Rent through the end of that Lease Quarter, and (4) the cumulative total of any Percentage Rent then due and the cumulative total of any Percentage Rent previously paid with respect to any prior Lease Quarter(s) within such Lease Year. If such CFO Certificate indicates that any Percentage Rent is due for such Lease Quarter (or such Lease Year, as applicable), based upon the cumulative total of Gross Revenues through the end of such Lease Quarter and the applicable Percentage Rent Breakpoint reflected in such statement, then Lessee shall pay and deliver any Percentage Rent then due with the statement and CFO Certificate for such Lease Quarter (or such Lease Year, as applicable). With respect to the final Percentage Rent calculation for any Lease Year, Lessee shall receive a credit for any Percentage Rent previously paid with respect to such Lease Year. If the Percentage Rent payments previously made by Lessee to Lessor for the first three Lease Quarters of a Lease Year, on a cumulative basis, exceed the annual amount of Percentage Rent payable by Lessee to Lessor for such Lease Year, then Lessee shall receive a credit for such excess amount against the next Percentage Rent payment(s) becoming due and payable by Lessee to Lessor under this Agreement. All statements deliverable by Lessee to Lessor under this Agreement shall be delivered to the place where rent is then payable, or to such other place or places as Lessor may from time to time direct by written notice to Lessee.
3.2. Rent Supplements .
(a) The Parties have executed a Rent Supplement with respect to the Rent in effect as of the Effective Date. This Section 3.2(a) will not require any amendment to Rent unless the Parties expect Incremental CapEx and the Parties have not previously entered into a Rent Supplement with respect to such Incremental CapEx. If the Parties expect that, during any Lease Year there will be Incremental CapEx, then the Parties will negotiate in good faith to supplement Rent and other matters in accordance with this Section 3.2. In connection therewith, the Parties will negotiate the pre-tax rate of return that Lessor should earn on such Incremental CapEx, which will be based generally on an agreed-to discount from the rate of return that public utility companies generally earn in the State of Texas at the time of such Rent Supplement negotiation, adjusted in the manner agreed to by the Parties (if justified) to take into account the creditworthiness of Lessee at the time of such Rent Supplement negotiation (the “ Agreed-to-Discount ”). Such discount will be based on the comparable discount the parties negotiated and agreed to on or around the Original Lease Date, as modified to take into account appropriate factors at the time of such Rent Supplement negotiation. Such pre-tax rate of return, as determined in accordance with this paragraph, is referred to as a “ Comparable Rate of Return .” The following will apply to the determination of the matters set forth on the Rent Supplement:
(i) The Parties will supplement Base Rent and Percentage Rent in a manner intended to provide a Comparable Rate of Return for Lessor on its Incremental CapEx. Such Comparable Rate of Return will be achieved by a split between Base Rent and Percentage Rent in the proportions requested by Lessor and agreed to by Lessee.
 
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(ii) Unless the Parties agree otherwise based on appropriate factors at the time of the negotiation, Capital Expenditures will qualify as Incremental CapEx on the date such Capital Expenditures are placed in service, which differentiates these Capital Expenditures from the Capital Expenditures included in CapEx Budgets pursuant to Article X, which are measured under this Agreement based on the date the related Capital Expenditures are incurred.
(iii) Notwithstanding anything herein to the contrary, such supplement shall be determined solely to provide a Comparable Rate of Return on such Incremental CapEx and shall not be determined with reference to, or with any intention to true up, the effect of any difference between the initially anticipated and the actual return of or on, or the Base Rent or Percentage Rent payable with respect to, the System as in place prior to the additions resulting from such Incremental CapEx.
(iv) Base Rent shall at all times be at least equal to the aggregate amount of scheduled principal and interest due and payable by Lessor for such period with respect to indebtedness incurred by Lessor in connection with the acquisition of the Original Assets and all indebtedness incurred by Lessor in connection with its funding of any Footprint Projects.
(v) For clarity, in no event will this Section 3.2 require a reduction in Rent if there is no Incremental CapEx.
(b) The Parties will memorialize the results of all Incremental CapEx supplements and Lessee CapEx supplement negotiations by executing and delivering a Rent Supplement, which will set forth the amount of contemplated Incremental CapEx, new Base Rent, a new Percentage Rent Schedule, new Revenues Attributable to Lessee CapEx, Lessee CapEx, new Accumulated Deficit, new TCOS Allocation (if applicable), the effective date on which such changes will occur and the term of such Rent Supplement (if applicable). In no event will any new Base Rent or new Percentage Rent be payable, or any Revenues Attributable to Lessee CapEx be taken into account as a reduction to Unadjusted Gross Revenues, before the assets funded by the related Incremental CapEx or Lessee CapEx are placed in service. The Rent Supplement may also include the projected in-service date of the Incremental CapEx or Lessee CapEx to which the Rent Supplement applies. Upon execution and delivery of any such Rent Supplement, this Agreement will be deemed amended thereby. The Rent Supplement shall have the term set forth therein, not to extend past the then-current Term of this Agreement. At the end of the term of each Rent Supplement, the Parties shall negotiate a new Rent Supplement for the Lessee CapEx and Incremental CapEx covered by such prior Rent Supplement using the Comparable Rate of Return methodology set forth in Sections 3.1(d)(iii) and 3.2(a). Notwithstanding the foregoing, the Percentage Rent Percentages and Annual Percentage Rent Breakpoints reflected on such new Rent Supplement with respect to the Rate Base covered by such prior Rent Supplement shall be as set forth on the Percentage Rent Schedule of such prior Rent Supplement. If necessary, Exhibit A will be supplemented to reflect new assets funded by Incremental CapEx.
 
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(c) If following a Rent Supplement there is a difference in (i) the amount of actual Incremental CapEx compared to the amount contemplated by the then-effective Rent Supplement, (ii) the amount of actual Lessee CapEx compared to the amount contemplated by the then-effective Rent Supplement, or (iii) the placed-in-service date of such Incremental CapEx or Lessee CapEx compared to what was contemplated at the time of the then-effective Rent Supplement, then, at any time within two years of the date the Parties agree to a Rent Supplement, either Party may request a Rent Validation. If there has been such a difference, the Parties will supplement Incremental CapEx, Base Rent, Percentage Rent Percentages, Annual Percentage Rent Breakpoints, Revenues Attributable to Lessee CapEx, Lessee CapEx and/or Accumulated Deficit, as applicable, to what they would have been, at the time of the Rent Supplement, to reflect (1) the amount of actual Incremental CapEx and Lessee CapEx and/or (2) the actual dates such Incremental CapEx and/or Lessee CapEx was placed in service, but keeping fixed all other relevant assumptions and inputs, including the Comparable Rate of Return. For the avoidance of doubt, in no circumstance will a Rent Validation occur to account for any difference between the initially anticipated and the actual return of or on the Incremental CapEx and/or Lessee CapEx, and no such difference will be taken in to account as part of such Rent Validation. The Parties also will negotiate in good faith to determine (A) whether one Party should make a lump sum payment to the other Party as a result of excess or deficient Rent Lessee paid, prior to the date of the effective date of the Rent Validation, in connection with the Rent Supplement, given any negotiated supplement, and, (B) if applicable, the amount of any such lump sum payment. The Parties will memorialize the result of any Rent Validation negotiation by executing and delivering a revised Rent Supplement, which will set forth revised expected Incremental CapEx, Lessee CapEx, Base Rent, Percentage Rent Percentages, Annual Percentage Rent Breakpoints, Revenues Attributable to Lessee CapEx and/or Accumulated Deficit, as applicable, the effective date on which such changes will occur and, if applicable, the amount of the lump sum payment that one Party must make to the other Party (which payment must be made within 30 days of the execution and delivery of such revised Rent Supplement). Any lump sum payments received by Lessor under this Section 3.2(c) shall be treated as Rent by the Parties. Upon execution and delivery of any such revised Rent Supplement, this Agreement will be deemed amended thereby. The Parties will reasonably cooperate to minimize the number of Rent Validations, and prospective Rent Supplements and Rent Validations may be combined into one revised, amended and restated Rent Supplement.
(d) In connection with the foregoing provisions of this Section 3.2, Lessor and Lessee shall use good faith efforts to agree to a Rent Supplement, renewal of a Rent Supplement or Rent Validation, as applicable, within 60 days of a request therefor by either Party. If, by the end of such 60 day period, Lessee and Lessor cannot in good faith agree to the terms of a Rent Supplement, renewal of a Rent Supplement or Rent Validation, such dispute shall be submitted to arbitration in accordance with Section 13.7 of this Agreement, pursuant to which the Arbitration Panel shall be empowered to determine the terms of such Rent Supplement, renewal of a Rent Supplement or Rent Validation (including any lump sum payment amount), based on submissions by each of the Lessee and the Lessor.
3.3. Confirmation of Percentage Rent .
(a) In the event that Lessee determines that the Percentage Rent paid with respect to any Lease Year exceeded the amount of Percentage Rent actually due for such Lease Year (such overage being the “ Excess Percentage Rent ”), Lessee shall promptly notify Lessor of such fact and shall deliver a new CFO Certificate (the “ Revised Certificate ”) setting forth the corrected
 
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calculations of the Percentage Rent due for such Lease Year and identifying the amount of the Excess Percentage Rent. Upon Lessor’s reasonable verification of the information set forth in the Revised Certificate, Lessor shall refund to Lessee the Excess Percentage Rent. Notwithstanding anything to the contrary contained herein, in no event shall Lessor have any obligation under this Section 3.3(a) to refund any Excess Percentage Rent if Lessor has not received the Revised Certificate by March 31 of the year following the Lease Year for which the Excess Percentage Rent was paid.
(b) Lessee shall utilize, or cause to be utilized, an accounting system for the System in accordance with the FERC Uniform System of Accounts for electric utilities, that will accurately record all data necessary to compute Percentage Rent, and Lessee shall retain and shall allow Lessor and its representatives to have reasonable access to, for at least five (5) years after the expiration of each Lease Year, reasonably adequate records conforming to such accounting system showing all data necessary to conduct Lessor’s Audit and to compute Percentage Rent for the applicable Lease Years and to otherwise file or defend tax returns and reports to any Regulatory Authority.
(c) Lessor shall have the right from time to time to cause its accountants or representatives to conduct an inspection, examination and/or audit (a “Lessor’s Audit” ) of all of Lessee’s records, including supporting data, sales and excise tax returns and the records described in Section 3.3(b), reasonably required to complete such Lessor’s Audit and to verify Percentage Rent, subject to any prohibitions or limitations on disclosure of any such data under applicable laws, regulations and governmental requirements. If any Lessor’s Audit discloses a deficiency in the payment of Percentage Rent, and either Lessee agrees with the result of Lessor’s Audit or the matter is otherwise determined or compromised, Lessee shall forthwith pay to Lessor the amount of the deficiency, as finally agreed or determined, together with interest at the Overdue Rate from the date when said payment should have been made to the date of payment thereof. In addition to the amounts described above in this Section 3.3(c), if any Lessor’s Audit discloses a deficiency in the payment of Percentage Rent which, as finally agreed or determined, exceeds 3% of the amount paid, Lessee shall pay the costs of Lessor’s Audit. In no event shall Lessor undertake a Lessor’s Audit after March 31 of the second year following the Lease Year for which such audit is requested.
(d) Any proprietary information obtained by Lessor pursuant to the provisions of this Section 3.3 shall be treated as confidential, except that such information may be used, subject to appropriate confidentiality safeguards, in any litigation or arbitration between the Parties and except further that Lessor may disclose such information to lenders and investors, including prospective lenders or investors and to any other persons to whom disclosure is necessary or appropriate to comply with applicable laws, regulations and governmental requirements and to comply with any reporting requirements applicable to Lessor or Lessee under any applicable securities laws or regulations or any listing requirements of any applicable securities exchange.
(e) The obligations of Lessee and Lessor contained in this Section 3.3 shall survive the expiration or earlier termination of this Agreement. Any dispute as to the existence or amount of any deficiency in the payment of Percentage Rent as disclosed by Lessor’s Audit shall, if not otherwise settled by the Parties, be submitted to arbitration pursuant to the provisions of Section 13.7.
 
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3.4. Additional Rent . In addition to Base Rent and Percentage Rent, Lessee also will pay and discharge as and when due and payable all other amounts, liabilities, obligations and impositions that Lessee assumes or agrees to pay under this Agreement, including without limitation, the expenses described in Section 1.3 and any reimbursement for such amounts and other damages to Lessor in the event that Lessor pays such expenses or performs such obligations on behalf of Lessee (collectively, “ Additional Rent ”).
3.5. No Set Off . Rent shall be paid to Lessor without set off, deduction or counterclaim; provided, however, that Lessee shall have the right to assert any claim or counterclaim in a separate action brought by Lessee under this Agreement or to assert any mandatory counterclaim in any action brought by Lessor under this Agreement.
3.6. Late Payment Penalty . If Lessee fails to make any payment of Rent to Lessor within five (5) days after it is due, interest shall accrue on the overdue amount, from the date overdue until the date paid, at the Overdue Rate.
3.7. Credit Support . If Lessor has reasonable grounds for insecurity regarding the performance of Lessee’s obligations hereunder, Lessor may require Lessee to provide credit support in the amount, form and for the term reasonably acceptable to Lessor, including but not limited to, a letter of credit, a prepayment, or a guaranty.
3.8. Other Revenue . If Lessee receives or expects to receive any fees, charges or Other Revenues and other than de minimis amounts not to exceed $100,000 in any calendar year, then, unless Lessee reasonably believes that such Other Revenue will not operate to reduce Lessee’s tariff within the State of Texas, Lessee and Lessor will negotiate in good faith to amend this Agreement or a similar lease to characterize the portion of such Other Revenue which Lessor reasonably expects will operate to reduce Lessee’s tariff within the State of Texas as Unadjusted Gross Revenue hereunder or under such other similar lease. In the event the Lessee and Lessor cannot agree on the terms of such amendment of this Agreement or of a similar lease after 60 days of negotiating in good faith, then either the Lessee or the Lessor may submit such matters to arbitration pursuant to Section 13.7 of this Agreement, pursuant to which the Arbitration Panel shall be empowered to characterize the portion of such Other Revenue which Lessor reasonably expects will operate to reduce Lessee’s tariff within the State of Texas as Unadjusted Gross Revenue hereunder or under such other similar lease, based on submissions by each of the Lessee and the Lessor.
ARTICLE IV
LESSEE’S REPRESENTATIONS, WARRANTIES AND COVENANTS
Lessee hereby represents, warrants and covenants to Lessor that:
4.1. Maintenance, Operation and Repair of the System .
(a) Lessee, at its own cost and expense, shall maintain (including both scheduled and unscheduled maintenance), operate, repair and make all modifications (other than Footprint Projects) to the System and any components thereof (whether owned by Lessor or Lessee), including directing all operations of and supplying all personnel necessary for the operation of the System, in each case, as reasonable and prudent and consistent with Good Utility Practice
 
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and as required by Applicable Law. Lessee shall carry out all obligations under this Agreement as reasonable and prudent and consistent with Good Utility Practice and in accordance with manufacturers’ warranty requirements (during any applicable warranty period) and the Lessee’s established operating procedures and maintenance, rebuild and repair programs so as to keep the System in good working order, ordinary wear and tear excepted, and in such condition as shall comply in all material respects with all Applicable Laws. Lessee will operate the System in a reliable and safe manner in compliance with all applicable requirements and regulations of Regulatory Authorities. Lessee will not operate the System or any component thereof in any manner excluded from coverage by any insurance in effect as required by the terms hereof.
(b) If inspections of the System by Lessor show that the System does not meet industry standards or Good Utility Practice for maintenance and repair and/or fails to meet the requirements of any Applicable Law, Lessee shall promptly, but in any event within thirty (30) days after such initial notification, (i) develop a plan for Lessor’s review by which the System can be modified to comply with the standards, and (ii) complete any and all such modifications consistent with all applicable reliability and safety standards established by regulations, orders or requirements of Regulatory Authorities.
4.2. Licenses and Permits . Lessee shall obtain and maintain any and all licenses, permits and other governmental and third-party consents and approvals required by Applicable Law in order to carry out its obligations under this Agreement.
4.3. Property Taxes, and other Assessments and Fees . Lessee shall bear and timely pay all ad valorem or property taxes, sales and use taxes, or other assessments, governmental charges or fees that shall or may during the Term be imposed on, or arise in connection with, the repair, maintenance or operation of the System (including all Footprint Projects as described and provided for in Section 10.1 of this Agreement) (“ Lessee Taxes ”); provided that Lessee shall not be obligated to pay any net income taxes imposed upon Lessor or any sales and use taxes which arise in connection with Lessor’s acquisition of Footprint Projects (“ Lessor Taxes ”). Upon the written request by Lessor, Lessee shall provide Lessor with evidence of the payment of any such Lessee Taxes, the failure of which to be paid would cause the imposition of a Lien upon the System or any component thereof or interest therein. Lessee shall assume full responsibility for preparing and furnishing to Lessor for execution all filings with any governmental authority of or in the state and/or locality in which the System is located in respect of any and all taxes; except that, where required or permitted by Applicable Law, Lessee shall make such filings on behalf of Lessor in the name of Lessor or in Lessee’s own name. In each case in which Lessee furnishes a tax return or any other form to be executed by Lessor for filing with or delivery to any taxing authority, Lessee shall certify to Lessor that such document is in the proper form, is required to be filed under Applicable Law and does not impose any tax or other liability on Lessor or any of its affiliates which is not indemnified by Lessee. Lessee shall be permitted to contest, in its own name when permitted by law but otherwise on behalf of Lessor, in good faith and upon consultation with Lessor, any taxes it is obligated to pay hereunder.
4.4. Requirements of Governmental Agencies and Regulatory Authorities . Lessee, at its expense, shall comply with all Applicable Laws, including without limitation all requirements of the Regulatory Authorities. Lessee shall have the right, in its reasonable discretion and at its cost and expense, to contest by appropriate legal proceedings, the validity or applicability to the
 
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System of any Applicable Law made or issued by any federal, state, county, local or other governmental agency or entity. Any such contest or proceeding shall be controlled and directed by Lessee. Notwithstanding the foregoing, Lessee shall provide Lessor written notice of the commencement and, at reasonable intervals after commencement, the progress of any such legal proceedings.
4.5. Liens . Lessee shall keep the System free and clear of all Liens other than Permitted Liens; provided, however, that if Lessee wishes to contest any such Lien (other than a Permitted Lien), Lessee shall, promptly, and in any event within thirty (30) days after it receives notice of the filing of such Lien, remove or bond over such lien from the System pursuant to Applicable Law. If Lessee fails to promptly remove or bond over any such Lien, Lessor may, after providing notice to Lessee, take reasonable action to satisfy, defend, settle or otherwise remove the Lien at Lessee’s expense.
4.6. Hazardous Materials .
(a) Lessee shall operate and maintain the System and conduct all of its other activities in respect thereof in compliance in all material respects with any Applicable Laws relating to air, water, land and the generation, storage, use, handling, transportation, treatment or disposal of Hazardous Material. Lessee shall promptly notify Lessor of any such violation and, to the extent Lessee becomes aware of any environmental, health, safety or security matter that requires a corrective action, Lessee shall, in consultation with Lessor, undertake and complete such corrective action. Lessee shall have the obligation to report any such violations to the appropriate Regulatory Authorities in accordance with Applicable Law and, if practicable, shall give notice thereof to Lessor prior to making such report.
(b) Without limiting the generality of the foregoing, Lessee shall not (i) place or locate any underground tanks on the property underlying the System, (ii) generate, manufacture, transport, produce, use, treat, store, release, dispose of or otherwise deposit Hazardous Materials in or on the System, the property underlying the System or any portion thereof other than as permitted by Applicable Laws that govern the same or are applicable thereto, (iii) permit any other substances, materials or conditions in, on or emanating from the System, the property underlying the System or any portion thereof which may support a claim or cause of action under any Applicable Law or (iv) undertake any action that would reasonably be expected to cause an unauthorized release of Hazardous Materials at the property underlying the System.
(c) Lessee shall periodically, at intervals determined in its reasonable discretion in accordance with Good Utility Practice or as required by Applicable Law, at Lessee’s sole expense, conduct inspections of all components of the System to ensure compliance with Applicable Laws and with this Section 4.6, and shall promptly notify Lessor of the results of any such inspections. Lessor may, at Lessor’s expense, conduct its own testing at times determined in its reasonable discretion, and after reasonable consultation with Lessee, to ensure Lessee’s compliance with Applicable Laws and with this Section 4.6, provided, however, that Lessor agrees to indemnify Lessee, in accordance with Section 12.2, from and against any and all Claims arising from such testing.
 
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4.7. Indebtedness . Lessee shall not incur Indebtedness other than: (i) Indebtedness in an aggregate principal amount of up to the greater of (A) $5,000,000 and (B) an amount equal to one percent (1%) of the sum of, without duplication, (x) the total amount of the Consolidated Net Plant of Lessee, plus (y) the total amount of the Consolidated Net Plant of any guarantor(s) of Lessee’s obligations under any Lease to which Lessee is a party as a lessee, plus (z) the total amount of Leased Consolidated Net Plant of Lessee, in each case on a senior secured basis, (ii) Indebtedness in an aggregate principal amount of up to the greater of (A) $10,000,000 and (B) an amount equal to one-and-a-half percent (1.5%) of the sum of, without duplication, (x) the total amount of the Consolidated Net Plant of Lessee, plus (y) the total amount of the Consolidated Net Plant of any guarantor(s) of Lessee’s obligations under any Lease to which Lessee is a party as a lessee, plus (z) the total amount of Leased Consolidated Net Plant of Lessee, in each case on an unsecured subordinated basis on terms substantially similar to the terms set forth on Exhibit C and (iii) loans, in an aggregate principal amount not to exceed $10,000,000 at any time outstanding, made by InfraREIT Partners, LP or a subsidiary thereof to Lessee from time to time for the purpose of financing capital expenditures. For purposes of clauses (i) and (ii) of the preceding sentence, any Consolidated Qualified Lessees of Lessee will be treated as Lessee. In addition to the foregoing, any of Lessee’s subsidiaries may incur Indebtedness in an aggregate principal amount of up to the product of (x) Lessee’s aggregate Consolidated Net Plant multiplied by (y) the lesser of (A) the sum of Lessee’s then-current PUCT-regulated debt-to-equity ratio (expressed as a percentage) and five percent (5%) or (B) sixty-five percent (65%); provided, however, that such Indebtedness must be Non-Recourse Debt to Lessee. For purposes of this Section 4.7, Lessee’s Consolidated Net Plant will be derived from its most recently prepared consolidated balance sheet, prepared in accordance with GAAP but adjusted to reverse the effects of failed sale-leaseback accounting in a manner reasonably determined by Lessee in good faith. Without limiting the amount of Indebtedness permitted by the foregoing, Lessee may also incur Indebtedness (x) in the form of a pledge of equity interests in a subsidiary of Lessee as security for Non-Recourse Debt of such subsidiary and (y) in amounts otherwise permitted under the Debt Agreements.
4.8. Records . In addition to the records referred to in Section 3.3, Lessee shall maintain proper books of record and account in conformity with GAAP and all applicable Regulatory Authorities and each other governmental agency or authority having legal or regulatory jurisdiction over Lessee. Additionally, Lessee shall maintain or cause to be maintained all logs, drawings, manuals, specifications and data and inspection, modification and maintenance records and other materials required to be maintained in respect of the System by Applicable Laws or by prudent and Good Utility Practice. Lessee shall allow Lessor and its representatives to have reasonable access to, for at least five (5) years after the expiration of each Lease Year, the records referred to in this Section 4.8.
4.9. Surrender . Upon expiration or earlier termination of this Agreement in accordance with its terms (but subject to Section 2.2 and the requirements of all Applicable Laws), and in a manner calculated to avoid any disruption of electrical service, Lessee shall vacate and surrender possession of all components of the System (other than in respect of Footprint Projects funded by Lessee as described in Section 10.5(a)) to Lessor, or to such other person or entity as Lessor may direct. At the time of such surrender, the System shall be free and clear of Liens and other rights of third parties (other than Permitted Liens), and shall be in the same condition as on the Original Lease Date, ordinary wear and tear and subsequent Footprint
 
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Projects excepted. Lessee shall deliver or cause to be delivered to Lessor, or to such other person or entity as Lessor may direct, copies of all title documents, logs, drawings, manuals, specifications and data and inspection, modification and maintenance records, billing records, reports and other documents in respect of the System which are necessary to determine the condition of the System or for the continued maintenance, repair or general operation of the System and are in Lessee’s possession at such time. In connection with the surrender of the System, Lessor shall pay to Lessee the aggregate purchase price for any Footprint Projects, equipment or other property purchased by Lessor in accordance with Section 2.3 or Section 10.5(b).
4.10. Cooperation; Transition Services .
(a) During the period after notice of termination and prior to the termination of the Agreement, with reasonable notice, Lessee will cooperate in all reasonable respects with the efforts of Lessor to sell or lease the System (or any component thereof) or any interest therein, including, without limitation, permitting prospective purchasers or lessees to fully inspect the System and any logs, drawings, manuals, specifications, data and maintenance records relating thereto; provided, that such cooperation shall not unreasonably interfere with the normal operation of the System or cause Lessee to incur any additional expenses other than as specifically provided herein. All information obtained in connection with such inspection shall be subject to confidentiality requirements at least as restrictive as those contained in Section 13.3.
(b) Upon expiration or termination of this Agreement, Lessee shall continue to lease and operate the System pursuant to the terms of Section 2.2, if required thereunder. During such period Lessee shall perform all duties and retain all obligations under Article IV in all respects, as if the Agreement had not expired or been terminated.
4.11. Lessee’s Authority . Lessee has all requisite power and authority to execute and deliver this Agreement and to perform its obligations hereunder. Lessee has taken all action necessary to execute and deliver this Agreement and to perform its obligations hereunder, and no other action or proceeding on the part of Lessee is necessary to authorize this Agreement. This Agreement constitutes the legally valid and binding obligation of Lessee, enforceable against Lessee in accordance with its terms, except as the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Applicable Laws affecting the enforcement of creditors’ rights generally and equitable principles.
4.12. Litigation . If Lessee becomes aware of any actions, claims or other legal or administrative proceedings that are pending, threatened or anticipated with respect to, or which could materially and adversely affect, the System, Lessee shall promptly deliver notice thereof to Lessor.
4.13. Financing . Lessee acknowledges that Lessor has advised Lessee that Lessor has obtained financing secured by, among other things, the System and this Agreement. In connection with such financing, Lessor made certain representations, warranties and covenants set forth in that certain (i) Amended and Restated Note Purchase Agreement entered into by Lessor and dated as of September 14, 2010 (as amended, restated, supplemented or otherwise
 
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modified from time to time, the “ 2009 Note Purchase Agreement ”), a copy of which has been provided to and reviewed by Lessee, (ii) Amended and Restated Note Purchase Agreement entered into by Lessor and dated as of July 13, 2010 (as amended, restated, supplemented or otherwise modified from time to time, the “ 2010 Note Purchase Agreement ” and, together with the 2009 Note Purchase Agreement, the “ Note Purchase Agreements ”), a copy of which has been provided to and reviewed by Lessee and (iii) Second Amended and Restated Credit Agreement entered into by Lessor and dated as of June 28, 2013 (as amended, restated, amended and restated, supplemented or otherwise modified from time to time, the “ Credit Agreement ” and, together with the Note Purchase Agreements, the “ Debt Agreements ”), a copy of which has been provided to and reviewed by Lessee.
Lessee hereby covenants and agrees with Lessor that, during the term of the 2009 Note Purchase Agreement, Lessee will comply with the covenants set forth in Sections 9.08 ( Material Project Documents ) (to the extent that Lessee is a party to any Material Project Documents, as defined in the 2009 Note Purchase Agreement), 10.04 ( Terrorism Sanctions Regulations ), 10.10 ( Sale of Assets, Etc .), 10.11 ( Sale or Discount of Receivables ), 10.12 ( Amendments to Organizational Documents ), 10.16 ( Project Documents ) and 10.17 ( Regulation ) of the 2009 Note Purchase Agreement.
Lessee hereby covenants and agrees with Lessor that, during the term of the 2010 Note Purchase Agreement, Lessee will comply with the covenants set forth in Sections 9.8 ( Material Project Documents ) (to the extent that Lessee is a party to any Material Project Documents, as defined in the 2010 Note Purchase Agreement), 10.4 ( Terrorism Sanctions Regulations ), 10.10 ( Sale of Assets, Etc .), 10.11 ( Sale or Discount of Receivables ), 10.12 ( Amendments to Organizational Documents ), 10.16 ( Project Documents ) and 10.17 ( Regulation ) of the 2010 Note Purchase Agreement.
Lessee hereby agrees with Lessor that, to the extent not otherwise covered by the terms of this Agreement, (i) Lessee hereby makes the same representations and warranties to Lessor as Lessor makes to the Lender (as defined in the Credit Agreement) in Sections 6.3 ( Disclosure ), 6.5 ( Financial Condition; Financial Instruments ), 6.6 ( Compliance with Laws, Other Instruments, Etc. ), 6.7 ( Governmental Authorizations, Etc. ), 6.8 ( Litigation; Observance of Agreements, Statutes and Orders ), 6.9 ( Taxes ), 6.10 ( Title to Property; Leases ), 6.11 ( Insurance ), 6.12 ( Licenses, Permits, Etc.; Material Project Documents ), 6.16 ( Foreign Assets and Control Regulations, Etc. ), 6.17 ( Status under Certain Statutes ), 6.18 ( Environmental Matters ), 6.19 ( Force Majeure Events; Employees ) and 6.20 ( Collateral ) of the Credit Agreement (or equivalent provisions), to the extent that such representations and warranties relate to (x) Lessee, whether in its capacity as Lessee or otherwise, including, without limitation, Lessee’s status or operations as a public utility, or (y) Lessee’s ownership of the System on or before the date hereof, and (ii) Lessee hereby covenants and agrees with Lessor that, during the term of the Credit Agreement, Lessee will comply with the covenants set forth in Sections 7.10 ( Material Project Documents ) (to the extent that Lessee is a party to any Material Project Documents, as defined in the Credit Agreement), 8.4 ( Terrorism Sanctions Regulations ), 8.10 ( Sale of Assets, Etc. ), 8.11 ( Sale or Discount of Receivables ), 8.12 ( Amendments to Organizational Documents ), 8.16 ( Material Projects Documents ) and 8.17 ( Regulation ) of the Credit Agreement (or equivalent provisions).
 
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Lessee may not lease, or agree or otherwise commit to lease, any transmission or distribution facilities other than pursuant to a Lease. Further, Lessee shall not permit Persons other than Hunt Family Members to acquire any interest in the Lessee, directly or indirectly, in a manner that would result in a Change in Control of Lessee. The Parties agree to amend, alter or supplement this Section 4.13 from time to time to give effect to the obligations under Lessor’s then-current credit arrangements.
ARTICLE V
LESSOR’S REPRESENTATIONS, WARRANTIES AND COVENANTS
Lessor hereby represents, warrants and covenants as follow:
5.1. Lessor’s Authority . Lessor has all requisite power and authority to execute and deliver this Agreement and to perform its obligations hereunder. Lessor has taken all action necessary to execute and deliver this Agreement and to perform its obligations hereunder, and no other action or proceeding on the part of Lessor is necessary to authorize this Agreement. This Agreement constitutes the legally valid and binding obligation of Lessor, enforceable against Lessor in accordance with its terms, except as the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Applicable Laws affecting the enforcement of creditors’ rights generally and equitable principles.
5.2. Liens and Tenants . Lessor represents that Lessor has good and valid title to the System, there are no unrecorded liens, encumbrances, leases, mortgages, deeds of trust (except as disclosed to Lessee in writing or as arise by operation of law), or other exceptions (collectively, “ Liens ”) arising as a result of any acts or omissions to act of Lessor by, through or under Lessor to Lessor’s right, title or interest in the System other than any such of the foregoing that does not materially impair the Lessee’s use of the System, and, to Lessor’s knowledge, there exist no rights or interests of any third party relating to the System that are not contemplated herein. Except for Permitted Liens or as may be disclosed in the applicable real property records in the State of Texas, or as disclosed by Lessor in writing to Lessee, Lessor represents that there are no mortgages, deeds of trust, or similar liens or security interests encumbering all or any portion of the System. Lessor shall fully cooperate and assist Lessee, at no out-of-pocket expense to Lessor, in obtaining a subordination and non-disturbance agreement from each party that holds a Lien that might reasonably be expected to interfere in any material respect with Lessee’s rights under this Agreement. Notwithstanding the foregoing, Lessor and its affiliates shall have the right to incur Permitted Liens encumbering the System or any component thereof solely for the benefit of Lessor in connection with any existing or future financing or refinancing pursuant to which the System (or any component thereof) is pledged as collateral and Lessee agrees to enter into such acknowledgments and agreements in respect thereof with the lenders, or a trustee or agent for the lenders as the Lessor may reasonably request.
5.3. Condition of Assets . Lessor has not taken any action or failed to take any action that would cause the System not to be in good operating condition and repair, ordinary wear and tear excepted, or adequate for the uses to which it is being put.
 
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5.4. Requirements of Governmental Agencies . Lessor shall assist and fully cooperate with Lessee, in complying with or obtaining any material land use permits and approvals, building permits, environmental impact reviews or any other approvals reasonably required for the maintenance or operation of the System, including execution of applications for such approvals, and including participating in any appeals or regulatory proceedings respecting the System at Lessee’s cost and expense, if requested by Lessee.
5.5. Hazardous Materials . Lessor shall conduct its activities in respect of the System in compliance in all material respects with applicable Environmental Laws.
5.6. Litigation . If Lessor becomes aware of any actions, claims or other legal or administrative proceedings that are pending, threatened or anticipated with respect to, or which could materially and adversely affect, the System, Lessor shall promptly deliver notice thereof to Lessee.
5.7. Limitation . EXCEPT AS EXPRESSLY REPRESENTED OTHERWISE IN THIS ARTICLE V, LESSOR (A) MAKES NO AND EXPRESSLY DISCLAIMS ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO (I) TITLE TO THE SYSTEM OR ANY PORTION THEREOF, (II) ANY ESTIMATES OF THE VALUE OF THE SYSTEM OR FUTURE REVENUES THAT MIGHT BE GENERATED BY THE SYSTEM, (III) THE MAINTENANCE, REPAIR, CONDITION, QUALITY, SUITABILITY, DESIGN OR MARKETABILITY OF THE SYSTEM, (IV) INFRINGEMENT OF ANY INTELLECTUAL PROPERTY RIGHT OR (V) ANY OTHER MATERIALS OR INFORMATION THAT MAY HAVE BEEN MADE AVAILABLE OR COMMUNICATED TO LESSEE OR ITS AFFILIATES, OR ITS OR THEIR EMPLOYEES, AGENTS, CONSULTANTS, REPRESENTATIVES OR ADVISORS IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY DISCUSSION OR PRESENTATION RELATING THERETO, AND (B) FURTHER DISCLAIMS ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR CONFORMITY TO MODELS OR SAMPLES OF MATERIALS OF ANY PORTION OF THE SYSTEM, IT BEING EXPRESSLY UNDERSTOOD AND AGREED BY THE PARTIES HERETO THAT THE SYSTEM IS BEING LEASED “AS IS, WHERE IS,” WITH ALL FAULTS AND DEFECTS, AND THAT LESSEE HAS MADE OR CAUSED TO BE MADE SUCH INSPECTIONS AS LESSEE DEEMS APPROPRIATE.
ARTICLE VI
LOSS AND DAMAGE; INSURANCE
6.1. Loss and Damage to the System .
(a) In the event of any damage or loss to any component of the System, Lessee shall promptly repair or replace such component to the standards required by Section 4.1 (regardless of whether such repair or replacement constitutes a Repair or a Footprint Project). Any such repaired or replaced component will immediately become part of the System owned by Lessor and the cost of any repair or replacement shall be borne as described in Sections 6.1(b)-(d) below.
 
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(b) If such repair or replacement constitutes a Repair, the cost of repairing or replacing such damage or loss, whether actually covered in whole or in part by insurance, shall be the responsibility of Lessee. Lessee shall be entitled to retain any insurance proceeds in excess of the amount necessary in connection with such Repair.
(c) If such repair or replacement constitutes a Footprint Project, then, as long as the related costs have been included in a CapEx Budget, the cost of repairing or replacing such damage or loss, whether actually covered in whole or in part by insurance, shall be the responsibility of Lessor. In such circumstance, unless otherwise agreed by the Parties, (i) if the damage or loss is covered by insurance, Lessor shall be responsible for payment of any deductible, and (ii) any damage or loss not covered by insurance (exclusive of any deductible) shall be the responsibility of Lessor. If the sum of such deductible and insurance proceeds exceeds the cost of such Footprint Project, then such excess will first reduce Lessor’s obligation to fund the deductible hereunder, and any excess thereafter will be retained by Lessee. If such repair or replacement constitutes a Footprint Project that is not included in a CapEx Budget, the provisions of Article X shall apply.
(d) Lessee shall be solely responsible for all costs of repairing or replacing any damaged property and equipment that is not part of the System and owned by Lessee, whether covered by Lessee’s insurance under Section 6.2 or otherwise. Nothing in this provision shall preclude Lessee from seeking recovery of such costs in a rate proceeding at the PUCT.
(e) If Lessor funds Lessee’s Personal Property pursuant to Section 10.1(b) of this Agreement, then all such funded Personal Property will be treated as a Footprint Project, and not a Repair, for purposes of this Section 6.1.
6.2. Insurance . Lessee will maintain, with financially sound and reputable insurers, insurance with respect to its business and properties and the System against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated, but in no event less than the insurance set forth in this Section 6.2 and Exhibit D .
(a) Lessee shall procure at its own expense and maintain in full force and effect at all times throughout the term of this insurance policies with insurance companies rated A-, 8 or higher by A.M. Best or acceptable to Lessor if not so rated, and authorized to do business in the State of Texas.
(b) Lessor may at any time amend the requirements and approved insurance companies described in this Section 6.2 or Exhibit D due to (i) new information not previously known by Lessor prior to the date of this Agreement or (ii) changed circumstances after the date of this Agreement, which in the reasonable judgment of Lessor either renders a required coverage to be materially inadequate or materially reduces the financial ability of the approved insurance companies to pay claims.
 
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(c) On the first Business Day of each year, and promptly at such other times as Lessor may reasonably request, Lessee shall furnish Lessor with approved certification of all required insurance. Such certification shall be executed by each insurer or by an authorized representative of each insurer where it is not practical for such insurer to execute the certificate itself. Such certification shall identify underwriters, the type of insurance, the insurance limits, and the policy term, and shall specifically list the special provisions enumerated for such insurance required by this Section 6.2. Upon request, Lessee will promptly furnish Lessor with copies of all insurance certificates, binders, and cover notes or other evidence of such insurance relating to the System.
(d) Concurrently with the furnishing of the certification referred to in Section 6.2(c) and on an annual basis thereafter, Lessee shall furnish Lessor with a certificate, signed by an officer of Lessee, stating that all premiums then due have been paid and that the insurance then carried or to be renewed is in accordance with the terms of this Section 6.2. and Exhibit D .
(e) In the event Lessee fails to take out or maintain the full insurance coverage required by this Section 6.2 and Exhibit D , Lessor, upon thirty (30) days’ prior notice (unless the aforementioned insurance would lapse within such period, in which event notice should be given as soon as reasonably possible) to Lessee of any such failure, may (but shall not be obligated to) take out the required policies of insurance and pay the premiums on the same. All amounts so advanced thereof by Lessor shall become an additional obligation of Lessee to Lessor, and Lessee shall forthwith pay such amounts to Lessor.
(f) No provision of this Section 6.2 or Exhibit D or any other provision of this Agreement shall impose on Lessor any duty or obligation to verify the existence or adequacy of the insurance coverage maintained by Lessee, nor shall Lessor be responsible for any representations or warranties made by or on behalf of Lessee to any insurance company or underwriter.
ARTICLE VII
REPORTING
7.1. Private Financing Arrangements . Lessee understands that Lessor, or an affiliate thereof, has raised equity and debt capital secured by the System and this Agreement and that Lessor or its affiliates have reporting obligations in connection with such arrangements, including obligations to provide financial statements prepared in accordance with GAAP, to prepare an annual strategic plan and to update such annual strategic plan in the event of certain material deviations therefrom. Lessee understands that Lessor relies on Lessee in order to comply with such obligations. From time to time, Lessor or an affiliate thereof may enter into additional arrangements that impose similar obligations. Accordingly, Lessee agrees to provide Lessor in a timely manner audited year-end financial statements, quarterly unaudited financial statements for the first three quarters of each year (certified by a financial officer of Lessee), estimates of Percentage Rent, and such acknowledgements, certificates, permits, licenses, instruments, documents and other information as Lessor may reasonably request from time to time in connection with, or to enable Lessor and its affiliates to comply with any such debt or equity financing arrangements or with Applicable Law. The Parties will negotiate in good faith the time frames during which Lessee will provide such information, with the intention that
 
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Lessee provide such information in a manner that is not unduly burdensome but that also allows Lessor sufficient time to comply with its reporting obligations. Lessee will also cooperate with Lessor to enable Lessor to satisfy its obligations in respect of annual strategic plans, including providing Lessor with requested information in advance of the due date of such annual strategic plan and keeping Lessor apprised of deviations in capital expenditures, construction activity or revenues of Lessee from amounts that were originally provided by Lessee in preparing such annual strategic plan. Lessee agrees to use reasonable efforts to advise Lessor if Lessee will be unable to meet the reporting requirements set forth herein in a timely manner and to reasonably cooperate with Lessor to remedy the effects of such non-compliance.
7.2. Public Company and Regulatory Information and Cooperation .
(a) Lessee agrees to provide audited full-year and unaudited (but SAS 100 reviewed) interim financial statements and the consent of Lessee’s auditors to the inclusion of their opinion regarding such financial statements in filings with the Securities and Exchange Commission made by Lessor or an affiliate of Lessor. Lessor may also request that Lessee provide evidence of a SAS 100 review from Lessee’s auditors with respect to any unaudited interim financial statements included in any such filing. Lessor shall have the right to share any such financial statements with its lenders under the Debt Agreements. Lessee covenants that (i) such financial statements will fairly present in all material respects the financial condition, results of operations and cash flows of Lessee as of, and for, the periods presented, and (ii) Lessee will endeavor to cause such financial statements to comply with any applicable laws, rules or regulations that Lessee and Lessor conclude in good faith are applicable to such financial statements by virtue of their inclusion in the securities law filings of Lessor or an affiliate thereof.
(b) Lessee agrees that, in connection with any underwritten offering of the securities of Lessor or any affiliate thereof, Lessee will use commercially reasonable efforts to cause its auditors to provide a comfort letter (or its equivalent) to such underwriters, if requested by Lessor.
(c) Lessee agrees to cooperate with Lessor when Lessor or an affiliate provides estimates to analysts and or investors regarding Lessor’s expectations of its future operating results (including capital expenditures) and to cooperate with Lessor with respect to analysts and investors to the extent such expectations change in any material respect.
(d) Lessee and Lessor agree to reasonably cooperate to ensure that, to the extent they require information from the other party in order to prepare their financial statements, to obtain audits of those financial statements and, if required, of their internal control over financial reporting, to respond to comments of the Securities and Exchange Commission on such financial statements or statements related to internal control over financial reporting or disclosure controls and procedures, or to ensure the efficacy of their internal controls or disclosure controls and procedures, they will reasonably cooperate in order to ensure that each Party is able to meet its obligations in respect thereof. Lessee agrees to promptly notify Lessor of or provide to Lessor, as applicable, (i) any material communication, written or otherwise, submitted to the Lessee by its auditors, including, but not limited to an audit response letter, accountant’s management letter or other written report submitted to Lessee by its accountants or any governmental agency in connection with an annual or interim audit of Lessee’s books, (ii) any material correspondence with, reports of or reports to any Regulatory Authority with respect to the System and (iii) any notices of violations of Applicable Law with respect to the System, in each case taking into account the REIT’s reporting obligations as a public company.
 
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(e) Lessor agrees to inform Lessee of the time periods in which each of the items identified in this Section 7.2 will be required, which may change. Lessee agrees to use reasonable efforts to advise Lessor if Lessee will be unable to meet the reporting requirements set forth herein in a timely manner and to reasonably cooperate with Lessor to remedy the effects of such non-compliance.
(f) If Lessor identifies additional matters with respect to which Lessee input, assistance or information is required in order for Lessor and its affiliates to comply with any applicable securities laws, the rules or regulations of any exchange on which the securities of such affiliate are traded or any similar laws, rules or regulations, the Parties agree to cooperate and negotiate in good faith in order to determine the manner in which Lessee can provide such input, assistance or information in a manner that positions Lessor and its affiliates to comply in a timely manner with such laws, rules or regulations, as efficiently as is feasible so as to minimize the burden that the provision of such input, assistance or information imposes on Lessee.
7.3. Mutual Obligations . Each Party shall as promptly as reasonably practicable furnish or cause to be furnished to the other Party, upon request from such Party, such information as may be required to enable such Party to file any reports required to be filed with any governmental or Regulatory Authority due to such Party’s ownership interest in or operation and control of the System, as applicable.
ARTICLE VIII
ASSIGNMENT
This Agreement shall not be assignable by either Party, nor shall the System or any part thereof be subleased by Lessee, except with the prior written consent of the other Party and the prior approval of any Regulatory Authority whose approval is required for the effectiveness of such assignment or sublease. For purposes of this Article VIII, an “assignment” by Lessee shall mean and include, in addition to any direct transfer by Lessee to a third party of all or any part of Lessee’s rights, estate or interests under this Agreement, any direct or indirect, voluntary or involuntary transfer of or encumbrance on all or any part of Lessee’s rights, estate or interests under this Agreement (i) by operation of law and/or (ii) by direct or collateral transfer of all or any part of the legal or beneficial ownership interest in Lessee by merger, consolidation or otherwise, provided, in the case of clause (ii), any such transaction or transactions will only constitute an assignment hereunder to the extent they result in a Change of Control. Notwithstanding the foregoing, Lessor shall have the right, without Lessee’s consent but subject to obtaining regulatory approval as described in the foregoing sentence, (a) to assign, pledge or grant a security interest in any or all of its interest in the Agreement to a lender or lenders, or a trustee acting on behalf of such lenders, in connection with a financing or refinancing in which such interest is pledged as collateral, and Lessee agrees to enter into such acknowledgments and agreements in respect thereof as the Lessor may reasonably request and (b) to assign its interest in this Agreement to a successor owner of the System.
 
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ARTICLE IX
DEFAULT
9.1. Lessee Default . Subject to Section 9.3, Lessee shall be in default in the event of any of the following:
(a) Except as provided in Section 9.1(g), Lessee’s failure to make any payment of Rent when due;
(b) Lessee (i) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes corporate action for the purpose of any of the foregoing;
(c) a court or a Regulatory Authority or other governmental agency of competent jurisdiction enters an order appointing, without consent by Lessee, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of Lessee or any such petition shall be filed against Lessee and such petition shall not be dismissed within 90 days;
(d) Any representation or warranty made by Lessee herein shall prove to have been inaccurate in any material respect at the time made;
(e) a final judgment or judgments for the payment of money aggregating in excess of $1,000,000 are rendered against Lessee and which judgments are not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay;
(f) Lessee shall have breached or failed to comply in any material respect with any other covenant or agreement contained herein; or
(g) Notwithstanding Section 9.1(a), Lessee’s failure to pay Rent when due shall not constitute a default if (i) such failure is due to unforeseeable circumstances arising from a physical event beyond the control of the Lessee, including the incurrence of costs and expenditures as a result of such an event that are materially in excess of budgeted costs and expenditures or an unforeseen material decline in electricity usage as a result of such event and (ii) such failure is cured within ninety (90) days after the date such rent was due through Lessee’s payment of the entire amount of such unpaid Rent, plus interest thereon at a rate equal to six percent (6%) per annum or the maximum rate allowed by law, whichever is lesser, from the date such Rent was originally due until the date of payment.
 
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9.2. Lessor Default . Subject to Section 9.3, Lessor shall be in default in the event any representation or warranty made by Lessor herein shall prove to have been inaccurate in any material respect at the time made, or in the event Lessor breaches or fails to comply in any material respect with any covenant or agreement contained herein.
9.3. Right to Cure . If a Party (the “ Defaulting Party ”) defaults pursuant to an Event of Default, such Defaulting Party shall not be in default of the terms of this Agreement if (other than in the event of a default described in Sections 9.1(a), 9.1(b) and/or 9.1(c) above), (a) in the case of a Monetary Default, the Defaulting Party pays the past due amount within thirty (30) days of receiving a Notice of Default from the other Party (the “ Non-Defaulting Party ”), and (b) in the case of a Non-Monetary Default, the Event of Default is cured within forty-five (45) days of receiving the Notice of Default; provided, that if the nature of the Non-Monetary Default requires, in the exercise of commercially reasonable diligence, more than forty-five (45) days to cure then the Defaulting Party shall not be in default as long as it commences performance of the cure within forty-five (45) days and thereafter completes such cure with commercially reasonable diligence.
9.4. Remedies .
(a) Should an Event of Default remain uncured by the Defaulting Party, the Non-Defaulting Party shall have and shall be entitled to exercise the remedies provided in this Section 9.4 and any and all other remedies available to it at law or in equity, all of which remedies shall be cumulative; provided, that the exercise of any remedies hereunder shall be subject to PUCT and other required regulatory approvals to the extent applicable.
(b) In no way limiting the provisions of Section 9.4(a), in the case of an Event of Default of Lessee, Lessor shall have the right to (i) terminate the Agreement upon notice to Lessee, and recover from Lessee all damages to which Lessor is entitled under Applicable Laws, (ii) terminate Lessee’s right to use and operate the System while keeping this Agreement in effect, and recover from Lessee all damages to which Lessor is entitled under Applicable Laws, and (iii) take reasonable action to cure Lessee’s default at Lessee’s expense; provided, that in the event of a violation of Applicable Laws by Lessee, an emergency or government or regulatory action in respect of which Lessor, in its reasonable discretion, determines immediate action is necessary, Lessor shall have the right to step in and take such action on behalf of Lessee at Lessee’s cost and expense immediately upon giving notice to Lessee, notwithstanding any applicable cure period.
(c) Any amounts recovered by Lessor from Lessee in the event of a default shall, to the maximum extent permissible under Applicable Laws, be deemed to be in respect of past or future Rent owing under this Agreement.
 
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ARTICLE X
CAPITAL EXPENDITURES
10.1. Capital Expenditures Generally .
(a) Lessee has provided to Lessor in the CapEx Budget the approximate amounts of Capital Expenditures that Lessee expects will be needed for purposes of funding Footprint Projects in each Lease Year through 2017. On or before October 15 of each calendar year, Lessee shall review and revise the CapEx Budget on a rolling three-year basis (which shall include, if applicable, any year in such three-year period following the end of the then-current Term and assume the renewal of this Agreement pursuant to Section 2.1), taking into account any changed circumstances that (i) make it no longer feasible to incur one or more of the costs reflected on the prevailing CapEx Budget, (ii) make it necessary to amend the nature or amounts reflected for a particular Footprint Project or (iii) dictate that additional Footprint Projects be added (such budget, as so updated and revised, is referred to herein as the “ CapEx Budget ”). Lessee agrees to revise the CapEx Budget to include any Footprint Projects (x) required by Regulatory Authorities or (y) reasonably necessary to satisfy Lessee’s obligation as a regulated utility to serve its customers or to maintain the safety or reliability of the System. Capital Expenditures included in a CapEx Budget will be included based on the date such Capital Expenditures are to be incurred, which differentiates these Capital Expenditures from Incremental CapEx and Lessee CapEx, which are measured under this Agreement based on when the assets developed with such Capital Expenditures are placed in service, and not when they are incurred.
(b) If requested by Lessor, Lessee will also provide an estimate of any Capital Expenditures that Lessee expects for purposes of funding Personal Property related to the System. If Lessor and Lessee agree, Lessor will fund such Capital Expenditures pursuant to this Agreement, through a loan or through a separate lease. Amounts Lessor provides pursuant to this Agreement to fund any such Personal Property will be treated in a manner similar to any amounts Lessor provides to fund Footprint Projects for purposes of Section 3.2 and elsewhere herein. Lessee will cause any such Personal Property to be titled in Lessor’s name and will reasonably cooperate with Lessor in order to enable any secured lender of Lessor or any secured lender of an affiliate of Lessor to perfect its security interest in any such Personal Property. In the alternative, Lessor may elect to fund such Capital Expenditures through a TRS or to loan (or cause such TRS to loan) Lessee the cash to acquire any such Personal Property in a transaction in which Lessor or a TRS may retain a security interest in such Personal Property. In such case the Parties shall negotiate in good faith the terms under which Lessor or such TRS shall fund any such Personal Property, including the terms of any lease between Lessee and the TRS or other financing arrangements provided by the Lessor or the TRS. Any such funded amounts, regardless of the form in which they are funded, will be included in the calculation of whether there is Incremental CapEx, and, if such funded amounts constitute Incremental CapEx, the Parties’ intention is to provide Lessor with a Comparable Rate of Return on all such funded amounts.
10.2. Capital Expenditures Funded by Lessor . Lessor agrees to fund any Footprint Projects contained in the CapEx Budget (as revised from time to time). Lessor’s obligation to fund Footprint Projects pursuant to this Section 10.2 shall include any costs associated with such Footprint Projects that Lessee is not allowed to recover through its PUCT-approved rates. Any Footprint Projects funded by Lessor under this Section 10.2 shall be deemed to be part of the System upon completion.
10.3. Capital Expenditures Funded by Lessee . Except as set forth in this Section 10.3, Lessee may not fund any Footprint Projects. In the event Lessor fails to fund any Footprint Projects, Lessee may at its sole discretion fund the needed capital expenditures (and Lessee shall
 
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be entitled to applicable damages, if any, as a result of funding any such Footprint Projects); provided that, in such circumstance, Lessee may fund Severable Footprint Projects without restriction under this Section 10.3 but may only fund Nonseverable Footprint Projects which are required in order to comply with Applicable Law or which are required by any Regulatory Authority. Any Footprint Projects funded by Lessee under this Section 10.3 shall not be considered part of the System for purposes of this Agreement; provided however , that any part of the System that is built with CIAC funds shall be considered a leasehold improvement that is part of the System and reverts to the Lessor upon termination of this Agreement without further payment from Lessor to Lessee under Section 2.3.
10.4. Footprint Project Construction Activities . Lessee will either use its personnel, or either Lessee or Lessor will contract with third parties, to construct Footprint Projects. Lessee shall be responsible for the oversight of such construction activities, regardless of whether the Footprint Project is funded by Lessor or Lessee. Lessee’s construction activities and oversight shall be intended to ensure that such construction is performed in a manner consistent with Good Utility Practice and does not adversely affect the reliability and safety of the System or the ERCOT electric grid. In connection therewith, Lessor will reimburse Lessee for all Project Management Costs that Lessee incurs in connection with constructing such Footprint Project, provided that any costs and expenses of Lessee under this Section 10.4 must be included in any CapEx Budget submitted by Lessee under Section 10.1 or approved by Lessor to qualify for reimbursement by Lessor hereunder.
10.5. Ownership of Footprint Projects .
(a) Each Footprint Project shall be owned by the Party that funded the capital expenditures used to construct such Footprint Project; provided however , that any part of the System that is built with CIAC funds shall be considered a leasehold improvement that is part of the System and shall revert to the Lessor upon termination of this Agreement without further payment from Lessor to Lessee under Section 2.3.
(b) Upon the expiration or termination of this Agreement, Lessor shall have the right (but not the obligation) to purchase, subject to required regulatory approvals, any Nonseverable Footprint Projects or Severable Footprint Projects owned by Lessee at the greater of (i) net book value plus ten percent (10%) and (ii) the fair market value thereof as determined by mutual agreement of Lessor and Lessee. If the Parties fail to agree on the amount of the purchase price, the purchase price shall be submitted to arbitration in accordance with Section 13.7 of this agreement, pursuant to which the Arbitration Panel shall be empowered to determine the amount of the purchase price, based on submissions by each of the Lessee and the Lessor. Lessee shall be entitled to remove any Severable Footprint Projects owned by Lessee upon the expiration or termination of this Agreement in the event such Severable Footprint Projects are not purchased by Lessor, subject to any required regulatory approvals.
10.6. Asset Acquisitions . Lessee and Lessor will cooperate in good faith to ensure that all assets comprising the System (“ System Assets ”) are acquired in Lessor’s name or are acquired by Lessee and subsequently transferred to Lessor. In connection therewith, Lessee agrees (a) to transfer to Lessor all previously acquired System Assets, (b) that any future-acquired System Assets will be deemed automatically transferred to Lessor, (c) to take reasonable actions as are
 
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necessary and appropriate to document the transfer of any such System Assets to Lessor and, if applicable, to memorialize the security interest in such System Assets required to be granted pursuant to the terms of the Debt Agreements, including through the delivery and recordation of mortgages, deeds of trust or UCC financing statements, and (d) to take reasonable steps to record the transfer and such security interest in the records of the applicable county or other applicable locale in which the System Assets are located.
10.7. Reimbursements . From time to time, Lessee may enter into interconnect or similar agreements that obligate the counterparty to such agreements to reimburse Lessee for Capital Expenditures in certain circumstances. Such reimbursement obligation may, in some circumstances, be accompanied by additional security such as parent guaranty or a letter of credit. If and to the extent that (a) Lessor funds Capital Expenditures that are used for the construction or development pursuant to any of these interconnect agreements, and (b) Lessee becomes entitled to assert any reimbursement or other rights pursuant to any such interconnect agreements, then, unless Lessor agrees otherwise, Lessee will enforce such reimbursement or other rights and will in turn reimburse Lessor for the amount of related Capital Expenditures that Lessor has funded pursuant hereto. Lessee further agrees to reimburse Lessor for other Capital Expenditures that Lessor has funded pursuant to this Agreement to the extent required by the Policies and Procedures.
ARTICLE XI
REGULATORY COOPERATION
11.1. Jurisdiction . The Parties recognize that (i) the System and the operation thereof are subject to the jurisdiction of the PUCT and to certain reliability and safety requirements of ERCOT and TRE, and (ii) Lessee holds the CCN for operation of the System. The Parties agree that, as the lessee hereunder, as operator of the System and as the holder of the CCN, Lessee shall be responsible for compliance with all regulatory requirements related to the System, including but not limited to, taking all actions reasonably necessary or advisable to comply with such requirements; preparing and filing all necessary notices, reports, applications, and other materials with the PUCT, ERCOT and TRE; and initiating, prosecuting, defending or participating in any administrative or judicial proceeding reasonably necessary or advisable to operate the System in an economical and efficient manner. Lessee shall consult with Lessor prior to initiating any rate proceeding with the PUCT to change the rates Lessee can lawfully charge, provided that, with or without Lessor consent, Lessee shall be authorized to initiate any such rate proceeding. Upon Lessor’s request, Lessee shall file a rate proceeding before the PUCT; provided that, Lessor shall be responsible for reimbursing Lessee for all costs associated with prosecution of such proceeding to the extent that such costs are not recoverable in Lessee’s PUCT-approved rates.
11.2. Cooperation . The Parties agree that during the term of this Agreement they will cooperate to assure compliance with all applicable regulations, orders or lawful requests of any governmental or Regulatory Authorities that relate to the System and Lessee’s obligations as the holder of the CCN and will provide such information to such governmental and Regulatory Authorities as the other Party or such governmental or Regulatory Authorities may reasonably
 
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request in connection therewith. Lessor further agrees to use its best efforts to cooperate and promptly respond to any lawful requests from Lessee relating to Lessee’s efforts to comply with all regulatory requirements or to participate in any necessary or advisable legal proceedings, whether judicial or administrative. Each Party shall bear its own costs in complying with this paragraph.
ARTICLE XII
INDEMNITY
12.1. General Indemnity . EACH PARTY (THE “ INDEMNIFYING PARTY ”) SHALL DEFEND, INDEMNIFY AND HOLD HARMLESS THE OTHER PARTY AND THE OTHER PARTY’S RELATED PERSONS (EACH, AN “ INDEMNIFIED PARTY ”) FROM AND AGAINST ANY AND ALL CLAIMS, LITIGATION, ACTIONS, PROCEEDINGS, LOSSES, DAMAGES, LIABILITIES, OBLIGATIONS, COSTS AND EXPENSES, INCLUDING ATTORNEYS’, INVESTIGATORS’ AND CONSULTING FEES, COURT COSTS AND LITIGATION EXPENSES (COLLECTIVELY, “ CLAIMS ”) SUFFERED OR INCURRED BY SUCH INDEMNIFIED PARTY, EVEN IF SUCH LIABILITIES ARE CAUSED SOLELY OR IN PART BY THE NEGLIGENCE OF ANY INDEMNIFIED PARTY, ARISING FROM THE ACTS OR OMISSIONS TO ACT OF THE INDEMNIFYING PARTY (A) ARISING IN THE CASE OF THE LESSEE AS THE INDEMNIFYING PARTY, FROM THE OPERATION OF THE SYSTEM, (B) FOR PHYSICAL DAMAGE TO THE SYSTEM, TO THE EXTENT CAUSED BY THE INDEMNIFYING PARTY OR ANY RELATED PERSON THEREOF, (C) FOR PHYSICAL INJURIES OR DEATH (INCLUDING BY REASON OF OPERATING THE SYSTEM) TO OR OF THE INDEMNIFIED PARTY OR THE PUBLIC, TO THE EXTENT CAUSED BY THE INDEMNIFYING PARTY OR ANY RELATED PERSON THEREOF, (D) ANY BREACH OF ANY COVENANT OR ANY FAILURE TO BE TRUE OF ANY REPRESENTATION OR WARRANTY, MADE BY THE INDEMNIFYING PARTY UNDER THIS AGREEMENT OR (E) THE NEGLIGENCE, RECKLESSNESS OR INTENTIONAL MISCONDUCT OF THE INDEMNIFYING PARTY OR ANY RELATED PERSON THEREOF; PROVIDED, HOWEVER, THAT IN NO EVENT SHALL THE INDEMNIFYING PARTY BE RESPONSIBLE FOR DEFENDING, INDEMNIFYING OR HOLDING HARMLESS ANY INDEMNIFIED PARTY TO THE EXTENT OF ANY CLAIM CAUSED BY, ARISING FROM OR CONTRIBUTED TO BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH INDEMNIFIED PARTY. AS USED HEREIN, THE TERM “ RELATED PERSON ” SHALL MEAN ANY AFFILIATES, CONTRACTORS, LESSEES, AND SUBLESSEES, AND EACH OF THEIR RESPECTIVE, PRINCIPALS, OFFICERS, EMPLOYEES, SERVANTS, AGENTS, REPRESENTATIVES, SUBCONTRACTORS, LICENSEES, INVITEES, GUESTS, SUCCESSORS AND/OR ASSIGNS OF A PARTY; PROVIDED, THAT IN NO EVENT SHALL A PARTY BE DEEMED A RELATED PERSON WITH RESPECT TO THE OTHER PARTY.
12.2. Environmental Indemnity .
(a) To the fullest extent permitted by law, Lessee shall defend, indemnify and hold harmless Lessor and Lessor’s Related Persons from Claims (including, without limitation, any costs and expenses of clean up or other mitigation) suffered or incurred by such persons resulting from any of the following occurring from and after the date hereof or the date on which Lessee
 
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assumed operational control over the relevant property: (i) the presence or release of Hazardous Materials in, under or about the System which are or were brought or permitted to be brought onto the System by the Lessee or Lessee’s Related Persons, (ii) creation of any hazardous or potentially hazardous environmental conditions or exacerbation of a pre-existing environmental condition, (iii) the violation of any Environmental Law by Lessee or Lessee’s Related Persons or (iv) any other failure to comply with Section 4.6 by Lessee or Lessee’s Related Persons.
(b) To the fullest extent permitted by law, Lessor shall defend, indemnify and hold harmless Lessee and Lessee’s Related Persons from Claims (including, without limitation, any costs and expenses of clean up or other mitigation) suffered or incurred by such persons resulting from (i) the presence or release of any Hazardous Material or hazardous or potentially hazardous condition in, under or about the System that was present in, under or about the System as of the date Lessee assumed operational control over the relevant property (except to the extent such existing Hazardous Material or condition is exacerbated by Lessee or Lessee’s Related Persons), (ii) the presence or release of Hazardous Materials in, under or about the System which are or were brought or permitted to be brought onto the System by Lessor or Lessor’s Related Persons during construction of any improvement or addition to the System, (iii) the violation of any Applicable Law by Lessor or Lessor’s Related Persons, or (iv) testing conducted under Section 4.6 by Lessor or Lessor’s Related Persons.
ARTICLE XIII
MISCELLANEOUS
13.1. Limitation of Damages . NEITHER PARTY SHALL BE LIABLE FOR ANY LOST OR PROSPECTIVE PROFITS, AND IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY OTHER SPECIAL, PUNITIVE, EXEMPLARY, CONSEQUENTIAL, INCIDENTAL OR INDIRECT LOSSES OR DAMAGES (IN TORT, CONTRACT OR OTHERWISE) UNDER OR IN RESPECT OF THIS AGREEMENT OR FOR ANY FAILURE OF PERFORMANCE RELATED HERETO, HOWSOEVER CAUSED.
13.2. Condemnation . In the case of a condemnation or taking, this Agreement shall continue in effect; provided, that this Agreement shall terminate if 75% or more of the System is subject to the condemnation or taking. Lessor shall be entitled to all sums received by reason of any such taking or condemnation, except for that portion of such award, if any, which is expressly awarded for the Lessee’s leasehold interest under this Agreement or which is awarded for any property owned by Lessee (including any Footprint Projects funded by Lessee).
13.3. Confidentiality . To the full extent allowed by Applicable Law, each Party (the “ Receiving Party ”) shall maintain, for the benefit of the other Party (the “ Disclosing Party ”), in the strictest confidence all information pertaining to the financial terms of or payments under this Agreement, the Disclosing Party’s methods of operation, methods of the System, and the like, whether disclosed by the Disclosing Party or discovered by the Receiving Party, unless such information either (i) is in the public domain by reason of prior publication through no act or omission of the Receiving Party or its employees or agents, (ii) was already known to the Receiving Party at the time of disclosure and which the Receiving Party is free to use or disclose without breach of any obligation to any person or entity or (iii) is required to be disclosed by the PUCT or other Regulatory Authorities, or must be disclosed in accordance with applicable
 
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securities laws or the rules of any applicable securities exchange on which the securities of the Receiving Party (or an affiliate thereof) are traded. To the full extent permitted by law, neither Party shall use such information for its own benefit, publish or otherwise disclose it to others, or permit its use by others for their benefit or to the detriment of the other Party. Notwithstanding the foregoing, the Receiving Party may disclose such information to any auditor or to the Receiving Party’s lenders, attorneys, accountants and other personal advisors; any prospective purchaser of the System; or pursuant to lawful process, subpoena or court order; provided the Receiving Party, in making such disclosure, advises the party receiving the information of the confidentiality of the information and obtains the agreement of said party not to disclose the information.
13.4. Successors and Assigns . The Agreement shall inure to the benefit of and be binding upon Lessor and Lessee and, to the extent provided in any assignment or other transfer under Article VIII hereof, any assignee, and their respective heirs, transferees, successors and assigns, and all persons claiming under them. References to Lessee in this Agreement shall be deemed to include assignees that hold a direct ownership interest in this Agreement and actually are exercising rights under this Agreement to the extent consistent with such interest.
13.5. Rent Obligations Not Excused by Force Majeure, Etc. Lessee shall not be excused from its obligation to pay Rent during any Force Majeure Event or a condemnation or casualty of all or any part of the System.
13.6. Further Assurances; Policies and Procedures .
(a) Each Party will, from time to time, execute, cause to be acknowledged and deliver such documents or instruments, and provide such certificates, as the other Party may reasonably request to carry out and fulfill the transactions, and permit the exercise and performance of the rights and obligations, as are contemplated hereunder. Each Party will cooperate with the other Party to effectuate fully the purposes and intent of this Agreement. In no way limiting the foregoing, the Parties shall cooperate to obtain any necessary regulatory approvals, including, without limitation, providing timely responses to discovery requests, participating in regulatory proceedings to the extent necessary and generally providing assistance as required.
(b) From time to time, the Parties shall agree to policies and procedures regarding matters arising under this Agreement including, without limitation, the treatment of Capital Expenditures for canceled Footprint Projects, each Party’s reporting obligations and such additional matters as the Parties may identify (the “ Policies and Procedures ”). The Parties agree to cooperate and negotiate in good faith the Policies and Procedures, and any amendment or revision thereto that may be reasonably requested by either Party, and to memorialize the same in a writing executed by a representative of each Party. In the event the Parties cannot agree on the terms of such Policies and Procedures after 60 days of negotiating in good faith, then either the Lessee or the Lessor may submit such matters to arbitration pursuant to Section 13.7 of this Agreement, pursuant to which the Arbitration Panel shall be empowered to determine Policies and Procedures that take into account the REIT’s reporting obligations as a public company and Lessee’s obligations as a regulated utility.
 
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13.7. Arbitration . Except for a dispute regarding the payment of Undisputed Rent, any dispute under this Agreement shall, if not resolved by the Parties within ninety (90) days after notice of such dispute is served by one Party to the other (or, if different, the period provided for resolution by the Parties in the provision of this Agreement under which such dispute is brought), be submitted to an “ Arbitration Panel ” comprised of three (3) members. No more than one (1) panel member may be with the same firm, and no panel member may have an economic interest in the outcome of the arbitration. In addition to the foregoing, the failure by the Lessee and the Lessor to reach an agreement or make a mutual determination or characterization required by Sections 2.2(b) (with respect to the determination of Extended Period Rent); 3.1(d)(i); 3.1(d)(ii); 3.1(d)(iii); 3.2(a); 3.2(b) (with respect to the terms of any renewed Rent Supplement that has expired during the term of this Agreement); 3.2(c); 3.2(d); 3.8 or 13.6(b), in each case after 60 days of negotiating in good faith, shall be deemed to be a “dispute” for purposes of this Section 13.7, to be resolved in accordance with this Section.
(a) The Arbitration Panel shall be selected as follows: Within five (5) Business Days after the expiration of the period referenced above, Lessee shall select its panel member meeting the criteria of the above paragraph (the “ Lessee Panel Member ”) and Lessor shall select its panel member meeting the criteria of the above paragraph (the “ Lessor Panel Member ”). If a Party fails to timely select its respective panel member, the other Party may notify such Party in writing of such failure, and if such Party fails to select its respective panel member within three (3) Business Days from such notice, then the other Party may select such panel member on such Party’s behalf. Within five (5) Business Days after the selection of the Lessor Panel Member and the Lessee Panel Member, the Lessee Panel Member and the Lessor Panel Member shall jointly select a third panel member meeting the criteria of the above paragraph (the “ Third Panel Member ”). If the Lessor Panel Member and the Lessee Panel Member fail to timely select the Third Panel Member and such failure continues for more than three (3) Business Days after written notice of such failure is delivered to the Lessor Panel Member and Lessee Panel Member by either Lessor or Lessee, either Lessor or Lessee may request the managing officer of the American Arbitration Association to appoint the Third Panel Member.
(b) Within ten (10) Business Days after the selection of the Arbitration Panel, each Party shall submit to the Arbitration Panel a written statement identifying its summary of the issues and claims, including, if applicable, its calculation of Rent. Any Party may also request an evidentiary hearing on the merits in addition to the submission of written statements. The Arbitration Panel shall make its decision within twenty (20) days after the later of (i) the submission of such written statements of particulars, and (ii) the conclusion of any evidentiary hearing on the merits, and shall take into consideration the relative risks and rewards undertaken and capital invested by each Party and shall use the Comparable Rate of Return concept described in Section 3.2(a) in determining any Rent disputes. The Arbitration Panel shall reach its decision by majority vote and shall communicate its decision by written notice to the Parties.
(c) The decision by the Arbitration Panel shall be final, binding and conclusive and shall be non-appealable and enforceable in any court having jurisdiction. All hearings and proceedings held by the Arbitration Panel shall take place in Dallas, Texas.
 
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(d) The resolution procedure described herein shall be governed by the Commercial Rules of the American Arbitration Association and subject to the Texas General Arbitration Act to the extent such act is applicable hereto.
(e) In the case of an arbitration proceeding involving a determination of Rent and Percentage Rent, until Rent and Percentage Rent have been finally determined, Lessee shall pay Rent and Percentage Rent based upon prevailing rates therefor, and an appropriate refund shall be made to or additional Rent shall be paid by Lessee within ten (10) days after a final determination is made.
(f) The Parties shall bear equally the fees, costs and expenses of the Arbitration Panel in conducting the arbitration.
13.8. Notices . All notices or other communications required or permitted by this Agreement, including payments to Lessor, shall be in writing and shall be served personally or by reputable express courier service or by facsimile transmission addressed to the relevant parties at the address stated below or at any other address notified by that Party to the other as its address for service. Any notice so given personally shall be deemed to have been served on delivery, any notice so given by express courier service shall be deemed to have been served the next Business Day after the same shall have been delivered to the relevant courier, and any notice so given by facsimile transmission shall be deemed to have been served on dispatch. As proof of such service it shall be sufficient to produce a receipt showing personal service, the receipt of a reputable courier company showing the correct address of the addressee or an activity report of the sender’s facsimile machine showing the correct facsimile number of the parties on whom notice is served and the correct number of pages transmitted. All communications, other than routine correspondence in the ordinary course of business, between the Parties pursuant to this Agreement shall be sent by the same method of communication by the Party sending the communication. The Parties’ addresses for service are:
If to Lessor:
Sharyland Distribution & Transmission Services, L.L.C.
1807 Ross Avenue, 4 th Floor
Dallas, Texas 75201
Attention: Chief Executive Officer and General Counsel
If to Lessee:
Sharyland Utilities, L.P.
1807 Ross Avenue, 4 th Floor
Dallas, Texas 75201
Attention: Hunter Hunt
With a copy to:
General Counsel
Fax: (214) 855-6965
 
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Any Party may change its address for purposes of this paragraph by giving written notice of such change to the other parties in the manner provided in this paragraph.
13.9. Entire Agreement; Amendments . This Agreement constitutes the entire agreement between Lessor and Lessee respecting its subject matter, and supersedes any and all oral or written agreements. Any agreement, understanding or representation respecting the System, or any other matter referenced herein not expressly set forth in this Agreement or a subsequent writing signed by both Parties is null and void. For avoidance of doubt, the Second Amended and Restated Lease is hereby replaced in its entirety by this Agreement. This Agreement shall not be modified or amended except in a writing signed by both Parties. No purported modifications or amendments, including without limitation any oral agreement (even if supported by new consideration), course of conduct or absence of a response to a unilateral communication, shall be binding on either Party.
13.10. Legal Matters . This Agreement shall be governed by and interpreted in accordance with the laws of the State of Texas, without regard to its conflicts of law principles. The Parties agree that any rule of construction to the effect that ambiguities are to be resolved in favor of either Party shall not be employed in the interpretation of this Agreement and is hereby waived.
13.11. Partial Invalidity . Should any provision of this Agreement be held, in a final and unappealable decision by a court of competent jurisdiction, to be either invalid, void or unenforceable, the remaining provisions hereof shall remain in full force and effect, unimpaired by the holding.
13.12. Recordin g . Lessee shall not record this Agreement without the prior written consent of the Lessor. Lessee may record at its expense a memorandum of this Agreement in form and substance reasonably approved by Lessor.
13.13. Intention of Parties; True Lease .
(a) The Parties hereby declare that their relationship in and to the Leased System is and will be that of lessor and lessee, expressly subject to the terms, conditions, limitations and requirements set forth in this Agreement. Nothing contained in this Agreement will be deemed to constitute the Parties as partners or joint venturers or as principal and agent. The Parties intend for this Agreement to constitute a true lease with respect to the Leased System for US Federal, state and local income tax purposes, and each Party shall treat the Agreement as a true lease with respect to the Leased System for federal income tax reporting purposes.
(b) The Parties acknowledge that Lessor is owned, directly or indirectly, in whole or in part, by an entity intending to qualify as a real estate investment trust under the Internal Revenue Code of 1986, as amended, and the Parties agree to negotiate in good faith any modification or amendment to this Agreement requested by Lessor to facilitate such qualification; provided that Lessee shall not be obligated to agree to any such modification or amendment if such modification or amendment would materially adversely affect Lessee or would be in conflict with Applicable Law or any regulations or orders of any Regulatory Authority.
 
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[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
 
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IN WITNESS WHEREOF, Lessor and Lessee, acting through their duly authorized representatives, have executed this Agreement with the intent that it be effective as of the Effective Date, and certify that they have read, understand and agree to the terms and conditions of this Agreement.

LESSOR:	
	
SHARYLAND DISTRIBUTION & TRANSMISSION
SERVICES, L.L.C.	
		
By:	 	/s/ Brant Meleski	
	 	Name:	 	Brant Meleski	
	 	Title:	 	Senior Vice President and	
	 		 	Chief Financial Officer	
	
LESSEE:	
	
SHARYLAND UTILITIES, L.P.	
		
By:	 	/s/ Mark Caskey	
	 	Name:	 	Mark Caskey	
	 	Title:	 	President	
Signature Page to McAllen Lease Agreement

APPENDIX A
DEFINITIONS
“2009 Note Purchase Agreement” has the meaning set forth in Section 4.13.
“2010 Note Purchase Agreement” has the meaning set forth in Section 4.13.
“AC” has the meaning set forth in Section 1.1(b)(v).
“Accumulated Deficit” for any Lease Year means the aggregate amounts by which Qualified CapEx has been less than Original Base CapEx during prior Lease Years, as set forth in a then-effective Rent Supplement.
“Additional Rent” has the meaning set forth in Section 3.4.
“AFUDC” means allowance for funds used during construction.
“Agreed-to-Discount” has the meaning set forth in Section 3.2(a).
“Agreement” has the meaning set forth in the Preamble.
“Annual Percentage Rent Breakpoint” means the dollar amount of annual Gross Revenues that must be exceeded in a particular Lease Year before Percentage Rent is owed, as set forth on the then-effective Rent Supplement for such Lease Year.
“Applicable Laws” means all laws, ordinances, statutes, orders and regulations of any federal, state, or local government, regulatory or administrative authority, any agency or commission thereof, or any court or tribunal, including without limitation all requirements of the Regulatory Authorities.
“Arbitration Panel” has the meaning set forth in Section 13.7.
“Base Rent” has the meaning set forth in Section 3.1(a).
“Business Day” means a day other than a Saturday, Sunday or other day on which federal agencies are authorized or required by law to close.
“CapEx Budget” has the meaning set forth in Section 10.1(a).
“Capital Expenditures” means expenditures that are or are expected to be capitalized under GAAP.
“CCN” means a Certificate of Convenience and Necessity or amendment thereto issued by the PUCT.
“CFO Certificate” means a document signed by the Chief Financial Officer of Lessee and certifying to the accuracy and completeness of the statement of Gross Revenues.

“Change in Control” means Hunt Family Members cease to possess, directly or indirectly, the power to direct or cause the direction of the management or policies of Lessee, whether through the ability to exercise voting power, by contract or otherwise.
“CIAC” means any contributions in aid of construction from current or prospective customers, plus any additional payments as a tax gross up for such contributions, with respect to which Lessee does not anticipate receiving an increase in its regulatory rate base.
“Claims” has the meaning set forth in Section 12.1.
“Comparable Rate of Return” has the meaning set forth in Section 3.2(a).
“Consolidated Net Plant” means, with respect to any Person, as of the date of determination, the net plant set forth on the face of the consolidated balance sheet of such Person or absent such amount on the consolidated balance sheet, the total plant of such Person on a consolidated basis minus accumulated depreciation as set forth in the footnotes of the consolidated financial statements, in each case, for the fiscal quarter ended on the date of the last financial statements delivered pursuant to Section 7.1 of the Credit Agreement.
“Consolidated Qualified Lessee” means any Qualified Lessee that is consolidated into the financial statements of another Qualified Lessee.
“Covered Revenue” means any fees, charges or other revenues (a) that are characterized as Unadjusted Gross Revenues (or Gross Revenues) for purposes hereof or for purposes of any other similar lease (x) between Lessee and Lessor or an affiliate thereof or (y) between Lessee and any of its wholly-owned subsidiaries or (b) that are generated from the Rate Base of regulated assets owned or operated by a party other than Lessor or a subsidiary thereof.
“Credit Agreement” has the meaning set forth in Section 4.13.
“CREZ Lease” means the Second Amended and Restated Lease Agreement (CREZ Assets) between Sharyland Projects, L.L.C. and Lessee effective as of the Effective Date, as the same may be amended from time to time.
“DC” has the meaning set forth in Section 1.1(b)(v).
“Debt Agreements” has the meaning set forth in Section 4.13.
“Defaulting Party” has the meaning set forth in Section 9.3.
“Disclosing Party” has the meaning set forth in Section 13.3.
“Effective Date” has the meaning set forth in the Preamble.
“Entity” means any general partnership, limited partnership, proprietorship, corporation, joint venture, joint stock company, limited liability company, limited liability partnership, business trust, estate, governmental entity, cooperative, association or other foreign or domestic enterprise.

“Environmental Law” means any and all Legal Requirements regulating, relating to or imposing liability or standards of conduct concerning protection of natural resources or the environment, or environmental impacts on human health as now or may at any time hereafter be in effect.
“ERCOT” means the Electric Reliability Council of Texas, or its successors.
“ERCOT Transmission Lease” means the Lease Agreement (ERCOT Transmission Assets) between Lessor and Lessee effective as of the Effective Date, as the same may be amended from time to time.
“ERCOT Transmission Revenues” means Lessee’s Unadjusted Gross Revenues from regulated electric transmission systems operated by Lessee within ERCOT pursuant to the PUCT’s transmission cost of service mechanism.
“Event of Default” means an event described in Section 9.1 or Section 9.2.
“Excess Percentage Rent” has the meaning set forth in Section 3.3(a).
“Extended Period Rent” means Rent that applies during any extended period of operatorship beyond the Term, which will be negotiated using the Comparable Rate of Return methodology set forth in Article III.
“FERC” means the Federal Energy Regulatory Commission, or its successors.
“First Lease Quarter Percentage Rent Breakpoint” has the meaning set forth in Section 3.1(c).
“Footprint Projects” means T&D Projects that are (i) (A) located in the distribution service territory of the System, (B) transmission assets that are added to an existing transmission substation within the System or hang from transmission towers within the System or (C) Reclassified Projects and (ii) funded by expenditures that are or are expected to be capitalized under GAAP and that are within the items described in Section 1.1(b)(i)-(vii) (specifically excluding Section 1.1(b)(viii)).
“Force Majeure Event” means, except to the extent resulting from the action or inaction of Lessee or within the control of Lessee, fire, earthquake, hurricane, flood, or other casualty or accident; strikes or labor disputes; war, civil strife or other violence; any law, order, proclamation, regulation, ordinance, action, demand or requirement of any government agency or utility; or any other act or condition beyond the reasonable control of Lessee.
“GAAP” means generally accepted accounting principles in effect in the United States of America.
“Good Utility Practice” shall be as defined from time to time by PUCT and, as of the date hereof, means any of the practices, methods, and acts engaged in or approved by a significant portion of the electric utility industry during the relevant time period, or any of the practices, methods, and acts that, in the exercise of reasonable judgment in light of the facts known at the

time the decision was made, could have been expected to accomplish the desired result at a reasonable cost consistent with good business practices, reliability, safety, and expedition. Good utility practice is not intended to be limited to the optimum practice, method, or act, to the exclusion of all others, but rather is intended to include acceptable practices, methods, and acts generally accepted in the region.
“Gross Revenues” has the meaning set forth in Section 3.1(d)(i).
“Hazardous Material” means (A) any substance which is listed, defined, designated or classified under any Applicable Law as a (i) hazardous material, substance, constituent or waste, (ii) toxic material, substance, constituent or waste, (iii) radioactive material, substance, constituent or waste, (iv) dangerous material, substance, constituent or waste, (v) pollutant, (vi) contaminant, or (vii) special waste; (B) any material, substance, constituent or waste regulated under any Applicable Laws; or (C) petroleum, petroleum products, radioactive matters, polychlorinated biphenyl, pesticides, asbestos or asbestos-containing materials.
“Hunt Family Members” means (i) Ray L. Hunt; (ii) the spouse of Ray L. Hunt and each of his children and siblings; (iii) the spouse and lineal descendants of any Person identified in the foregoing clause (ii); (iv) any trust or account primarily for the benefit of any Person or Persons identified in the foregoing clauses (i), (ii) or (iii); (v) any corporation, partnership or other Entity in which any of the Persons identified in the foregoing clauses (i), (ii), (iii) or (iv) are the beneficial owners of substantially all of the shares of capital stock, membership interests, partnership interests or other equity interests and options or warrants to acquire, or securities convertible into, capital stock, membership interests, partnership interests or other equity securities of an Entity; and (vi) the personal representative or guardian of any of the Persons identified in the foregoing clauses (i), (ii) and (iii) upon such Person’s death for purposes of the administration of such Person’s estate or upon such Person’s disability or incompetency for purposes of the protection and management of the assets of such Person.
“HVDC Ties” has the meaning set forth in Section 1.1(b)(v).
“Incremental CapEx” for any Lease Year means Qualified CapEx for that Lease Year, minus Original Base CapEx for such Lease Year, minus Accumulated Deficit for such Lease Year (if there is any Accumulated Deficit for such Lease Year).
“Indebtedness” with respect to any Person means, at any time, without duplication (a) such Person’s liabilities for borrowed money and its redemption obligations in respect of mandatorily redeemable preferred stock; (b) its liabilities for the deferred purchase price of property acquired by such Person (excluding accounts payable arising in the ordinary course of business but including all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property); (c)(i) all liabilities appearing on its balance sheet prepared in accordance with GAAP in respect of capital leases and (ii) all liabilities which would appear on its balance sheet prepared in accordance with GAAP in respect of Synthetic Leases assuming such Synthetic Leases were accounted for as capital leases; provided, however, that for purposes of this definition (including with respect to clauses (i) and (ii) hereof), (x) this Agreement and any similar lease between Lessor (or any subsidiary) and Lessee and (y) any lease between Lessee and any of its wholly-owned subsidiaries shall not be

treated as a capital lease; (d) all liabilities for borrowed money secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities); (e) all of its liabilities in respect of letters of credit or instruments serving a similar function issued or accepted for its account by banks and other financial institutions (whether or not representing obligations for borrowed money), provided, however, that for purposes of this definition, any surety bonds or indemnification agreements entered into by Lessee (with respect to which Lessee or a subsidiary has a reimbursement or backstop obligation) in connection with condemnation proceedings shall be excluded; (f) the aggregate Swap Termination Value of all Swap Contracts of such Person; and (g) any guaranty of such Person with respect to liabilities of a type described in any of clauses (a) through (f) hereof. Indebtedness of a Person shall include all obligations of the character described in clauses (a) through (g) to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is deemed to be extinguished under GAAP.
“Indemnified Party” has the meaning set forth in Section 12.1.
“Indemnifying Party” has the meaning set forth in Section 12.1.
“Initial Term” has the meaning set forth in Section 2.1.
“Lease” or “Leases” means (i) this Agreement, the Stanton/Brady/Celeste Lease, the CREZ Lease, the ERCOT Transmission Lease and the Stanton Transmission Loop Lease and any other leases of transmission and distribution and related assets to a Qualified Lessee under which Lessor or any subsidiary of Lessor is a party as a lessor, and (ii) any lease of transmission and distribution and related assets pursuant to which Lessee is the lessee and a subsidiary of Lessee or another Person controlled by one or more Hunt Family Members is the lessor; provided , no such lease will qualify as a “Lease” hereunder if each of the three following criteria apply: (x) Lessee is the lessee, (y) cash rental payments have become due and payable pursuant thereto and (z) none of Lessor, a subsidiary of Lessor or a subsidiary of Lessee is the lessor.
“Lease Quarter” means each calendar quarter during each Lease Year.
“Lease Year” means each calendar year during the Term of this Agreement.
“Leased Consolidated Net Plant” means that portion of the Consolidated Net Plant of the lessor of a Lease between such lessor and a Qualified Lessee that is the subject of such Lease.
“Leased System” means the System, excluding any Footprint Project included in the definition of the “System,” unless (i) such Footprint Project has been placed in service and (ii) a Rent Supplement has been executed with respect to such Footprint Project.
“Legal Requirements” means, as to any Person, the certificate of incorporation and by-laws, limited liability company agreement, partnership agreement or other organizational or governing documents of such Person, any law (including common law), statute, code, treaty, rule, regulation, ordinance including any government rule or determination of an arbitrator a court or other government authority, or any requirement under a Permit, in each case applicable to or binding upon such Person or any of its properties or to which such Person or any of its property is subject.

“Lessee” has the meaning set forth in the Preamble.
“Lessee CapEx” means Capital Expenditures that are related and fairly allocable to the System and are funded by Lessee.
“Lessee Panel Member” has the meaning set forth in Section 13.7(a).
“Lessee Taxes” has the meaning set forth in Section 4.3.
“Lessor” has the meaning set forth in the Preamble.
“Lessor’s Audit” has the meaning set forth in Section 3.3(c).
“Lessor Panel Member” has the meaning set forth in Section 13.7(a).
“Lessor Taxes” has the meaning set forth in Section 4.3.
“Liens” has the meaning set forth in Section 5.2.
“Monetary Default” means the failure to pay when due any amounts payable under this Agreement.
“NERC” means North American Electric Reliability Corporation, or its successors.
“Non-Defaulting Party” has the meaning set forth in Section 9.3.
“Non-Monetary Default” means an Event of Default other than a Monetary Default.
“Non-Recourse Debt” means Indebtedness of a subsidiary of Lessee that, if secured, is secured solely by a pledge of collateral owned by such subsidiary and the equity interests in such subsidiary, and for which no Person other than such subsidiary is personally liable.
“Nonseverable Footprint Projects” means those Footprint Projects that cannot be readily removed from the System without causing diminution in value to the System.
“Note Purchase Agreements” has the meaning set forth in Section 4.13.
“Notice of Default” means written notice of the Event of Default.
“Original Assets” has the meaning set forth in Section 1.1(b).
“Original Base CapEx” for a Lease Year means the amounts identified as such on a then-effective Rent Supplement.
“Original Lease Date” has the meaning set forth in Section 1.1(a).
“Other Revenue” means revenue generated from activities as a regulated utility within the State of Texas other than Covered Revenue.

“Overdue Rate” means a rate equal to ten percent (10%) per annum or the maximum rate allowed by law, whichever is lesser.
“Party” or “Parties” has the meaning set forth in the Preamble.
“Percentage Rent” has the meaning set forth in Section 3.1(b).
“Percentage Rent Breakpoint” means individually any of the Annual Percentage Rent Breakpoint, the First Lease Quarter Percentage Rent Breakpoint, the Second Lease Quarter Percentage Rent Breakpoint or the Third Lease Quarter Percentage Rent Breakpoint (collectively referred to as the “Percentage Rent Breakpoints”).
“Percentage Rent Percentages” has the meaning set forth in Section 3.1(b).
“Percentage Rent Schedule” means the schedule attached to the then-current Rent Supplement setting forth the Percentage Rent Percentages and Annual Percentage Rent Breakpoints for the System through the end of the Term.
“Permitted Liens” means:
(i) The Liens granted by the Lessor to any lender or trustee for any lender which finances the Lessor’s interest in the System;
(ii) Liens imposed by any governmental authority for any tax, assessment or other charge relating to the System to the extent not yet past due or being contested in good faith and by appropriate proceedings;
(iii) mechanics’, warehousemen’s, carriers’, workers’, repairers’, landlords’, and other similar liens arising or incurred in the ordinary course of business and (i) which do not in the aggregate materially detract from the value of property or assets subject to such Liens or materially impair the continued use thereof in the operation of the System or (ii) which are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property or asset subject to such Liens and for which cash reserves consistent with GAAP have been established on the books of Lessee or Lessor, or other Liens incurred or deposits made in the ordinary course of business in connection with workers’ compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, trade contracts, leases, government contracts, performance and return-of-money bonds and other similar obligations incurred in the ordinary course of business (exclusive of obligations in respect of the payment for borrowed money);
(iv) Liens arising out of judgments or awards so long as an appeal or proceeding for review is being prosecuted in good faith and for the payment of which adequate cash reserves consistent with GAAP have been established on the books of Lessee or Lessor, bonds or other security acceptable to the Lessor in its reasonable discretion have been provided or are fully covered by insurance;

(v) zoning, entitlement, restriction, and other land use and environmental regulations by governmental authorities and encroachments, easements, rights of way, covenants, restrictions or agreements which do not materially interfere with the continued use of any asset as currently used in the conduct of the business of the Lessee;
(vi) any encumbrances set forth in any franchise or governing ordinance under which any portion of the business of the Lessee is conducted and which could not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the operation of the System; and
(vii) all rights of condemnation, eminent domain, or other similar right of any person.
“Person” means any natural person, corporation, limited liability company, partnership, firm, association, government authority or other entity whether acting in an individual, fiduciary or other capacity.
“Personal Property” means all assets, or rights therein, related to or used in connection with the System, other than assets of the type and nature described in Section 1.1(b)(i)-(vii). Examples of Personal Property include rolling stock, computers and software programs.
“Policies and Procedures” has the meaning set forth in Section 13.6(b).
“Project Management Costs” means all actual out-of-pocket costs incurred by Lessee pursuant to this Agreement or a separate construction management agreement in connection with the construction activities, including (i) all direct wages and salaries (including benefits, payroll burden and overtime) which the Lessee pays to personnel employed or retained to conduct such construction activities and a fair allocation of the direct wages and salaries (including benefits, payroll burden and overtime) of Lessee’s other personnel conducting such construction activities; (ii) the fair market value of materials or equipment provided directly by Lessee or its affiliates (including the standard corporate day rate for any vehicles and equipment that are so utilized); (iii) a fair allocation of the lease payments of any leased vehicles and equipment that are so utilized; (iv) all other third-party costs incurred by Lessee in the performance of such construction activities; and (v) all sales, use, transfer or similar taxes (excluding those taxes based upon Lessee’s net income, gross receipts, net worth or similar taxes) incurred or paid by Lessee in conducting such construction activities or providing materials, if any ( provided , that in managing its affairs, Lessee will attempt to minimize, to the extent practicable, all such taxes incurred on behalf of Lessor and, in this regard, Lessor agrees to cooperate and provide Lessee any assistance necessary including providing appropriate evidence of any exemptions from tax).
“PUCT” means the Public Utility Commission of Texas or its successors.
“Qualified CapEx” means Lessor-funded Capital Expenditures related to the System Assets that are placed in service, as and when such System Assets are placed in service, as adjusted (y) for any applicable AFUDC and/or depreciation, and (z) to reflect the effect of the deferred tax liability or deferred tax asset, as applicable.

“Qualified Lessee” means Lessee and/or any other utility that is (x) approved or authorized by the applicable public utility commission or similar regulatory authority to operate and/or lease the transmission and/or distribution assets of Lessor or any subsidiary and (y) a party to a then-effective lease agreement with Lessor or a subsidiary thereof pursuant to which such utility leases and operates such entity’s transmission and/or distribution assets
“Rate Base” means, with respect to any transmission and distribution assets, gross electric plant in service under GAAP, which is the aggregate amount of capital expenditures used to construct such assets plus AFUDC, less accumulated depreciation, and adjusted for accumulated deferred income taxes.
“Receiving Party” has the meaning set forth in Section 13.3.
“Reclassified Projects” means any T&D Project that does not otherwise meet the definition of Footprint Project but Lessee and Lessor jointly agree, in their sole discretion, to classify such T&D Project as a Footprint Project based upon such factors that the Parties deem relevant, including (a) the expected Rate Base of the T&D Project, it being understood that the Parties generally expect that only T&D Projects with an expected Rate Base of less than $25 million could constitute a Reclassified Project; (b) whether the T&D Project is physically connected to the System; and (c) whether the T&D Project is necessary to serve distribution customers situated in the service territories of the System.
“Regulatory Authorities” means the PUCT, ERCOT, TRE, NERC and any other governmental agency with jurisdiction over Lessee, Lessor or the System.
“REIT” has the meaning set forth in the Recitals.
“REIT IPO” has the meaning set forth in the Recitals.
“Related Person” has the meaning set forth in Section 12.1.
“Renewal Term” has the meaning set forth in Section 2.1.
“Rent” means the sum of Base Rent, Percentage Rent, Additional Rent and Extended Period Rent.
“Rent Supplement” means a supplement to this Agreement in the form of Schedule 3.2(b) agreed to in accordance with Section 3.2(b).
“Rent Validation” means the process of validating any Rent Supplement pursuant to Section 3.2(c).“Repairs” means all replacements, repairs or remedial activity undertaken directly on a then-existing portion of the System that are not Footprint Projects and that are expensed and not capitalized under GAAP.
“Revenues Attributable to Lessee CapEx” means the portion of Unadjusted Gross Revenues from the System which is attributable to Lessee CapEx as determined in accordance with Section 3.1(d)(iii).

“Revised Certificate” has the meaning set forth in Section 3.3(a).
“Second Amended and Restated Lease” has the meaning set forth in the Recitals.
“Severable Footprint Projects” means any Footprint Projects that can be readily removed from the System without causing diminution in value to the System.
“Stanton/Brady/Celeste Lease” means the Second Amended and Restated Lease Agreement (Stanton/Brady/Celeste Assets) between Lessor and Lessee effective as of the Effective Date, as the same may be amended from time to time.
“Stanton Transmission Loop Lease” means the Third Amended and Restated Lease Agreement (Stanton Transmission Loop Assets) between SDTS FERC, L.L.C., a wholly-owned subsidiary of Lessor, and SU FERC, L.L.C., a wholly-owned subsidiary of Lessee, effective as of the Effective Date (f/k/a FERC Lease), as the same may be amended from time to time.
“Swap Contract” means (a) any and all interest rate swap transactions, basis swap transactions, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward foreign exchange transactions, cap transactions, floor transactions, currency options, spot contracts or any other similar transactions of any of the foregoing (including, without limitation, any options to enter into any of the foregoing), and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc. or any International Foreign Exchange Master Agreement.
“Swap Termination Value” means, in respect of one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (x) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (y) for any date prior to the date referenced in clause (x), the amount(s) determined as the mark-to-market value(s) for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts.
“Synthetic Lease” means, at any time, any lease (including a lease that may be terminated by the lessee at any time) of any property by a Person (i) that is accounted for as an operating lease under GAAP and (ii) in respect of which the lessee retains or obtains ownership of the property so leased for U.S. federal income tax purposes, other than any lease under which such Person is the lessor.
“System” means the integrated electrical transmission and distribution facilities connected to the ERCOT electric grid owned by Lessor and located within the area depicted on Exhibit A and Exhibit B and the systems and other property necessary to operate such transmission and distribution facilities, together with the exclusive right to occupy and use all of Lessor’s interest (whether by fee ownership, easement, lease, sublease, franchise or license) (other than to the extent expressly reserved to Lessor herein) in the premises upon which such facilities are situated and Footprint Projects that add, expand or alter the assets from time to time pursuant to Rent Supplements, as modified by Section 1.1(b).

“System Assets” has the meaning set forth in Section 10.6.
“TCOS Allocation” has the meaning set forth in Section 3.1(d)(ii).
“T&D Project” means a business, project or assets relating primarily to the transmission and/or distribution of electricity.
“Term” has the meaning set forth in Section 2.1.
“Third Lease Quarter Percentage Rent Breakpoint” has the meaning set forth in Section 3.1(c).
“Third Panel Member” has the meaning set forth in Section 13.7(a).
“Transmission Gross Plant” means electric transmission plant as determined in accordance with the FERC Uniform System of Accounts.
“Transmission Net Plant in Service” means Transmission Gross Plant in service less accumulated depreciation as determined in accordance with the FERC Uniform System of Accounts.
“TRE” means the Texas Reliability Entity, or its successor entity.
“TRS” means taxable REIT subsidiary.
“Unadjusted Gross Revenues” has the meaning set forth in Section 3.1(d)(i).
“Undisputed Rent” means the greater of (i) the undisputed amount of Rent the Parties agree is due and payable and (ii) during the term of the Debt Agreements, the amount necessary, when taken together with Rent payments made by Lessee to Lessor under other leases between the Parties, required for Lessor to comply with the covenants set forth in Section 9.08 of the 2009 Note Purchase Agreement, Section 9.8 of the 2010 Note Purchase Agreement and Section 7.10 of the Credit Agreement.

EXHIBIT A
System Area
 
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EXHIBIT B
Amarillo Operation Center Legal Description
Real Property Located at 4909 Canyon Drive, Amarillo, Texas 79118
A 2.75 acre tract of land being all of the northeasterly 400 feet of Block 8, McCarty Addition Unit No. 2, an addition to the City of Amarillo, Randall County, Texas, according to the recorded map or plat thereof, of record in Volume 200, Page 468 of the Deed Records of Randall County, Texas, and described in that certain Warranty Deed recorded in Volume 514, Page 137 of the Deed Records of Randall County, Texas, and all of that strip of land that lies between the west line of said Block 8 and the east right-of-way line of Interstate Highway 27, save and except therefrom all of Lot 1, Block 8, McCarty Addition Unit No. 14 an addition to the City of Amarillo, Randall County, Texas, according to the recorded map or plat thereof, of record in Volume 1463, Page 386 of the Deed Records of Randall County, Texas, said 2.75 acre tract of land being more particularly described by metes and bounds as follows:
BEGINNING at a  1 ⁄ 2 ” rebar with a cap stamped “KEYS R.P.L.S. 2507” found at the intersection of the North line of said Block 8 and east right-of-way line of said Interstate Highway 27;
THENCE S 54°40’33” E – bearings contained herein are relative to true North as determined from GPS observations – at a distance of 1.00 feet pass a  1 ⁄ 2 ” rebar found at northwest corner of said Block 8, continue along the southwesterly right-of-way line of James Louis Drive for a total distance of 240.94 feet to a  1 ⁄ 2 ” rebar with a cap stamped “KEYS R.P.L.S. 2507” found at the most northerly corner of said Lot 1, Block 8, McCarty Addition Unit No. 14;
THENCE S 35°20’49” W, 309.99 feet to a  1 ⁄ 2 ” rebar with a cap stamped “KEYS R.P.L.S. 2507” found at the most westerly corner of said Lot 1;
THENCE S 54°40’02” E, 260.10 feet to a  1 ⁄ 2 ” rebar with a cap stamped “KEYS R.P.L.S. 2507” found at the most southerly corner of said Lot 1 same being a point on the northwesterly right-of-way line of said McCarty Boulevard;
 
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THENCE S 35°11’38” W along the northwesterly right-of-way line of said McCarty Boulevard 89.73 feet to an “X” cut in concrete found at the most southerly corner of this tract of land;
THENCE N 54°42’28” W, at 500.27 feet pass an “X’ cut in concrete found in the northwesterly line of said Block 8, continue for a total distance of 501.15 feet to an “X” cut in concrete found at the most westerly corner of this tract of land and the east right-of-way line of said Interstate Highway 27;
THENCE S 35°19’41” E, along the east right-of-way line of said Interstate Highway 27, 400.04 feet to the POINT OF BEGINNING of this tract of land.
Said tract contains a computed area of 2.75 acres of land as described.
 
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EXHIBIT C
SUBORDINATED DEBT TERMS
Reference is made to that certain Second Amended and Restated Collateral Agency Agreement (as amended, restated, supplemented or otherwise modified, the “ Collateral Agency Agreement” ), to be entered into by and among The Bank of New York Mellon Trust Company, N.A., as collateral agent (together with its successors and assigns, the “ Collateral Agent” ), Sharyland Distribution & Transmission Services, L.L.C., a Texas limited liability company (the “ Company” ), and the holders of the Permitted Secured Indebtedness (as defined therein) from time to time party thereto.
Section 1. Definitions and Rules of Interpretation . Capitalized terms used herein without definition shall have the meanings assigned to such terms in the Collateral Agency Agreement. The rules of interpretation set forth in Schedule A of the Collateral Agency Agreement shall apply to this Exhibit C as if fully set forth herein. In addition, the following terms shall have the following meanings:
 
1.1	“ Entitled Party ” shall mean the Company unless the Collateral Agent or the Company has given notice to the Subordinated Lender that the Collateral Agent has, on behalf of the Secured Parties and pursuant to the Collateral Agency Agreement or related documents, properly exercised its remedies to foreclose on the Company’s interest in any System Lease and receive payments pursuant to any System Lease directly from Sharyland, in which case the Entitled Party shall mean the Collateral Agent, acting for the benefit of the Secured Parties.	
 
1.2	“ Governmental Authority ” shall mean	
 
 	(a)	the government of:	
 
 	(i)	The United States of America or any State or other political subdivision thereof, or	
 
 	(ii)	any other jurisdictions in which the Company conducts all or any part of its business, or which asserts jurisdiction over any properties of the Company, or	
 
 	(b)	any entity exercising executive, legislative, judicial, taxing, regulatory or administrative functions of, or pertaining to, any such government, or	
 
 	(c)	the Electric Reliability Council of Texas or any successor thereto (“ ERCOT ”), or	
 
 	(d)	the Texas Regional Entity.	
 
1.3	“ Insolvency Event ” means the occurrence of any of the following:	
 
 	(a)	Sharyland (i) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the	
 
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 	filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes a corporate action for the purpose of any of the foregoing; or	
 
 	(b)	a court or Governmental Authority of competent jurisdiction enters an order appointing, without consent by Sharyland, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of Sharyland or any such petition shall be filed against Sharyland and such petition shall not be dismissed within 60 days.	
 
1.4	“ Reorganization Securities ” shall mean any debt or equity securities issued on account of all or any portion of the Subordinated Indebtedness in connection with an Insolvency Event that are in each case subordinated in liquidation to the Obligations (or any debt or equity securities issued on account of any Obligations) to at least the same extent that the Subordinated Indebtedness are subordinated to the Obligations hereunder.	
 
1.5	“ Sharyland ” shall mean Sharyland Utilities, L.P.	
 
1.6	“ Subordinated Indebtedness ” shall mean, with respect to Sharyland, Indebtedness (as defined under the applicable Financing Agreement or such other similar term) that is incurred in accordance with the terms of such Financing Agreement and is required to be subordinated to the applicable Obligations.	
 
1.7	“ Subordinated Lenders ” shall mean each and every Person to whom any of the Subordinated Indebtedness are owed.	
 
1.8	“ Subordinated Loan Documents ” shall mean all documentation evidencing the Subordinated Indebtedness.	
 
1.9	“ System Leases ” shall mean any and all leases of transmission and distribution and related assets pursuant to which Sharyland is the lessee and the Company or any Subsidiary of the Company is a party as a lessor, and supplements thereto, each as amended, restated, supplemented or otherwise modified from time to time, or any new lease entered into in replacement thereof.	
 
1.10	“ System Lease Obligations ” shall mean any and all Rent or other similar term (as such term is defined in the System Leases) then due and payable under the System Leases.	

1.11	“ Texas Regional Entity ” shall mean the division of ERCOT authorized to develop, monitor, assess and enforce compliance with NERC Reliability Standards within geographic boundaries of ERCOT and any successor thereto.	
Section 2. Subordination of Subordinated Indebtedness . Until the indefeasible payment in full in cash of all the System Lease Obligations and the termination of any commitments to lend under any Permitted Secured Indebtedness, the Subordinated Lenders and Sharyland hereby agree that (i) all Subordinated Indebtedness is and shall be subordinated in right of liquidation in relation to all System Lease Obligations to the extent and in the manner hereinafter set forth, (ii) upon the occurrence and during the continuance of any default or event of default under any System Lease (or if after giving effect to a proposed distribution in respect of any part of the Subordinated Indebtedness, a default or event of default under any System Lease will exist), no payments or other distributions whatsoever in respect of any part of the Subordinated Indebtedness shall be made, (iii) upon the occurrence and during the continuance of an Insolvency Event, no payments or other distributions whatsoever-in respect of any part of the Subordinated Indebtedness shall be made nor shall any property or assets of Sharyland be applied to the purchase or other acquisition or retirement of any part of the Subordinated Indebtedness, and (iv) upon the occurrence and during the continuance of an Insolvency Event, the Subordinated Lenders shall not accept any payment by or on behalf of Sharyland on account of the principal of, premium or interest on, or any other amount in respect of, the Subordinated Indebtedness other than the payment of indemnity obligations and reasonable out of pocket costs and expenses (including reasonable attorney’s fees) in each case as and when due and payable in accordance with the terms of the Subordinated Debt Documents.
Section 3. Liquidation, Dissolution, Bankruptcy . Until the indefeasible payment in full in cash of all the System Lease Obligations and the termination of any commitments to lend under any Permitted Secured Indebtedness, and without limitation to the rights of the Secured Parties under the terms of the Financing Agreements or the rights of the Company under the System Leases:
 
3.1	upon the occurrence and during the continuance of any Insolvency Event:	
 
 	3.1.1	the System Lease Obligations then due and payable shall first be irrevocably and indefeasibly paid in full to the Entitled Party before any of the Subordinated Lenders shall be entitled to receive any payment (other than Reorganization Securities) on account of the Subordinated Indebtedness whether in cash, securities or other assets (other than Reorganization Securities);	
 
 	3.1.2	any payment or distribution of assets of Sharyland of any kind or character in respect of the Subordinated Indebtedness to which any of the Subordinated Lenders would be entitled if the Subordinated Indebtedness were not subordinated pursuant to the terms hereof shall be made by the trustee, liquidator or agent or other Person making such payment or distribution, directly to the Entitled Party until the System Lease Obligations then due and payable are paid in full and each of the Subordinated Lenders and, unless the Company is. the Entitled Party, Sharyland irrevocably authorizes and empowers the Entitled Party to receive. and collect on its behalf any and all such payments or distributions; and	

 	3.1.3	the Subordinated Lenders agree not to, directly or indirectly, initiate, prosecute or participate in any claim, action or other proceeding challenging the enforceability, validity or priority of the System Lease Obligations then due and payable.	
Section 4. Incorrect Payments . If, for any reason whatsoever and whether pursuant to an Insolvency Event or otherwise, Sharyland shall make or any of the Subordinated Lenders shall receive any payment or distribution of any kind or character, whether in cash, securities or other property (other than Reorganization Securities), on account or in respect of the Subordinated Indebtedness in contravention of any of the terms set forth herein, such Subordinated Lender shall hold any such payment or distribution in trust for the benefit of the Secured Parties, promptly notify the Entitled Party of the receipt of such payment or distribution and promptly pay over or deliver such distribution or payment to the Entitled Party or to any other Person nominated by the Entitled Party, to hold for the account of the Secured Parties.
Section 5. Non-Impairment . To the fullest extent permitted by applicable Law, no change of law or circumstances shall release or diminish any of the Subordinated Lender’s obligations, liabilities, agreements or duties hereunder, or affect the provisions set forth herein in any way.
Section 6. Benefit of Subordination Provisions . These subordination provisions are intended solely to define the relative rights of the Secured Parties, the Collateral Agent, the Company, the Subordinated Lenders, and their respective successors and permitted assigns.
Section 7. Termination and Reinstatement . Notwithstanding anything to the contrary contained herein, the Subordinated Indebtedness shall no longer be subordinated in right of liquidation pursuant to the terms contained herein otherwise at such time as the Secured Parties no longer have a lien on or security interest in the System Lease Obligations. If any payment to any of the Entitled Party, the Company, the Collateral Agent or the Secured Parties by Sharyland or any other Person in respect of any of the System Lease Obligations is held to constitute a preference or a voidable transfer under applicable Law, or if for any other reason any such party is required to refund such payment to Sharyland or to such Person or to pay the amount thereof to any other Person, each Subordinated Lender agrees and acknowledges that the provisions set forth herein shall continue to be effective or shall be reinstated, as the case may be, to the extent of any such payment or payments.
Section 8. Restrictions on Transfers . None of the Subordinated Lenders may transfer (by sale, novation or otherwise) any of its rights or obligations under the Subordinated Indebtedness unless the transferee of such interest first agrees in writing to be bound by the terms of this Exhibit C applicable to the transferor of such interest and executes an instrument to that effect.

Section 9. Exercise of Powers .
 
9.1	After the occurrence and during the continuance of an Insolvency Event, the Entitled Party shall be entitled to exercise its rights and powers under these subordination provisions in such a manner and at such times as the Entitled Party in its absolute discretion may determine.	
 
9.2	The Subordinated Lenders alone shall be responsible for their contracts, engagements, acts, omissions, defaults and losses and for liabilities incurred by them.	

EXHIBIT D
INSURANCE
Subject to Section 6.2(b) of this Agreement, during the term of the Note Purchase Agreements, the Credit Agreement or until otherwise agreed by Lessee and Lessor, Lessee shall comply with the insurance requirements set forth in this Exhibit D . Capitalized terms used herein but not otherwise defined in this Agreement have the meanings assigned to such terms in the Note Purchase Agreements or the Credit Agreement, as applicable.
 
A.	Coverages .	

Property Insurance (Operational) :	
Cover:	  	All assets comprising the System against “all risks” of physical loss or damage (including but not limited to machinery breakdown, earthquake, flood, windstorm and terrorism)	
		
Principal Exclusions:	  	War and civil war	
		
	  	Nuclear risks	
		
	  	Theft and mysterious disappearance revealed in the course of inventory undertaking	
		
	  	The cost of making good wear and tear, gradual deterioration, etc., but not the consequential damage	
		
	  	Consequential loss not otherwise excluded	
		
	  	Fraud and misrepresentation	
		
Sum Insured:	  	Full replacement cost subject to the following sublimits.	
		
Sublimits:	  	Earthquake – full replacement cost	
	  	Flood – full replacement cost	
	  	Windstorm – full replacement cost	
		
Deductible:	  	$250,000 per loss or occurrence, except $250,000 earthquake and flood and $250,000 windstorm	
		
Insured:	  	Lessee	
	  	Lessor	
		
Additional Insured:	  	The Prudential Insurance Company of America, as Purchaser	
 
S YSTEM L EASE A GREEMENT

			
	  	Prudential Retirement Insurance and Annuity Company, as Purchaser	
	  	Royal Bank of Canada, as Lender	
	  	The Bank of New York Mellon Trust Company, N. A., as Collateral Agent	
	  	The Secured Parties to the Note Purchase Agreement	
	  	The Secured Parties to the Credit Agreement	
		
Mortgagee:	  	Bank of New York Mellon Trust Company, N.A. as Collateral Agent for the benefit of the Secured Parties	
		
Loss Payee:	  	The Bank of New York Mellon Trust Company, N.A. as Collateral Agent, as first loss payee	
		
Conditions:	  	30 days’ notice of cancellation or non-renewal except 10 days for non-payment of premium	
		
	  	Acceptable loss payable clause	
		
	  	Non-vitiation wording in favor of the Collateral Agent and the Secured Parties	
		
	  	Waiver of subrogation in favor of the additional insureds	
	
General Liability Insurance :	
		
Cover:	  	Lessee against any liability arising out of claims for personal injury and property damage.	

Sum Insured:	  	$1,000,000 per occurrence up to a minimum of $2,000,000 aggregate limit (except that the fire damage legal liability coverage may be limited to $100,000 per fire and the medical expense coverage may be limited to $5,000 for any one injured person).	
		
Insured:	  	Lessee	
	  	Lessor	
		
Additional Insured:	  	The Prudential Insurance Company of America, as Purchaser	
	  	Prudential Retirement Insurance and Annuity Company, as Purchaser	
	  	The Bank of New York Mellon Trust Company, N. A., as Collateral Agent	
	  	Royal Bank of Canada, as Lender	
	  	The Secured Parties	
		
Conditions:	  	Occurrence policy wording or Aegis claims-first-made policy form Worldwide territory	

			
Automobile Liability Insurance :
 	
Cover:	  	Lessee for liability arising out of claims for personal injury (including bodily injury and death) and property damage covering all owned (if any), leased, non-owned and hired vehicles of Lessee, including loading and unloading.	
		
Sum Insured:	  	$1,000,000 each accident.	
		
Deductible:	  	$1,000 each accident.	
Insured:	  	Lessee	
	  	Lessor	
		
Additional Insured:	  	The Prudential Insurance Company of America, as Purchaser	
	  	Prudential Retirement Insurance and Annuity Company, as Purchaser	
	  	The Bank of New York Mellon Trust Company, N. A., as Collateral Agent	
	  	Royal Bank of Canada, as Lender	
	  	The Secured Parties	
	
Workers’ Compensation and Employer’s Liability Insurance :
 	
Cover:	  	Lessee will maintain workers’ compensation insurance as required by applicable state laws and employer’s liability insurance insuring Lessee for liability arising out of injury to or death of employees.	
		
Sum Insured:	  	$1,000,000 each accident.	
		
Insured:	  	Lessee	
	  	Lessor	
	
Excess or Umbrella Insurance :
 	
Cover:	  	Insurance covering claims in excess of the underlying insurance described in the foregoing.	
		
Sum Insured:	  	$25,000,000 each occurrence and in the aggregate	
		
Deductible:	  	$1,000,000 any one occurrence or amount of underlying insurance.	
		
Insured:	  	Lessee	
	  	Lessor	
		
Additional Insured:	  	The Prudential Insurance Company of America, as Purchaser	
	  	Prudential Retirement Insurance and Annuity Company, as Purchaser	
	  	The Bank of New York Mellon Trust Company, N. A., as Collateral Agent	
	  	Royal Bank of Canada, as Lender	
	  	The Secured Parties	
		
Conditions:	  	Following form	

B.	Company Conditions and Requirements.	
1. Loss Notification . Lessee shall promptly notify Lessor of any single loss or event likely to give rise to a claim against an insurer for an amount in excess of $1,000,000 covered by any insurance policies required by this Exhibit D .
2. Payment of Loss Proceeds . The Collateral Agent, on behalf of the Secured Parties, shall be named as the first loss payee in applicable insurance policies (pursuant to a standard lender’s loss payable endorsement equivalent to a CP 1218).
3. Compliance With Policy Requirements . Lessee shall not violate or permit to be violated any of the conditions, provisions or requirements of any insurance policy required by this Exhibit D , and Lessee shall perform, satisfy and comply with, or cause to be performed, satisfied and complied with, all conditions, provisions and requirements of all insurance policies.
4. Waiver of Subrogation . Lessee hereby waives any and every claim for recovery from the Secured Parties for any and all loss or damage covered by any of the insurance policies to be maintained under this Agreement to the extent that such loss or damage is recovered under any such policy. If the foregoing waiver will preclude the assignment of any such claim to the extent of such recovery, by subrogation (or otherwise), to an insurance company (or other Person), Lessee shall give written notice of the terms of such waiver to each insurance company which has issued, or which may issue in the future, any such policy of insurance (if such notice is required by the insurance policy) and shall cause each such insurance policy to be properly endorsed by Lessee to, or to otherwise contain one or more provisions that prevent the invalidation of the insurance coverage provided thereby by reason of such waiver.
5. Notices . Lessee will advise Lessor in writing promptly of (i) any material changes in the coverage or limits provided under any policy required by Section 6.2 of this Agreement and this Exhibit D and (ii) any default in the payment of any premium and of any other act or omission on the part of Lessee which may invalidate or render unenforceable, in whole or in part, any insurance being maintained by Lessee pursuant to this Exhibit D .
 
C.	Insurance Policy Conditions and Requirements .	
1. Permitted Insurers . Lessee shall obtain the insurance required by this Exhibit D from responsible insurance companies authorized to do business in Texas (if required by law or regulation) with an A.M. Best Insurance Reports rating of A-, 8 or better.
2. Control of Loss . If commercially feasible all policies of insurance required to be maintained pursuant to this Exhibit D , wherein more than one insurer provides the coverage on any single policy, shall have a clause (or a separate agreement among the insurers) wherein all insurers have agreed that the lead insurer shall have full settlement authority on behalf of the other insurers.

3. Loss Survey . All policies of insurance required to be maintained pursuant to this Exhibit D wherein more than one insurer provides the coverage on any single policy, shall have a clause (or a separate agreement among the insurers) wherein all insurers have agreed upon the employment of a single firm to survey and investigate all losses on behalf of the insurers.
4. Policy Cancellation and Change . All policies of insurance required to be maintained pursuant to this Exhibit D shall be endorsed so that if at any time they are canceled, or their coverage is reduced (by any party including the insured) so as to affect the interests of the Collateral Agent, the Holders and any other Secured Party, such cancellation or reduction shall not be effective as to the Secured Parties for thirty (30) days, except for non-payment of premium which shall be for ten (10) days, after receipt by the Collateral Agent and the Secured Parties of written notice from such insurer of such cancellation or reduction.
5. Miscellaneous Policy Provisions . All insurance policies providing operational property damage, (i) shall name the Collateral Agent, on behalf of the Secured Parties, as the first loss payee, (ii) shall include a Lender’s loss payable clause in favor of the Collateral Agent, on behalf of the Secured Parties.
6. Separation of Interests . All policies (other than in respect to workers compensation insurance) shall insure the interests of the Secured Parties regardless of any breach or violation by Lessee or any other party of warranties, declarations or conditions contained in such policies, any action or inaction of Lessee or others, or any foreclosure relating to the System.
7. Waiver of Subrogation . All policies of insurance required by this Exhibit D shall provide for waivers of subrogation in favor of the Secured Parties and their respective officers and employees.
8. Liability Insurance Endorsements . All policies of liability insurance required to be maintained by Lessee shall be endorsed as follows:
(i) To name the Secured Parties as additional insureds;
(ii) To provide a severability of interests and cross liability clause; and
(iii) That the insurance shall be primary and not excess to or contributing with any insurance or self-insurance maintained by Lessee.
D. Acceptable Policy Terms and Conditions . All policies of insurance required to be maintained pursuant to this Exhibit D shall contain terms and conditions reasonably acceptable to Lessor.

SCHEDULE 3.2(b)
FORM OF LEASE SUPPLEMENT
Rent Supplement
Pursuant to Section 3.2(b) of Lease
[Date of Supplement]
Incremental CapEx:
Lessee CapEx:
Base Rent:
Percentage Rent Percentages:
Annual Percentage Rent Breakpoints:
Revenues Attributable to Lessee CapEx:
Original Base CapEx:
Accumulated Deficit:
ERCOT Transmission Rate Allocation:
Term of Rent Supplement:

Executed this              day of                      , 20      .	
	
SHARYLAND UTILITIES, L.P.	
		
By:	 	 	
Name:	 	 	
Title:	 	 	
	
SHARYLAND DISTRIBUTION &	
TRANSMISSION SERVICES, L.L.C.	
		
By:	 	 	
Name:	 	 	
Title:	 	 	
 
S YSTEM L EASE A GREEMENT

Exhibit 10.9
Execution Version
SECOND AMENDED AND RESTATED
LEASE AGREEMENT
(STANTON/BRADY/CELESTE ASSETS)
between
SHARYLAND DISTRIBUTION & TRANSMISSION SERVICES, L.L.C.
and
SHARYLAND UTILITIES, L.P.
as of December 1, 2014
S TANTON /B RADY /C ELESTE A SSETS L EASE A GREEMENT

TABLE OF CONTENTS

 	  	 	  	Page	 	
ARTICLE I LEASE	  	 	1	  	
			
1.1.	  	Lease of Stanton/Brady/Celeste Assets	  	 	1	  	
1.2.	  	Exclusive Rights	  	 	3	  	
1.3.	  	Absolute Net Lease	  	 	3	  	
1.4.	  	Waiver by Lessee	  	 	3	  	
1.5.	  	Quiet Enjoyment	  	 	3	  	
		
ARTICLE II TERM OF LEASE	  	 	4	  	
			
2.1.	  	Term	  	 	4	  	
2.2.	  	Approvals upon Expiration or Termination	  	 	4	  	
2.3.	  	Purchase Option upon Expiration or Termination	  	 	4	  	
		
ARTICLE III RENT	  	 	5	  	
			
3.1.	  	Rent	  	 	5	  	
3.2.	  	Rent Supplements	  	 	8	  	
3.3.	  	Confirmation of Percentage Rent	  	 	11	  	
3.4.	  	Additional Rent	  	 	12	  	
3.5.	  	No Set Off	  	 	12	  	
3.6.	  	Late Payment Penalty	  	 	12	  	
3.7.	  	Credit Support	  	 	12	  	
3.8.	  	Other Revenue	  	 	12	  	
		
ARTICLE IV LESSEE’S REPRESENTATIONS, WARRANTIES AND COVENANTS	  	 	13	  	
			
4.1.	  	Maintenance, Operation and Repair of the Stanton/Brady/Celeste Assets	  	 	13	  	
4.2.	  	Licenses and Permits	  	 	14	  	
4.3.	  	Property Taxes, and other Assessments and Fees	  	 	14	  	
4.4.	  	Requirements of Governmental Agencies and Regulatory Authorities	  	 	14	  	
4.5.	  	Liens	  	 	14	  	
4.6.	  	Hazardous Materials	  	 	15	  	
4.7.	  	Indebtedness	  	 	15	  	
4.8.	  	Records	  	 	16	  	
4.9.	  	Surrender	  	 	16	  	
4.10.	  	Cooperation; Transition Services	  	 	17	  	
4.11.	  	Lessee’s Authority	  	 	17	  	
4.12.	  	Litigation	  	 	17	  	
4.13.	  	Financing	  	 	17	  	
		
ARTICLE V LESSOR’S REPRESENTATIONS, WARRANTIES AND COVENANTS	  	 	19	  	
			
5.1.	  	Lessor’s Authority	  	 	19	  	
5.2.	  	Liens and Tenants	  	 	19	  	
 
S TANTON /B RADY /C ELESTE A SSETS L EASE A GREEMENT

TABLE OF CONTENTS

 	  	 	  	Page	 	
5.3.	  	Condition of Assets	  	 	19	  	
5.4.	  	Requirements of Governmental Agencies	  	 	19	  	
5.5.	  	Hazardous Materials	  	 	20	  	
5.6.	  	Litigation	  	 	20	  	
5.7.	  	Limitation	  	 	20	  	
		
ARTICLE VI LOSS AND DAMAGE; INSURANCE	  	 	20	  	
			
6.1.	  	Loss and Damage to the Stanton/Brady/Celeste Assets	  	 	20	  	
6.2.	  	Insurance	  	 	21	  	
		
ARTICLE VII REPORTING	  	 	22	  	
			
7.1.	  	Private Financing Arrangements	  	 	22	  	
7.2.	  	Public Company and Regulatory Information and Cooperation	  	 	23	  	
7.3.	  	Mutual Obligations	  	 	24	  	
		
ARTICLE VIII ASSIGNMENT	  	 	24	  	
		
ARTICLE IX DEFAULT	  	 	25	  	
			
9.1.	  	Lessee Default	  	 	25	  	
9.2.	  	Lessor Default	  	 	26	  	
9.3.	  	Right to Cure	  	 	26	  	
9.4.	  	Remedies	  	 	26	  	
		
ARTICLE X CAPITAL EXPENDITURES	  	 	27	  	
			
10.1.	  	Capital Expenditures Generally	  	 	27	  	
10.2.	  	Capital Expenditures Funded by Lessor	  	 	28	  	
10.3.	  	Capital Expenditures Funded by Lessee	  	 	28	  	
10.4.	  	Footprint Project Construction Activities	  	 	28	  	
10.5.	  	Ownership of Footprint Projects	  	 	29	  	
10.6.	  	Asset Acquisitions	  	 	29	  	
10.7.	  	Reimbursements	  	 	29	  	
		
ARTICLE XI REGULATORY COOPERATION	  	 	30	  	
			
11.1.	  	Jurisdiction	  	 	30	  	
11.2.	  	Cooperation	  	 	30	  	
		
ARTICLE XII INDEMNITY	  	 	30	  	
			
12.1.	  	General Indemnity	  	 	30	  	
12.2.	  	Environmental Indemnity	  	 	31	  	
 
S TANTON /B RADY /C ELESTE A SSETS L EASE A GREEMENT

TABLE OF CONTENTS

ARTICLE XIII MISCELLANEOUS	  	 	32	  	
			
13.1.	  	Limitation of Damages	  	 	32	  	
13.2.	  	Condemnation	  	 	32	  	
13.3.	  	Confidentiality	  	 	32	  	
13.4.	  	Successors and Assigns	  	 	33	  	
13.5.	  	Rent Obligations Not Excused by Force Majeure, Etc.	  	 	33	  	
13.6.	  	Further Assurances; Policies and Procedures	  	 	33	  	
13.7.	  	Arbitration	  	 	33	  	
13.8.	  	Notices	  	 	35	  	
13.9.	  	Entire Agreement; Amendments	  	 	35	  	
13.10.	  	Legal Matters	  	 	36	  	
13.11.	  	Partial Invalidity	  	 	36	  	
13.12.	  	Recording	  	 	36	  	
13.13.	  	Intention of Parties; True Lease	  	 	36	  	
APPENDICES:
Appendix A — Definitions
EXHIBITS:
Exhibit A — Assets
Exhibit B — Subordinated Debt Terms
Exhibit C — Insurance
SCHEDULES:
Schedule 3.2(b) Form – Rent Supplement
 
S TANTON /B RADY /C ELESTE A SSETS L EASE A GREEMENT

SECOND AMENDED AND RESTATED
LEASE AGREEMENT
(STANTON/BRADY/CELESTE ASSETS)
This SECOND AMENDED AND RESTATED LEASE AGREEMENT (STANTON/BRADY/CELESTE ASSETS) (this “ Agreement ”) is entered into on December 1, 2014 (the “ Effective Date ”), between Sharyland Distribution & Transmission Services, L.L.C. (together with its transferees, successors and assigns, “ Lessor ”), and Sharyland Utilities, L.P. (together with its transferees, successors and assigns, “ Lessee ”), and in connection herewith, Lessor and Lessee agree, covenant and contract as set forth in this Agreement. Lessor and Lessee are sometimes referred to in this Agreement as a “ Party ” or collectively as the “ Parties ”.
Certain capitalized terms used in this Agreement have the meaning assigned to them in Appendix A attached hereto.
WITNESSETH:
WHEREAS, Lessor and Lessee entered into that certain Amended and Restated Lease Agreement dated as of July 1, 2012, as amended (as amended, restated, supplemented or otherwise modified from time to time, the “ Amended and Restated Lease ”), pursuant to which Lessee leases the Stanton/Brady/Celeste Lease Assets from Lessor; and
WHEREAS, Lessor is an indirect subsidiary of InfraREIT Partners, LP, whose general partner (the “ REIT ”) intends to raise equity capital through an initial public offering (the “ REIT IPO ”), and, in connection with the REIT IPO, Lessor and Lessee desire to amend the terms of the Amended and Restated Lease in certain respects and restate the Amended and Restated Lease as so amended;
NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Parties hereto hereby amend and restate the terms of the Amended and Restated Lease as follows:
ARTICLE I
LEASE
1.1. Lease of Stanton/Brady/Celeste Assets .
(a) Upon the terms and conditions set forth in this Agreement, Lessor hereby grants to Lessee the exclusive right to use and operate the Stanton/Brady/Celeste Lease Assets. Subject to necessary regulatory approvals and the penultimate sentence of this Section 1.1, this Agreement is intended by Lessor and Lessee to be a master lease of the Stanton/Brady/Celeste Lease Assets, as it existed as of July 13, 2010 (the “ Original Lease Date ”), and as it has been or may continue to be altered or expanded thereafter by Footprint Projects in which Lessor has an interest.
 
S TANTON /B RADY /C ELESTE A SSETS L EASE A GREEMENT

(b) The Stanton/Brady/Celeste Assets shall consist of (x) the original assets leased by Lessor to Lessee as of the Original Lease Date (the “ Original Assets ”), (y) assets that constitute Footprint Projects, other than any such Footprint Projects funded by Lessee pursuant to Section 10.3, and (z) any components of the Stanton/Brady/Celeste Assets that are repaired or replaced pursuant to Section 6.1. The Stanton/Brady/Celeste Assets shall consist of each of the following components which are owned by Lessor as of the Original Lease Date (or that are described within clause (y) or clause (z) above) and that are located within the area depicted on Exhibit A :
(i) towers and poles affixed to the land, and all necessary and proper foundations, footings, crossarms and other appliances and fixtures for use in connection with said towers, poles and lines;
(ii) overhead, underground and underwater electrical distribution, transmission and communications lines, together with related ductwork and insulators;
(iii) distribution transformers mounted on towers or poles and/or anchored to concrete pads;
(iv) electric substation and switching facilities, including all associated transformers, circuit breakers, resistors, capacitors, buses, interconnection and switching facilities, control and protection equipment which monitors the Stanton/Brady/Celeste Assets, and the building housing the foregoing items;
(v) all facilities associated with any high-voltage direct current interconnections (“ HVDC Ties ”), including alternating current (“ AC ”) / direct current (“ DC ”) converter stations;
(vi) electric meters affixed to buildings or residences or otherwise required to operate the Stanton/Brady/Celeste Assets;
(vii) real estate assets, including real property, interests in real property or real property rights (as defined in Section 856(c)(5)(B) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder, and not otherwise included in Sections 1.1(b)(i) – 1.1(b)(vi) above) owned or leased by Lessor; or
(viii) all other systems or property owned or leased by Lessor, as identified in the uniform system of accounts for major electric utilities, 18 C.F.R. Part 101, as adopted and amended from time to time by FERC (not otherwise included in Sections 1.1(b)(i) – 1.1(b)(vii) above).
Notwithstanding anything to the contrary in this Agreement, the parties do not intend or agree to enter into a lease with respect to any Footprint Project or other alteration, expansion or addition to the Stanton/Brady/Celeste Assets (and the Lessee shall not be authorized to use or operate such Footprint Project, alteration, expansion or addition to the Stanton/Brady/Celeste Assets) unless and until such time as the parties first execute a Rent Supplement for the underlying Footprint Project and such Footprint Project is placed in service, and such Rent
 
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Supplement together with this Agreement shall be treated as a new lease with respect to such Footprint Project. The parties further agree and acknowledge that a Rent Supplement will be executed with respect to each Footprint Project before such Footprint Project is placed in service, and references in this Agreement to “Stanton/Brady/Celeste Assets” rely on the assumption that this is the case.
1.2. Exclusive Rights . Throughout the Term of this Agreement, Lessee shall have the exclusive right (i) to operate and use the Stanton/Brady/Celeste Lease Assets for the transmission and distribution of electricity in accordance with applicable rules and regulations of all regulatory agencies having regulatory jurisdiction over the Stanton/Brady/Celeste Assets, including without limitation, the PUCT, as well as applicable rules and regulations of ERCOT, TRE, NERC and other Regulatory Authorities, and (ii) to utilize the Stanton/Brady/Celeste Lease Assets (and the associated easements, rights of way and similar rights) for other opportunities and uses (provided that such other uses do not interfere with the current or future transmission and delivery of electricity), subject to the approval of the Lessor, such approval not to be unreasonably withheld, conditioned or delayed. Throughout the Term of this Agreement, Lessor shall have access to the Stanton/Brady/Celeste Assets at all reasonable times for purposes of inspection and for the purposes of improving, expanding or modernizing the Stanton/Brady/Celeste Assets in accordance with Article X. Except in the case of emergency, prior to Lessor’s access of the Stanton/Brady/Celeste Assets, Lessor will provide written notification to Lessee’s operations personnel.
1.3. Absolute Net Lease . This Agreement is intended by the Parties to be an absolute net lease (and, except as otherwise specified herein, the expenses associated with the lease, servicing, insuring, maintenance, repair and operation of the Stanton/Brady/Celeste Assets shall be for the account of the Lessee, unless expressly stated that such expenses are for the account of Lessor or some other person or entity). Other than as expressly provided herein, (a) Lessee’s obligation to make all payments of Rent as and when the same shall become due and payable in accordance with the terms of this Agreement shall be absolute, irrevocable and unconditional and shall not be affected by any circumstance or subject to any abatement or diminution by set-off, deduction, counterclaim, recoupment, agreement, defense, suspension, deferment, interruption or otherwise, and (b) until such time as all Rent required to be paid has been paid, Lessee shall have no right to terminate this Agreement or to be released, relieved or discharged from its obligation to make, and shall not suspend or discontinue, any payment of Rent for any reason whatsoever.
1.4. Waiver by Lessee. Lessee hereby waives, to the extent permitted by Applicable Law, any and all rights which it may now have or which at any time hereafter may be conferred upon it, by statute or otherwise, to modify, terminate, cancel, quit or surrender this Agreement except in accordance with the express terms hereof.
1.5. Quiet Enjoyment . Lessee shall be entitled to the peaceful and quiet enjoyment of the Stanton/Brady/Celeste Assets, subject to the terms of this Agreement, so long as Lessee is not in default of this Agreement beyond applicable notice and cure periods.
 
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ARTICLE II
TERM OF LEASE
2.1. Term . Subject to the provisions of Section 2.2 of this Agreement, or as otherwise stated herein, this Agreement became effective on the Original Lease Date and shall continue through December 31, 2015 unless otherwise terminated in a manner consistent herewith (the “ Initial Term ”). Thereafter, this Agreement may be renewed for subsequent terms (each, a “ Renewal Term ” and, collectively with the Initial Term, the “ Term ”) by mutual agreement of the Parties; provided, however, that the Rent for any Renewal Term shall be targeted to provide the Lessor with a Comparable Rate of Return on the then-current Rate Base of the Stanton/Brady/Celeste Assets.
2.2. Approvals upon Expiration or Termination .
(a) Notwithstanding any provisions to the contrary herein, Lessee shall not surrender, resign, transfer, assign or otherwise cease to be the operator of the Stanton/Brady/Celeste Assets at any time, including upon the termination of this Agreement or at the expiration of the Term, without first acquiring any necessary regulatory approvals from the PUCT or other Regulatory Authorities regarding such surrender, resignation, transfer, assignment or cessation of such operatorship; provided that, in the event of expiration or termination, the Parties shall use commercially reasonable efforts to obtain all necessary regulatory approvals of the transfer of such operatorship as soon as reasonably practicable.
(b) During such extended period of operatorship, Lessee shall continue to operate the Stanton/Brady/Celeste Assets and shall continue to pay all Extended Period Rent; provided, however, that if regulatory approval is not obtained within twelve (12) months of initiation of the approval process and such delay is (a) due to Lessor’s failure to reasonably pursue such approval, then the amounts payable as Rent will be eighty percent (80%) of such amount, or (b) due to Lessee’s failure to reasonably pursue such approval, then the amounts payable as Rent will be one hundred five percent (105%) of such amount.
(c) Upon the expiration of the Term or termination of this Agreement, Lessee shall use commercially reasonable efforts to obtain all necessary regulatory approvals as soon as reasonably practicable from the PUCT or other Regulatory Authorities to transfer or assign the CCNs for the Stanton/Brady/Celeste Assets to Lessor or a third party designated by Lessor and acceptable to the PUCT or other Regulatory Authorities.
2.3. Purchase Option upon Expiration or Termination . Upon the expiration of the Term or termination of this Agreement, Lessor shall have the option to purchase from Lessee any equipment or other property, tangible or intangible, owned by Lessee and principally used in connection with and necessary for the operation of the Stanton/Brady/Celeste Assets (including any Nonseverable Footprint Projects owned by Lessee, if any), subject to any required regulatory approvals. The purchase price for such property or equipment shall be the greater of (i) the net book value thereof plus 10% and (ii) the fair market value thereof as determined by mutual agreement of Lessor and Lessee. If the Parties fail to agree on the amount of the purchase price, the purchase price shall be determined by arbitration pursuant to Section 13.7. In the event Lessor purchases such equipment, Lessee shall have the right to continue to use such equipment for no cost during the period of any extended operations by Lessee under Section 2.2.
 
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ARTICLE III
RENT
3.1. Rent . Lessee will pay to Lessor in lawful money of the United States of America which shall be legal tender for the payment of public and private debts, at Lessor’s address set forth in Section 13.8 hereof or at such other place or to such other Person, as Lessor from time to time may designate in a Notice, all Rent contemplated hereby during the Term on the basis hereinafter set forth. If there is a dispute as to the amount of Rent to be paid by Lessee, either Party may submit the dispute to arbitration pursuant to Section 13.7. However, Lessee shall be required to pay, as and when Rent is due and payable hereunder, the Undisputed Rent until such time as the dispute is resolved by agreement between the Parties or by arbitration pursuant to Section 13.7.
(a) Base Rent: Lessee shall pay to Lessor an amount of base rent equal to the amount set forth on the then-effective Rent Supplement, which shall be payable monthly in arrears 45 days after the conclusion of the month. The amount of base rent owed pursuant to this Section 3.1(a) may also be supplemented by the Parties from time to time in accordance with Section 3.2. The amount of base rent payable pursuant to this Section 3.1(a), as supplemented from time to time pursuant to Section 3.2, is referred to as “ Base Rent .”
(b) Percentage Rent: In addition to the Base Rent set forth above, Lessee covenants and agrees to pay to Lessor, as percentage rent, an annual amount equal to the percent of Gross Revenues during the applicable Lease Year in excess of the Annual Percentage Rent Breakpoint for such Lease Year, all as set forth on the then-effective Rent Supplement. The percentage amounts used for the calculation of percentage rent owed pursuant to this Section 3.1(b) (the “ Percentage Rent Percentages ”) may be supplemented by the Parties from time to time in accordance with Section 3.2 to account for additions to the Stanton/Brady/Celeste Assets. The percentage rent payable pursuant to this Section 3.1(b), as supplemented from time to time pursuant to Section 3.2, is referred to as “Percentage Rent.”
(c) Percentage Rent Breakpoints: With respect to the Annual Percentage Rent Breakpoint for each Lease Year: (1) the “First Lease Quarter Percentage Rent Breakpoint” shall be 25% of the Annual Percentage Rent Breakpoint for such Lease Year; (2) the “Second Lease Quarter Percentage Rent Breakpoint” shall be 50% of the Annual Percentage Rent Breakpoint for such Lease Year; and (3) the “Third Lease Quarter Percentage Rent Breakpoint” shall be 75% of the Annual Percentage Rent Breakpoint for such Lease Year.
 
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(d) Gross Revenues:
(i) As used in this Agreement, subject to Section 3.1(d)(ii), the “ Gross Revenues ” of the Stanton/Brady/Celeste Assets shall mean and include all fees, charges and other revenues generated by or otherwise (x) received by or payable to Lessee in connection with or which are the result of the operation of the Stanton/Brady/Celeste Assets (and any assets related to the Stanton/Brady/Celeste Assets owned by Lessee), as set forth in Account Nos. 440, 442, 444, 445, 449, 451, and 456 (but excluding any fees, charges or other revenues set forth in Account No. 555) of the FERC Uniform System of Accounts for electric utilities or such other accounts as may be applicable from time to time in which Lessee records its revenues from operation of the Stanton/Brady/Celeste Assets; (y) received by or payable to Lessee from other opportunities and uses of the Stanton/Brady/Celeste Assets pursuant to Section 1.2 hereof; or (z) that are insurance proceeds for business income lost from an insured event related to the Stanton/Brady/Celeste Assets; provided that, “ Gross Revenues ” shall not include (1) any payment received by Lessee as CIAC; (2) any items which are of a pure pass-through nature where such items are charged to and collected from customers of Lessee but which carry regulatory responsibility to remit such collections without offset or deduction to a third party, including, but not limited to, items such as: (A) sales taxes or other charges collected by Lessee on behalf of a taxing authority; (B) fees, charges and other revenues collected by Lessee that can be specifically traced to any regulatory approved costs incurred by Lessee that have been ordered or permitted by the PUCT to be recovered through Lessee’s rates such as system benefit fund, purchase power costs, wheeling charges, Purchase Power Cost Recovery Factor and Transmission Cost Recovery Factor; (C) fees, charges and other revenues collected by Lessee that can be specifically traced to any deferred costs funded by Lessee that have been ordered or permitted by the PUCT to be recovered through a tariff rider; and (D) such other items that Lessor and Lessee agree to in good faith are consistent with the foregoing and should be included prospectively in the list set forth in this clause (2) and in the event the Lessor and Lessee cannot agree on what items should be included on such list after 60 days of negotiating in good faith, then either Lessor or Lessee may submit such matter to arbitration pursuant to Section 13.7 of this Agreement, pursuant to which the Arbitration Panel shall be empowered to determine which such items shall be included on such list, based on submissions by each of the Lessee and the Lessor; and (3) Revenues Attributable to Lessee CapEx. The term “ Unadjusted Gross Revenues ” means the amount of Gross Revenue, calculated in accordance with this Section 3.1(d)(i), without giving effect to the offset set forth in clause (3), above, related to Revenues Attributable to Lessee CapEx.
(ii) Except as set forth below, all ERCOT Transmission Revenues will be allocated to the Stanton/Brady/Celeste Assets covered by this Agreement based upon the following formula: Multiply (x) total ERCOT Transmission Revenues received by Lessee by (y) a fraction, the numerator of which is the Transmission Net Plant in Service for the Stanton/Brady/Celeste Assets covered by this Agreement and the denominator of which is the total Transmission Net Plant in Service for all regulated electric transmission systems owned by Lessor or an affiliate thereof and operated by Lessee or a subsidiary thereof within ERCOT (the “ TCOS Allocation ”). As of the Effective Date, all regulated electric transmission systems operated by Lessee or a subsidiary thereof within ERCOT are owned by Lessor or a subsidiary or parent entity thereof. As long as that is the case, Transmission Net Plant in Service and Transmission Gross Plant in service shall be derived exclusively from the financial statements of Lessor and agreed to by Lessee. If Lessee operates any electric transmission systems within ERCOT that are not leased from Lessor or an affiliate thereof, then the Parties will negotiate in good faith an equitable and appropriate mechanism for allocating ERCOT Transmission Revenues based on the
 
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Transmission Net Plant in Service of the respective electric transmission systems and in the event the Parties cannot agree on an equitable and appropriate mechanism after 60 days of negotiating in good faith, then either Party may submit such matter to arbitration pursuant to Section 13.7 of this Agreement, pursuant to which the Arbitration Panel shall be empowered to determine such equitable and appropriate mechanism, based on submissions by each of the Lessee and the Lessor. The most recent TCOS Allocation agreed to by Lessor and Lessee will govern the allocation described in this Section 3.1(d)(ii), which TCOS Allocation may be set forth in a Rent Supplement but will not be required to be included in a Rent Supplement to be effective. Either Party may request a revision to such TCOS Allocation, based on the most recent available monthly balance sheet, no more frequently than once every sixty (60) days or in connection with any Rent Supplement or Rent Validation executed and delivered by the Parties. If the Parties are unable to agree to an allocation, such matter will be submitted to arbitration pursuant to Section 13.7. “Gross Revenues,” for purposes hereof, will consist of the amount of such ERCOT Transmission Revenues allocated to the Stanton/Brady/Celeste Assets pursuant to this Section 3.1(d)(ii), if any, plus any other amounts, such as distribution revenue, that constitute Gross Revenues pursuant hereto, minus Revenues Attributable to Lessee CapEx.
(iii) The Parties contemplate that there may be Capital Expenditures for assets that are placed in service and that are related and fairly allocable to the Stanton/Brady/Celeste Assets or the Stanton Transmission Loop Assets and are classified as Lessee CapEx. Unless the Parties agree otherwise based on appropriate factors at the time of the negotiation, Capital Expenditures that qualify as Lessee CapEx will qualify as Lessee CapEx on the date that the assets developed with such Capital Expenditures are placed in service. In such a case, Revenues Attributable to Lessee CapEx shall be determined and such portion shall be excluded from Unadjusted Gross Revenues. For these purposes, Revenues Attributable to Lessee CapEx shall be targeted to equal that portion of the Unadjusted Gross Revenues collected by Lessee which equals the amount needed to provide Lessee with the equivalent of a Comparable Rate of Return on any such Lessee CapEx (except that, in determining such Comparable Rate of Return, the Parties will not consider Lessee’s creditworthiness and there will be no Agreed-to-Discount). It is understood and agreed that such determinations of the Revenues Attributable to Lessee CapEx are intended to provide an accurate and reasonably administrable means of ensuring that the Lessee (and not the Lessor) will receive a Comparable Rate of Return attributable to the capital invested by Lessee in the Lessee CapEx. The Revenues Attributable to Lessee CapEx shall be determined solely to provide a Comparable Rate of Return on such Lessee CapEx and shall not be determined with reference to, or with any intention to true up, the effect of any difference between the initially anticipated and the actual return of or on prior Lessee CapEx. The Parties understand that there may be Capital Expenditures that relate to both (1) the Stanton/Brady/Celeste Assets and/or the Stanton Transmission Loop Assets and (2) to other transmission and/or distribution systems owned or operated by Lessee or an affiliate thereof, and, in such circumstance, the Parties will negotiate in good faith to determine the portion of such Capital Expenditures that constitute Lessee CapEx hereunder and in the event the Parties cannot determine such portion after 60 days of negotiating in good faith, then either Party may submit such matter to arbitration pursuant to Section 13.7 of this Agreement, pursuant to which the Arbitration Panel shall be empowered to determine such portion of Capital Expenditures that constitute Lessee CapEx hereunder, based on submissions by each of the Lessee and the Lessor.
 
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Lessee agrees to provide Lessor with sufficient information regarding Lessee CapEx so that Lessor can monitor amounts actually spent on Lessee CapEx. If Lessee expects there will be any Lessee CapEx, Lessee may request, no more frequently than annually, that the Parties determine the Revenues Attributable to Lessee CapEx which relate to such Lessee CapEx for each subsequent Lease Year. Lessee will use reasonable efforts to make such request coincide with a Rent Supplement pursuant to Section 3.2(a). Each supplement and related determination of Revenues Attributable to Lessee CapEx for any Lease Year which is specified in this Section 3.1(d)(iii) shall be memorialized in the manner specified in Section 3.2(b).
(e) Payment of Percentage Rent: Percentage Rent shall be paid by Lessee to Lessor not later than the date forty-five (45) days after the end of each Lease Quarter as herein provided. Lessee shall record Gross Revenues in order to provide an audit trail for the Gross Revenues. Lessee shall deliver a written statement to Lessor, accompanied by a CFO Certificate, within forty-five (45) days after the end of each Lease Quarter, stating (1) the Gross Revenues for that Lease Quarter, (2) the cumulative total through the end of that Lease Quarter of Gross Revenues for such Lease Year, (3) the Percentage Rent Breakpoint (the First Lease Quarter Percentage Rent Breakpoint, the Second Lease Quarter Percentage Rent Breakpoint, the Third Lease Quarter Percentage Rent Breakpoint or the Annual Percentage Rent Breakpoint for such Lease Year, as applicable), utilized by Lessee and applicable to Lessee’s calculation of Percentage Rent through the end of that Lease Quarter, and (4) the cumulative total of any Percentage Rent then due and the cumulative total of any Percentage Rent previously paid with respect to any prior Lease Quarter(s) within such Lease Year. If such CFO Certificate indicates that any Percentage Rent is due for such Lease Quarter (or such Lease Year, as applicable), based upon the cumulative total of Gross Revenues through the end of such Lease Quarter and the applicable Percentage Rent Breakpoint reflected in such statement, then Lessee shall pay and deliver any Percentage Rent then due with the statement and CFO Certificate for such Lease Quarter (or such Lease Year, as applicable). With respect to the final Percentage Rent calculation for any Lease Year, Lessee shall receive a credit for any Percentage Rent previously paid with respect to such Lease Year. If the Percentage Rent payments previously made by Lessee to Lessor for the first three Lease Quarters of a Lease Year, on a cumulative basis, exceed the annual amount of Percentage Rent payable by Lessee to Lessor for such Lease Year, then Lessee shall receive a credit for such excess amount against the next Percentage Rent payment(s) becoming due and payable by Lessee to Lessor under this Agreement. All statements deliverable by Lessee to Lessor under this Agreement shall be delivered to the place where rent is then payable, or to such other place or places as Lessor may from time to time direct by written notice to Lessee.
3.2. Rent Supplements.
(a) The Parties have executed a Rent Supplement with respect to the Rent in effect as of the Effective Date. This Section 3.2(a) will not require any amendment to Rent unless the Parties expect Incremental CapEx and the Parties have not previously entered into a Rent Supplement with respect to such Incremental CapEx. If the Parties expect that during any Lease Year there will be Incremental CapEx, then the Parties will negotiate in good faith to supplement Rent and other matters in accordance with this Section 3.2. In connection therewith, the Parties will negotiate the pre-tax rate of return that Lessor should earn on such Incremental CapEx, which will be based generally on an agreed-to discount from the rate of return that public utility
 
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companies generally earn in the State of Texas at the time of such Rent Supplement negotiation, adjusted in the manner agreed to by the Parties (if justified) to take into account the creditworthiness of Lessee at the time of such Rent Supplement negotiation (the “ Agreed-to-Discount ”). Such discount will be based on the comparable discount agreed to in connection with the negotiation of rent pursuant to the McAllen Lease and other leases between Lessee and Lessor (or an affiliate thereof), as modified to take into account appropriate factors at the time of such Rent Supplement negotiation. Such pre-tax rate of return, as determined in accordance with this paragraph, is referred to as a “ Comparable Rate of Return . ” The following will apply to the determination of the matters set forth on the Rent Supplement:
(i) The Parties will supplement Base Rent and Percentage Rent in a manner intended to provide a Comparable Rate of Return for Lessor on its Incremental CapEx. Such Comparable Rate of Return will be achieved by a split between Base Rent and Percentage Rent in the proportions requested by Lessor and agreed to by Lessee.
(ii) Unless the Parties agree otherwise based on appropriate factors at the time of the negotiation, Capital Expenditures will qualify as Incremental CapEx on the date such Capital Expenditures are placed in service, which differentiates these Capital Expenditures from the Capital Expenditures included in CapEx Budgets pursuant to Article X, which are measured under this Agreement based on the date the related Capital Expenditures are incurred.
(iii) Notwithstanding anything herein to the contrary, such supplement shall be determined solely to provide a Comparable Rate of Return on such Incremental CapEx and shall not be determined with reference to, or with any intention to true up, the effect of any difference between the initially anticipated and the actual return of or on, or the Base Rent or Percentage Rent payable with respect to, the Stanton/Brady/Celeste Assets as in place prior to the additions resulting from such Incremental CapEx.
(iv) Base Rent shall at all times be at least equal to the aggregate amount of scheduled principal and interest due and payable by Lessor for such period with respect to indebtedness incurred by Lessor in connection with the acquisition of the Original Assets and all indebtedness incurred by Lessor in connection with its funding of any Footprint Projects.
(v) For clarity, in no event will this Section 3.2 require a reduction in Rent if there is no Incremental CapEx.
(b) The Parties will memorialize the results of all Incremental CapEx supplements and Lessee CapEx supplement negotiations by executing and delivering a Rent Supplement, which will set forth the amount of contemplated Incremental CapEx, new Base Rent, a new Percentage Rent Schedule, new Revenues Attributable to Lessee CapEx, Lessee CapEx, new Accumulated Deficit (if applicable), new TCOS Allocation (if applicable), the effective date on which such changes will occur and the term of such Rent Supplement (if applicable). In no event will any new Base Rent or new Percentage Rent be payable, or any Revenues Attributable to Lessee CapEx be taken into account as a reduction to Unadjusted Gross Revenues, before the
 
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assets funded by the related Incremental CapEx or Lessee CapEx are placed in service. The Rent Supplement may also include the projected in-service date of the Incremental CapEx or Lessee CapEx to which the Rent Supplement applies. Upon execution and delivery of any such Rent Supplement, this Agreement will be deemed amended thereby. The Rent Supplement shall have the term set forth therein, not to extend past the then-current Term of this Agreement. At the end of the term of each Rent Supplement, the Parties shall negotiate a new Rent Supplement for the Lessee CapEx and Incremental CapEx covered by such prior Rent Supplement using the Comparable Rate of Return methodology set forth in Sections 3.1(d)(iii) and 3.2(a). Notwithstanding the foregoing, the Percentage Rent Percentages and Annual Percentage Rent Breakpoints reflected on such new Rent Supplement with respect to the Rate Base covered by such prior Rent Supplement shall be as set forth on the Percentage Rent Schedule of such prior Rent Supplement. If necessary, Exhibit A will be supplemented to reflect new assets funded by Incremental CapEx.
(c) If following a Rent Supplement there is a difference in (i) the amount of actual Incremental CapEx compared to the amount contemplated by the then-effective Rent Supplement, (ii) the amount of actual Lessee CapEx compared to the amount contemplated by the then-effective Rent Supplement, or (iii) the placed-in-service date of such Incremental CapEx or Lessee CapEx compared to what was contemplated at the time of the then-effective Rent Supplement, then, at any time within two years of the date the Parties agree to a Rent Supplement, either Party may request a Rent Validation. If there has been such a difference, the Parties will supplement Incremental CapEx, Base Rent, Percentage Rent Percentages, Annual Percentage Rent Breakpoints, Revenues Attributable to Lessee CapEx, Lessee CapEx and/or Accumulated Deficit, as applicable, to what they would have been, at the time of the Rent Supplement, to reflect (1) the amount of actual Incremental CapEx and Lessee CapEx and/or (2) the actual dates such Incremental CapEx and/or Lessee CapEx was placed in service, but keeping fixed all other relevant assumptions and inputs, including the Comparable Rate of Return. For the avoidance of doubt, in no circumstance will a Rent Validation occur to account for any difference between the initially anticipated and the actual return of or on the Incremental CapEx and/or Lessee CapEx, and no such difference will be taken into account as part of such Rent Validation. The Parties also will negotiate in good faith to determine (A) whether one Party should make a lump sum payment to the other Party as a result of excess or deficient Rent Lessee paid, prior to the date of the effective date of the Rent Validation, in connection with the Rent Supplement, given any negotiated supplement, and, (B) if applicable, the amount of any such lump sum payment. The Parties will memorialize the result of any Rent Validation negotiation by executing and delivering a revised Rent Supplement, which will set forth revised expected Incremental CapEx, Lessee CapEx, Base Rent, Percentage Rent Percentages, Annual Percentage Rent Breakpoints, Revenues Attributable to Lessee CapEx and/or Accumulated Deficit, as applicable, the effective date on which such changes will occur and, if applicable, the amount of the lump sum payment that one Party must make to the other Party (which payment must be made within 30 days of the execution and delivery of such revised Rent Supplement). Any lump sum payments received by Lessor under this Section 3.2(c) shall be treated as Rent by the Parties. Upon execution and delivery of any such revised Rent Supplement, this Agreement will be deemed amended thereby. The Parties will reasonably cooperate to minimize the number of Rent Validations, and prospective Rent Supplements and Rent Validations may be combined into one revised, amended and restated Rent Supplement.
 
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(d) In connection with the foregoing provisions of this Section 3.2, Lessor and Lessee shall use good faith efforts to agree to a Rent Supplement, renewal of a Rent Supplement or Rent Validation, as applicable, within 60 days of a request therefor by either Party. If, by the end of such 60 day period, Lessee and Lessor cannot in good faith agree to the terms of a Rent Supplement, renewal of a Rent Supplement or Rent Validation, such dispute shall be submitted to arbitration in accordance with Section 13.7 of this Agreement, pursuant to which the Arbitration Panel shall be empowered to determine the terms of such Rent Supplement, renewal of a Rent Supplement or Rent Validation (including any lump sum payment amount), based on submissions by each of the Lessee and the Lessor.
3.3. Confirmation of Percentage Rent.
(a) In the event that Lessee determines that the Percentage Rent paid with respect to any Lease Year exceeded the amount of Percentage Rent actually due for such Lease Year (such overage being the “ Excess Percentage Rent ”), Lessee shall promptly notify Lessor of such fact and shall deliver a new CFO Certificate (the “ Revised Certificate ”) setting forth the corrected calculations of the Percentage Rent due for such Lease Year and identifying the amount of the Excess Percentage Rent. Upon Lessor’s reasonable verification of the information set forth in the Revised Certificate, Lessor shall refund to Lessee the Excess Percentage Rent. Notwithstanding anything to the contrary contained herein, in no event shall Lessor have any obligation under this Section 3.3(a) to refund any Excess Percentage Rent if Lessor has not received the Revised Certificate by March 31 of the year following the Lease Year for which the Excess Percentage Rent was paid.
(b) Lessee shall utilize, or cause to be utilized, an accounting system for the Stanton/Brady/Celeste Assets in accordance with the FERC Uniform System of Accounts for electric utilities, that will accurately record all data necessary to compute Percentage Rent, and Lessee shall retain and shall allow Lessor and its representatives to have reasonable access to, for at least five (5) years after the expiration of each Lease Year, reasonably adequate records conforming to such accounting system showing all data necessary to conduct Lessor’s Audit and to compute Percentage Rent for the applicable Lease Years and to otherwise file or defend tax returns and reports to any Regulatory Authority.
(c) Lessor shall have the right from time to time to cause its accountants or representatives to conduct an inspection, examination and/or audit (a “ Lessor’s Audit ”) of all of Lessee’s records, including supporting data, sales and excise tax returns and the records described in Section 3.3(b), reasonably required to complete such Lessor’s Audit and to verify Percentage Rent, subject to any prohibitions or limitations on disclosure of any such data under applicable laws, regulations and governmental requirements. If any Lessor’s Audit discloses a deficiency in the payment of Percentage Rent, and either Lessee agrees with the result of Lessor’s Audit or the matter is otherwise determined or compromised, Lessee shall forthwith pay to Lessor the amount of the deficiency, as finally agreed or determined, together with interest at the Overdue Rate from the date when said payment should have been made to the date of
 
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payment thereof. In addition to the amounts described above in this Section 3.3(c), if any Lessor’s Audit discloses a deficiency in the payment of Percentage Rent which, as finally agreed or determined, exceeds 3% of the amount paid, Lessee shall pay the costs of Lessor’s Audit. In no event shall Lessor undertake a Lessor’s Audit after March 31 of the second year following the Lease Year for which such audit is requested.
(d) Any proprietary information obtained by Lessor pursuant to the provisions of this Section 3.3 shall be treated as confidential, except that such information may be used, subject to appropriate confidentiality safeguards, in any litigation or arbitration between the Parties and except further that Lessor may disclose such information to lenders and investors, including prospective lenders or investors and to any other persons to whom disclosure is necessary or appropriate to comply with applicable laws, regulations and governmental requirements and to comply with any reporting requirements applicable to Lessor or Lessee under any applicable securities laws or regulations or any listing requirements of any applicable securities exchange.
(e) The obligations of Lessee and Lessor contained in this Section 3.3 shall survive the expiration or earlier termination of this Agreement. Any dispute as to the existence or amount of any deficiency in the payment of Percentage Rent as disclosed by Lessor’s Audit shall, if not otherwise settled by the Parties, be submitted to arbitration pursuant to the provisions of Section 13.7.
3.4. Additional Rent . In addition to Base Rent and Percentage Rent, Lessee also will pay and discharge as and when due and payable all other amounts, liabilities, obligations and impositions that Lessee assumes or agrees to pay under this Agreement, including without limitation, the expenses described in Section 1.3 and any reimbursement for such amounts and other damages to Lessor in the event that Lessor pays such expenses or performs such obligations on behalf of Lessee (collectively, “ Additional Rent ”).
3.5. No Set Off. Rent shall be paid to Lessor without set off, deduction or counterclaim; provided, however, that Lessee shall have the right to assert any claim or counterclaim in a separate action brought by Lessee under this Agreement or to assert any mandatory counterclaim in any action brought by Lessor under this Agreement.
3.6. Late Payment Penalty. If Lessee fails to make any payment of Rent to Lessor within five (5) days after it is due, interest shall accrue on the overdue amount, from the date overdue until the date paid, at the Overdue Rate.
3.7. Credit Support. If Lessor has reasonable grounds for insecurity regarding the performance of Lessee’s obligations hereunder, Lessor may require Lessee to provide credit support in the amount, form and for the term reasonably acceptable to Lessor, including but not limited to, a letter of credit, a prepayment, or a guaranty.
3.8. Other Revenue. If Lessee receives or expects to receive any fees, charges or Other Revenues and other than de minimis amounts not to exceed $100,000 in any calendar year, then, unless Lessee reasonably believes that such Other Revenue will not operate to reduce Lessee’s tariff within the State of Texas, Lessee and Lessor will negotiate in good faith to amend this
 
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Agreement or a similar lease to characterize the portion of such Other Revenue which Lessor reasonably expects will operate to reduce Lessee’s tariff within the State of Texas as Unadjusted Gross Revenue hereunder or under such other similar lease. In the event the Lessee and Lessor cannot agree on the terms of such amendment of this Agreement or of a similar lease after 60 days of negotiating in good faith, then either the Lessee or the Lessor may submit such matters to arbitration pursuant to Section 13.7 of this Agreement, pursuant to which the Arbitration Panel shall be empowered to characterize the portion of such Other Revenue which Lessor reasonably expects will operate to reduce Lessee’s tariff within the State of Texas as Unadjusted Gross Revenue hereunder or under such other similar lease, based on submissions by each of the Lessee and the Lessor.
ARTICLE IV
LESSEE’S REPRESENTATIONS, WARRANTIES AND COVENANTS
Lessee hereby represents, warrants and covenants to Lessor that:
4.1. Maintenance, Operation and Repair of the Stanton/Brady/Celeste Assets.
(a) Lessee, at its own cost and expense, shall maintain (including both scheduled and unscheduled maintenance), operate, repair and make all modifications (other than Footprint Projects) to the Stanton/Brady/Celeste Assets and any components thereof (whether owned by Lessor or Lessee), including directing all operations of and supplying all personnel necessary for the operation of the Stanton/Brady/Celeste Assets, in each case, as reasonable and prudent and consistent with Good Utility Practice and as required by Applicable Law. Lessee shall carry out all obligations under this Agreement as reasonable and prudent and consistent with Good Utility Practice and in accordance with manufacturers’ warranty requirements (during any applicable warranty period) and the Lessee’s established operating procedures and maintenance, rebuild and repair programs so as to keep the Stanton/Brady/Celeste Assets in good working order, ordinary wear and tear excepted, and in such condition as shall comply in all material respects with all Applicable Laws. Lessee will operate the Stanton/Brady/Celeste Assets in a reliable and safe manner in compliance with all applicable requirements and regulations of Regulatory Authorities. Lessee will not operate the Stanton/Brady/Celeste Assets or any component thereof in any manner excluded from coverage by any insurance in effect as required by the terms hereof.
(b) If inspections of the Stanton/Brady/Celeste Assets by Lessor show that the Stanton/Brady/Celeste Assets do not meet industry standards or Good Utility Practice for maintenance and repair and/or fail to meet the requirements of any Applicable Law, Lessee shall promptly, but in any event within thirty (30) days after such initial notification, (i) develop a plan for Lessor’s review by which the Stanton/Brady/Celeste Assets can be modified to comply with the standards, and (ii) complete any and all such modifications consistent with all applicable reliability and safety standards established by regulations, orders or requirements of Regulatory Authorities.
 
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4.2. Licenses and Permits. Lessee shall obtain and maintain any and all licenses, permits and other governmental and third-party consents and approvals required by Applicable Law in order to carry out its obligations under this Agreement.
4.3. Property Taxes, and other Assessments and Fees. Lessee shall bear and timely pay all ad valorem or property taxes, sales and use taxes, or other assessments, governmental charges or fees that shall or may during the Term be imposed on, or arise in connection with, the repair, maintenance or operation of the Stanton/Brady/Celeste Assets (including all Footprint Projects as described and provided for in Section 10.1 of this Agreement) (“ Lessee Taxes ”); provided that Lessee shall not be obligated to pay any net income taxes imposed upon Lessor or any sales and use taxes which arise in connection with Lessor’s acquisition of Footprint Projects (“ Lessor Taxes ”). Upon the written request by Lessor, Lessee shall provide Lessor with evidence of the payment of any such Lessee Taxes, the failure of which to be paid would cause the imposition of a Lien upon the Stanton/Brady/Celeste Assets or any component thereof or interest therein. Lessee shall assume full responsibility for preparing and furnishing to Lessor for execution all filings with any governmental authority of or in the state and/or locality in which the Stanton/Brady/Celeste Assets is located in respect of any and all taxes; except that, where required or permitted by Applicable Law, Lessee shall make such filings on behalf of Lessor in the name of Lessor or in Lessee’s own name. In each case in which Lessee furnishes a tax return or any other form to be executed by Lessor for filing with or delivery to any taxing authority, Lessee shall certify to Lessor that such document is in the proper form, is required to be filed under Applicable Law and does not impose any tax or other liability on Lessor or any of its affiliates which is not indemnified by Lessee. Lessee shall be permitted to contest, in its own name when permitted by law but otherwise on behalf of Lessor, in good faith and upon consultation with Lessor, any taxes it is obligated to pay hereunder.
4.4. Requirements of Governmental Agencies and Regulatory Authorities . Lessee, at its expense, shall comply with all Applicable Laws, including without limitation all requirements of the Regulatory Authorities. Lessee shall have the right, in its reasonable discretion and at its cost and expense, to contest by appropriate legal proceedings, the validity or applicability to the Stanton/Brady/Celeste Assets of any Applicable Law made or issued by any federal, state, county, local or other governmental agency or entity. Any such contest or proceeding shall be controlled and directed by Lessee. Notwithstanding the foregoing, Lessee shall provide Lessor written notice of the commencement and, at reasonable intervals after commencement, the progress of any such legal proceedings.
4.5. Liens. Lessee shall keep the Stanton/Brady/Celeste Assets free and clear of all Liens other than Permitted Liens; provided, however, that if Lessee wishes to contest any such Lien (other than a Permitted Lien), Lessee shall, promptly, and in any event within thirty (30) days after it receives notice of the filing of such Lien, remove or bond over such lien from the Stanton/Brady/Celeste Assets pursuant to Applicable Law. If Lessee fails to promptly remove or bond over any such Lien, Lessor may, after providing notice to Lessee, take reasonable action to satisfy, defend, settle or otherwise remove the Lien at Lessee’s expense.
 
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4.6. Hazardous Materials .
(a) Lessee shall operate and maintain the Stanton/Brady/Celeste Assets and conduct all of its other activities in respect thereof in compliance in all material respects with any Applicable Laws relating to air, water, land and the generation, storage, use, handling, transportation, treatment or disposal of Hazardous Material. Lessee shall promptly notify Lessor of any such violation and, to the extent Lessee becomes aware of any environmental, health, safety or security matter that requires a corrective action, Lessee shall, in consultation with Lessor, undertake and complete such corrective action. Lessee shall have the obligation to report any such violations to the appropriate Regulatory Authorities in accordance with Applicable Law and, if practicable, shall give notice thereof to Lessor prior to making such report.
(b) Without limiting the generality of the foregoing, Lessee shall not (i) place or locate any underground tanks on the property underlying the Stanton/Brady/Celeste Assets, (ii) generate, manufacture, transport, produce, use, treat, store, release, dispose of or otherwise deposit Hazardous Materials in or on the Stanton/Brady/Celeste Assets, the property underlying the Stanton/Brady/Celeste Assets or any portion thereof other than as permitted by Applicable Laws that govern the same or are applicable thereto, (iii) permit any other substances, materials or conditions in, on or emanating from the Stanton/Brady/Celeste Assets, the property underlying the Stanton/Brady/Celeste Assets or any portion thereof which may support a claim or cause of action under any Applicable Law or (iv) undertake any action that would reasonably be expected to cause an unauthorized release of Hazardous Materials at the property underlying the Stanton/Brady/Celeste Assets.
(c) Lessee shall periodically, at intervals determined in its reasonable discretion in accordance with Good Utility Practice or as required by Applicable Law, at Lessee’s sole expense, conduct inspections of all components of the Stanton/Brady/Celeste Assets to ensure compliance with Applicable Laws and with this Section 4.6, and shall promptly notify Lessor of the results of any such inspections. Lessor may, at Lessor’s expense, conduct its own testing at times determined in its reasonable discretion, and after reasonable consultation with Lessee, to ensure Lessee’s compliance with Applicable Laws and with this Section 4.6, provided, however, that Lessor agrees to indemnify Lessee, in accordance with Section 12.2, from and against any and all Claims arising from such testing.
4.7. Indebtedness . Lessee shall not incur Indebtedness other than: (i) Indebtedness in an aggregate principal amount of up to the greater of (A) $5,000,000 and (B) an amount equal to one percent (1%) of the sum of, without duplication, (x) the total amount of the Consolidated Net Plant of Lessee, plus (y) the total amount of the Consolidated Net Plant of any guarantor(s) of Lessee’s obligations under any Lease to which Lessee is a party as a lessee, plus (z) the total amount of Leased Consolidated Net Plant of Lessee, in each case on a senior secured basis, (ii) Indebtedness in an aggregate principal amount of up to the greater of (A) $10,000,000 and (B) an amount equal to one-and-a-half percent (1.5%) of the sum of, without duplication, (x) the total amount of the Consolidated Net Plant of Lessee, plus (y) the total amount of the Consolidated Net Plant of any guarantor(s) of Lessee’s obligations under any Lease to which Lessee is a party as a lessee, plus (z) the total amount of Leased Consolidated Net Plant of Lessee, in each case on an unsecured subordinated basis on terms substantially similar to the terms set forth on Exhibit B and (iii) loans, in an aggregate principal amount not to exceed $10,000,000 at any time outstanding, made by InfraREIT Partners, LP or a subsidiary thereof to Lessee from time to time
 
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for the purpose of financing capital expenditures. For purposes of clauses (i) and (ii) of the preceding sentence, any Consolidated Qualified Lessees of Lessee will be treated as Lessee. In addition to the foregoing, any of Lessee’s subsidiaries may incur Indebtedness in an aggregate principal amount of up to the product of (x) Lessee’s aggregate Consolidated Net Plant multiplied by (y) the lesser of (A) the sum of Lessee’s then-current PUCT-regulated debt-to-equity ratio (expressed as a percentage) and five percent (5%) or (B) sixty-five percent (65%); provided, however, that such Indebtedness must be Non-Recourse Debt to Lessee. For purposes of this Section 4.7, Lessee’s Consolidated Net Plant will be derived from its most recently prepared consolidated balance sheet, prepared in accordance with GAAP but adjusted to reverse the effects of failed sale-leaseback accounting in a manner reasonably determined by Lessee in good faith. Without limiting the amount of Indebtedness permitted by the foregoing, Lessee may also incur Indebtedness (x) in the form of a pledge of equity interests in a subsidiary of Lessee as security for Non-Recourse Debt of such subsidiary and (y) in amounts otherwise permitted under the Debt Agreements.
4.8. Records . In addition to the records referred to in Section 3.3, Lessee shall maintain proper books of record and account in conformity with GAAP and all applicable Regulatory Authorities and each other governmental agency or authority having legal or regulatory jurisdiction over Lessee. Additionally, Lessee shall maintain or cause to be maintained all logs, drawings, manuals, specifications and data and inspection, modification and maintenance records and other materials required to be maintained in respect of the Stanton/Brady/Celeste Assets by Applicable Laws or by prudent and Good Utility Practice. Lessee shall allow Lessor and its representatives to have reasonable access to, for at least five (5) years after the expiration of each Lease Year, the records referred to in this Section 4.8.
4.9. Surrender . Upon expiration or earlier termination of this Agreement in accordance with its terms (but subject to Section 2.2 and the requirements of all Applicable Laws), and in a manner calculated to avoid any disruption of electrical service, Lessee shall vacate and surrender possession of all components of the Stanton/Brady/Celeste Assets (other than in respect of Footprint Projects funded by Lessee as described in Section 10.5(a)) to Lessor, or to such other person or entity as Lessor may direct. At the time of such surrender, the Stanton/Brady/Celeste Assets shall be free and clear of Liens and other rights of third parties (other than Permitted Liens), and shall be in the same condition as on the Original Lease Date, ordinary wear and tear and subsequent Footprint Projects excepted. Lessee shall deliver or cause to be delivered to Lessor, or to such other person or entity as Lessor may direct, copies of all title documents, logs, drawings, manuals, specifications and data and inspection, modification and maintenance records, billing records, reports and other documents in respect of the Stanton/Brady/Celeste Assets which are necessary to determine the condition of the Stanton/Brady/Celeste Assets or for the continued maintenance, repair or general operation of the Stanton/Brady/Celeste Assets and are in Lessee’s possession at such time. In connection with the surrender of the Stanton/Brady/Celeste Assets, Lessor shall pay to Lessee the aggregate purchase price for any Footprint Projects, equipment or other property purchased by Lessor in accordance with Section 2.3 or Section 10.5(b).
 
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4.10. Cooperation; Transition Services .
(a) During the period after notice of termination and prior to the termination of the Agreement, with reasonable notice, Lessee will cooperate in all reasonable respects with the efforts of Lessor to sell or lease the Stanton/Brady/Celeste Assets (or any component thereof) or any interest therein, including, without limitation, permitting prospective purchasers or lessees to fully inspect the Stanton/Brady/Celeste Assets and any logs, drawings, manuals, specifications, data and maintenance records relating thereto; provided, that such cooperation shall not unreasonably interfere with the normal operation of the Stanton/Brady/Celeste Assets or cause Lessee to incur any additional expenses other than as specifically provided herein. All information obtained in connection with such inspection shall be subject to confidentiality requirements at least as restrictive as those contained in Section 13.3.
(b) Upon expiration or termination of this Agreement, Lessee shall continue to operate the Stanton/Brady/Celeste Assets pursuant to the terms of Section 2.2, if required thereunder. During such period Lessee shall perform all duties and retain all obligations under Article IV in all respects, as if the Agreement had not expired or been terminated.
4.11. Lessee’s Authority . Lessee has all requisite power and authority to execute and deliver this Agreement and to perform its obligations hereunder. Lessee has taken all action necessary to execute and deliver this Agreement and to perform its obligations hereunder, and no other action or proceeding on the part of Lessee is necessary to authorize this Agreement. This Agreement constitutes the legally valid and binding obligation of Lessee, enforceable against Lessee in accordance with its terms, except as the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Applicable Laws affecting the enforcement of creditors’ rights generally and equitable principles.
4.12. Litigation . If Lessee becomes aware of any actions, claims or other legal or administrative proceedings that are pending, threatened or anticipated with respect to, or which could materially and adversely affect, the Stanton/Brady/Celeste Assets, Lessee shall promptly deliver notice thereof to Lessor.
4.13. Financing . Lessee acknowledges that Lessor has advised Lessee that Lessor has obtained financing secured by, among other things, the Stanton/Brady/Celeste Assets and this Agreement. In connection with such financing, Lessor made certain representations, warranties and covenants set forth in that certain (i) Amended and Restated Note Purchase Agreement entered into by Lessor and dated as of September 14, 2010 (as amended, restated, supplemented or otherwise modified from time to time, the “ 2009 Note Purchase Agreement ”), a copy of which has been provided to and reviewed by Lessee, (ii) Amended and Restated Note Purchase Agreement entered into by Lessor and dated as of July 13, 2010 (as amended, restated, supplemented or otherwise modified from time to time, the “ 2010 Note Purchase Agreement ” and, together with the 2009 Note Purchase Agreement, the “ Note Purchase Agreements ”), a copy of which has been provided to and reviewed by Lessee and (iii) Second Amended and Restated Credit Agreement entered into by Lessor and dated as of June 28, 2013 (as amended, restated, amended and restated, supplemented or otherwise modified from time to time, the “ Credit Agreement ” and, together with the Note Purchase Agreements, the “ Debt Agreements ”), a copy of which has been provided to and reviewed by Lessee.
 
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Lessee hereby covenants and agrees with Lessor that, during the term of the 2009 Note Purchase Agreement, Lessee will comply with the covenants set forth in Sections 9.08 ( Material Project Documents ) (to the extent that Lessee is a party to any Material Project Documents, as defined in the 2009 Note Purchase Agreement), 10.04 ( Terrorism Sanctions Regulations ), 10.10 ( Sale of Assets, Etc .), 10.11 ( Sale or Discount of Receivables ), 10.12 ( Amendments to Organizational Documents ), 10.16 ( Project Documents ) and 10.17 ( Regulation ) of the 2009 Note Purchase Agreement.
Lessee hereby covenants and agrees with Lessor that, during the term of the 2010 Note Purchase Agreement, Lessee will comply with the covenants set forth in Sections 9.8 ( Material Project Documents ) (to the extent that Lessee is a party to any Material Project Documents, as defined in the 2010 Note Purchase Agreement), 10.4 ( Terrorism Sanctions Regulations ), 10.10 ( Sale of Assets , Etc .), 10.11 ( Sale or Discount of Receivables ), 10.12 ( Amendments to Organizational Documents ), 10.16 ( Project Documents ) and 10.17 ( Regulation ) of the 2010 Note Purchase Agreement.
Lessee hereby agrees with Lessor that, to the extent not otherwise covered by the terms of this Agreement, (i) Lessee hereby makes the same representations and warranties to Lessor as Lessor makes to the Lender (as defined in the Credit Agreement) in Sections 6.3 ( Disclosure ), 6.5 ( Financial Condition; Financial Instruments ), 6.6 ( Compliance with Laws, Other Instruments, Etc .), 6.7 (Governmental Authorizations, Etc .), 6.8 ( Litigation; Observance of Agreements, Statutes and Orders ), 6.9 ( Taxes ), 6.10 ( Title to Property; Leases ), 6.11 ( Insurance ), 6.12 ( Licenses, Permits, Etc.; Material Project Documentation ), 6.16 ( Foreign Assets and Control Regulations, Etc. ), 6.17 ( Status under Certain Statutes ), 6.18 ( Environmental Matters ), 6.19 ( Force Majeure Events; Employees ) and 6.20 ( Collateral ) of the Credit Agreement (or equivalent provisions), to the extent that such representations and warranties relate to (x) Lessee, whether in its capacity as Lessee or otherwise, including, without limitation, Lessee’s status or operations as a public utility, or (y) Lessee’s ownership of the Stanton/Brady/Celeste Assets on or before the date hereof, and (ii) Lessee hereby covenants and agrees with Lessor that, during the term of the Credit Agreement, Lessee will comply with the covenants set forth in Sections 7.10 ( Material Project Documents ) (to the extent that Lessee is a party to any Material Project Documents, as defined in the Credit Agreement), 8.4 ( Terrorism Sanctions Regulations ), 8.10 (S ale of Assets, Etc. ), 8.11 ( Sale or Discount of Receivables ), 8.12 ( Amendments to Organizational Documents ), 8.16 ( Material Projects Documents ) and 8.17 ( Regulation ) of the Credit Agreement (or equivalent provisions).
Lessee may not lease, or agree or otherwise commit to lease, any transmission or distribution facilities other than pursuant to a Lease. Further, Lessee shall not permit Persons other than Hunt Family Members to acquire any interest in the Lessee, directly or indirectly, in a manner that would result in a Change in Control of Lessee. The Parties agree to amend, alter or supplement this Section 4.13 from time to time to give effect to the obligations under Lessor’s then-current credit arrangements.
 
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ARTICLE V
LESSOR’S REPRESENTATIONS, WARRANTIES AND COVENANTS
Lessor hereby represents, warrants and covenants as follow:
5.1. Lessor’s Authority . Lessor has all requisite power and authority to execute and deliver this Agreement and to perform its obligations hereunder. Lessor has taken all action necessary to execute and deliver this Agreement and to perform its obligations hereunder, and no other action or proceeding on the part of Lessor is necessary to authorize this Agreement. This Agreement constitutes the legally valid and binding obligation of Lessor, enforceable against Lessor in accordance with its terms, except as the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Applicable Laws affecting the enforcement of creditors’ rights generally and equitable principles.
5.2. Liens and Tenants . Lessor represents that Lessor has good and valid title to the Stanton/Brady/Celeste Assets, there are no unrecorded liens, encumbrances, leases, mortgages, deeds of trust (except as disclosed to Lessee in writing or as arise by operation of law), or other exceptions (collectively, “ Liens ”) arising as a result of any acts or omissions to act of Lessor by, through or under Lessor to Lessor’s right, title or interest in the Stanton/Brady/Celeste Assets other than any such of the foregoing that does not materially impair the Lessee’s use of the Stanton/Brady/Celeste Assets, and, to Lessor’s knowledge, there exist no rights or interests of any third party relating to the Stanton/Brady/Celeste Assets that are not contemplated herein. Except for Permitted Liens or as may be disclosed in the applicable real property records in the State of Texas, or as disclosed by Lessor in writing to Lessee, Lessor represents that there are no mortgages, deeds of trust, or similar liens or security interests encumbering all or any portion of the Stanton/Brady/Celeste Assets. Lessor shall fully cooperate and assist Lessee, at no out-of-pocket expense to Lessor, in obtaining a subordination and non-disturbance agreement from each party that holds a Lien that might reasonably be expected to interfere in any material respect with Lessee’s rights under this Agreement. Notwithstanding the foregoing, Lessor and its affiliates shall have the right to incur Permitted Liens encumbering the Stanton/Brady/Celeste Assets or any component thereof solely for the benefit of Lessor in connection with any existing or future financing or refinancing pursuant to which the Stanton/Brady/Celeste Assets (or any component thereof) is pledged as collateral and Lessee agrees to enter into such acknowledgments and agreements in respect thereof with the lenders, or a trustee or agent for the lenders as the Lessor may reasonably request.
5.3. Condition of Assets. Lessor has not taken any action or failed to take any action that would cause the Stanton/Brady/Celeste Assets not to be in good operating condition and repair, ordinary wear and tear excepted, or adequate for the uses to which it is being put.
5.4. Requirements of Governmental Agencies . Lessor shall assist and fully cooperate with Lessee, in complying with or obtaining any material land use permits and approvals, building permits, environmental impact reviews or any other approvals reasonably required for the maintenance or operation of the Stanton/Brady/Celeste Assets, including execution of applications for such approvals, and including participating in any appeals or regulatory proceedings respecting the Stanton/Brady/Celeste Assets at Lessee’s cost and expense, if requested by Lessee.
 
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5.5. Hazardous Materials . Lessor shall conduct its activities in respect of the Stanton/Brady/Celeste Assets in compliance in all material respects with applicable Environmental Laws.
5.6. Litigation . If Lessor becomes aware of any actions, claims or other legal or administrative proceedings that are pending, threatened or anticipated with respect to, or which could materially and adversely affect, the Stanton/Brady/Celeste Assets, Lessor shall promptly deliver notice thereof to Lessee.
5.7. Limitation . EXCEPT AS EXPRESSLY REPRESENTED OTHERWISE IN THIS ARTICLE V, LESSOR (A) MAKES NO AND EXPRESSLY DISCLAIMS ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO (I) TITLE TO THE STANTON/BRADY/CELESTE ASSETS OR ANY PORTION THEREOF, (II) ANY ESTIMATES OF THE VALUE OF THE STANTON/BRADY/CELESTE ASSETS OR FUTURE REVENUES THAT MIGHT BE GENERATED BY THE STANTON/BRADY/CELESTE ASSETS, (III) THE MAINTENANCE, REPAIR, CONDITION, QUALITY, SUITABILITY, DESIGN OR MARKETABILITY OF THE STANTON/BRADY/CELESTE ASSETS, (IV) INFRINGEMENT OF ANY INTELLECTUAL PROPERTY RIGHT OR (V) ANY OTHER MATERIALS OR INFORMATION THAT MAY HAVE BEEN MADE AVAILABLE OR COMMUNICATED TO LESSEE OR ITS AFFILIATES, OR ITS OR THEIR EMPLOYEES, AGENTS, CONSULTANTS, REPRESENTATIVES OR ADVISORS IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY DISCUSSION OR PRESENTATION RELATING THERETO, AND (B) FURTHER DISCLAIMS ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR CONFORMITY TO MODELS OR SAMPLES OF MATERIALS OF ANY PORTION OF THE STANTON/BRADY/CELESTE ASSETS, IT BEING EXPRESSLY UNDERSTOOD AND AGREED BY THE PARTIES HERETO THAT THE STANTON/BRADY/CELESTE ASSETS ARE BEING LEASED “AS IS, WHERE IS,” WITH ALL FAULTS AND DEFECTS, AND THAT LESSEE HAS MADE OR CAUSED TO BE MADE SUCH INSPECTIONS AS LESSEE DEEMS APPROPRIATE.
ARTICLE VI
LOSS AND DAMAGE; INSURANCE
6.1. Loss and Damage to the Stanton/Brady/Celeste Assets .
(a) In the event of any damage or loss to any component of the Stanton/Brady/Celeste Assets, Lessee shall promptly repair or replace such component to the standards required by Section 4.1 (regardless of whether such repair or replacement constitutes a Repair or a Footprint Project). Any such repaired or replaced component will immediately become part of the Stanton/Brady/Celeste Assets owned by Lessor and the cost of any repair or replacement shall be borne as described in Sections 6.1(b)-(d) below.
 
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(b) If such repair or replacement constitutes a Repair, the cost of repairing or replacing such damage or loss, whether actually covered in whole or in part by insurance, shall be the responsibility of Lessee. Lessee shall be entitled to retain any insurance proceeds in excess of the amount necessary in connection with such Repair.
(c) If such repair or replacement constitutes a Footprint Project, then, as long as the related costs have been included in a CapEx Budget, the cost of repairing or replacing such damage or loss, whether actually covered in whole or in part by insurance, shall be the responsibility of Lessor. In such circumstance, unless otherwise agreed by the Parties, (i) if the damage or loss is covered by insurance, Lessor shall be responsible for payment of any deductible, and (ii) any damage or loss not covered by insurance (exclusive of any deductible) shall be the responsibility of Lessor. If the sum of such deductible and insurance proceeds exceeds the cost of such Footprint Project, then such excess will first reduce Lessor’s obligation to fund the deductible hereunder, and any excess thereafter will be retained by Lessee. If such repair or replacement constitutes a Footprint Project that is not included in a CapEx Budget, the provisions of Article X shall apply.
(d) Lessee shall be solely responsible for all costs of repairing or replacing any damaged property and equipment that is not part of the Stanton/Brady/Celeste Assets and owned by Lessee, whether covered by Lessee’s insurance under Section 6.2 or otherwise. Nothing in this provision shall preclude Lessee from seeking recovery of such costs in a rate proceeding at the PUCT.
(e) If Lessor funds Lessee’s Personal Property pursuant to Section 10.1(b) of this Agreement, then all such funded Personal Property will be treated as a Footprint Project, and not a Repair, for purposes of this Section 6.1.
6.2. Insurance . Lessee will maintain, with financially sound and reputable insurers, insurance with respect to its business and properties and the Stanton/Brady/Celeste Assets against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated, but in no event less than the insurance set forth in this Section 6.2 and Exhibit C .
(a) Lessee shall procure at its own expense and maintain in full force and effect at all times throughout the term of this insurance policies with insurance companies rated A-, 8 or higher by A.M. Best or acceptable to Lessor if not so rated, and authorized to do business in the State of Texas.
(b) Lessor may at any time amend the requirements and approved insurance companies described in this Section 6.2 or Exhibit C due to (i) new information not previously known by Lessor prior to the date of this Agreement or (ii) changed circumstances after the date of this Agreement, which in the reasonable judgment of Lessor either renders a required coverage to be materially inadequate or materially reduces the financial ability of the approved insurance companies to pay claims.
 
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(c) On the first Business Day of each year, and promptly at such other times as Lessor may reasonably request, Lessee shall furnish Lessor with approved certification of all required insurance. Such certification shall be executed by each insurer or by an authorized representative of each insurer where it is not practical for such insurer to execute the certificate itself. Such certification shall identify underwriters, the type of insurance, the insurance limits, and the policy term, and shall specifically list the special provisions enumerated for such insurance required by this Section 6.2. Upon request, Lessee will promptly furnish Lessor with copies of all insurance certificates, binders, and cover notes or other evidence of such insurance relating to the Stanton/Brady/Celeste Assets.
(d) Concurrently with the furnishing of the certification referred to in Section 6.2(c) and on an annual basis thereafter, Lessee shall furnish Lessor with a certificate, signed by an officer of Lessee, stating that all premiums then due have been paid and that the insurance then carried or to be renewed is in accordance with the terms of this Section 6.2. and Exhibit C .
(e) In the event Lessee fails to take out or maintain the full insurance coverage required by this Section 6.2 and Exhibit C , Lessor, upon thirty (30) days’ prior notice (unless the aforementioned insurance would lapse within such period, in which event notice should be given as soon as reasonably possible) to Lessee of any such failure, may (but shall not be obligated to) take out the required policies of insurance and pay the premiums on the same. All amounts so advanced thereof by Lessor shall become an additional obligation of Lessee to Lessor, and Lessee shall forthwith pay such amounts to Lessor.
(f) No provision of this Section 6.2 or Exhibit C or any other provision of this Agreement shall impose on Lessor any duty or obligation to verify the existence or adequacy of the insurance coverage maintained by Lessee, nor shall Lessor be responsible for any representations or warranties made by or on behalf of Lessee to any insurance company or underwriter.
ARTICLE VII
REPORTING
7.1. Private Financing Arrangements . Lessee understands that Lessor, or an affiliate thereof, has raised equity and debt capital secured by the Stanton/Brady/Celeste Assets and this Agreement and that Lessor or its affiliates have reporting obligations in connection with such arrangements, including obligations to provide financial statements prepared in accordance with GAAP, to prepare an annual strategic plan and to update such annual strategic plan in the event of certain material deviations therefrom. Lessee understands that Lessor relies on Lessee in order to comply with such obligations. From time to time, Lessor or an affiliate thereof may enter into additional arrangements that impose similar obligations. Accordingly, Lessee agrees to provide Lessor in a timely manner audited year-end financial statements, quarterly unaudited financial statements for the first three quarters of each year (certified by a financial officer of Lessee), estimates of Percentage Rent, and such acknowledgements, certificates, permits, licenses, instruments, documents and other information as Lessor may reasonably request from time to time in connection with, or to enable Lessor and its affiliates to comply with any such debt or equity financing arrangements or with Applicable Law. The Parties will negotiate in
 
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good faith the time frames during which Lessee will provide such information, with the intention that Lessee provide such information in a manner that is not unduly burdensome but that also allows Lessor sufficient time to comply with its reporting obligations. Lessee will also cooperate with Lessor to enable Lessor to satisfy its obligations in respect of annual strategic plans, including providing Lessor with requested information in advance of the due date of such annual strategic plan and keeping Lessor apprised of deviations in capital expenditures, construction activity or revenues of Lessee from amounts that were originally provided by Lessee in preparing such annual strategic plan. Lessee agrees to use reasonable efforts to advise Lessor if Lessee will be unable to meet the reporting requirements set forth herein in a timely manner and to reasonably cooperate with Lessor to remedy the effects of such non-compliance.
7.2. Public Company and Regulatory Information and Cooperation .
(a) Lessee agrees to provide audited full-year and unaudited (but SAS 100 reviewed) interim financial statements and the consent of Lessee’s auditors to the inclusion of their opinion regarding such financial statements in filings with the Securities and Exchange Commission made by Lessor or an affiliate of Lessor. Lessor may also request that Lessee provide evidence of a SAS 100 review from Lessee’s auditors with respect to any unaudited interim financial statements included in any such filing. Lessor shall have the right to share any such financial statements with its lenders under the Debt Agreements. Lessee covenants that (i) such financial statements will fairly present in all material respects the financial condition, results of operations and cash flows of Lessee as of, and for, the periods presented, and (ii) Lessee will endeavor to cause such financial statements to comply with any applicable laws, rules or regulations that Lessee and Lessor conclude in good faith are applicable to such financial statements by virtue of their inclusion in the securities law filings of Lessor or an affiliate thereof.
(b) Lessee agrees that, in connection with any underwritten offering of the securities of Lessor or any affiliate thereof, Lessee will use commercially reasonable efforts to cause its auditors to provide a comfort letter (or its equivalent) to such underwriters, if requested by Lessor.
(c) Lessee agrees to cooperate with Lessor when Lessor or an affiliate provides estimates to analysts and or investors regarding Lessor’s expectations of its future operating results (including capital expenditures) and to cooperate with Lessor with respect to analysts and investors to the extent such expectations change in any material respect.
(d) Lessee and Lessor agree to reasonably cooperate to ensure that, to the extent they require information from the other party in order to prepare their financial statements, to obtain audits of those financial statements and, if required, of their internal control over financial reporting, to respond to comments of the Securities and Exchange Commission on such financial statements or statements related to internal control over financial reporting or disclosure controls and procedures, or to ensure the efficacy of their internal controls or disclosure controls and procedures, they will reasonably cooperate in order to ensure that each Party is able to meet its obligations in respect thereof. Lessee agrees to promptly notify Lessor of or provide to Lessor, as applicable, (i) any material communication, written or otherwise, submitted to the Lessee by its auditors, including, but not limited to an audit response letter, accountant’s management letter
 
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or other written report submitted to Lessee by its accountants or any governmental agency in connection with an annual or interim audit of Lessee’s books, (ii) any material correspondence with, reports of or reports to any Regulatory Authority with respect to the Stanton/Brady/Celeste Assets and (iii) any notices of violations of Applicable Law with respect to the Stanton/Brady/Celeste Assets, in each case taking into account the REIT’s reporting obligations as a public company.
(e) Lessor agrees to inform Lessee of the time periods in which each of the items identified in this Section 7.2 will be required, which may change. Lessee agrees to use reasonable efforts to advise Lessor if Lessee will be unable to meet the reporting requirements set forth herein in a timely manner and to reasonably cooperate with Lessor to remedy the effects of such non-compliance.
(f) If Lessor identifies additional matters with respect to which Lessee input, assistance or information is required in order for Lessor and its affiliates to comply with any applicable securities laws, the rules or regulations of any exchange on which the securities of such affiliate are traded or any similar laws, rules or regulations, the Parties agree to cooperate and negotiate in good faith in order to determine the manner in which Lessee can provide such input, assistance or information in a manner that positions Lessor and its affiliates to comply in a timely manner with such laws, rules or regulations, as efficiently as is feasible so as to minimize the burden that the provision of such input, assistance or information imposes on Lessee.
7.3. Mutual Obligations . Each Party shall as promptly as reasonably practicable furnish or cause to be furnished to the other Party, upon request from such Party, such information as may be required to enable such Party to file any reports required to be filed with any governmental or Regulatory Authority due to such Party’s ownership interest in or operation and control of the Stanton/Brady/Celeste Assets, as applicable.
ARTICLE VIII
ASSIGNMENT
This Agreement shall not be assignable by either Party, nor shall the Stanton/Brady/Celeste Assets or any part thereof be subleased by Lessee, except with the prior written consent of the other Party and the prior approval of any Regulatory Authority whose approval is required for the effectiveness of such assignment or sublease. For purposes of this Article VIII, an “assignment” by Lessee shall mean and include, in addition to any direct transfer by Lessee to a third party of all or any part of Lessee’s rights, estate or interests under this Agreement, any direct or indirect, voluntary or involuntary transfer of or encumbrance on all or any part of Lessee’s rights, estate or interests under this Agreement (i) by operation of law and/or (ii) by direct or collateral transfer of all or any part of the legal or beneficial ownership interest in Lessee by merger, consolidation or otherwise, provided, in the case of clause (ii), any such transaction or transactions will only constitute an assignment hereunder to the extent they result in a Change of Control. Notwithstanding the foregoing, Lessor shall have the right, without Lessee’s consent but subject to obtaining regulatory approval as described in the foregoing sentence, (a) to assign, pledge or grant a security interest in any or all of its interest in the Agreement to a lender or lenders, or a trustee acting on behalf of such lenders, in connection
 
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with a financing or refinancing in which such interest is pledged as collateral, and Lessee agrees to enter into such acknowledgments and agreements in respect thereof as the Lessor may reasonably request and (b) to assign its interest in this Agreement to a successor owner of the Stanton/Brady/Celeste Assets.
ARTICLE IX
DEFAULT
9.1. Lessee Default . Subject to Section 9.3, Lessee shall be in default in the event of any of the following:
(a) Except as provided in Section 9.1(g), Lessee’s failure to make any payment of Rent when due;
(b) Lessee (i) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes corporate action for the purpose of any of the foregoing;
(c) a court or a Regulatory Authority or other governmental agency of competent jurisdiction enters an order appointing, without consent by Lessee, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of Lessee or any such petition shall be filed against Lessee and such petition shall not be dismissed within 90 days;
(d) Any representation or warranty made by Lessee herein shall prove to have been inaccurate in any material respect at the time made;
(e) a final judgment or judgments for the payment of money aggregating in excess of $1,000,000 are rendered against Lessee and which judgments are not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay;
(f) Lessee shall have breached or failed to comply in any material respect with any other covenant or agreement contained herein; or
 
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(g) Notwithstanding Section 9.1(a), Lessee’s failure to pay Rent when due shall not constitute a default if (i) such failure is due to unforeseeable circumstances arising from a physical event beyond the control of the Lessee, including the incurrence of costs and expenditures as a result of such an event that are materially in excess of budgeted costs and expenditures or an unforeseen material decline in electricity usage as a result of such event and (ii) such failure is cured within ninety (90) days after the date such rent was due through Lessee’s payment of the entire amount of such unpaid Rent, plus interest thereon at a rate equal to six percent (6%) per annum or the maximum rate allowed by law, whichever is lesser, from the date such Rent was originally due until the date of payment.
9.2. Lessor Default . Subject to Section 9.3, Lessor shall be in default in the event any representation or warranty made by Lessor herein shall prove to have been inaccurate in any material respect at the time made, or in the event Lessor breaches or fails to comply in any material respect with any covenant or agreement contained herein.
9.3. Right to Cure . If a Party (the “ Defaulting Party ”) defaults pursuant to an Event of Default, such Defaulting Party shall not be in default of the terms of this Agreement if (other than in the event of a default described in Sections 9.1(a), 9.1(b) and/or 9.1(c) above), (a) in the case of a Monetary Default, the Defaulting Party pays the past due amount within thirty (30) days of receiving a Notice of Default from the other Party (the “ Non-Defaulting Party ”), and (b) in the case of a Non-Monetary Default, the Event of Default is cured within forty-five (45) days of receiving the Notice of Default; provided, that if the nature of the Non-Monetary Default requires, in the exercise of commercially reasonable diligence, more than forty-five (45) days to cure then the Defaulting Party shall not be in default as long as it commences performance of the cure within forty-five (45) days and thereafter completes such cure with commercially reasonable diligence.
9.4. Remedies.
(a) Should an Event of Default remain uncured by the Defaulting Party, the Non-Defaulting Party shall have and shall be entitled to exercise the remedies provided in this Section 9.4 and any and all other remedies available to it at law or in equity, all of which remedies shall be cumulative; provided, that the exercise of any remedies hereunder shall be subject to PUCT and other required regulatory approvals to the extent applicable.
(b) In no way limiting the provisions of Section 9.4(a), in the case of an Event of Default of Lessee, Lessor shall have the right to (i) terminate the Agreement upon notice to Lessee, and recover from Lessee all damages to which Lessor is entitled under Applicable Laws, (ii) terminate Lessee’s right to use and operate the Stanton/Brady/Celeste Assets while keeping this Agreement in effect, and recover from Lessee all damages to which Lessor is entitled under Applicable Laws, and (iii) take reasonable action to cure Lessee’s default at Lessee’s expense; provided, that in the event of a violation of Applicable Laws by Lessee, an emergency or government or regulatory action in respect of which Lessor, in its reasonable discretion, determines immediate action is necessary, Lessor shall have the right to step in and take such action on behalf of Lessee at Lessee’s cost and expense immediately upon giving notice to Lessee, notwithstanding any applicable cure period.
 
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(c) Any amounts recovered by Lessor from Lessee in the event of a default shall, to the maximum extent permissible under Applicable Laws, be deemed to be in respect of past or future Rent owing under this Agreement.
ARTICLE X
CAPITAL EXPENDITURES
10.1. Capital Expenditures Generally .
(a) Lessee has provided to Lessor in the CapEx Budget the approximate amounts of Capital Expenditures that Lessee expects will be needed for purposes of funding Footprint Projects in each Lease Year through 2017 (assuming the renewal of this Agreement pursuant to Section 2.1). On or before October 15 of each calendar year, Lessee shall review and revise the CapEx Budget on a rolling three-year basis (which shall include, if applicable, any year in such three-year period following the end of the then-current Term and assume the renewal of this Agreement pursuant to Section 2.1), taking into account any changed circumstances that (i) make it no longer feasible to incur one or more of the costs reflected on the prevailing CapEx Budget, (ii) make it necessary to amend the nature or amounts reflected for a particular Footprint Project or (iii) dictate that additional Footprint Projects be added (such budget, as so updated and revised, is referred to herein as the “ CapEx Budget ”). Lessee agrees to revise the CapEx Budget to include any Footprint Projects (x) required by Regulatory Authorities or (y) reasonably necessary to satisfy Lessee’s obligation as a regulated utility to serve its customers or to maintain the safety or reliability of the Stanton/Brady/Celeste Assets and the Stanton Transmission Loop Assets. Capital Expenditures included in a CapEx Budget will be included based on the date such Capital Expenditures are to be incurred, which differentiates these Capital Expenditures from Incremental CapEx and Lessee CapEx, which are measured under this Agreement based on when the assets developed with such Capital Expenditures are placed in service, and not when they are incurred.
(b) If requested by Lessor, Lessee will also provide an estimate of any Capital Expenditures that Lessee expects for purposes of funding Personal Property related to the Stanton/Brady/Celeste Assets and the Stanton Transmission Loop Assets. If Lessor and Lessee agree, Lessor will fund such Capital Expenditures pursuant to this Agreement, through a loan or through a separate lease. Amounts Lessor provides pursuant to this Agreement to fund any such Personal Property will be treated in a manner similar to any amounts Lessor provides to fund Footprint Projects for purposes of Section 3.2 and elsewhere herein. Lessee will cause any such Personal Property to be titled in Lessor’s name and will reasonably cooperate with Lessor in order to enable any secured lender of Lessor or any secured lender of an affiliate of Lessor to perfect its security interest in any such Personal Property. In the alternative, Lessor may elect to fund such Capital Expenditures through a TRS or to loan (or cause such TRS to loan) Lessee the cash to acquire any such Personal Property in a transaction in which Lessor or a TRS may retain a security interest in such Personal Property. In such case the Parties shall negotiate in good faith the terms under which Lessor or such TRS shall fund any such Personal Property, including the terms of any lease between Lessee and the TRS or other financing arrangements provided by the Lessor or the TRS. Any such funded amounts, regardless of the form in which they are funded, will be included in the calculation of whether there is Incremental CapEx, and, if such funded amounts constitute Incremental CapEx, the Parties’ intention is to provide Lessor with a Comparable Rate of Return on all such funded amounts.
 
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10.2. Capital Expenditures Funded by Lessor . Lessor agrees to fund any Footprint Projects contained in the CapEx Budget (as revised from time to time). Lessor’s obligation to fund Footprint Projects pursuant to this Section 10.2 shall include any costs associated with such Footprint Projects that Lessee is not allowed to recover through its PUCT-approved rates. Any Footprint Projects funded by Lessor under this Section 10.2 shall be deemed to be part of the Stanton/Brady/Celeste Assets upon completion.
10.3. Capital Expenditures Funded by Lessee . Except as set forth in this Section 10.3, Lessee may not fund any Footprint Projects. In the event Lessor fails to fund any Footprint Projects, Lessee may at its sole discretion fund the needed capital expenditures (and Lessee shall be entitled to applicable damages, if any, as a result of funding any such Footprint Projects); provided that, in such circumstance, Lessee may fund Severable Footprint Projects without restriction under this Section 10.3 but may only fund Nonseverable Footprint Projects which are required in order to comply with Applicable Law or which are required by any Regulatory Authority. Any Footprint Projects funded by Lessee under this Section 10.3 shall not be considered part of the Stanton/Brady/Celeste Assets or the Stanton Transmission Loop Assets for purposes of this Agreement; provided however , that any part of the Stanton/Brady/Celeste Assets and the Stanton Transmission Loop Assets that is built with CIAC funds shall be considered a leasehold improvement that is part of the Stanton/Brady/Celeste Assets and reverts to the Lessor upon termination of this Agreement without further payment from Lessor to Lessee under Section 2.3.
10.4. Footprint Project Construction Activities . Lessee will either use its personnel, or either Lessee or Lessor will contract with third parties, to construct Footprint Projects. Lessee shall be responsible for the oversight of such construction activities, regardless of whether the Footprint Project is funded by Lessor or Lessee. Lessee’s construction activities and oversight shall be intended to ensure that such construction is performed in a manner consistent with Good Utility Practice and does not adversely affect the reliability and safety of the Stanton/Brady/Celeste Assets and the Stanton Transmission Loop Assets or the ERCOT electric grid. In connection therewith, Lessor will reimburse Lessee for all Project Management Costs that Lessee incurs in connection with constructing such Footprint Project, provided that any costs and expenses of Lessee under this Section 10.4 must be included in any CapEx Budget submitted by Lessee under Section 10.1 or approved by Lessor to qualify for reimbursement by Lessor hereunder.
 
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10.5. Ownership of Footprint Projects .
(a) Each Footprint Project shall be owned by the Party that funded the capital expenditures used to construct such Footprint Project; provided however , that any part of the Stanton/Brady/Celeste Assets or the Stanton Transmission Loop Assets that is built with CIAC funds shall be considered a leasehold improvement that is part of the Stanton/Brady/Celeste Assets and shall revert to the Lessor upon termination of this Agreement without further payment from Lessor to Lessee under Section 2.3.
(b) Upon the expiration or termination of this Agreement, Lessor shall have the right (but not the obligation) to purchase, subject to required regulatory approvals, any Nonseverable Footprint Projects or Severable Footprint Projects owned by Lessee at the greater of (i) net book value plus ten percent (10%) and (ii) the fair market value thereof as determined by mutual agreement of Lessor and Lessee. If the Parties fail to agree on the amount of the purchase price, the purchase price shall be submitted to arbitration in accordance with Section 13.7 of this Agreement, pursuant to which the Arbitration Panel shall be empowered to determine the amount of the purchase price, based on submissions by each of the Lessee and the Lessor. Lessee shall be entitled to remove any Severable Footprint Projects owned by Lessee upon the expiration or termination of this Agreement in the event such Severable Footprint Projects are not purchased by Lessor, subject to any required regulatory approvals.
10.6. Asset Acquisitions . Lessee and Lessor will cooperate in good faith to ensure that all Stanton/Brady/Celeste Assets (including Footprint Projects relating to the Stanton Transmission Loop Assets) are acquired in Lessor’s name or are acquired by Lessee and subsequently transferred to Lessor. In connection therewith, Lessee agrees (a) to transfer to Lessor all previously acquired Stanton/Brady/Celeste Assets (including Footprint Projects relating to the Stanton Transmission Loop Assets), (b) that any future-acquired Stanton/Brady/Celeste Assets will be deemed automatically transferred to Lessor, (c) to take reasonable actions as are necessary and appropriate to document the transfer of any such Stanton/Brady/Celeste Assets (including Footprint Projects relating to the Stanton Transmission Loop Assets) to Lessor and, if applicable, to memorialize the security interest in such Stanton/Brady/Celeste Assets (including Footprint Projects relating to the Stanton Transmission Loop Assets) required to be granted pursuant to the terms of the Debt Agreements, including through the delivery and recordation of mortgages, deeds of trust or UCC financing statements, and (d) to take reasonable steps to record the transfer and such security interest in the records of the applicable county or other applicable locale in which the Stanton/Brady/Celeste Assets (including Footprint Projects relating to the Stanton Transmission Loop Assets) are located.
10.7. Reimbursements . From time to time, Lessee may enter into interconnect or similar agreements that obligate the counterparty to such agreements to reimburse Lessee for Capital Expenditures in certain circumstances. Such reimbursement obligation may, in some circumstances, be accompanied by additional security such as parent guaranty or a letter of credit. If and to the extent that (a) Lessor funds Capital Expenditures that are used for the construction or development pursuant to any of these interconnect agreements, and (b) Lessee becomes entitled to assert any reimbursement or other rights pursuant to any such interconnect agreements, then, unless Lessor agrees otherwise, Lessee will enforce such reimbursement or
 
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other rights and will in turn reimburse Lessor for the amount of related Capital Expenditures that Lessor has funded pursuant hereto. Lessee further agrees to reimburse Lessor for other Capital Expenditures that Lessor has funded pursuant to this Agreement to the extent required by the Policies and Procedures.
ARTICLE XI
REGULATORY COOPERATION
11.1. Jurisdiction . The Parties recognize that (i) the Stanton/Brady/Celeste Assets and the operation thereof are subject to the jurisdiction of the PUCT and to certain reliability and safety requirements of ERCOT and TRE, and (ii) Lessee holds the CCNs for operation of the Stanton/Brady/Celeste Assets. The Parties agree that, as the lessee hereunder, as operator of the Stanton/Brady/Celeste Assets and as the holder of the CCNs, Lessee shall be responsible for compliance with all regulatory requirements related to the Stanton/Brady/Celeste Assets, including but not limited to, taking all actions reasonably necessary or advisable to comply with such requirements; preparing and filing all necessary notices, reports, applications, and other materials with the PUCT, ERCOT, TRE and NERC; and initiating, prosecuting, defending or participating in any administrative or judicial proceeding reasonably necessary or advisable to operate the Stanton/Brady/Celeste Assets in an economical and efficient manner. Lessee shall consult with Lessor prior to initiating any rate proceeding with the PUCT to change the rates Lessee can lawfully charge, provided that, with or without Lessor consent, Lessee shall be authorized to initiate any such rate proceeding. Upon Lessor’s request, Lessee shall file a rate proceeding before the PUCT; provided that, Lessor shall be responsible for reimbursing Lessee for all costs associated with prosecution of such proceeding to the extent that such costs are not recoverable in Lessee’s PUCT-approved rates.
11.2. Cooperation . The Parties agree that during the term of this Agreement they will cooperate to assure compliance with all applicable regulations, orders or lawful requests of any governmental or Regulatory Authorities that relate to the Stanton/Brady/Celeste Assets and Lessee’s obligations as the holder of the CCNs and will provide such information to such governmental and Regulatory Authorities as the other Party or such governmental or Regulatory Authorities may reasonably request in connection therewith. Lessor further agrees to use its best efforts to cooperate and promptly respond to any lawful requests from Lessee relating to Lessee’s efforts to comply with all regulatory requirements or to participate in any necessary or advisable legal proceedings, whether judicial or administrative. Each Party shall bear its own costs in complying with this paragraph.
ARTICLE XII
INDEMNITY
12.1. General Indemnity . EACH PARTY (THE “ INDEMNIFYING PARTY ”) SHALL DEFEND, INDEMNIFY AND HOLD HARMLESS THE OTHER PARTY AND THE OTHER PARTY’S RELATED PERSONS (EACH, AN “ INDEMNIFIED PARTY ”) FROM AND AGAINST ANY AND ALL CLAIMS, LITIGATION, ACTIONS, PROCEEDINGS, LOSSES, DAMAGES, LIABILITIES, OBLIGATIONS, COSTS AND EXPENSES, INCLUDING ATTORNEYS’, INVESTIGATORS’ AND CONSULTING FEES, COURT COSTS AND
 
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LITIGATION EXPENSES (COLLECTIVELY, “ CLAIMS ”) SUFFERED OR INCURRED BY SUCH INDEMNIFIED PARTY, EVEN IF SUCH LIABILITIES ARE CAUSED SOLELY OR IN PART BY THE NEGLIGENCE OF ANY INDEMNIFIED PARTY, ARISING FROM THE ACTS OR OMISSIONS TO ACT OF THE INDEMNIFYING PARTY (A) ARISING IN THE CASE OF THE LESSEE AS THE INDEMNIFYING PARTY, FROM THE OPERATION OF THE STANTON/BRADY/CELESTE ASSETS, (B) FOR PHYSICAL DAMAGE TO THE STANTON/BRADY/CELESTE ASSETS, TO THE EXTENT CAUSED BY THE INDEMNIFYING PARTY OR ANY RELATED PERSON THEREOF, (C) FOR PHYSICAL INJURIES OR DEATH (INCLUDING BY REASON OF OPERATING THE STANTON/BRADY/CELESTE ASSETS) TO OR OF THE INDEMNIFIED PARTY OR THE PUBLIC, TO THE EXTENT CAUSED BY THE INDEMNIFYING PARTY OR ANY RELATED PERSON THEREOF, (D) ANY BREACH OF ANY COVENANT OR ANY FAILURE TO BE TRUE OF ANY REPRESENTATION OR WARRANTY, MADE BY THE INDEMNIFYING PARTY UNDER THIS AGREEMENT OR (E) THE NEGLIGENCE, RECKLESSNESS OR INTENTIONAL MISCONDUCT OF THE INDEMNIFYING PARTY OR ANY RELATED PERSON THEREOF; PROVIDED, HOWEVER, THAT IN NO EVENT SHALL THE INDEMNIFYING PARTY BE RESPONSIBLE FOR DEFENDING, INDEMNIFYING OR HOLDING HARMLESS ANY INDEMNIFIED PARTY TO THE EXTENT OF ANY CLAIM CAUSED BY, ARISING FROM OR CONTRIBUTED TO BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH INDEMNIFIED PARTY. AS USED HEREIN, THE TERM “ RELATED PERSON ” SHALL MEAN ANY AFFILIATES, CONTRACTORS, LESSEES, AND SUBLESSEES, AND EACH OF THEIR RESPECTIVE, PRINCIPALS, OFFICERS, EMPLOYEES, SERVANTS, AGENTS, REPRESENTATIVES, SUBCONTRACTORS, LICENSEES, INVITEES, GUESTS, SUCCESSORS AND/OR ASSIGNS OF A PARTY; PROVIDED, THAT IN NO EVENT SHALL A PARTY BE DEEMED A RELATED PERSON WITH RESPECT TO THE OTHER PARTY.
12.2. Environmental Indemnity .
(a) To the fullest extent permitted by law, Lessee shall defend, indemnify and hold harmless Lessor and Lessor’s Related Persons from Claims (including, without limitation, any costs and expenses of clean up or other mitigation) suffered or incurred by such persons resulting from any of the following occurring from and after the date hereof or the date on which Lessee assumed operational control over the relevant property: (i) the presence or release of Hazardous Materials in, under or about the Stanton/Brady/Celeste Assets which are or were brought or permitted to be brought onto the Stanton/Brady/Celeste Assets by the Lessee or Lessee’s Related Persons, (ii) creation of any hazardous or potentially hazardous environmental conditions or exacerbation of a pre-existing environmental condition, (iii) the violation of any Environmental Law by Lessee or Lessee’s Related Persons or (iv) any other failure to comply with Section 4.6 by Lessee or Lessee’s Related Persons.
(b) To the fullest extent permitted by law, Lessor shall defend, indemnify and hold harmless Lessee and Lessee’s Related Persons from Claims (including, without limitation, any costs and expenses of clean up or other mitigation) suffered or incurred by such persons resulting from (i) the presence or release of any Hazardous Material or hazardous or potentially hazardous
 
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condition in, under or about the Stanton/Brady/Celeste Assets that was present in, under or about the Stanton/Brady/Celeste Assets as of the date Lessee assumed operational control over the relevant property (except to the extent such existing Hazardous Material or condition is exacerbated by Lessee or Lessee’s Related Persons), (ii) the presence or release of Hazardous Materials in, under or about the Stanton/Brady/Celeste Assets which are or were brought or permitted to be brought onto the Stanton/Brady/Celeste Assets by Lessor or Lessor’s Related Persons during construction of any improvement or addition to the Stanton/Brady/Celeste Assets, (iii) the violation of any Applicable Law by Lessor or Lessor’s Related Persons, or (iv) testing conducted under Section 4.6 by Lessor or Lessor’s Related Persons.
ARTICLE XIII
MISCELLANEOUS
13.1. Limitation of Damages . NEITHER PARTY SHALL BE LIABLE FOR ANY LOST OR PROSPECTIVE PROFITS, AND IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY OTHER SPECIAL, PUNITIVE, EXEMPLARY, CONSEQUENTIAL, INCIDENTAL OR INDIRECT LOSSES OR DAMAGES (IN TORT, CONTRACT OR OTHERWISE) UNDER OR IN RESPECT OF THIS AGREEMENT OR FOR ANY FAILURE OF PERFORMANCE RELATED HERETO, HOWSOEVER CAUSED.
13.2. Condemnation . In the case of a condemnation or taking, this Agreement shall continue in effect; provided, that this Agreement shall terminate if 75% or more of the Stanton/Brady/Celeste Assets is subject to the condemnation or taking. Lessor shall be entitled to all sums received by reason of any such taking or condemnation, except for that portion of such award, if any, which is expressly awarded for the Lessee’s leasehold interest under this Agreement or which is awarded for any property owned by Lessee (including any Footprint Projects funded by Lessee).
13.3. Confidentiality . To the full extent allowed by Applicable Law, each Party (the “ Receiving Party ”) shall maintain, for the benefit of the other Party (the “ Disclosing Party ”), in the strictest confidence all information pertaining to the financial terms of or payments under this Agreement, the Disclosing Party’s methods of operation, methods of the Stanton/Brady/Celeste Assets, and the like, whether disclosed by the Disclosing Party or discovered by the Receiving Party, unless such information either (i) is in the public domain by reason of prior publication through no act or omission of the Receiving Party or its employees or agents, (ii) was already known to the Receiving Party at the time of disclosure and which the Receiving Party is free to use or disclose without breach of any obligation to any person or entity or (iii) is required to be disclosed by the PUCT or other Regulatory Authorities, or must be disclosed in accordance with applicable securities laws or the rules of any applicable securities exchange on which the securities of the Receiving Party (or an affiliate thereof) are traded. To the full extent permitted by law, neither Party shall use such information for its own benefit, publish or otherwise disclose it to others, or permit its use by others for their benefit or to the detriment of the other Party. Notwithstanding the foregoing, the Receiving Party may disclose such information to any auditor or to the Receiving Party’s lenders, attorneys, accountants and other personal advisors; any prospective purchaser of the Stanton/Brady/Celeste Assets; or pursuant to lawful process, subpoena or court order; provided the Receiving Party, in making such disclosure, advises the party receiving the information of the confidentiality of the information and obtains the agreement of said party not to disclose the information.
 
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13.4. Successors and Assigns . The Agreement shall inure to the benefit of and be binding upon Lessor and Lessee and, to the extent provided in any assignment or other transfer under Article VIII hereof, any assignee, and their respective heirs, transferees, successors and assigns, and all persons claiming under them. References to Lessee in this Agreement shall be deemed to include assignees that hold a direct ownership interest in this Agreement and actually are exercising rights under this Agreement to the extent consistent with such interest.
13.5. Rent Obligations Not Excused by Force Majeure, Etc. Lessee shall not be excused from its obligation to pay Rent during any Force Majeure Event or a condemnation or casualty of all or any part of the Stanton/Brady/Celeste Assets.
13.6. Further Assurances; Policies and Procedures .
(a) Each Party will, from time to time, execute, cause to be acknowledged and deliver such documents or instruments, and provide such certificates, as the other Party may reasonably request to carry out and fulfill the transactions, and permit the exercise and performance of the rights and obligations, as are contemplated hereunder. Each Party will cooperate with the other Party to effectuate fully the purposes and intent of this Agreement. In no way limiting the foregoing, the Parties shall cooperate to obtain any necessary regulatory approvals, including, without limitation, providing timely responses to discovery requests, participating in regulatory proceedings to the extent necessary and generally providing assistance as required.
(b) From time to time, the Parties shall agree to policies and procedures regarding matters arising under this Agreement including, without limitation, the treatment of Capital Expenditures for canceled Footprint Projects, each Party’s reporting obligations and such additional matters as the Parties may identify (the “ Policies and Procedures ”). The Parties agree to cooperate and negotiate in good faith the Policies and Procedures, and any amendment or revision thereto that may be reasonably requested by either Party, and to memorialize the same in a writing executed by a representative of each Party. In the event the Parties cannot agree on the terms of such Policies and Procedures after 60 days of negotiating in good faith, then either the Lessee or the Lessor may submit such matters to arbitration pursuant to Section 13.7 of this Agreement, pursuant to which the Arbitration Panel shall be empowered to determine Policies and Procedures that take into account the REIT’s reporting obligations as a public company and Lessee’s obligations as a regulated utility.
13.7. Arbitration . Except for a dispute regarding the payment of Undisputed Rent, any dispute under this Agreement shall, if not resolved by the Parties within ninety (90) days after notice of such dispute is served by one Party to the other (or, if different, the period provided for resolution by the Parties in the provision of this Agreement under which such dispute is brought), be submitted to an “ Arbitration Panel ” comprised of three (3) members. No more than one (1) panel member may be with the same firm, and no panel member may have an economic interest in the outcome of the arbitration. In addition to the foregoing, the failure by the Lessee and the Lessor to reach an agreement or make a mutual determination or characterization required by
 
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Sections 2.2(b) (with respect to the determination of Extended Period Rent); 3.1(d)(i); 3.1(d)(ii); 3.1(d)(iii); 3.2(a); 3.2(b) (with respect to the terms of any renewed Rent Supplement that has expired during the term of this Agreement); 3.2(c); 3.2(d); 3.8 or 13.6(b), in each case after 60 days of negotiating in good faith, shall be deemed to be a “dispute” for purposes of this Section 13.7, to be resolved in accordance with this Section.
(a) The Arbitration Panel shall be selected as follows: Within five (5) Business Days after the expiration of the period referenced above, Lessee shall select its panel member meeting the criteria of the above paragraph (the “ Lessee Panel Member ”) and Lessor shall select its panel member meeting the criteria of the above paragraph (the “ Lessor Panel Member ”). If a Party fails to timely select its respective panel member, the other Party may notify such Party in writing of such failure, and if such Party fails to select its respective panel member within three (3) Business Days from such notice, then the other Party may select such panel member on such Party’s behalf. Within five (5) Business Days after the selection of the Lessor Panel Member and the Lessee Panel Member, the Lessee Panel Member and the Lessor Panel Member shall jointly select a third panel member meeting the criteria of the above paragraph (the “ Third Panel Member ”). If the Lessor Panel Member and the Lessee Panel Member fail to timely select the Third Panel Member and such failure continues for more than three (3) Business Days after written notice of such failure is delivered to the Lessor Panel Member and Lessee Panel Member by either Lessor or Lessee, either Lessor or Lessee may request the managing officer of the American Arbitration Association to appoint the Third Panel Member.
(b) Within ten (10) Business Days after the selection of the Arbitration Panel, each Party shall submit to the Arbitration Panel a written statement identifying its summary of the issues and claims, including, if applicable, its calculation of Rent. Any Party may also request an evidentiary hearing on the merits in addition to the submission of written statements. The Arbitration Panel shall make its decision within twenty (20) days after the later of (i) the submission of such written statements of particulars, and (ii) the conclusion of any evidentiary hearing on the merits, and shall take into consideration the relative risks and rewards undertaken and capital invested by each Party and shall use the Comparable Rate of Return concept described in Section 3.2(a) in determining any Rent disputes. The Arbitration Panel shall reach its decision by majority vote and shall communicate its decision by written notice to the Parties.
(c) The decision by the Arbitration Panel shall be final, binding and conclusive and shall be non-appealable and enforceable in any court having jurisdiction. All hearings and proceedings held by the Arbitration Panel shall take place in Dallas, Texas.
(d) The resolution procedure described herein shall be governed by the Commercial Rules of the American Arbitration Association and subject to the Texas General Arbitration Act to the extent such act is applicable hereto.
(e) In the case of an arbitration proceeding involving a determination of Rent and Percentage Rent, until Rent and Percentage Rent have been finally determined, Lessee shall pay Rent and Percentage Rent based upon prevailing rates therefor, and an appropriate refund shall be made to or additional Rent shall be paid by Lessee within ten (10) days after a final determination is made.
 
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(f) The Parties shall bear equally the fees, costs and expenses of the Arbitration Panel in conducting the arbitration.
13.8. Notices . All notices or other communications required or permitted by this Agreement, including payments to Lessor, shall be in writing and shall be served personally or by reputable express courier service or by facsimile transmission addressed to the relevant parties at the address stated below or at any other address notified by that Party to the other as its address for service. Any notice so given personally shall be deemed to have been served on delivery, any notice so given by express courier service shall be deemed to have been served the next Business Day after the same shall have been delivered to the relevant courier, and any notice so given by facsimile transmission shall be deemed to have been served on dispatch. As proof of such service it shall be sufficient to produce a receipt showing personal service, the receipt of a reputable courier company showing the correct address of the addressee or an activity report of the sender’s facsimile machine showing the correct facsimile number of the parties on whom notice is served and the correct number of pages transmitted. All communications, other than routine correspondence in the ordinary course of business, between the Parties pursuant to this Agreement shall be sent by the same method of communication by the Party sending the communication. The Parties’ addresses for service are:
If to Lessor:
Sharyland Distribution & Transmission Services, L.L.C.
1807 Ross Avenue, 4 th Floor
Dallas, Texas 75201
Attention: Chief Executive Officer and General Counsel
If to Lessee:
Sharyland Utilities, L.P.
1807 Ross Avenue, 4 th Floor
Dallas, Texas 75201
Attention: Hunter Hunt
With a copy to:
General Counsel
Fax: (214) 855-6965
Any Party may change its address for purposes of this paragraph by giving written notice of such change to the other parties in the manner provided in this paragraph.
13.9. Entire Agreement; Amendments . This Agreement constitutes the entire agreement between Lessor and Lessee respecting its subject matter, and supersedes any and all oral or written agreements. Any agreement, understanding or representation respecting the Stanton/Brady/Celeste Assets, or any other matter referenced herein not expressly set forth in this Agreement or a subsequent writing signed by both Parties is null and void. For avoidance of
 
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doubt, the Amended and Restated Lease is hereby replaced in its entirety by this Agreement. This Agreement shall not be modified or amended except in a writing signed by both Parties. No purported modifications or amendments, including without limitation any oral agreement (even if supported by new consideration), course of conduct or absence of a response to a unilateral communication, shall be binding on either Party.
13.10. Legal Matters . This Agreement shall be governed by and interpreted in accordance with the laws of the State of Texas, without regard to its conflicts of law principles. The Parties agree that any rule of construction to the effect that ambiguities are to be resolved in favor of either Party shall not be employed in the interpretation of this Agreement and is hereby waived.
13.11. Partial Invalidity . Should any provision of this Agreement be held, in a final and unappealable decision by a court of competent jurisdiction, to be either invalid, void or unenforceable, the remaining provisions hereof shall remain in full force and effect, unimpaired by the holding.
13.12. Recording . Lessee shall not record this Agreement without the prior written consent of the Lessor. Lessee may record at its expense a memorandum of this Agreement in form and substance reasonably approved by Lessor.
13.13. Intention of Parties; True Lease .
(a) The Parties hereby declare that their relationship in and to the Stanton/Brady/Celeste Lease Assets is and will be that of lessor and lessee, expressly subject to the terms, conditions, limitations and requirements set forth in this Agreement. Nothing contained in this Agreement will be deemed to constitute the Parties as partners or joint venturers or as principal and agent. The Parties intend for this Agreement to constitute a true lease with respect to the Stanton/Brady/Celeste Lease Assets for US Federal, state and local income tax purposes, and each Party shall treat the Agreement as a true lease with respect to the Stanton/Brady/Celeste Lease Assets for federal income tax reporting purposes.
(b) The Parties acknowledge that Lessor is owned, directly or indirectly, in whole or in part, by an entity intending to qualify as a real estate investment trust under the Internal Revenue Code of 1986, as amended, and the Parties agree to negotiate in good faith any modification or amendment to this Agreement requested by Lessor to facilitate such qualification; provided that Lessee shall not be obligated to agree to any such modification or amendment if such modification or amendment would materially adversely affect Lessee or would be in conflict with Applicable Law or any regulations or orders of any Regulatory Authority.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
 
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IN WITNESS WHEREOF, Lessor and Lessee, acting through their duly authorized representatives, have executed this Agreement with the intent that it be effective as of the Effective Date, and certify that they have read, understand and agree to the terms and conditions of this Agreement.

LESSOR:	
	
SHARYLAND DISTRIBUTION & TRANSMISSION SERVICES, L.L.C.	
		
By:	 	/s/ Brant Meleski	
Name:	 	Brant Meleski	
Title:	 	Senior Vice President and	
	 	Chief Financial Officer	
	
LESSEE:	
	
SHARYLAND UTILITIES, L.P.	
		
By:	 	/s/ Mark Caskey	
Name:	 	Mark Caskey	
Title:	 	President	
Signature Page to Stanton/Brady/Celeste Assets Lease Agreement

APPENDIX A
DEFINITIONS
“2009 Note Purchase Agreement” has the meaning set forth in Section 4.13.
“2010 Note Purchase Agreement” has the meaning set forth in Section 4.13.
“AC” has the meaning set forth in Section 1.1(b)(v).
“Accumulated Deficit” for any Lease Year means the aggregate amounts by which Qualified CapEx has been less than Original Base CapEx during prior Lease Years, as set forth in a then-effective Rent Supplement.
“Additional Rent” has the meaning set forth in Section 3.4.
“AFUDC” means allowance for funds used during construction.
“Agreed-to-Discount” has the meaning set forth in Section 3.2(a).
“Agreement” has the meaning set forth in the Preamble.
“Annual Percentage Rent Breakpoint” means the dollar amount of annual Gross Revenues that must be exceeded in a particular Lease Year before Percentage Rent is owed, as set forth on the then-effective Rent Supplement for such Lease Year.
“Applicable Laws” means all laws, ordinances, statutes, orders and regulations of any federal, state, or local government, regulatory or administrative authority, any agency or commission thereof, or any court or tribunal, including without limitation all requirements of the Regulatory Authorities.
“Arbitration Panel” has the meaning set forth in Section 13.7.
“Base Rent” has the meaning set forth in Section 3.1(a).
“Business Day” means a day other than a Saturday, Sunday or other day on which federal agencies are authorized or required by law to close.
“CapEx Budget” has the meaning set forth in Section 10.1(a).
“Capital Expenditures” means expenditures that are or are expected to be capitalized under GAAP.
“CCN” means a Certificate of Convenience and Necessity or amendment thereto issued by the PUCT.
“CFO Certificate” means a document signed by the Chief Financial Officer of Lessee and certifying to the accuracy and completeness of the statement of Gross Revenues.

“Change in Control” means Hunt Family Members cease to possess, directly or indirectly, the power to direct or cause the direction of the management or policies of Lessee, whether through the ability to exercise voting power, by contract or otherwise.
“CIAC” means any contributions in aid of construction from current or prospective customers, plus any additional payments as a tax gross up for such contributions, with respect to which Lessee does not anticipate receiving an increase in its regulatory rate base.
“Claims” has the meaning set forth in Section 12.1.
“Comparable Rate of Return” has the meaning set forth in Section 3.2(a).
“Consolidated Net Plant” means, with respect to any Person, as of the date of determination, the net plant set forth on the face of the consolidated balance sheet of such Person or absent such amount on the consolidated balance sheet, the total plant of such Person on a consolidated basis minus accumulated depreciation as set forth in the footnotes of the consolidated financial statements, in each case, for the fiscal quarter ended on the date of the last financial statements delivered pursuant to Section 7.1 of the Credit Agreement.
“Consolidated Qualified Lessee” means any Qualified Lessee that is consolidated into the financial statements of another Qualified Lessee.
“Covered Revenue” means any fees, charges or other revenues (a) that are characterized as Unadjusted Gross Revenues (or Gross Revenues) for purposes hereof or for purposes of any other similar lease (x) between Lessee and Lessor or an affiliate thereof or (y) between Lessee and any of its wholly-owned subsidiaries or (b) that are generated from the Rate Base of regulated assets owned or operated by a party other than Lessor or a subsidiary thereof.
“Credit Agreement” has the meaning set forth in Section 4.13.
“CREZ Lease” means the Second Amended and Restated Lease Agreement (CREZ Assets) between Sharyland Projects, L.L.C. and Lessee effective as of the Effective Date, as the same may be amended from time to time.
“DC” has the meaning set forth in Section 1.1(b)(v).
“Debt Agreements” has the meaning set forth in Section 4.13.
“Defaulting Party” has the meaning set forth in Section 9.3.
“Disclosing Party” has the meaning set forth in Section 13.3.
“Effective Date” has the meaning set forth in the Preamble.
“Entity” means any general partnership, limited partnership, proprietorship, corporation, joint venture, joint stock company, limited liability company, limited liability partnership, business trust, estate, governmental entity, cooperative, association or other foreign or domestic enterprise.

“Environmental Law” means any and all Legal Requirements regulating, relating to or imposing liability or standards of conduct concerning protection of natural resources or the environment, or environmental impacts on human health as now or may at any time hereafter be in effect.
“ERCOT” means the Electric Reliability Council of Texas, or its successors.
“ERCOT Transmission Lease” means the Lease Agreement (ERCOT Transmission Assets) between Lessor and Lessee effective as of the Effective Date, as the same may be amended from time to time.
“ERCOT Transmission Revenues” means Lessee’s Unadjusted Gross Revenues from regulated electric transmission systems operated by Lessee within ERCOT pursuant to the PUCT’s transmission cost of service mechanism.
“Event of Default” means an event described in Section 9.1 or Section 9.2.
“Excess Percentage Rent” has the meaning set forth in Section 3.3(a).
“Extended Period Rent” means Rent that applies during any extended period of operatorship beyond the Term, which will be negotiated using the Comparable Rate of Return methodology set forth in Article III.
“FERC” means the Federal Energy Regulatory Commission, or its successors.
“First Lease Quarter Percentage Rent Breakpoint” has the meaning set forth in Section 3.1(c).
“Footprint Projects” means T&D Projects that are (i) (A) located in the distribution service territory of the Stanton/Brady/Celeste Assets or the Stanton Transmission Loop Assets, (B) transmission assets that are added to an existing transmission substation that comprises a part of the Stanton/Brady/Celeste Assets or the Stanton Transmission Loop Assets or hang from transmission towers within the Stanton/Brady/Celeste Assets or the Stanton Transmission Loop Assets or (C) Reclassified Projects and (ii) funded by expenditures that are or are expected to be capitalized under GAAP and that are within the items described in Section 1.1(b)(i)-(vii) (specifically excluding Section 1.1(b)(viii)).
“Force Majeure Event” means, except to the extent resulting from the action or inaction of Lessee or within the control of Lessee, fire, earthquake, hurricane, flood, or other casualty or accident; strikes or labor disputes; war, civil strife or other violence; any law, order, proclamation, regulation, ordinance, action, demand or requirement of any government agency or utility; or any other act or condition beyond the reasonable control of Lessee.
“GAAP” means generally accepted accounting principles in effect in the United States of America.

“Good Utility Practice” shall be as defined from time to time by PUCT and, as of the date hereof, means any of the practices, methods, and acts engaged in or approved by a significant portion of the electric utility industry during the relevant time period, or any of the practices, methods, and acts that, in the exercise of reasonable judgment in light of the facts known at the time the decision was made, could have been expected to accomplish the desired result at a reasonable cost consistent with good business practices, reliability, safety, and expedition. Good utility practice is not intended to be limited to the optimum practice, method, or act, to the exclusion of all others, but rather is intended to include acceptable practices, methods, and acts generally accepted in the region.
“Gross Revenues” has the meaning set forth in Section 3.1(d)(i).
“Hazardous Material” means (A) any substance which is listed, defined, designated or classified under any Applicable Law as a (i) hazardous material, substance, constituent or waste, (ii) toxic material, substance, constituent or waste, (iii) radioactive material, substance, constituent or waste, (iv) dangerous material, substance, constituent or waste, (v) pollutant, (vi) contaminant, or (vii) special waste; (B) any material, substance, constituent or waste regulated under any Applicable Laws; or (C) petroleum, petroleum products, radioactive matters, polychlorinated biphenyl, pesticides, asbestos or asbestos-containing materials.
“Hunt Family Members” means (i) Ray L. Hunt; (ii) the spouse of Ray L. Hunt and each of his children and siblings; (iii) the spouse and lineal descendants of any Person identified in the foregoing clause (ii); (iv) any trust or account primarily for the benefit of any Person or Persons identified in the foregoing clauses (i), (ii) or (iii); (v) any corporation, partnership or other Entity in which any of the Persons identified in the foregoing clauses (i), (ii), (iii) or (iv) are the beneficial owners of substantially all of the shares of capital stock, membership interests, partnership interests or other equity interests and options or warrants to acquire, or securities convertible into, capital stock, membership interests, partnership interests or other equity securities of an Entity; and (vi) the personal representative or guardian of any of the Persons identified in the foregoing clauses (i), (ii) and (iii) upon such Person’s death for purposes of the administration of such Person’s estate or upon such Person’s disability or incompetency for purposes of the protection and management of the assets of such Person.
“HVDC Ties” has the meaning set forth in Section 1.1(b)(v).
“Incremental CapEx” for any Lease Year means Qualified CapEx for that Lease Year, minus Original Base CapEx for such Lease Year, minus Accumulated Deficit for such Lease Year (if there is any Accumulated Deficit for such Lease Year).
“Indebtedness” with respect to any Person means, at any time, without duplication (a) such Person’s liabilities for borrowed money and its redemption obligations in respect of mandatorily redeemable preferred stock; (b) its liabilities for the deferred purchase price of property acquired by such Person (excluding accounts payable arising in the ordinary course of business but including all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property); (c)(i) all liabilities appearing on its balance sheet prepared in accordance with GAAP in respect of capital leases and (ii) all liabilities which would appear on its balance sheet prepared in accordance with GAAP in respect of Synthetic Leases assuming such Synthetic Leases were accounted for as capital leases; provided, however, that for purposes of this definition (including with respect to clauses (i) and

(ii) hereof), (x) this Agreement and any similar lease between Lessor (or any subsidiary) and Lessee and (y) any lease between Lessee and any of its wholly-owned subsidiaries shall not be treated as a capital lease; (d) all liabilities for borrowed money secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities); (e) all of its liabilities in respect of letters of credit or instruments serving a similar function issued or accepted for its account by banks and other financial institutions (whether or not representing obligations for borrowed money), provided, however, that for purposes of this definition, any surety bonds or indemnification agreements entered into by Lessee (with respect to which Lessee or a subsidiary has a reimbursement or backstop obligation) in connection with condemnation proceedings shall be excluded; (f) the aggregate Swap Termination Value of all Swap Contracts of such Person; and (g) any guaranty of such Person with respect to liabilities of a type described in any of clauses (a) through (f) hereof. Indebtedness of a Person shall include all obligations of the character described in clauses (a) through (g) to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is deemed to be extinguished under GAAP.
“Indemnified Party” has the meaning set forth in Section 12.1.
“Indemnifying Party” has the meaning set forth in Section 12.1.
“Initial Term” has the meaning set forth in Section 2.1.
“Lease” or “Leases” means (i) this Agreement, the McAllen Lease, the CREZ Lease, the ERCOT Transmission Lease and the Stanton Transmission Loop Lease and any other leases of transmission and distribution and related assets to a Qualified Lessee under which Lessor or any subsidiary of Lessor is a party as a lessor, and (ii) any lease of transmission and distribution and related assets pursuant to which Lessee is the lessee and a subsidiary of Lessee or another Person controlled by one or more Hunt Family Members is the lessor; provided , no such lease will qualify as a “Lease” hereunder if each of the three following criteria apply: (x) Lessee is the lessee, (y) cash rental payments have become due and payable pursuant thereto and (z) none of Lessor, a subsidiary of Lessor or a subsidiary of Lessee is the lessor.
“Lease Quarter” means each calendar quarter during each Lease Year.
“Lease Year” means each calendar year during the Term of this Agreement.
“Leased Consolidated Net Plant” means that portion of the Consolidated Net Plant of the lessor of a Lease between such lessor and a Qualified Lessee that is the subject of such Lease.
“Legal Requirements” means, as to any Person, the certificate of incorporation and by-laws, limited liability company agreement, partnership agreement or other organizational or governing documents of such Person, any law (including common law), statute, code, treaty, rule, regulation, ordinance including any government rule or determination of an arbitrator a court or other government authority, or any requirement under a Permit, in each case applicable to or binding upon such Person or any of its properties or to which such Person or any of its property is subject.
“Lessee” has the meaning set forth in the Preamble.

“Lessee CapEx” means Capital Expenditures that are related and fairly allocable to the Stanton/Brady/Celeste Assets or Stanton Transmission Loop Assets and are funded by Lessee.
“Lessee Panel Member” has the meaning set forth in Section 13.7(a).
“Lessee Taxes” has the meaning set forth in Section 4.3.
“Lessor” has the meaning set forth in the Preamble.
“Lessor’s Audit” has the meaning set forth in Section 3.3(c).
“Lessor Panel Member” has the meaning set forth in Section 13.7(a).
“Lessor Taxes” has the meaning set forth in Section 4.3.
“Liens” has the meaning set forth in Section 5.2.
“McAllen Lease” means the Third Amended and Restated Master System Lease Agreement (McAllen System) between Lessor and Lessee effective as of the Effective Date, as the same may be amended from time to time.
“Monetary Default” means the failure to pay when due any amounts payable under this Agreement.
“NERC” means North American Electric Reliability Corporation, or its successors.
“Non-Defaulting Party” has the meaning set forth in Section 9.3.
“Non-Monetary Default” means an Event of Default other than a Monetary Default.
“Non-Recourse Debt” means Indebtedness of a subsidiary of Lessee that, if secured, is secured solely by a pledge of collateral owned by such subsidiary and the equity interests in such subsidiary, and for which no Person other than such subsidiary is personally liable.
“Nonseverable Footprint Projects” means those Footprint Projects that cannot be readily removed from the Stanton/Brady/Celeste Assets or the Stanton Transmission Loop Assets without causing diminution in value to the Stanton/Brady/Celeste Assets or the Stanton Transmission Loop Assets, as applicable.
“Note Purchase Agreements” has the meaning set forth in Section 4.13.
“Notice of Default” means written notice of the Event of Default.
“Original Assets” has the meaning set forth in Section 1.1(b).
“Original Base CapEx” for a Lease Year means the amounts identified as such on a then-effective Rent Supplement.

“Original Lease Date” has the meaning set forth in Section 1.1(a).
“Other Revenue” means revenue generated from activities as a regulated utility within the State of Texas other than Covered Revenue.
“Overdue Rate” means a rate equal to ten percent (10%) per annum or the maximum rate allowed by law, whichever is lesser.
“Party” or “Parties” has the meaning set forth in the Preamble.
“Percentage Rent” has the meaning set forth in Section 3.1(b).
“Percentage Rent Breakpoint” means individually any of the Annual Percentage Rent Breakpoint, the First Lease Quarter Percentage Rent Breakpoint, the Second Lease Quarter Percentage Rent Breakpoint or the Third Lease Quarter Percentage Rent Breakpoint (collectively referred to as the “Percentage Rent Breakpoints”).
“Percentage Rent Percentages” has the meaning set forth in Section 3.1(b).
“Percentage Rent Schedule” means the schedule attached to the then-current Rent Supplement setting forth the Percentage Rent Percentages and Annual Percentage Rent Breakpoints for the Stanton/Brady/Celeste Assets through the end of the Term.
“Permitted Liens” means:
(i) The Liens granted by the Lessor to any lender or trustee for any lender which finances the Lessor’s interest in the Stanton/Brady/Celeste Assets;
(ii) Liens imposed by any governmental authority for any tax, assessment or other charge relating to the Stanton/Brady/Celeste Assets to the extent not yet past due or being contested in good faith and by appropriate proceedings;
(iii) mechanics’, warehousemen’s, carriers’, workers’, repairers’, landlords’, and other similar liens arising or incurred in the ordinary course of business and (i) which do not in the aggregate materially detract from the value of property or assets subject to such Liens or materially impair the continued use thereof in the operation of the Stanton/Brady/Celeste Assets or (ii) which are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property or asset subject to such Liens and for which cash reserves consistent with GAAP have been established on the books of Lessee or Lessor, or other Liens incurred or deposits made in the ordinary course of business in connection with workers’ compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, trade contracts, leases, government contracts, performance and return-of-money bonds and other similar obligations incurred in the ordinary course of business (exclusive of obligations in respect of the payment for borrowed money);

(iv) Liens arising out of judgments or awards so long as an appeal or proceeding for review is being prosecuted in good faith and for the payment of which adequate cash reserves consistent with GAAP have been established on the books of Lessee or Lessor, bonds or other security acceptable to the Lessor in its reasonable discretion have been provided or are fully covered by insurance;
(v) zoning, entitlement, restriction, and other land use and environmental regulations by governmental authorities and encroachments, easements, rights of way, covenants, restrictions or agreements which do not materially interfere with the continued use of any asset as currently used in the conduct of the business of the Lessee;
(vi) any encumbrances set forth in any franchise or governing ordinance under which any portion of the business of the Lessee is conducted and which could not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the operation of the Stanton/Brady/Celeste Assets; and
(vii) all rights of condemnation, eminent domain, or other similar right of any person.
“Person” means any natural person, corporation, limited liability company, partnership, firm, association, government authority or other entity whether acting in an individual, fiduciary or other capacity.
“Personal Property” means all assets, or rights therein, related to or used in connection with the Stanton/Brady/Celeste Assets and the Stanton Transmission Loop Assets, other than assets of the type and nature described in Section 1.1(b)(i)-(vii). Examples of Personal Property include rolling stock, computers and software programs.
“Policies and Procedures” has the meaning set forth in Section 13.6(b).
“Project Management Costs” means all actual out-of-pocket costs incurred by Lessee pursuant to this Agreement or a separate construction management agreement in connection with the construction activities, including (i) all direct wages and salaries (including benefits, payroll burden and overtime) which the Lessee pays to personnel employed or retained to conduct such construction activities and a fair allocation of the direct wages and salaries (including benefits, payroll burden and overtime) of Lessee’s other personnel conducting such construction activities; (ii) the fair market value of materials or equipment provided directly by Lessee or its affiliates (including the standard corporate day rate for any vehicles and equipment that are so utilized); (iii) a fair allocation of the lease payments of any leased vehicles and equipment that are so utilized; (iv) all other third-party costs incurred by Lessee in the performance of such construction activities; and (v) all sales, use, transfer or similar taxes (excluding those taxes based upon Lessee’s net income, gross receipts, net worth or similar taxes) incurred or paid by Lessee in conducting such construction activities or providing materials, if any (provided, that in managing its affairs, Lessee will attempt to minimize, to the extent practicable, all such taxes incurred on behalf of Lessor and, in this regard, Lessor agrees to cooperate and provide Lessee any assistance necessary including providing appropriate evidence of any exemptions from tax).
“PUCT” means the Public Utility Commission of Texas or its successors.

“Qualified CapEx” means Lessor-funded Capital Expenditures related to the Stanton/Brady/Celeste Assets that are placed in service, as and when such Stanton/Brady/Celeste Assets are placed in service, as adjusted (y) for any applicable AFUDC and/or depreciation, and (z) to reflect the effect of the deferred tax liability or deferred tax asset, as applicable.
“Qualified Lessee” means Lessee and/or any other utility that is (x) approved or authorized by the applicable public utility commission or similar regulatory authority to operate and/or lease the transmission and/or distribution assets of Lessor or any subsidiary and (y) a party to a then-effective lease agreement with Lessor or a subsidiary thereof pursuant to which such utility leases and operates such entity’s transmission and/or distribution assets
“Rate Base” means, with respect to any transmission and distribution assets, gross electric plant in service under GAAP, which is the aggregate amount of capital expenditures used to construct such assets plus AFUDC, less accumulated depreciation, and adjusted for accumulated deferred income taxes.
“Receiving Party” has the meaning set forth in Section 13.3.
“Reclassified Projects” means any T&D Project that does not otherwise meet the definition of Footprint Project but Lessee and Lessor jointly agree, in their sole discretion, to classify such T&D Project as a Footprint Project based upon such factors that the Parties deem relevant, including (a) the expected Rate Base of the T&D Project, it being understood that the Parties generally expect that only T&D Projects with an expected Rate Base of less than $25 million could constitute a Reclassified Project; (b) whether the T&D Project is physically connected to the Stanton/Brady/Celeste Assets or the Stanton Transmission Loop Assets; and (c) whether the T&D Project is necessary to serve distribution customers situated in the service territories of the Stanton/Brady/Celeste Assets or the Stanton Transmission Loop Assets.
“Regulatory Authorities” means the PUCT, ERCOT, TRE, NERC and any other governmental agency with jurisdiction over Lessee, Lessor or the Stanton/Brady/Celeste Assets.
“REIT” has the meaning set forth in the Recitals.
“REIT IPO” has the meaning set forth in the Recitals.
“Related Person” has the meaning set forth in Section 12.1.
“Renewal Term” has the meaning set forth in Section 2.1.
“Rent” means the sum of Base Rent, Percentage Rent, Additional Rent and Extended Period Rent.
“Rent Supplement” means a supplement to this Agreement in the form of Schedule 3.2(b) agreed to in accordance with Section 3.2(b).
“Rent Validation” means the process of validating any Rent Supplement pursuant to Section 3.2(c). “Repairs” means all replacements, repairs or remedial activity undertaken directly on a then-existing portion of the Stanton/Brady/Celeste Assets or the Stanton Transmission Loop Assets that are not Footprint Projects and that are expensed and not capitalized under GAAP.

“Revenues Attributable to Lessee CapEx” means the portion of Unadjusted Gross Revenues from the Stanton/Brady/Celeste Assets or the Stanton Transmission Loop Assets which is attributable to Lessee CapEx as determined in accordance with Section 3.1(d)(iii).
“Revised Certificate” has the meaning set forth in Section 3.3(a).
“Second Lease Quarter Percentage Rent Breakpoint” has the meaning set forth in Section 3.1(c).
“Severable Footprint Projects” means any Footprint Projects that can be readily removed from the Stanton/Brady/Celeste Assets or the Stanton Transmission Loop Assets without causing diminution in value to the Stanton/Brady/Celeste Assets or the Stanton Transmission Loop Assets, as applicable.
“Stanton/Brady/Celeste Assets” means the integrated electrical transmission and distribution facilities located within the area depicted on Exhibit A , and the systems and other property necessary to operate such transmission and distribution facilities, together with the exclusive right to occupy and use all of Lessor’s interest (whether by fee ownership, easement, lease, sublease, franchise or license) (other than to the extent expressly reserved to Lessor herein) in the premises upon which such facilities are situated and Footprint Projects that add, expand or alter the assets identified from time to time pursuant to Rent Supplements, as modified by Section 1.1(b).
“Stanton/Brady/Celeste Lease Assets” means the Stanton/Brady/Celeste Assets, excluding any Footprint Project included in the definition of “Stanton/Brady/Celeste Assets,” unless (i) such Footprint Project has been placed in service and (ii) a Rent Supplement has been executed with respect to such Footprint Project.
“Stanton Transmission Loop Assets” means the leasehold assets related to the Stanton Transmission Loop Lease.
“Stanton Transmission Loop Lease” means the Third Amended and Restated Lease Agreement (Stanton Transmission Loop Assets) between SDTS FERC, L.L.C., a wholly-owned subsidiary of Lessor, and SU FERC, L.L.C., a wholly-owned subsidiary of Lessee, effective as of the Effective Date (f/k/a FERC Lease), as the same may be amended from time to time.
“Swap Contract” means (a) any and all interest rate swap transactions, basis swap transactions, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward foreign exchange transactions, cap transactions, floor transactions, currency options, spot contracts or any other similar transactions of any of the foregoing (including, without limitation, any options to enter into any of the foregoing), and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc. or any International Foreign Exchange Master Agreement.

“Swap Termination Value” means, in respect of one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (x) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (y) for any date prior to the date referenced in clause (x), the amount(s) determined as the mark-to-market value(s) for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts.
“Synthetic Lease” means, at any time, any lease (including a lease that may be terminated by the lessee at any time) of any property by a Person (i) that is accounted for as an operating lease under GAAP and (ii) in respect of which the lessee retains or obtains ownership of the property so leased for U.S. federal income tax purposes, other than any lease under which such Person is the lessor.
“TCOS Allocation” has the meaning set forth in Section 3.1(d)(ii).
“T&D Project” means a business, project or assets relating primarily to the transmission and/or distribution of electricity.
“Term” has the meaning set forth in Section 2.1.
“Third Lease Quarter Percentage Rent Breakpoint” has the meaning set forth in Section 3.1(c).
“Third Panel Member” has the meaning set forth in Section 13.7(a).
“Transmission Gross Plant” means electric transmission plant as determined in accordance with the FERC Uniform System of Accounts.
“Transmission Net Plant in Service” means Transmission Gross Plant in service less accumulated depreciation as determined in accordance with the FERC Uniform System of Accounts.
“TRE” means the Texas Reliability Entity, or its successor entity.
“TRS” means taxable REIT subsidiary.
“Unadjusted Gross Revenues” has the meaning set forth in Section 3.1(d)(i).
“Undisputed Rent” means the greater of (i) the undisputed amount of Rent the Parties agree is due and payable and (ii) during the term of the Debt Agreements, the amount necessary, when taken together with Rent payments made by Lessee to Lessor under other leases between the Parties, required for Lessor to comply with the covenants set forth in Section 9.08 of the 2009 Note Purchase Agreement, Section 9.8 of the 2010 Note Purchase Agreement and Section 7.10 of the Credit Agreement.

EXHIBIT A
Assets
 
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EXHIBIT B
SUBORDINATED DEBT TERMS
Reference is made to that certain Second Amended and Restated Collateral Agency Agreement (as amended, restated, supplemented or otherwise modified, the “ Collateral Agency Agreement” ), to be entered into by and among The Bank of New York Mellon Trust Company, N.A., as collateral agent (together with its successors and assigns, the “ Collateral Agent” ), Sharyland Distribution & Transmission Services, L.L.C., a Texas limited liability company (the “ Company” ), and the holders of the Permitted Secured Indebtedness (as defined therein) from time to time party thereto.
Section 1. Definitions and Rules of Interpretation . Capitalized terms used herein without definition shall have the meanings assigned to such terms in the Collateral Agency Agreement. The rules of interpretation set forth in Schedule A of the Collateral Agency Agreement shall apply to this Exhibit B as if fully set forth herein. In addition, the following terms shall have the following meanings:
 
1.1	“ Entitled Party ” shall mean the Company unless the Collateral Agent or the Company has given notice to the Subordinated Lender that the Collateral Agent has, on behalf of the Secured Parties and pursuant to the Collateral Agency Agreement or related documents, properly exercised its remedies to foreclose on the Company’s interest in any System Lease and receive payments pursuant to any System Lease directly from Sharyland, in which case the Entitled Party shall mean the Collateral Agent, acting for the benefit of the Secured Parties.	
 
1.2	“ Governmental Authority ” shall mean	
 
 	(a)	the government of:	
 
 	(i)	The United States of America or any State or other political subdivision thereof, or	
 
 	(ii)	any other jurisdictions in which the Company conducts all or any part of its business, or which asserts jurisdiction over any properties of the Company, or	
 
 	(b)	any entity exercising executive, legislative, judicial, taxing, regulatory or administrative functions of, or pertaining to, any such government, or	
 
 	(c)	the Electric Reliability Council of Texas or any successor thereto (“ ERCOT ”), or	
 
 	(d)	the Texas Regional Entity.	
 
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1.3	“ Insolvency Event ” means the occurrence of any of the following:	
 
 	(a)	Sharyland (i) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes a corporate action for the purpose of any of the foregoing; or	
 
 	(b)	a court or Governmental Authority of competent jurisdiction enters an order appointing, without consent by Sharyland, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of Sharyland or any such petition shall be filed against Sharyland and such petition shall not be dismissed within 60 days.	
 
1.4	“ Reorganization Securities ” shall mean any debt or equity securities issued on account of all or any portion of the Subordinated Indebtedness in connection with an Insolvency Event that are in each case subordinated in liquidation to the Obligations (or any debt or equity securities issued on account of any Obligations) to at least the same extent that the Subordinated Indebtedness are subordinated to the Obligations hereunder.	
 
1.5	“ Sharyland ” shall mean Sharyland Utilities, L.P.	
 
1.6	“ Subordinated Indebtedness ” shall mean, with respect to Sharyland, Indebtedness (as defined under the applicable Financing Agreement or such other similar term) that is incurred in accordance with the terms of such Financing Agreement and is required to be subordinated to the applicable Obligations.	
 
1.7	“ Subordinated Lenders ” shall mean each and every Person to whom any of the Subordinated Indebtedness are owed.	
 
1.8	“ Subordinated Loan Documents ” shall mean all documentation evidencing the Subordinated Indebtedness.	
 
1.9	“ System Leases ” shall mean any and all leases of transmission and distribution and related assets pursuant to which Sharyland is the lessee and the Company or any Subsidiary of the Company is a party as a lessor, and supplements thereto, each as amended, restated, supplemented or otherwise modified from time to time, or any new lease entered into in replacement thereof.	
 
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1.10	“ System Lease Obligations ” shall mean any and all Rent or other similar term (as such term is defined in the System Leases) then due and payable under the System Leases.	
 
1.11	“ Texas Regional Entity ” shall mean the division of ERCOT authorized to develop, monitor, assess and enforce compliance with NERC Reliability Standards within geographic boundaries of ERCOT and any successor thereto.	
Section 2. Subordination of Subordinated Indebtedness . Until the indefeasible payment in full in cash of all the Obligations and the termination of any commitments to lend under any Permitted Secured Indebtedness, the Subordinated Lenders and Sharyland hereby agree that (i) all Subordinated Indebtedness is and shall be subordinated in right of liquidation in relation to all System Lease Obligations to the extent and in the manner hereinafter set forth, (ii) upon the occurrence and during the continuance of any default or event of default under any System Lease (or if after giving effect to a proposed distribution in respect of any part of the Subordinated Indebtedness, a default or event of default under any System Lease will exist), no payments or other distributions whatsoever in respect of any part of the Subordinated Indebtedness shall be made, (iii) upon the occurrence and during the continuance of an Insolvency Event, no payments or other distributions whatsoever-in respect of any part of the Subordinated Indebtedness shall be made nor shall any property or assets of Sharyland be applied to the purchase or other acquisition or retirement of any part of the Subordinated Indebtedness, and (iv) upon the occurrence and during the continuance of an Insolvency Event, the Subordinated Lenders shall not accept any payment by or on behalf of Sharyland on account of the principal of, premium or interest on, or any other amount in respect of, the Subordinated Indebtedness other than the payment of indemnity obligations and reasonable out of pocket costs and expenses (including reasonable attorney’s fees) in each case as and when due and payable in accordance with the terms of the Subordinated Debt Documents.
Section 3. Liquidation, Dissolution, Bankruptcy . Until the indefeasible payment in full in cash of all the Obligations and the termination of any commitments to lend under any Permitted Secured Indebtedness, and without limitation to the rights of the Secured Parties under the terms of the Financing Agreements or the rights of Company under the System Leases:
 
3.1	upon the occurrence and during the continuance of any Insolvency Event:	
 
 	3.1.1	the System Lease Obligations then due and payable shall first be irrevocably and indefeasibly paid in full to the Entitled Party before any of the Subordinated Lenders shall be entitled to receive any payment (other than Reorganization Securities) on account of the Subordinated Indebtedness whether in cash, securities or other assets (other than Reorganization Securities);	
 
 	3.1.2	any payment or distribution of assets of Sharyland of any kind or character in respect of the Subordinated Indebtedness to which any of the Subordinated Lenders would be entitled if the Subordinated Indebtedness were not subordinated pursuant to the terms hereof shall be made by the trustee, liquidator or agent or other Person making such payment or distribution, directly to the Entitled Party until the System Lease Obligations then due and payable are paid in full and each of the Subordinated Lenders and, unless the Company is. the Entitled Party, Sharyland irrevocably authorizes and empowers the Entitled Party to receive. and collect on its behalf any and all such payments or distributions; and	
 
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 	3.1.3	the Subordinated Lenders agree not to, directly or indirectly, initiate, prosecute or participate in any claim, action or other proceeding challenging the enforceability, validity or priority of the System Lease Obligations then due and payable.	
Section 4. Incorrect Payments . If, for any reason whatsoever and whether pursuant to an Insolvency Event or otherwise, Sharyland shall make or any of the Subordinated Lenders shall receive any payment or distribution of any kind or character, whether in cash, securities or other property (other than Reorganization Securities), on account or in respect of the Subordinated Indebtedness in contravention of any of the terms set forth herein, such Subordinated Lender shall hold any such payment or distribution in trust for the benefit of the Secured Parties, promptly notify the Entitled Party of the receipt of such payment or distribution and promptly pay over or deliver such distribution or payment to the Entitled Party or to any other Person nominated by the Entitled Party, to hold for the account of the Secured Parties.
Section 5. Non-Impairment . To the fullest extent permitted by applicable Law, no change of law or circumstances shall release or diminish any of the Subordinated Lender’s obligations, liabilities, agreements or duties hereunder, or affect the provisions set forth herein in any way.
Section 6. Benefit of Subordination Provisions . These subordination provisions are intended solely to define the relative rights of the Secured Parties, the Collateral Agent, the Company, the Subordinated Lenders, and their respective successors and permitted assigns.
Section 7. Termination and Reinstatement . Notwithstanding anything to the contrary contained herein, the Subordinated Indebtedness shall no longer be subordinated in right of liquidation pursuant to the terms contained herein otherwise at such time as the Secured Parties no longer have a lien on or security interest in the System Lease Obligations. If any payment to any of the Entitled Party, the Company, the Collateral Agent or the Secured Parties by Sharyland or any other Person in respect of any of the System Lease Obligations is held to constitute a preference or a voidable transfer under applicable Law, or if for any other reason any such party is required to refund such payment to Sharyland or to such Person or to pay the amount thereof to any other Person, each Subordinated Lender agrees and acknowledges that the provisions set forth herein shall continue to be effective or shall be reinstated, as the case may be, to the extent of any such payment or payments.
Section 8. Restrictions on Transfers . None of the Subordinated Lenders may transfer (by sale, novation or otherwise) any of its rights or obligations under the Subordinated Indebtedness unless the transferee of such interest first agrees in writing to be bound by the terms of this Exhibit B applicable to the transferor of such interest and executes an instrument to that effect.
 
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Section 9. Exercise of Powers .
 
9.1	After the occurrence and during the continuance of an Insolvency Event, the Entitled Party shall be entitled to exercise its rights and powers under these subordination provisions in such a manner and at such times as the Entitled Party in its absolute discretion may determine.	
 
9.2	The Subordinated Lenders alone shall be responsible for their contracts, engagements, acts, omissions, defaults and losses and for liabilities incurred by them.	
 
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EXHIBIT C
INSURANCE
Subject to Section 6.2(b) of this Agreement, during the term of the Note Purchase Agreements, the Credit Agreement or until otherwise agreed by Lessee and Lessor, Lessee shall comply with the insurance requirements set forth in this Exhibit C . Capitalized terms used herein but not otherwise defined in this Agreement have the meanings assigned to such terms in the Note Purchase Agreements or the Credit Agreement, as applicable.
 
A.	Coverages .	
Property Insurance (Operational):

Cover:	  	All assets comprising the Stanton/Brady/Celeste Assets against “all risks” of physical loss or damage (including but not limited to machinery breakdown, earthquake, flood, windstorm and terrorism)	
		
Principal Exclusions:  	  	War and civil war	
		
	  	Nuclear risks	
		
	  	Theft and mysterious disappearance revealed in the course of inventory undertaking	
		
	  	The cost of making good wear and tear, gradual deterioration, etc., but not the consequential damage	
		
	  	Consequential loss not otherwise excluded	
		
	  	Fraud and misrepresentation	
		
Sum Insured:	  	Full replacement cost subject to the following sublimits.	
		
Sublimits:	  	Earthquake – full replacement cost	
	  	Flood – full replacement cost	
	  	Windstorm – full replacement cost	
		
Deductible:	  	$250,000 per loss or occurrence, except $250,000 earthquake and flood and $250,000 windstorm	
		
Insured:	  	Lessee	
	  	Lessor	
		
Additional Insured:	  	The Prudential Insurance Company of America, as Purchaser
Prudential Retirement Insurance and Annuity Company, as Purchaser	
 
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	  	Royal Bank of Canada, as Lender	
	  	The Bank of New York Mellon Trust Company, N. A., as Collateral Agent	
	  	The Secured Parties to the Note Purchase Agreement	
	  	The Secured Parties to the Credit Agreement	
		
Mortgagee:	  	Bank of New York Mellon Trust Company, N.A. as Collateral Agent for the benefit of the Secured Parties	
		
Loss Payee:	  	The Bank of New York Mellon Trust Company, N.A. as Collateral Agent, as first loss payee	
		
Conditions:	  	30 days’ notice of cancellation or non-renewal except 10 days for non-payment of premium Acceptable loss payable clause	
		
	  	Non-vitiation wording in favor of the Collateral Agent and the Secured Parties	
		
	  	Waiver of subrogation in favor of the additional insureds	
	
General Liability Insurance:	
		
Cover:	  	Lessee against any liability arising out of claims for personal injury and property damage.	
		
Sum Insured:	  	$1,000,000 per occurrence up to a minimum of $2,000,000 aggregate limit (except that the fire damage legal liability coverage may be limited to $100,000 per fire and the medical expense coverage may be limited to $5,000 for any one injured person).	
		
Insured:	  	Lessee	
	  	Lessor	
		
Additional Insured:     	  	The Prudential Insurance Company of America, as Purchaser	
	  	Prudential Retirement Insurance and Annuity Company, as Purchaser	
	  	The Bank of New York Mellon Trust Company, N. A., as Collateral Agent	
	  	Royal Bank of Canada, as Lender	
	  	The Secured Parties	
		
Conditions:	  	Occurrence policy wording or Aegis claims-first-made policy form	
	  	Worldwide territory	
 
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Automobile Liability Insurance:	
		
Cover:	  	Lessee for liability arising out of claims for personal injury (including bodily injury and death) and property damage covering all owned (if any), leased, non-owned and hired vehicles of Lessee, including loading and unloading.	
		
Sum Insured:	  	$1,000,000 each accident.	
		
Deductible:	  	$1,000 each accident.	
		
Insured:	  	Lessee	
	  	Lessor	
		
Additional Insured:	  	The Prudential Insurance Company of America, as Purchaser	
	  	Prudential Retirement Insurance and Annuity Company, as Purchaser	
	  	The Bank of New York Mellon Trust Company, N. A., as Collateral Agent	
	  	Royal Bank of Canada, as Lender	
	  	The Secured Parties	
	
Workers’ Compensation and Employer’s Liability Insurance:	
		
Cover:	  	Lessee will maintain workers’ compensation insurance as required by applicable state laws and employer’s liability insurance insuring Lessee for liability arising out of injury to or death of employees.	
		
Sum Insured:	  	$1,000,000 each accident.	
		
Insured:	  	Lessee	
	  	Lessor	
	
Excess or Umbrella Insurance:	
		
Cover:	  	Insurance covering claims in excess of the underlying insurance described in the foregoing.	
		
Sum Insured:	  	$25,000,000 each occurrence and in the aggregate	
		
Deductible:	  	$1,000,000 any one occurrence or amount of underlying insurance.	
		
Insured:	  	Lessee	
	  	Lessor	
		
Additional Insured:     	  	The Prudential Insurance Company of America, as Purchaser	
	  	Prudential Retirement Insurance and Annuity Company, as Purchaser	
	  	The Bank of New York Mellon Trust Company, N. A., as Collateral Agent	
	  	Royal Bank of Canada, as Lender	
	  	The Secured Parties	
		
Conditions:	  	Following form	
 
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B.	Company Conditions and Requirements.	
1. Loss Notification . Lessee shall promptly notify Lessor of any single loss or event likely to give rise to a claim against an insurer for an amount in excess of $1,000,000 covered by any insurance policies required by this Exhibit C .
2. Payment of Loss Proceeds . The Collateral Agent, on behalf of the Secured Parties, shall be named as the first loss payee in applicable insurance policies (pursuant to a standard lender’s loss payable endorsement equivalent to a CP 1218).
3. Compliance With Policy Requirements . Lessee shall not violate or permit to be violated any of the conditions, provisions or requirements of any insurance policy required by this Exhibit C , and Lessee shall perform, satisfy and comply with, or cause to be performed, satisfied and complied with, all conditions, provisions and requirements of all insurance policies.
4. Waiver of Subrogation . Lessee hereby waives any and every claim for recovery from the Secured Parties for any and all loss or damage covered by any of the insurance policies to be maintained under this Agreement to the extent that such loss or damage is recovered under any such policy. If the foregoing waiver will preclude the assignment of any such claim to the extent of such recovery, by subrogation (or otherwise), to an insurance company (or other Person), Lessee shall give written notice of the terms of such waiver to each insurance company which has issued, or which may issue in the future, any such policy of insurance (if such notice is required by the insurance policy) and shall cause each such insurance policy to be properly endorsed by Lessee to, or to otherwise contain one or more provisions that prevent the invalidation of the insurance coverage provided thereby by reason of such waiver.
5. Notices . Lessee will advise Lessor in writing promptly of (i) any material changes in the coverage or limits provided under any policy required by Section 6.2 of this Agreement and this Exhibit C and (ii) any default in the payment of any premium and of any other act or omission on the part of Lessee which may invalidate or render unenforceable, in whole or in part, any insurance being maintained by Lessee pursuant to this Exhibit C .
 
C.	Insurance Policy Conditions and Requirements .	
1. Permitted Insurers . Lessee shall obtain the insurance required by this Exhibit C from responsible insurance companies authorized to do business in Texas (if required by law or regulation) with an A.M. Best Insurance Reports rating of A-, 8 or better.
2. Control of Loss . If commercially feasible all policies of insurance required to be maintained pursuant to this Exhibit C , wherein more than one insurer provides the coverage on any single policy, shall have a clause (or a separate agreement among the insurers) wherein all insurers have agreed that the lead insurer shall have full settlement authority on behalf of the other insurers.
 
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3. Loss Survey . All policies of insurance required to be maintained pursuant to this Exhibit C , wherein more than one insurer provides the coverage on any single policy, shall have a clause (or a separate agreement among the insurers) wherein all insurers have agreed upon the employment of a single firm to survey and investigate all losses on behalf of the insurers.
4. Policy Cancellation and Change . All policies of insurance required to be maintained pursuant to this Exhibit C shall be endorsed so that if at any time they are canceled, or their coverage is reduced (by any party including the insured) so as to affect the interests of the Collateral Agent, the Holders and any other Secured Party, such cancellation or reduction shall not be effective as to the Secured Parties for thirty (30) days, except for non-payment of premium which shall be for ten (10) days, after receipt by the Collateral Agent and the Secured Parties of written notice from such insurer of such cancellation or reduction.
5. Miscellaneous Policy Provisions . All insurance policies providing operational property damage, (i) shall name the Collateral Agent, on behalf of the Secured Parties, as the first loss payee, (ii) shall include a Lender’s loss payable clause in favor of the Collateral Agent, on behalf of the Secured Parties.
6. Separation of Interests . All policies (other than in respect to workers compensation insurance) shall insure the interests of the Secured Parties regardless of any breach or violation by Lessee or any other party of warranties, declarations or conditions contained in such policies, any action or inaction of Lessee or others, or any foreclosure relating to the Stanton/Brady/Celeste Assets.
7. Waiver of Subrogation . All policies of insurance required by this Exhibit C shall provide for waivers of subrogation in favor of the Secured Parties and their respective officers and employees.
8. Liability Insurance Endorsements . All policies of liability insurance required to be maintained by Lessee shall be endorsed as follows:
(i) To name the Secured Parties as additional insureds;
(ii) To provide a severability of interests and cross liability clause; and
(iii) That the insurance shall be primary and not excess to or contributing with any insurance or self-insurance maintained by Lessee.
D. Acceptable Policy Terms and Conditions . All policies of insurance required to be maintained pursuant to this Exhibit C shall contain terms and conditions reasonably acceptable to Lessor.
 
S TANTON /B RADY /C ELESTE A SSETS L EASE A GREEMENT

SCHEDULE 3.2(b)
FORM OF LEASE SUPPLEMENT
Rent Supplement
Pursuant to Section 3.2(b) of Lease
[Date of Supplement]                    
Incremental CapEx:
Lessee CapEx:
Base Rent:
Percentage Rent Percentages:
Annual Percentage Rent Breakpoints:
Revenues Attributable to Lessee CapEx:
Original Base CapEx:
Accumulated Deficit:
ERCOT Transmission Rate Allocation:
Term of Rent Supplement:

Executed this ____ day of ___________, 20___.	
	
SHARYLAND UTILITIES, L.P.	
		
By:	 	 	
Name:	 	 	
Title:	 	 	
	
SHARYLAND DISTRIBUTION &	
TRANSMISSION SERVICES, L.L.C.	
		
By:	 	 	
Name:	 	 	
Title:	 	 	
 
S TANTON /B RADY /C ELESTE A SSETS L EASE A GREEMENT

Exhibit 10.11
Execution Version
THIRD AMENDED AND RESTATED LEASE AGREEMENT
(STANTON TRANSMISSION LOOP ASSETS)
between
SDTS FERC, L.L.C.
and
SU FERC, L.L.C.
as of December 1, 2014

TABLE OF CONTENTS

 	 	 	  	Page	 	
ARTICLE I LEASE	  	 	2	  	
			
1.1.	 	Lease of Stanton Transmission Loop Assets	  	 	2	  	
1.2.	 	Exclusive Rights	  	 	3	  	
1.3.	 	Absolute Net Lease	  	 	3	  	
1.4.	 	Waiver by Lessee	  	 	3	  	
1.5.	 	Quiet Enjoyment	  	 	3	  	
		
ARTICLE II TERM OF LEASE	  	 	3	  	
			
2.1.	 	Term	  	 	3	  	
2.2.	 	Approvals upon Expiration or Termination	  	 	4	  	
2.3.	 	Purchase Option upon Expiration or Termination	  	 	4	  	
		
ARTICLE III RENT	  	 	5	  	
			
3.1.	 	Rent	  	 	5	  	
3.2.	 	Additional Rent	  	 	5	  	
3.3.	 	No Set Off	  	 	5	  	
3.4.	 	Late Payment Penalty	  	 	5	  	
		
ARTICLE IV LESSEE’S REPRESENTATIONS, WARRANTIES AND COVENANTS	  	 	5	  	
			
4.1.	 	Maintenance, Operation and Repair of the Stanton Transmission Loop Assets	  	 	5	  	
4.2.	 	Licenses and Permits	  	 	6	  	
4.3.	 	Property Taxes and Other Assessments and Fees	  	 	6	  	
4.4.	 	Requirements of Governmental Agencies and Regulatory Authorities	  	 	7	  	
4.5.	 	Liens	  	 	7	  	
4.6.	 	Hazardous Materials	  	 	7	  	
4.7.	 	Indebtedness	  	 	8	  	
4.8.	 	Records	  	 	8	  	
4.9.	 	Surrender	  	 	8	  	
4.10.	 	Cooperation; Transition Services	  	 	9	  	
4.11.	 	Lessee’s Authority	  	 	9	  	
4.12.	 	Litigation	  	 	9	  	
4.13.	 	Financing	  	 	9	  	
		
ARTICLE V LESSOR’S REPRESENTATIONS, WARRANTIES AND COVENANTS	  	 	11	  	
			
5.1.	 	Lessor’s Authority	  	 	11	  	
5.2.	 	Liens	  	 	11	  	
5.3.	 	Condition of Assets	  	 	11	  	
5.4.	 	Requirements of Governmental Agencies	  	 	11	  	
5.5.	 	Hazardous Materials	  	 	12	  	
5.6.	 	Litigation	  	 	12	  	
5.7.	 	Records	  	 	12	  	
5.8.	 	Limitation	  	 	12	  	
 
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TABLE OF CONTENTS

 	 	 	  	Page	 	
ARTICLE VI LOSS AND DAMAGE; INSURANCE	  	 	13	  	
			
6.1.	 	Loss and Damage to the Stanton Transmission Loop Assets	  	 	13	  	
6.2.	 	Insurance	  	 	13	  	
		
ARTICLE VII REPORTING	  	 	14	  	
			
7.1.	 	Private Financing Arrangements	  	 	14	  	
7.2.	 	Public Company and Regulatory Information and Cooperation	  	 	15	  	
7.3.	 	Mutual Obligations	  	 	16	  	
		
ARTICLE VIII ASSIGNMENT	  	 	16	  	
		
ARTICLE IX DEFAULT	  	 	17	  	
			
9.1.	 	Lessee Default	  	 	17	  	
9.2.	 	Lessor Default	  	 	18	  	
9.3.	 	Right to Cure	  	 	18	  	
9.4.	 	Remedies	  	 	18	  	
		
ARTICLE X CAPITAL EXPENDITURES	  	 	19	  	
		
ARTICLE XI REGULATORY COOPERATION	  	 	19	  	
			
11.1.	 	Jurisdiction	  	 	19	  	
11.2.	 	Cooperation	  	 	19	  	
		
ARTICLE XII INDEMNITY	  	 	19	  	
			
12.1.	 	General Indemnity	  	 	19	  	
12.2.	 	Environmental Indemnity	  	 	20	  	
		
ARTICLE XIII MISCELLANEOUS	  	 	21	  	
			
13.1.	 	Limitation of Damages	  	 	21	  	
13.2.	 	Condemnation	  	 	21	  	
13.3.	 	Confidentiality	  	 	21	  	
13.4.	 	Successors and Assigns	  	 	22	  	
13.5.	 	Rent Obligations Not Excused by Force Majeure, Etc.	  	 	22	  	
13.6.	 	Further Assurances; Policies and Procedures	  	 	22	  	
13.7.	 	Arbitration	  	 	22	  	
13.8.	 	Notices	  	 	23	  	
13.9.	 	Entire Agreement; Amendments	  	 	24	  	
13.10.	 	Legal Matters	  	 	24	  	
13.11.	 	Partial Invalidity	  	 	25	  	
13.12.	 	Recording	  	 	25	  	
13.13.	 	Intention of Parties; True Lease	  	 	25	  	
 
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TABLE OF CONTENTS

 	 	 	  	Page	
			
Appendix A	 	Definitions	  		
			
EXHIBITS:	 		  		
			
Exhibit A	 	Stanton Transmission Loop Assets Area	  		
Exhibit B	 	Subordinated Debt Terms	  		
Exhibit C	 	Insurance	  		
 
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THIRD AMENDED AND RESTATED LEASE AGREEMENT
This THIRD AMENDED AND RESTATED LEASE AGREEMENT (this “ Agreement ”) is entered into on December 1, 2014 (the “ Effective Date ”), between SDTS FERC, L.L.C. (together with its transferees, successors and assigns, “ Lessor ”), and SU FERC, L.L.C. (together with its transferees, successors and assigns, “ Lessee ”), and in connection herewith, Lessor and Lessee agree, covenant and contract as set forth in this Agreement. Lessor and Lessee are sometimes referred to in this Agreement as a “ Party ” or collectively as the “ Parties. ”
Certain capitalized terms used in this Agreement have the meaning assigned to them in Appendix A attached hereto.
WITNESSETH:
WHEREAS, Lessor and Lessee were parties to a Lease Agreement, entered into as of July 13, 2010, as amended, restated and supplemented to date, pursuant to which Lessor leased assets known as the FERC Assets to Lessee (the “ FERC Lease Agreement ”);
WHEREAS, Lessee was subject to an Agreed Transfer Option issued by the PUCT pursuant to PUCT Docket No. 37990, which provided that the PUCT could order all the FERC Assets to be moved from the SPP to ERCOT by 2014, at which time the FERC Assets would no longer be subject to FERC jurisdiction;
WHEREAS, the PUCT has ordered the FERC Assets to be moved from SPP to ERCOT and all necessary regulatory approvals for the Agreed Transfer Option have been obtained;
WHEREAS, the FERC Assets have been moved to ERCOT and are subject to PUCT jurisdiction and are no longer subject to FERC jurisdiction;
WHEREAS, Section 2.4 of the FERC Lease Agreement provided that once the FERC Assets had been moved to ERCOT, the Parties could to terminate the FERC Lease Agreement and Lessor and Lessee could enter into a new lease for the FERC Assets;
WHEREAS, Lessor is an indirect subsidiary of InfraREIT Partners, LP, whose general partner (the “ REIT ”) intends to raise equity capital through an initial public offering (the “ REIT IPO ”), and, in connection with the REIT IPO, Lessor and Lessee desire to amend the terms of the FERC Lease Agreement in certain respects;
WHEREAS, consistent with Section 2.4 of the FERC Lease Agreement, Lessor and Lessee wish to enter into an amended and restated lease for the FERC Assets, now known as the “ Stanton Transmission Loop Assets ”; and
WHEREAS, instead of entering in to a new lease agreement related to the Stanton Transmission Loop Assets, the Parties have decided to amend and restate the FERC Lease;
NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto hereby amend and restate the terms of the FERC Lease as follows:
 
S TANTON T RANSMISSION L OOP L EASE A GREEMENT

ARTICLE I
LEASE
1.1. Lease of Stanton Transmission Loop Assets.
(a) Upon the terms and conditions set forth in this Agreement, Lessor hereby grants to Lessee the exclusive right to use and operate the integrated electrical transmission facilities that comprise Lessor’s 138kv transmission loop around the Stanton Service Territory and that are connected to the ERCOT electric grid owned by Lessor and located within the area depicted on Exhibit A , together with the exclusive right to occupy and use all of Lessor’s interest (whether by fee ownership, easement, lease, sublease, franchise or license) (other than to the extent expressly reserved to Lessor herein) in the premises upon which such facilities are situated (collectively, the “ Stanton Transmission Loop Assets ”). Subject to necessary regulatory approvals, this Agreement is intended by Lessor and Lessee to be a lease of the Stanton Transmission Loop Assets, as they exist as of the Effective Date.
(b) The Stanton Transmission Loop Assets shall consist of (x) the original assets leased by Lessor to Lessee as of the Effective Date, and (y) any components of the Stanton Transmission Loop Assets that are repaired or replaced pursuant to Section 6.1. The Stanton Transmission Loop Assets shall consist of each of the following components that are owned or leased by Lessor as of the Effective Date and that comprise part of Lessor’s 138kv transmission loop around the Stanton Service Territory (specifically excluding any such Lessor-owned assets that are not part of Lessor’s 138kv transmission loop):
(i) towers and poles affixed to the land, and all necessary and proper foundations, footings, crossarms and other appliances and fixtures for use in connection with said towers, poles and lines;
(ii) overhead, underground and underwater electrical transmission and communications lines, together with related ductwork and insulators;
(iii) distribution transformers mounted on towers or poles and/or anchored to concrete pads;
(iv) electric substation and switching facilities, including all associated transformers, circuit breakers, resistors, capacitors, buses, interconnection and switching facilities, control and protection equipment which monitors the Stanton Transmission Loop Assets, and the building housing the foregoing items;
(v) electric meters affixed to buildings or residences or otherwise required to operate the Stanton Transmission Loop Assets;
(vi) real estate assets, including real property, interests in real property or real property rights (as defined in Section 856(c)(5)(B) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder, and not otherwise included in Sections 1.1(b)(i) – 1.1(b)(v) above) owned or leased by Lessor; and
 
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(vii) all other systems or property owned or leased by Lessor, as identified in the uniform system of accounts for major electric utilities, 18 C.F.R. Part 101, as adopted and amended from time to time by FERC (not otherwise included in Sections 1.1(b)(i) – 1.1(b)(vi) above).
1.2. Exclusive Rights . Throughout the Term of this Agreement, Lessee shall have the exclusive right (i) to operate and use the Stanton Transmission Loop Assets for the transmission of electricity in accordance with applicable rules and regulations of all regulatory agencies having regulatory jurisdiction over the Stanton Transmission Loop Assets, including without limitation, the PUCT, as well as applicable rules and regulations of ERCOT, TRE, NERC and other Regulatory Authorities, and (ii) to utilize the Stanton Transmission Loop Assets (and the associated easements, rights of way and similar rights) for other opportunities and uses (provided that such other uses do not interfere with the current or future transmission and delivery of electricity), subject to the approval of Lessor, such approval not to be unreasonably withheld, conditioned or delayed. Throughout the Term of this Agreement, Lessor shall have access to the Stanton Transmission Loop Assets at all reasonable times for purposes of inspection. Except in the case of emergency, prior to Lessor’s access of the Stanton Transmission Loop Assets, Lessor will provide written notification to Lessee’s operations personnel.
1.3. Absolute Net Lease . This Agreement is intended by the Parties to be an absolute net lease (and, except as otherwise specified herein, the expenses associated with the lease, servicing, insuring, maintenance, repair and operation of the Stanton Transmission Loop Assets shall be for the account of the Lessee, unless expressly stated that such expenses are for the account of Lessor or some other person or entity). Other than as expressly provided herein, (a) Lessee’s obligation to make all payments of Rent as and when the same shall become due and payable in accordance with the terms of this Agreement shall be absolute, irrevocable and unconditional and shall not be affected by any circumstance or subject to any abatement or diminution by set-off, deduction, counterclaim, recoupment, agreement, defense, suspension, deferment, interruption or otherwise, and (b) until such time as all Rent required to be paid has been paid, Lessee shall have no right to terminate this Agreement or to be released, relieved or discharged from its obligation to make, and shall not suspend or discontinue, any payment of Rent for any reason whatsoever.
1.4. Waiver by Lessee . Lessee hereby waives, to the extent permitted by Applicable Law, any and all rights which it may now have or which at any time hereafter may be conferred upon it, by statute or otherwise, to modify, terminate, cancel, quit or surrender this Agreement except in accordance with the express terms hereof.
1.5. Quiet Enjoyment . Lessee shall be entitled to the peaceful and quiet enjoyment of the Stanton Transmission Loop Assets, subject to the terms of this Agreement, so long as Lessee is not in default of this Agreement beyond applicable notice and cure periods.
ARTICLE II
TERM OF LEASE
2.1. Term . Subject to the provisions of Section 2.2 of this Agreement, or as otherwise stated herein, this Agreement is effective on the Effective Date and shall continue through December 31, 2021, unless otherwise terminated in a manner consistent herewith (the “ Initial Term ”). Thereafter, this Agreement may be renewed for subsequent terms (each, a “ Renewal
 
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Term ” and, collectively with the Initial Term, the “ Term ”) by mutual agreement of the Parties; provided, however, that the Rent for any Renewal Term shall be negotiated using the Comparable Rate of Return methodology set forth in Article III of the McAllen Lease. Notwithstanding the foregoing, the Parties agree that, in the event that both Parties desire to renew this Agreement upon the expiration of the Initial Term, it is their intention that this Agreement will be combined with, and the Stanton Transmission Loop Assets shall be covered by, the Stanton/Brady/Celeste Lease.
2.2. Approvals upon Expiration or Termination
(a) Notwithstanding any provisions to the contrary herein, Lessee shall not surrender, resign, transfer, assign or otherwise cease to be the operator of the Stanton Transmission Loop Assets at any time, including upon the termination of this Agreement or at the expiration of the Term, without first acquiring any necessary regulatory approvals from the PUCT or other Regulatory Authorities regarding such surrender, resignation, transfer, assignment or cessation of such operatorship; provided that, in the event of expiration or termination, the Parties shall use commercially reasonable efforts to obtain all necessary regulatory approvals of the transfer of such operatorship as soon as reasonably practicable.
(b) During such extended period of operatorship, Lessee shall continue to operate the Stanton Transmission Loop Assets and shall continue to pay all Extended Period Rent; provided, however, that if regulatory approval is not obtained within twelve (12) months of initiation of the approval process and such delay is (a) due to Lessor’s failure to reasonably pursue such approval, then the amounts payable as Rent will be eighty percent (80%) of such amount, or (b) due to Lessee’s failure to reasonably pursue such approval, then the amounts payable as Rent will be one hundred five percent (105%) of such amount.
(c) Upon the expiration of the Term or termination of this Agreement, Lessee shall use commercially reasonable efforts to obtain all necessary regulatory approvals as soon as reasonably practicable from the PUCT or other Regulatory Authorities to transfer or assign the CCNs for the Stanton Transmission Loop Assets to Lessor or a third party designated by Lessor and acceptable to the PUCT or other Regulatory Authorities.
2.3. Purchase Option upon Expiration or Termination . Upon the expiration of the Term or termination of this Agreement, Lessor shall have the option to purchase from Lessee any equipment or other property, tangible or intangible, owned by Lessee and principally used in connection with and necessary for the operation of the Stanton Transmission Loop Assets (including any Nonseverable Footprint Projects owned by Lessee, if any), subject to any required regulatory approvals. The purchase price for such property or equipment shall be the greater of (i) the net book value thereof plus 10% and (ii) the fair market value thereof as determined by mutual agreement of Lessor and Lessee. If the Parties fail to agree on the amount of the purchase price, the purchase price shall be determined by arbitration pursuant to Section 13.7. In the event Lessor purchases such equipment, Lessee shall have the right to continue to use such equipment for no cost during the period of any extended operations by Lessee under Section 2.2.
 
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ARTICLE III
RENT
3.1. Rent .
(a) Lessee will pay to Lessor in lawful money of the United States of America which shall be legal tender for the payment of public and private debts, at Lessor’s address set forth in Section 13.8 hereof or at such other place or to such other Person, as Lessor from time to time may designate in a Notice, all Rent contemplated hereby during the Term on the basis hereinafter set forth. If there is a dispute as to the amount of Rent to be paid by Lessee, either Party may submit the dispute to arbitration pursuant to Section 13.7. However, Lessee shall be required to pay, as and when Rent is due and payable hereunder, the Undisputed Rent until such time as the dispute is resolved by agreement between the Parties or by arbitration pursuant to Section 13.7.
(b) Lessee shall pay to Lessor an amount of base rent equal to the amount set forth on the rent supplement executed and delivered by the Parties in connection herewith, which shall be payable monthly in arrears 45 days after the conclusion of the month (“ Base Rent ”). The Parties acknowledge that such rent supplement also provides for a one-time payment by Lessor to Lessee, calculated in the manner described therein, as a reimbursement for excess rent paid by Lessee for the period from May 1, 2014 through the Effective Date.
3.2. Additional Rent . In addition to Base Rent, Lessee also will pay and discharge as and when due and payable all other amounts, liabilities, obligations and impositions that Lessee assumes or agrees to pay under this Agreement, including without limitation, the expenses described in Section 1.3 and any reimbursement for such amounts and other damages to Lessor in the event that Lessor pays such expenses or performs such obligations on behalf of Lessee (collectively, “ Additional Rent ”).
3.3. No Set Off . Rent shall be paid to Lessor without set off, deduction or counterclaim; provided, however, that Lessee shall have the right to assert any claim or counterclaim in a separate action brought by Lessee under this Agreement or to assert any mandatory counterclaim in any action brought by Lessor under this Agreement.
3.4. Late Payment Penalty. If Lessee fails to make any payment of Rent to Lessor within five (5) days after it is due, interest shall accrue on the overdue amount, from the date overdue until the date paid, at the Overdue Rate.
ARTICLE IV
LESSEE’S REPRESENTATIONS, WARRANTIES AND COVENANTS
Lessee hereby represents, warrants and covenants to Lessor that:
4.1. Maintenance, Operation and Repair of the Stanton Transmission Loop Assets.
(a) Lessee, at its own cost and expense, shall maintain (including both scheduled and unscheduled maintenance), operate, repair and make all modifications (other than Footprint Projects) to the Stanton Transmission Loop Assets and any components thereof (whether owned by Lessor or Lessee), including directing all operations of and supplying all personnel necessary for the operation of the Stanton Transmission Loop Assets, in each case, as reasonable and prudent and consistent with Good Utility Practice and as required by Applicable Law. Lessee
 
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shall carry out all obligations under this Agreement as reasonable and prudent and consistent with Good Utility Practice and in accordance with manufacturers’ warranty requirements (during any applicable warranty period) and the Lessee’s established operating procedures and maintenance, rebuild and repair programs so as to keep the Stanton Transmission Loop Assets in good working order, ordinary wear and tear excepted, and in such condition as shall comply in all material respects with all Applicable Laws. Lessee will operate the Stanton Transmission Loop Assets in a reliable and safe manner in compliance with all applicable requirements and regulations of Regulatory Authorities. Lessee will not operate the Stanton Transmission Loop Assets or any component thereof in any manner excluded from coverage by any insurance in effect as required by the terms hereof.
(b) If inspections of the Stanton Transmission Loop Assets by Lessor show that the Stanton Transmission Loop Assets do not meet industry standards or Good Utility Practice for maintenance and repair and/or fail to meet the requirements of any Applicable Law, Lessee shall promptly, but in any event within thirty (30) days after such initial notification, (i) develop a plan for Lessor’s review by which the Stanton Transmission Loop Assets can be modified to comply with the standards, and (ii) complete any and all such modifications consistent with all applicable reliability and safety standards established by regulations, orders or requirements of Regulatory Authorities.
4.2. Licenses and Permits. Lessee shall obtain and maintain any and all licenses, permits and other governmental and third-party consents and approvals required by Applicable Law in order to carry out its obligations under this Agreement.
4.3. Property Taxes and Other Assessments and Fees . Lessee shall bear and timely pay all ad valorem and property taxes, sales and use taxes, or other assessments, governmental charges or fees that shall or may during the Term be imposed on, or arise in connection with, the repair, maintenance or operation of the Stanton Transmission Loop Assets (including all Footprint Projects) (“ Lessee Taxes ”); provided that Lessee shall not be obligated to pay any net income taxes imposed upon Lessor (“ Lessor Taxes ”). Upon the written request by Lessor, Lessee shall provide Lessor with evidence of the payment of any such Lessee Taxes, the failure of which to be paid would cause the imposition of a Lien upon the Stanton Transmission Loop Assets or any component thereof or interest therein. Lessee shall assume full responsibility for preparing and furnishing to Lessor for execution all filings with any governmental authority of or in the state and/or locality in which the Stanton Transmission Loop Assets are located in respect of any and all taxes; except that, where required or permitted by Applicable Law, Lessee shall make such filings on behalf of Lessor in the name of Lessor or in Lessee’s own name. In each case in which Lessee furnishes a tax return or any other form to be executed by Lessor for filing with or delivery to any taxing authority, Lessee shall certify to Lessor that such document is in the proper form, is required to be filed under Applicable Law and does not impose any tax or other liability on Lessor or any of its affiliates which is not indemnified by Lessee. Lessee shall be permitted to contest, in its own name when permitted by law but otherwise on behalf of Lessor, in good faith and upon consultation with Lessor, any taxes it is obligated to pay hereunder.
 
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4.4. Requirements of Governmental Agencies and Regulatory Authorities. Lessee, at its expense, shall comply with all Applicable Laws, including without limitation all requirements of the Regulatory Authorities. Lessee shall have the right, in its reasonable discretion and at its cost and expense, to contest by appropriate legal proceedings, the validity or applicability to the Stanton Transmission Loop Assets of any Applicable Law made or issued by any federal, state, county, local or other governmental agency or entity. Any such contest or proceeding shall be controlled and directed by Lessee. Notwithstanding the foregoing, Lessee shall provide Lessor written notice of the commencement and, at reasonable intervals after commencement, the progress of any such legal proceedings.
4.5. Liens . Lessee shall keep the Stanton Transmission Loop Assets free and clear of all Liens other than Permitted Liens; provided, however, that if Lessee wishes to contest any such Lien (other than a Permitted Lien), Lessee shall, promptly, and in any event within thirty (30) days after it receives notice of the filing of such Lien, remove or bond over such Lien from the Stanton Transmission Loop Assets pursuant to Applicable Law. If Lessee fails to promptly remove or bond over any such Lien, Lessor may, after providing notice to Lessee, take reasonable action to satisfy, defend, settle or otherwise remove the Lien at Lessee’s expense.
4.6. Hazardous Materials
(a) Lessee shall operate and maintain the Stanton Transmission Loop Assets and conduct all of its other activities in respect thereof in compliance in all material respects with any Applicable Laws relating to air, water, land and the generation, storage, use, handling, transportation, treatment or disposal of Hazardous Material. Lessee shall promptly notify Lessor of any such violation and, to the extent Lessee becomes aware of any environmental, health, safety or security matter that requires a corrective action, Lessee shall, in consultation with Lessor, undertake and complete such corrective action. Lessee shall have the obligation to report any such violations to the appropriate Regulatory Authorities in accordance with Applicable Law and, if practicable, shall give notice thereof to Lessor prior to making such report.
(b) Without limiting the generality of the foregoing, Lessee shall not (i) place or locate any underground tanks on the property underlying the Stanton Transmission Loop Assets, (ii) generate, manufacture, transport, produce, use, treat, store, release, dispose of or otherwise deposit Hazardous Materials in or on the Stanton Transmission Loop Assets, the property underlying the Stanton Transmission Loop Assets or any portion thereof other than as permitted by Applicable Laws that govern the same or are applicable thereto, (iii) permit any other substances, materials or conditions in, on or emanating from the Stanton Transmission Loop Assets, the property underlying the Stanton Transmission Loop Assets or any portion thereof which may support a claim or cause of action under any Applicable Law or (iv) undertake any action that would reasonably be expected to cause an unauthorized release of Hazardous Materials at the property underlying the Stanton Transmission Loop Assets.
(c) Lessee shall periodically, at intervals determined in its reasonable discretion in accordance with Good Utility Practice or as required by Applicable Law, at Lessee’s sole expense, conduct inspections of all components of the Stanton Transmission Loop Assets to ensure compliance with Applicable Laws and with this Section 4.6, and shall promptly notify Lessor of the results of any such inspections. Lessor may, at Lessor’s expense, conduct its own testing at times determined in its reasonable discretion, and after reasonable consultation with Lessee, to ensure Lessee’s compliance with Applicable Laws and with this Section 4.6, provided, however, that Lessor agrees to indemnify Lessee, in accordance with Section 12.2, from and against any and all Claims arising from such testing.
 
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4.7. Indebtedness . Lessee shall not incur Indebtedness other than: (i) Indebtedness in an aggregate principal amount of up to the greater of (A) $5,000,000 and (B) an amount equal to one percent (1%) of the sum of, without duplication, (x) the total amount of the Consolidated Net Plant of Lessee, plus (y) the total amount of the Consolidated Net Plant of any guarantor(s) of Lessee’s obligations under any Lease to which Lessee is a party as a lessee, plus (z) the total amount of Leased Consolidated Net Plant of Lessee, in each case on a senior secured basis, (ii) Indebtedness in an aggregate principal amount of up to the greater of (A) $10,000,000 and (B) an amount equal to one-and-a-half percent (1.5%) of the sum of, without duplication, (x) the total amount of the Consolidated Net Plant of Lessee, plus (y) the total amount of the Consolidated Net Plant of any guarantor(s) of Lessee’s obligations under any Lease to which Lessee is party as a lessee, plus (z) the total amount of Leased Consolidated Net Plant of Lessee, in each case on an unsecured subordinated basis on terms substantially similar to the terms set forth on Exhibit B and (iii) loans, in an aggregate principal amount not to exceed $10,000,000 at any time outstanding, made by InfraREIT Partners, LP or a subsidiary thereof to Lessee from time to time for the purpose of financing capital expenditures. For purposes of clauses (i) and (ii) of the preceding sentence, any Consolidated Qualified Lessees of Lessee will be treated as Lessee. In addition to the foregoing, Lessee may incur Indebtedness in an aggregate principal amount of up to the product of (x) Sharyland’s aggregate Consolidated Net Plant multiplied by (y) the lesser of (A) the sum of Sharyland’s then-current PUCT-regulated debt-to-equity ratio (expressed as a percentage) and five percent (5%) or (B) sixty-five percent (65%); provided, however, that such Indebtedness must be Non-Recourse Debt to Lessee. For purposes of this Section 4.7, Sharyland’s Consolidated Net Plant will be derived from its most recently prepared consolidated balance sheet, prepared in accordance with GAAP but adjusted to reverse the effects of failed sale-leaseback accounting in a manner reasonably determined by Sharyland in good faith. Without limiting the amount of Indebtedness permitted by the foregoing, Lessee may also incur Indebtedness (x) in the form of a pledge of equity interests in a subsidiary of Lessee as security for Non-Recourse Debt of such subsidiary and (y) in amounts otherwise permitted under the Debt Agreements.
4.8. Records . Lessee shall maintain proper books of record and account in conformity with GAAP and all applicable Regulatory Authorities and each other governmental agency or authority having legal or regulatory jurisdiction over Lessee. Additionally, Lessee shall maintain or cause to be maintained all logs, drawings, manuals, specifications and data and inspection, modification and maintenance records and other materials required to be maintained in respect of the Stanton Transmission Loop Assets by Applicable Laws or by Good Utility Practice. Lessee shall allow Lessor and its representatives to have reasonable access to, for at least five (5) years after the expiration of each Lease Year, the records referred to in this Section 4.8.
4.9. Surrender . Upon expiration of the Term or earlier termination of this Agreement in accordance with its terms (but subject to Section 2.2 and the requirements of all Applicable Laws), and in a manner calculated to avoid any disruption of electrical service, Lessee shall vacate and surrender possession of all components of the Stanton Transmission Loop Assets (other than Severable Footprint Projects) to Lessor, or to such other person or entity as Lessor may direct. At the time of such surrender, the Stanton Transmission Loop Assets shall be free and clear of Liens and other rights of third parties (other than Permitted Liens), and shall be in the same condition as on the Effective Date, ordinary wear and tear excepted. Lessee shall deliver or cause to be delivered to Lessor, or to such other person or entity as Lessor may direct, copies of all title documents, logs, drawings, manuals, specifications and data and inspection,
 
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modification and maintenance records, billing records, reports and other documents in respect of the Stanton Transmission Loop Assets which are necessary to determine the condition of the Stanton Transmission Loop Assets or for the continued maintenance, repair or general operation of the Stanton Transmission Loop Assets and are in Lessee’s possession at such time. In connection with the surrender of the Stanton Transmission Loop Assets, Lessor shall pay to Lessee the aggregate purchase price for any property and equipment purchased by Lessor in accordance with Section 2.3.
4.10. Cooperation; Transition Services.
(a) During the period after notice of termination and prior to the termination of the Agreement, with reasonable notice, Lessee will cooperate in all reasonable respects with the efforts of Lessor to sell or lease the Stanton Transmission Loop Assets (or any component thereof) or any interest therein, including, without limitation, permitting prospective purchasers or lessees to fully inspect the Stanton Transmission Loop Assets and any logs, drawings, manuals, specifications, data and maintenance records relating thereto; provided, that such cooperation shall not unreasonably interfere with the normal operation of the Stanton Transmission Loop Assets or cause Lessee to incur any additional expenses other than as specifically provided herein. All information obtained in connection with such inspection shall be subject to confidentiality requirements at least as restrictive as those contained in Section 13.3.
(b) Upon expiration of the Term or termination of this Agreement, Lessee shall continue to operate the Stanton Transmission Loop Assets pursuant to the terms of Section 2.2, if required thereunder. During such period Lessee shall perform all duties and retain all obligations under Article IV in all respects, as if the Term had not expired or this Agreement had not been terminated.
4.11. Lessee’s Authority . Lessee has all requisite power and authority to execute and deliver this Agreement and to perform its obligations hereunder. Lessee has taken all action necessary to execute and deliver this Agreement and to perform its obligations hereunder, and no other action or proceeding on the part of Lessee is necessary to authorize this Agreement. This Agreement constitutes the legally valid and binding obligation of Lessee, enforceable against Lessee in accordance with its terms, except as the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Applicable Laws affecting the enforcement of creditors’ rights generally and equitable principles.
4.12. Litigation . If Lessee becomes aware of any actions, claims or other legal or administrative proceedings that are pending, threatened or anticipated with respect to, or which could materially and adversely affect, the Stanton Transmission Loop Assets, Lessee shall promptly deliver notice thereof to Lessor.
4.13. Financing. Lessee acknowledges that Lessor has advised Lessee that the Stanton Transmission Loop Assets and this Agreement are security for the financings described below. In connection with such financings, SDTS made certain representations, warranties and covenants set forth in that certain (i) Amended and Restated Note Purchase Agreement entered into by SDTS and dated as of September 14, 2010 (as amended, restated, supplemented or otherwise modified from time to time, the “ 2009 Note Purchase Agreement ”), a copy of which has been provided to and reviewed by Lessee, (ii) Amended and Restated Note Purchase Agreement
 
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entered into by SDTS and dated as of July 13, 2010 (as amended, restated, supplemented or otherwise modified from time to time, the “ 2010 Note Purchase Agreement ” and, together with the 2009 Note Purchase Agreement, the “ Note Purchase Agreements ”), a copy of which has been provided to and reviewed by Lessee and (iii) Second Amended and Restated Credit Agreement entered into by SDTS and dated as of June 28, 2013 (as amended, restated, amended and restated, supplemented or otherwise modified from time to time, the “ Credit Agreement ” and, together with the Note Purchase Agreements, the “ Debt Agreements ”), a copy of which has been provided to and reviewed by Lessee.
Lessee hereby covenants and agrees with Lessor that, during the term of the 2009 Note Purchase Agreement, Lessee will comply with the covenants set forth in Sections 9.08 ( Material Project Documents ) (to the extent that Lessee is a party to any Material Project Documents, as defined in the 2009 Note Purchase Agreement), 10.04 ( Terrorism Sanctions Regulations ), 10.10 ( Sale of Assets, Etc .), 10.11 ( Sale or Discount of Receivables ), 10.12 ( Amendments to Organizational Documents ), 10.16 ( Project Documents ) and 10.17 ( Regulation ) of the 2009 Note Purchase Agreement.
Lessee hereby covenants and agrees with Lessor that, during the term of the 2010 Note Purchase Agreement, Lessee will comply with the covenants set forth in Sections 9.8 ( Material Project Documents ) (to the extent that Lessee is a party to any Material Project Documents, as defined in the 2010 Note Purchase Agreement), 10.4 ( Terrorism Sanctions Regulations ), 10.10 ( Sale of Assets, Etc .), 10.11 ( Sale or Discount of Receivables ), 10.12 ( Amendments to Organizational Documents ), 10.16 ( Project Documents ) and 10.17 ( Regulation ) of the 2010 Note Purchase Agreement.
Lessee hereby agrees with Lessor that, to the extent not otherwise covered by the terms of this Agreement, (i) Lessee hereby makes the same representations and warranties to Lessor as SDTS makes to the Lender (as defined in the Credit Agreement) in Sections 6.3 ( Disclosure ), 6.5 ( Financial Condition; Financial Instruments ), 6.6 ( Compliance with Laws, Other Instruments, Etc. ), 6.7 ( Governmental Authorizations, Etc. ), 6.8 ( Litigation; Observance of Agreements, Statutes and Orders ), 6.9 ( Taxes ), 6.10 ( Title to Property; Leases ), 6.11 ( Insurance ), 6.12 ( Licenses, Permits, Etc.; Material Project Documentation ), 6.16 ( Foreign Assets and Control Regulations, Etc. ), 6.17 ( Status under Certain Statutes ), 6.18 ( Environmental Matters ), 6.19 ( Force Majeure Events; Employees ) and 6.20 ( Collateral ) of the Credit Agreement (or equivalent provisions), to the extent that such representations and warranties relate to (x) Lessee, whether in its capacity as Lessee or otherwise, including, without limitation, Lessee’s status or operations as a public utility, or (y) Lessee’s ownership of the Stanton Transmission Loop Assets on or before the date hereof, and (ii) Lessee hereby covenants and agrees with Lessor that, during the term of the Credit Agreement, Lessee will comply with the covenants set forth in Sections 7.10 ( Material Project Documents ) (to the extent that Lessee is a party to any Material Project Documents, as defined in the Credit Agreement), 8.4 ( Terrorism Sanctions Regulations ), 8.10 ( Sale of Assets, Etc. ), 8.11 ( Sale or Discount of Receivables ), 8.12 ( Amendments to Organizational Documents ), 8.16 ( Material Projects Documents ) and 8.17 ( Regulation ) of the Credit Agreement (or equivalent provisions).
 
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Lessee may not lease, or agree or otherwise commit to lease, any transmission or distribution facilities other than pursuant to a Lease. Further, Lessee shall not permit Persons other than Hunt Family Members to acquire any interest in the Lessee, directly or indirectly, in a manner that would result in a Change in Control of Lessee. The Parties agree to amend, alter or supplement this Section 4.13 from time to time to give effect to the obligations under SDTS’ then-current credit arrangements.
ARTICLE V
LESSOR’S REPRESENTATIONS, WARRANTIES AND COVENANTS
Lessor hereby represents, warrants and covenants as follow:
5.1. Lessor’s Authority . Lessor has all requisite power and authority to execute and deliver this Agreement and to perform its obligations hereunder. Lessor has taken all action necessary to execute and deliver this Agreement and to perform its obligations hereunder, and no other action or proceeding on the part of Lessor is necessary to authorize this Agreement. This Agreement constitutes the legally valid and binding obligation of Lessor, enforceable against Lessor in accordance with its terms, except as the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Applicable Laws affecting the enforcement of creditors’ rights generally and equitable principles.
5.2. Liens. Lessor represents that Lessor has good and valid title to the Stanton Transmission Loop Assets, there are no unrecorded liens, encumbrances, leases, mortgages, deeds of trust (except as disclosed to Lessee in writing or as arise by operation of law), or other exceptions (collectively, “ Liens ”) arising as a result of any acts or omissions to act of Lessor by, through or under Lessor to Lessor’s right, title or interest in the Stanton Transmission Loop Assets other than any such of the foregoing that does not materially impair the Lessee’s use of the Stanton Transmission Loop Assets, and, to Lessor’s knowledge, there exist no rights or interests of any third party relating to the Stanton Transmission Loop Assets that are not contemplated herein. Except for Permitted Liens or as may be disclosed in the applicable real property records in the State of Texas, or as disclosed by Lessor in writing to Lessee, Lessor represents that there are no mortgages, deeds of trust, or similar liens or security interests encumbering all or any portion of the Stanton Transmission Loop Assets. Lessor shall fully cooperate and assist Lessee, at no out-of-pocket expense to Lessor, in obtaining a subordination and non-disturbance agreement from each party that holds a Lien that might reasonably be expected to interfere in any material respect with Lessee’s rights under this Agreement. Notwithstanding the foregoing and subject to receipt of any regulatory approvals, Lessor and its affiliates shall have the right to incur Permitted Liens encumbering the Stanton Transmission Loop Assets or any component thereof solely for the benefit of Lessor in connection with any existing or future financing or refinancing pursuant to which the Stanton Transmission Loop Assets (or any component thereof) is pledged as collateral and Lessee agrees to enter into such acknowledgments and agreements in respect thereof with the lenders, or a trustee or agent for the lenders as the Lessor may reasonably request.
5.3. Condition of Assets . Lessor has not taken any action or failed to take any action that would cause the Stanton Transmission Loop Assets not to be in good operating condition and repair, ordinary wear and tear excepted, or adequate for the uses to which it is being put.
5.4. Requirements of Governmental Agencies . Lessor shall assist and fully cooperate with Lessee, in complying with or obtaining any material land use permits and approvals, building permits, environmental impact reviews or any other approvals reasonably required for the maintenance or operation of the Stanton Transmission Loop Assets, including execution of applications for such approvals, and including participating in any appeals or regulatory proceedings respecting the Stanton Transmission Loop Assets at Lessee’s cost and expense, if requested by Lessee.
 
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5.5. Hazardous Materials . Lessor shall conduct its activities in respect of the Stanton Transmission Loop Assets in compliance in all material respects with applicable Environmental Laws.
5.6. Litigation . If Lessor becomes aware of any actions, claims or other legal or administrative proceedings that are pending, threatened or anticipated with respect to, or which could materially and adversely affect, the Stanton Transmission Loop Assets, Lessor shall promptly deliver notice thereof to Lessee.
5.7. Records . Lessor shall maintain proper books of record and accounts in conformity with GAAP and all applicable Regulatory Authorities and each other governmental agency or authority having legal or regulatory jurisdiction over Lessor. Additionally, Lessor shall maintain or cause to be maintained all logs, drawings, manuals, specifications and data and inspection, modification and maintenance records and other materials required to be maintained in respect of the Stanton Transmission Loop Assets by Applicable Laws or by Good Utility Practice. Lessor shall provide quarterly estimates and other information necessary to allow Lessee to comply with Applicable Laws and by Good Utility Practice.
5.8. Limitation . EXCEPT AS EXPRESSLY REPRESENTED OTHERWISE IN THIS ARTICLE V, LESSOR (A) MAKES NO AND EXPRESSLY DISCLAIMS ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO (I) TITLE TO THE STANTON TRANSMISSION LOOP ASSETS OR ANY PORTION THEREOF, (II) ANY ESTIMATES OF THE VALUE OF THE STANTON TRANSMISSION LOOP ASSETS OR FUTURE REVENUES THAT MIGHT BE GENERATED BY THE STANTON TRANSMISSION LOOP ASSETS, (III) THE MAINTENANCE, REPAIR, CONDITION, QUALITY, SUITABILITY, DESIGN OR MARKETABILITY OF THE STANTON TRANSMISSION LOOP ASSETS, (IV) INFRINGEMENT OF ANY INTELLECTUAL PROPERTY RIGHT OR (V) ANY OTHER MATERIALS OR INFORMATION THAT MAY HAVE BEEN MADE AVAILABLE OR COMMUNICATED TO LESSEE OR ITS AFFILIATES, OR ITS OR THEIR EMPLOYEES, AGENTS, CONSULTANTS, REPRESENTATIVES OR ADVISORS IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY DISCUSSION OR PRESENTATION RELATING THERETO, AND (B) FURTHER DISCLAIMS ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR CONFORMITY TO MODELS OR SAMPLES OF MATERIALS OF ANY PORTION OF THE STANTON TRANSMISSION LOOP ASSETS, IT BEING EXPRESSLY UNDERSTOOD AND AGREED BY THE PARTIES HERETO THAT THE STANTON TRANSMISSION LOOP ASSETS ARE BEING LEASED “AS IS, WHERE IS,” WITH ALL FAULTS AND DEFECTS, AND THAT LESSEE HAS MADE OR CAUSED TO BE MADE SUCH INSPECTIONS AS LESSEE DEEMS APPROPRIATE.
 
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ARTICLE VI
LOSS AND DAMAGE; INSURANCE
6.1. Loss and Damage to the Stanton Transmission Loop Assets.
(a) In the event of any damage or loss to any component of the Stanton Transmission Loop Assets, Lessee shall promptly repair or replace such component to the standards required by Section 4.1 (regardless of whether such repair or replacement constitutes a Repair or a Footprint Project). The cost of any such repair or replacement shall be borne as described in Section 6.1(b)-(c) below.
(b) If such repair or replacement constitutes a Repair, the cost of repairing or replacing such damage or loss, whether actually covered in whole or in part by insurance, shall be the responsibility of Lessee. Lessee shall be entitled to retain any insurance proceeds in excess of the amount necessary to repair or replace any component of the Stanton Transmission Loop Assets. Any Repair will immediately become part of the Stanton Transmission Loop Assets owned by Lessor.
(c) If such repair or replacement constitutes a Footprint Project, then it will be treated as a Footprint Project under the Stanton/Brady/Celeste Lease (initially), or another lease to which Lessor and Lessee are a party, and addressed pursuant to the terms thereof.
(d) Lessee shall be solely responsible for all costs of repairing or replacing any damaged property and equipment that is not part of the Stanton Transmission Loop Assets and owned by Lessee, whether covered by Lessee’s insurance under Section 6.2 or otherwise. Nothing in this provision shall preclude Lessee from seeking recovery of such costs in a rate proceeding at the PUCT.
6.2. Insurance . Lessee will maintain, with financially sound and reputable insurers, insurance with respect to its business and properties and the Stanton Transmission Loop Assets against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated, but in no event less than the insurance set forth in this Section 6.2 and Exhibit C .
(a) Lessee shall procure at its own expense and maintain in full force and effect at all times throughout the term of this insurance policies with insurance companies rated A-, 8 or higher by A.M. Best or acceptable to Lessor if not so rated, and authorized to do business in the State of Texas.
(b) Lessor may at any time amend the requirements and approved insurance companies described in this Section 6.2 or Exhibit C due to (i) new information not previously known by Lessor prior to the date of this Agreement or (ii) changed circumstances after the date of this Agreement, which in the reasonable judgment of Lessor either renders a required coverage to be materially inadequate or materially reduces the financial ability of the approved insurance companies to pay claims.
 
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(c) On the first Business Day of each year, and promptly at such other times as Lessor may reasonably request, Lessee shall furnish Lessor with approved certification of all required insurance. Such certification shall be executed by each insurer or by an authorized representative of each insurer where it is not practical for such insurer to execute the certificate itself. Such certification shall identify underwriters, the type of insurance, the insurance limits, and the policy term, and shall specifically list the special provisions enumerated for such insurance required by this Section 6.2. Upon request, Lessee will promptly furnish Lessor with copies of all insurance certificates, binders, and cover notes or other evidence of such insurance relating to the Stanton Transmission Loop Assets.
(d) Concurrently with the furnishing of the certification referred to in Section 6.2(c) and on an annual basis thereafter, Lessee shall furnish Lessor with a certificate, signed by an officer of Lessee, stating that all premiums then due have been paid and that the insurance then carried or to be renewed is in accordance with the terms of this Section 6.2 and Exhibit C .
(e) In the event Lessee fails to take out or maintain the full insurance coverage required by this Section 6.2 and Exhibit C , Lessor, upon thirty (30) days’ prior notice (unless the aforementioned insurance would lapse within such period, in which event notice should be given as soon as reasonably possible) to Lessee of any such failure, may (but shall not be obligated to) take out the required policies of insurance and pay the premiums on the same. All amounts so advanced thereof by Lessor shall become an additional obligation of Lessee to Lessor, and Lessee shall forthwith pay such amounts to Lessor.
(f) No provision of this Section 6.2 or Exhibit C or any other provision of this Agreement shall impose on Lessor any duty or obligation to verify the existence or adequacy of the insurance coverage maintained by Lessee, nor shall Lessor be responsible for any representations or warranties made by or on behalf of Lessee to any insurance company or underwriter.
ARTICLE VII
REPORTING
7.1. Private Financing Arrangements . Lessee understands that Lessor, or an affiliate thereof, has raised equity and debt capital secured by the Stanton Transmission Loop Assets and this Agreement and that Lessor or its affiliates have reporting obligations in connection with such arrangements, including obligations to provide financial statements prepared in accordance with GAAP, to prepare an annual strategic plan and to update such annual strategic plan in the event of certain material deviations therefrom. Lessee understands that Lessor relies on Lessee in order to comply with such obligations. From time to time, Lessor or an affiliate thereof may enter into additional arrangements that impose similar obligations. Accordingly, Lessee agrees to provide Lessor in a timely manner audited year-end financial statements, quarterly unaudited financial statements for the first three quarters of each year (certified by a financial officer of Lessee), and such acknowledgements, certificates, permits, licenses, instruments, documents and other information as Lessor may reasonably request from time to time in connection with, or to enable Lessor and its affiliates to comply with any such debt or equity financing arrangements or with Applicable Law. The Parties will negotiate in good faith the time frames during which Lessee will provide such information, with the intention that Lessee provide such information in
 
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a manner that is not unduly burdensome but that also allows Lessor sufficient time to comply with its reporting obligations. Lessee will also cooperate with Lessor to enable Lessor to satisfy its obligations in respect of annual strategic plans, including providing Lessor with requested information in advance of the due date of such annual strategic plan and keeping Lessor apprised of deviations in capital expenditures, construction activity or revenues of Lessee from amounts that were originally provided by Lessee in preparing such annual strategic plan. Lessee agrees to use reasonable efforts to advise Lessor if Lessee will be unable to meet the reporting requirements set forth herein in a timely manner and to reasonably cooperate with Lessor to remedy the effects of such non-compliance.
7.2. Public Company and Regulatory Information and Cooperation.
(a) Lessee agrees to provide audited full-year and unaudited (but SAS 100 reviewed) interim financial statements and the consent of Lessee’s auditors to the inclusion of their opinion regarding such financial statements in filings with the Securities and Exchange Commission made by Lessor or an affiliate of Lessor. Lessor may also request that Lessee provide evidence of a SAS 100 review from Lessee’s auditors with respect to any unaudited interim financial statements included in any such filing. Lessor shall have the right to share any such financial statements with its lenders under the Debt Agreements. Lessee covenants that (i) such financial statements will fairly present in all material respects the financial condition, results of operations and cash flows of Lessee as of, and for, the periods presented, and (ii) Lessee will endeavor to cause such financial statements to comply with any applicable laws, rules or regulations that Lessee and Lessor conclude in good faith are applicable to such financial statements by virtue of their inclusion in the securities law filings of Lessor or an affiliate thereof.
(b) Lessee agrees that, in connection with any underwritten offering of the securities of Lessor or any affiliate thereof, Lessee will use commercially reasonable efforts to cause its auditors to provide a comfort letter (or its equivalent) to such underwriters, if requested by Lessor.
(c) Lessee agrees to cooperate with Lessor when Lessor or an affiliate provides estimates to analysts and or investors regarding Lessor’s expectations of its future operating results (including capital expenditures) and to cooperate with Lessor with respect to analysts and investors to the extent such expectations change in any material respect.
(d) Lessee and Lessor agree to reasonably cooperate to ensure that, to the extent they require information from the other party in order to prepare their financial statements, to obtain audits of those financial statements and, if required, of their internal control over financial reporting, to respond to comments of the Securities and Exchange Commission on such financial statements or statements related to internal control over financial reporting or disclosure controls and procedures, or to ensure the efficacy of their internal controls or disclosure controls and procedures, they will reasonably cooperate in order to ensure that each Party is able to meet its obligations in respect thereof. Lessee agrees to promptly notify Lessor of or provide to Lessor, as applicable, (i) any material communication, written or otherwise, submitted to the Lessee by its auditors, including, but not limited to an audit response letter, accountant’s management letter or other written report submitted to Lessee by its accountants or any governmental agency in connection with an annual or interim audit of Lessee’s books, (ii) any material correspondence with, reports of or reports to any Regulatory Authority with respect to the Stanton Transmission Loop Assets and (iii) any notices of violations of Applicable Law with respect to the Stanton Transmission Loop Assets, in each case taking into account the REIT’s reporting obligations as a public company.
 
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(e) Lessor agrees to inform Lessee of the time periods in which each of the items identified in this Section 7.2 will be required, which may change. Lessee agrees to use reasonable efforts to advise Lessor if Lessee will be unable to meet the reporting requirements set forth herein in a timely manner and to reasonably cooperate with Lessor to remedy the effects of such non-compliance.
(f) If Lessor identifies additional matters with respect to which Lessee input, assistance or information is required in order for Lessor and its affiliates to comply with any applicable securities laws, the rules or regulations of any exchange on which the securities of such affiliate are traded or any similar laws, rules or regulations, the Parties agree to cooperate and negotiate in good faith in order to determine the manner in which Lessee can provide such input, assistance or information in a manner that positions Lessor and its affiliates to comply in a timely manner with such laws, rules or regulations, as efficiently as is feasible so as to minimize the burden that the provision of such input, assistance or information imposes on Lessee.
7.3. Mutual Obligations . Each Party shall as promptly as reasonably practicable furnish or cause to be furnished to the other Party, upon request from such Party, such information as may be required to enable such Party to file any reports required to be filed with any governmental or Regulatory Authority due to such Party’s ownership interest in or operation and control of the Stanton Transmission Loop Assets, as applicable.
ARTICLE VIII
ASSIGNMENT
This Agreement shall not be assignable by either Party, nor shall the Stanton Transmission Loop Assets or any part thereof be subleased by Lessee, except with the prior written consent of the other Party and the prior approval of any Regulatory Authority whose approval is required for the effectiveness of such assignment or sublease. For purposes of this Article VIII, an “assignment” by Lessee shall mean and include, in addition to any direct transfer by Lessee to a third party of all or any part of Lessee’s rights, estate or interests under this Agreement, any direct or indirect, voluntary or involuntary transfer of or encumbrance on all or any part of Lessee’s rights, estate or interests under this Agreement (i) by operation of law and/or (ii) by direct or collateral transfer of all or any part of the legal or beneficial ownership interest in Lessee by merger, consolidation or otherwise, provided, in the case of clause (ii), any such transaction or transactions will only constitute an assignment hereunder to the extent they result in a Change of Control. Notwithstanding the foregoing, Lessor shall have the right, without Lessee’s consent but subject to obtaining regulatory approval as described in the foregoing sentence, (a) to assign, pledge or grant a security interest in any or all of its interest in this Agreement to a lender or lenders, or a trustee acting on behalf of such lenders, in connection with a financing or refinancing in which such interest is pledged as collateral, and Lessee agrees to enter into such acknowledgments and agreements in respect thereof as the Lessor may reasonably request and (b) to assign its interest in this Agreement to a successor owner of the Stanton Transmission Loop Assets.
 
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ARTICLE IX
DEFAULT
9.1. Lessee Default . Subject to Section 9.3, Lessee shall be in default in the event of any of the following:
(a) Except as provided in Section 9.1(g), Lessee’s failure to make any payment of Rent when due;
(b) Lessee (i) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes company action for the purpose of any of the foregoing;
(c) A court or a Regulatory Authority or other governmental agency of competent jurisdiction enters an order appointing, without consent by Lessee, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of Lessee or any such petition shall be filed against Lessee and such petition shall not be dismissed within 90 days;
(d) Any representation or warranty made by Lessee herein shall prove to have been inaccurate in any material respect at the time made;
(e) A final judgment or judgments for the payment of money aggregating in excess of $1,000,000 are rendered against Lessee and which judgments are not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay;
(f) Lessee shall have breached or failed to comply in any material respect with any other covenant or agreement contained herein; or
(g) Notwithstanding Section 9.1(a), Lessee’s failure to pay Rent when due shall not constitute a default if (i) such failure is due to unforeseeable circumstances arising from a physical event beyond the control of the Lessee, including the incurrence of costs and expenditures as a result of such an event that are materially in excess of budgeted costs and expenditures or an unforeseen material decline in electricity usage as a result of such an event and (ii) such failure is cured within ninety (90) days after the date such rent was due through Lessee’s payment of the entire amount of such unpaid Rent, plus interest thereon at a rate equal to six percent (6%) per annum or the maximum rate allowed by law, whichever is lesser, from the date such Rent was originally due until the date of payment.
 
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9.2. Lessor Default . Subject to Section 9.3, Lessor shall be in default in the event any representation or warranty made by Lessor herein shall prove to have been inaccurate in any material respect at the time made, or in the event Lessor breaches or fails to comply in any material respect with any covenant or agreement contained herein.
9.3. Right to Cure . If a Party (the “ Defaulting Party ”) defaults pursuant to an Event of Default, such Defaulting Party shall not be in default of the terms of this Agreement if (other than in the event of a default described in Sections 9.1(a), 9.1(b) and/or 9.1(c) above), (a) in the case of a Monetary Default, the Defaulting Party pays the past due amount within thirty (30) days of receiving a Notice of Default from the other Party (the “ Non-Defaulting Party ”), and (b) in the case of a Non-Monetary Default, the Event of Default is cured within forty-five (45) days of receiving the Notice of Default; provided, that if the nature of the Non-Monetary Default requires, in the exercise of commercially reasonable diligence, more than forty-five (45) days to cure then the Defaulting Party shall not be in default as long as it commences performance of the cure within forty-five (45) days and thereafter completes such cure with commercially reasonable diligence.
9.4. Remedies.
(a) Should an Event of Default remain uncured by the Defaulting Party, the Non-Defaulting Party shall have and shall be entitled to exercise the remedies provided in this Section 9.4 and any and all other remedies available to it at law or in equity, all of which remedies shall be cumulative; provided, that the exercise of any remedies hereunder shall be subject to the PUCT and other required regulatory approvals to the extent applicable.
(b) In no way limiting the provisions of Section 9.4(a), in the case of an Event of Default of Lessee, Lessor shall have the right to (i) terminate the Agreement upon notice to Lessee, and recover from Lessee all damages to which Lessor is entitled under Applicable Laws, (ii) terminate Lessee’s right to use and operate the Stanton Transmission Loop Assets while keeping this Agreement in effect, and recover from Lessee all damages to which Lessor is entitled under Applicable Laws, and (iii) take reasonable action to cure Lessee’s default at Lessee’s expense; provided, that in the event of a violation of Applicable Laws by Lessee, an emergency or government or regulatory action in respect of which Lessor, in its reasonable discretion, determines immediate action is necessary, Lessor shall have the right to step in and take such action on behalf of Lessee at Lessee’s cost and expense immediately upon giving notice to Lessee, notwithstanding any applicable cure period.
(c) Any amounts recovered by Lessor from Lessee in the event of a default shall, to the maximum extent permissible under Applicable Laws, be deemed to be in respect of past or future Rent owing under this Agreement.
 
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ARTICLE X
CAPITAL EXPENDITURES
Lessor shall not have any obligation to make Capital Expenditures for Footprint Projects to the Stanton Transmission Loop Assets under this Agreement. Capital Expenditures for Footprint Projects to the Stanton Transmission Loop Assets shall be covered by the Stanton/Brady/Celeste Lease (initially), or another lease to which Lessor and Lessee are party.
ARTICLE XI
REGULATORY COOPERATION
11.1. Jurisdiction . The Parties recognize that (i) the Stanton Transmission Loop Assets and the operation thereof are subject to the jurisdiction of the PUCT and to certain reliability and safety requirements of ERCOT, TRE and NERC, and (ii) Lessee holds a CCN for operation of the Stanton Transmission Loop Assets. The Parties agree that, as the lessee hereunder, as operator of the Stanton Transmission Loop Assets and as the holder of the CCN, Lessee shall be responsible for compliance with all regulatory requirements related to the Stanton Transmission Loop Assets, including but not limited to, taking all actions reasonably necessary or advisable to comply with such requirements; preparing and filing all necessary notices, reports, applications, and other materials with the PUCT, ERCOT, TRE and NERC; and initiating, prosecuting, defending or participating in any administrative or judicial proceeding reasonably necessary or advisable to operate the Stanton Transmission Loop Assets in an economical and efficient manner. Lessee shall consult with Lessor prior to initiating any rate proceeding with the PUCT to change the rates Lessee can lawfully charge, provided that, with or without Lessor consent, Lessee shall be authorized to initiate any such rate proceeding. Upon Lessor’s request, Lessee shall file a rate proceeding before the PUCT; provided that, Lessor shall be responsible for reimbursing Lessee for all costs associated with prosecution of such proceeding to the extent that such costs are not recoverable in Lessee’s PUCT-approved rates.
11.2. Cooperation . The Parties agree that during the term of this Agreement they will cooperate to assure compliance with all applicable regulations, orders or lawful requests of any governmental or Regulatory Authorities that relate to the Stanton Transmission Loop Assets and Lessee’s obligations as the holder of the CCN and will provide such information to such governmental and Regulatory Authorities as the other Party or such governmental or Regulatory Authorities may reasonably request in connection therewith. Lessor further agrees to use its best efforts to cooperate and promptly respond to any lawful requests from Lessee relating to Lessee’s efforts to comply with all regulatory requirements or to participate in any necessary or advisable legal proceedings, whether judicial or administrative. Each Party shall bear its own costs in complying with this paragraph.
ARTICLE XII
INDEMNITY
12.1. General Indemnity . EACH PARTY (THE “ INDEMNIFYING PARTY ”) SHALL DEFEND, INDEMNIFY AND HOLD HARMLESS THE OTHER PARTY AND THE OTHER PARTY’S RELATED PERSONS (EACH, AN “ INDEMNIFIED PARTY ”) FROM AND AGAINST ANY AND ALL CLAIMS, LITIGATION, ACTIONS, PROCEEDINGS, LOSSES, DAMAGES, LIABILITIES, OBLIGATIONS, COSTS AND EXPENSES, INCLUDING
 
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ATTORNEYS’, INVESTIGATORS’ AND CONSULTING FEES, COURT COSTS AND LITIGATION EXPENSES (COLLECTIVELY, “ CLAIMS ”) SUFFERED OR INCURRED BY SUCH INDEMNIFIED PARTY, EVEN IF SUCH LIABILITIES ARE CAUSED SOLELY OR IN PART BY THE NEGLIGENCE OF ANY INDEMNIFIED PARTY, ARISING FROM THE ACTS OR OMISSIONS TO ACT OF THE INDEMNIFYING PARTY (A) ARISING IN THE CASE OF THE LESSEE AS THE INDEMNIFYING PARTY, FROM THE OPERATION OF THE STANTON TRANSMISSION LOOP ASSETS, (B) FOR PHYSICAL DAMAGE TO THE STANTON TRANSMISSION LOOP ASSETS, TO THE EXTENT CAUSED BY THE INDEMNIFYING PARTY OR ANY RELATED PERSON THEREOF, (C) FOR PHYSICAL INJURIES OR DEATH (INCLUDING BY REASON OF OPERATING THE STANTON TRANSMISSION LOOP ASSETS) TO OR OF THE INDEMNIFIED PARTY OR THE PUBLIC, TO THE EXTENT CAUSED BY THE INDEMNIFYING PARTY OR ANY RELATED PERSON THEREOF, (D) ANY BREACH OF ANY COVENANT OR ANY FAILURE TO BE TRUE OF ANY REPRESENTATION OR WARRANTY, MADE BY THE INDEMNIFYING PARTY UNDER THIS AGREEMENT OR (E) THE NEGLIGENCE, RECKLESSNESS OR INTENTIONAL MISCONDUCT OF THE INDEMNIFYING PARTY OR ANY RELATED PERSON THEREOF; PROVIDED, HOWEVER, THAT IN NO EVENT SHALL THE INDEMNIFYING PARTY BE RESPONSIBLE FOR DEFENDING, INDEMNIFYING OR HOLDING HARMLESS ANY INDEMNIFIED PARTY TO THE EXTENT OF ANY CLAIM CAUSED BY, ARISING FROM OR CONTRIBUTED TO BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH INDEMNIFIED PARTY. AS USED HEREIN, THE TERM “ RELATED PERSON ” SHALL MEAN ANY AFFILIATES, CONTRACTORS, LESSEES, AND SUBLESSEES, AND EACH OF THEIR RESPECTIVE, PRINCIPALS, OFFICERS, EMPLOYEES, SERVANTS, AGENTS, REPRESENTATIVES, SUBCONTRACTORS, LICENSEES, INVITEES, GUESTS, SUCCESSORS AND/OR ASSIGNS OF A PARTY; PROVIDED, THAT IN NO EVENT SHALL A PARTY BE DEEMED A RELATED PERSON WITH RESPECT TO THE OTHER PARTY.
12.2. Environmental Indemnity.
(a) To the fullest extent permitted by law, Lessee shall defend, indemnify and hold harmless Lessor and Lessor’s Related Persons from Claims (including, without limitation, any costs and expenses of clean up or other mitigation) suffered or incurred by such persons resulting from any of the following occurring from and after the date on which Lessee assumed operational control over the Stanton Transmission Loop Assets: (i) the presence or release of Hazardous Materials in, under or about the Stanton Transmission Loop Assets which are or were brought or permitted to be brought onto the Stanton Transmission Loop Assets by the Lessee or Lessee’s Related Persons, (ii) creation of any hazardous or potentially hazardous environmental conditions or exacerbation of a pre-existing environmental condition, (iii) the violation of any Environmental Law by Lessee or Lessee’s Related Persons or (iv) any other failure to comply with Section 4.6 by Lessee or Lessee’s Related Persons.
(b) To the fullest extent permitted by law, Lessor shall defend, indemnify and hold harmless Lessee and Lessee’s Related Persons from Claims (including, without limitation, any costs and expenses of clean up or other mitigation) suffered or incurred by such persons resulting from (i) the presence or release of any Hazardous Material or hazardous or potentially hazardous
 
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condition in, under or about the Stanton Transmission Loop Assets that was present in, under or about the Stanton Transmission Loop Assets as of the date Lessee assumed operational control over the Stanton Transmission Loop Assets (except to the extent such existing Hazardous Material or condition is exacerbated by Lessee or Lessee’s Related Persons), (ii) the presence or release of Hazardous Materials in, under or about the Stanton Transmission Loop Assets which are or were brought or permitted to be brought onto the Stanton Transmission Loop Assets by Lessor or Lessor’s Related Persons during construction of any improvement or addition to the Stanton Transmission Loop Assets, (iii) the violation of any Applicable Law by Lessor or Lessor’s Related Persons, or (iv) testing conducted under Section 4.6 by Lessor or Lessor’s Related Persons.
ARTICLE XIII
MISCELLANEOUS
13.1. Limitation of Damages . NEITHER PARTY SHALL BE LIABLE FOR ANY LOST OR PROSPECTIVE PROFITS, AND IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY OTHER SPECIAL, PUNITIVE, EXEMPLARY, CONSEQUENTIAL, INCIDENTAL OR INDIRECT LOSSES OR DAMAGES (IN TORT, CONTRACT OR OTHERWISE) UNDER OR IN RESPECT OF THIS AGREEMENT OR FOR ANY FAILURE OF PERFORMANCE RELATED HERETO, HOWSOEVER CAUSED.
13.2. Condemnation . In the case of a condemnation or taking, this Agreement shall continue in effect; provided, that this Agreement shall terminate if 75% or more of the Stanton Transmission Loop Assets are subject to the condemnation or taking. Lessor shall be entitled to all sums received by reason of any such taking or condemnation, except for that portion of such award, if any, which is expressly awarded for the Lessee’s leasehold interest under this Agreement or which is awarded for any property owned by Lessee (including any Footprint Projects funded by Lessee).
13.3. Confidentiality . To the full extent allowed by Applicable Law, each Party (the “ Receiving Party ”) shall maintain, for the benefit of the other Party (the “ Disclosing Party ”), in the strictest confidence all information pertaining to the financial terms of or payments under this Agreement, the Disclosing Party’s methods of operation, methods of the system, and the like, whether disclosed by the Disclosing Party or discovered by the Receiving Party, unless such information either (i) is in the public domain by reason of prior publication through no act or omission of the Receiving Party or its employees or agents, (ii) was already known to the Receiving Party at the time of disclosure and which the Receiving Party is free to use or disclose without breach of any obligation to any person or entity or (iii) is required to be disclosed by the PUCT or other Regulatory Authorities, or must be disclosed in accordance with applicable securities laws or the rules of any applicable securities exchange on which the securities of the Receiving Party (or an affiliate thereof) are traded. To the full extent permitted by law, neither Party shall use such information for its own benefit, publish or otherwise disclose it to others, or permit its use by others for their benefit or to the detriment of the other Party. Notwithstanding the foregoing, the Receiving Party may disclose such information to any auditor or to the Receiving Party’s equity investors, lenders, attorneys, accountants and other personal advisors; any prospective purchaser of the Stanton Transmission Loop Assets; or pursuant to lawful process, subpoena or court order; provided the Receiving Party, in making such disclosure, advises the Party receiving the information of the confidentiality of the information and obtains the agreement of said Party not to disclose the information.
 
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13.4. Successors and Assigns . The Agreement shall inure to the benefit of and be binding upon Lessor and Lessee and, to the extent provided in any assignment or other transfer under Article VIII hereof, any assignee, and their respective heirs, transferees, successors and assigns, and all persons claiming under them. References to Lessee in this Agreement shall be deemed to include assignees that hold a direct ownership interest in this Agreement and actually are exercising rights under this Agreement to the extent consistent with such interest.
13.5. Rent Obligations Not Excused by Force Majeure, Etc. . Lessee shall not be excused from its obligation to pay Rent during any Force Majeure Event or a condemnation or casualty of all or any part of the Stanton Transmission Loop Assets.
13.6. Further Assurances; Policies and Procedures.
(a) Each Party will, from time to time, execute, cause to be acknowledged and deliver such documents or instruments, and provide such certificates, as the other Party may reasonably request to carry out and fulfill the transactions, and permit the exercise and performance of the rights and obligations, as are contemplated hereunder. Each Party will cooperate with the other Party to effectuate fully the purposes and intent of this Agreement. In no way limiting the foregoing, the Parties shall cooperate to obtain any necessary regulatory approvals, including, without limitation, providing timely responses to discovery requests, participating in regulatory proceedings to the extent necessary and generally providing assistance as required.
(b) From time to time, the Parties shall agree to policies and procedures regarding matters arising under this Agreement including, without limitation, each Party’s reporting obligations and such additional matters as the Parties may identify (the “Policies and Procedures”). The Parties agree to cooperate and negotiate in good faith the Policies and Procedures, and any amendment or revision thereto that may be reasonably requested by either Party, and to memorialize the same in a writing executed by a representative of each Party. In the event the Parties cannot agree on the terms of such Policies and Procedures after 60 days of negotiating in good faith, then either the Lessee or the Lessor may submit such matters to arbitration pursuant to Section 13.7 of this Agreement, pursuant to which the Arbitration Panel shall be empowered to determine Policies and Procedures that take into account the REIT’s reporting obligations as a public company and Lessee’s obligations as a regulated utility.
13.7 . Arbitration . Except for a dispute regarding the payment of Undisputed Rent, any dispute under this Agreement shall, if not resolved by the Parties within ninety (90) days after notice of such dispute is served by one Party to the other (or, if different, the period provided for resolution by the Parties in the provision of this Agreement under which such dispute is brought), be submitted to an “ Arbitration Panel ” comprised of three (3) members. No more than one (1) panel member may be with the same firm, and no panel member may have an economic interest in the outcome of the arbitration. In addition to the foregoing, the failure by the Lessee and the Lessor to reach an agreement or make a mutual determination or characterization required by Section 2.2(b) (with respect to the determination of Extended Period Rent) or 13.6(b) (with respect to the determination of the Policies and Procedures) after 60 days of negotiating in good faith, shall be deemed to be a “dispute” for purposes of this Section 13.7, to be resolved in accordance with this Section.
 
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(a) The Arbitration Panel shall be selected as follows: Within five (5) Business Days after the expiration of the period referenced above, Lessee shall select its panel member meeting the criteria of the above paragraph (the “Lessee Panel Member”) and Lessor shall select its panel member meeting the criteria of the above paragraph (the “Lessor Panel Member”). If a Party fails to timely select its respective panel member, the other Party may notify such Party in writing of such failure, and if such Party fails to select its respective panel member within three (3) Business Days from such notice, then the other Party may select such panel member on such Party’s behalf. Within five (5) Business Days after the selection of the Lessor Panel Member and the Lessee Panel Member, the Lessee Panel Member and the Lessor Panel Member shall jointly select a third panel member meeting the criteria of the above paragraph (the “Third Panel Member”). If the Lessor Panel Member and the Lessee Panel Member fail to timely select the Third Panel Member and such failure continues for more than three (3) Business Days after written notice of such failure is delivered to the Lessor Panel Member and Lessee Panel Member by either Lessor or Lessee, either Lessor or Lessee may request the managing officer of the American Arbitration Association to appoint the Third Panel Member.
(b) Within ten (10) Business Days after the selection of the Arbitration Panel, each Party shall submit to the Arbitration Panel a written statement identifying its summary of the issues and claims, including, if applicable, its calculation of Rent. Any Party may also request an evidentiary hearing on the merits in addition to the submission of written statements. The Arbitration Panel shall make its decision within twenty (20) days after the later of (i) submission of such written statements of particulars and (ii) the conclusion of any evidentiary hearing on the merits, and shall take into consideration the relative risks and rewards undertaken and capital invested by each Party and shall use the Comparable Rate of Return concept described in Section 3.2(a) of the McAllen Lease in determining any Rent disputes. The Arbitration Panel shall reach its decision by majority vote and shall communicate its decision by written notice to the Parties.
(c) The decision by the Arbitration Panel shall be final, binding and conclusive and shall be non-appealable and enforceable in any court having jurisdiction. All hearings and proceedings held by the Arbitration Panel shall take place in Dallas, Texas.
(d) The resolution procedure described herein shall be governed by the Commercial Rules of the American Arbitration Association and subject to the Texas General Arbitration Act to the extent such act is applicable hereto.
(e) In the case of an arbitration proceeding involving a determination of Rent, until Rent has been finally determined, Lessee shall pay Rent based upon prevailing rates therefor, and an appropriate refund shall be made to or additional Rent shall be paid by Lessee within ten (10) days after a final determination is made.
(f) The Parties shall bear equally the fees, costs and expenses of the Arbitration Panel in conducting the arbitration.
13.8 . Notices . All notices or other communications required or permitted by this Agreement, including payments to Lessor, shall be in writing and shall be served personally or by reputable express courier service or by facsimile transmission addressed to the relevant parties at the address stated below or at any other address notified by that Party to the other as its
 
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address for service. Any notice so given personally shall be deemed to have been served on delivery, any notice so given by express courier service shall be deemed to have been served the next Business Day after the same shall have been delivered to the relevant courier, and any notice so given by facsimile transmission shall be deemed to have been served on dispatch. As proof of such service it shall be sufficient to produce a receipt showing personal service, the receipt of a reputable courier company showing the correct address of the addressee or an activity report of the sender’s facsimile machine showing the correct facsimile number of the parties on whom notice is served and the correct number of pages transmitted. All communications, other than routine correspondence in the ordinary course of business, between the Parties pursuant to this Agreement shall be sent by the same method of communication by the Party sending the communication. The Parties’ addresses for service are:
If to Lessor:
SDTS FERC, L.L.C.
1807 Ross Avenue, 4 th Floor
Dallas, Texas 75201
Attention: Chief Executive Officer and General Counsel
If to Lessee:
SU FERC, L.L.C.
1807 Ross Avenue, 4 th Floor
Dallas, Texas 75201
Attention: Hunter Hunt
With a copy to:
General Counsel
Fax: (214) 855-6965
Any Party may change its address for purposes of this paragraph by giving written notice of such change to the other parties in the manner provided in this paragraph.
13.9. Entire Agreement; Amendments . This Agreement constitutes the entire agreement between Lessor and Lessee respecting its subject matter, and supersedes any and all oral or written agreements. Any agreement, understanding or representation respecting the Stanton Transmission Loop Assets, or any other matter referenced herein not expressly set forth in this Agreement or a subsequent writing signed by both Parties is null and void. This Agreement shall not be modified or amended except in a writing signed by both Parties. No purported modifications or amendments, including without limitation any oral agreement (even if supported by new consideration), course of conduct or absence of a response to a unilateral communication, shall be binding on either Party.
13.10. Legal Matters . This Agreement shall be governed by and interpreted in accordance with the laws of the State of Texas, without regard to its conflicts of law principles. The parties agree that any rule of construction to the effect that ambiguities are to be resolved in favor of either Party shall not be employed in the interpretation of this Agreement and is hereby waived.
 
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13.11. Partial Invalidity . Should any provision of this Agreement be held, in a final and unappealable decision by a court of competent jurisdiction, to be either invalid, void or unenforceable, the remaining provisions hereof shall remain in full force and effect, unimpaired by the holding.
13.12. Recording . Lessee shall not record this Agreement without the prior written consent of the Lessor. Lessee may record at its expense a memorandum of this Agreement in form and substance reasonably approved by Lessor.
13.13. Intention of Parties; True Lease . The Parties hereby declare that their relationship in and to the Stanton Transmission Loop Assets is and will be that of lessor and lessee, expressly subject to the terms, conditions, limitations and requirements set forth in this Agreement. Nothing contained in this Agreement will be deemed to constitute the Parties as partners or joint venturers or as principal and agent. The Parties intend for this Agreement to constitute a true lease with respect to the Stanton Transmission Loop Assets for US Federal, state and local income tax purposes, and each Party shall treat the Agreement as a true lease with respect to the Stanton Transmission Loop Assets for federal income tax reporting purposes.
The Parties acknowledge that Lessor is owned, directly or indirectly, in whole or in part by an entity intending to qualify as a real estate investment trust under the Internal Revenue Code of 1986, as amended, and the Parties agree to negotiate in good faith any modification or amendment to this Agreement requested by Lessor to facilitate such qualification; provided that Lessee shall not be obligated to agree to any such modification or amendment if such modification or amendment would materially adversely affect Lessee or would be in conflict with Applicable Law or any regulations or orders of any Regulatory Authority.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
 
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IN WITNESS WHEREOF, Lessor and Lessee, acting through their duly authorized representatives, have executed this Agreement with the intent that it be effective as of the Effective Date, and certify that they have read, understand and agree to the terms and conditions of this Agreement.

LESSOR:	
	
SDTS FERC, L.L.C.	
		
By:	 	/s/ Brant Meleski	
Name:	 	Brant Meleski	
Title:	 	Senior Vice President and	
	 	Chief Financial Officer	
	
LESSEE:	
	
SU FERC, L.L.C.	
		
By:	 	/s/ Mark Caskey	
Name:	 	Mark Caskey	
Title:	 	President	
Signature Page to Stanton Transmission Loop Lease Agreement

APPENDIX A
DEFINITIONS
“ 2009 Note Purchase Agreement ” has the meaning set forth in Section 4.13.
“ 2010 Note Purchase Agreement ” has the meaning set forth in Section 4.13.
“ Additional Rent ” has the meaning set forth in Section 3.2.
“ Agreement ” has the meaning set forth in the Preamble.
“ Applicable Laws ” means all laws, ordinances, statutes, orders and regulations of any federal, state, or local government, regulatory or administrative authority, any agency or commission thereof, or any court or tribunal, including without limitation all requirements of the Regulatory Authorities.
“ Arbitration Panel ” has the meaning set forth in Section 13.7.
“ Base Rent ” has the meaning set forth in Section 3.1(b).
“ Business Day ” means a day other than a Saturday, Sunday or other day on which federal agencies are authorized or required by law to close.
“ Capital Expenditures ” means expenditures that are or are expected to be capitalized under GAAP.
“ CCN ” means a Certificate of Convenience and Necessity or amendment thereto issued by the PUCT.
“ Change in Control ” means Hunt Family Members cease to possess, directly or indirectly, the power to direct or cause the direction of the management or policies of Sharyland, whether through the ability to exercise voting power, by contract or otherwise.
“ Claims ” has the meaning set forth in Section 12.1.
“ Consolidated Net Plant ” means, with respect to any Person, as of the date of determination, the net plant set forth on the face of the consolidated balance sheet of such Person or absent such amount on the consolidated balance sheet, the total plant of such Person on a consolidated basis minus accumulated depreciation as set forth in the footnotes of the consolidated financial statements, in each case, for the fiscal quarter ended on the date of the last financial statements delivered pursuant to Section 7.1 of the Credit Agreement.
“ Consolidated Qualified Lessee ” means any Qualified Lessee that is consolidated into the financial statements of another Qualified Lessee.
 
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Appendix A – Page 1

“ Credit Agreement ” has the meaning set forth in Section 4.13.
“ CREZ Lease ” means the Second Amended and Restated Lease Agreement (CREZ Assets) between Sharyland Projects, L.L.C. and Sharyland effective as of the Effective Date, as the same may be amended from time to time.
“ Debt Agreements ” has the meaning set forth in Section 4.13.
“ Defaulting Party ” has the meaning set forth in Section 9.3.
“ Disclosing Party ” has the meaning set forth in Section 13.3.
“ Effective Date ” has the meaning set forth in the Preamble.
“ Entity ” means any general partnership, limited partnership, proprietorship, corporation, joint venture, joint stock company, limited liability company, limited liability partnership, business trust, estate, governmental entity, cooperative, association or other foreign or domestic enterprise.
“ Environmental Law ” means any and all Legal Requirements regulating, relating to or imposing liability or standards of conduct concerning protection of natural resources or the environment, or environmental impacts on human health as now or may at any time hereafter be in effect.
“ ERCOT ” means the Electric Reliability Council of Texas, or its successors.
“ ERCOT Transmission Lease ” means the Lease Agreement (ERCOT Transmission Assets) between SDTS and Sharyland effective as of the Effective Date, as the same may be amended from time to time.
“ Event of Default ” means an event described in Section 9.1 or Section 9.2.
“ Extended Period Rent ” means Rent that applies during any extended period of operatorship beyond the Term, which will be negotiated using the Comparable Rate of Return methodology set forth in Article III of the McAllen Lease.
“ FERC ” means the Federal Energy Regulatory Commission, or its successors.
“ FERC Lease Agreement ” has the meaning set forth in the Recitals.
“ Footprint Project ” means a business, project or assets relating primarily to the transmission and/or distribution of electricity that are (i) (A) located in the distribution service territory of the Stanton Transmission Loop Assets or (B) transmission assets that are added to an existing transmission substation that comprises a part of the Stanton Transmission Loop Assets or hang from transmission towers that comprise a part of the Stanton Transmission Loop Assets and (ii) funded by expenditures that are or are expected to be capitalized under GAAP and that are within the items described in Section 1.1(b)(i)-(v) (specifically excluding Section 1.1(b)(vi)).
 
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“ Force Majeure Event ” means, except to the extent resulting from the action or inaction of Lessee or within the control of Lessee, fire, earthquake, hurricane, flood, or other casualty or accident; strikes or labor disputes; war, civil strife or other violence; any law, order, proclamation, regulation, ordinance, action, demand or requirement of any government agency or utility; or any other act or condition beyond the reasonable control of Lessee.
“ GAAP ” means generally accepted accounting principles in effect in the United States of America.
“ Good Utility Practice ” shall be as defined from time to time by PUCT and, as of the date hereof, means any of the practices, methods, and acts engaged in or approved by a significant portion of the electric utility industry during the relevant time period, or any of the practices, methods, and acts that, in the exercise of reasonable judgment in light of the facts known at the time the decision was made, could have been expected to accomplish the desired result at a reasonable cost consistent with good business practices, reliability, safety, and expedition. Good utility practice is not intended to be limited to the optimum practice, method, or act, to the exclusion of all others, but rather is intended to include acceptable practices, methods, and acts generally accepted in the region.
“ Hazardous Materials ” means (A) any substance which is listed, defined, designated or classified under any Applicable Law as a (i) hazardous material, substance, constituent or waste, (ii) toxic material, substance, constituent or waste, (iii) radioactive material, substance, constituent or waste, (iv) dangerous material, substance, constituent or waste, (v) pollutant, (vi) contaminant, or (vii) special waste; (B) any material, substance, constituent or waste regulated under any Applicable Laws; or (C) petroleum, petroleum products, radioactive matters, polychlorinated biphenyl, pesticides, asbestos or asbestos-containing materials.
“ Hunt Family Members ” means (i) Ray L. Hunt; (ii) the spouse of Ray L. Hunt and each of his children and siblings; (iii) the spouse and lineal descendants of any Person identified in the foregoing clause (ii); (iv) any trust or account primarily for the benefit of any Person or Persons identified in the foregoing clauses (i), (ii) or (iii); (v) any corporation, partnership or other Entity in which any of the Persons identified in the foregoing clauses (i), (ii), (iii) or (iv) are the beneficial owners of substantially all of the shares of capital stock, membership interests, partnership interests or other equity interests and options or warrants to acquire, or securities convertible into, capital stock, membership interests, partnership interests or other equity securities of an Entity; and (vi) the personal representative or guardian of any of the Persons identified in the foregoing clauses (i), (ii) and (iii) upon such Person’s death for purposes of the administration of such Person’s estate or upon such Person’s disability or incompetency for purposes of the protection and management of the assets of such Person.
“ Indebtedness ” with respect to any Person means, at any time, without duplication (a) its liabilities for borrowed money and its redemption obligations in respect of mandatorily redeemable preferred stock; (b) its liabilities for the deferred purchase price of property acquired by such Person (excluding accounts payable arising in the ordinary course of business but including all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property); (c)(i) all liabilities appearing on its balance sheet
 
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Appendix A – Page 3

prepared in accordance with GAAP in respect of capital leases; and (ii) all liabilities which would appear on its balance sheet in accordance with GAAP in respect of Synthetic Leases assuming such Synthetic Leases were accounted for as capital leases; provided, however, that for purposes of this definition (including with respect to clauses (i) and (ii) hereof), (x) this Agreement and any similar lease between Lessor (or any subsidiary) and Lessee and (y) any lease between Lessee and any of its wholly-owned subsidiaries shall not be treated as a capital lease; (d) all liabilities for borrowed money secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities); (e) all of its liabilities in respect of letters of credit or instruments serving a similar function issued or accepted for its account by banks and other financial institutions (whether or not representing obligations for borrowed money), provided, however, that for purposes of this definition, any surety bonds or indemnification agreements entered into by Lessee (with respect to which Lessee or a subsidiary has a reimbursement or backstop obligation) in connection with condemnation proceedings shall be excluded; (f) the aggregate Swap Termination Value of all Swap Contracts of such Person; and (g) any guaranty of such Person with respect to liabilities of a type described in any of clauses (a) through (f) hereof. Indebtedness of any Person shall include all obligations of such Person of the character described in clauses (a) through (g) to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is deemed to be extinguished under GAAP.
“ Indemnified Party ” has the meaning set forth in Section 12.1.
“ Indemnifying Party ” has the meaning set forth in Section 12.1.
“ Initial Term ” has the meaning set forth in Section 2.1.
“ Lease ” or “ Leases ” means (i) this Agreement, the McAllen Lease, the Stanton/Brady/Celeste Lease, the CREZ Lease and the ERCOT Transmission Lease and any other leases of transmission and distribution and related assets to a Qualified Lessee under which Lessor or any subsidiary of Lessor is a party as a lessor, and (ii) any lease of transmission and distribution and related assets pursuant to which Lessee is the lessee and a subsidiary of Lessee or another Person controlled by one or more Hunt Family Members is the lessor; provided , no such lease will qualify as a “Lease” hereunder if each of the three following criteria apply: (x) Lessee is the lessee, (y) cash rental payments have become due and payable pursuant thereto and (z) none of Lessor, a subsidiary of Lessor or a subsidiary of Lessee is the lessor.
“ Lease Year ” means each calendar year during the Term of this Agreement.
“ Leased Consolidated Net Plant ” means that portion of the Consolidated Net Plant of the lessor of a Lease between such lessor and a Qualified Lessee that is the subject of such Lease.
“ Legal Requirements ” means, as to any Person, the certificate of incorporation and by-laws, limited liability company agreement, partnership agreement or other organizational or governing documents of such Person, any law (including common law), statute, code, treaty, rule, regulation, ordinance including any government rule or determination of an arbitrator a court or other government authority, or any requirement under a Permit, in each case applicable to or binding upon such Person or any of its properties or to which such Person or any of its property is subject.
 
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“ Lessee ” has the meaning set forth in the Preamble.
“ Lessee Panel Member ” has the meaning set forth in Section 13.7(a).
“ Lessee Taxes ” has the meaning set forth in Section 4.3.
“ Lessor ” has the meaning set forth in the Preamble.
“ Lessor Panel Member ” has the meaning set forth in Section 13.7(a).
“ Lessor Taxes ” has the meaning set forth in Section 4.3.
“ Liens ” has the meaning set forth in Section 5.2.
“ McAllen Lease ” means the Third Amended and Restated Master System Lease Agreement (McAllen System) between SDTS and Sharyland effective as of the Effective Date, as the same may be amended from time to time.
“ Monetary Default ” means the failure to pay when due any amounts payable under this Agreement.
“ NERC ” means North American Electric Reliability Corporation, or its successors.
“ Non-Defaulting Party ” has the meaning set forth in Section 9.3.
“ Non-Monetary Default ” means an Event of Default other than a Monetary Default.
“ Non-Recourse Debt ” means Indebtedness of a subsidiary of Lessee that, if secured, is secured solely by a pledge of collateral owned by such subsidiary and the equity interests in such subsidiary, and for which no Person other than such subsidiary is personally liable.
“ Nonseverable Footprint Projects ” means those Footprint Projects that cannot be readily removed from the Stanton Transmission Loop Assets without causing diminution in value to the Stanton Transmission Loop Assets.
“ Note Purchase Agreements ” has the meaning set forth in Section 4.13.
“ Notice of Default ” means written notice of the Event of Default.
“ Overdue Rate ” means a rate equal to ten percent (10%) per annum or the maximum rate allowed by law, whichever is lesser.
“ Party ” or “ Parties ” has the meaning set forth in the Preamble.
 
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“ Permitted Liens ” means
 
 	(i)	The Liens granted by the Lessor to any lender or trustee for any lender which finances the Lessor’s interest in the Stanton Transmission Loop Assets;	
 
 	(ii)	Liens imposed by any Governmental Authority for any tax, assessment or other charge relating to Stanton Transmission Loop Assets to the extent not yet past due or being contested in good faith and by appropriate proceedings;	
 
 	(iii)	mechanics’, warehousemen’s, carriers’, workers’, repairers’, landlords’, and other similar liens arising or incurred in the ordinary course of business and (i) which do not in the aggregate materially detract from the value of property or assets subject to such Liens or materially impair the continued use thereof in the operation of the Stanton Transmission Loop Assets or (ii) which are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property or asset subject to such Liens and for which cash reserves consistent with GAAP have been established on the books of Lessee or Lessor, or other Liens incurred or deposits made in the ordinary course of business in connection with workers’ compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, trade contracts, leases, government contracts, performance and return-of-money bonds and other similar obligations incurred in the ordinary course of business (exclusive of obligations in respect of the payment for borrowed money);	
 
 	(iv)	Liens arising out of judgments or awards so long as an appeal or proceeding for review is being prosecuted in good faith and for the payment of which adequate cash reserves consistent with GAAP have been established on the books of Lessee or Lessor, bonds or other security acceptable to the Lessor in its reasonable discretion have been provided or are fully covered by insurance;	
 
 	(v)	zoning, entitlement, restriction, and other land use and environmental regulations by governmental authorities and encroachments, easements, rights of way, covenants, restrictions or agreements which do not materially interfere with the continued use of any asset as currently used in the conduct of the business of the Lessee;	
 
 	(vi)	any encumbrances set forth in any franchise or governing ordinance under which any portion of the business of the Lessee is conducted and which could not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the operation of the Stanton Transmission Loop Assets; and	
 
 	(vii)	all rights of condemnation, eminent domain, or other similar right of any person.	
 
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“ Person ” means any natural person, corporation, limited liability company, partnership, firm, association, government authority or other entity whether acting in an individual, fiduciary or other capacity.
“ Personal Property ” means all assets, or rights therein, related to or used in connection with the Stanton Transmission Loop Assets, other than assets of the type and nature described in Section 1.1(b)(i)-(v).
“ Policies and Procedures ” has the meaning set forth in Section 13.6(b).
“ PUCT ” means the Public Utility Commission of Texas or its successors.
“ Qualified Lessee ” means Lessee and/or any other utility that is (x) approved or authorized by the applicable public utility commission or similar regulatory authority to operate and/or lease the transmission and/or distribution assets of Lessor or any subsidiary and (y) a party to a then-effective lease agreement with Lessor or a subsidiary thereof pursuant to which such utility leases and operates such entity’s transmission and/or distribution assets
“ Receiving Party ” has the meaning set forth in Section 13.3.
“ REIT ” has the meaning set forth in the Recitals.
“ REIT IPO ” has the meaning set forth in the Recitals.
“ Regulatory Authority ” means the PUCT, ERCOT, SPP, TRE, NERC and any other governmental agency with jurisdiction over Lessee, Lessor or the Stanton Transmission Loop Assets.
“ Related Person ” has the meaning set forth in Section 12.1.
“ Renewal Term ” has the meaning set forth in Section 2.1.
“ Rent ” means the sum of Base Rent, Additional Rent and Extended Period Rent.
“ Repairs ” means all replacements, repairs or remedial activity undertaken directly on a then-existing portion of the Stanton Transmission Loop Assets that are not Footprint Projects and that are expensed and not capitalized under GAAP.
“ SDTS ” means Sharyland Distribution & Transmission Services, L.L.C., which is the sole member of Lessor.
“ Severable Footprint Projects ” means any Footprint Projects that can be readily removed from the Stanton Transmission Loop Assets without causing diminution in value to the Stanton Transmission Loop Assets.
“ Sharyland ” means Sharyland Utilities, L.P., which is the sole member of Lessee.
 
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“ SPP ” means the Southwest Power Pool.
“ Stanton/Brady/Celeste Lease ” means the Second Amended and Restated Lease Agreement (Stanton/Brady/Celeste Assets) between SDTS and Sharyland effective as of the Effective Date, as the same may be amended from time to time.
“ Stanton Service Territory ” means the area around Stanton, Texas in which Lessee as a regulated utility is required to supply electric service to its customers.
“ Stanton Transmission Loop Assets ” has the meaning defined in the Recitals and Section 1.1(a).
“ Swap Contract ” means (a) any and all interest rate swap transactions, basis swap transactions, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward foreign exchange transactions, cap transactions, floor transactions, currency options, spot contracts or any other similar transactions of any of the foregoing (including, without limitation, any options to enter into any of the foregoing), and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc. or any International Foreign Exchange Master Agreement.
“ Swap Termination Value ” means, in respect of one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a), the amount(s) determined as the mark-to-market value(s) for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts.
“ Synthetic Lease ” means, at any time, any lease (including a lease that may be terminated by the lessee at any time) of any property by a Person (a) that is accounted for as an operating lease under GAAP and (b) in respect of which the lessee retains or obtains ownership of the property so leased for U.S. federal income tax purposes, other than any lease under which such Person is the lessor.
“ Term ” has the meaning set forth in Section 2.1.
“ Third Panel Member ” has the meaning set forth in Section 13.7(a).
“ TRE ” means the Texas Reliability Entity, or its successor entity.
“ TRS ” means taxable REIT subsidiary.
 
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“ Undisputed Rent ” means the greater of (i) the undisputed amount of Rent the Parties agree is due and payable and (ii) during the term of the Debt Agreements, the amount necessary, when taken together with Rent payments made by Lessee to Lessor under other leases between the Parties, required for Lessor to comply with the covenants set forth in Section 9.08 of the 2009 Note Purchase Agreement, Section 9.8 of the 2010 Note Purchase Agreement and Section 7.10 of the Credit Agreement.
 
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EXHIBIT A
Stanton Transmission Loop Assets Area
 
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Exhibit A – Page 1

 
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Exhibit A – Page 2

 
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Exhibit A – Page 3

EXHIBIT B
SUBORDINATED DEBT TERMS
Reference is made to that certain Second Amended and Restated Collateral Agency Agreement (as amended, restated, supplemented or otherwise modified, the “ Collateral Agency Agreement ”), to be entered into by and among The Bank of New York Mellon Trust Company, N.A., as collateral agent (together with its successors and assigns, the “ Collateral Agent ”), Sharyland Distribution & Transmission Services, L.L.C., a Texas limited liability company (the “ Company ”), and the holders of the Permitted Secured Indebtedness (as defined therein) from time to time party thereto.
Section 1. Definitions and Rules of Interpretation . Capitalized terms used herein without definition shall have the meanings assigned to such terms in the Collateral Agency Agreement. The rules of interpretation set forth in Schedule A of the Collateral Agency Agreement shall apply to this Exhibit B as if fully set forth herein. In addition, the following terms shall have the following meanings:
 
1.1	“ Entitled Party ” shall mean the Company unless the Collateral Agent or the Company has given notice to the Subordinated Lender that the Collateral Agent has, on behalf of the Secured Parties and pursuant to the Collateral Agency Agreement or related documents, properly exercised its remedies to foreclose on the Company’s interest in any System Lease and receive payments pursuant to any System Lease directly from Sharyland, in which case the Entitled Party shall mean the Collateral Agent, acting for the benefit of the Secured Parties.	
 
1.2	“ Governmental Authority ” shall mean	
 
 	(a)	the government of:	
 
 	(i)	The United States of America or any State or other political subdivision thereof, or	
 
 	(ii)	any other jurisdictions in which the Company conducts all or any part of its business, or which asserts jurisdiction over any properties of the Company, or	
 
 	(b)	any entity exercising executive, legislative, judicial, taxing, regulatory or administrative functions of, or pertaining to, any such government, or	
 
 	(c)	the Electric Reliability Council of Texas or any successor thereto (“ ERCOT ”), or	
 
 	(d)	the Texas Regional Entity.	
 
1.3	“ Insolvency Event ” means the occurrence of any of the following:	
 
 	(a)	Sharyland (i) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the	
 
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Exhibit B – Page 1

 	filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes a corporate action for the purpose of any of the foregoing; or	
 
 	(b)	a court or Governmental Authority of competent jurisdiction enters an order appointing, without consent by Sharyland, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of Sharyland or any such petition shall be filed against Sharyland and such petition shall not be dismissed within 60 days.	
 
1.4	“ Reorganization Securities ” shall mean any debt or equity securities issued on account of all or any portion of the Subordinated Indebtedness in connection with an Insolvency Event that are in each case subordinated in liquidation to the Obligations (or any debt or equity securities issued on account of any Obligations) to at least the same extent that the Subordinated Indebtedness are subordinated to the Obligations hereunder.	
 
1.5	“ Sharyland ” shall mean SU FERC, L.L.C.	
 
1.6	“ Subordinated Indebtedness ” shall mean, with respect to Sharyland, Indebtedness (as defined under the applicable Financing Agreement or such other similar term) that is incurred in accordance with the terms of such Financing Agreement and is required to be subordinated to the applicable Obligations.	
 
1.7	“ Subordinated Lenders ” shall mean each and every Person to whom any of the Subordinated Indebtedness are owed.	
 
1.8	“ Subordinated Loan Documents ” shall mean all documentation evidencing the Subordinated Indebtedness.	
 
1.9	“ System Leases ” shall mean any and all leases of transmission and distribution and related assets pursuant to which Sharyland is the lessee and the Company or any Subsidiary of the Company is a party as a lessor, and supplements thereto, each as amended, restated, supplemented or otherwise modified from time to time, or any new lease entered into in replacement thereof.	
 
1.10	“ System Lease Obligations ” shall mean any and all Rent or other similar term (as such term is defined in the System Leases) then due and payable under the System Leases.	
 
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Exhibit B – Page 2

1.11	“ Texas Regional Entity ” shall mean the division of ERCOT authorized to develop, monitor, assess and enforce compliance with NERC Reliability Standards within geographic boundaries of ERCOT and any successor thereto.	
Section 2. Subordination of Subordinated Indebtedness . Until the indefeasible payment in full in cash of all the Obligations and the termination of any commitments to lend under any Permitted Secured Indebtedness, the Subordinated Lenders and Sharyland hereby agree that (i) all Subordinated Indebtedness is and shall be subordinated in right of liquidation in relation to all System Lease Obligations to the extent and in the manner hereinafter set forth, (ii) upon the occurrence and during the continuance of any default or event of default under any System Lease (or if after giving effect to a proposed distribution in respect of any part of the Subordinated Indebtedness, a default or event of default under any System Lease will exist), no payments or other distributions whatsoever in respect of any part of the Subordinated Indebtedness shall be made, (iii) upon the occurrence and during the continuance of an Insolvency Event, no payments or other distributions whatsoever in respect of any part of the Subordinated Indebtedness shall be made nor shall any property or assets of Sharyland be applied to the purchase or other acquisition or retirement of any part of the Subordinated Indebtedness, and (iv) upon the occurrence and during the continuance of an Insolvency Event, the Subordinated Lenders shall not accept any payment by or on behalf of Sharyland on account of the principal of, premium or interest on, or any other amount in respect of, the Subordinated Indebtedness other than the payment of indemnity obligations and reasonable out of pocket costs and expenses (including reasonable attorney’s fees) in each case as and when due and payable in accordance with the terms of the Subordinated Debt Documents.
Section 3. Liquidation, Dissolution, Bankruptcy . Until the indefeasible payment in full in cash of all the Obligations and the termination of any commitments to lend under any Permitted Secured Indebtedness, and without limitation to the rights of the Secured Parties under the terms of the Financing Agreements or the rights of Company under the System Leases:
 
3.1	upon the occurrence and during the continuance of any Insolvency Event:	
 
 	3.1.1	the System Lease Obligations then due and payable shall first be irrevocably and indefeasibly paid in full to the Entitled Party before any of the Subordinated Lenders shall be entitled to receive any payment (other than Reorganization Securities) on account of the Subordinated Indebtedness whether in cash, securities or other assets (other than Reorganization Securities);	
 
 	3.1.2	any payment or distribution of assets of Sharyland of any kind or character in respect of the Subordinated Indebtedness to which any of the Subordinated Lenders would be entitled if the Subordinated Indebtedness were not subordinated pursuant to the terms hereof shall be made by the trustee, liquidator or agent or other Person making such payment or distribution, directly to the Entitled Party until the System Lease Obligations then due and payable are paid in full and each of the Subordinated Lenders and, unless the Company is the Entitled Party, Sharyland irrevocably authorizes and empowers the Entitled Party to receive and collect on its behalf any and all such payments or distributions; and	
 
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Exhibit B – Page 3

 	3.1.3	the Subordinated Lenders agree not to, directly or indirectly, initiate, prosecute or participate in any claim, action or other proceeding challenging the enforceability, validity or priority of the System Lease Obligations then due and payable.	
Section 4. Incorrect Payments . If, for any reason whatsoever and whether pursuant to an Insolvency Event or otherwise, Sharyland shall make or any of the Subordinated Lenders shall receive any payment or distribution of any kind or character, whether in cash, securities or other property (other than Reorganization Securities), on account or in respect of the Subordinated Indebtedness in contravention of any of the terms set forth herein, such Subordinated Lender shall hold any such payment or distribution in trust for the benefit of the Secured Parties, promptly notify the Entitled Party of the receipt of such payment or distribution and promptly pay over or deliver such distribution or payment to the Entitled Party or to any other Person nominated by the Entitled Party, to hold for the account of the Secured Parties.
Section 5. Non-Impairment . To the fullest extent permitted by applicable Law, no change of law or circumstances shall release or diminish any of the Subordinated Lender’s obligations, liabilities, agreements or duties hereunder, or affect the provisions set forth herein in any way.
Section 6. Benefit of Subordination Provisions . These subordination provisions are intended solely to define the relative rights of the Secured Parties, the Collateral Agent, the Company, the Subordinated Lenders, and their respective successors and permitted assigns.
Section 7. Termination and Reinstatement . Notwithstanding anything to the contrary contained herein, the Subordinated Indebtedness shall no longer be subordinated in right of liquidation pursuant to the terms contained herein otherwise at such time as the Secured Parties no longer have a lien on or security interest in the System Lease Obligations. If any payment to any of the Entitled Party, the Company, the Collateral Agent or the Secured Parties by Sharyland or any other Person in respect of any of the System Lease Obligations is held to constitute a preference or a voidable transfer under applicable Law, or if for any other reason any such party is required to refund such payment to Sharyland or to such Person or to pay the amount thereof to any other Person, each Subordinated Lender agrees and acknowledges that the provisions set forth herein shall continue to be effective or shall be reinstated, as the case may be, to the extent of any such payment or payments.
Section 8. Restrictions on Transfers . None of the Subordinated Lenders may transfer (by sale, novation or otherwise) any of its rights or obligations under the Subordinated Indebtedness unless the transferee of such interest first agrees in writing to be bound by the terms of this Exhibit C applicable to the transferor of such interest and executes an instrument to that effect.
Section 9. Exercise of Powers .
 
9.1	After the occurrence and during the continuance of an Insolvency Event, the Entitled Party shall be entitled to exercise its rights and powers under these subordination provisions in such a manner and at such times as the Entitled Party in its absolute discretion may determine.	
 
9.2.	The Subordinated Lenders alone shall be responsible for their contracts, engagements, acts, omissions, defaults and losses and for liabilities incurred by them.	
 
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Exhibit B – Page 4

EXHIBIT C
INSURANCE
Subject to Section 6.2(b) of this Agreement, during the term of the Note Purchase Agreements, the Credit Agreement or until otherwise agreed by Lessee and Lessor, Lessee shall comply with the insurance requirements set forth in this Exhibit C . Capitalized terms used herein but not otherwise defined in this Agreement have the meanings assigned to such terms in the Note Purchase Agreements or the Credit Agreement, as applicable.
 
A.	Coverages .	

Property Insurance (Operational):	
		
Cover:	  	All assets comprising the Stanton Transmission Loop Assets against “all risks” of physical loss or damage (including but not limited to machinery breakdown, earthquake, flood, windstorm and terrorism)	
		
Principal Exclusions:  	  	War and civil war	
		
	  	Nuclear risks	
		
	  	Theft and mysterious disappearance revealed in the course of inventory undertaking	
		
	  	The cost of making good wear and tear, gradual deterioration, etc., but not the consequential damage	
		
	  	Consequential loss not otherwise excluded	
		
	  	Fraud and misrepresentation	
		
Sum Insured:	  	Full replacement cost subject to the following sublimits.	
		
Sublimits:	  	Earthquake – full replacement cost
Flood – full replacement cost
Windstorm – full replacement cost	
		
Deductible:	  	$250,000 per loss or occurrence, except $250,000 earthquake and flood and $250,000 windstorm	
		
Insured:	  	Lessee
Lessor	
		
Additional Insured:	  	The Prudential Insurance Company of America, as Purchaser	
	  	Prudential Retirement Insurance and Annuity Company, as Purchaser	
 
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Exhibit C – Page 1

			
	  	Royal Bank of Canada, as Lender The Bank of New York Mellon Trust Company, N. A., as Collateral Agent The Secured Parties to the Note Purchase Agreement The Secured Parties to the Credit Agreement	
		
Mortgagee:	  	Bank of New York Mellon Trust Company, N.A. as Collateral Agent for the benefit of the Secured Parties	
		
Loss Payee:	  	The Bank of New York Mellon Trust Company, N.A. as Collateral Agent, as first loss payee	
		
Conditions:	  	30 days’ notice of cancellation or non-renewal except 10 days for non-payment of premium	
		
	  	Acceptable loss payable clause	
		
	  	Non-vitiation wording in favor of the Collateral Agent and the Secured Parties	
		
	  	Waiver of subrogation in favor of the additional insureds	
	
General Liability Insurance:	
		
Cover:	  	Lessee against any liability arising out of claims for personal injury and property damage.	
		
Sum Insured:	  	$1,000,000 per occurrence up to a minimum of $2,000,000 aggregate limit (except that the fire damage legal liability coverage may be limited to $100,000 per fire and the medical expense coverage may be limited to $5,000 for any one injured person).	
		
Insured:	  	Lessee Lessor	
		
Additional Insured:	  	The Prudential Insurance Company of America, as Purchaser Prudential Retirement Insurance and Annuity Company, as Purchaser The Bank of New York Mellon Trust Company, N. A., as Collateral Agent Royal Bank of Canada, as Lender The Secured Parties	
		
Conditions:	  	Occurrence policy wording or Aegis claims-first-made policy form Worldwide territory	
 
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Exhibit C – Page 2

			
Automobile Liability Insurance:	
		
Cover:	  	Lessee for liability arising out of claims for personal injury (including bodily injury and death) and property damage covering all owned (if any), leased, non-owned and hired vehicles of Lessee, including loading and unloading.	
		
Sum Insured:	  	$1,000,000 each accident.	
		
Deductible:	  	$1,000 each accident.	
		
Insured:	  	Lessee Lessor	
		
Additional Insured:	  	The Prudential Insurance Company of America, as Purchaser Prudential Retirement Insurance and Annuity Company, as Purchaser The Bank of New York Mellon Trust Company, N. A., as Collateral Agent Royal Bank of Canada, as Lender The Secured Parties	
	
Workers’ Compensation and Employer’s Liability Insurance:	
		
Cover:	  	Lessee will maintain workers’ compensation insurance as required by applicable state laws and employer’s liability insurance insuring Lessee for liability arising out of injury to or death of employees.	
		
Sum Insured:	  	$1,000,000 each accident.	
		
Insured:	  	Lessee
Lessor	
	
Excess or Umbrella Insurance:	
		
Cover:	  	Insurance covering claims in excess of the underlying insurance described in the foregoing.	
		
Sum Insured:	  	$25,000,000 each occurrence and in the aggregate	
		
Deductible:	  	$1,000,000 any one occurrence or amount of underlying insurance.	
		
Insured:	  	Lessee
Lessor	
		
Additional Insured:	  	The Prudential Insurance Company of America, as Purchaser Prudential Retirement Insurance and Annuity Company, as Purchaser The Bank of New York Mellon Trust Company, N. A., as Collateral Agent Royal Bank of Canada, as Lender The Secured Parties	
		
Conditions:	  	Following form	
 
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Exhibit C – Page 3

B.	Company Conditions and Requirements.	
1. Loss Notification . Lessee shall promptly notify Lessor of any single loss or event likely to give rise to a claim against an insurer for an amount in excess of $1,000,000 covered by any insurance policies required by this Exhibit C .
2. Payment of Loss Proceeds . The Collateral Agent, on behalf of the Secured Parties, shall be named as the first loss payee in applicable insurance policies (pursuant to a standard lender’s loss payable endorsement equivalent to a CP 1218).
3. Compliance With Policy Requirements . Lessee shall not violate or permit to be violated any of the conditions, provisions or requirements of any insurance policy required by this Exhibit C , and Lessee shall perform, satisfy and comply with, or cause to be performed, satisfied and complied with, all conditions, provisions and requirements of all insurance policies.
4. Waiver of Subrogation . Lessee hereby waives any and every claim for recovery from the Secured Parties for any and all loss or damage covered by any of the insurance policies to be maintained under this Agreement to the extent that such loss or damage is recovered under any such policy. If the foregoing waiver will preclude the assignment of any such claim to the extent of such recovery, by subrogation (or otherwise), to an insurance company (or other Person), Lessee shall give written notice of the terms of such waiver to each insurance company which has issued, or which may issue in the future, any such policy of insurance (if such notice is required by the insurance policy) and shall cause each such insurance policy to be properly endorsed by Lessee to, or to otherwise contain one or more provisions that prevent the invalidation of the insurance coverage provided thereby by reason of such waiver.
5. Notices . Lessee will advise Lessor in writing promptly of (i) any material changes in the coverage or limits provided under any policy required by Section 6.2 of this Agreement and this Exhibit C and (ii) any default in the payment of any premium and of any other act or omission on the part of Lessee which may invalidate or render unenforceable, in whole or in part, any insurance being maintained by Lessee pursuant to this Exhibit C .
 
C.	Insurance Policy Conditions and Requirements .	
1. Permitted Insurers . Lessee shall obtain the insurance required by this Exhibit C from responsible insurance companies authorized to do business in Texas (if required by law or regulation) with an A.M. Best Insurance Reports rating of A-, 8 or better.
2. Control of Loss . If commercially feasible all policies of insurance required to be maintained pursuant to this Exhibit C , wherein more than one insurer provides the coverage on any single policy, shall have a clause (or a separate agreement among the insurers) wherein all insurers have agreed that the lead insurer shall have full settlement authority on behalf of the other insurers.
 
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Exhibit C – Page 4

3. Loss Survey . All policies of insurance required to be maintained pursuant to this Exhibit C , wherein more than one insurer provides the coverage on any single policy, shall have a clause (or a separate agreement among the insurers) wherein all insurers have agreed upon the employment of a single firm to survey and investigate all losses on behalf of the insurers.
4. Policy Cancellation and Change . All policies of insurance required to be maintained pursuant to this Exhibit C shall be endorsed so that if at any time they are canceled, or their coverage is reduced (by any party including the insured) so as to affect the interests of the Collateral Agent, the Holders and any other Secured Party, such cancellation or reduction shall not be effective as to the Secured Parties for thirty (30) days, except for non-payment of premium which shall be for ten (10) days, after receipt by the Collateral Agent and the Secured Parties of written notice from such insurer of such cancellation or reduction.
5. Miscellaneous Policy Provisions . All insurance policies providing operational property damage, (i) shall name the Collateral Agent, on behalf of the Secured Parties, as the first loss payee, (ii) shall include a Lender’s loss payable clause in favor of the Collateral Agent, on behalf of the Secured Parties.
6. Separation of Interests . All policies (other than in respect to workers compensation insurance) shall insure the interests of the Secured Parties regardless of any breach or violation by Lessee or any other party of warranties, declarations or conditions contained in such policies, any action or inaction of Lessee or others, or any foreclosure relating to the Stanton Transmission Loop Assets.
7. Waiver of Subrogation . All policies of insurance required by this Exhibit C shall provide for waivers of subrogation in favor of the Secured Parties and their respective officers and employees.
8. Liability Insurance Endorsements . All policies of liability insurance required to be maintained by Lessee shall be endorsed as follows:
(i) To name the Secured Parties as additional insureds;
(ii) To provide a severability of interests and cross liability clause; and
(iii) That the insurance shall be primary and not excess to or contributing with any insurance or self-insurance maintained by Lessee.
D. Acceptable Policy Terms and Conditions . All policies of insurance required to be maintained pursuant to this Exhibit C shall contain terms and conditions reasonably acceptable to Lessor.
 
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Exhibit C – Page 5

Exhibit 10.13
Execution Version
SECOND AMENDED AND RESTATED
LEASE AGREEMENT
(CREZ ASSETS)
between
SHARYLAND PROJECTS, L.L.C.
and
SHARYLAND UTILITIES, L.P.
as of December 1, 2014
 
CREZ A SSETS L EASE A GREEMENT

TABLE OF CONTENTS

ARTICLE I LEASE	  	 	1	  	
			
1.1	 	Lease of CREZ Assets	  	 	1	  	
1.2	 	Exclusive Rights	  	 	2	  	
1.3	 	Absolute Net Lease	  	 	3	  	
1.4	 	Waiver by Lessee	  	 	3	  	
1.5	 	Quiet Enjoyment	  	 	3	  	
		
ARTICLE II TERM OF LEASE	  	 	3	  	
			
2.1	 	Term	  	 	3	  	
2.2	 	Approvals upon Expiration or Termination	  	 	4	  	
2.3	 	Purchase Option upon Expiration or Termination	  	 	4	  	
		
ARTICLE III RENT	  	 	4	  	
			
3.1	 	Rent	  	 	4	  	
3.2	 	Rent Supplements	  	 	8	  	
3.3	 	Confirmation of Percentage Rent	  	 	10	  	
3.4	 	Additional Rent	  	 	12	  	
3.5	 	No Set Off	  	 	12	  	
3.6	 	Late Payment Penalty	  	 	12	  	
3.7	 	Credit Support	  	 	12	  	
3.8	 	Other Revenue	  	 	12	  	
		
ARTICLE IV LESSEE’S REPRESENTATIONS, WARRANTIES AND COVENANTS	  	 	12	  	
			
4.1	 	Maintenance, Operation and Repair of the CREZ Assets	  	 	12	  	
4.2	 	Licenses and Permits	  	 	13	  	
4.3	 	Property Taxes, and other Assessments and Fees	  	 	13	  	
4.4	 	Requirements of Governmental Agencies and Regulatory Authorities	  	 	13	  	
4.5	 	Liens	  	 	14	  	
4.6	 	Hazardous Materials	  	 	14	  	
4.7	 	Indebtedness	  	 	15	  	
4.8	 	Records	  	 	15	  	
4.9	 	Surrender	  	 	15	  	
4.10	 	Cooperation; Transition Services	  	 	16	  	
4.11	 	Lessee’s Authority	  	 	16	  	
4.12	 	Litigation	  	 	16	  	
4.13	 	Financing	  	 	17	  	
		
ARTICLE V LESSOR’S REPRESENTATIONS, WARRANTIES AND COVENANTS	  	 	17	  	
			
5.1	 	Lessor’s Authority	  	 	17	  	
5.2	 	Liens and Tenants	  	 	17	  	
5.3	 	Condition of Assets	  	 	18	  	
5.4	 	Requirements of Governmental Agencies	  	 	18	  	
5.5	 	Hazardous Materials	  	 	18	  	
5.6	 	Litigation	  	 	18	  	
5.7	 	Limitation	  	 	18	  	
 
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ARTICLE VI LOSS AND DAMAGE; INSURANCE	  	 	19	  	
			
6.1	 	Loss and Damage to the CREZ Assets	  	 	19	  	
6.2	 	Insurance	  	 	20	  	
		
ARTICLE VII REPORTING	  	 	21	  	
			
7.1	 	Private Financing Arrangements	  	 	21	  	
7.2	 	Public Company and Regulatory Information and Cooperation	  	 	21	  	
7.3	 	Mutual Obligations	  	 	23	  	
		
ARTICLE VIII ASSIGNMENT	  	 	23	  	
		
ARTICLE IX DEFAULT	  	 	23	  	
			
9.1	 	Lessee Default	  	 	23	  	
9.2	 	Lessor Default	  	 	24	  	
9.3	 	Right to Cure	  	 	24	  	
9.4	 	Remedies	  	 	25	  	
		
ARTICLE X CAPITAL EXPENDITURES	  	 	25	  	
			
10.1	 	Capital Expenditures Generally	  	 	25	  	
10.2	 	Capital Expenditures Funded by Lessor	  	 	26	  	
10.3	 	Capital Expenditures Funded by Lessee	  	 	26	  	
10.4	 	Footprint Project Construction Activities	  	 	26	  	
10.5	 	Ownership of Footprint Projects	  	 	27	  	
10.6	 	Asset Acquisitions	  	 	27	  	
10.7	 	Reimbursements	  	 	27	  	
		
ARTICLE XI REGULATORY COOPERATION	  	 	28	  	
			
11.1	 	Jurisdiction	  	 	28	  	
11.2	 	Cooperation	  	 	28	  	
		
ARTICLE XII INDEMNITY	  	 	28	  	
			
12.1	 	General Indemnity	  	 	28	  	
12.2	 	Environmental Indemnity	  	 	29	  	
		
ARTICLE XIII MISCELLANEOUS	  	 	29	  	
			
13.1	 	Limitation of Damages	  	 	29	  	
13.2	 	Condemnation	  	 	29	  	
13.3	 	Confidentiality	  	 	30	  	
13.4	 	Successors and Assigns	  	 	30	  	
13.5	 	Rent Obligations Not Excused by Force Majeure, Etc.	  	 	30	  	
13.6	 	Further Assurances; Policies and Procedures	  	 	30	  	
13.7	 	Arbitration	  	 	31	  	
13.8	 	Notices	  	 	32	  	
13.9	 	Entire Agreement; Amendments	  	 	33	  	
13.10	 	Legal Matters	  	 	33	  	
13.11	 	Partial Invalidity	  	 	33	  	
13.12	 	Recording	  	 	33	  	
13.13	 	Intention of Parties; True Lease	  	 	34	  	
 
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APPENDICES	  		
		
Appendix A —	  	Definitions	
		
EXHIBITS:	  		
		
Exhibit A —	  	Assets	
Exhibit B —	  	Insurance	
Exhibit C —	  	Subordinated Debt Terms	
		
SCHEDULES:	  		
		
Schedule 3.2(b)	  	Form Rent Supplement	
 
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SECOND AMENDED AND RESTATED
LEASE AGREEMENT
(CREZ ASSETS)
This SECOND AMENDED AND RESTATED LEASE AGREEMENT (CREZ ASSETS) (this “ Agreement ”) is entered into on December 1, 2014 (the “ Effective Date ”), between Sharyland Projects, L.L.C. (together with its transferees, successors and assigns, “ Lessor ”), and Sharyland Utilities, L.P. (together with its transferees, successors and assigns, “ Lessee ”), and in connection herewith, Lessor and Lessee agree, covenant and contract as set forth in this Agreement. Lessor and Lessee are sometimes referred to in this Agreement as a “ Party ” or collectively as the “ Parties ”.
Certain capitalized terms used in this Agreement have the meaning assigned to them in Appendix A attached hereto.
WITNESSETH:
WHEREAS, Lessor and Lessee entered into that certain Amended and Restated Lease Agreement dated as of April 30, 2013 (as amended, restated, supplemented or otherwise modified from time to time, the “ Amended and Restated Lease ”), pursuant to which Lessee leases the CREZ Lease Assets from Lessor; and
WHEREAS, Lessor is an indirect subsidiary of InfraREIT Partners, LP, whose general partner (the “ REIT ”) intends to raise equity capital through an initial public offering (the “ REIT IPO ”), and, in connection with the REIT IPO, Lessor and Lessee desire to amend the terms of the Amended and Restated Lease in certain respects and restate the Amended and Restated Lease as so amended;
NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Parties hereto hereby amend and restate the terms of the Amended and Restated Lease as follows:
ARTICLE I
LEASE
1.1 Lease of CREZ Assets.
(a) Upon the terms and conditions set forth in this Agreement, Lessor hereby grants to Lessee the exclusive right to use and operate the CREZ Lease Assets. Subject to necessary regulatory approvals and the penultimate sentence of this Section 1.1, this Agreement is intended by Lessor and Lessee to be a master lease of the CREZ Lease Assets, as it existed as of June 20, 2011 (the “ Original Lease Date ”), as it has been altered by the completion of the construction of the CREZ Project and as it has been or may continue to be altered or expanded thereafter by Footprint Projects in which Lessor has an interest.
 
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(b) The CREZ Assets shall consist of the Transmission Lines and the Collection Stations and each of the following components which are owned by Lessor as of the date hereof (or that are included within the CREZ Assets by virtue of clause (i), (ii) or (iii) of the definition thereof) and that are located within the area depicted on Exhibit A:
(i) towers and poles affixed to the land, and all necessary and proper foundations, footings, crossarms and other appliances and fixtures for use in connection with said towers, poles and lines;
(ii) overhead, underground and underwater electrical distribution, transmission and communications lines, together with related ductwork and insulators;
(iii) electric substation and switching facilities, including all associated transformers, circuit breakers, resistors, capacitors, buses, interconnection and switching facilities, control and protection equipment which monitors the CREZ Assets, and the building housing the foregoing items;
(iv) electric meters required to operate the CREZ Assets;
(v) real estate assets, including real property, interests in real property or real property rights (as defined in Section 856(c)(5)(B) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder, and not otherwise included in Sections 1.1(b)(i)-1.1(b)(iv) above) owned or leased by Lessor; or
(vi) all other systems or property owned or leased by Lessor, as identified in the uniform system of accounts for major electric utilities, 18 C.F.R. Part 101, as adopted and amended from time to time by FERC (not otherwise included in Sections 1.1(b)(i)-1.1(b)(v) above).
The CREZ Assets exclude, for avoidance of doubt, the Transmission Operation Center and the transmission and distribution related assets included in the Backup Operations Center located in Amarillo, Texas, which are currently owned by SDTS (Lessor’s parent entity) and leased to Lessee pursuant to the McAllen Lease. Notwithstanding anything to the contrary in this Agreement, the parties do not intend or agree to enter into a lease with respect to any Footprint Project or other alteration, expansion or addition to the CREZ Assets (and the Lessee shall not be authorized to use or operate such Footprint Project, alteration, expansion or addition to the CREZ Assets) unless and until such time as the parties first execute a Rent Supplement for the underlying Footprint Project and such Footprint Project is placed in service, and such Rent Supplement together with this Agreement shall be treated as a new lease with respect to such Footprint Project. The parties further agree and acknowledge that a Rent Supplement will be executed with respect to each Footprint Project before such Footprint Project is placed in service, and references in this Agreement to “CREZ Assets” rely on the assumption that this is the case.
1.2 Exclusive Rights . Throughout the Term of this Agreement, Lessee shall have the exclusive right (i) to operate and use the CREZ Lease Assets for the transmission of electricity in accordance with applicable rules and regulations of all regulatory agencies having regulatory jurisdiction over the CREZ Assets, including without limitation, the PUCT , as well as applicable rules and regulations of ERCOT, TRE, NERC and other Regulatory
 
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Authorities, and (ii) to utilize the CREZ Lease Assets (and the associated easements, rights of way and similar rights) for other opportunities and uses (provided that such other uses do not interfere with the current or future transmission and delivery of electricity), subject to the approval of the Lessor, such approval not to be unreasonably withheld, conditioned or delayed. Throughout the Term of this Agreement, Lessor shall have access to the CREZ Assets at all reasonable times for purposes of inspection and for the purposes of improving, expanding or modernizing the CREZ Assets in accordance with Article X. Except in the case of emergency, prior to Lessor’s access of the CREZ Assets, Lessor will provide written notification to Lessee’s operations personnel.
1.3 Absolute Net Lease . This Agreement is intended by the Parties to be an absolute net lease (and, except as otherwise specified herein, the expenses associated with the lease, servicing, insuring, maintenance, repair and operation of the CREZ Assets shall be for the account of the Lessee, unless expressly stated that such expenses are for the account of Lessor or some other person or entity). Other than as expressly provided herein, (a) Lessee’s obligation to make all payments of Rent as and when the same shall become due and payable in accordance with the terms of this Agreement shall be absolute, irrevocable and unconditional and shall not be affected by any circumstance or subject to any abatement or diminution by set-off, deduction, counterclaim, recoupment, agreement, defense, suspension, deferment, interruption or otherwise, and (b) until such time as all Rent required to be paid has been paid, Lessee shall have no right to terminate this Agreement or to be released, relieved or discharged from its obligation to make, and shall not suspend or discontinue, any payment of Rent for any reason whatsoever.
1.4 Waiver by Lessee . Lessee hereby waives, to the extent permitted by Applicable Law, any and all rights which it may now have or which at any time hereafter may be conferred upon it, by statute or otherwise, to modify, terminate, cancel, quit or surrender this Agreement except in accordance with the express terms hereof.
1.5 Quiet Enjoyment . Lessee shall be entitled to the peaceful and quiet enjoyment of the CREZ Assets, subject to the terms of this Agreement, so long as Lessee is not in default of this Agreement beyond applicable notice and cure periods.
ARTICLE II
TERM OF LEASE
2.1 Term . Subject to the provisions of Section 2.2 of this Agreement, or as otherwise stated herein, this Agreement became effective on the Original Lease Date and shall continue through December 31, 2020 unless otherwise terminated in a manner consistent herewith (the “ Initial Term ”). Thereafter, this Agreement may be renewed for subsequent terms (each, a “ Renewal Term ” and, collectively with the Initial Term, the “ Term ”) by mutual agreement of the Parties; provided, however, that the Rent for any Renewal Term shall be targeted to provide the Lessor with a Comparable Rate of Return on the then-current Rate Base of the CREZ Assets.
 
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2.2 Approvals upon Expiration or Termination .
(a) Notwithstanding any provisions to the contrary herein, Lessee shall not surrender, resign, transfer, assign or otherwise cease to be the operator of the CREZ Assets at any time, including upon the termination of this Agreement or at the expiration of the Term, without first acquiring any necessary regulatory approvals from the PUCT or other Regulatory Authorities regarding such surrender, resignation, transfer, assignment or cessation of such operatorship; provided that, in the event of expiration or termination, the Parties shall use commercially reasonable efforts to obtain all necessary regulatory approvals of the transfer of such operatorship as soon as reasonably practicable.
(b) During such extended period of operatorship, Lessee shall continue to operate the CREZ Assets and shall continue to pay all Extended Period Rent; provided, however, that if regulatory approval is not obtained within twelve (12) months of initiation of the approval process and such delay is (a) due to Lessor’s failure to reasonably pursue such approval, then the amounts payable as Rent will be eighty percent (80%) of such amount, or (b) due to Lessee’s failure to reasonably pursue such approval, then the amounts payable as Rent will be one hundred five percent (105%) of such amount.
(c) Upon the expiration of the Term or termination of this Agreement, Lessee shall use commercially reasonable efforts to obtain all necessary regulatory approvals as soon as reasonably practicable from the PUCT or other Regulatory Authorities to transfer or assign the CCNs for the CREZ Assets to Lessor or a third party designated by Lessor and acceptable to the PUCT or other Regulatory Authorities.
2.3 Purchase Option upon Expiration or Termination . Upon the expiration of the Term or termination of this Agreement, Lessor shall have the option to purchase from Lessee any equipment or other property, tangible or intangible, owned by Lessee and principally used in connection with and necessary for the operation of the CREZ Assets (including any Nonseverable Footprint Projects owned by Lessee, if any), subject to any required regulatory approvals. The purchase price for such property or equipment shall be the greater of (i) the net book value thereof plus 10% and (ii) the fair market value thereof as determined by mutual agreement of Lessor and Lessee. If the Parties fail to agree on the amount of the purchase price,. the purchase price shall be determined by arbitration pursuant to Section 13.7. In the event Lessor purchases such equipment, Lessee shall have the right to continue to use such equipment for no cost during the period of any extended operations by Lessee under Section 2.2.
ARTICLE III
RENT
3.1 Rent . Lessee will pay to Lessor in lawful money of the United States of America which shall be legal tender for the payment of public and private debts, at Lessor’s address set forth in Section 13.8 hereof or at such other place or to such other Person, as Lessor from time to time may designate in a Notice, all Rent contemplated hereby during the Term on the basis hereinafter set forth. If there is a dispute as to the amount of Rent to be paid by Lessee, either Party may submit the dispute to arbitration pursuant to Section 13.7. However, Lessee shall be required to pay, as and when Rent is due and payable hereunder, the Undisputed Rent until such time as the dispute is resolved by agreement between the Parties or by arbitration pursuant to Section 13.7.
 
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(a) Base Rent : Lessee will pay Lessor an amount of base rent equal to the amount set forth on the then-effective Rent Supplement executed and delivered in connection herewith, which shall be payable monthly in arrears 45 days after the conclusion of the month. The amount of base rent owed pursuant to this Section 3.1(a) may be supplemented by the Parties from time to time in accordance with Section 3.2. The amount of base rent payable pursuant to this Section 3.1(a), as supplemented from time to time pursuant to Section 3.2, is referred to as “Base Rent.”
(b) Percentage Rent : In addition to the Base Rent set forth above, Lessee covenants and agrees to pay to Lessor, as percentage rent, an annual amount equal to the percent of Gross Revenues during the applicable Lease Year in excess of the Annual Percentage Rent Breakpoint for such Lease Year, all as set forth on the then-effective Rent Supplement. The percentage amounts used for the calculation of percentage rent owed pursuant to this Section 3.1(b) (the “ Percentage Rent Percentages ”) may be supplemented by the Parties from time to time in accordance with Section 3.2 to account for additions to the CREZ Assets. The percentage rent payable pursuant to this Section 3.1(b), as supplemented from time to time pursuant to Section 3.2, is referred to as “Percentage Rent.”
(c) Percentage Rent Breakpoints : With respect to the Annual Percentage Rent Breakpoint for each Lease Year: (1) the “First Lease Quarter Percentage Rent Breakpoint” shall be 25% of the Annual Percentage Rent Breakpoint for such Lease Year; (2) the “Second Lease Quarter Percentage Rent Breakpoint” shall be 50% of the Annual Percentage Rent Breakpoint for such Lease Year; and (3) the “Third Lease Quarter Percentage Rent Breakpoint” shall be 75% of the Annual Percentage Rent Breakpoint for such Lease Year.
(d) Gross Revenues:
(i) As used in this Agreement, subject to Section 3.1(d)(ii), the “Gross Revenues” of the CREZ Assets shall mean and include all fees, charges and other revenues generated by or otherwise (x) received by or payable to Lessee in connection with or which are the result of the operation of the CREZ Assets (and any assets related to the CREZ Assets owned by Lessee), as set forth in the FERC Uniform System of Accounts for electric utilities or such other accounts as may be applicable from time to time in which Lessee records its revenues from operation of the CREZ Assets; (y) received by or payable to Lessee from other opportunities and uses of the CREZ Assets pursuant to Section 1.2 hereof; or (z) that are insurance proceeds for business income lost from an insured event related to the CREZ Assets; provided that, “Gross Revenues” shall not include (1) any payment received by Lessee as CIAC; (2) any items which are of a pure pass-through nature where such items are charged to and collected from customers of Lessee but which carry regulatory responsibility to remit such collections without offset or deduction to a third party, including, but not limited to, items such as: (A) sales taxes or other charges collected by Lessee on behalf of a taxing authority; (B) fees, charges and other revenues collected by Lessee that can be specifically traced to any regulatory approved costs incurred by Lessee that have been ordered or permitted by the PUCT to be recovered through Lessee’s rates such as system benefit funds; (C) fees,
 
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charges and other revenues collected by Lessee that can be specifically traced to any deferred costs funded by Lessee that have been ordered or permitted by the PUCT to be recovered through a tariff rider; and (D) such other items that Lessor and Lessee agree to in good faith are consistent with the foregoing and should be included prospectively in the list set forth in this clause (2) and in the event the Lessor and Lessee cannot agree on what items should be included on such list after 60 days of negotiating in good faith, then either Lessor or Lessee may submit such matter to arbitration pursuant to Section 13.7 of this Agreement, pursuant to which the Arbitration Panel shall be empowered to determine which such items shall be included on such list, based on submissions by each of the Lessee and the Lessor; and (3) Revenues Attributable to Lessee CapEx. The term “ Unadjusted Gross Revenues ” means the amount of Gross Revenue, calculated in accordance with this Section 3.1(d)(i), without giving effect to the offset set forth in clause (3), above, related to Revenues Attributable to Lessee CapEx.
(ii) Except as set forth below, all ERCOT Transmission Revenues will be allocated to the CREZ Assets covered by this Agreement based upon the following formula: Multiply (x) total ERCOT Transmission Revenues received by Lessee by (y) a fraction, the numerator of which is the Transmission Net Plant in Service for the CREZ Assets covered by this Agreement and the denominator of which is the total Transmission Net Plant in Service for all regulated electric transmission systems owned by Lessor or an affiliate thereof and operated by Lessee or a subsidiary thereof within ERCOT (the “ TCOS Allocation ”). As of the Effective Date, all regulated electric transmission systems operated by Lessee or a subsidiary thereof within ERCOT are owned by Lessor or a subsidiary or parent entity thereof. As long as that is the case, Transmission Net Plant in Service and Transmission Gross Plant in service shall be derived exclusively from the financial statements of Lessor and agreed to by Lessee. If Lessee operates any electric transmission systems within ERCOT that are not leased from Lessor or an affiliate thereof, then the Parties will negotiate in good faith an equitable and appropriate mechanism for allocating ERCOT Transmission Revenues based on the Transmission Net Plant in Service of the respective electric transmission systems and in the event the Parties cannot agree on an equitable and appropriate mechanism after 60 days of negotiating in good faith, then either Party may submit such matter to arbitration pursuant to Section 13.7 of this Agreement, pursuant to which the Arbitration Panel shall be empowered to determine such equitable and appropriate mechanism, based on submissions by each of the Lessee and the Lessor. The most recent TCOS Allocation agreed to by Lessor and Lessee will govern the allocation described in this Section 3.1(d)(ii), which TCOS Allocation may be set forth in a Rent Supplement, but will not be required to be included in a Rent Supplement to be effective. Either Party may request a revision to such TCOS Allocation, based on the most recent available monthly balance sheet, no more frequently than once every sixty (60) days or in connection with any Rent Supplement or Rent Validation executed and delivered by the Parties. If the Parties are unable to agree to an allocation, such matter will be submitted to arbitration pursuant to Section 13.7. “Gross Revenues,” for purposes hereof, will consist of the amount of such ERCOT Transmission Revenues allocated to the CREZ Assets pursuant to this Section 3.1(d)(ii), plus any other amounts that constitute Gross Revenues pursuant hereto, minus Revenues Attributable to Lessee CapEx. As of the date hereof, the Parties do not expect that any Lessee revenue, other than ERCOT Transmission Revenues, will be allocated to the CREZ Assets and constitute Gross Revenues hereunder.
 
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(iii) The Parties contemplate that there may be Capital Expenditures for assets that are placed in service and that are related and fairly allocable to the CREZ Assets and are classified as Lessee CapEx. Unless the Parties agree otherwise based on appropriate factors at the time of the negotiation, Capital Expenditures that qualify as Lessee CapEx will qualify as Lessee CapEx on the date that the assets developed with such Capital Expenditures are placed in service. In such a case, Revenues Attributable to Lessee CapEx shall be determined and such portion shall be excluded from Unadjusted Gross Revenues. For these purposes, Revenues Attributable to Lessee CapEx shall be targeted to equal that portion of the Unadjusted Gross Revenues collected by Lessee which equals the amount needed to provide Lessee with the equivalent of a Comparable Rate of Return on any such Lessee CapEx (except that, in determining such Comparable Rate of Return, the Parties will not consider Lessee’s creditworthiness and there will be no Agreed-to-Discount). It is understood and agreed that such determinations of the Revenues Attributable to Lessee CapEx are intended to provide an accurate and reasonably administrable means of ensuring that the Lessee (and not the Lessor) will receive a Comparable Rate of Return attributable to the capital invested by Lessee in the Lessee CapEx. The Revenues Attributable to Lessee CapEx shall be determined solely to provide a Comparable Rate of Return on such Lessee CapEx and shall not be determined with reference to, or with any intention to true up, the effect of any difference between the initially anticipated and the actual return of or on prior Lessee CapEx. The Parties understand that there may be Capital Expenditures that relate to both the CREZ Assets and to other transmission and/or distribution systems owned or operated by Lessee or an affiliate thereof, and, in such circumstance, the Parties will negotiate in good faith to determine the portion of such Capital Expenditures that constitute Lessee CapEx hereunder and in the event the Parties cannot determine such portion after 60 days of negotiating in good faith, then either Party may submit such matter to arbitration pursuant to Section 13.7 of this Agreement, pursuant to which the Arbitration Panel shall be empowered to determine such portion of Capital Expenditures that constitute Lessee CapEx hereunder, based on submissions by each of the Lessee and the Lessor. Lessee agrees to provide Lessor with sufficient information regarding Lessee CapEx so that Lessor can monitor amounts actually spent on Lessee CapEx. If Lessee expects there will be any Lessee CapEx, Lessee may request, no more frequently than annually, that the Parties determine the Revenues Attributable to Lessee CapEx which relate to such Lessee CapEx for each subsequent Lease Year. Lessee will use reasonable efforts to make such request coincide with a Rent Supplement pursuant to Section 3.2(a). Each supplement and related determination of Revenues Attributable to Lessee CapEx for any Lease Year which is specified in this Section 3.1(d)(iii) shall be memorialized in the manner specified in Section 3.2(b).
(e) Payment of Percentage Rent: Percentage Rent shall be paid by Lessee to Lessor not later than the date forty-five (45) days after the end of each Lease Quarter as herein provided. Lessee shall record Gross Revenues in order to provide an audit trail for the Gross Revenues. Lessee shall deliver a written statement to Lessor, accompanied by a CFO Certificate, within forty-five (45) days after the end of each Lease Quarter, stating (1) the Gross Revenues for that Lease Quarter, (2) the cumulative total through the end of that Lease Quarter of Gross Revenues for such Lease Year, (3) the Percentage Rent Breakpoint (the First Lease Quarter Percentage Rent Breakpoint, the Second Lease Quarter Percentage Rent Breakpoint, the Third Lease Quarter Percentage Rent Breakpoint or the Annual Percentage Rent Breakpoint for such Lease Year, as applicable), utilized by Lessee and applicable to
 
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Lessee’s calculation of Percentage Rent through the end of that Lease Quarter, and (4) the cumulative total of any Percentage Rent then due and the cumulative total of any Percentage Rent previously paid with respect to any prior Lease Quarter(s) within such Lease Year. If such CFO Certificate indicates that any Percentage Rent is due for such Lease Quarter (or such Lease Year, as applicable), based upon the cumulative total of Gross Revenues through the end of such Lease Quarter and the applicable Percentage Rent Breakpoint reflected in such statement, then Lessee shall pay and deliver any Percentage Rent then due with the statement and CFO Certificate for such Lease Quarter (or such Lease Year, as applicable). With respect to the final Percentage Rent calculation for any Lease Year, Lessee shall receive a credit for any Percentage Rent previously paid with respect to such Lease Year. If the Percentage Rent payments previously made by Lessee to Lessor for the first three Lease Quarters of a Lease Year, on a cumulative basis, exceed the annual amount of Percentage Rent payable by Lessee to Lessor for such Lease Year, then Lessee shall receive a credit for such excess amount against the next Percentage Rent payment(s) becoming due and payable by Lessee to Lessor under this Agreement. All statements deliverable by Lessee to Lessor under this Agreement shall be delivered to the place where rent is then payable, or to such other place or places as Lessor may from time to time direct by written notice to Lessee.
3.2 Rent Supplements.
(a) The Parties have executed a Rent Supplement with respect to the Rent in effect as of the Effective Date. This Section 3.2(a) will not require any amendment to Rent unless the Parties expect Incremental CapEx and the Parties have not previously entered into a Rent Supplement with respect to such Incremental CapEx. If the Parties expect Incremental CapEx, then they will negotiate in good faith to supplement Rent and other matters in accordance with this Section 3.2. In connection therewith, the Parties will negotiate the pre-tax rate of return that Lessor should earn on such Incremental CapEx, which will be based generally on an agreed-to-discount from the rate of return that public utility companies generally earn in the State of Texas at the time of such Rent Supplement negotiation, adjusted in the manner agreed to by the Parties (if justified) to take into account the creditworthiness of Lessee at the time of such Rent Supplement negotiation (the “ Agreed - to-Discount ”). Such discount will be based on the comparable discount agreed to in connection with the negotiation of rent pursuant to the McAllen Lease and other leases between Lessee and SDTS (or an affiliate thereof), as modified to take into account appropriate factors at the time of such Rent Supplement negotiation. Such pre-tax rate of return, as determined in accordance with this paragraph, is referred to as a “ Comparable Rate of Return .” The following will apply to the determination of the matters set forth on the Rent Supplement:
(i) The Parties will supplement Base Rent and Percentage Rent in a manner intended to provide a Comparable Rate of Return for Lessor on its Incremental CapEx. Such Comparable Rate of Return will be achieved by a split between Base Rent and Percentage Rent in the proportions requested by Lessor and agreed to by Lessee.
 
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(ii) Unless the Parties agree otherwise based on appropriate factors at the time of the negotiation, Capital Expenditures will qualify as Incremental CapEx on the date such Capital Expenditures are placed in service, which differentiates these Capital Expenditures from the Capital Expenditures included in CapEx Budgets pursuant to Article X, which are measured under this Agreement based on the date the related Capital Expenditures are incurred.
(iii) Notwithstanding anything herein to the contrary, such supplement shall be determined solely to provide a Comparable Rate of Return on such Incremental CapEx and shall not be determined with reference to, or with any intention to true up, the effect of any difference between the initially anticipated and the actual return of or on, or the Base Rent or Percentage Rent payable with respect to, the CREZ Assets as in place prior to the additions resulting from such Incremental CapEx.
(iv) Notwithstanding the foregoing, the aggregate Base Rent provided for in the Rent Supplements for the Transmission Lines and the Collection Stations shall not be less than the amount necessary for the Lessor to demonstrate a Debt Service Coverage Ratio of not less than 1.25x for each calendar quarter falling during the terms of such Rent Supplements.
(b) The Parties will memorialize the results of any Incremental CapEx supplements and Lessee CapEx supplement negotiations by executing and delivering a Rent Supplement, which will set forth the amount of contemplated Incremental CapEx, new Base Rent, a new Percentage Rent Schedule, new Revenues Attributable to Lessee CapEx, Lessee CapEx, new TCOS Allocation (if applicable), the effective date on which such changes will occur and the term of such Rent Supplement (if applicable). In no event will any new Base Rent or new Percentage Rent be payable, or any Revenues Attributable to Lessee CapEx be taken into account as a reduction to Unadjusted Gross Revenues, before the assets funded by the related Incremental CapEx or Lessee CapEx are placed in service. The Rent Supplement may also include the projected in-service date of the Incremental CapEx or Lessee CapEx to which the Rent Supplement applies. Upon execution and delivery of any such Rent Supplement, this Agreement will be deemed amended thereby. If necessary, Exhibit A will be supplemented to reflect new assets funded by Incremental CapEx. The Rent Supplement shall have the term set forth therein, not to extend past the then-current Term of this Agreement. At the end of the term of each Rent Supplement, the Parties shall negotiate a new Rent Supplement for the Lessee CapEx and Incremental CapEx covered by such prior Rent Supplement using the Comparable Rate of Return methodology set forth in Sections 3.1(d)(iii) and 3.2(a). Notwithstanding the foregoing, the Percentage Rent Percentages and Annual Percentage Rent Breakpoints reflected on such new Rent Supplement with respect to the Rate Base covered by such prior Rent Supplement shall be as set forth on the Percentage Rent Schedule of such prior Rent Supplement.
(c) If following a Rent Supplement there is a difference in (i) the amount of actual Incremental CapEx compared to the amount contemplated by the then-effective Rent Supplement, (ii) the amount of actual Lessee CapEx compared to the amount contemplated by the then-effective Rent Supplement, or (iii) the placed-in-service date of such Incremental CapEx or Lessee CapEx compared to what was contemplated at the time of the then-effective Rent Supplement, then, at any time within two years of the date the Parties agree to a Rent Supplement, either Party may request a Rent Validation. If there has been such a difference, the
 
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Parties will supplement Incremental CapEx, Base Rent, Percentage Rent Percentages, Annual Percentage Rent Breakpoints, Revenues Attributable to Lessee CapEx and/or Lessee CapEx, as applicable, to what they would have been, at the time of the Rent Supplement, to reflect (1) the amount of actual Incremental CapEx and Lessee CapEx and/or (2) the actual dates such Incremental CapEx and/or Lessee CapEx was placed in service, but keeping fixed all other relevant assumptions and inputs, including the Comparable Rate of Return. For the avoidance of doubt, in no circumstance will a Rent Validation occur to account for any difference between the initially anticipated and the actual return of or on the Incremental CapEx and/or Lessee CapEx, and no such difference will be taken into account as part of such Rent Validation. The Parties also will negotiate in good faith to determine (A) whether one Party should make a lump sum payment to the other Party as a result of excess or deficient Rent Lessee paid, prior to the date of the effective date of the Rent Validation, in connection with the Rent Supplement, and, (B) if applicable, the amount of any such lump sum payment. The Parties will memorialize the result of any Rent Validation negotiation by executing and delivering a revised Rent Supplement, which will set forth revised expected Incremental CapEx, Lessee CapEx, Base Rent, Percentage Rent Percentages, Annual Percentage Rent Breakpoints and/or Revenues Attributable to Lessee CapEx, as applicable, the effective date on which such changes will occur and, if applicable, the amount of the lump sum payment that one Party must make to the other Party (which payment must be made within 30 days of the execution and delivery of such revised Rent Supplement). Any lump sum payments received by Lessor under this Section 3.2(c) shall be treated as Rent by the Parties. Upon execution and delivery of any such Rent Validation, this Agreement will be deemed amended thereby. The Parties will reasonably cooperate to minimize the number of Rent Validations, and prospective Rent Supplements and Rent Validations may be combined into one revised, amended and restated Rent Supplement.
(d) In connection with the foregoing provisions of this Section 3.2, Lessor and Lessee shall use good faith efforts to agree to a Rent Supplement, renewal of a Rent Supplement or Rent Validation, as applicable, within 60 days of a request therefor by either Party. If, by the end of such 60 day period, Lessee and Lessor cannot in good faith agree to the terms of a Rent Supplement, renewal of a Rent Supplement or Rent Validation, such dispute shall be submitted to arbitration in accordance with Section 13.7 of this Agreement, pursuant to which the Arbitration Panel shall be empowered to determine the terms of such Rent Supplement, renewal of a Rent Supplement or Rent Validation (including any lump sum payment amount), based on submissions by each of the Lessee and the Lessor.
3.3 Confirmation of Percentage Rent.
(a) In the event that Lessee determines that the Percentage Rent paid with respect to any Lease Year exceeded the amount of Percentage Rent actually due for such Lease Year (such overage being the “ Excess Percentage Rent ”), Lessee shall promptly notify Lessor of such fact and shall deliver a new CFO Certificate (the “ Revised Certificate ”) setting forth the corrected calculations of the Percentage Rent due for such Lease Year and identifying the amount of the Excess Percentage Rent. Upon Lessor’s reasonable verification of the information set forth in the Revised Certificate, Lessor shall refund to Lessee the Excess Percentage Rent. Notwithstanding anything to the contrary contained herein, in no event shall Lessor have any obligation under this Section 3.3(a) to refund any Excess Percentage Rent if Lessor has not received the Revised Certificate by March 31 of the year following the Lease Year for which the Excess Percentage Rent was paid.
 
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(b) Lessee shall utilize, or cause to be utilized, an accounting system for the CREZ Assets in accordance with the FERC Uniform System of Accounts for electric utilities, that will accurately record all data necessary to compute Percentage Rent, and Lessee shall retain and shall allow Lessor and its representatives to have reasonable access to, for at least five (5) years after the expiration of each Lease Year, reasonably adequate records conforming to such accounting system showing all data necessary to conduct Lessor’s Audit and to compute Percentage Rent for the applicable Lease Years and to otherwise file or defend tax returns and reports to any Regulatory Authority.
(c) Lessor shall have the right from time to time to cause its accountants or representatives to conduct an inspection, examination and/or audit (a “ Lessor’s Audit ”) of all of Lessee’s records, including supporting data, sales and excise tax returns and the records described in Section 3.3(b), reasonably required to complete such Lessor’s Audit and to verify Percentage Rent, subject to any prohibitions or limitations on disclosure of any such data under applicable laws, regulations and governmental requirements. If any Lessor’s Audit discloses a deficiency in the payment of Percentage Rent, and either Lessee agrees with the result of Lessor’s Audit or the matter is otherwise determined or compromised, Lessee shall forthwith pay to Lessor the amount of the deficiency, as finally agreed or determined, together with interest at the Overdue Rate from the date when said payment should have been made to the date of payment thereof. In addition to the amounts described above in this Section 3.3(c), if any Lessor’s Audit discloses a deficiency in the payment of Percentage Rent which, as finally agreed or determined, exceeds 3% of the amount paid, Lessee shall pay the costs of Lessor’s Audit. In no event shall Lessor undertake a Lessor’s Audit after March 31 of the second year following the Lease Year for which such audit is requested.
(d) Any proprietary information obtained by Lessor pursuant to the provisions of this Section 3.3 shall be treated as confidential, except that such information may be used, subject to appropriate confidentiality safeguards, in any litigation or arbitration between the Parties and except further that Lessor may disclose such information to lenders and investors, including prospective lenders or investors and to any other persons to whom disclosure is necessary or appropriate to comply with applicable laws, regulations and governmental requirements and to comply with any reporting requirements applicable to Lessor or Lessee under any applicable securities laws or regulations or any listing requirements of any applicable securities exchange.
(e) The obligations of Lessee and Lessor contained in this Section 3.3 shall survive the expiration or earlier termination of this Agreement. Any dispute as to the existence or amount of any deficiency in the payment of Percentage Rent as disclosed by Lessor’s Audit shall, if not otherwise settled by the Parties, be submitted to arbitration pursuant to the provisions of Section 13.7.
 
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3.4 Additional Rent . In addition to Base Rent and Percentage Rent, Lessee also will pay and discharge as and when due and payable all other amounts, liabilities, obligations and impositions that Lessee assumes or agrees to pay under this Agreement, including without limitation, the expenses described in Section 1.3 and any reimbursement for such amounts and other damages to Lessor in the event that Lessor pays such expenses or performs such obligations on behalf of Lessee (collectively, “ Additional Rent ”).
3.5 No Set Off . Rent shall be paid to Lessor without set off, deduction or counterclaim; provided, however, that Lessee shall have the right to assert any claim or counterclaim in a separate action brought by Lessee under this Agreement or to assert any mandatory counterclaim in any action brought by Lessor under this Agreement.
3.6 Late Payment Penalty . If Lessee fails to make any payment of Rent to Lessor within five (5) days after it is due, interest shall accrue on the overdue amount, from the date overdue until the date paid, at the Overdue Rate.
3.7 Credit Support . If Lessor has reasonable grounds for insecurity regarding the performance of Lessee’s obligations hereunder, Lessor may require Lessee to provide credit support in the amount, form and for the term reasonably acceptable to Lessor, including but not limited to, a letter of credit, a prepayment, or a guaranty.
3.8 Other Revenue . If Lessee receives or expects to receive any fees, charges or Other Revenues and other than de minimis amounts not to exceed $100,000 in any calendar year, then, unless Lessee reasonably believes that such Other Revenue will not operate to reduce Lessee’s tariff within the State of Texas, Lessee and Lessor will negotiate in good faith to amend this Agreement or a similar lease to characterize the portion of such Other Revenue which Lessor reasonably expects will operate to reduce Lessee’s tariff within the State of Texas as Unadjusted Gross Revenue hereunder or under such other similar lease. In the event the Lessee and Lessor cannot agree on the terms of such amendment of this Agreement or of a similar lease after 60 days of negotiating in good faith, then either the Lessee or the Lessor may submit such matters to arbitration pursuant to Section 13.7 of this Agreement, pursuant to which the Arbitration Panel shall be empowered to characterize the portion of such Other Revenue which Lessor reasonably expects will operate to reduce Lessee’s tariff within the State of Texas as Unadjusted Gross Revenue hereunder or under such other similar lease, based on submissions by each of the Lessee and the Lessor.
ARTICLE IV
LESSEE’S REPRESENTATIONS, WARRANTIES AND COVENANTS
Lessee hereby represents, warrants and covenants to Lessor that:
4.1 Maintenance, Operation and Repair of the CREZ Assets.
(a) Lessee, at its own cost and expense, shall maintain (including both scheduled and unscheduled maintenance), operate, repair and make all modifications (other than Footprint Projects) to the CREZ Assets and any components thereof (whether owned by Lessor or Lessee), including directing all operations of and supplying all personnel necessary for the operation of the CREZ Assets, in each case, as reasonable and prudent and consistent with Good Utility Practice and as required by Applicable Law. Lessee shall carry out all obligations under this Agreement as reasonable and prudent and consistent with Good Utility Practice and in accordance with manufacturers’ warranty requirements (during any applicable warranty
 
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period) and the Lessee’s established operating procedures and maintenance, rebuild and repair programs so as to keep the CREZ Assets in good working order, ordinary wear and tear excepted, and in such condition as shall comply in all material respects with all Applicable Laws. Lessee will operate the CREZ Assets in a reliable and safe manner in compliance with all applicable requirements and regulations of Regulatory Authorities. Lessee will not operate the CREZ Assets or any component thereof in any manner excluded from coverage by any insurance in effect as required by the terms hereof.
(b) If inspections of the CREZ Assets by Lessor show that the CREZ Assets do not meet industry standards or Good Utility Practice for maintenance and repair and/or fail to meet the requirements of any Applicable Law, Lessee shall promptly, but in any event within thirty (30) days after such initial notification, (i) develop a plan for Lessor’s review by which the CREZ Assets can be modified to comply with the standards, and (ii) complete any and all such modifications consistent with all applicable reliability and safety standards established by regulations, orders or requirements of Regulatory Authorities.
4.2 Licenses and Permits . Lessee shall obtain and maintain any and all licenses, permits and other governmental and third-party consents and approvals required by Applicable Law in order to carry out its obligations under this Agreement.
4.3 Property Taxes, and other Assessments and Fees . Lessee shall bear and timely pay all ad valorem or property taxes, sales and use taxes, or other assessments, governmental charges or fees that shall or may during the Term be imposed on, or arise in connection with, the repair, maintenance or operation of the CREZ Assets (including all Footprint Projects as described and provided for in Section 10.1 of this Agreement) (“ Lessee Taxes ”); provided that Lessee shall not be obligated to pay any net income taxes imposed upon Lessor or any sales and use taxes which arise in connection with Lessor’s acquisition of Footprint Projects (“ Lessor Taxes ”). Upon the written request by Lessor, Lessee shall provide Lessor with evidence of the payment of any such Lessee Taxes, the failure of which to be paid would cause the imposition of a Lien upon the CREZ Assets or any component thereof or interest therein. Lessee shall assume full responsibility for preparing and furnishing to Lessor for execution all filings with any governmental authority of or in the state and/or locality in which the CREZ Assets is located in respect of any and all taxes; except that, where required or permitted by Applicable Law, Lessee shall make such filings on behalf of Lessor in the name of Lessor or in Lessee’s own name. In each case in which Lessee furnishes a tax return or any other form to be executed by Lessor for filing with or delivery to any taxing authority, Lessee shall certify to Lessor that such document is in the proper form, is required to be filed under Applicable Law and does not impose any tax or other liability on Lessor or any of its affiliates which is not indemnified by Lessee. Lessee shall be permitted to contest, in its own name when permitted by law but otherwise on behalf of Lessor, in good faith and upon consultation with Lessor, any taxes it is obligated to pay hereunder.
4.4 Requirements of Governmental Agencies and Regulatory Authorities . Lessee, at its expense, shall comply with all Applicable Laws, including without limitation all requirements of the Regulatory Authorities. Lessee shall have the right, in its reasonable discretion and at its cost and expense, to contest by appropriate legal proceedings, the validity or applicability to the CREZ Assets of any Applicable Law made or issued by any federal, state, county, local or other
 
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governmental agency or entity. Any such contest or proceeding shall be controlled and directed by Lessee. Notwithstanding the foregoing, Lessee shall provide Lessor written notice of the commencement and, at reasonable intervals after commencement, the progress of any such legal proceedings.
4.5 Liens . Lessee shall keep the CREZ Assets free and clear of all Liens other than Permitted Liens; provided, however, that if Lessee wishes to contest any such Lien (other than a Permitted Lien), Lessee shall, promptly, and in any event within thirty (30) days after it receives notice of the filing of such Lien, remove or bond over such lien from the CREZ Assets pursuant to Applicable Law. If Lessee fails to promptly remove or bond over any such Lien, Lessor may, after providing notice to Lessee, take reasonable action to satisfy, defend, settle or otherwise remove the Lien at Lessee’s expense.
4.6 Hazardous Materials.
(a) Lessee shall operate and maintain the CREZ Assets and conduct all of its other activities in respect thereof in compliance in all material respects with any Applicable Laws relating to air, water, land and the generation, storage, use, handling, transportation, treatment or disposal of Hazardous Materials. Lessee shall promptly notify Lessor of any such violation and, to the extent Lessee becomes aware of any environmental, health, safety or security matter that requires a corrective action, Lessee shall, in consultation with Lessor, undertake and complete such corrective action. Lessee shall have the obligation to report any such violations to the appropriate Regulatory Authorities in accordance with Applicable Law and, if practicable, shall give notice thereof to Lessor prior to making such report.
(b) Without limiting the generality of the foregoing, Lessee shall not (i) place or locate any underground tanks on the property underlying the CREZ Assets, (ii) generate, manufacture, transport, produce, use, treat, store, release, dispose of or otherwise deposit Hazardous Materials in or on the CREZ Assets, the property underlying the CREZ Assets or any portion thereof other than as permitted by Applicable Laws that govern the same or are applicable thereto, (iii) permit any other substances, materials or conditions in, on or emanating from the CREZ Assets, the property underlying the CREZ Assets or any portion thereof which may support a claim or cause of action under any Applicable Law or (iv) undertake any action that would reasonably be expected to cause an unauthorized release of Hazardous Materials at the property underlying the CREZ Assets.
(c) Lessee shall periodically, at intervals determined in its reasonable discretion in accordance with Good Utility Practice or as required by Applicable Law, at Lessee’s sole expense, conduct inspections of all components of the CREZ Assets to ensure compliance with Applicable Laws and with this Section 4.6, and shall promptly notify Lessor of the results of any such inspections. Lessor may, at Lessor’s expense, conduct its own testing at times determined in its reasonable discretion, and after reasonable consultation with Lessee, to ensure Lessee’s compliance with Applicable Laws and with this Section 4.6, provided, however, that Lessor agrees to indemnify Lessee, in accordance with Section 12.2, from and against any and all Claims arising from such testing.
 
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4.7 Indebtedness . Lessee shall not incur Indebtedness other than: (i) Indebtedness in an aggregate principal amount of up to the greater of (A) $5,000,000 and (B) an amount equal to one percent (1%) of the sum of, without duplication, (x) the total amount of the Consolidated Net Plant of Lessee, plus (y) the total amount of the Consolidated Net Plant of any guarantor(s) of Lessee’s obligations under any Lease to which Lessee is a party as a lessee, plus (z) the total amount of Leased Consolidated Net Plant of Lessee, in each case on a senior secured basis, (ii) Indebtedness in an aggregate principal amount of up to the greater of (A) $10,000,000 and (B) an amount equal to one-and-a-half percent (1.5%) of the sum of, without duplication, (x) the total amount of the Consolidated Net Plant of Lessee, plus (y) the total amount of the Consolidated Net Plant of any guarantor(s) of Lessee’s obligations under any Lease to which Lessee is a party as a lessee, plus (z) the total amount of Leased Consolidated Net Plant of Lessee, in each case on an unsecured subordinated basis on terms substantially similar to the terms set forth on Exhibit C and (iii) loans, in an aggregate principal amount not to exceed $10,000,000 at any time outstanding, made by InfraREIT Partners, LP or a subsidiary thereof to Lessee from time to time for the purpose of financing capital expenditures. For purposes of clauses (i) and (ii) of the preceding sentence, any Consolidated Qualified Lessees of Lessee will be treated as Lessee. In addition to the foregoing, any of Lessee’s subsidiaries may incur Indebtedness in an aggregate principal amount of up to the product of (x) Lessee’s aggregate Consolidated Net Plant multiplied by (y) the lesser of (A) the sum of Lessee’s then-current PUCT-regulated debt-to-equity ratio (expressed as a percentage) and five percent (5%) or (B) sixty-five percent (65%); provided, however, that such Indebtedness must be Non-Recourse Debt to Lessee. For purposes of this Section 4.7, Lessee’s Consolidated Net Plant will be derived from its most recently prepared consolidated balance sheet, prepared in accordance with GAAP but adjusted to reverse the effects of failed sale-leaseback accounting in a manner reasonably determined by Lessee in good faith. Without limiting the amount of Indebtedness permitted by the foregoing, Lessee may also incur Indebtedness (x) in the form of a pledge of equity interests in a subsidiary of Lessee as security for Non-Recourse Debt of such subsidiary and (y) in amounts otherwise permitted under the SDTS Debt Agreements.
4.8 Records . In addition to the records referred to in Section 3.3, Lessee shall maintain proper books of record and account in conformity with GAAP and all applicable Regulatory Authorities and each other governmental agency or authority having legal or regulatory jurisdiction over Lessee. Additionally, Lessee shall maintain or cause to be maintained all logs, drawings, manuals, specifications and data and inspection, modification and maintenance records and other materials required to be maintained in respect of the CREZ Assets by Applicable Laws or by prudent and Good Utility Practice. Lessee shall allow Lessor and its representatives to have reasonable access to, for at least five (5) years after the expiration of each Lease Year, the records referred to in this Section 4.8.
4.9 Surrender . Upon expiration or earlier termination of this Agreement in accordance with its terms (but subject to Section 2.2 and the requirements of all Applicable Laws), and in a manner calculated to avoid any disruption of electrical service, Lessee shall vacate and surrender possession of all components of the CREZ Assets (other than in respect of Footprint Projects funded by Lessee as described in Section 10.5(a)) to Lessor, or to such other person or entity as Lessor may direct. At the time of such surrender, the CREZ Assets shall be free and clear of Liens and other rights of third parties (other than Permitted Liens), and shall be in the same condition as the date the construction of such CREZ Assets
 
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was completed, ordinary wear and tear and subsequent Footprint Projects excepted. Lessee shall deliver or cause to be delivered to Lessor, or to such other person or entity as Lessor may direct, copies of all title documents, logs, drawings, manuals, specifications and data and inspection, modification and maintenance records, billing records, reports and other documents in respect of the CREZ Assets which are necessary to determine the condition of the CREZ Assets or for the continued maintenance, repair or general operation of the CREZ Assets and are in Lessee’s possession at such time. In connection with the surrender of the CREZ Assets, Lessor shall pay to Lessee the aggregate purchase price for any Footprint Projects, equipment or other property purchased by Lessor in accordance with Section 2.3 or Section 10.5(b).
4.10 Cooperation; Transition Services.
(a) During the period after notice of termination and prior to the termination of the Agreement, with reasonable notice, Lessee will cooperate in all reasonable respects with the efforts of Lessor to sell or lease the CREZ Assets (or any component thereof) or any interest therein, including, without limitation, permitting prospective purchasers or lessees to fully inspect the CREZ Assets and any logs, drawings, manuals, specifications, data and maintenance records relating thereto; provided, that such cooperation shall not unreasonably interfere with the normal operation of the CREZ Assets or cause Lessee to incur any additional expenses other than as specifically provided herein. All information obtained in connection with such inspection shall be subject to confidentiality requirements at least as restrictive as those contained in Section 13.3.
(b) Upon expiration or termination of this Agreement, Lessee shall continue to lease and operate the CREZ Assets pursuant to the terms of Section 2.2, if required thereunder. During such period Lessee shall perform all duties and retain all obligations under Article IV in all respects, as if the Agreement had not expired or been terminated.
4.11 Lessee’s Authority . Lessee has all requisite power and authority to execute and deliver this Agreement and to perform its obligations hereunder. Lessee has taken all action necessary to execute and deliver this Agreement and to perform its obligations hereunder, and no other action or proceeding on the part of Lessee is necessary to authorize this Agreement. This Agreement constitutes the legally valid and binding obligation of Lessee, enforceable against Lessee in accordance with its terms, except as the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Applicable Laws affecting the enforcement of creditors’ rights generally and equitable principles.
4.12 Litigation . If Lessee becomes aware of any actions, claims or other legal or administrative proceedings that are pending, threatened or anticipated with respect to, or which could materially and adversely affect, the CREZ Assets, Lessee shall promptly deliver notice thereof to Lessor.
 
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4.13 Financing . Lessee acknowledges that Lessor has obtained financing secured by, among other things, the CREZ Assets and this Agreement. In connection with such financing, Lessor made certain representations, warranties and covenants set forth in that certain Credit Agreement a copy of which has been provided to and reviewed by Lessee. Lessee hereby agrees with Lessor that, to the extent not otherwise covered by the terms of this Agreement, Lessee hereby makes the same representations and warranties to Lessor as Lessor makes to the Financing Parties (as defined in the Credit Agreement) in Sections 5.4 ( Financial Statements; Material Adverse Effect ), 5.5 ( Disclosure ), 5.6 ( No Material Adverse Effect ), 5.7 ( Governmental Approvals ), 5.9 ( Taxes ), 5.10 ( Title to Properties; Eminent Domain Authority; Possession Under Leases; Investments ), 5.11 ( Security Documents ), 5.12 ( Filings ), 5.13 ( Investment Company ), 5.14 ( Governmental Regulation ), 5.16 ( Compliance with Legal Requirements ), 5.17 ( OFAC ), 5.18 ( PUCT; ERCOT ), 5.19 ( Permits ), 5.20 ( Litigation ), 5.21 ( No Default ), 5.22 ( Insurance ), 5.23 ( Certain Environmental Matters ), 5.24 ( Utilities ), 5.25 ( Material Project Documents ), 5.26 ( Intellectual Property ), 5.27 ( Partnerships and Joint Ventures; Separateness ), 5.28 ( Accounts ), and 5.29 ( Solvency ) of the Credit Agreement to the extent that such representations and warranties relate to Lessee, whether in its capacity as Lessee or otherwise, including, without limitation, Lessee’s status or operations as a public utility, and (ii) Lessee hereby covenants and agrees with Lessor that, during the term of the Credit Agreement, Lessee will comply with the covenants set forth in Sections 6.10 ( Material Project Documents ) (to the extent that Lessee is a party to any Material Project Documents), 6.12 ( Operation of Project ), 6.13 ( PUCT; ERCOT ), 6.19 ( Construction of Project ), 7.9 ( Material Project Documents ) and 7.10 ( Amendments to Organizational Documents ) of the Credit Agreement. Lessee may not lease, or agree or otherwise commit to lease, any transmission or distribution facilities other than pursuant to a Lease. Further, Lessee shall not permit Persons other than Hunt Family Members to acquire any interest in the Lessee, directly or indirectly, in a manner that would result in a Change of Control of Lessee. The Parties agree to amend, alter or supplement this Section 4.13 from time to time to give effect to the obligations under Lessor’s then-current credit arrangements.
ARTICLE V
LESSOR’S REPRESENTATIONS, WARRANTIES AND COVENANTS
Lessor hereby represents, warrants and covenants as follow:
5.1 Lessor’s Authority . Lessor has all requisite power and authority to execute and deliver this Agreement and to perform its obligations hereunder. Lessor has taken all action necessary to execute and deliver this Agreement and to perform its obligations hereunder, and no other action or proceeding on the part of Lessor is necessary to authorize this Agreement. This Agreement constitutes the legally valid and binding obligation of Lessor, enforceable against Lessor in accordance with its terms, except as the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Applicable Laws affecting the enforcement of creditors’ rights generally and equitable principles.
5.2 Liens and Tenants . Lessor represents that Lessor has good and valid title to the CREZ Assets, there are no unrecorded liens, encumbrances, leases, mortgages, deeds of trust (except as disclosed to Lessee in writing or as arise by operation of law), or other exceptions (collectively, “ Liens ”) arising as a result of any acts or omissions to act of Lessor by, through or under Lessor to Lessor’s right, title or interest in the CREZ Assets other than any such of the foregoing that does not materially impair the Lessee’s use of the CREZ Assets, and, to Lessor’s knowledge, there exist no rights or interests of any third party relating to the
 
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CREZ Assets that are not contemplated herein. Except for Permitted Liens or as may be disclosed in the applicable real property records in the State of Texas, or as disclosed by Lessor in writing to Lessee, Lessor represents that there are no mortgages, deeds of trust, or similar liens or security interests encumbering all or any portion of the CREZ Assets. Lessor shall fully cooperate and assist Lessee, at no out-of-pocket expense to Lessor, in obtaining a subordination and non-disturbance agreement from each party that holds a Lien that might reasonably be expected to interfere in any material respect with Lessee’s rights under this Agreement. Notwithstanding the foregoing, Lessor and its affiliates shall have the right to incur Permitted Liens encumbering the CREZ Assets or any component thereof solely for the benefit of Lessor in connection with any existing or future financing or refinancing pursuant to which the CREZ Assets (or any component thereof) is pledged as collateral and Lessee agrees to enter into such acknowledgments and agreements in respect thereof with the lenders, or a trustee or agent for the lenders as the Lessor may reasonably request.
5.3 Condition of Assets. Lessor has not taken any action or failed to take any action that would cause the CREZ Assets not to be in good operating condition and repair, ordinary wear and tear excepted, or adequate for the uses to which it is being put.
5.4 Requirements of Governmental Agencies. Lessor shall assist and fully cooperate with Lessee, in complying with or obtaining any material land use permits and approvals, building permits, environmental impact reviews or any other approvals reasonably required for the maintenance or operation of the CREZ Assets, including execution of applications for such approvals, and including participating in any appeals or regulatory proceedings respecting the CREZ Assets at Lessee’s cost and expense, if requested by Lessee.
5.5 Hazardous Materials. Lessor shall conduct its activities in respect of the CREZ Assets in compliance in all material respects with applicable Environmental Laws.
5.6 Litigation. If Lessor becomes aware of any actions, claims or other legal or administrative proceedings that are pending, threatened or anticipated with respect to, or which could materially and adversely affect, the CREZ Assets, Lessor shall promptly deliver notice thereof to Lessee.
5.7 Limitation. EXCEPT AS EXPRESSLY REPRESENTED OTHERWISE IN THIS ARTICLE V, LESSOR (A) MAKES NO AND EXPRESSLY DISCLAIMS ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO (I) TITLE TO THE CREZ ASSETS OR ANY PORTION THEREOF, (II) ANY ESTIMATES OF THE VALUE OF THE CREZ ASSETS OR FUTURE REVENUES THAT MIGHT BE GENERATED BY THE CREZ ASSETS, (III) THE MAINTENANCE, REPAIR, CONDITION, QUALITY, SUITABILITY, DESIGN OR MARKETABILITY OF THE CREZ ASSETS, (IV) INFRINGEMENT OF ANY INTELLECTUAL PROPERTY RIGHT OR (V) ANY OTHER MATERIALS OR INFORMATION THAT MAY HAVE BEEN MADE AVAILABLE OR COMMUNICATED TO LESSEE OR ITS AFFILIATES, OR ITS OR THEIR EMPLOYEES, AGENTS, CONSULTANTS, REPRESENTATIVES OR ADVISORS IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY DISCUSSION OR PRESENTATION RELATING THERETO, AND (B) FURTHER DISCLAIMS ANY REPRESENTATION OR WARRANTY,
 
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EXPRESS OR IMPLIED, OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR CONFORMITY TO MODELS OR SAMPLES OF MATERIALS OF ANY PORTION OF THE CREZ ASSETS, IT BEING EXPRESSLY UNDERSTOOD AND AGREED BY THE PARTIES HERETO THAT THE CREZ ASSETS ARE BEING LEASED “AS IS, WHERE IS,” WITH ALL FAULTS AND DEFECTS, AND THAT LESSEE HAS MADE OR CAUSED TO BE MADE SUCH INSPECTIONS AS LESSEE DEEMS APPROPRIATE.
ARTICLE VI
LOSS AND DAMAGE; INSURANCE
 
6.1	Loss and Damage to the CREZ Assets.	
(a) In the event of any damage or loss to any component of the CREZ Assets, Lessee shall promptly repair or replace such component to the standards required by Section 4.1 (regardless of whether such repair or replacement constitutes a Repair or a Footprint Project). Any such repaired or replaced component will immediately become part of the CREZ Assets owned by Lessor and the cost of any repair or replacement shall be borne as described in Sections 6.1(b)-(d) below.
(b) If such repair or replacement constitutes a Repair, the cost of repairing or replacing such damage or loss, whether actually covered in whole or in part by insurance, shall be the responsibility of Lessee. Lessee shall be entitled to retain any insurance proceeds in excess of the amount necessary in connection with such Repair.
(c) If such repair or replacement constitutes a Footprint Project, then, as long as the related costs have been included in a CapEx Budget, the cost of repairing or replacing such damage or loss, whether actually covered in whole or in part by insurance, shall be the responsibility of Lessor. In such circumstance, unless otherwise agreed by the Parties, (i) if the damage or loss is covered by insurance, Lessor shall be responsible for payment of any deductible, and (ii) any damage or loss not covered by insurance (exclusive of any deductible) shall be the responsibility of Lessor. If the sum of such deductible and insurance proceeds exceeds the cost of such Footprint Project, then such excess will first reduce Lessor’s obligation to fund the deductible hereunder, and any excess thereafter will be retained by Lessee. If such repair or replacement constitutes a Footprint Project that is not included in a CapEx Budget, the provisions of Article X shall apply.
(d) Lessee shall be solely responsible for all costs of repairing or replacing any damaged property and equipment that is not part of the CREZ Assets and owned by Lessee, whether covered by Lessee’s insurance under Section 6.2 or otherwise. Nothing in this provision shall preclude Lessee from seeking recovery of such costs in a rate proceeding at the PUCT.
(e) If Lessor funds Lessee’s Personal Property pursuant to Section 10.1(b) of this Agreement, then all such funded Personal Property will be treated as a Footprint Project, and not a Repair, for purposes of this Section 6.1.
 
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6.2 Insurance. Lessee will maintain, with financially sound and reputable insurers, insurance with respect to its properties and business against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated, but in no event less than the insurance set forth in this Section 6.2 and Exhibit B.
(a) Lessee shall procure at its own expense and maintain in full force and effect at all times throughout the term of this insurance policies with insurance companies rated A-, 9 or higher by A.M. Best or acceptable to Lessor if not so rated, and authorized to do business in the State of Texas.
(b) Lessor may at any time amend the requirements and approved insurance companies described in this Section 6.2 or Exhibit B due to (i) new information not previously known by Lessor prior to the date of this Agreement or (ii) changed circumstances after the date of this Agreement, which in the reasonable judgment of Lessor either renders a required coverage to be materially inadequate or materially reduces the financial ability of the approved insurance companies to pay claims.
(c) On the first Business Day of each year, if so requested by Lessor, Lessee shall furnish Lessor with certification of all required insurance. Such certification shall be executed by each insurer or by an authorized representative of each insurer where it is not practical for such insurer to execute the certificate itself. Such certification shall identify underwriters, the type of insurance, the insurance limits, and the policy term, and shall specifically list the special provisions enumerated for such insurance required by this Section 6.2. Upon request, Lessee will promptly furnish Lessor with copies of all insurance certificates, binders, and cover notes or other evidence of such insurance relating to the CREZ Assets.
(d) Concurrently with the furnishing of the certification referred to in Section 6.2(c) and on an annual basis thereafter, Lessee shall furnish Lessor with a certificate, signed by an officer of Lessee, stating that all premiums then due have been paid and that the insurance then carried or to be renewed is in accordance with the terms of this Section 6.2. and Exhibit B.
(e) In the event Lessee fails to take out or maintain the full insurance coverage required by this Section 6.2 and Exhibit B , Lessor, upon thirty (30) days’ prior notice (unless the aforementioned insurance would lapse within such period, in which event notice should be given as soon as reasonably possible) to Lessee of any such failure, may (but shall not be obligated to) take out the required policies of insurance and pay the premiums on the same. All amounts so advanced thereof by Lessor shall become an additional obligation of Lessee to Lessor, and Lessee shall forthwith pay such amounts to Lessor.
(f) No provision of this Section 6.2 or Exhibit B or any other provision of this Agreement, shall impose on Lessor any duty or obligation to verify the existence or adequacy of the insurance coverage maintained by Lessee, nor shall Lessor be responsible for any representations or warranties made by or on behalf of Lessee to any insurance company or underwriter.
 
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(g) Notwithstanding the foregoing, the Parties acknowledge that Lessee has not been able to obtain property insurance on commercially reasonable terms to comply with Exhibit B , and as a result Lessor has waived and, until such time as Lessee can obtain such coverages on commercially reasonable terms, hereby does waive the requirements of Exhibit B in favor of the property insurance coverages that have been obtained and are currently in effect; provided that Lessor has obtained a waiver of this insurance requirement under the Credit Agreement.
ARTICLE VII
REPORTING
7.1 Private Financing Arrangements . Lessee understands that Lessor, or an affiliate thereof, has raised equity and debt capital secured by the CREZ Assets and this Agreement and that Lessor or its affiliates have reporting obligations in connection with such arrangements, including obligations to provide financial statements prepared in accordance with GAAP, to prepare an annual strategic plan and to update such annual strategic plan in the event of certain material deviations therefrom. Lessee understands that Lessor relies on Lessee in order to comply with such obligations. From time to time, Lessor or an affiliate thereof may enter into additional arrangements that impose similar obligations. Accordingly, Lessee agrees to provide Lessor in a timely manner audited year-end financial statements, quarterly unaudited financial statements for the first three quarters of each year (certified by a financial officer of Lessee), estimates of Percentage Rent, and such acknowledgements, certificates, permits, licenses, instruments, documents and other information as Lessor may reasonably request from time to time in connection with, or to enable Lessor and its affiliates to comply with any such debt or equity financing arrangements or with Applicable Law. The Parties will negotiate in good faith the time frames during which Lessee will provide such information, with the intention that Lessee provide such information in a manner that is not unduly burdensome but that also allows Lessor sufficient time to comply with its reporting obligations. Lessee will also cooperate with Lessor to enable Lessor to satisfy its obligations in respect of annual strategic plans, including providing Lessor with requested information in advance of the due date of such annual strategic plan and keeping Lessor apprised of deviations in capital expenditures, construction activity or revenues of Lessee from amounts that were originally provided by Lessee in preparing such annual strategic plan. Lessee agrees to use reasonable efforts to advise Lessor if Lessee will be unable to meet the reporting requirements set forth herein in a timely manner and to reasonably cooperate with Lessor to remedy the effects of such non-compliance.
7.2 Public Company and Regulatory Information and Cooperation .
(a) Lessee agrees to provide audited full-year and unaudited (but SAS 100 reviewed) interim financial statements and the consent of Lessee’s auditors to the inclusion of their opinion regarding such financial statements in filings with the Securities and Exchange Commission made by Lessor or an affiliate of Lessor. Lessor may also request that Lessee provide evidence of a SAS 100 review from Lessee’s auditors with respect to any unaudited interim financial statements included in any such filing. Lessor shall have the right to share any such financial statements with its lenders under the Credit Agreement. Lessee covenants that (i) such financial statements will fairly present in all material respects the financial condition, results of operations and cash flows of Lessee as of, and for, the periods presented, and (ii) Lessee will endeavor to cause such financial statements to comply with any applicable laws, rules or regulations that Lessee and Lessor conclude in good faith are applicable to such financial statements by virtue of their inclusion in the securities law filings of Lessor or an affiliate thereof.
 
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(b) Lessee agrees that, in connection with any underwritten offering of the securities of Lessor or any affiliate thereof, Lessee will use commercially reasonable efforts to cause its auditors to provide a comfort letter (or its equivalent) to such underwriters, if requested by Lessor.
(c) Lessee agrees to cooperate with Lessor when Lessor or an affiliate provides estimates to analysts and or investors regarding Lessor’s expectations of its future operating results (including capital expenditures) and to cooperate with Lessor with respect to analysts and investors to the extent such expectations change in any material respect.
(d) Lessee and Lessor agree to reasonably cooperate to ensure that, to the extent they require information from the other party in order to prepare their financial statements, to obtain audits of those financial statements and, if required, of their internal control over financial reporting, to respond to comments of the Securities and Exchange Commission on such financial statements or statements related to internal control over financial reporting or disclosure controls and procedures, or to ensure the efficacy of their internal controls or disclosure controls and procedures, they will reasonably cooperate in order to ensure that each Party is able to meet its obligations in respect thereof. Lessee agrees to promptly notify Lessor of or provide to Lessor, as applicable, (i) any material communication, written or otherwise, submitted to the Lessee by its auditors, including, but not limited to an audit response letter, accountant’s management letter or other written report submitted to Lessee by its accountants or any governmental agency in connection with an annual or interim audit of Lessee’s books, (ii) any material correspondence with, reports of or reports to any Regulatory Authority with respect to the CREZ Assets and (iii) any notices of violations of Applicable Law with respect to the CREZ Assets, in each case taking into account the REIT’s reporting obligations as a public company.
(e) Lessor agrees to inform Lessee of the time periods in which each of the items identified in this Section 7.2 will be required, which may change. Lessee agrees to use reasonable efforts to advise Lessor if Lessee will be unable to meet the reporting requirements set forth herein in a timely manner and to reasonably cooperate with Lessor to remedy the effects of such non-compliance.
(f) If Lessor identifies additional matters with respect to which Lessee input, assistance or information is required in order for Lessor and its affiliates to comply with any applicable securities laws, the rules or regulations of any exchange on which the securities of such affiliate are traded or any similar laws, rules or regulations, the Parties agree to cooperate and negotiate in good faith in order to determine the manner in which Lessee can provide such input, assistance or information in a manner that positions Lessor and its affiliates to comply in a timely manner with such laws, rules or regulations, as efficiently as is feasible so as to minimize the burden that the provision of such input, assistance or information imposes on Lessee.
 
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7.3 Mutual Obligations . Each Party shall as promptly as reasonably practicable furnish or cause to be furnished to the other Party, upon request from such Party, such information as may be required to enable such Party to file any reports required to be filed with any governmental or Regulatory Authority due to such Party’s ownership interest in or operation and control of the CREZ Assets, as applicable.
ARTICLE VIII
ASSIGNMENT
This Agreement shall not be assignable by either Party, nor shall the CREZ Assets or any part thereof be subleased by Lessee, except with the prior written consent of the other Party and the prior approval of any Regulatory Authority whose approval is required for the effectiveness of such assignment or sublease. For purposes of this Article VIII, an “assignment” by Lessee shall mean and include, in addition to any direct transfer by Lessee to a third party of all or any part of Lessee’s rights, estate or interests under this Agreement, any direct or indirect, voluntary or involuntary transfer of or encumbrance on all or any part of Lessee’s rights, estate or interests under this Agreement (i) by operation of law and/or (ii) by direct or collateral transfer of all or any part of the legal or beneficial ownership interest in Lessee by merger, consolidation or otherwise, provided, in the case of clause (ii), any such transaction or transactions will only constitute an assignment hereunder to the extent they result in a Change of Control. Notwithstanding the foregoing, Lessor shall have the right, without Lessee’s consent but subject to obtaining regulatory approval as described in the foregoing sentence, (a) to assign, pledge or grant a security interest in any or all of its interest in the Agreement to a lender or lenders, or a trustee acting on behalf of such lenders, in connection with a financing or refinancing in which such interest is pledged as collateral, and Lessee agrees to enter into such acknowledgments and agreements in respect thereof as the Lessor may reasonably request and (b) to assign its interest in this Agreement to a successor owner of the CREZ Assets.
ARTICLE IX
DEFAULT
9.1 Lessee Default . Subject to Section 9.3, Lessee shall be in default in the event of any of the following:
(a) Except as provided in Section 9.1(g), Lessee’s failure to make any payment of Rent when due;
(b) Lessee (i) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes corporate action for the purpose of any of the foregoing;
 
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(c) a court or a Regulatory Authority or other governmental agency of competent jurisdiction enters an order appointing, without consent by Lessee, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of Lessee or any such petition shall be filed against Lessee and such petition shall not be dismissed within 90 days;
(d) Any representation or warranty made by Lessee herein shall prove to have been inaccurate in any material respect at the time made;
(e) a final judgment or judgments for the payment of money aggregating in excess of $1,000,000 are rendered against Lessee and which judgments are not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay;
(f) Lessee shall have breached or failed to comply in any material respect with any other covenant or agreement contained herein; or
(g) Notwithstanding Section 9.1(a), Lessee’s failure to pay Rent when due shall not constitute a default if (i) such failure is due to unforeseeable circumstances arising. from a physical event beyond the control of the Lessee, including the incurrence of costs and expenditures as a result of such an event that are materially in excess of budgeted costs and expenditures or an unforeseen material decline in electricity usage as a result of such event and (ii) such failure is cured within ninety (90) days after the date such rent was due through Lessee’s payment of the entire amount of such unpaid Rent, plus interest thereon at a rate equal to six percent (6%) per annum or the maximum rate allowed by law, whichever is lesser, from the date such Rent was originally due until the date of payment.
9.2 Lessor Default. Subject to Section 9.3, Lessor shall be in default in the event any representation or warranty made by Lessor herein shall prove to have been inaccurate in any material respect at the time made, or in the event Lessor breaches or fails to comply in any material respect with any covenant or agreement contained herein.
9.3 Right to Cure . If a Party (the “ Defaulting Party ”) defaults pursuant to an Event of Default, such Defaulting Party shall not be in default of the terms of this Agreement if (other than in the event of a default described in Sections 9.1(b) and/or 9.1(c) above), (a) in the case of a Monetary Default, the Defaulting Party pays the past due amount within thirty (30) days of receiving a Notice of Default from the other Party (the “ Non-Defaulting Party ”), and (b) in the case of a Non-Monetary Default, the Event of Default is cured within forty-five (45) days of receiving the Notice of Default; provided, that if the nature of the Non-Monetary Default requires, in the exercise of commercially reasonable diligence, more than forty-five (45) days to cure then the Defaulting Party shall not be in default as long as it commences performance of the cure within forty-five (45) days and thereafter completes such cure with commercially reasonable diligence.
 
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9.4 Remedies .
(a) Should an Event of Default remain uncured by the Defaulting Party, the Non- Defaulting Party shall have and shall be entitled to exercise the remedies provided in this Section 9.4 and any and all other remedies available to it at law or in equity, all of which remedies shall be cumulative; provided, that the exercise of any remedies hereunder shall be subject to PUCT and other required regulatory approvals to the extent applicable.
(b) In no way limiting the provisions of Section 9.4(a), in the case of an Event of Default of Lessee, Lessor shall have the right to (i) terminate the Agreement upon notice to Lessee, and recover from Lessee all damages to which Lessor is entitled under Applicable Laws, (ii) terminate Lessee’s right to use and operate the CREZ Assets while keeping this Agreement in effect, and recover from Lessee all damages to which Lessor is entitled under Applicable Laws, and (iii) take reasonable action to cure Lessee’s default at Lessee’s expense; provided, that in the event of a violation of Applicable Laws by Lessee, an emergency or government or regulatory action in respect of which Lessor, in its reasonable discretion, determines immediate action is necessary, Lessor shall have the right to step in and take such action on behalf of Lessee at Lessee’s cost and expense immediately upon giving notice to Lessee, notwithstanding any applicable cure period.
(c) Any amounts recovered by Lessor from Lessee in the event of a default shall, to the maximum extent permissible under Applicable Laws, be deemed to be in respect of past or future Rent owing under this Agreement.
ARTICLE X
CAPITAL EXPENDITURES
10.1 Capital Expenditures Generally .
(a) Lessee has provided to Lessor in the CapEx Budget the approximate amounts of Capital Expenditures that Lessee expects will be needed for purposes of funding Footprint Projects in each Lease Year through 2017. On or before October 15 of each calendar year, Lessee shall review and revise the CapEx Budget on a rolling three-year basis (which shall include, if applicable, any year in such three-year period following the end of then-current Term and assume the renewal of this Agreement pursuant to Section 2.1), taking into account any changed circumstances that (i) make it no longer feasible to incur one or more of the costs reflected on the prevailing CapEx Budget, (ii) make it necessary to amend the nature or amounts reflected for a particular Footprint Project or (iii) dictate that additional Footprint Projects be added (such budget, as so updated and revised, is referred to herein as the “ CapEx Budget ”). Lessee agrees to revise the CapEx Budget to include any Footprint Projects (x) required by Regulatory Authorities or (y) reasonably necessary to satisfy Lessee’s obligation as a regulated utility to serve its customers or to maintain the safety or reliability of the CREZ Assets. Capital Expenditures included in a CapEx Budget will be included based on the date such Capital Expenditures are to be incurred, which differentiates these Capital Expenditures from Incremental CapEx and Lessee CapEx, which are measured under this Agreement based on when the assets developed with such Capital Expenditures are placed in service, and not when they are incurred.
 
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(b) If requested by Lessor, Lessee will also provide an estimate of any Capital Expenditures that Lessee expects for purposes of funding Personal Property related to the CREZ Assets. If Lessor and Lessee agree, Lessor will fund such Capital Expenditures pursuant to this Agreement, through a loan or through a separate lease. Amounts Lessor provides pursuant to this Agreement to fund any such Personal Property will be treated in a manner similar to any amounts Lessor provides to fund Footprint Projects for purposes of Section 3.2 and elsewhere herein. Lessee will cause any such Personal Property to be titled in Lessor’s name and will reasonably cooperate with Lessor in order to enable any secured lender of Lessor or any secured lender of an affiliate of Lessor to perfect its security interest in any such Personal Property. In the alternative, Lessor may elect to fund such Capital Expenditures through a TRS or to loan (or cause such TRS to loan) Lessee the cash to acquire any such Personal Property in a transaction in which Lessor or a TRS may retain a security interest in such Personal Property. In such case the Parties shall negotiate in good faith the terms under which Lessor or such TRS shall fund any such Personal Property, including the terms of any lease between Lessee and the TRS or other financing arrangements provided by the Lessor or the TRS.
10.2 Capital Expenditures Funded by Lessor . Lessor agrees to fund any Footprint Projects contained in the CapEx Budget (as revised from time to time). Lessor’s obligation to fund Footprint Projects pursuant to this Section 10.2 shall include any costs associated with such Footprint Projects that Lessee is not allowed to recover through its PUCT-approved rates. Any Footprint Projects funded by Lessor under this Section 10.2 shall be deemed to be part of the CREZ Assets upon completion.
10.3 Capital Expenditures Funded by Lessee . Except as set forth in this Section 10.3, Lessee may not fund any Footprint Projects. In the event Lessor fails to fund any Footprint Projects, Lessee may at its sole discretion fund the needed capital expenditures (and Lessee shall be entitled to applicable damages, if any, as a result of funding any such Footprint Projects); provided that, in such circumstance, Lessee may fund Severable Footprint Projects without restriction under this Section 10.3 but may only fund Nonseverable Footprint Projects which are required in order to comply with Applicable Law or which are required by any Regulatory Authority. Any Footprint Projects funded by Lessee under this Section 10.3 shall not be considered part of the CREZ Assets for purposes of this Agreement; provided however , that any part of the CREZ Assets that is built with CIAC funds shall be considered a leasehold improvement that is part of the CREZ Assets and reverts to the Lessor upon termination of this Agreement without further payment from Lessor to Lessee under Section 2.3.
10.4 Footprint Project Construction Activities . Lessee will either use its personnel, or either Lessee or Lessor will contract with third parties, to construct Footprint Projects. Lessee shall be responsible for the oversight of such construction activities, regardless of whether the Footprint Project is funded by Lessor or Lessee. Lessee’s construction activities and oversight shall be intended to ensure that such construction is performed in a manner consistent with Good Utility Practice and does not adversely affect the reliability and safety of the CREZ Assets or the ERCOT electric grid. In connection therewith, Lessor will reimburse Lessee for all Project Management Costs that Lessee incurs in connection with constructing such Footprint Project, provided that any costs and expenses of Lessee under this Section 10.4 must be included in any CapEx Budget submitted by Lessee under Section 10.1 or approved by Lessor to qualify for reimbursement by Lessor hereunder.
 
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10.5 Ownership of Footprint Projects .
(a) Each Footprint Project shall be owned by the Party that funded the capital expenditures used to construct such Footprint Project; provided however , that any part of the CREZ Assets that is built with CIAC funds shall be considered a leasehold improvement that is part of the CREZ Assets and shall revert to the Lessor upon termination of this Agreement without further payment from Lessor to Lessee under Section 2.3.
(b) Upon the expiration or termination of this Agreement, Lessor shall have the right (but not the obligation) to purchase, subject to required regulatory approvals, any Nonseverable Footprint Projects or Severable Footprint Projects owned by Lessee at the greater of (i) net book value plus ten percent (10%) and (ii) the fair market value thereof as determined by mutual agreement of Lessor and Lessee. If the Parties fail to agree on the amount of the purchase price, the purchase price shall be submitted to arbitration in accordance with Section 13.7 of this Agreement, pursuant to which the Arbitration Panel shall be empowered to determine the amount of the purchase price, based on submissions by each of the Lessee and the Lessor. Lessee shall be entitled to remove any Severable Footprint Projects owned by Lessee upon the expiration or termination of this Agreement in the event such Severable Footprint Projects are not purchased by Lessor, subject to any required regulatory approvals.
10.6 Asset Acquisitions . Lessee and Lessor will cooperate in good faith to ensure that all CREZ Assets are acquired in Lessor’s name or are acquired by Lessee and subsequently transferred to Lessor. In connection therewith, Lessee agrees (a) to transfer to Lessor all previously acquired CREZ Assets, (b) that any future-acquired CREZ Assets will be deemed automatically transferred to Lessor, (c) to take reasonable actions as are necessary and appropriate to document the transfer of any such CREZ Assets to Lessor and, if applicable, to memorialize the security interest of any lenders under the Financing Agreements in such CREZ Assets, including through the delivery and recordation of mortgages, deeds of trust or UCC financing statements, and (d) to take reasonable steps to record the transfer and such security interest in the records of the applicable county or other applicable locale in which the CREZ Assets are located.
10.7 Reimbursements . From time to time, Lessee may enter into interconnect or similar agreements that obligate the counterparty to such agreements to reimburse Lessee for Capital Expenditures in certain circumstances. Such reimbursement obligation may, in some circumstances, be accompanied by additional security such as parent guaranty or a letter of credit. If and to the extent that (a) Lessor funds Capital Expenditures that are used for the construction or development pursuant to any of these interconnect agreements, and (b) Lessee becomes entitled to assert any reimbursement or other rights pursuant to any such interconnect agreements, then, unless Lessor agrees otherwise, Lessee will enforce such reimbursement or other rights and will in turn reimburse Lessor for the amount of related Capital Expenditures that Lessor has funded pursuant hereto. Lessee further agrees to reimburse Lessor for other Capital Expenditures that Lessor has funded pursuant to this Agreement to the extent required by the Policies and Procedures.
 
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ARTICLE XI
REGULATORY COOPERATION
11.1 Jurisdiction . The Parties recognize that (i) the CREZ Assets and the operation thereof are subject to the jurisdiction of the PUCT and to certain reliability and safety requirements of ERCOT and TRE, and (ii) Lessee holds CCNs for operation of the CREZ Assets. The Parties agree that, as the lessee hereunder, as operator of the CREZ Assets and as the holder of the CCNs, Lessee shall be responsible for compliance with all regulatory requirements related to the CREZ Assets, including but not limited to, taking all actions reasonably necessary or advisable to comply with such requirements; preparing and filing all necessary notices, reports, applications, and other materials with the PUCT, ERCOT, SPP, TRE and NERC; and initiating, prosecuting, defending or participating in any administrative or judicial proceeding reasonably necessary or advisable to operate the CREZ Assets in an economical and efficient manner. Lessee shall consult with Lessor prior to initiating any rate proceeding with the PUCT to change the rates Lessee can lawfully charge, provided that, with or without Lessor consent, Lessee shall be authorized to initiate any such rate proceeding. Upon Lessor’s request, Lessee shall file a rate proceeding before the PUCT; provided that, Lessor shall be responsible for reimbursing Lessee for all costs associated with prosecution of such proceeding to the extent that such costs are not recoverable in Lessee’s PUCT-approved rates.
11.2 Cooperation . The Parties agree that during the term of this Agreement they will cooperate to assure compliance with all applicable regulations, orders or lawful requests of any governmental or Regulatory Authorities that relate to the CREZ Assets and Lessee’s obligations as the holder of the CCNs and will provide such information to such governmental and Regulatory Authorities as the other Party or such governmental or Regulatory Authorities may reasonably request in connection therewith. Lessor further agrees to use its best efforts to cooperate and promptly respond to any lawful requests from Lessee relating to Lessee’s efforts to comply with all regulatory requirements or to participate in any necessary or advisable legal proceedings, whether judicial or administrative. Each Party shall bear its own costs in complying with this paragraph.
ARTICLE XII
INDEMNITY
12.1 General Indemnity . EACH PARTY (THE “INDEMNIFYING PARTY’’ ) SHALL DEFEND, INDEMNIFY AND HOLD HARMLESS THE OTHER PARTY AND THE OTHER PARTY’S RELATED PERSONS (EACH, AN “INDEMNIFIED PARTY’’ ) FROM AND AGAINST ANY AND ALL CLAIMS, LITIGATION, ACTIONS, PROCEEDINGS, LOSSES, DAMAGES, LIABILITIES, OBLIGATIONS, COSTS AND EXPENSES, INCLUDING ATTORNEYS’, INVESTIGATORS’ AND CONSULTING FEES, COURT COSTS AND LITIGATION EXPENSES (COLLECTIVELY, “ CLAIMS ”) SUFFERED OR INCURRED BY SUCH INDEMNIFIED PARTY, EVEN IF SUCH LIABILITIES ARE CAUSED SOLELY OR IN PART BY , THE NEGLIGENCE OF ANY INDEMNIFIED PARTY, ARISING FROM THE ACTS OR OMISSIONS TO ACT OF THE INDEMNIFYING PARTY (A) ARISING IN THE CASE OF THE LESSEE AS THE INDEMNIFYING PARTY, FROM THE OPERATION OF THE CREZ ASSETS, (B) FOR PHYSICAL DAMAGE TO THE CREZ ASSETS, TO THE EXTENT CAUSED BY THE INDEMNIFYING PARTY OR
 
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ANY RELATED PERSON THEREOF, (C) FOR PHYSICAL INJURIES OR DEATH (INCLUDING BY REASON OF OPERATING THE CREZ ASSETS) TO OR OF THE INDEMNIFIED PARTY OR THE PUBLIC, TO THE EXTENT CAUSED BY THE INDEMNIFYING PARTY OR ANY RELATED PERSON THEREOF, (D) ANY BREACH OF ANY COVENANT OR ANY FAILURE TO BE TRUE OF ANY REPRESENTATION OR WARRANTY, MADE BY THE INDEMNIFYING PARTY UNDER THIS AGREEMENT OR (E) THE NEGLIGENCE, RECKLESSNESS OR INTENTIONAL MISCONDUCT OF THE INDEMNIFYING PARTY OR ANY RELATED PERSON THEREOF; PROVIDED, HOWEVER, THAT IN NO EVENT SHALL THE INDEMNIFYING PARTY BE RESPONSIBLE FOR DEFENDING, INDEMNIFYING OR HOLDING HARMLESS ANY INDEMNIFIED PARTY TO THE EXTENT OF ANY CLAIM CAUSED BY, ARISING FROM OR CONTRIBUTED TO BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH INDEMNIFIED PARTY. AS USED HEREIN, THE TERM “RELATED PERSON” SHALL MEAN ANY AFFILIATES, CONTRACTORS, LESSEES, AND SUBLESSEES, AND EACH OF THEIR RESPECTIVE, PRINCIPALS, OFFICERS, EMPLOYEES, SERVANTS, AGENTS, REPRESENTATIVES, SUBCONTRACTORS, LICENSEES, INVITEES, GUESTS, SUCCESSORS AND/OR ASSIGNS OF A PARTY; PROVIDED, THAT IN NO EVENT SHALL A PARTY BE DEEMED A RELATED PERSON WITH RESPECT TO THE OTHER PARTY.
12.2 Environmental Indemnity . To the fullest extent permitted by law, Lessee shall defend, indemnify and hold harmless Lessor and Lessor’s Related Persons from Claims (including, without limitation, any costs and expenses of clean up or other mitigation) suffered or incurred by such persons resulting from any of the following occurring from and after the date on which Lessee assumed operational control over the relevant property: (i) the presence or release of Hazardous Materials in, under or about the CREZ Assets which are or were brought or permitted to be brought onto the CREZ Assets by the Lessee or Lessee’s Related Persons, (ii) creation of any hazardous or potentially hazardous environmental conditions or exacerbation of a pre-existing environmental condition, (iii) the violation of any Environmental Law by Lessee or Lessee’s Related Persons or (iv) any other failure to comply with Section 4.6 by Lessee or Lessee’s Related Persons.
ARTICLE XIII
MISCELLANEOUS
13.1 Limitation of Damages . NEITHER PARTY SHALL BE LIABLE FOR ANY LOST OR PROSPECTIVE PROFITS, AND IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY OTHER SPECIAL, PUNITIVE, EXEMPLARY, CONSEQUENTIAL, INCIDENTAL OR INDIRECT LOSSES OR DAMAGES (IN TORT, CONTRACT OR OTHERWISE) UNDER OR IN RESPECT OF THIS AGREEMENT OR FOR ANY FAILURE OF PERFORMANCE RELATED HERETO, HOWSOEVER CAUSED.
13.2 Condemnation . In the case of a condemnation or taking, this Agreement shall continue in effect; provided, that this Agreement shall terminate if 75% or more of the CREZ Assets is subject to the condemnation or taking. Lessor shall be entitled to all sums received by reason of any such taking or condemnation, except for that portion of such award, if any, which is expressly awarded for the Lessee’s leasehold interest under this Agreement or which is awarded for any property owned by Lessee (including any Footprint Projects funded by Lessee).
 
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13.3 Confidentiality . To the full extent allowed by Applicable Law, each Party (the “ Receiving Party ”) shall maintain, for the benefit of the other Party (the “ Disclosing Party ”), in the strictest confidence all information pertaining to the financial terms of or payments under this Agreement, the Disclosing Party’s methods of operation, methods of the CREZ Assets, and the like, whether disclosed by the Disclosing Party or discovered by the Receiving Party, unless such information either (i) is in the public domain by reason of prior publication through no act or omission of the Receiving Party or its employees or agents, (ii) was already known to the Receiving Party at the time of disclosure and which the Receiving Party is free to use or disclose without breach of any obligation to any person or entity or (iii) is required to be disclosed by the PUCT or other Regulatory Authorities, or must be disclosed in accordance with applicable securities laws or the rules of any applicable securities exchange on which the securities of the Receiving Party (or an affiliate thereof) are traded. To the full extent permitted by law, neither Party shall use such information for its own benefit, publish or otherwise disclose it to others, or permit its use by others for their benefit or to the detriment of the other Party. Notwithstanding the foregoing, the Receiving Party may disclose such information to any auditor or to the Receiving Party’s lenders, attorneys, accountants and other personal advisors; any prospective purchaser of the CREZ Assets; or pursuant to lawful process, subpoena or court order; provided the Receiving Party, in making such disclosure, advises the party receiving the information of the confidentiality of the information and obtains the agreement of said party not to disclose the information.
13.4 Successors and Assigns . The Agreement shall inure to the benefit of and be binding upon Lessor and Lessee and, to the extent provided in any assignment or other transfer under Article VIII hereof, any assignee, and their respective heirs, transferees, successors and assigns, and all persons claiming under them. References to Lessee in this Agreement shall be deemed to include assignees that hold a direct ownership interest in this Agreement and actually are exercising rights under this Agreement to the extent consistent with such interest.
13.5 Rent Obligations Not Excused by Force Majeure, Etc. Lessee shall not be excused from its obligation to pay Rent during any Force Majeure Event or a condemnation or casualty of all or any part of the CREZ Assets.
13.6 Further Assurances; Policies and Procedures.
(a) Each Party will, from time to time, execute, cause to be acknowledged and deliver such documents or instruments, and provide such certificates, as the other Party may reasonably request to carry out and fulfill the transactions, and permit the exercise and performance of the rights and obligations, as are contemplated hereunder. Each Party will cooperate with the other Party to effectuate fully the purposes and intent of this Agreement. In no way limiting the foregoing, the Parties shall cooperate to obtain any necessary regulatory approvals, including, without limitation, providing timely responses to discovery requests, participating in regulatory proceedings to the extent necessary and generally providing assistance as required.
 
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(b) From time to time, the Parties shall agree to policies and procedures regarding matters arising under this Agreement including, without limitation, the treatment of Capital Expenditures for canceled Footprint Projects, each Party’s reporting obligations and such additional matters as the Parties may identify (the “ Policies and Procedures ”). The Parties agree to cooperate and negotiate in good faith the Policies and Procedures, and any amendment or revision thereto that may be reasonably requested by either Party, and to memorialize the same in a writing executed by a representative of each Party. In the event the Parties cannot agree on the terms of such Policies and Procedures after 60 days of negotiating in good faith, then either the Lessee or the Lessor may submit such matters to arbitration pursuant to Section 13.7 of this Agreement, pursuant to which the Arbitration Panel shall be empowered to determine Policies and Procedures that take into account the REIT’s reporting obligations as a public company and Lessee’s obligations as a regulated utility.
13.7 Arbitration . Except for a dispute regarding the payment of Undisputed Rent, any dispute under this Agreement shall, if not resolved by the Parties within ninety (90) days after notice of such dispute is served by one Party to the other (or, if different, the period provided for resolution by the Parties in the provision of this Agreement under which such dispute is brought), be submitted to an “ Arbitration Panel ” comprised of three (3) members. No more than one (1) panel member may be with the same firm, and no panel member may have an economic interest in the outcome of the arbitration. In addition to the foregoing, the failure by the Lessee and the Lessor to reach an agreement or make a mutual determination or characterization required by Sections 2.2(b) (with respect to the determination of Extended Period Rent); 3.1(d)(i); 3.1(d)(ii); 3.1(d)(iii); 3.2(a); 3.2(b) (with respect to the terms of any renewed Rent Supplement that has expired during the term of this Agreement); 3.2(c); 3.2(d); 3.8 or 13.6(b), in each case after 60 days of negotiating in good faith, shall be deemed to be a “dispute” for purposes of this Section 13.7, to be resolved in accordance with this Section.
(a) The Arbitration Panel shall be selected as follows: Within five (5) business days after the expiration of the period referenced above, Lessee shall select its panel member meeting the criteria of the above paragraph (the “ Lessee Panel Member ”) and Lessor shall select its panel member meeting the criteria of the above paragraph (the “ Lessor Panel Member ”). If a Party fails to timely select its respective panel member, the other Party may notify such Party in writing of such failure, and if such Party fails to select its respective panel member within three (3) business days from such notice, then the other Party may select such panel member on such Party’s behalf. Within five (5) business days after the selection of the Lessor Panel Member and the Lessee Panel Member, the Lessee Panel Member and the Lessor Panel Member shall jointly select a third panel member meeting the criteria of the above paragraph (the “ Third Panel Member ”). If the Lessor Panel Member and the Lessee Panel Member fail to timely select the Third Panel Member and such failure continues for more than three (3) business days after written notice of such failure is delivered to the Lessor Panel Member and Lessee Panel Member by either Lessor or Lessee, either Lessor or Lessee may request the managing officer of the American Arbitration Association to appoint the Third Panel Member.
 
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(b) Within ten (10) business days after the selection of the Arbitration Panel, each Party shall submit to the Arbitration Panel a written statement identifying its summary of the issues and claims, including, if applicable, its calculation of Rent. Any Party may also request an evidentiary hearing on the merits in addition to the submission of written statements. The Arbitration Panel shall make its decision within twenty (20) days after the later of (i) the submission of such written statements of particulars, and (ii) the conclusion of any evidentiary hearing on the merits, and shall take into consideration the relative risks and rewards undertaken and capital invested by each Party and shall use the Comparable Rate of Return concept described in Section 3.2(a) in determining any Rent disputes. The Arbitration Panel shall reach its decision by majority vote and shall communicate its decision by written notice to the Parties.
(c) The decision by the Arbitration Panel shall be final, binding and conclusive and shall be non-appealable and enforceable in any court having jurisdiction. All hearings and proceedings held by the Arbitration Panel shall take place in Dallas, Texas.
(d) The resolution procedure described herein shall be governed by the Commercial Rules of the American Arbitration Association and subject to the Texas General Arbitration Act to the extent such act is applicable hereto.
(e) In the case of an arbitration proceeding involving a determination of Rent and Percentage Rent, until Rent and Percentage Rent have been finally determined, Lessee shall pay Rent and Percentage Rent based upon prevailing rates therefor, and an appropriate refund shall be made to or additional Rent shall be paid by Lessee within ten (10) days after a final determination is made.
(f) The Parties shall bear equally the fees, costs and expenses of the Arbitration Panel in conducting the arbitration.
13.8 Notices . All notices or other communications required or permitted by this Agreement, including payments to Lessor, shall be in writing and shall be served personally or by reputable express courier service or by facsimile transmission addressed to the relevant parties at the address stated below or at any other address notified by that Party to the other as its address for service. Any notice so given personally shall be deemed to have been served on delivery, any notice so given by express courier service shall be deemed to have been served the next business day after the same shall have been delivered to the relevant courier, and any notice so given by facsimile transmission shall be deemed to have been served on dispatch. As proof of such service it shall be sufficient to produce a receipt showing personal service, the receipt of a reputable courier company showing the correct address of the addressee or an activity report of the sender’s facsimile machine showing the correct facsimile number of the parties on whom notice is served and the correct number of pages transmitted. All communications, other than routine correspondence in the ordinary course of business, between the Parties pursuant to this Agreement shall be sent by the same method of communication by the Party sending the communication. The Parties’ addresses for service are:
If to Lessor:
Sharyland Distribution & Transmission Services, L.L.C.
1807 Ross Avenue, 4 th Floor
Dallas, Texas 75201
Attention: Chief Executive Officer and General Counsel
 
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If to Lessee:
Sharyland Utilities, L.P.
1807 Ross Avenue, 4 th Floor
Dallas, Texas 75201
Attention: Hunter Hunt
With a copy to:
General Counsel
Fax: (214) 855-6965
Any Party may change its address for purposes of this paragraph by giving written notice of such change to the other parties in the manner provided in this paragraph.
13.9 Entire Agreement; Amendments . This Agreement constitutes the entire agreement between Lessor and Lessee respecting its subject matter, and supersedes any and all oral or written agreements. Any agreement, understanding or representation respecting the CREZ Assets, or any other matter referenced herein not expressly set forth in this Agreement or a subsequent writing signed by both Parties is null and void. For avoidance of doubt, the Amended and Restated Lease is hereby replaced in its entirety by this Agreement. This Agreement shall not be modified or amended except in a writing signed by both Parties. No purported modifications or amendments, including without limitation any oral agreement (even if supported by new consideration), course of conduct or absence of a response to a unilateral communication, shall be binding on either Party.
13.10 Legal Matters . This Agreement shall be governed by and interpreted in accordance with the laws of the State of Texas, without regard to its conflicts of law principles. The Parties agree that any rule of construction to the effect that ambiguities are to be resolved in favor of either Party shall not be employed in the interpretation of this Agreement and is hereby waived.
13.11 Partial Invalidity . Should any provision of this Agreement be held, in a final and unappealable decision by a court of competent jurisdiction, to be either invalid, void or unenforceable, the remaining provisions hereof shall remain in full force and effect, unimpaired by the holding.
13.12 Recording . Lessee shall not record this Agreement without the prior written consent of the Lessor. Lessee may record at its expense a memorandum of this Agreement in form and substance reasonably approved by Lessor.
 
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13.13 Intention of Parties; True Lease .
(a) The Parties hereby declare that their relationship in and to the CREZ Lease Assets is and will be that of lessor and lessee, expressly subject to the terms, conditions, limitations and requirements set forth in this Agreement. Nothing contained in this Agreement will be deemed to constitute the Parties as partners or joint venturers or as principal and agent. The Parties intend for this Agreement to constitute a true lease with respect to the CREZ Lease Assets for US Federal, state and local income tax purposes, and each Party shall treat the Agreement as a true lease with respect to the CREZ Lease Assets for federal income , tax reporting purposes.
(b) The Parties acknowledge that Lessor is owned, directly or indirectly, in whole or in part, by an entity intending to qualify as a real estate investment trust under the Internal Revenue Code of 1986, as amended, and the Parties agree to negotiate in good faith any modification or amendment to this Agreement requested by Lessor to facilitate such qualification; provided that Lessee shall not be obligated to agree to any such modification or amendment if such modification or amendment would materially adversely affect Lessee or would be in conflict with Applicable Law or any regulations or orders of any Regulatory Authority.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
 
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IN WITNESS WHEREOF, Lessor and Lessee, acting through their duly authorized representatives, have executed this Agreement with the intent that. it be effective as of the Effective Date, and certify that they have read, understand and agree to the terms and conditions of this Agreement.

LESSOR:	
	
SHARYLAND PROJECTS, L.L.C.	
		
By:	 	/s/ Brant Meleski	
	 	Name: Brant Meleski	
	 	Title:   Senior Vice President and
            Chief Financial Officer	
	
LESSEE:	
	
SHARYLAND UTILITIES, L.P.	
		
By:	 	/s/ Mark Caskey	
	 	Name: Mark Caskey	
	 	Title:   President	
Signature Page to CREZ Assets Lease Agreement

APPENDIX A
DEFINITIONS
“Additional Rent” has the meaning set forth in Section 3.4.
“AFUDC” means allowance for funds used during construction.
“Agreed-to-Discount” has the meaning set forth in Section 3.2(a).
“Agreement” has the meaning set forth in the Preamble.
“Amended and Restated Lease” has the meaning set forth in the Recitals.
“Annual Percentage Rent Breakpoint” means the dollar value of annual Gross Revenues that must be exceeded in a particular Lease Year before Percentage Rent is owed, as set forth on the then-effective Rent Supplement.
“Applicable Laws” means all laws, ordinances, statutes, orders and regulations of any federal, state, or local government, regulatory or administrative authority, any agency or commission thereof, or any court or tribunal, including without limitation all requirements of the Regulatory Authorities.
“Arbitration Panel” has the meaning set forth in Section 13.7.
“Base Rent” has the meaning set forth in Section 3.1(a).
“Business Day” means a day other than a Saturday, Sunday or other day on which federal agencies are authorized or required by law to close.
“CapEx Budget” has the meaning set forth in Section 10.1(a).
“Capital Expenditures” means expenditures that are or are expected to be capitalized under GAAP.
“CCN” means a Certificate of Convenience and Necessity or amendment thereto issued by the PUCT.
“CFO Certificate” means a document signed by the Chief Financial Officer of Lessee and certifying to the accuracy and completeness of the statement of Gross Revenues.
“Change of Control” means Hunt Family Members cease to possess, directly or indirectly, the power to direct or cause the direction of the management or policies of Lessee, whether through the ability to exercise voting power, by contract or otherwise.
“CIAC” means any contributions in aid of construction from current or prospective customers, plus any additional payments as a tax gross up for such contributions, with respect to which Lessee does not anticipate receiving an increase in its regulatory rate base.
 
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Appendix A-1

“Claims” has the meaning set forth in Section 12.1.
“Collection Station” means the four collection stations currently known as Tule Canyon Station, Windmill Station, Ogallala Station and Alibates Station.
“Comparable Rate of Return” has the meaning set forth in Section 3.2(a).
“Consolidated Net Plant” means, with respect to any Person, as of the date of determination, the net plant set forth on the face of the consolidated balance sheet of such Person or absent such amount on the consolidated balance sheet, the total plant of such Person on a consolidated basis minus accumulated depreciation as set forth in the footnotes of the consolidated financial statements, in each case, for the fiscal quarter ended on the date of the last financial statements delivered hereunder.
“Consolidated Qualified Lessee” means any Qualified Lessee that is consolidated into the financial statements of another Qualified Lessee.
“Covered Revenue” means any fees, charges or other revenues (a) that are characterized as Unadjusted Gross Revenues (or Gross Revenues) for purposes hereof or for purposes of any other similar lease (x) between Lessee and Lessor or an affiliate thereof or (y) between Lessee and any of its wholly-owned subsidiaries or (b) that are generated from the Rate Base of regulated assets owned or operated by a party other than Lessor or a subsidiary thereof.
“Credit Agreement” means the credit agreement entered into by Lessor, dated as of June 20, 2011, as amended, amended and restated, supplemented or otherwise modified from time to time.
“CREZ Assets” means the integrated electrical transmission facilities connected to the ERCOT electric grid owned by Lessor and located within the area depicted on Exhibit A and the systems and other property necessary to operate such transmission facilities, together with the exclusive right to occupy and use all of Lessor’s interest (whether by fee ownership, easement, lease, sublease, franchise or license) (other than to the extent expressly reserved to Lessor herein) in the premises upon which such facilities are situated (together with (i) any facilities that were added to the CREZ Project through the completion of the construction of the CREZ Project and (ii) any components of the CREZ Assets that are repaired or replaced pursuant to Section 6.1) and assets that constitute Footprint Projects identified from time to time pursuant to Rent Supplements (other than any such Footprint Projects funded by Lessee pursuant to Section 10.3), as modified by Section 1.1(b).
“CREZ Lease Assets” means the CREZ Assets, excluding any Footprint Project included in the definition of “CREZ Assets,” unless (i) such Footprint Project has been placed in service and (ii) a Rent Supplement has been executed with respect to such Footprint Project.
“CREZ Project” means the construction project to build the Transmission Lines and Collection Station.
“Debt Service” has the meaning set forth in the Credit Agreement.
 
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Appendix A-2

“Debt Service Coverage Ratio” has the meaning set forth in the Credit Agreement.
“Defaulting Party” has the meaning set forth in Section 9.3.
“Disclosing Party” has the meaning set forth in Section 13.3.
“Effective Date” has the meaning set forth in the Preamble.
“Entity” means any general partnership, limited partnership, proprietorship, corporation, joint venture, joint stock company, limited liability company, limited liability partnership, business trust, estate, governmental entity, cooperative, association or other foreign or domestic enterprise.
“Environmental Law” means any and all Legal Requirements regulating, relating to or imposing liability or standards of conduct concerning protection of natural resources or the environment, or environmental impacts on human health as now or may at any time hereafter be in effect.
“ERCOT” means the Electric Reliability Council of Texas, or its successors.
“ERCOT Transmission Lease” means the Lease Agreement (ERCOT Transmission Assets) between SDTS and Lessee effective as of the Effective Date, as the same may be amended from time to time.
“ERCOT Transmission Revenues” means Lessee’s Unadjusted Gross Revenues from regulated electric transmission systems operated by Lessee within ERCOT pursuant to the PUCT’s transmission cost of service mechanism.
“Event of Default” means an event described in Section 9.1 or Section 9.2.
“Excess Percentage Rent” has the meaning set forth in Section 3.3(a).
“Extended Period Rent” means Rent that applies during any extended period of operatorship beyond the Term, which will be negotiated using the Comparable Rate of Return methodology set forth in Article III.
“FERC” means the Federal Energy Regulatory Commission, or its successors.
“First Lease Quarter Percentage Rent Breakpoint” has the meaning set forth in Section 3.1(c).
“Footprint Projects” means T&D Projects that are (i) (A) transmission assets that are added to an existing transmission substation that comprises a part of the CREZ Assets or hang from transmission towers that comprise a part of the CREZ Assets or (B) Reclassified Projects and (ii) funded by expenditures that are or are expected to be capitalized under GAAP and that are within the items described in Section 1.1(b)(i)-(v) (specifically excluding Section 1.1(b)(vi)).
 
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Appendix A-3

“Force Majeure Event” means, except to the extent resulting from the action or inaction of Lessee or within the control of Lessee, fire, earthquake, hurricane, flood, or other casualty or accident; strikes or labor disputes; war, civil strife or other violence; any law, order, proclamation, regulation, ordinance, action, demand or requirement of any government agency or utility; or any other act or condition beyond the reasonable control of Lessee.
“GAAP” means generally accepted accounting principles in effect in the United States of America.
“Good Utility Practice” shall be as defined from time to time by PUCT and, as of the date hereof, means any of the practices, methods, and acts engaged in or approved by a significant portion of the electric utility industry during the relevant time period, or any of the practices, methods, and acts that, in the exercise of reasonable judgment in light of the facts known at the time the decision was made, could have been expected to accomplish the desired result at a reasonable cost consistent with good business practices, reliability, safety, and expedition. Good utility practice is not intended to be limited to the optimum practice, method, or act, to the exclusion of all others, but rather is intended to include acceptable practices, methods, and acts generally accepted in the region.
“Gross Revenues” has the meaning set forth in Section 3.1(d)(i).
“Hazardous Materials” means (A) any substance which is listed, defined, designated or classified under any Applicable Law as a (i) hazardous material, substance, constituent or waste, (ii) toxic material, substance, constituent or waste, (iii) radioactive material, substance, constituent or waste, (iv) dangerous material, substance, constituent or waste, (v) pollutant, (vi) contaminant, or (vii) special waste; (B) any material, substance, constituent or waste regulated under any Applicable Laws; or (C) petroleum, petroleum products, radioactive matters, polychlorinated biphenyl, pesticides, asbestos or asbestos-containing materials.
“Hunt Family Members” means (i) Ray L. Hunt; (ii) the spouse of Ray L. Hunt and each of his children and siblings; (iii) the spouse and lineal descendants of any Person identified in the foregoing clause (ii); (iv) any trust or account primarily for the benefit of any Person or Persons identified in the foregoing clauses (i), (ii) or (iii); (v) any corporation, partnership or other Entity in which any of the Persons identified in the foregoing clauses (i), (ii), (iii) or (iv) are the beneficial owners of substantially all of the shares of capital stock, membership interests, partnership interests or other equity interests and options or warrants to acquire, or securities convertible into, capital stock, membership interests, partnership interests or other equity securities of an Entity; and (vi) the personal representative or guardian of any of the Persons identified in the foregoing clauses (i), (ii) and (iii) upon such Person’s death for purposes of the administration of such Person’s estate or upon such Person’s disability or incompetency for purposes of the protection and management of the assets of such Person.
“Incremental CapEx” means Lessor-funded Capital Expenditures related to CREZ Assets that are placed in service, as and when such CREZ Assets are placed in service, as adjusted (y) for any applicable AFUDC and/or depreciation, and (z) to reflect the effect of the deferred tax liability or deferred tax asset, as applicable.
 
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Appendix A-4

“Indebtedness” with respect to any Person means, at any time, without duplication (a) its liabilities for borrowed money and its redemption obligations in respect of mandatorily redeemable preferred stock; (b) its liabilities for the deferred purchase price of property acquired by such Person (excluding accounts payable arising in the ordinary course of business but including all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property); (c)(i) all liabilities appearing on its balance sheet prepared in accordance with GAAP in respect of capital leases; and (ii) all liabilities which would appear on its balance sheet prepared in accordance with GAAP in respect of Synthetic Leases assuming such Synthetic Leases were accounted for as capital leases; provided, however, that for purposes of this definition (including with respect to clauses (i) and (ii) hereof), (x) this Agreement and any similar lease between Lessor (or any subsidiary) and Lessee and (y) any lease between Lessee and any of its wholly-owned subsidiaries shall not be treated as a capital lease; (d) all liabilities for borrowed money secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities); (e) all of its liabilities in respect of letters of credit or instruments serving a similar function issued or accepted for its account by banks and other financial institutions (whether or not representing obligations for borrowed money), provided, however, that for purposes of this definition, any surety bonds or indemnification agreements entered into by Lessee (with respect to which Lessee or a subsidiary has a reimbursement or backstop obligation) in connection with condemnation proceedings shall be excluded; (f) the aggregate Swap Termination Value of all Swap Contracts of such Person; and (g) any Guaranty of such Person with respect to liabilities of a type described in any of clauses (a) through (f) hereof. Indebtedness of any Person shall include all obligations of such Person of the character described in clauses (a) through (g) to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is deemed to be extinguished under GAAP.
“Indemnified Party” has the meaning set forth in Section 12.1.
“Indemnifying Party” has the meaning set forth in Section 12.1.
“Initial Term” has the meaning set forth in Section 2.1.
“Lease” or “Leases” means (i) this Agreement, the McAllen Lease, the Stanton/Brady/Celeste Lease, the ERCOT Transmission Lease and the Stanton Transmission Loop Lease and any other leases of transmission and distribution and related assets to a Qualified Lessee under which Lessor or any subsidiary of Lessor is a party as a lessor, and (ii) any lease of transmission and distribution and related assets pursuant to which Lessee is the lessee and a subsidiary of Lessee or another Person controlled by one or more Hunt Family Members is the lessor; provided , no such lease will qualify as a “Lease” hereunder if each of the three following criteria apply: (x) Lessee is the lessee, (y) cash rental payments have become due and payable pursuant thereto and (z) none of Lessor, a subsidiary of Lessor or a subsidiary of Lessee is the lessor.
“Lease Quarter” means each calendar quarter during each Lease Year.
“Lease Year” means each calendar year during the Term of this Agreement.
 
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Appendix A-5

“Leased Consolidated Net Plant” means that portion of the Consolidated Net Plant of the lessor of a Lease between such lessor and a Qualified Lessee that is the subject of such Lease.
“Legal Requirements” means, as to any Person, the certificate of incorporation and by-laws, limited liability company agreement, partnership agreement or other organizational or governing documents of such Person, any law (including common law), statute, code, treaty, rule, regulation, ordinance including any government rule or determination of an arbitrator a court or other government authority, or any requirement under a Permit, in each case applicable to or binding upon such Person or any of its properties or to which such Person or any of its property is subject.
“Lessee” has the meaning set forth in the Preamble.
“Lessee CapEx” means Capital Expenditures that are related and fairly allocable to the CREZ Assets and are funded by Lessee.
“Lessee Consent” means that certain Consent and Agreement, to be entered into among Lessee, Lessor and Societe Generale, as collateral agent, as amended, restated, supplemented or otherwise modified from time to time.
“Lessee Panel Member” has the meaning set forth in Section 13.7(a).
“Lessee Taxes” has the meaning set forth in Section 4.3.
“Lessor” has the meaning set forth in the Preamble.
“Lessor’s Audit” has the meaning set forth in Section 3.3(c).
“Lessor Panel Member” has the meaning set forth in Section 13.7(a).
“Lessor Taxes” has the meaning set forth in Section 4.3.
“Liens” has the meaning set forth in Section 5.2.
“Material Project Document” has the meaning set forth in the Credit Agreement.
“McAllen Lease” means the Third Amended and Restated Master System Lease Agreement (McAllen System) between SDTS and Lessee effective as of the Effective Date, as the same may be amended from time to time.
“Monetary Default” means the failure to pay when due any amounts payable under this Agreement.
“NERC” means North American Electric Reliability Corporation, or its successors.
“Non-Defaulting Party” has the meaning set forth in Section 9.3.
“Non-Monetary Default” means an Event of Default other than a Monetary Default.
 
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Appendix A-6

“Non-Recourse Debt” means Indebtedness of a subsidiary of Lessee that, if secured, is secured solely by a pledge of collateral owned by such subsidiary and the equity interests in such subsidiary, and for which no Person other than such subsidiary is personally liable.
“Nonseverable Footprint Projects” means those Footprint Projects that cannot be readily removed from the CREZ Assets without causing diminution in value to the CREZ Assets.
“Notice of Default” means written notice of the Event of Default.
“Original Lease Date” has the meaning set forth in Section 1.1(a).
“Other Revenue” means revenue generated from activities as a regulated utility within the State of Texas other than Covered Revenue.
“Overdue Rate” means a rate equal to ten percent (10%) per annum or the maximum rate allowed by law, whichever is lesser.
“Party” or “Parties” has the meaning set forth in the Preamble.
“Percentage Rent” has the meaning set forth in Section 3.1(b).
“Percentage Rent Breakpoint” means individually any of the Annual Percentage Rent Breakpoint, the First Lease Quarter Percentage Rent Breakpoint, the Second Lease Quarter Percentage Rent Breakpoint or the Third Lease Quarter Percentage Rent Breakpoint (collectively referred to as the “Percentage Rent Breakpoints”).
“Percentage Rent Percentages” has the meaning set forth in Section 3.1(b).
“Percentage Rent Schedule” means the schedule attached to the then-current Rent Supplement setting forth the Percentage Rent Percentages and Annual Percentage Rent Breakpoints for the CREZ Assets through the end of the Term.
“Permitted Liens” means
 
 	(i)	The Liens granted by the Lessor to any lender or trustee for any lender which finances the Lessor’s interest in the CREZ Assets;	
 
 	(ii)	Liens imposed by any Governmental Authority for any tax, assessment or other charge relating to CREZ Assets to the extent not yet past due or being contested in good faith and by appropriate proceedings;	
 
 	(iii)	mechanics’, warehousemen’s, carriers’, workers’, repairers’, landlords’, and other similar liens arising or incurred in the ordinary course of business and (i) which do not in the aggregate materially detract from the value of property or assets subject to such Liens or materially impair the continued use thereof in the operation of the CREZ Assets or (ii) which are being contested in good faith by appropriate proceedings, which proceedings have the effect of	
 
CREZ A SSETS L EASE A GREEMENT
 
Appendix A-7

 	preventing the forfeiture or sale of the property or asset subject to such Liens and for which cash reserves consistent with GAAP have been established on the books of Lessee or Lessor, or other Liens incurred or deposits made in the ordinary course of business in connection with workers’ compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, trade contracts, leases, government contracts, performance and return-of-money bonds and other similar obligations incurred in the ordinary course of business (exclusive of obligations in respect of the payment for borrowed money);	
 
 	(iv)	Liens arising out of judgments or awards so long as an appeal or proceeding for review is being prosecuted in good faith and for the payment of which adequate cash reserves consistent with GAAP have been established on the books of Lessee or Lessor, bonds or other security acceptable to the Lessor in its reasonable discretion have been provided or are fully covered by insurance;	
 
 	(v)	Liens, deposits or pledges to secure mandatory statutory obligations or performance of bids, tenders, or leases, or in the ordinary course of Lessee’s business, not to exceed $5,000,000 in the aggregate at any time, and with any such Lien to be released within 30 days of its attachment;	
 
 	(vi)	zoning, entitlement, restriction, and other land use and environmental regulations by governmental authorities and encroachments, easements, rights of way, covenants, restrictions or agreements which do not materially interfere with the continued use of any asset as currently used in the conduct of the business of the Lessee;	
 
 	(vii)	any encumbrances set forth in any franchise or governing ordinance under which any portion of the business of the Lessee is conducted and which could not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the operation of the CREZ Assets; and	
 
 	(viii)	all rights of condemnation, eminent domain, or other similar right of any person.	
“Person” means any natural person, corporation, limited liability company, partnership, firm, association, government authority or other entity whether acting in an individual, fiduciary or other capacity.
“Personal Property” means all assets, or rights therein, related to or used in connection with the CREZ Assets, other than assets of the type and nature described in Section 1.1(b)(i)-(v).
“Policies and Procedures” has the meaning set forth in Section 13.6(b).
 
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Appendix A-8

“Project Management Costs” means all actual out-of-pocket costs incurred by Lessee pursuant to this Agreement or a separate construction management agreement in connection with the construction activities, including (i) all direct wages and salaries (including benefits, payroll burden and overtime) which the Lessee pays to personnel employed or retained to conduct such construction activities and a fair allocation of the direct wages and salaries (including benefits, payroll burden and overtime) of Lessee’s other personnel conducting such construction activities; (ii) the fair market value of materials or equipment provided directly by Lessee or its affiliates (including the standard corporate day rate for any vehicles and equipment that are so utilized); (iii) a fair allocation of the lease payments of any leased vehicles and equipment that are so utilized; (iv) all other third-party costs incurred by Lessee in the performance of such construction activities; and (v) all sales, use, transfer or similar taxes (excluding those taxes based upon Lessee’s net income, gross receipts, net worth or similar taxes) incurred or paid by Lessee in conducting such construction activities or providing materials, if any (provided, that in managing its affairs, Lessee will attempt to minimize, to the extent practicable, all such taxes incurred on behalf of Lessor and, in this regard, Lessor agrees to cooperate and provide Lessee any assistance necessary including providing appropriate evidence of any exemptions from tax).
“PUCT” means the Public Utility Commission of Texas or its successors.
“Qualified Lessee” means Lessee and/or any other utility that is (x) approved or authorized by the applicable public utility commission or similar regulatory authority to operate and/or lease the transmission and/or distribution assets of SDTS or any subsidiary and (y) a party to a then-effective lease agreement with SDTS or a subsidiary thereof pursuant to which such utility leases and operates such entity’s transmission and/or distribution assets.
“Rate Base” means, with respect to any transmission and distribution assets, gross electric plant in service under GAAP, which is the aggregate amount of capital expenditures used to construct such assets plus AFUDC, less accumulated depreciation, and adjusted for accumulated deferred income taxes.
“Receiving Party” has the meaning set forth in Section 13.3.
“Reclassified Projects” means any T&D Project that does not otherwise meet the definition of Footprint Project but Lessee and Lessor jointly agree, in their sole discretion, to classify such T&D Project as a Footprint Project based upon such factors that the Parties deem relevant, including (a) the expected Rate Base of the T&D Project, it being understood that the Parties generally expect that only T&D Projects with an expected Rate Base of less than $25 million could constitute a Reclassified Project; (b) whether the T&D Project is physically connected to the CREZ Assets; and (c) whether the T&D Project is necessary to serve distribution customers situated in the service territories of the CREZ Assets.
“Regulatory Authority” means the PUCT, ERCOT, SPP, TRE, NERC and any other governmental agency with jurisdiction over Lessee, Lessor or the CREZ Assets.
“REIT” has the meaning set forth in the Recitals.
“REIT IPO” has the meaning set forth in the Recitals.
“Related Person” has the meaning set forth in Section 12.1.
“Renewal Term” has the meaning set forth in Section 2.1.
 
CREZ A SSETS L EASE A GREEMENT
 
Appendix A-9

“Rent” means the sum of Base Rent, Percentage Rent, Additional Rent and Extended Period Rent.
“Rent Supplement” means a supplement to this Agreement in the form of Schedule 3.2(b) agreed to in accordance with Section 3.2(b).
“Rent Validation” means the process of validating any Rent Supplement pursuant to Section 3.2(c).
“Repairs” means all replacements, repairs or remedial activity undertaken directly on a then-existing portion of the CREZ Assets that are not Footprint Projects and that are expensed and not capitalized under GAAP.
“Revenues Attributable to Lessee CapEx” means the portion of Unadjusted Gross Revenue from the CREZ Assets that is attributable to Lessee CapEx as determined under Section 3.1(d)(iii).
“Revised Certificate” has the meaning set forth in Section 3.3(a).
“Second Lease Quarter Percentage Rent Breakpoint” has the meaning set forth in Section 3.1(c).
“Severable Footprint Projects” means any Footprint Projects that can be readily removed from the CREZ Assets without causing diminution in value to the CREZ Assets.
“SDTS” means Sharyland Distribution and Transmission Services, L.L.C, Lessor’s parent entity.
“SDTS Debt Agreements” means that certain (i) Amended and Restated Note Purchase Agreement entered into by SDTS and dated as of September 14, 2010, a copy of which has been provided to and reviewed by Lessee, (ii) Amended and Restated Note Purchase Agreement entered into by SDTS and dated as of July 13, 2010, a copy of which has been provided to and reviewed by Lessee and (iii) Second Amended and Restated Credit Agreement entered into by SDTS and dated as of June 28, 2013, a copy of which has been provided to and reviewed by Lessee, each as amended, restated, supplemented or otherwise modified from time to time.
“SPP” means the Southwest Power Pool and its successors.
“Stanton/Brady/Celeste Lease” means the Second Amended and Restated Lease Agreement (Stanton/Brady/Celeste Assets) between SDTS and Lessee effective as of the Effective Date, as the same may be amended from time to time.
“Stanton Transmission Loop Lease” means the Third Amended and Restated Lease Agreement (Stanton Transmission Loop Assets) between SDTS FERC, L.L.C., a wholly-owned subsidiary of SDTS, and SU FERC, L.L.C., a wholly-owned subsidiary of Lessee, effective as of the Effective Date (f/k/a FERC Lease), as the same may be amended from time to time.
 
CREZ A SSETS L EASE A GREEMENT
 
Appendix A-10

“Swap Contract” means (a) any and all interest rate swap transactions, basis swap transactions, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward foreign exchange transactions, cap transactions, floor transactions, currency options, spot contracts or any other similar transactions of any of the foregoing (including, without limitation, any options to enter into any of the foregoing), and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc. or any International Foreign Exchange Master Agreement.
“Swap Termination Value” means, in respect of one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a), the amount(s) determined as the mark-to-market value(s) for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts.
“Synthetic Lease” means, at any time, any lease (including a lease that may be terminated by the lessee at any time) of any property by a Person (a) that is accounted for as an operating lease under GAAP and (b) in respect of which the lessee retains or obtains ownership of the property so leased for U.S. federal income tax purposes, other than any lease under which such Person is the lessor.
“TCOS Allocation” has the meaning set forth in Section 3.1(d)(ii).
“T&D Project” means a business, project or assets relating primarily to the transmission and/or distribution of electricity.
“Term” has the meaning set forth in Section 2.1.
“Third Lease Quarter Percentage Rent Breakpoint” has the meaning set forth in Section 3.1(c).
“Third Panel Member” has the meaning set forth in Section 13.7(a).
“Transmission Gross Plant” means electric transmission plant as determined in accordance with the FERC Uniform System of Accounts.
“Transmission Lines” means the five transmission line segments consisting of the Ogallala (formerly Nazareth) to Tule Canyon (formerly Silverton) Transmission Line (“ LS01 ”), the Windmill (formerly) Hereford) to Ogallala (formerly Nazareth) Transmission Line (“ LS02 ”), the Windmill (formerly Hereford) to Alibates (formerly White Deer) Transmission Line (“ LS03 ”), the Tule Canyon (formerly Silverton) to Cottonwood Transmission Line (“ LS04 ”), the Tule Canyon (formerly Silverton) to Alibates (formerly White Deer) Transmission Line (“ LS05 ”).
 
CREZ A SSETS L EASE A GREEMENT
 
Appendix A-11

“Transmission Net Plant in Service” means Transmission Gross Plant in service less accumulated depreciation as determined in accordance with the FERC Uniform System of Accounts.
“TRE” means the Texas Reliability Entity, or its successor entity.
“TRS” means taxable REIT subsidiary.
“Unadjusted Gross Revenues” has the meaning set forth in Section 3.1(d)(i).
“Undisputed Rent” means the greater of (i) the undisputed amount of Rent that the Parties agree is to be due and payable and (ii) during the term of the Credit Agreement, the amount required in Section 3.2(a)(iv).
 
CREZ A SSETS L EASE A GREEMENT
 
Appendix A-12

EXHIBIT A

 
					
	 		 	Tule
Canyon	
 
CREZ A SSETS L EASE A GREEMENT
 
Exhibit A-1

EXHIBIT B
INSURANCE REQUIREMENTS
Subject to Section 6.2(b) of this Agreement, during the term of the Credit Agreement or until otherwise agreed by Lessee and Lessor, Lessee shall comply with the insurance requirements set forth in this Exhibit B. Capitalized terms used herein but not otherwise defined in this Agreement have the meanings assigned to such terms in the Credit Agreement.
1. With respect to the ongoing operations of the Lessor and Lessee and to the extent related to the Project, the Lessee shall, without cost to the Lessor, the Administrative Agent, the Collateral Agent or the other Secured Parties, maintain or cause to be maintained on its behalf in effect at all times the types of insurance required by the following provisions together with any other types of insurance that may be required under the Credit Agreement, including without limitation the Operative Documents unless otherwise waived by the appropriate contract party or the Lessor and the Administrative Agent in consultation with the Insurance Consultant with respect to the Credit Agreement, with insurance companies rated “A-” or better, with a minimum financial size classification of “X,” by A.M. Best (or an equivalent rating by another nationally recognized insurance rating agency of similar standing if Best’s Insurance Guide and Key Ratings shall no longer be published) or other insurance companies of recognized responsibility satisfactory to the Lessor and the Administrative Agent, until all obligations of Lessor pursuant to the Credit Agreement and the other Financing Documents have been fully discharged:
a. Commercial General Liability . Commercial general liability insurance on an “occurrence” policy form or other similar policy form acceptable to the Administrative Agent in consultation with the Insurance Consultant, including coverage for premises/operations, explosion, collapse and underground hazards, products/completed operations, broad form property damage, blanket contractual liability, suits brought against Lessor and, to the extent related to the Project, Lessee, from actions of an independent contractor and personal injury, with primary coverage limits of no less than $1,000,000 for injuries or death to one or more persons or damage to property resulting from any one occurrence and a $2,000,000 annual aggregate limit.
The commercial general liability policy shall also include a severability of interest clause with no exclusions or limitations for cross-liability. Deductibles or self-insured retentions in excess of $100,000 shall be subject to review and approval by the Administrative Agent.
b. Auto Liability Insurance. Automobile liability insurance (to the extent any exposure exists), including coverage for owned, non-owned and hired automobiles, as well as trailers and semi-trailers designed for travel on public roads for both bodily injury and property damage and containing appropriate no-fault insurance provisions or other endorsements in accordance with state legal requirements, with combined single limits of no less than $1,000,000 per accident.
 
CREZ A SSETS L EASE A GREEMENT
 
Exhibit B-1

c. Workers’ Compensation . To the extent the Lessor or Lessee has any employees, workers’ compensation insurance providing statutory benefits and including an other states endorsement, employer’s liability insurance with a limit of not less than $1,000,000, disability benefits insurance and such other forms of insurance which the Lessor or Lessee is required by law to provide.
d. Umbrella/Excess Liability Insurance . Umbrella and/or excess liability insurance of not less than $25,000,000 per occurrence and in the aggregate for bodily injury and property damage to third parties. Such coverages shall be on an “occurrence” policy form, or other similar policy form acceptable to the Administrative Agent in consultation with the Insurance Consultant, over and above coverage provided by the policies described in paragraphs a., b. and c. (employer’s liability, as applicable) above whose limits may apply toward the $25,000,000 limits set forth in this section. The umbrella and/or excess policies shall not contain endorsements which unreasonably restrict coverages as set forth in the underlying policies noted in paragraphs a., b. and c. (employer’s liability, if applicable) above. The total limits required may be satisfied through one or more policies. Deductibles or self-insured retentions in excess of $100,000 shall be subject to review and approval by the Administrative Agent.
If the policy or policies provided under this paragraph contain(s) aggregate limits applying to other operations not related to the Lessor or in the case of Lessee, the Project, and such limits are diminished below $15,000,000 by any incident, occurrence, claim, settlement or judgment against such insurance which has caused the carrier to establish a reserve, Lessee shall take or cause immediate steps to be taken to restore such aggregate limits or shall provide other equivalent insurance protection for such aggregate limits unless otherwise approved by the Administrative Agent.
In the event that any policy is written on a “claims-made” basis and such policy is not renewed or the retroactive date of such policy is to be changed, the Lessee shall obtain for each such policy or policies a minimum two (2) year extended reporting period endorsement, also known as “tail” coverage, or in the alternative, a “prior acts” endorsement from the insurer that assumes the policy exposures in question, and for each such policy or policies shall provide to the Financing Parties proof that such basic extended reporting period coverage (“tail” coverage) or “prior acts” coverage has been, or can be, obtained.
e. Aircraft Liability Insurance . To the extent any exposures exist, aircraft liability insurance, in an amount not less than $20,000,000 for all owned, non-owned and hired aircraft, fixed wing or rotary, used in connection with the operations of the Lessor or Lessee.
f. Transit Insurance. Transit coverage, either included in a property policy or under a separate policy (including air, land and ocean cargo, as applicable) on an “all-risk” basis with a per occurrence limit equal to not less than $10,000,000 of any single shipment involving Project or any other Collateral assets to or from any storage site or the Project site at all times for which the Lessor or Lessee has accepted risk of loss or has responsibility for providing insurance. Coverage shall include loading and unloading, temporary storage (as applicable), a 50/50 clause and shall apply on a difference in limits and difference in conditions basis for inland and ocean transit shipments when coverage for physical damage is being provided by a third party (as required by the Administrative Agent in consultation with the Insurance Consultant). Coverage shall be maintained with per occurrence deductibles of not more than $150,000 for physical damage and other terms and conditions acceptable to the Administrative Agent in consultation with the Insurance Consultant.
 
CREZ A SSETS L EASE A GREEMENT
 
Exhibit B-2

It is hereby noted that all or a portion of the transit insurance required herein may be maintained on behalf of the Lessor or Lessee by a third party. If a third party is to provide transit insurance on behalf of the Lessor or Lessee, such insurance is contingent upon the Lessee using its best efforts to have the Collateral Agent, acting on behalf of itself and the other Secured Parties, named as a lender loss payee and additional insured and provided a waiver of subrogation in their favor with respect to their collective insurable interests in the Collateral assets.
g. Builders All-Risk Insurance. The Lessor or the Lessee shall maintain builders risk insurance from the point of groundbreaking for the Project through the date of Substantial Completion, with a limit equal to the full replacement cost value of the Project and any other Collateral assets, on an “all risk” basis and on a completed value form, including without limitation coverage for earthquake, flood, and wind perils, all testing and commissioning required to complete construction and reach commercial operation, machinery breakdown (including resulting damage from design defects and faulty workmanship or materials), inland and ocean transit (unless provided under a separate all-risk transit policy for property and equipment in transit), and off-site storage (unless provided under a separate all-risk property policy for equipment in storage), subject to the following:
 
 	A.	debris removal with a limit of not less than 10% of insured loss or max $10,000,000 per occurrence.	
 
 	B.	expediting and extra expense coverage, each with a limit of the lesser of 20% of insured physical loss or damage or $10,000,000;	
 
 	C.	transmission and distribution lines with a limit of not less than $5,000,000 per occurrence;	
 
 	D.	pollution and hazardous material clean up and removal with a limit of not less than $1,000,000;	
 
 	E.	earthquake (collapse, sinkhole and subsidence) with a limit of not less than 50% of the outstanding debt (minimum of no less than $30,000,000) subject to availability at commercially reasonable terms;	
 
 	F.	flood with a limit of not less than 50% of the outstanding debt (minimum of no less than $30,000,000) subject to availability at commercially reasonable terms;	
 
 	G.	off-site storage coverage, however, with a minimum per occurrence limit of $10,000,000, that is sufficient to cover the full replacement cost values subject to availability at commercially reasonable terms of any Project or other Collateral assets stored off-site Said off-site coverage may be insured under the builders all risk policy or under a separate all-risk property policy;	
 
CREZ A SSETS L EASE A GREEMENT
 
Exhibit B-3

 	H.	transit coverage (including ocean cargo where ocean transit will be required) with a per occurrence limit that is sufficient to cover the full replacement cost value of any single shipment, subject to availability at commercially reasonable terms, of Project or other Collateral assets. Said transit coverage may be insured under builders all- risk policy with a minimum limit of $10,000,000, or under a separate all-risk policy. If under a separate policy, such policy to be placed no later than 10 days prior to the first shipment and both the builders all-risk and transit policies shall contain a 50/50 clause;	
 
 	I.	coverage for operational testing and commissioning with the same dollar coverage limits and modifications as set out in (h)(A) above for all Project assets, with coverage effective continuously for machinery breakdown from the beginning of testing until such time as operational coverage is put into place;	
 
 	J.	such other customary coverages, sublimits and aggregates and other terms and conditions acceptable to the Administrative Agent, in consultation with the Insurance Consultant;	
 
 	K.	such policy may have deductibles of not greater than $250,000 per unit subject to an aggregate of $250,000 per loss for physical damage, except $250,000 per occurrence for flood, and $250,000 per occurrence for earthquake.	
h. Property All Risk Insurance . Upon the earlier of COD or expiration of the builders risk coverage required in (g) above and throughout the term of this agreement the Lessee shall maintain for the Project and any other Collateral assets until such time as the Lessor’s obligations under the Financing Documents have been fully discharged, operational property insurance an “all-risk” basis including without limitation earthquake, flood, and wind perils, machinery breakdown (including resulting damage from design defects and faulty workmanship or materials), inland transit (unless provided under a separate all-risk transit policy for property and equipment noted above under paragraph (f)), and off-site storage (unless provided under a separate all-risk property policy for equipment in storage), subject to the following:
 
 	A.	debris removal with a limit of not less than $5,000,000;	
 
 	B.	expediting and extra expense coverage, each with a limit of not less than $5,000,000;	
 
CREZ A SSETS L EASE A GREEMENT
 
Exhibit B-4

 	C.	transmission and distribution lines with a limit of not less than $5,000,000 per occurrence;	
 
 	D.	pollution and hazardous material clean up and removal with a limit of not less than $1,000,000;	
 
 	E.	earthquake (collapse, sinkhole and subsidence) with a limit of not less than 50% of the outstanding debt (minimum of no less than $30,000,000) subject to availability at commercially reasonable terms;	
 
 	F.	flood with a limit of not less than 50% of the outstanding debt (minimum of no less than $30,000,000) subject to availability at commercially reasonable terms;	
 
 	G.	off-site storage coverage, to the extent applicable, with a per occurrence limit that is sufficient to cover the full replacement cost values of the largest single off-site storage location containing any Project or other Collateral assets;	
 
 	H.	inland transit coverage with a minimum per occurrence limit of $10,000,000 shall contain a 50/50 clause whenever ocean transit risks are insured,	
 
 	I.	such other customary coverages, with sublimits, aggregates and other terms and conditions acceptable to the Administrative Agent in consultation with the Insurance Consultant;	
 
 	J.	such policy may have deductibles of not greater than $250,000 per unit subject to an aggregate of $250,000 per loss for physical damage, except $250,000 per occurrence for flood, and $250,000 per occurrence for earthquake.	
i. Sharing of Aggregate Property Limits. The Lessee shall be permitted to provide builders all-risk or operational all-risk property insurance for the benefit of the Project through an insurance policy or policies which also insure other assets owned by the Lessor or the Pledgor that contains aggregate limits or sublimits, subject to the following conditions:
 
 	(i)	if the aggregate limits or sublimits are eroded below 80% of the limits required herein, or exhausted due to a loss at the Project or at another location, the Lessee will immediately cause limits to be reinstated or obtained for the benefit of the Project. The Administrative Agent, in consultation with the Insurance Consultant, will have the right to reevaluate the above threshold for reinstatement of the aggregate earthquake limits required herein in accordance with the timelines and procedures outlined in (ii) and (iii) below;	
 
CREZ A SSETS L EASE A GREEMENT
 
Exhibit B-5

 	(ii)	to the extent total loss or damage insured in any one event or events exceeds policy limits, the Lessee shall be responsible for ensuring a pro-rata sharing of aggregate limits amongst all insured projects based upon the percentage of loss that each project sustaining damage bears to the total insured loss for all projects for benefit of the Lenders; and	
 
 	(iii)	any applicable deductible that applies based upon a percentage of total insured value will apply to each individual project sustaining loss or damage, separately, and not the entire portfolio of insured assets in the area or region affected by loss.	
j. Contractor Requirements . To the extent applicable during the term of the Credit Agreement, Lessee shall use commercially reasonable efforts to ensure where contractually able that each material contractor performing work at any storage location or the Project site (unless covered under the Lessee’s insurance) shall, prior to performing work at the Project site, supply proper evidence of insurance as set forth in paragraphs a., b. and c. above with limits consistent with industry standards for similar operations. Where contractually allowed and commercially feasible, such insurance, with the exception of workers compensation, supplied by these parties shall:
 
 	(i)	add Lessor, Lessee, the Administrative Agent, the Collateral Agent and the other Secured Parties, as additional insureds;	
 
 	(ii)	be primary as respects insurance provided by Lessor, Lessee, the Administrative Agent, the Collateral Agent and the other Secured Parties;	
 
 	(iii)	waive rights of subrogation against the Lessor, Lessee, the Administrative Agent, the Collateral Agent and the other Secured Parties;	
 
 	(iv)	continue in force until obligations of the applicable material contractors are fulfilled.	
Such material contractors shall be responsible for tools and equipment brought onto the Project site unless such tools and equipment are required to be insured or are financed by the Project, in which case such tools and equipment shall be covered under the Lessee’s all-risk property insurance (as applicable).
2. General Property Insurance Conditions. All property related insurance covering the Collateral assets shall be placed on a policy form that does not contain “coinsurance” clauses or contains a waiver thereof and that adjusts claims on a “replacement cost” basis and will be in such form (including the form of the lender loss payable clauses) as shall be acceptable to the Administrative Agent (which acceptance shall not be unreasonably withheld). Upon request, Lessee shall submit copies of policies to the Administrative Agent.
 
CREZ A SSETS L EASE A GREEMENT
 
Exhibit B-6

3. Property Loss Payable Conditions . All policies covering real or personal property wherein the Secured Parties party to the Credit Agreement have an insurable interest shall include the interests of the Secured Parties as well as Lessor and Lessee and all such property policies shall name the Collateral Agent or its assignee as the “sole” loss payee (on all losses exceeding $5,000,000 per occurrence and in the annual aggregate) in accordance with lenders loss payable endorsement 438 BFU or other equivalent form reasonably acceptable to the Administrative Agent. The Administrative Agent shall have the right but not the obligation to participate with the Lessor in negotiation of claims that are expected to exceed $5,000,000 in value.
4. General Policy Conditions . Each policy shall expressly provide that all provisions thereof, except the limits of liability (which shall be applicable to all insureds as a group) and liability for premiums (which shall as between Lessor and Lessee, be the responsibility of Lessee) shall operate in the same manner as if there were a separate policy covering each such insured, shall name the Administrative Agent, the Collateral Agent and the other Secured Parties as additional insured (with the exception of workers compensation) and shall waive subrogation against the Administrative Agent, the Collateral Agent and the other Secured Parties, Lessee and Lessor and shall waive any right of the insurers to any setoff or counterclaim or any other deduction, whether by attachment or otherwise, in respect of any liability of Lessor, Lessee, the Administrative Agent, the Collateral Agent and the other Secured Parties. Each of the property and liability related policies required above (to the extent commercially available) shall provide that if any premium or installment is not paid when due, or if such insurance is to be cancelled, terminated or reduced for any reason whatsoever, the insurers (or their representatives) will promptly notify Lessor and the Administrative Agent, and any such cancellation, termination or change shall not be effective until 60 days after receipt of such notice by the Administrative Agent (10 days with respect to non-payment of premium), and that appropriate certification shall be made to Lessor by each insurer with respect thereto. Policies of insurance provided in accordance with this Exhibit B shall be primary with respect to any other insurance carried by the Administrative Agent, the Collateral Agent and the other Secured Parties.
5. Claims Conditions . In the event that Lessee or Lessor fails to respond in a timely and appropriate manner (as reasonably determined by the Administrative Agent) to take any steps necessary or reasonably requested by the Administrative Agent to collect from any insurers for any loss covered by any insurance required to be maintained by this Exhibit B , the Lessee acknowledges that the Administrative Agent shall have the right to make all proofs of loss, negotiate all claims and receive all or any part of the proceeds of the foregoing insurance policies, either in its own name or the name of Lessor or Lessee; provided, however, that Lessee shall, upon the Administrative Agent’s request and at Lessee’s own cost and expense, make all proofs of loss and take all other steps necessary or reasonably requested by the Administrative Agent to collect from insurers for any loss covered by any insurance required to be obtained by this Exhibit B.
 
CREZ A SSETS L EASE A GREEMENT
 
Exhibit B-7

6. Annual Certification of Compliance . At the request of Lessor, Lessee shall furnish to Lessor and the Administrative Agent, with a copy for each Lender, as required, a certificate signed by an authorized officer of Lessee or authorized insurance representative, showing the insurance then maintained by or on behalf of Lessee pursuant to this Exhibit B and stating that such insurance complies in all material aspects with the terms hereof, is in full force and effect and that all premiums then due have been paid or are not in arrears. In the event that at any time the insurance as herein provided shall be reduced (and such reduction is not reinstated) or cease to be maintained, then (without limiting the rights of the Administrative Agent under the Credit Agreement in respect of the Event of Default which arises as a result of such failure) the Administrative Agent may at its option maintain the insurance required hereby and, in such event, Lessee shall reimburse the Lessor or the Administrative Agent, as applicable, upon demand for the cost thereof together with interest thereon at a rate as specified in the Credit Agreement, but in no event shall the rate of interest exceed the maximum rate permitted by law.
7. Waiver of Insurance Requirements . In the event any insurance (including the limits or deductibles thereof) herein required to be maintained, other than insurance required by law to be maintained, shall not be available and commercially feasible in the commercial insurance market, the Administrative Agent, with the advice of the Insurance Consultant, shall not unreasonably withhold its agreement to waive such requirement to the extent the maintenance thereof is not so available; provided , however, that (i) Lessee shall first request any such waiver in writing, which request shall be accompanied by written reports prepared by their authorized insurance representative or other insurance advisor of recognized national standing certifying that such insurance is not reasonably available and commercially feasible in the commercial insurance market for similarly situated transmission facilities (and, in any case where the required amount is not so available, certifying as to the maximum amount which is so available) and explaining in detail the basis for such conclusions, such insurance advisers and the form and substance of such reports to be reasonably acceptable to the Administrative Agent; (ii) at any time after the granting of any such waiver, the Lessor or the Administrative Agent may request, and Lessee shall furnish to the Administrative Agent within 15 days after such request, supplemental reports reasonably acceptable to the Administrative Agent from such insurance advisers updating their prior reports and reaffirming such conclusion; and (iii) any such waiver shall be effective only so long as such insurance shall not be available and commercially feasible in the commercial insurance market, it being understood that the failure of Lessee to timely furnish any such supplemental report shall be evidence that such waiver is no longer effective because such condition no longer exists, but that such failure is not the only way to establish such non-existence.
8. Other Insurance . The Lessor or the Administrative Agent shall have the right to make requests for additional insurance to the extent that (i) insurance becomes available on commercially reasonable terms which had previously not been available, (ii) exposures at the Project increase necessitating an increase in limits or an additional type of insurance, all subject to commercial availability, (iii) other operations of a similar nature sustain losses or threats of losses which could happen at any location that contains the Collateral or other physical property or assets that secure the Obligations or (iv) such other or additional insurance (as to types of risks covered, policy amounts, deductibles and other terms and conditions) as, under prudent utility practices, are from time to time insured against for property and facilities similar in nature, use and location to the Project.
* * * * * *
 
CREZ A SSETS L EASE A GREEMENT
 
Exhibit B-8

EXHIBIT C
SUBORDINATED DEBT TERMS
Reference is made to that certain Second Amended and Restated Collateral Agency Agreement (as amended, restated, supplemented or otherwise modified, the “ Collateral Agency Agreement” ), to be entered into by and among The Bank of New York Mellon Trust Company, N.A., as collateral agent (together with its successors and assigns, the “Collateral Agent” ), Sharyland Distribution & Transmission Services, L.L.C., a Texas limited liability company (the “ Company” ), and the holders of the Permitted Secured Indebtedness (as defined below) from time to time party thereto
1. Definitions and Rules of Interpretation. Capitalized terms used herein without definition shall have the meanings assigned to such terms in the Collateral Agency Agreement. The rules of interpretation set forth in Schedule A of the Collateral Agency Agreement shall apply to this Exhibit C as if fully set forth herein. In addition, the following terms shall have the following meanings:
“ Entitled Party ” shall mean the Company unless the Collateral Agent or the Company has given notice to the Subordinated Lender that the Collateral Agent has, on behalf of the Secured Parties and pursuant to the Collateral Agency Agreement or related documents, properly exercised its remedies to foreclose on the Company’s interest in any System Lease and receive payments pursuant to any System Lease directly from Sharyland, in which case the Entitled Party shall mean the Collateral Agent, acting for the benefit of the Secured Parties.
“ Governmental Authority ” shall mean
 
 	(a)	the government of:	
 
 	(i)	The United States of America or any State or other political subdivision thereof, or	
 
 	(ii)	any other jurisdictions in which the Company conducts all or any part of its business, or which asserts jurisdiction over any properties of the Company, or	
 
 	(b)	any entity exercising executive, legislative, judicial, taxing, regulatory or administrative functions of, or pertaining to, any such government, or	
 
 	(c)	the Electric Reliability Council of Texas or any successor thereto (“ ERCOT ”), or	
 
 	(d)	the Texas Regional Entity.	
 
CREZ A SSETS L EASE A GREEMENT
 
Exhibit C-1

“ Insolvency Event ” means the occurrence of any of the following:
 
 	(a)	Sharyland (i) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes a corporate action for the purpose of any of the foregoing; or	
 
 	(b)	a court or Governmental Authority of competent jurisdiction enters an order appointing, without consent by Sharyland, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of Sharyland or any such petition shall be filed against Sharyland and such petition shall not be dismissed within 60 days.	
“ Reorganization Securities ” shall mean any debt or equity securities issued on account of all or any portion of the Subordinated Indebtedness in connection with an Insolvency Event that are in each case subordinated in liquidation to the Obligations (or any debt or equity securities issued on account of any Obligations) to at least the same extent that the Subordinated Indebtedness are subordinated to the Obligations hereunder.
“ Sharyland ” shall mean Sharyland Utilities, L.P.
“ Subordinated Indebtedness ” shall mean, with respect to Sharyland, Indebtedness (as defined under the applicable Financing Agreement or such other similar term) that is incurred in accordance with the terms of such Financing Agreement and is required to be subordinated to the applicable Obligations.
“ Subordinated Lenders ” shall mean each and every Person to whom any of the Subordinated Indebtedness are owed.
“ Subordinated Loan Documents ” shall mean all documentation evidencing the Subordinated Indebtedness.
“ System Leases ” shall mean any and all leases of transmission and distribution and related assets pursuant to which Sharyland is the lessee and the Company or any Subsidiary of the Company is a party as a lessor, and supplements thereto, each as amended, restated, supplemented or otherwise modified from time to time, or any new lease entered into in replacement thereof.
“ System Lease Obligations ” shall mean any and all Rent or other similar term (as such term is defined in the System Leases) then due and payable under the System Leases.
 
CREZ A SSETS L EASE A GREEMENT
 
Exhibit C-2

“ Texas Regional Entity ” shall mean the division of ERCOT authorized to develop, monitor, assess and enforce compliance with NERC Reliability Standards within geographic boundaries of ERCOT and any successor thereto.
2. Subordination of Subordinated Indebtedness. Until the indefeasible payment in full in cash of all the Obligations and the termination of any commitments to lend under any Permitted Secured Indebtedness, the Subordinated Lenders and Sharyland hereby agree that (i) all Subordinated Indebtedness is and shall be subordinated in right of liquidation in relation to all System Lease Obligations to the extent and in the manner hereinafter set forth, (ii) upon the occurrence and during the continuance of any default or event of default under any System Lease (or if after giving effect to a proposed distribution in respect of any part of the Subordinated Indebtedness, a default or event of default under any System Lease will exist), no payments or other distributions whatsoever in respect of any part of the Subordinated Indebtedness shall be made, (iii) upon the occurrence and during the continuance of an Insolvency Event, no payments or other distributions whatsoever in respect of any part of the Subordinated Indebtedness shall be made nor shall any property or assets of Sharyland be applied to the purchase or other acquisition or retirement of any part of the Subordinated Indebtedness, and (iv) upon the occurrence and during the continuance of an Insolvency Event, the Subordinated Lenders shall not accept any payment by or on behalf of Sharyland on account of the principal of, premium or interest on, or any other amount in respect of, the Subordinated Indebtedness other than the payment of indemnity obligations and reasonable out of pocket costs and expenses (including reasonable attorney’s fees) in each case as and when due and payable in accordance with the terms of the Subordinated Debt Documents.
3. Liquidation, Dissolution, Bankruptcy . Until the indefeasible payment in full in cash of all the Obligations and the termination of any commitments to lend under any Permitted Secured Indebtedness, and without limitation to the rights of the Secured Parties under the terms of the Financing Agreements or the rights of Company under the System Leases:
 
 	(a)	upon the occurrence and during the continuance of any Insolvency Event :	
 
 	(i)	the System Lease Obligations then due and payable shall first be irrevocably and indefeasibly paid in full to the Entitled Party before any of the Subordinated Lenders shall be entitled to receive any payment (other than Reorganization Securities) on account of the Subordinated Indebtedness whether in cash, securities or other assets (other than Reorganization Securities);	
 
 	(ii)	any payment or distribution of assets of Sharyland of any kind or character in respect of the Subordinated Indebtedness to which any of the Subordinated Lenders would be entitled if the Subordinated Indebtedness were not subordinated pursuant to the terms hereof shall be made by the trustee, liquidator or agent or other Person making such payment or distribution, directly to the Entitled Party until the System Lease Obligations then due and payable are paid in full and each of the Subordinated Lenders and, unless the Company is the Entitled Party, Sharyland irrevocably authorizes and empowers the Entitled Party to receive and collect on its behalf any and all such payments or distributions; and	
 
CREZ A SSETS L EASE A GREEMENT
 
Exhibit C-3

 	(iii)	the Subordinated Lenders agree not to, directly or indirectly, initiate, prosecute or participate in any claim, action or other proceeding challenging the enforceability, validity or priority of the System Lease Obligations then due and payable.	
4. Incorrect Payments. If, for any reason whatsoever and whether pursuant to an Insolvency Event or otherwise, Sharyland shall make or any of the Subordinated Lenders shall receive any payment or distribution of any kind or character, whether in cash, securities or other property (other than Reorganization Securities), on account or in respect of the Subordinated Indebtedness in contravention of any of the terms set forth herein, such Subordinated Lender shall hold any such payment or distribution in trust for the benefit of the Secured Parties, promptly notify the Entitled Party of the receipt of such payment or distribution and promptly pay over or deliver such distribution or payment to the Entitled Party or to any other Person nominated by the Entitled Party, to hold for the account of the Secured Parties.
5. Non-Impairment . To the fullest extent permitted by applicable Law, no change of law or circumstances shall release or diminish any of the Subordinated Lender’s obligations, liabilities, agreements or duties hereunder, affect the provisions set forth herein in any way.
6. Benefit of Subordination Provisions . These subordination provisions are intended solely to define the relative rights of the Secured Parties, the Collateral Agent, the Company, the Subordinated Lenders, and their respective successors and permitted assigns.
7. Termination and Reinstatement. Notwithstanding anything to the contrary contained herein, the Subordinated Indebtedness shall no longer be subordinated in right of liquidation pursuant to the terms contained herein otherwise at such time as the Secured Parties no longer have a lien on or security interest in the System Lease Obligations. If any payment to any of the Entitled Party, the Company, the Collateral Agent or the Secured Parties by Sharyland or any other Person in respect of any of the System Lease Obligations is held to constitute a preference or a voidable transfer under applicable Law, or if for any other reason any such party is required to refund such payment to Sharyland or to such Person or to pay the amount thereof to any other Person, each Subordinated Lender agrees and acknowledges that the provisions set forth herein shall continue to be effective or shall be reinstated, as the case may be, to the extent of any such payment or payments.
8. Restrictions on Transfers . None of the Subordinated Lenders may transfer (by sale, novation or otherwise) any of its rights or obligations under the Subordinated Indebtedness unless the transferee of such interest first agrees in writing to be bound by the terms of this Exhibit C applicable to the transferor of such interest and executes an instrument to that effect.
 
CREZ A SSETS L EASE A GREEMENT
 
Exhibit C-4

EXERCISE OF POWERS.
After the occurrence and during the continuance of an Insolvency Event, the Entitled Party shall be entitled to exercise its rights and powers under these subordination provisions in such a manner and at such times as the Entitled Party in its absolute discretion may determine.
The Subordinated Lenders alone shall be responsible for their contracts, engagements, acts, omissions, defaults and losses and for liabilities incurred by them.
 
CREZ A SSETS L EASE A GREEMENT
 
Exhibit C-5

SCHEDULE 3.2(b)
FORM OF RENT SUPPLEMENT
Rent Supplement
Pursuant to Section 3.2(b) of Lease
[Date of Supplement]
Incremental CapEx:
Lessee CapEx:
Base Rent:
Percentage Rent Percentages:
Annual Percentage Rent Breakpoints:
Revenues Attributable to Lessee CapEx:
ERCOT Transmission Rate Allocation:
Term of Rent Supplement:

Executed this day of _, 20	
	
SHARYLAND UTILITIES, L.P.	
		
By:	 	 	
Name:	
Title:	
	
SHARYLAND PROJECTS, L.L.C.	
		
By:	 	 	
Name:	 		 		
Title:	 		 		
 
CREZ A SSETS L EASE A GREEMENT

Exhibit 10.15
Execution Version
LEASE AGREEMENT
(ERCOT TRANSMISSION ASSETS)
between
SHARYLAND DISTRIBUTION & TRANSMISSION SERVICES, L.L.C.
and
SHARYLAND UTILITIES, L.P.
as of December 1, 2014

TABLE OF CONTENTS

 	 	 	  	Page	 	
ARTICLE I LEASE	  	 	1	  	
			
1.1.	 	Lease of ERCOT Transmission Assets	  	 	1	  	
1.2.	 	Exclusive Rights	  	 	3	  	
1.3.	 	Absolute Net Lease	  	 	3	  	
1.4.	 	Waiver by Lessee	  	 	3	  	
1.5.	 	Quiet Enjoyment	  	 	3	  	
		
ARTICLE II TERM OF LEASE	  	 	4	  	
			
2.1.	 	Term	  	 	4	  	
2.2.	 	Approvals upon Expiration or Termination	  	 	4	  	
2.3.	 	Purchase Option upon Expiration or Termination	  	 	4	  	
		
ARTICLE III RENT	  	 	5	  	
			
3.1.	 	Rent	  	 	5	  	
3.2.	 	Rent Supplements	  	 	8	  	
3.3.	 	Confirmation of Percentage Rent	  	 	10	  	
3.4.	 	Additional Rent	  	 	11	  	
3.5.	 	No Set Off	  	 	12	  	
3.6.	 	Late Payment Penalty	  	 	12	  	
3.7.	 	Credit Support	  	 	12	  	
3.8.	 	Other Revenue	  	 	12	  	
		
ARTICLE IV LESSEE’S REPRESENTATIONS, WARRANTIES AND COVENANTS	  	 	12	  	
			
4.1.	 	Maintenance, Operation and Repair of the ERCOT Transmission Assets	  	 	12	  	
4.2.	 	Licenses and Permits	  	 	13	  	
4.3.	 	Property Taxes, and other Assessments and Fees	  	 	13	  	
4.4.	 	Requirements of Governmental Agencies and Regulatory Authorities	  	 	13	  	
4.5.	 	Liens	  	 	14	  	
4.6.	 	Hazardous Materials	  	 	14	  	
4.7.	 	Indebtedness	  	 	15	  	
4.8.	 	Records	  	 	15	  	
4.9.	 	Surrender	  	 	15	  	
4.10.	 	Cooperation; Transition Services	  	 	16	  	
4.11.	 	Lessee’s Authority	  	 	16	  	
4.12.	 	Litigation	  	 	16	  	
4.13.	 	Financing	  	 	17	  	
 
ERCOT T RANSMISSION A SSETS L EASE A GREEMENT
 
i

TABLE OF CONTENTS

 	 	 	  	Page	 	
ARTICLE V LESSOR’S REPRESENTATIONS, WARRANTIES AND COVENANTS	  	 	18	  	
			
5.1.	 	Lessor’s Authority	  	 	18	  	
5.2.	 	Liens and Tenants	  	 	18	  	
5.3.	 	Condition of Assets	  	 	19	  	
5.4.	 	Requirements of Governmental Agencies	  	 	19	  	
5.5.	 	Hazardous Materials	  	 	19	  	
5.6.	 	Litigation	  	 	19	  	
5.7.	 	Limitation	  	 	19	  	
		
ARTICLE VI LOSS AND DAMAGE; INSURANCE	  	 	20	  	
			
6.1.	 	Loss and Damage to the ERCOT Transmission Assets	  	 	20	  	
6.2.	 	Insurance	  	 	20	  	
		
ARTICLE VII REPORTING	  	 	21	  	
			
7.1.	 	Private Financing Arrangements	  	 	21	  	
7.2.	 	Public Company and Regulatory Information and Cooperation	  	 	22	  	
7.3.	 	Mutual Obligations	  	 	23	  	
		
ARTICLE VIII ASSIGNMENT	  	 	23	  	
		
ARTICLE IX DEFAULT	  	 	24	  	
			
9.1.	 	Lessee Default	  	 	24	  	
9.2.	 	Lessor Default	  	 	25	  	
9.3.	 	Right to Cure	  	 	25	  	
9.4.	 	Remedies	  	 	25	  	
		
ARTICLE X CAPITAL EXPENDITURES	  	 	26	  	
			
10.1.	 	Capital Expenditures Generally	  	 	26	  	
10.2.	 	Capital Expenditures Funded by Lessor	  	 	26	  	
10.3.	 	Capital Expenditures Funded by Lessee	  	 	27	  	
10.4.	 	Footprint Project Construction Activities	  	 	27	  	
10.5.	 	Ownership of Footprint Projects	  	 	27	  	
10.6.	 	Asset Acquisitions	  	 	28	  	
10.7.	 	Reimbursements	  	 	28	  	
		
ARTICLE XI REGULATORY COOPERATION	  	 	28	  	
			
11.1.	 	Jurisdiction	  	 	28	  	
11.2.	 	Cooperation	  	 	29	  	
		
ARTICLE XII INDEMNITY	  	 	29	  	
			
12.1.	 	General Indemnity	  	 	30	  	
12.2.	 	Environmental Indemnity	  	 	30	  	
 
ERCOT T RANSMISSION A SSETS L EASE A GREEMENT
 
ii

TABLE OF CONTENTS

 	 	 	  	Page	 	
ARTICLE XIII MISCELLANEOUS	  	 	30	  	
			
13.1.	 	Limitation of Damages	  	 	30	  	
13.2.	 	Condemnation	  	 	30	  	
13.3.	 	Confidentiality	  	 	31	  	
13.4.	 	Successors and Assigns	  	 	31	  	
13.5.	 	Rent Obligations Not Excused by Force Majeure, Etc.	  	 	31	  	
13.6.	 	Further Assurances; Policies and Procedures	  	 	31	  	
13.7.	 	Arbitration	  	 	32	  	
13.8.	 	Notices	  	 	33	  	
13.9.	 	Entire Agreement; Amendments	  	 	34	  	
13.10.	 	Legal Matters	  	 	34	  	
13.11.	 	Partial Invalidity	  	 	34	  	
13.12.	 	Recording	  	 	34	  	
13.13.	 	Intention of Parties; True Lease	  	 	34	  	
APPENDICES:
Appendix A — Definitions
EXHIBITS:
Exhibit A — Subordinated Debt Terms
Exhibit B — Insurance
SCHEDULES:
Schedule 3.2(b)     Form – Rent Supplement
 
ERCOT T RANSMISSION A SSETS L EASE A GREEMENT
 
iii

LEASE AGREEMENT
(ERCOT TRANSMISSION ASSETS)
This LEASE AGREEMENT (ERCOT TRANSMISSION ASSETS) (this “ Agreement ”) is entered into on December 1, 2014 (the “ Effective Date ”), between Sharyland Distribution & Transmission Services, L.L.C. (together with its transferees, successors and assigns, “ Lessor ”), and Sharyland Utilities, L.P. (together with its transferees, successors and assigns, “ Lessee ”), and in connection herewith, Lessor and Lessee agree, covenant and contract as set forth in this Agreement. Lessor and Lessee are sometimes referred to in this Agreement as a “ Party ” or collectively as the “ Parties ”.
Certain capitalized terms used in this Agreement have the meaning assigned to them in Appendix A attached hereto.
WITNESSETH:
WHEREAS, Lessor owns certain transmission assets in Texas referred to as the AJ Swope substation and may acquire or build additional transmission assets in Texas that are subject to the jurisdiction of ERCOT; and
WHEREAS, Lessor and Lessee wish to enter into a lease agreement covering the AJ Swope substation and, in the future, to enter into lease agreements covering Footprint Projects that add, expand or alter transmission assets identified from time to time pursuant to Rent Supplements;
NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Parties hereto hereby enter into this Agreement as follows:
ARTICLE I
LEASE
1.1. Lease of ERCOT Transmission Assets.
(a) Upon the terms and conditions set forth in this Agreement, Lessor hereby grants to Lessee the exclusive right to use and operate the ERCOT Transmission Lease Assets. Subject to necessary regulatory approvals and the penultimate sentence of this Section 1.1, this Agreement is intended by Lessor and Lessee to be a master lease of the ERCOT Transmission Lease Assets, as they exist as of the Effective Date, and as they may be altered or expanded thereafter by Footprint Projects in which Lessor has an interest or by other additions of assets to this Agreement as Footprint Projects pursuant to Rent Supplements.
(b) The ERCOT Transmission Assets shall consist of (x) the original assets leased by Lessor to Lessee as of the Effective Date, (y) assets that constitute Footprint Projects, other than any such Footprint Projects funded by Lessee pursuant to Section 10.3, and (z) any components of the ERCOT Transmission Assets that are repaired or replaced pursuant to Section 6.1. The ERCOT Transmission Assets shall consist of each of the following components which are owned by Lessor as of the Effective Date (or that are described within clause (y) or clause (z) above) and that are part of the AJ Swope Substation or that are added to this Agreement as Footprint Projects pursuant to Rent Supplements:
 
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(i) towers and poles affixed to the land, and all necessary and proper foundations, footings, crossarms and other appliances and fixtures for use in connection with said towers, poles and lines;
(ii) overhead, underground and underwater electrical distribution, transmission and communications lines, together with related ductwork and insulators;
(iii) electric substation and switching facilities, including all associated transformers, circuit breakers, resistors, capacitors, buses, interconnection and switching facilities, control and protection equipment which monitors the ERCOT Transmission Assets, and the building housing the foregoing items;
(iv) electric meters required to operate the ERCOT Transmission Assets;
(v) all facilities associated with HVDC Ties, including AC/DC converter stations;
(vi) real estate assets, including real property, interests in real property or real property rights (as defined in Section 856(c)(5)(B) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder, and not otherwise included in Sections 1.1(b)(i) – 1.1(b)(v) above) owned or leased by Lessor; or
(vii) all other systems or property owned or leased by Lessor, as identified in the uniform system of accounts for major electric utilities, 18 C.F.R. Part 101, as adopted and amended from time to time by FERC (not otherwise included in Sections 1.1(b)(i) – 1.1(b)(vi) above).
The ERCOT Transmission Assets exclude, for the avoidance of doubt, (a) the Transmission Operation Center and the transmission and distribution related assets included in the Backup Operations Center located in Amarillo, Texas, which are currently owned by Lessor and leased to Lessee pursuant to the McAllen Lease, (b) the transmission assets currently located in the Stanton/Brady/Celeste service territory, owned by Lessor and leased to Lessee pursuant to the Stanton/Brady/Celeste Lease, (c) the transmission assets currently located in Mission, Texas (Railroad Tie) owned by Lessor and leased to Lessee pursuant to the McAllen Lease, (d) the 138kv loop transmission assets located near Stanton, Texas owned by Lessor and leased to Lessee under the Stanton Transmission Loop Lease, and (e) certain transmission assets located in the Texas Panhandle and owned by Sharyland Projects, L.L.C., a subsidiary of Lessor, and leased to Lessee under the CREZ Lease. Notwithstanding anything to the contrary in this Agreement, the parties do not intend or agree to enter into a lease with respect to any Footprint Project or other alteration, expansion or addition to the ERCOT Transmission Assets (and the Lessee shall not be authorized to use or operate such Footprint Project, alteration, expansion or addition to the ERCOT Transmission Assets) unless and until such time as the parties first execute a Rent Supplement for the underlying Footprint Project and such Footprint Project is placed in service, and such Rent Supplement together with this Agreement shall be treated as a
 
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new lease with respect to such Footprint Project. The parties further agree and acknowledge that a Rent Supplement will be executed with respect to each Footprint Project before such Footprint Project is placed in service, and references in this Agreement to “ERCOT Transmission Assets” rely on the assumption that this is the case.
1.2. Exclusive Rights. Throughout the Term of this Agreement, Lessee shall have the exclusive right (i) to operate and use the ERCOT Transmission Lease Assets for the transmission of electricity in accordance with applicable rules and regulations of all regulatory agencies having regulatory jurisdiction over the ERCOT Transmission Assets, including without limitation, PUCT, TRE, NERC and other Regulatory Authorities, and (ii) to utilize the ERCOT Transmission Lease Assets (and the associated easements, rights of way and similar rights) for other opportunities and uses (provided that such other uses do not interfere with the current or future transmission and delivery of electricity), subject to the approval of the Lessor, such approval not to be unreasonably withheld, conditioned or delayed. Throughout the Term of this Agreement, Lessor shall have access to the ERCOT Transmission Assets at all reasonable times for purposes of inspection and for the purposes of improving, expanding or modernizing the ERCOT Transmission Assets in accordance with Article X. Except in the case of emergency, prior to Lessor’s access of the ERCOT Transmission Assets, Lessor will provide written notification to Lessee’s operations personnel.
1.3. Absolute Net Lease. This Agreement is intended by the Parties to be an absolute net lease (and, except as otherwise specified herein, the expenses associated with the lease, servicing, insuring, maintenance, repair and operation of the ERCOT Transmission Assets shall be for the account of the Lessee, unless expressly stated that such expenses are for the account of Lessor or some other person or entity). Other than as expressly provided herein, (a) Lessee’s obligation to make all payments of Rent as and when the same shall become due and payable in accordance with the terms of this Agreement shall be absolute, irrevocable and unconditional and shall not be affected by any circumstance or subject to any abatement or diminution by set-off, deduction, counterclaim, recoupment, agreement, defense, suspension, deferment, interruption or otherwise, and (b) until such time as all Rent required to be paid has been paid, Lessee shall have no right to terminate this Agreement or to be released, relieved or discharged from its obligation to make, and shall not suspend or discontinue, any payment of Rent for any reason whatsoever.
1.4. Waiver by Lessee. Lessee hereby waives, to the extent permitted by Applicable Law, any and all rights which it may now have or which at any time hereafter may be conferred upon it, by statute or otherwise, to modify, terminate, cancel, quit or surrender this Agreement except in accordance with the express terms hereof.
1.5. Quiet Enjoyment . Lessee shall be entitled to the peaceful and quiet enjoyment of the ERCOT Transmission Assets, subject to the terms of this Agreement, so long as Lessee is not in default of this Agreement beyond applicable notice and cure periods.
 
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ARTICLE II
TERM OF LEASE
2.1. Term . Subject to the provisions of Section 2.2 of this Agreement, or as otherwise stated herein, this Agreement is effective on the Effective Date and shall continue through December 31, 2022 unless otherwise terminated in a manner consistent herewith (the “ Initial Term ”). Thereafter, this Agreement may be renewed for subsequent terms (each, a “ Renewal Term ” and, collectively with the Initial Term, the “ Term ”) by mutual agreement of the Parties; provided, however, that the Rent for any Renewal Term shall be targeted to provide the Lessor with a Comparable Rate of Return on the then-current Rate Base of the ERCOT Transmission Assets.
2.2. Approvals upon Expiration or Termination .
(a) Notwithstanding any provisions to the contrary herein, Lessee shall not surrender, resign, transfer, assign or otherwise cease to be the operator of the ERCOT Transmission Assets at any time, including upon the termination of this Agreement or at the expiration of the Term, without first acquiring any necessary regulatory approvals from the PUCT or other Regulatory Authorities regarding such surrender, resignation, transfer, assignment or cessation of such operatorship; provided that, in the event of expiration or termination, the Parties shall use commercially reasonable efforts to obtain all necessary regulatory approvals of the transfer of such operatorship as soon as reasonably practicable.
(b) During such extended period of operatorship, Lessee shall continue to operate the ERCOT Transmission Assets and shall continue to pay all Extended Period Rent; provided, however, that if regulatory approval is not obtained within twelve (12) months of initiation of the approval process and such delay is (a) due to Lessor’s failure to reasonably pursue such approval, then the amounts payable as Rent will be eighty percent (80%) of such amount, or (b) due to Lessee’s failure to reasonably pursue such approval, then the amounts payable as Rent will be one hundred five percent (105%) of such amount.
(c) Upon the expiration of the Term or termination of this Agreement, Lessee shall use commercially reasonable efforts to obtain all necessary regulatory approvals as soon as reasonably practicable from the PUCT or other Regulatory Authorities to transfer or assign the CCNs for the ERCOT Transmission Assets to Lessor or a third party designated by Lessor and acceptable to the PUCT or other Regulatory Authorities.
2.3. Purchase Option upon Expiration or Termination . Upon the expiration of the Term or termination of this Agreement, Lessor shall have the option to purchase from Lessee any equipment or other property, tangible or intangible, owned by Lessee and principally used in connection with and necessary for the operation of the ERCOT Transmission Assets (including any Nonseverable Footprint Projects owned by Lessee, if any), subject to any required regulatory approvals. The purchase price for such property or equipment shall be the greater of (i) the net book value thereof plus 10% and (ii) the fair market value thereof as determined by mutual agreement of Lessor and Lessee. If the Parties fail to agree on the amount of the purchase price, the purchase price shall be determined by arbitration pursuant to Section 13.7. In the event Lessor purchases such equipment, Lessee shall have the right to continue to use such equipment for no cost during the period of any extended operations by Lessee under Section 2.2.
 
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ARTICLE III
RENT
3.1. Rent . Lessee will pay to Lessor in lawful money of the United States of America which shall be legal tender for the payment of public and private debts, at Lessor’s address set forth in Section 13.8 hereof or at such other place or to such other Person, as Lessor from time to time may designate in a Notice, all Rent contemplated hereby during the Term on the basis hereinafter set forth. If there is a dispute as to the amount of Rent to be paid by Lessee, either Party may submit the dispute to arbitration pursuant to Section 13.7. However, Lessee shall be required to pay, as and when Rent is due and payable hereunder, the Undisputed Rent until such time as the dispute is resolved by agreement between the Parties or by arbitration pursuant to Section 13.7.
(a) Base Rent: Lessee will pay Lessor an amount of base rent equal to the amount set forth on the then-effective Rent Supplement, which shall be payable monthly in arrears 45 days after the conclusion of the month. The amount of base rent owed pursuant to this Section 3.1(a) may be supplemented by the Parties from time to time in accordance with Section 3.2. The amount of base rent payable pursuant to this Section 3.1(a), as supplemented from time to time pursuant to Section 3.2, is referred to as “ Base Rent .”
(b) Percentage Rent: In addition to the Base Rent set forth above, Lessee covenants and agrees to pay to Lessor, as percentage rent, an annual amount equal to the percent of Gross Revenues during the applicable Lease Year in excess of the Annual Percentage Rent Breakpoint for such Lease Year, all as set forth on the then-effective Rent Supplement. The percentage amounts used for the calculation of percentage rent owed pursuant to this Section 3.1(b) (the “ Percentage Rent Percentages ”) may be supplemented by the Parties from time to time in accordance with Section 3.2 to account for additions to the ERCOT Transmission Assets. The percentage rent payable pursuant to this Section 3.1(b), as supplemented from time to time pursuant to Section 3.2, is referred to as “ Percentage Rent .”
(c) Percentage Rent Breakpoints: With respect to the Annual Percentage Rent Breakpoint for each Lease Year: (1) the “First Lease Quarter Percentage Rent Breakpoint” shall be 25% of the Annual Percentage Rent Breakpoint for such Lease Year; (2) the “Second Lease Quarter Percentage Rent Breakpoint” shall be 50% of the Annual Percentage Rent Breakpoint for such Lease Year; and (3) the “Third Lease Quarter Percentage Rent Breakpoint” shall be 75% of the Annual Percentage Rent Breakpoint for such Lease Year.
(d) Gross Revenues:
(i) As used in this Agreement, subject to Section 3.1(d)(ii), the “ Gross Revenues ” of the ERCOT Transmission Assets shall mean and include all fees, charges and other revenues generated by or otherwise (x) received by or payable to Lessee in connection with or which are the result of the operation of the ERCOT Transmission Assets (and any assets related to the ERCOT Transmission Assets owned by Lessee), as set forth in the FERC Uniform System of Accounts for electric utilities or such other accounts as may be applicable from time to time in which Lessee records its revenues from operation of the ERCOT Transmission Assets; (y) received by or payable to Lessee from other opportunities and uses of the ERCOT Transmission
 
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Assets pursuant to Section 1.2 hereof; or (z) that are insurance proceeds for business income lost from an insured event related to the ERCOT Transmission Assets; provided that, “ Gross Revenues ” shall not include (1) any payment received by Lessee as CIAC; (2) any items which are of a pure pass-through nature where such items are charged to and collected from customers of Lessee but which carry regulatory responsibility to remit such collections without offset or deduction to a third party, including, but not limited to, items such as: (A) sales taxes or other charges collected by Lessee on behalf of a taxing authority; (B) fees, charges and other revenues collected by Lessee that can be specifically traced to any regulatory approved costs incurred by Lessee that have been ordered or permitted by the PUCT to be recovered through Lessee’s rates such as system benefit funds; (C) fees, charges and other revenues collected by Lessee that can be specifically traced to any deferred costs funded by Lessee that have been ordered or permitted by the PUCT to be recovered through a tariff rider; and (D) such other items that Lessor and Lessee agree to in good faith are consistent with the foregoing and should be included prospectively in the list set forth in this clause (2) and in the event the Lessor and Lessee cannot agree on what items should be included on such list after 60 days of negotiating in good faith, then either Lessor or Lessee may submit such matter to arbitration pursuant to Section 13.7 of this Agreement, pursuant to which the Arbitration Panel shall be empowered to determine which such items shall be included on such list, based on submissions by each of the Lessee and the Lessor; and (3) Revenues Attributable to Lessee CapEx. The term “ Unadjusted Gross Revenues ” means the amount of Gross Revenue, calculated in accordance with this Section 3.1(d)(i), without giving effect to the offset set forth in clause 3 above, related to Revenues Attributable to Lessee CapEx.
(ii) Except as set forth below, all ERCOT Transmission Revenues will be allocated to the ERCOT Transmission Assets covered by this Agreement based upon the following formula: Multiply (x) total ERCOT Transmission Revenues received by Lessee by (y) a fraction, the numerator of which is the Transmission Net Plant in Service for the ERCOT Transmission Assets covered by this Agreement and the denominator of which is the total Transmission Net Plant in Service for all regulated electric transmission systems owned by Lessor or an affiliate thereof and operated by Lessee or a subsidiary thereof within ERCOT (the “ TCOS Allocation ”). As of the Effective Date, all regulated electric transmission systems operated by Lessee or a subsidiary thereof within ERCOT are owned by Lessor or a subsidiary or parent entity thereof. As long as that is the case, Transmission Net Plant in Service and Transmission Gross Plant in service shall be derived exclusively from the financial statements of Lessor and agreed to by Lessee. If Lessee operates any electric transmission systems within ERCOT that are not leased from Lessor or an affiliate thereof, then the Parties will negotiate in good faith an equitable and appropriate mechanism for allocating ERCOT Transmission Revenues based on the Transmission Net Plant in Service of the respective electric transmission systems and in the event the Parties cannot agree on an equitable and appropriate mechanism after 60 days of negotiating in good faith, then either Party may submit such matter to arbitration pursuant to Section 13.7 of this Agreement, pursuant to which the Arbitration Panel shall be empowered to determine such equitable and appropriate TCOS mechanism, based on submissions by each of the Lessee and the Lessor. The most recent TCOS Allocation agreed to by Lessor and Lessee will govern the allocation described in this Section 3.1(d)(ii), which TCOS Allocation may be set forth in a Rent Supplement but will not be required to be included in a Rent Supplement to be effective. Either Party may request a revision to such TCOS Allocation, based on the most recent available monthly balance sheet, no more frequently than once every sixty (60) days or in
 
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connection with any Rent Supplement or Rent Validation executed and delivered by the Parties. If the Parties are unable to agree to an allocation, such matter will be submitted to arbitration pursuant to Section 13.7. “ Gross Revenues ,” for purposes hereof, will consist of the amount of such ERCOT Transmission Revenues allocated to the ERCOT Transmission Assets pursuant to this Section 3.1(d)(ii), plus any other amounts that constitute Gross Revenues pursuant hereto, minus Revenues Attributable to Lessee CapEx. As of the date hereof, the Parties do not expect that any Lessee Revenue, other than ERCOT Transmission Revenues, will be allocated to the ERCOT Transmission Assets and constitute Gross Revenues hereunder.
(iii) The Parties contemplate that there may be Capital Expenditures for assets that are placed in service and that are related and fairly allocable to the ERCOT Transmission Assets and are classified as Lessee CapEx. Unless the Parties agree otherwise based on appropriate factors at the time of the negotiation, Capital Expenditures that qualify as Lessee CapEx will qualify as Lessee CapEx on the date that the assets developed with such Capital Expenditures are placed in service. In such a case, Revenues Attributable to Lessee CapEx shall be determined and such portion shall be subtracted from Unadjusted Gross Revenues in order to calculate Gross Revenues. For these purposes, Revenues Attributable to Lessee CapEx shall be targeted to equal that portion of the Unadjusted Gross Revenues collected by Lessee which equals the amount needed to provide Lessee with the equivalent of a Comparable Rate of Return on any such Lessee CapEx (except that, in determining such Comparable Rate of Return, the Parties will not consider Lessee’s creditworthiness and there will be no Agreed-to-Discount). It is understood and agreed that such determinations of the Revenues Attributable to Lessee CapEx are intended to provide an accurate and reasonably administrable means of ensuring that the Lessee (and not the Lessor) will receive a Comparable Rate of Return attributable to the capital invested by Lessee in the Lessee CapEx. The Revenues Attributable to Lessee CapEx shall be determined solely to provide a Comparable Rate of Return on such Lessee CapEx and shall not be determined with reference to, or with any intention to true up, the effect of any difference between the initially anticipated and the actual return of or on prior Lessee CapEx. The Parties understand that there may be Capital Expenditures that relate to both the ERCOT Transmission Assets and to other transmission and/or distribution systems owned or operated by Lessee or an affiliate thereof, and, in such circumstance, the Parties will negotiate in good faith to determine the portion of such Capital Expenditures that constitute Lessee CapEx hereunder and in the event the Parties cannot determine such portion after 60 days of negotiating in good faith, then either Party may submit such matter to arbitration pursuant to Section 13.7 of this Agreement, pursuant to which the Arbitration Panel shall be empowered to determine such portion of Capital Expenditures that constitute Lessee CapEx hereunder, based on submissions by each of the Lessee and the Lessor. Lessee agrees to provide Lessor with sufficient information regarding Lessee CapEx so that Lessor can monitor amounts actually spent on Lessee CapEx. If Lessee expects there will be any Lessee CapEx, Lessee may request, no more frequently than annually, that the Parties determine the Revenues Attributable to Lessee CapEx which relate to such Lessee CapEx for each subsequent Lease Year. Lessee will use reasonable efforts to make such request coincide with a Rent Supplement pursuant to Section 3.2(a). Each supplement and related determination of Revenues Attributable to Lessee CapEx for any Lease Year which is specified in this Section 3.1(d)(iii) shall be memorialized in the manner specified in Section 3.2(b).
 
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(e) Payment of Percentage Rent: Percentage Rent shall be paid by Lessee to Lessor not later than the date forty-five (45) days after the end of each Lease Quarter as herein provided. Lessee shall record Gross Revenues in order to provide an audit trail for the Gross Revenues. Lessee shall deliver a written statement to Lessor, accompanied by a CFO Certificate, within forty-five (45) days after the end of each Lease Quarter, stating (1) the Gross Revenues for that Lease Quarter, (2) the cumulative total through the end of that Lease Quarter of Gross Revenues for such Lease Year, (3) the Percentage Rent Breakpoint (the First Lease Quarter Percentage Rent Breakpoint, the Second Lease Quarter Percentage Rent Breakpoint, the Third Lease Quarter Percentage Rent Breakpoint or the Annual Percentage Rent Breakpoint for such Lease Year, as applicable), utilized by Lessee and applicable to Lessee’s calculation of Percentage Rent through the end of that Lease Quarter, and (4) the cumulative total of any Percentage Rent then due and the cumulative total of any Percentage Rent previously paid with respect to any prior Lease Quarter(s) within such Lease Year. If such CFO Certificate indicates that any Percentage Rent is due for such Lease Quarter (or such Lease Year, as applicable), based upon the cumulative total of Gross Revenues through the end of such Lease Quarter and the applicable Percentage Rent Breakpoint reflected in such statement, then Lessee shall pay and deliver any Percentage Rent then due with the statement and CFO Certificate for such Lease Quarter (or such Lease Year, as applicable). With respect to the final Percentage Rent calculation for any Lease Year, Lessee shall receive a credit for any Percentage Rent previously paid with respect to such Lease Year. If the Percentage Rent payments previously made by Lessee to Lessor for the first three Lease Quarters of a Lease Year, on a cumulative basis, exceed the annual amount of Percentage Rent payable by Lessee to Lessor for such Lease Year, then Lessee shall receive a credit for such excess amount against the next Percentage Rent payment(s) becoming due and payable by Lessee to Lessor under this Agreement. All statements deliverable by Lessee to Lessor under this Agreement shall be delivered to the place where rent is then payable, or to such other place or places as Lessor may from time to time direct by written notice to Lessee.
3.2. Rent Supplements .
(a) The Parties have executed a Rent Supplement with respect to the Rent in effect as of the Effective Date. This Section 3.2(a) will not require any amendment to Rent unless the Parties expect Incremental CapEx and the Parties have not previously entered into a Rent Supplement with respect to such Incremental CapEx. If the Parties expect Incremental CapEx, then they will negotiate in good faith to supplement Rent and other matters in accordance with this Section 3.2. In connection therewith, the Parties will negotiate the pre-tax rate of return that Lessor should earn on such Incremental CapEx, which will be based generally on an agreed-to-discount from the rate of return that public utility companies generally earn in the State of Texas at the time of such Rent Supplement negotiation, adjusted in the manner agreed to by the Parties (if justified) to take into account the creditworthiness of Lessee at the time of such Rent Supplement negotiation (the “ Agreed-to-Discount ”). Such discount will be based on the comparable discount agreed to in connection with the negotiation of rent pursuant to the McAllen Lease and other leases between Lessee and Lessor (or an affiliate thereof), as modified to take in to account appropriate factors at the time of such Rent Supplement negotiation. Such pre-tax rate of return, as determined in accordance with this paragraph, is referred to as a “ Comparable Rate of Return .” The following will apply to the determination of the matters set forth on the Supplement:
 
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(i) The Parties will supplement Base Rent and Percentage Rent in a manner intended to provide a Comparable Rate of Return for Lessor on its Incremental CapEx. Such Comparable Rate of Return will be achieved by a split between Base Rent and Percentage Rent in the proportions requested by Lessor and agreed to by Lessee.
(ii) Unless the Parties agree otherwise based on appropriate factors at the time of the negotiation, Capital Expenditures will qualify as Incremental CapEx on the date such Capital Expenditures are placed in service, which differentiates these Capital Expenditures from the Capital Expenditures included in CapEx Budgets pursuant to Article X, which are measured under this Agreement based on the date the related Capital Expenditures are incurred.
(iii) Notwithstanding anything herein to the contrary, such supplement shall be determined solely to provide a Comparable Rate of Return on such Incremental CapEx and shall not be determined with reference to, or with any intention to true up, the effect of any difference between the initially anticipated and the actual return of or on, or the Base Rent or Percentage Rent payable with respect to, the ERCOT Transmission Assets as in place prior to the additions resulting from such Incremental CapEx.
(b) The Parties will memorialize the results of all Incremental CapEx supplements and Lessee CapEx supplement negotiations by executing and delivering a Rent Supplement, which will set forth the amount of contemplated Incremental CapEx, new Base Rent, a new Percentage Rent Schedule, new Revenues Attributable to Lessee CapEx, Lessee CapEx, new TCOS Allocation (if applicable), the effective date on which such changes will occur and the term of such Rent Supplement (if applicable). In no event will any new Base Rent or new Percentage Rent be payable, or any Revenues Attributable to Lessee CapEx be taken into account as a reduction to Unadjusted Gross Revenues, before the assets funded by the related Incremental CapEx or Lessee CapEx are placed in service. The Rent Supplement may also include the projected in-service date of the Incremental CapEx or Lessee CapEx to which the Rent Supplement applies. Upon execution and delivery of any such Rent Supplement, this Agreement will be deemed amended thereby. If necessary, the applicable Rent Supplement will include a description of the new assets to be funded by the Incremental CapEx. The Rent Supplement shall have the term set forth therein, not to extend past the then-current Term of this Agreement. At the end of the term of each Rent Supplement, the Parties shall negotiate a new Rent Supplement for the Lessee CapEx and Incremental CapEx covered by such prior Rent Supplement using the Comparable Rate of Return methodology set forth in Sections 3.1(d)(iii) and 3.2(a). Notwithstanding the foregoing, the Percentage Rent Percentages and Annual Percentage Rent Breakpoints reflected on such new Rent Supplement with respect to the Rate Base covered by such prior Rent Supplement shall be as set forth on the Percentage Rent Schedule of such prior Rent Supplement.
(c) If following a Rent Supplement there is a difference in (i) the amount of actual Incremental CapEx compared to the amount contemplated by the then-effective Rent Supplement, (ii) the amount of actual Lessee CapEx compared to the amount contemplated by the then-effective Rent Supplement, or (iii) the placed-in-service date of such Incremental CapEx or Lessee CapEx compared to what was contemplated at the time of the then-effective Rent Supplement then, at any time within two years of the date the Parties agree to a Rent
 
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Supplement, either Party may request a Rent Validation. If there has been such a difference, the Parties will supplement Incremental CapEx, Base Rent, Percentage Rent Percentages, Annual Percentage Rent Breakpoints, Revenues Attributable to Lessee CapEx, and/or Lessee CapEx, as applicable, to what they would have been, at the time of the Rent Supplement, to reflect (1) the amount of actual Incremental CapEx and Lessee CapEx and/or (2) the actual dates such Incremental CapEx and/or Lessee CapEx was placed in service, but keeping fixed all other relevant assumptions and inputs, including the Comparable Rate of Return. For the avoidance of doubt, in no circumstance will a Rent Validation occur to account for any difference between the initially anticipated and the actual return of or on the Incremental CapEx and/or Lessee CapEx, and no such difference will be taken into account as part of such Rent Validation. The Parties also will negotiate in good faith to determine (A) whether one Party should make a lump sum payment to the other Party as a result of excess or deficient Rent Lessee paid, prior to the date of the effective date of the Rent Validation, in connection with the Rent Supplement, and, (B) if applicable, the amount of any such lump sum payment. The Parties will memorialize the result of any Rent Validation negotiation by executing and delivering a revised Rent Supplement, which will set forth revised expected Incremental CapEx, Lessee CapEx, Base Rent, Percentage Rent Percentages, Annual Percentage Rent Breakpoints, and/or Revenues Attributable to Lessee CapEx, as applicable, the effective date on which such changes will occur and, if applicable, the amount of the lump sum payment that one Party must make to the other Party (which payment must be made within 30 days of the execution and delivery of such revised Rent Supplement). Any lump sum payments received by Lessor under this Section 3.2(c) shall be treated as Rent by the Parties. Upon execution and delivery of any such Rent Validation, this Agreement will be deemed amended thereby. The Parties will reasonably cooperate to minimize the number of Rent Validations, and prospective Rent Supplements and Rent Validations may be combined into one revised, amended and restated Rent Supplement.
(d) In connection with the foregoing provisions of this Section 3.2, Lessor and Lessee shall use good faith efforts to agree to a Rent Supplement, renewal of a Rent Supplement or Rent Validation, as applicable, within 60 days of a request therefor by either Party. If, by the end of such 60 day period, Lessee and Lessor cannot in good faith agree to the terms of a Rent Supplement, renewal of a Rent Supplement or Rent Validation, such dispute shall be submitted to arbitration in accordance with Section 13.7 of this Agreement, pursuant to which the Arbitration Panel shall be empowered to determine the terms of such Rent Supplement, renewal of a Rent Supplement or Rent Validation (including any lump sum payment amount), based on submissions by each of the Lessee and the Lessor.
3.3. Confirmation of Percentage Rent .
(a) In the event that Lessee determines that the Percentage Rent paid with respect to any Lease Year exceeded the amount of Percentage Rent actually due for such Lease Year (such overage being the “ Excess Percentage Rent ”), Lessee shall promptly notify Lessor of such fact and shall deliver a new CFO Certificate (the “ Revised Certificate ”) setting forth the corrected calculations of the Percentage Rent due for such Lease Year and identifying the amount of the Excess Percentage Rent. Upon Lessor’s reasonable verification of the information set forth in the Revised Certificate, Lessor shall refund to Lessee the Excess Percentage Rent. Notwithstanding anything to the contrary contained herein, in no event shall Lessor have any obligation under this Section 3.3(a) to refund any Excess Percentage Rent if Lessor has not received the Revised Certificate by March 31 of the year following the Lease Year for which the Excess Percentage Rent was paid.
 
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(b) Lessee shall utilize, or cause to be utilized, an accounting system for the ERCOT Transmission Assets in accordance with the FERC Uniform System of Accounts for electric utilities, that will accurately record all data necessary to compute Percentage Rent, and Lessee shall retain and shall allow Lessor and its representatives to have reasonable access to, for at least five (5) years after the expiration of each Lease Year, reasonably adequate records conforming to such accounting system showing all data necessary to conduct Lessor’s Audit and to compute Percentage Rent for the applicable Lease Years and to otherwise file or defend tax returns and reports to any Regulatory Authority.
(c) Lessor shall have the right from time to time to cause its accountants or representatives to conduct an inspection, examination and/or audit (a “ Lessor’s Audit ”) of all of Lessee’s records, including supporting data, sales and excise tax returns and the records described in Section 3.3(b), reasonably required to complete such Lessor’s Audit and to verify Percentage Rent, subject to any prohibitions or limitations on disclosure of any such data under applicable laws, regulations and governmental requirements. If any Lessor’s Audit discloses a deficiency in the payment of Percentage Rent, and either Lessee agrees with the result of Lessor’s Audit or the matter is otherwise determined or compromised, Lessee shall forthwith pay to Lessor the amount of the deficiency, as finally agreed or determined, together with interest at the Overdue Rate from the date when said payment should have been made to the date of payment thereof. In addition to the amounts described above in this Section 3.3(c), if any Lessor’s Audit discloses a deficiency in the payment of Percentage Rent which, as finally agreed or determined, exceeds 3% of the amount paid, Lessee shall pay the costs of Lessor’s Audit. In no event shall Lessor undertake a Lessor’s Audit after March 31 of the second year following the Lease Year for which such audit is requested.
(d) Any proprietary information obtained by Lessor pursuant to the provisions of this Section 3.3 shall be treated as confidential, except that such information may be used, subject to appropriate confidentiality safeguards, in any litigation or arbitration between the Parties and except further that Lessor may disclose such information to lenders and investors, including prospective lenders or investors and to any other persons to whom disclosure is necessary or appropriate to comply with applicable laws, regulations and governmental requirements and to comply with any reporting requirements applicable to Lessor or Lessee under any applicable securities laws or regulations or any listing requirements of any applicable securities exchange.
(e) The obligations of Lessee and Lessor contained in this Section 3.3 shall survive the expiration or earlier termination of this Agreement. Any dispute as to the existence or amount of any deficiency in the payment of Percentage Rent as disclosed by Lessor’s Audit shall, if not otherwise settled by the Parties, be submitted to arbitration pursuant to the provisions of Section 13.7.
3.4. Additional Rent . In addition to Base Rent and Percentage Rent, Lessee also will pay and discharge as and when due and payable all other amounts, liabilities, obligations and impositions that Lessee assumes or agrees to pay under this Agreement, including without limitation, the expenses described in Section 1.3 and any reimbursement for such amounts and other damages to Lessor in the event that Lessor pays such expenses or performs such obligations on behalf of Lessee (collectively, “ Additional Rent ”).
 
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3.5. No Set Off . Rent shall be paid to Lessor without set off, deduction or counterclaim; provided, however, that Lessee shall have the right to assert any claim or counterclaim in a separate action brought by Lessee under this Agreement or to assert any mandatory counterclaim in any action brought by Lessor under this Agreement.
3.6. Late Payment Penalty. If Lessee fails to make any payment of Rent to Lessor within five (5) days after it is due, interest shall accrue on the overdue amount, from the date overdue until the date paid, at the Overdue Rate.
3.7. Credit Support. If Lessor has reasonable grounds for insecurity regarding the performance of Lessee’s obligations hereunder, Lessor may require Lessee to provide credit support in the amount, form and for the term reasonably acceptable to Lessor, including but not limited to, a letter of credit, a prepayment, or a guaranty.
3.8. Other Revenue . If Lessee receives or expects to receive any fees, charges or Other Revenue and other than de minimis amounts not to exceed $100,000 in any calendar year, then, unless Lessee reasonably believes that such Other Revenue will not operate to reduce Lessee’s tariff within the State of Texas, Lessee and Lessor will negotiate in good faith to amend this Agreement or a similar lease to characterize the portion of such Other Revenue which Lessor reasonably expects will operate to reduce Lessee’s tariff within the State of Texas as Unadjusted Gross Revenue hereunder or under such other similar lease. In the event the Lessee and Lessor cannot agree on the terms of such amendment of this Agreement or of a similar lease after 60 days of negotiating in good faith, then either the Lessee or the Lessor may submit such matters to arbitration pursuant to Section 13.7 of this Agreement, pursuant to which the Arbitration Panel shall be empowered to characterize the portion of such Other Revenue which Lessor reasonably expects will operate to reduce Lessee’s tariff within the State of Texas as Unadjusted Gross Revenue hereunder or under such other similar lease, based on submissions by each of the Lessee and the Lessor.
ARTICLE IV
LESSEE’S REPRESENTATIONS, WARRANTIES AND COVENANTS
Lessee hereby represents, warrants and covenants to Lessor that:
4.1. Maintenance, Operation and Repair of the ERCOT Transmission Assets.
(a) Lessee, at its own cost and expense, shall maintain (including both scheduled and unscheduled maintenance), operate, repair and make all modifications (other than Footprint Projects) to the ERCOT Transmission Assets and any components thereof (whether owned by Lessor or Lessee), including directing all operations of and supplying all personnel necessary for the operation of the ERCOT Transmission Assets, in each case, as reasonable and prudent and consistent with Good Utility Practice and as required by Applicable Law. Lessee shall carry out all obligations under this Agreement as reasonable and prudent and consistent with Good Utility Practice and in accordance with manufacturers’ warranty requirements (during any applicable warranty period) and the Lessee’s established operating procedures and maintenance, rebuild and
 
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repair programs so as to keep the ERCOT Transmission Assets in good working order, ordinary wear and tear excepted, and in such condition as shall comply in all material respects with all Applicable Laws. Lessee will operate the ERCOT Transmission Assets in a reliable and safe manner in compliance with all applicable requirements and regulations of Regulatory Authorities. Lessee will not operate the ERCOT Transmission Assets or any component thereof in any manner excluded from coverage by any insurance in effect as required by the terms hereof.
(b) If inspections of the ERCOT Transmission Assets by Lessor show that the ERCOT Transmission Assets do not meet industry standards or Good Utility Practice for maintenance and repair and/or fail to meet the requirements of any Applicable Law, Lessee shall promptly, but in any event within thirty (30) days after such initial notification, (i) develop a plan for Lessor’s review by which the ERCOT Transmission Assets can be modified to comply with the standards, and (ii) complete any and all such modifications consistent with all applicable reliability and safety standards established by regulations, orders or requirements of Regulatory Authorities.
4.2. Licenses and Permits. Lessee shall obtain and maintain any and all licenses, permits and other governmental and third-party consents and approvals required by Applicable Law in order to carry out its obligations under this Agreement.
4.3. Property Taxes, and other Assessments and Fees. Lessee shall bear and timely pay all ad valorem or property taxes, sales and use taxes, or other assessments, governmental charges or fees that shall or may during the Term be imposed on, or arise in connection with, the repair, maintenance or operation of the ERCOT Transmission Assets (including all Footprint Projects as described and provided for in Section 10.1 of this Agreement) (“ Lessee Taxes ”); provided that Lessee shall not be obligated to pay any net income taxes imposed upon Lessor or any sales and use taxes which arise in connection with Lessor’s acquisition of Footprint Projects (“ Lessor Taxes ”) . Upon the written request by Lessor, Lessee shall provide Lessor with evidence of the payment of any such Lessee Taxes, the failure of which to be paid would cause the imposition of a Lien upon the ERCOT Transmission Assets or any component thereof or interest therein. Lessee shall assume full responsibility for preparing and furnishing to Lessor for execution all filings with any governmental authority of or in the state and/or locality in which the ERCOT Transmission Assets is located in respect of any and all taxes; except that, where required or permitted by Applicable Law, Lessee shall make such filings on behalf of Lessor in the name of Lessor or in Lessee’s own name. In each case in which Lessee furnishes a tax return or any other form to be executed by Lessor for filing with or delivery to any taxing authority, Lessee shall certify to Lessor that such document is in the proper form, is required to be filed under Applicable Law and does not impose any tax or other liability on Lessor or any of its affiliates which is not indemnified by Lessee. Lessee shall be permitted to contest, in its own name when permitted by law but otherwise on behalf of Lessor, in good faith and upon consultation with Lessor, any taxes it is obligated to pay hereunder.
4.4. Requirements of Governmental Agencies and Regulatory Authorities . Lessee, at its expense, shall comply with all Applicable Laws, including without limitation all requirements of the Regulatory Authorities. Lessee shall have the right, in its reasonable discretion and at its cost and expense, to contest by appropriate legal proceedings, the validity or
 
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applicability to the ERCOT Transmission Assets of any Applicable Law made or issued by any federal, state, county, local or other governmental agency or entity. Any such contest or proceeding shall be controlled and directed by Lessee. Notwithstanding the foregoing, Lessee shall provide Lessor written notice of the commencement and, at reasonable intervals after commencement, the progress of any such legal proceedings.
4.5. Liens. Lessee shall keep the ERCOT Transmission Assets free and clear of all Liens other than Permitted Liens; provided, however, that if Lessee wishes to contest any such Lien (other than a Permitted Lien), Lessee shall, promptly, and in any event within thirty (30) days after it receives notice of the filing of such Lien, remove or bond over such lien from the ERCOT Transmission Assets pursuant to Applicable Law. If Lessee fails to promptly remove or bond over any such Lien, Lessor may, after providing notice to Lessee, take reasonable action to satisfy, defend, settle or otherwise remove the Lien at Lessee’s expense.
4.6. Hazardous Materials .
(a) Lessee shall operate and maintain the ERCOT Transmission Assets and conduct all of its other activities in respect thereof in compliance in all material respects with any Applicable Laws relating to air, water, land and the generation, storage, use, handling, transportation, treatment or disposal of Hazardous Materials. Lessee shall promptly notify Lessor of any such violation and, to the extent Lessee becomes aware of any environmental, health, safety or security matter that requires a corrective action, Lessee shall, in consultation with Lessor, undertake and complete such corrective action. Lessee shall have the obligation to report any such violations to the appropriate Regulatory Authorities in accordance with Applicable Law and, if practicable, shall give notice thereof to Lessor prior to making such report.
(b) Without limiting the generality of the foregoing, Lessee shall not (i) place or locate any underground tanks on the property underlying the ERCOT Transmission Assets, (ii) generate, manufacture, transport, produce, use, treat, store, release, dispose of or otherwise deposit Hazardous Materials in or on the ERCOT Transmission Assets, the property underlying the ERCOT Transmission Assets or any portion thereof other than as permitted by Applicable Laws that govern the same or are applicable thereto, (iii) permit any other substances, materials or conditions in, on or emanating from the ERCOT Transmission Assets, the property underlying the ERCOT Transmission Assets or any portion thereof which may support a claim or cause of action under any Applicable Law or (iv) undertake any action that would reasonably be expected to cause an unauthorized release of Hazardous Materials at the property underlying the ERCOT Transmission Assets.
(c) Lessee shall periodically, at intervals determined in its reasonable discretion in accordance with Good Utility Practice or as required by Applicable Law, at Lessee’s sole expense, conduct inspections of all components of the ERCOT Transmission Assets and the ERCOT Transmission Assets property to ensure compliance with Applicable Laws and with this Section 4.6, and shall promptly notify Lessor of the results of any such inspections. Lessor may, at Lessor’s expense, conduct its own testing at times determined in its reasonable discretion, and after reasonable consultation with Lessee, to ensure Lessee’s compliance with Applicable Laws and with this Section 4.6, provided, however, that Lessor agrees to indemnify Lessee, in accordance with Section 12.2, from and against any and all Claims arising from such testing.
 
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4.7. Indebtedness. Lessee shall not incur Indebtedness other than: (i) Indebtedness in an aggregate principal amount of up to the greater of (A) $5,000,000 and (B) an amount equal to one percent (1%) of the sum of, without duplication, (x) the total amount of the Consolidated Net Plant of Lessee, plus (y) the total amount of the Consolidated Net Plant of any guarantor(s) of Lessee’s obligations under any Lease to which Lessee is a party as a lessee, plus (z) the total amount of Leased Consolidated Net Plant of Lessee, in each case on a senior secured basis, (ii) Indebtedness in an aggregate principal amount of up to the greater of (A) $10,000,000 and (B) an amount equal to one-and-a-half percent (1.5%) of the sum of, without duplication, (x) the total amount of the Consolidated Net Plant of Lessee, plus (y) the total amount of the Consolidated Net Plant of any guarantor(s) of Lessee’s obligations under any Lease to which Lessee is a party as a lessee, plus (z) the total amount of Leased Consolidated Net Plant of Lessee, in each case on an unsecured subordinated basis on terms substantially similar to the terms set forth on Exhibit A and (iii) loans, in an aggregate principal amount not to exceed $10,000,000 at any time outstanding, made by InfraREIT Partners, LP or a subsidiary thereof to Lessee from time to time for the purpose of financing capital expenditures. For purposes of clauses (i) and (ii) of the preceding sentence, any Consolidated Qualified Lessees of Lessee will be treated as Lessee. In addition to the foregoing, any of Lessee’s subsidiaries may incur Indebtedness in an aggregate principal amount of up to the product of (x) Lessee’s aggregate Consolidated Net Plant multiplied by (y) the lesser of (A) the sum of Lessee’s then-current PUCT-regulated debt-to-equity ratio (expressed as a percentage) and five percent (5%) or (B) sixty-five percent (65%); provided, however, that such Indebtedness must be Non-Recourse Debt to Lessee. For purposes of this Section 4.7, Lessee’s Consolidated Net Plant will be derived from its most recently prepared consolidated balance sheet, prepared in accordance with GAAP but adjusted to reverse the effects of failed sale-leaseback accounting in a manner reasonably determined by Lessee in good faith. Without limiting the amount of Indebtedness permitted by the foregoing, Lessee may also incur Indebtedness (x) in the form of a pledge of equity interests in a subsidiary of Lessee as security for Non-Recourse Debt of such subsidiary and (y) in amounts otherwise permitted under the Debt Agreements.
4.8. Records. In addition to the records referred to in Section 3.3, Lessee shall maintain proper books of record and account in conformity with GAAP and all applicable Regulatory Authorities and each other governmental agency or authority having legal or regulatory jurisdiction over Lessee. Additionally, Lessee shall maintain or cause to be maintained all logs, drawings, manuals, specifications and data and inspection, modification and maintenance records and other materials required to be maintained in respect of the ERCOT Transmission Assets by Applicable Laws or by prudent and Good Utility Practice. Lessee shall allow Lessor and its representatives to have reasonable access to, for at least five (5) years after the expiration of each Lease Year, the records referred to in this Section 4.8.
4.9. Surrender . Upon expiration or earlier termination of this Agreement in accordance with its terms (but subject to Section 2.2 and the requirements of all Applicable Laws), and in a manner calculated to avoid any disruption of electrical service, Lessee shall vacate and surrender possession of all components of the ERCOT Transmission Assets (other than in respect of Footprint Projects funded by Lessee as described in Section 10.5(a)) to Lessor,
 
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or to such other person or entity as Lessor may direct. At the time of such surrender, the ERCOT Transmission Assets shall be free and clear of Liens and other rights of third parties (other than Permitted Liens), and shall be in the same condition as on the Effective Date, ordinary wear and tear and subsequent Footprint Projects excepted. Lessee shall deliver or cause to be delivered to Lessor, or to such other person or entity as Lessor may direct, copies of all title documents, logs, drawings, manuals, specifications and data and inspection, modification and maintenance records, billing records, reports and other documents in respect of the ERCOT Transmission Assets which are necessary to determine the condition of the ERCOT Transmission Assets or for the continued maintenance, repair or general operation of the ERCOT Transmission Assets and are in Lessee’s possession at such time. In connection with the surrender of the ERCOT Transmission Assets, Lessor shall pay to Lessee the aggregate purchase price for any Footprint Projects, equipment or other property purchased by Lessor in accordance with Section 2.3 or Section 10.5(b).
4.10. Cooperation; Transition Services .
(a) During the period after notice of termination and prior to the termination of the Agreement, with reasonable notice, Lessee will cooperate in all reasonable respects with the efforts of Lessor to sell or lease the ERCOT Transmission Assets (or any component thereof) or any interest therein, including, without limitation, permitting prospective purchasers or lessees to fully inspect the ERCOT Transmission Assets and any logs, drawings, manuals, specifications, data and maintenance records relating thereto; provided, that such cooperation shall not unreasonably interfere with the normal operation of the ERCOT Transmission Assets or cause Lessee to incur any additional expenses other than as specifically provided herein. All information obtained in connection with such inspection shall be subject to confidentiality requirements at least as restrictive as those contained in Section 13.3.
(b) Upon expiration or termination of this Agreement, Lessee shall continue to lease and operate the ERCOT Transmission Assets pursuant to the terms of Section 2.2, if required thereunder. During such period Lessee shall perform all duties and retain all obligations under Article IV in all respects, as if the Agreement had not expired or been terminated.
4.11. Lessee’s Authority. Lessee has all requisite power and authority to execute and deliver this Agreement and to perform its obligations hereunder. Lessee has taken all action necessary to execute and deliver this Agreement and to perform its obligations hereunder, and no other action or proceeding on the part of Lessee is necessary to authorize this Agreement. This Agreement constitutes the legally valid and binding obligation of Lessee, enforceable against Lessee in accordance with its terms, except as the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Applicable Laws affecting the enforcement of creditors’ rights generally and equitable principles.
4.12. Litigation . If Lessee becomes aware of any actions, claims or other legal or administrative proceedings that are pending, threatened or anticipated with respect to, or which could materially and adversely affect, the ERCOT Transmission Assets, Lessee shall promptly deliver notice thereof to Lessor.
 
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4.13. Financing . Lessee acknowledges that Lessor has advised Lessee that Lessor has obtained financing secured by, among other things, the ERCOT Transmission Assets and this Agreement. In connection with such financing, Lessor made certain representations, warranties and covenants set forth in that certain (i) Amended and Restated Note Purchase Agreement entered into by Lessor and dated as of September 14, 2010 (as amended, restated, supplemented or otherwise modified from time to time, the “ 2009 Note Purchase Agreement ”), a copy of which has been provided to and reviewed by Lessee, (ii) Amended and Restated Note Purchase Agreement entered into by Lessor and dated as of July 13, 2010 (as amended, restated, supplemented or otherwise modified from time to time, the “ 2010 Note Purchase Agreement ” and, together with the 2009 Note Purchase Agreement, the “ Note Purchase Agreements ”), a copy of which has been provided to and reviewed by Lessee and (iii) Second Amended and Restated Credit Agreement entered into by Lessor and dated as of June 28, 2013 (as amended, restated, amended and restated, supplemented or otherwise modified from time to time, the “ Credit Agreement ” and, together with the Note Purchase Agreements, the “ Debt Agreements ”), a copy of which has been provided to and reviewed by Lessee.
Lessee hereby covenants and agrees with Lessor that, during the term of the 2009 Note Purchase Agreement, Lessee will comply with the covenants set forth in Sections 9.08 ( Material Project Documents ) (to the extent that Lessee is a party to any Material Project Documents, as defined in the 2009 Note Purchase Agreement), 10.04 ( Terrorism Sanctions Regulations ), 10.10 ( Sale of Assets, Etc .), 10.11 ( Sale or Discount of Receivables ), 10.12 ( Amendments to Organizational Documents ), 10.16 ( Project Documents ) and 10.17 ( Regulation ) of the 2009 Note Purchase Agreement.
Lessee hereby covenants and agrees with Lessor that, during the term of the 2010 Note Purchase Agreement, Lessee will comply with the covenants set forth in Sections 9.8 ( Material Project Documents ) (to the extent that Lessee is a party to any Material Project Documents, as defined in the 2010 Note Purchase Agreement), 10.4 ( Terrorism Sanctions Regulations ), 10.10 ( Sale of Assets, Etc .), 10.11 ( Sale or Discount of Receivables ), 10.12 ( Amendments to Organizational Documents ), 10.16 ( Project Documents ) and 10.17 ( Regulation ) of the 2010 Note Purchase Agreement.
Lessee hereby agrees with Lessor that, to the extent not otherwise covered by the terms of this Agreement, (i) Lessee hereby makes the same representations and warranties to Lessor as Lessor makes to the Lender (as defined in the Credit Agreement) in Sections 6.3 ( Disclosure ), 6.5 ( Financial Condition; Financial Instruments ), 6.6 ( Compliance with Laws, Other Instruments, Etc. ), 6.7 ( Governmental Authorizations, Etc. ), 6.8 ( Litigation; Observance of Agreements, Statutes and Orders ), 6.9 ( Taxes ), 6.10 ( Title to Property; Leases ), 6.11 ( Insurance ), 6.12 ( Licenses, Permits, Etc.; Material Project Documentation ), 6.16 ( Foreign Assets and Control Regulations, Etc. ), 6.17 ( Status under Certain Statutes ), 6.18 ( Environmental Matters ), 6.19 ( Force Majeure Events; Employees ) and 6.20 ( Collateral ) of the Credit Agreement (or equivalent provisions), to the extent that such representations and warranties relate to (x) Lessee, whether in its capacity as Lessee or otherwise, including, without limitation, Lessee’s status or operations as a public utility, or (y) Lessee’s ownership of the ERCOT Transmission Assets on or before the date hereof, and (ii) Lessee hereby covenants and agrees with Lessor that, during the term of the Credit Agreement, Lessee will comply with the covenants set forth in Sections 7.10 ( Material Project Documents ) (to the extent that Lessee is a
 
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party to any Material Project Documents, as defined in the Credit Agreement), 8.4 ( Terrorism Sanctions Regulations ), 8.10 ( Sale of Assets, Etc. ), 8.11 ( Sale or Discount of Receivables ), 8.12 ( Amendments to Organizational Documents ), 8.16 ( Material Projects Documents ) and 8.17 ( Regulation ) of the Credit Agreement (or equivalent provisions).
Lessee may not lease, or agree or otherwise commit to lease, any transmission or distribution facilities other than pursuant to a Lease. Further, Lessee shall not permit Persons other than Hunt Family Members to acquire any interest in the Lessee, directly or indirectly, in a manner that would result in a Change in Control of Lessee. The Parties agree to amend, alter or supplement this Section 4.13 from time to time to give effect to the obligations under Lessor’s then-current credit arrangements.
ARTICLE V
LESSOR’S REPRESENTATIONS, WARRANTIES AND COVENANTS
Lessor hereby represents, warrants and covenants as follow:
5.1. Lessor’s Authority. Lessor has all requisite power and authority to execute and deliver this Agreement and to perform its obligations hereunder. Lessor has taken all action necessary to execute and deliver this Agreement and to perform its obligations hereunder, and no other action or proceeding on the part of Lessor is necessary to authorize this Agreement. This Agreement constitutes the legally valid and binding obligation of Lessor, enforceable against Lessor in accordance with its terms, except as the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Applicable Laws affecting the enforcement of creditors’ rights generally and equitable principles.
5.2. Liens and Tenants. Lessor represents that Lessor has good and valid title to the ERCOT Transmission Assets, there are no unrecorded liens, encumbrances, leases, mortgages, deeds of trust (except as disclosed to Lessee in writing or as arise by operation of law), or other exceptions (collectively, “ Liens ”) arising as a result of any acts or omissions to act of Lessor by, through or under Lessor to Lessor’s right, title or interest in the ERCOT Transmission Assets other than any such of the foregoing that does not materially impair the Lessee’s use of the ERCOT Transmission Assets, and, to Lessor’s knowledge, there exist no rights or interests of any third party relating to the ERCOT Transmission Assets that are not contemplated herein. Except for Permitted Liens or as may be disclosed in the applicable real property records in the State of Texas, or as disclosed by Lessor in writing to Lessee, Lessor represents that there are no mortgages, deeds of trust, or similar liens or security interests encumbering all or any portion of the ERCOT Transmission Assets. Lessor shall fully cooperate and assist Lessee, at no out-of-pocket expense to Lessor, in obtaining a subordination and non-disturbance agreement from each party that holds a Lien that might reasonably be expected to interfere in any material respect with Lessee’s rights under this Agreement. Notwithstanding the foregoing, Lessor and its affiliates shall have the right to incur Permitted Liens encumbering the ERCOT Transmission Assets or any component thereof solely for the benefit of Lessor in connection with any existing or future financing or refinancing pursuant to which the ERCOT Transmission Assets (or any component thereof) is pledged as collateral and Lessee agrees to enter into such acknowledgments and agreements in respect thereof with the lenders, or a trustee or agent for the lenders as the Lessor may reasonably request.
 
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5.3. Condition of Assets. Lessor has not taken any action or failed to take any action that would cause the ERCOT Transmission Assets not to be in good operating condition and repair, ordinary wear and tear excepted, or adequate for the uses to which it is being put.
5.4. Requirements of Governmental Agencies. Lessor shall assist and fully cooperate with Lessee, in complying with or obtaining any material land use permits and approvals, building permits, environmental impact reviews or any other approvals reasonably required for the maintenance or operation of the ERCOT Transmission Assets, including execution of applications for such approvals, and including participating in any appeals or regulatory proceedings respecting the ERCOT Transmission Assets at Lessee’s cost and expense, if requested by Lessee.
5.5. Hazardous Materials. Lessor shall conduct its activities in respect of the ERCOT Transmission Assets in compliance in all material respects with applicable Environmental Laws.
5.6. Litigation. If Lessor becomes aware of any actions, claims or other legal or administrative proceedings that are pending, threatened or anticipated with respect to, or which could materially and adversely affect, the ERCOT Transmission Assets, Lessor shall promptly deliver notice thereof to Lessee.
5.7. Limitation. EXCEPT AS EXPRESSLY REPRESENTED OTHERWISE IN THIS ARTICLE V, LESSOR (A) MAKES NO AND EXPRESSLY DISCLAIMS ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO (I) TITLE TO THE ERCOT TRANSMISSION ASSETS OR ANY PORTION THEREOF, (II) ANY ESTIMATES OF THE VALUE OF THE SYSTEM OR FUTURE REVENUES THAT MIGHT BE GENERATED BY THE ERCOT TRANSMISSION ASSETS, (III) THE MAINTENANCE, REPAIR, CONDITION, QUALITY, SUITABILITY, DESIGN OR MARKETABILITY OF THE ERCOT TRANSMISSION ASSETS, (IV) INFRINGEMENT OF ANY INTELLECTUAL PROPERTY RIGHT OR (V) ANY OTHER MATERIALS OR INFORMATION THAT MAY HAVE BEEN MADE AVAILABLE OR COMMUNICATED TO LESSEE OR ITS AFFILIATES, OR ITS OR THEIR EMPLOYEES, AGENTS, CONSULTANTS, REPRESENTATIVES OR ADVISORS IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY DISCUSSION OR PRESENTATION RELATING THERETO, AND (B) FURTHER DISCLAIMS ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR CONFORMITY TO MODELS OR SAMPLES OF MATERIALS OF ANY PORTION OF THE ERCOT TRANSMISSION ASSETS, IT BEING EXPRESSLY UNDERSTOOD AND AGREED BY THE PARTIES HERETO THAT THE ERCOT TRANSMISSION ASSETS ARE BEING LEASED “AS IS, WHERE IS,” WITH ALL FAULTS AND DEFECTS, AND THAT LESSEE HAS MADE OR CAUSED TO BE MADE SUCH INSPECTIONS AS LESSEE DEEMS APPROPRIATE.
 
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ARTICLE VI
LOSS AND DAMAGE; INSURANCE
6.1. Loss and Damage to the ERCOT Transmission Assets.
(a) In the event of any damage or loss to any component of the ERCOT Transmission Assets, Lessee shall promptly repair or replace such component to the standards required by Section 4.1 (regardless of whether such repair or replacement constitutes a Repair or a Footprint Project). Any such repaired or replaced component will immediately become part of the ERCOT Transmission Assets owned by Lessor and the cost of any repair or replacement shall be borne as described in Sections 6.1(b)-(d) below.
(b) If such repair or replacement constitutes a Repair, the cost of repairing or replacing such damage or loss, whether actually covered in whole or in part by insurance, shall be the responsibility of Lessee. Lessee shall be entitled to retain any insurance proceeds in excess of the amount necessary in connection with such Repair.
(c) If such repair or replacement constitutes a Footprint Project, then, as long as the related costs have been included in a CapEx Budget, the cost of repairing or replacing such damage or loss, whether actually covered in whole or in part by insurance, shall be the responsibility of Lessor. In such circumstance, unless otherwise agreed by the Parties, (i) if the damage or loss is covered by insurance, Lessor shall be responsible for payment of any deductible, and (ii) any damage or loss not covered by insurance (exclusive of any deductible) shall be the responsibility of Lessor. If the sum of such deductible and insurance proceeds exceeds the cost of such Footprint Project, then such excess will first reduce Lessor’s obligation to fund the deductible hereunder, and any excess thereafter will be retained by Lessee. If such repair or replacement constitutes a Footprint Project that is not included in a CapEx Budget, the provisions of Article X shall apply.
(d) Lessee shall be solely responsible for all costs of repairing or replacing any damaged property and equipment that is not part of the ERCOT Transmission Assets and owned by Lessee, whether covered by Lessee’s insurance under Section 6.2 or otherwise. Nothing in this provision shall preclude Lessee from seeking recovery of such costs in a rate proceeding at the PUCT.
(e) If Lessor funds Lessee’s Personal Property pursuant to Section 10.1(b) of this Agreement, then all such funded Personal Property will be treated as a Footprint Project, and not a Repair, for purposes of this Section 6.1.
6.2. Insurance. Lessee will maintain, with financially sound and reputable insurers, insurance with respect to its business and properties and the ERCOT Transmission Assets against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated, but in no event less than the insurance set forth in this Section 6.2 and Exhibit B.
(a) Lessee shall procure at its own expense and maintain in full force and effect at all times throughout the term of this insurance policies with insurance companies rated A-, 8 or higher by A.M. Best or acceptable to Lessor if not so rated, and authorized to do business in the State of Texas.
 
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(b) Lessor may at any time amend the requirements and approved insurance companies described in this Section 6.2 or Exhibit B due to (i) new information not previously known by Lessor prior to the date of this Agreement or (ii) changed circumstances after the date of this Agreement, which in the reasonable judgment of Lessor either renders a required coverage to be materially inadequate or materially reduces the financial ability of the approved insurance companies to pay claims.
(c) On the first Business Day of each year, and promptly at such other times as Lessor may reasonably request, Lessee shall furnish Lessor with approved certification of all required insurance. Such certification shall be executed by each insurer or by an authorized representative of each insurer where it is not practical for such insurer to execute the certificate itself. Such certification shall identify underwriters, the type of insurance, the insurance limits, and the policy term, and shall specifically list the special provisions enumerated for such insurance required by this Section 6.2. Upon request, Lessee will promptly furnish Lessor with copies of all insurance certificates, binders, and cover notes or other evidence of such insurance relating to the ERCOT Transmission Assets.
(d) Concurrently with the furnishing of the certification referred to in Section 6.2(c) and on an annual basis thereafter, Lessee shall furnish Lessor with a certificate, signed by an officer of Lessee, stating that all premiums then due have been paid and that the insurance then carried or to be renewed is in accordance with the terms of this Section 6.2. and Exhibit B.
(e) In the event Lessee fails to take out or maintain the full insurance coverage required by this Section 6.2 and Exhibit B, Lessor, upon thirty (30) days’ prior notice (unless the aforementioned insurance would lapse within such period, in which event notice should be given as soon as reasonably possible) to Lessee of any such failure, may (but shall not be obligated to) take out the required policies of insurance and pay the premiums on the same. All amounts so advanced thereof by Lessor shall become an additional obligation of Lessee to Lessor, and Lessee shall forthwith pay such amounts to Lessor.
(f) No provision of this Section 6.2 or Exhibit B or any other provision of this Agreement shall impose on Lessor any duty or obligation to verify the existence or adequacy of the insurance coverage maintained by Lessee, nor shall Lessor be responsible for any representations or warranties made by or on behalf of Lessee to any insurance company or underwriter.
ARTICLE VII
REPORTING
7.1. Private Financing Arrangements . Lessee understands that Lessor, or an affiliate thereof, has raised equity and debt capital secured by the ERCOT Transmission Assets and this Agreement and that Lessor or its affiliates have reporting obligations in connection with such arrangements, including obligations to provide financial statements prepared in accordance with GAAP, to prepare an annual strategic plan and to update such annual strategic plan in the event of certain material deviations therefrom. Lessee understands that Lessor relies on Lessee in order to comply with such obligations. From time to time, Lessor or an affiliate thereof may enter into additional arrangements that impose similar obligations. Accordingly, Lessee agrees
 
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to provide Lessor in a timely manner audited year-end financial statements, quarterly unaudited financial statements for the first three quarters of each year (certified by a financial officer of Lessee), estimates of Percentage Rent, and such acknowledgements, certificates, permits, licenses, instruments, documents and other information as Lessor may reasonably request from time to time in connection with, or to enable Lessor and its affiliates to comply with any such debt or equity financing arrangements or with Applicable Law. The Parties will negotiate in good faith the time frames during which Lessee will provide such information, with the intention that Lessee provide such information in a manner that is not unduly burdensome but that also allows Lessor sufficient time to comply with its reporting obligations. Lessee will also cooperate with Lessor to enable Lessor to satisfy its obligations in respect of annual strategic plans, including providing Lessor with requested information in advance of the due date of such annual strategic plan and keeping Lessor apprised of deviations in capital expenditures, construction activity or revenues of Lessee from amounts that were originally provided by Lessee in preparing such annual strategic plan. Lessee agrees to use reasonable efforts to advise Lessor if Lessee will be unable to meet the reporting requirements set forth herein in a timely manner and to reasonably cooperate with Lessor to remedy the effects of such non-compliance.
7.2. Public Company and Regulatory Information and Cooperation .
(a) Lessee agrees to provide audited full-year and unaudited (but SAS 100 reviewed) interim financial statements and the consent of Lessee’s auditors to the inclusion of their opinion regarding such financial statements in filings with the Securities and Exchange Commission made by Lessor or an affiliate of Lessor. Lessor may also request that Lessee provide evidence of a SAS 100 review from Lessee’s auditors with respect to any unaudited interim financial statements included in any such filing. Lessor shall have the right to share any such financial statements with its lenders under the Debt Agreements. Lessee covenants that (i) such financial statements will fairly present in all material respects the financial condition, results of operations and cash flows of Lessee as of, and for, the periods presented, and (ii) Lessee will endeavor to cause such financial statements to comply with any applicable laws, rules or regulations that Lessee and Lessor conclude in good faith are applicable to such financial statements by virtue of their inclusion in the securities law filings of Lessor or an affiliate thereof.
(b) Lessee agrees that, in connection with any underwritten offering of the securities of Lessor or any affiliate thereof, Lessee will use commercially reasonable efforts to cause its auditors to provide a comfort letter (or its equivalent) to such underwriters, if requested by Lessor.
(c) Lessee agrees to cooperate with Lessor when Lessor or an affiliate provides estimates to analysts and or investors regarding Lessor’s expectations of its future operating results (including capital expenditures) and to cooperate with Lessor with respect to analysts and investors to the extent such expectations change in any material respect.
(d) Lessee and Lessor agree to reasonably cooperate to ensure that, to the extent they require information from the other party in order to prepare their financial statements, to obtain audits of those financial statements and, if required, of their internal control over financial reporting, to respond to comments of the Securities and Exchange Commission on such financial statements or statements related to internal control over financial reporting or disclosure controls
 
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and procedures, or to ensure the efficacy of their internal controls or disclosure controls and procedures, they will reasonably cooperate in order to ensure that each Party is able to meet its obligations in respect thereof. Lessee agrees to promptly notify Lessor of or provide to Lessor, as applicable, (i) any material communication, written or otherwise, submitted to the Lessee by its auditors, including, but not limited to an audit response letter, accountant’s management letter or other written report submitted to Lessee by its accountants or any governmental agency in connection with an annual or interim audit of Lessee’s books, (ii) any material correspondence with, reports of or reports to any Regulatory Authority with respect to the ERCOT Transmission Assets and (iii) any notices of violations of Applicable Law with respect to the ERCOT Transmission Assets, in each case taking into account the REIT’s reporting obligations as a public company.
(e) Lessor agrees to inform Lessee of the time periods in which each of the items identified in this Section 7.2 will be required, which may change. Lessee agrees to use reasonable efforts to advise Lessor if Lessee will be unable to meet the reporting requirements set forth herein in a timely manner and to reasonably cooperate with Lessor to remedy the effects of such non-compliance.
(f) If Lessor identifies additional matters with respect to which Lessee input, assistance or information is required in order for Lessor and its affiliates to comply with any applicable securities laws, the rules or regulations of any exchange on which the securities of such affiliate are traded or any similar laws, rules or regulations, the Parties agree to cooperate and negotiate in good faith in order to determine the manner in which Lessee can provide such input, assistance or information in a manner that positions Lessor and its affiliates to comply in a timely manner with such laws, rules or regulations, as efficiently as is feasible so as to minimize the burden that the provision of such input, assistance or information imposes on Lessee.
7.3. Mutual Obligations . Each Party shall as promptly as reasonably practicable furnish or cause to be furnished to the other Party, upon request from such Party, such information as may be required to enable such Party to file any reports required to be filed with any governmental or Regulatory Authority due to such Party’s ownership interest in or operation and control of the ERCOT Transmission Assets, as applicable.
ARTICLE VIII
ASSIGNMENT
This Agreement shall not be assignable by either Party, nor shall the ERCOT Transmission Assets or any part thereof be subleased by Lessee, except with the prior written consent of the other Party and the prior approval of any Regulatory Authority whose approval is required for the effectiveness of such assignment or sublease. For purposes of this Article VIII, an “assignment” by Lessee shall mean and include, in addition to any direct transfer by Lessee to a third party of all or any part of Lessee’s rights, estate or interests under this Agreement, any direct or indirect, voluntary or involuntary transfer of or encumbrance on all or any part of Lessee’s rights, estate or interests under this Agreement (i) by operation of law and/or (ii) by direct or collateral transfer of all or any part of the legal or beneficial ownership interest in Lessee by merger, consolidation or otherwise, provided, in the case of clause (ii), any such transaction or transactions will only constitute an assignment hereunder to the extent they result
 
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in a Change of Control. Notwithstanding the foregoing, Lessor shall have the right, without Lessee’s consent but subject to obtaining regulatory approval as described in the foregoing sentence, (a) to assign, pledge or grant a security interest in any or all of its interest in the Agreement to a lender or lenders, or a trustee acting on behalf of such lenders, in connection with a financing or refinancing in which such interest is pledged as collateral, and Lessee agrees to enter into such acknowledgments and agreements in respect thereof as the Lessor may reasonably request and (b) to assign its interest in this Agreement to a successor owner of the ERCOT Transmission Assets.
ARTICLE IX
DEFAULT
9.1. Lessee Default. Subject to Section 9.3, Lessee shall be in default in the event of any of the following:
(a) Except as provided in Section 9.1(g), Lessee’s failure to make any payment of Rent when due;
(b) Lessee (i) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes corporate action for the purpose of any of the foregoing;
(c) a court or a Regulatory Authority or other governmental agency of competent jurisdiction enters an order appointing, without consent by Lessee, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of Lessee or any such petition shall be filed against Lessee and such petition shall not be dismissed within 90 days;
(d) Any representation or warranty made by Lessee herein shall prove to have been inaccurate in any material respect at the time made;
(e) a final judgment or judgments for the payment of money aggregating in excess of $1,000,000 are rendered against Lessee and which judgments are not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay;
(f) Lessee shall have breached or failed to comply in any material respect with any other covenant or agreement contained herein; or
 
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(g) Notwithstanding Section 9.1(a), Lessee’s failure to pay Rent when due shall not constitute a default if (i) such failure is due to unforeseeable circumstances arising from a physical event beyond the control of the Lessee, including the incurrence of costs and expenditures as a result of such an event that are materially in excess of budgeted costs and expenditures or an unforeseen material decline in electricity usage as a result of such event and (ii) such failure is cured within ninety (90) days after the date such rent was due through Lessee’s payment of the entire amount of such unpaid Rent, plus interest thereon at a rate equal to six percent (6%) per annum or the maximum rate allowed by law, whichever is lesser, from the date such Rent was originally due until the date of payment.
9.2. Lessor Default. Subject to Section 9.3, Lessor shall be in default in the event any representation or warranty made by Lessor herein shall prove to have been inaccurate in any material respect at the time made, or in the event Lessor breaches or fails to comply in any material respect with any covenant or agreement contained herein.
9.3. Right to Cure. If a Party (the “ Defaulting Party ”) defaults pursuant to an Event of Default, such Defaulting Party shall not be in default of the terms of this Agreement if (other than in the event of a default described in Sections 9.1(b) and/or 9.1(c) above), (a) in the case of a Monetary Default, the Defaulting Party pays the past due amount within thirty (30) days of receiving a Notice of Default from the other Party (the “ Non-Defaulting Party ”), and (b) in the case of a Non-Monetary Default, the Event of Default is cured within forty-five (45) days of receiving the Notice of Default; provided, that if the nature of the Non-Monetary Default requires, in the exercise of commercially reasonable diligence, more than forty-five (45) days to cure then the Defaulting Party shall not be in default as long as it commences performance of the cure within forty-five (45) days and thereafter completes such cure with commercially reasonable diligence.
9.4. Remedies .
(a) Should an Event of Default remain uncured by the Defaulting Party, the Non-Defaulting Party shall have and shall be entitled to exercise the remedies provided in this Section 9.4 and any and all other remedies available to it at law or in equity, all of which remedies shall be cumulative; provided, that the exercise of any remedies hereunder shall be subject to PUCT and other required regulatory approvals to the extent applicable.
(b) In no way limiting the provisions of Section 9.4(a), in the case of an Event of Default of Lessee, Lessor shall have the right to (i) terminate the Agreement upon notice to Lessee, and recover from Lessee all damages to which Lessor is entitled under Applicable Laws, (ii) terminate Lessee’s right to use and operate the ERCOT Transmission Assets while keeping this Agreement in effect, and recover from Lessee all damages to which Lessor is entitled under Applicable Laws, and (iii) take reasonable action to cure Lessee’s default at Lessee’s expense; provided, that in the event of a violation of Applicable Laws by Lessee, an emergency or government or regulatory action in respect of which Lessor, in its reasonable discretion, determines immediate action is necessary, Lessor shall have the right to step in and take such action on behalf of Lessee at Lessee’s cost and expense immediately upon giving notice to Lessee, notwithstanding any applicable cure period.
 
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(c) Any amounts recovered by Lessor from Lessee in the event of a default shall, to the maximum extent permissible under Applicable Laws, be deemed to be in respect of past or future Rent owing under this Agreement.
ARTICLE X
CAPITAL EXPENDITURES
10.1. Capital Expenditures Generally .
(a) Lessee has provided to Lessor in the CapEx Budget the approximate amounts of Capital Expenditures that Lessee expects will be needed for purposes of funding Footprint Projects in each Lease Year through 2017. On or before October 15 of each calendar year, Lessee shall review and revise the CapEx Budget on a rolling three-year basis (which shall include, if applicable, any year in such three-year period following the end of the then-current Term and assume the renewal of this Agreement pursuant to Section 2.1), taking into account any changed circumstances that (i) make it no longer feasible to incur one or more of the costs reflected on the prevailing CapEx Budget, (ii) make it necessary to amend the nature or amounts reflected for a particular Footprint Project or (iii) dictate that additional Footprint Projects be added (such budget, as so updated and revised, is referred to herein as the “ CapEx Budget ”). Lessee agrees to revise the CapEx Budget to include any Footprint Projects (x) required by Regulatory Authorities or (y) reasonably necessary to satisfy Lessee’s obligation as a regulated utility to serve its customers or to maintain the safety or reliability of the ERCOT Transmission Assets. Capital Expenditures included in a CapEx Budget will be included based on the date such Capital Expenditures are to be incurred, which differentiates these Capital Expenditures from Incremental CapEx and Lessee CapEx, which are measured under this Agreement based on when the assets developed with such Capital Expenditures are placed in service, and not when they are incurred.
(b) If requested by Lessor, Lessee will also provide an estimate of any Capital Expenditures that Lessee expects for purposes of funding Personal Property related to the ERCOT Transmission Assets. If Lessor and Lessee agree, Lessor will fund such Capital Expenditures pursuant to this Agreement, through a loan or through a separate lease. Amounts Lessor provides pursuant to this Agreement to fund any such Personal Property will be treated in a manner similar to any amounts Lessor provides to fund Footprint Projects for purposes of Section 3.2 and elsewhere herein. Lessee will cause any such Personal Property to be titled in Lessor’s name and will reasonably cooperate with Lessor in order to enable any secured lender of Lessor or any secured lender of an affiliate of Lessor to perfect its security interest in any such Personal Property. In the alternative, Lessor may elect to fund such Capital Expenditures through a TRS or to loan (or cause such TRS to loan) Lessee the cash to acquire any such Personal Property in a transaction in which Lessor or a TRS may retain a security interest in such Personal Property. In such case the Parties shall negotiate in good faith the terms under which Lessor or such TRS shall fund any such Personal Property, including the terms of any lease between Lessee and the TRS or other financing arrangements provided by the Lessor or the TRS.
10.2. Capital Expenditures Funded by Lessor Lessor agrees to fund any Footprint Projects contained in the CapEx Budget (as revised from time to time). Lessor’s obligation to fund Footprint Projects pursuant to this Section 10.2 shall include any costs associated with such Footprint Projects that Lessee is not allowed to recover through its PUCT-approved rates. Any Footprint Projects funded by Lessor under this Section 10.2 shall be deemed to be part of the ERCOT Transmission Assets upon completion.
 
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10.3. Capital Expenditures Funded by Lessee. Except as set forth in this Section 10.3, Lessee may not fund any Footprint Projects. In the event Lessor fails to fund any Footprint Projects, Lessee may at its sole discretion fund the needed capital expenditures (and Lessee shall be entitled to applicable damages, if any, as a result of funding any such Footprint Projects); provided that, in such circumstance, Lessee may fund Severable Footprint Projects without restriction under this Section 10.3 but may only fund Nonseverable Footprint Projects which are required in order to comply with Applicable Law or which are required by any Regulatory Authority. Any Footprint Projects funded by Lessee under this Section 10.3 shall not be considered part of the ERCOT Transmission Assets for purposes of this Agreement; provided however , that any part of the ERCOT Transmission Assets that is built with CIAC funds shall be considered a leasehold improvement that is part of the ERCOT Transmission Assets and reverts to the Lessor upon termination of this Agreement without further payment from Lessor to Lessee under Section 2.3.
10.4. Footprint Project Construction Activities. Lessee will either use its personnel, or either Lessee or Lessor will contract with third parties, to construct Footprint Projects. Lessee shall be responsible for the oversight of such construction activities, regardless of whether the Footprint Project is funded by Lessor or Lessee. Lessee’s construction activities and oversight shall be intended to ensure that such construction is performed in a manner consistent with Good Utility Practice and does not adversely affect the reliability and safety of the ERCOT Transmission Assets or the ERCOT electric grid. In connection therewith, Lessor will reimburse Lessee for all Project Management Costs that Lessee incurs in connection with constructing such Footprint Project, provided that any costs and expenses of Lessee under this Section 10.4 must be included in any CapEx Budget submitted by Lessee under Section 10.1 or approved by Lessor to qualify for reimbursement by Lessor hereunder.
10.5. Ownership of Footprint Projects
(a) Each Footprint Project shall be owned by the Party that funded the capital expenditures used to construct such Footprint Project; provided however , that any part of the ERCOT Transmission Assets that is built with CIAC funds shall be considered a leasehold improvement that is part of the ERCOT Transmission Assets and shall revert to the Lessor upon termination of this Agreement without further payment from Lessor to Lessee under Section 2.3.
(b) Upon the expiration or termination of this Agreement, Lessor shall have the right (but not the obligation) to purchase, subject to required regulatory approvals, any Nonseverable Footprint Projects or Severable Footprint Projects owned by Lessee at the greater of (i) net book value plus ten percent (10%) and (ii) the fair market value thereof as determined by mutual agreement of Lessor and Lessee. If the Parties fail to agree on the amount of the purchase price, the purchase price shall be submitted to arbitration in accordance with Section 13.7 of this Agreement, pursuant to which the Arbitration Panel shall be empowered to determine the amount of the purchase price, based on submissions by each of the Lessee and the Lessor. Lessee shall be entitled to remove any Severable Footprint Projects owned by Lessee upon the expiration or termination of this Agreement in the event such Severable Footprint Projects are not purchased by Lessor, subject to any required regulatory approvals.
 
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10.6. Asset Acquisitions . Lessee and Lessor will cooperate in good faith to ensure that all ERCOT Transmission Assets are acquired in Lessor’s name or are acquired by Lessee and subsequently transferred to Lessor. In connection therewith, Lessee agrees (a) to transfer to Lessor all previously acquired ERCOT Transmission Assets, (b) that any future-acquired ERCOT Transmission Assets will be deemed automatically transferred to Lessor, (c) to take reasonable actions as are necessary and appropriate to document the transfer of any such ERCOT Transmission Assets to Lessor and, if applicable, to memorialize the security interest in such ERCOT Transmission Assets required to be granted pursuant to the terms of the Debt Agreements, including through the delivery and recordation of mortgages, deeds of trust or UCC financing statements, and (d) to take reasonable steps to record the transfer and such security interest in the records of the applicable county or other applicable locale in which the ERCOT Transmission Assets are located.
10.7. Reimbursements. From time to time, Lessee may enter into interconnect or similar agreements that obligate the counterparty to such agreements to reimburse Lessee for Capital Expenditures in certain circumstances. Such reimbursement obligation may, in some circumstances, be accompanied by additional security such as parent guaranty or a letter of credit. If and to the extent that (a) Lessor funds Capital Expenditures that are used for the construction or development pursuant to any of these interconnect agreements, and (b) Lessee becomes entitled to assert any reimbursement or other rights pursuant to any such interconnect agreements, then, unless Lessor agrees otherwise, Lessee will enforce such reimbursement or other rights and will in turn reimburse Lessor for the amount of related Capital Expenditures that Lessor has funded pursuant hereto. Lessee further agrees to reimburse Lessor for other Capital Expenditures that Lessor has funded pursuant to this Agreement to the extent required by the Policies and Procedures.
ARTICLE XI
REGULATORY COOPERATION
11.1. Jurisdiction. The Parties recognize that (i) the ERCOT Transmission Assets and the operation thereof are subject to the jurisdiction of the PUCT and to certain reliability and safety requirements of ERCOT and TRE, and (ii) Lessee holds CCNs for operation of the ERCOT Transmission Assets. The Parties agree that, as the lessee hereunder, as operator of the ERCOT Transmission Assets and as the holder of the CCNs, Lessee shall be responsible for compliance with all regulatory requirements related to the ERCOT Transmission Assets, including but not limited to, taking all actions reasonably necessary or advisable to comply with such requirements; preparing and filing all necessary notices, reports, applications, and other materials with the PUCT, ERCOT, TRE and NERC; and initiating, prosecuting, defending or participating in any administrative or judicial proceeding reasonably necessary or advisable to operate the ERCOT Transmission Assets in an economical and efficient manner. Lessee shall consult with Lessor prior to initiating any rate proceeding with the PUCT to change the rates Lessee can lawfully charge, provided that, with or without Lessor consent, Lessee shall be authorized to initiate any such rate proceeding. Upon Lessor’s request, Lessee shall file a rate proceeding before the PUCT; provided that, Lessor shall be responsible for reimbursing Lessee for all costs associated with prosecution of such proceeding to the extent that such costs are not recoverable in Lessee’s PUCT-approved rates.
 
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11.2. Cooperation. The Parties agree that during the term of this Agreement they will cooperate to assure compliance with all applicable regulations, orders or lawful requests of any governmental or Regulatory Authorities that relate to the ERCOT Transmission Assets and Lessee’s obligations as the holder of the CCNs and will provide such information to such governmental and Regulatory Authorities as the other Party or such governmental or Regulatory Authorities may reasonably request in connection therewith. Lessor further agrees to use its best efforts to cooperate and promptly respond to any lawful requests from Lessee relating to Lessee’s efforts to comply with all regulatory requirements or to participate in any necessary or advisable legal proceedings, whether judicial or administrative. Each Party shall bear its own costs in complying with this paragraph.
ARTICLE XII
INDEMNITY
12.1. General Indemnity. EACH PARTY (THE “ INDEMNIFYING PARTY ”) SHALL DEFEND, INDEMNIFY AND HOLD HARMLESS THE OTHER PARTY AND THE OTHER PARTY’S RELATED PERSONS (EACH, AN “ INDEMNIFIED PARTY ”) FROM AND AGAINST ANY AND ALL CLAIMS, LITIGATION, ACTIONS, PROCEEDINGS, LOSSES, DAMAGES, LIABILITIES, OBLIGATIONS, COSTS AND EXPENSES, INCLUDING ATTORNEYS’, INVESTIGATORS’ AND CONSULTING FEES, COURT COSTS AND LITIGATION EXPENSES (COLLECTIVELY, “ CLAIMS ”) SUFFERED OR INCURRED BY SUCH INDEMNIFIED PARTY, EVEN IF SUCH LIABILITIES ARE CAUSED SOLELY OR IN PART BY THE NEGLIGENCE OF ANY INDEMNIFIED PARTY, ARISING FROM THE ACTS OR OMISSIONS TO ACT OF THE INDEMNIFYING PARTY (A) ARISING IN THE CASE OF THE LESSEE AS THE INDEMNIFYING PARTY, FROM THE OPERATION OF THE ERCOT TRANSMISSION ASSETS, (B) FOR PHYSICAL DAMAGE TO THE ERCOT TRANSMISSION ASSETS, TO THE EXTENT CAUSED BY THE INDEMNIFYING PARTY OR ANY RELATED PERSON THEREOF, (C) FOR PHYSICAL INJURIES OR DEATH (INCLUDING BY REASON OF OPERATING THE ERCOT TRANSMISSION ASSETS) TO OR OF THE INDEMNIFIED PARTY OR THE PUBLIC, TO THE EXTENT CAUSED BY THE INDEMNIFYING PARTY OR ANY RELATED PERSON THEREOF, (D) ANY BREACH OF ANY COVENANT OR ANY FAILURE TO BE TRUE OF ANY REPRESENTATION OR WARRANTY, MADE BY THE INDEMNIFYING PARTY UNDER THIS AGREEMENT OR (E) THE NEGLIGENCE, RECKLESSNESS OR INTENTIONAL MISCONDUCT OF THE INDEMNIFYING PARTY OR ANY RELATED PERSON THEREOF; PROVIDED, HOWEVER, THAT IN NO EVENT SHALL THE INDEMNIFYING PARTY BE RESPONSIBLE FOR DEFENDING, INDEMNIFYING OR HOLDING HARMLESS ANY INDEMNIFIED PARTY TO THE EXTENT OF ANY CLAIM CAUSED BY, ARISING FROM OR CONTRIBUTED TO BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH INDEMNIFIED PARTY. AS USED HEREIN, THE TERM “ RELATED PERSON ” SHALL MEAN ANY AFFILIATES, CONTRACTORS, LESSEES, AND SUBLESSEES, AND EACH OF THEIR RESPECTIVE, PRINCIPALS, OFFICERS, EMPLOYEES, SERVANTS, AGENTS, REPRESENTATIVES, SUBCONTRACTORS, LICENSEES, INVITEES, GUESTS, SUCCESSORS AND/OR ASSIGNS OF A PARTY; PROVIDED, THAT IN NO EVENT SHALL A PARTY BE DEEMED A RELATED PERSON WITH RESPECT TO THE OTHER PARTY.
 
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12.2. Environmental Indemnity .
(a) To the fullest extent permitted by law, Lessee shall defend, indemnify and hold harmless Lessor and Lessor’s Related Persons from Claims (including, without limitation, any costs and expenses of clean up or other mitigation) suffered or incurred by such persons resulting from any of the following occurring from and after the date hereof or the date on which Lessee assumed operational control over the relevant property: (i) the presence or release of Hazardous Materials in, under or about the ERCOT Transmission Assets which are or were brought or permitted to be brought onto the ERCOT Transmission Assets by the Lessee or Lessee’s Related Persons, (ii) creation of any hazardous or potentially hazardous environmental conditions or exacerbation of a pre-existing environmental condition, (iii) the violation of any Environmental Law by Lessee or Lessee’s Related Persons or (iv) any other failure to comply with Section 4.6 by Lessee or Lessee’s Related Persons.
(b) To the fullest extent permitted by law, Lessor shall defend, indemnify and hold harmless Lessee and Lessee’s Related Persons from Claims (including, without limitation, any costs and expenses of clean up or other mitigation) suffered or incurred by such persons resulting from (i) the presence or release of Hazardous Materials in, under or about the ERCOT Transmission Assets which are or were brought or permitted to be brought onto the ERCOT Transmission Assets by Lessor or Lessor’s Related Persons during construction of any improvement or addition to the ERCOT Transmission Assets, (ii) the violation of any Applicable Law by Lessor or Lessor’s Related Persons, or (iii) testing conducted under Section 4.6 by Lessor or Lessor’s Related Persons.
ARTICLE XIII
MISCELLANEOUS
13.1. Limitation of Damages. NEITHER PARTY SHALL BE LIABLE FOR ANY LOST OR PROSPECTIVE PROFITS, AND IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY OTHER SPECIAL, PUNITIVE, EXEMPLARY, CONSEQUENTIAL, INCIDENTAL OR INDIRECT LOSSES OR DAMAGES (IN TORT, CONTRACT OR OTHERWISE) UNDER OR IN RESPECT OF THIS AGREEMENT OR FOR ANY FAILURE OF PERFORMANCE RELATED HERETO, HOWSOEVER CAUSED.
13.2. Condemnation. In the case of a condemnation or taking, this Agreement shall continue in effect; provided, that this Agreement shall terminate if 75% or more of the ERCOT Transmission Assets is subject to the condemnation or taking. Lessor shall be entitled to all sums received by reason of any such taking or condemnation, except for that portion of such award, if any, which is expressly awarded for the Lessee’s leasehold interest under this Agreement or which is awarded for any property owned by Lessee (including any Footprint Projects funded by Lessee).
 
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13.3. Confidentiality. To the full extent allowed by Applicable Law, each Party (the “ Receiving Party ”) shall maintain, for the benefit of the other Party (the “ Disclosing Party ”), in the strictest confidence all information pertaining to the financial terms of or payments under this Agreement, the Disclosing Party’s methods of operation, methods of the ERCOT Transmission Assets, and the like, whether disclosed by the Disclosing Party or discovered by the Receiving Party, unless such information either (i) is in the public domain by reason of prior publication through no act or omission of the Receiving Party or its employees or agents, (ii) was already known to the Receiving Party at the time of disclosure and which the Receiving Party is free to use or disclose without breach of any obligation to any person or entity or (iii) is required to be disclosed by the PUCT or other Regulatory Authorities, or must be disclosed in accordance with applicable securities laws or the rules of any applicable securities exchange on which the securities of the Receiving Party (or an affiliate thereof) are traded. To the full extent permitted by law, neither Party shall use such information for its own benefit, publish or otherwise disclose it to others, or permit its use by others for their benefit or to the detriment of the other Party. Notwithstanding the foregoing, the Receiving Party may disclose such information to any auditor or to the Receiving Party’s lenders, attorneys, accountants and other personal advisors; any prospective purchaser of the ERCOT Transmission Assets; or pursuant to lawful process, subpoena or court order; provided the Receiving Party, in making such disclosure, advises the party receiving the information of the confidentiality of the information and obtains the agreement of said party not to disclose the information.
13.4. Successors and Assigns. The Agreement shall inure to the benefit of and be binding upon Lessor and Lessee and, to the extent provided in any assignment or other transfer under Article VIII hereof, any assignee, and their respective heirs, transferees, successors and assigns, and all persons claiming under them. References to Lessee in this Agreement shall be deemed to include assignees that hold a direct ownership interest in this Agreement and actually are exercising rights under this Agreement to the extent consistent with such interest.
13.5. Rent Obligations Not Excused by Force Majeure, Etc. Lessee shall not be excused from its obligation to pay Rent during any Force Majeure Event or a condemnation or casualty of all or any part of the ERCOT Transmission Assets.
13.6. Further Assurances; Policies and Procedures.
(a) Each Party will, from time to time, execute, cause to be acknowledged and deliver such documents or instruments, and provide such certificates, as the other Party may reasonably request to carry out and fulfill the transactions, and permit the exercise and performance of the rights and obligations, as are contemplated hereunder. Each Party will cooperate with the other Party to effectuate fully the purposes and intent of this Agreement. In no way limiting the foregoing, the Parties shall cooperate to obtain any necessary regulatory approvals, including, without limitation, providing timely responses to discovery requests, participating in regulatory proceedings to the extent necessary and generally providing assistance as required.
(b) From time to time, the Parties shall agree to policies and procedures regarding matters arising under this Agreement including, without limitation, the treatment of Capital Expenditures for canceled Footprint Projects, each Party’s reporting obligations and such additional matters as the Parties may identify (the “ Policies and Procedures ”). The Parties agree
 
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to cooperate and negotiate in good faith the Policies and Procedures, and any amendment or revision thereto that may be reasonably requested by either Party, and to memorialize the same in a writing executed by a representative of each Party. In the event the Parties cannot agree on the terms of such Policies and Procedures after 60 days of negotiating in good faith, then either the Lessee or the Lessor may submit such matters to arbitration pursuant to Section 13.7 of this Agreement, pursuant to which the Arbitration Panel shall be empowered to determine Policies and Procedures that take into account the REIT’s reporting obligations as a public company and Lessee’s obligations as a regulated utility.
13.7. Arbitration. Except for a dispute regarding the payment of Undisputed Rent, any dispute under this Agreement shall, if not resolved by the Parties within ninety (90) days after notice of such dispute is served by one Party to the other (or, if different, the period provided for resolution by the Parties in the provision of this Agreement under which such dispute is brought), be submitted to an “ Arbitration Panel ” comprised of three (3) members. No more than one (1) panel member may be with the same firm, and no panel member may have an economic interest in the outcome of the arbitration. In addition to the foregoing, the failure by the Lessee and the Lessor to reach an agreement or make a mutual determination or characterization required by Sections 2.2(b) (with respect to the determination of Extended Period Rent); 3.1(d)(i); 3.1(d)(ii); 3.1(d)(iii); 3.2(a); 3.2(b) (with respect to the terms of any renewed Rent Supplement that has expired during the term of this Agreement); 3.2(c); 3.2(d); 3.8 or 13.6(b), in each case after 60 days of negotiating in good faith, shall be deemed to be a “dispute” for purposes of this Section 13.7, to be resolved in accordance with this Section.
(a) The Arbitration Panel shall be selected as follows: Within five (5) Business Days after the expiration of the period referenced above, Lessee shall select its panel member meeting the criteria of the above paragraph (the “ Lessee Panel Member ”) and Lessor shall select its panel member meeting the criteria of the above paragraph (the “ Lessor Panel Member ”). If a Party fails to timely select its respective panel member, the other Party may notify such Party in writing of such failure, and if such Party fails to select its respective panel member within three (3) Business Days from such notice, then the other Party may select such panel member on such Party’s behalf. Within five (5) Business Days after the selection of the Lessor Panel Member and the Lessee Panel Member, the Lessee Panel Member and the Lessor Panel Member shall jointly select a third panel member meeting the criteria of the above paragraph (the “ Third Panel Member ”). If the Lessor Panel Member and the Lessee Panel Member fail to timely select the Third Panel Member and such failure continues for more than three (3) Business Days after written notice of such failure is delivered to the Lessor Panel Member and Lessee Panel Member by either Lessor or Lessee, either Lessor or Lessee may request the managing officer of the American Arbitration Association to appoint the Third Panel Member.
(b) Within ten (10) Business Days after the selection of the Arbitration Panel, each Party shall submit to the Arbitration Panel a written statement identifying its summary of the issues and claims, including, if applicable, its calculation of Rent. Any Party may also request an evidentiary hearing on the merits in addition to the submission of written statements. The Arbitration Panel shall make its decision within twenty (20) days after the later of (i) the submission of such written statements of particulars, and (ii) the conclusion of any evidentiary hearing on the merits, and shall take into consideration the relative risks and rewards undertaken and capital invested by each Party and shall use the Comparable Rate of Return concept described in Section 3.2(a) in determining any Rent disputes. The Arbitration Panel shall reach its decision by majority vote and shall communicate its decision by written notice to the Parties.
 
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(c) The decision by the Arbitration Panel shall be final, binding and conclusive and shall be non-appealable and enforceable in any court having jurisdiction. All hearings and proceedings held by the Arbitration Panel shall take place in Dallas, Texas.
(d) The resolution procedure described herein shall be governed by the Commercial Rules of the American Arbitration Association and subject to the Texas General Arbitration Act to the extent such act is applicable hereto.
(e) In the case of an arbitration proceeding involving a determination of Rent and Percentage Rent, until Rent and Percentage Rent have been finally determined, Lessee shall pay Rent and Percentage Rent based upon prevailing rates therefor, and an appropriate refund shall be made to or additional Rent shall be paid by Lessee within ten (10) days after a final determination is made.
(f) The Parties shall bear equally the fees, costs and expenses of the Arbitration Panel in conducting the arbitration.
13.8. Notices. All notices or other communications required or permitted by this Agreement, including payments to Lessor, shall be in writing and shall be served personally or by reputable express courier service or by facsimile transmission addressed to the relevant parties at the address stated below or at any other address notified by that Party to the other as its address for service. Any notice so given personally shall be deemed to have been served on delivery, any notice so given by express courier service shall be deemed to have been served the next Business Day after the same shall have been delivered to the relevant courier, and any notice so given by facsimile transmission shall be deemed to have been served on dispatch. As proof of such service it shall be sufficient to produce a receipt showing personal service, the receipt of a reputable courier company showing the correct address of the addressee or an activity report of the sender’s facsimile machine showing the correct facsimile number of the parties on whom notice is served and the correct number of pages transmitted. All communications, other than routine correspondence in the ordinary course of business, between the Parties pursuant to this Agreement shall be sent by the same method of communication by the Party sending the communication. The Parties’ addresses for service are:
If to Lessor:
Sharyland Distribution & Transmission Services, L.L.C.
1807 Ross Avenue, 4 th Floor
Dallas, Texas 75201
Attention: Chief Executive Officer and General Counsel
 
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If to Lessee:
Sharyland Utilities, L.P.
1807 Ross Avenue, 4 th Floor
Dallas, Texas 75201
Attention: Hunter Hunt
With a copy to:
General Counsel
Fax: (214) 855-6965
Any Party may change its address for purposes of this paragraph by giving written notice of such change to the other parties in the manner provided in this paragraph.
13.9. Entire Agreement; Amendments. This Agreement constitutes the entire agreement between Lessor and Lessee respecting its subject matter, and supersedes any and all oral or written agreements. Any agreement, understanding or representation respecting the ERCOT Transmission Assets, or any other matter referenced herein not expressly set forth in this Agreement or a subsequent writing signed by both Parties is null and void. This Agreement shall not be modified or amended except in a writing signed by both Parties. No purported modifications or amendments, including without limitation any oral agreement (even if supported by new consideration), course of conduct or absence of a response to a unilateral communication, shall be binding on either Party.
13.10. Legal Matters. This Agreement shall be governed by and interpreted in accordance with the laws of the State of Texas, without regard to its conflicts of law principles. The Parties agree that any rule of construction to the effect that ambiguities are to be resolved in favor of either Party shall not be employed in the interpretation of this Agreement and is hereby waived.
13.11. Partial Invalidity. Should any provision of this Agreement be held, in a final and unappealable decision by a court of competent jurisdiction, to be either invalid, void or unenforceable, the remaining provisions hereof shall remain in full force and effect, unimpaired by the holding.
13.12. Recording . Lessee shall not record this Agreement without the prior written consent of the Lessor. Lessee may record at its expense a memorandum of this Agreement in form and substance reasonably approved by Lessor.
13.13. Intention of Parties; True Lease.
(a) The Parties hereby declare that their relationship in and to the ERCOT Transmission Lease Assets is and will be that of lessor and lessee, expressly subject to the terms, conditions, limitations and requirements set forth in this Agreement. Nothing contained in this Agreement will be deemed to constitute the Parties as partners or joint venturers or as principal and agent. The Parties intend for this Agreement to constitute a true lease with respect to the ERCOT Transmission Lease Assets for US Federal, state and local income tax purposes, and each Party shall treat the Agreement as a true lease with respect to the ERCOT Transmission Lease Assets for federal income tax reporting purposes.
 
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(b) The Parties acknowledge that Lessor is owned, directly or indirectly, in whole or in part, by an entity intending to qualify as a real estate investment trust under the Internal Revenue Code of 1986, as amended, and the Parties agree to negotiate in good faith any modification or amendment to this Agreement requested by Lessor to facilitate such qualification; provided that Lessee shall not be obligated to agree to any such modification or amendment if such modification or amendment would materially adversely affect Lessee or would be in conflict with Applicable Law or any regulations or orders of any Regulatory Authority.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
 
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IN WITNESS WHEREOF, Lessor and Lessee, acting through their duly authorized representatives, have executed this Agreement with the intent that it be effective as of the Effective Date, and certify that they have read, understand and agree to the terms and conditions of this Agreement.

LESSOR:	
	
SHARYLAND DISTRIBUTION & TRANSMISSION
SERVICES, L.L.C.	
		
By:	 	/s/ Brant Meleski	
	 	Name:	 	Brant Meleski	
	 	Title:	 	Senior Vice President and
Chief Financial Officer	

LESSEE:	
	
SHARYLAND UTILITIES, L.P.	
		
By:	 	/s/ Mark Caskey	
	 	Name:	 	Mark Caskey	
	 	Title:	 	President	
Signature Page to ERCOT Transmission Assets Lease Agreement

APPENDIX A
DEFINITIONS
“ 2009 Note Purchase Agreement ” has the meaning set forth in Section 4.13.
“ 2010 Note Purchase Agreement ” has the meaning set forth in Section 4.13.
“ Additional Rent ” has the meaning set forth in Section 3.4.
“ AFUDC ” means allowance for funds used during construction.
“ Agreed-to-Discount ” has the meaning set forth in Section 3.2(a).
“ Agreement ” has the meaning set forth in the Preamble.
“ Annual Percentage Rent Breakpoint ” means the dollar value of annual Gross Revenues that must be exceeded in a particular Lease Year before Percentage Rent is owed, as set forth on the then-effective Rent Supplement.
“ Applicable Laws ” means all laws, ordinances, statutes, orders and regulations of any federal, state, or local government, regulatory or administrative authority, any agency or commission thereof, or any court or tribunal, including without limitation all requirements of the Regulatory Authorities.
“ Arbitration Panel ” has the meaning set forth in Section 13.7.
“ Base Rent ” has the meaning set forth in Section 3.1(a).
“ Business Day ” means a day other than a Saturday, Sunday or other day on which federal agencies are authorized or required by law to close.
“ CapEx Budget ” has the meaning set forth in Section 10.1(a).
“ Capital Expenditures ” means expenditures that are or are expected to be capitalized under GAAP.
“ CCN ” means a Certificate of Convenience and Necessity or amendment thereto issued by the PUCT.
“ CFO Certificate ” means a document signed by the Chief Financial Officer of Lessee and certifying to the accuracy and completeness of the statement of Gross Revenues.
 
Appendix A – Page 1

“ Change in Control ” means Hunt Family Members cease to possess, directly or indirectly, the power to direct or cause the direction of the management or policies of Lessee, whether through the ability to exercise voting power, by contract or otherwise.
“ CIAC ” means any contributions in aid of construction from current or prospective customers, plus any additional payments as a tax gross up for such contributions, with respect to which Lessee does not anticipate receiving an increase in its regulatory rate base.
“ Claims ” has the meaning set forth in Section 12.1.
“ Comparable Rate of Return ” has the meaning set forth in Section 3.2(a).
“ Consolidated Net Plant ” means, with respect to any Person, as of the date of determination, the net plant set forth on the face of the consolidated balance sheet of such Person or absent such amount on the consolidated balance sheet, the total plant of such Person on a consolidated basis minus accumulated depreciation as set forth in the footnotes of the consolidated financial statements, in each case, for the fiscal quarter ended on the date of the last financial statements delivered pursuant to Section 7.1 of the Credit Agreement.
“ Consolidated Qualified Lessee ” means any Qualified Lessee that is consolidated into the financial statements of another Qualified Lessee.
“ Covered Revenue ” means any fees, charges or other revenues (a) that are characterized as Unadjusted Gross Revenues (or Gross Revenues) for purposes hereof or for purposes of any other similar lease (x) between Lessee and Lessor or an affiliate thereof or (y) between Lessee and any of its wholly-owned subsidiaries or (b) that are generated from the Rate Base of regulated assets owned or operated by a party other than Lessor or a subsidiary thereof.
“ Credit Agreement ” has the meaning set forth in Section 4.13.
“ CREZ Lease ” means the Second Amended and Restated Lease Agreement (CREZ Assets) between Sharyland Projects, L.L.C. and Lessee effective as of the Effective Date, as the same may be amended from time to time.
“ Debt Agreements ” has the meaning set forth in Section 4.13.
“ Defaulting Party ” has the meaning set forth in Section 9.3.
“ Disclosing Party ” has the meaning set forth in Section 13.3.
“ Effective Date ” has the meaning set forth in the Preamble.
“ Entity ” means any general partnership, limited partnership, proprietorship, corporation, joint venture, joint stock company, limited liability company, limited liability partnership, business trust, estate, governmental entity, cooperative, association or other foreign or domestic enterprise.
 
Appendix A – Page 2

“ Environmental Law ” means any and all Legal Requirements regulating, relating to or imposing liability or standards of conduct concerning protection of natural resources or the environment, or environmental impacts on human health as now or may at any time hereafter be in effect.
“ ERCOT ” means the Electric Reliability Council of Texas, or its successors.
“ ERCOT Transmission Assets ” means the AJ Swope substation and Footprint Projects that add, expand or alter transmission assets identified from time to time pursuant to Rent Supplements, as modified by Section 1.1(b).
“ ERCOT Transmission Lease Assets ” means the ERCOT Transmission Assets, excluding any Footprint Project included in the definition of “ERCOT Transmission Assets” unless (i) such Footprint Project has been placed in service and (ii) a Rent Supplement has been executed with respect to such Footprint Project.
“ ERCOT Transmission Revenues ” means Lessee’s Unadjusted Gross Revenues from regulated electric transmission systems operated by Lessee within ERCOT pursuant to the PUCT’s transmission cost of service mechanism.
“ Event of Default ” means an event described in Section 9.1 or Section 9.2.
“ Excess Percentage Rent ” has the meaning set forth in Section 3.3(a).
“ Extended Period Rent ” means Rent that applies during any extended period of operatorship beyond the Term, which will be negotiated using the Comparable Rate of Return methodology set forth in Article III.
“ FERC ” means the Federal Energy Regulatory Commission, or its successors.
“ First Lease Quarter Percentage Rent Breakpoint ” has the meaning set forth in Section 3.1(c).
“ Footprint Projects ” means T&D Projects that are (i) (A) located in the distribution service territory of the ERCOT Transmission Assets, (B) transmission assets that are added to an existing transmission substation that comprises a part of the ERCOT Transmission Assets or hang from transmission towers that comprise a part of the ERCOT Transmission Assets or (C) Reclassified Projects and (ii) funded by expenditures that are or are expected to be capitalized under GAAP and that are within the items described in Section 1.1(b)(i)-(v) (specifically excluding Section 1.1(b)(vi)).
“ Force Majeure Event ” means, except to the extent resulting from the action or inaction of Lessee or within the control of Lessee, fire, earthquake, hurricane, flood, or other casualty or accident; strikes or labor disputes; war, civil strife or other violence; any law, order, proclamation, regulation, ordinance, action, demand or requirement of any government agency or utility; or any other act or condition beyond the reasonable control of Lessee.
 
Appendix A – Page 3

“ GAAP ” means generally accepted accounting principles in effect in the United States of America.
“ Good Utility Practice ” shall be as defined from time to time by PUCT and, as of the date hereof, means any of the practices, methods, and acts engaged in or approved by a significant portion of the electric utility industry during the relevant time period, or any of the practices, methods, and acts that, in the exercise of reasonable judgment in light of the facts known at the time the decision was made, could have been expected to accomplish the desired result at a reasonable cost consistent with good business practices, reliability, safety, and expedition. Good utility practice is not intended to be limited to the optimum practice, method, or act, to the exclusion of all others, but rather is intended to include acceptable practices, methods, and acts generally accepted in the region.
“ Gross Revenues ” has the meaning set forth in Section 3.1(d)(i).
“ Hazardous Materials ” means (A) any substance which is listed, defined, designated or classified under any Applicable Law as a (i) hazardous material, substance, constituent or waste, (ii) toxic material, substance, constituent or waste, (iii) radioactive material, substance, constituent or waste, (iv) dangerous material, substance, constituent or waste, (v) pollutant, (vi) contaminant, or (vii) special waste; (B) any material, substance, constituent or waste regulated under any Applicable Laws; or (C) petroleum, petroleum products, radioactive matters, polychlorinated biphenyl, pesticides, asbestos or asbestos-containing materials.
“ Hunt Family Members ” means (i) Ray L. Hunt; (ii) the spouse of Ray L. Hunt and each of his children and siblings; (iii) the spouse and lineal descendants of any Person identified in the foregoing clause (ii); (iv) any trust or account primarily for the benefit of any Person or Persons identified in the foregoing clauses (i), (ii) or (iii); (v) any corporation, partnership or other Entity in which any of the Persons identified in the foregoing clauses (i), (ii), (iii) or (iv) are the beneficial owners of substantially all of the shares of capital stock, membership interests, partnership interests or other equity interests and options or warrants to acquire, or securities convertible into, capital stock, membership interests, partnership interests or other equity securities of an Entity; and (vi) the personal representative or guardian of any of the Persons identified in the foregoing clauses (i), (ii) and (iii) upon such Person’s death for purposes of the administration of such Person’s estate or upon such Person’s disability or incompetency for purposes of the protection and management of the assets of such Person.
“ HVDC Ties ” are high voltage direct current interconnections, including AC/DC converter stations.
“ Incremental CapEx ” means Lessor-funded Capital Expenditures related to ERCOT Transmission Assets that are placed in service, as and when such ERCOT Transmission Assets are placed in service, as adjusted (y) for any applicable AFUDC and/or depreciation, and (z) to reflect the effect of the deferred tax liability or deferred tax asset, as applicable.
 
Appendix A – Page 4

“ Indebtedness ” with respect to any Person means, at any time, without duplication (a) its liabilities for borrowed money and its redemption obligations in respect of mandatorily redeemable preferred stock; (b) its liabilities for the deferred purchase price of property acquired by such Person (excluding accounts payable arising in the ordinary course of business but including all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property); (c)(i) all liabilities appearing on its balance sheet prepared in accordance with GAAP in respect of capital leases; and (ii) all liabilities which would appear on its balance sheet prepared in accordance with GAAP in respect of Synthetic Leases assuming such Synthetic Leases were accounted for as capital leases; provided, however, that for purposes of this definition (including with respect to clauses (i) and (ii) hereof), (x) this Agreement and any similar lease between Lessor (or any subsidiary) and Lessee and (y) any lease between Lessee and any of its wholly-owned subsidiaries shall not be treated as a capital lease; (d) all liabilities for borrowed money secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities); (e) all of its liabilities in respect of letters of credit or instruments serving a similar function issued or accepted for its account by banks and other financial institutions (whether or not representing obligations for borrowed money), provided, however, that for purposes of this definition, any surety bonds or indemnification agreements entered into by Lessee (with respect to which Lessee or a subsidiary has a reimbursement or backstop obligation) in connection with condemnation proceedings shall be excluded; (f) the aggregate Swap Termination Value of all Swap Contracts of such Person; and (g) any guaranty of such Person with respect to liabilities of a type described in any of clauses (a) through (f) hereof. Indebtedness of any Person shall include all obligations of such Person of the character described in clauses (a) through (g) to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is deemed to be extinguished under GAAP.
“ Indemnified Party ” has the meaning set forth in Section 12.1.
“ Indemnifying Party ” has the meaning set forth in Section 12.1.
“ Initial Term ” has the meaning set forth in Section 2.1.
“ Lease ” or “ Leases ” means (i) this Agreement, the McAllen Lease, the Stanton/Brady/Celeste Lease, the CREZ Lease and the Stanton Transmission Loop Lease and any other leases of transmission and distribution and related assets to a Qualified Lessee under which Lessor or any subsidiary of Lessor is a party as a lessor, and (ii) any lease of transmission and distribution and related assets pursuant to which Lessee is the lessee and a subsidiary of Lessee or another Person controlled by one or more Hunt Family Members is the lessor; provided , no such lease will qualify as a “Lease” hereunder if each of the three following criteria apply: (x) Lessee is the lessee, (y) cash rental payments have become due and payable pursuant thereto and (z) none of Lessor, a subsidiary of Lessor or a subsidiary of Lessee is the lessor.
“ Lease Quarter ” means each calendar quarter during each Lease Year.
“ Lease Year ” means each calendar year during the Term of this Agreement.
“ Leased Consolidated Net Plant ” means that portion of the Consolidated Net Plant of the lessor of a Lease between such lessor and a Qualified Lessee that is the subject of such Lease.
 
Appendix A – Page 5

“ Legal Requirements ” means, as to any Person, the certificate of incorporation and by-laws, limited liability company agreement, partnership agreement or other organizational or governing documents of such Person, any law (including common law), statute, code, treaty, rule, regulation, ordinance including any government rule or determination of an arbitrator a court or other government authority, or any requirement under a Permit, in each case applicable to or binding upon such Person or any of its properties or to which such Person or any of its property is subject.
“ Lessee ” has the meaning set forth in the Preamble.
“ Lessee CapEx ” means Capital Expenditures that are related and fairly allocable to the ERCOT Transmission Assets and are funded by Lessee.
“ Lessee Panel Member ” has the meaning set forth in Section 13.7(a).
“ Lessee Taxes ” has the meaning set forth in Section 4.3.
“ Lessor ” has the meaning set forth in the Preamble.
“ Lessor’s Audit ” has the meaning set forth in Section 3.3(c).
“ Lessor Panel Member ” has the meaning set forth in Section 13.7(a).
“ Lessor Taxes ” has the meaning set forth in Section 4.3.
“ Liens ” has the meaning set forth in Section 5.2.
“ McAllen Lease ” means the Third Amended and Restated Master System Lease Agreement (McAllen System) between Lessor and Lessee effective as of the Effective Date, as the same may be amended from time to time.
“ Monetary Default ” means the failure to pay when due any amounts payable under this Agreement.
“ NERC ” means North American Electric Reliability Corporation, or its successors.
“ Non-Defaulting Party ” has the meaning set forth in Section 9.3.
“ Non-Monetary Default ” means an Event of Default other than a Monetary Default.
“ Non-Recourse Debt ” means Indebtedness of a subsidiary of Lessee that, if secured, is secured solely by a pledge of collateral owned by such subsidiary and the equity interests in such subsidiary, and for which no Person other than such subsidiary is personally liable.
“ Nonseverable Footprint Projects ” means those Footprint Projects that cannot be readily removed from the ERCOT Transmission Assets without causing diminution in value to the ERCOT Transmission Assets.
 
Appendix A – Page 6

“ Note Purchase Agreements ” has the meaning set forth in Section 4.13.
“ Notice of Default ” means written notice of the Event of Default.
“ Other Revenue ” means revenue generated from activities as a regulated utility within the State of Texas other than Covered Revenue.
“ Overdue Rate ” means a rate equal to ten percent (10%) per annum or the maximum rate allowed by law, whichever is lesser.
“ Party ” or “ Parties ” has the meaning set forth in the Preamble.
“ Percentage Rent ” has the meaning set forth in Section 3.1(b).
“ Percentage Rent Breakpoint ” means individually any of the Annual Percentage Rent Breakpoint, the First Lease Quarter Percentage Rent Breakpoint, the Second Lease Quarter Percentage Rent Breakpoint or the Third Lease Quarter Percentage Rent Breakpoint (collectively referred to as the “ Percentage Rent Breakpoints”).
“ Percentage Rent Percentages ” has the meaning set forth in Section 3.1(b).
“ Percentage Rent Schedule ” means the schedule attached to the then-current Rent Supplement setting forth the Percentage Rent Percentages and Annual Percentage Rent Breakpoints for the ERCOT Transmission Assets through the end of the Term.
“ Permitted Liens ” means
 
 	(i)	The Liens granted by the Lessor to any lender or trustee for any lender which finances the Lessor’s interest in the ERCOT Transmission Assets;	
 
 	(ii)	Liens imposed by any governmental authority for any tax, assessment or other charge relating to ERCOT Transmission Assets to the extent not yet past due or being contested in good faith and by appropriate proceedings;	
 
 	(iii)	mechanics’, warehousemen’s, carriers’, workers’, repairers’, landlords’, and other similar liens arising or incurred in the ordinary course of business and (i) which do not in the aggregate materially detract from the value of property or assets subject to such Liens or materially impair the continued use thereof in the operation of the ERCOT Transmission Assets or (ii) which are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property or asset subject to such Liens and for which cash reserves consistent with GAAP have been established on the books of Lessee or Lessor, or other Liens incurred or deposits made in the ordinary course of business in connection with workers’ compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, trade contracts, leases, government contracts, performance and return-of-money bonds and other similar obligations incurred in the ordinary course of business (exclusive of obligations in respect of the payment for borrowed money);	
 
Appendix A – Page 7

 	(iv)	Liens arising out of judgments or awards so long as an appeal or proceeding for review is being prosecuted in good faith and for the payment of which adequate cash reserves consistent with GAAP have been established on the books of Lessee or Lessor, bonds or other security acceptable to the Lessor in its reasonable discretion have been provided or are fully covered by insurance;	
 
 	(v)	zoning, entitlement, restriction, and other land use and environmental regulations by governmental authorities and encroachments, easements, rights of way, covenants, restrictions or agreements which do not materially interfere with the continued use of any asset as currently used in the conduct of the business of the Lessee;	
 
 	(vi)	any encumbrances set forth in any franchise or governing ordinance under which any portion of the business of the Lessee is conducted and which could not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the operation of the ERCOT Transmission Assets; and	
 
 	(vii)	all rights of condemnation, eminent domain, or other similar right of any person.	
“ Person ” means any natural person, corporation, limited liability company, partnership, firm, association, government authority or other entity whether acting in an individual, fiduciary or other capacity.
“ Personal Property ” means all assets, or rights therein, related to or used in connection with the ERCOT Transmission Assets, other than assets of the type and nature described in Section 1.1(b)(i)-(v).
“ Policies and Procedures ” has the meaning set forth in Section 13.6(b).
“ Project Management Costs ” means all actual out-of-pocket costs incurred by Lessee pursuant to this Agreement or a separate construction management agreement in connection with the construction activities, including (i) all direct wages and salaries (including benefits, payroll burden and overtime) which the Lessee pays to personnel employed or retained to conduct such construction activities and a fair allocation of the direct wages and salaries (including benefits, payroll burden and overtime) of Lessee’s other personnel conducting such construction activities; (ii) the fair market value of materials or equipment provided directly by Lessee or its affiliates (including the standard corporate day rate for any vehicles and equipment that are so utilized); (iii) a fair allocation of the lease payments of any leased vehicles and equipment that are so utilized; (iv) all other third-party costs incurred by Lessee in the performance of such construction activities; and (v) all sales, use, transfer or similar taxes (excluding those taxes based upon Lessee’s net income, gross receipts, net worth or similar taxes) incurred or paid by Lessee in conducting such construction activities or providing materials, if any (provided, that in managing its affairs, Lessee will attempt to minimize, to the extent practicable, all such taxes incurred on behalf of Lessor and, in this regard, Lessor agrees to cooperate and provide Lessee any assistance necessary including providing appropriate evidence of any exemptions from tax).
 
Appendix A – Page 8

“ PUCT ” means the Public Utility Commission of Texas or its successors.
“ Qualified Lessee ” means Lessee and/or any other utility that is (x) approved or authorized by the applicable public utility commission or similar regulatory authority to operate and/or lease the transmission and/or distribution assets of Lessor or any subsidiary and (y) a party to a then-effective lease agreement with Lessor or a subsidiary thereof pursuant to which such utility leases and operates such entity’s transmission and/or distribution assets
“ Rate Base ” means, with respect to any transmission and distribution assets, gross electric plant in service under GAAP, which is the aggregate amount of capital expenditures used to construct such assets plus AFUDC, less accumulated depreciation, and adjusted for accumulated deferred income taxes.
“ Receiving Party ” has the meaning set forth in Section 13.3.
“ Reclassified Projects ” means any T&D Project that does not otherwise meet the definition of Footprint Project but Lessee and Lessor jointly agree, in their sole discretion, to classify such T&D Project as a Footprint Project based upon such factors that the Parties deem relevant, including (a) the expected Rate Base of the T&D Project, it being understood that the Parties generally expect that only T&D Projects with an expected Rate Base of less than $25 million could constitute a Reclassified Project; (b) whether the T&D Project is physically connected to the ERCOT Transmission Assets; and (c) whether the T&D Project is necessary to serve distribution customers situated in the service territories of the ERCOT Transmission Assets.
“ Regulatory Authority ” means the PUCT, ERCOT, SPP, TRE, NERC and any other governmental agency with jurisdiction over Lessee, Lessor or the ERCOT Transmission Assets.
“ REIT ” means the general partner of InfraREIT Partners, LP.
“ Related Person ” has the meaning set forth in Section 12.1.
“ Renewal Term ” has the meaning set forth in Section 2.1.
“ Rent ” means the sum of Base Rent, Percentage Rent, Additional Rent and Extended Period Rent.
“ Rent Supplement ” means a supplement to this Agreement in the form of Schedule 3.2(b) agreed to in accordance with Section 3.2(b).
“ Rent Validation ” means the process of validating any Rent Supplement pursuant to Section 3.2(c).
 
Appendix A – Page 9

“ Repairs ” means all replacements, repairs or remedial activity undertaken directly on a then-existing portion of the ERCOT Transmission Assets that are not Footprint Projects and that are expensed and not capitalized under GAAP.
“ Revenues Attributable to Lessee CapEx ” means the portion of Unadjusted Gross Revenue from the ERCOT Transmission Assets that is attributable to Lessee CapEx as determined under Section 3.1(d)(iii).
“ Revised Certificate ” has the meaning set forth in Section 3.3(a).
“ Second Lease Quarter Percentage Rent Breakpoint ” has the meaning set forth in Section 3.1(c).
“ Severable Footprint Projects ” means any Footprint Projects that can be readily removed from the ERCOT Transmission Assets without causing diminution in value to the ERCOT Transmission Assets.
“ Stanton/Brady/Celeste Lease ” means the Second Amended and Restated Lease Agreement (Stanton/Brady/Celeste Assets) between Lessor and Lessee effective as of the Effective Date, as the same may be amended from time to time.
“ Stanton Transmission Loop Lease ” means the Third Amended and Restated Lease Agreement (Stanton Transmission Loop Assets) between SDTS FERC, L.L.C., a wholly-owned subsidiary of Lessor, and SU FERC, L.L.C., a wholly-owned subsidiary of Lessee, effective as of the Effective Date, as the same may be amended from time to time.
“ Swap Contract ” means (a) any and all interest rate swap transactions, basis swap transactions, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward foreign exchange transactions, cap transactions, floor transactions, currency options, spot contracts or any other similar transactions of any of the foregoing (including, without limitation, any options to enter into any of the foregoing), and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc. or any International Foreign Exchange Master Agreement.
“ Swap Termination Value ” means, in respect of one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a), the amount(s) determined as the mark-to-market value(s) for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts.
 
Appendix A – Page 10

“ Synthetic Lease ” means, at any time, any lease (including a lease that may be terminated by the lessee at any time) of any property by a Person (a) that is accounted for as an operating lease under GAAP and (b) in respect of which the lessee retains or obtains ownership of the property so leased for U.S. federal income tax purposes, other than any lease under which such Person is the lessor.
“ TCOS Allocation ” has the meaning set forth in Section 3.1(d)(ii).
“ T&D Project ” means a business, project or assets relating primarily to the transmission and/or distribution of electricity.
“ Term ” has the meaning set forth in Section 2.1.
“ Third Lease Quarter Percentage Rent Breakpoint ” has the meaning set forth in Section 3.1(c).
“ Third Panel Member ” has the meaning set forth in Section 13.7(a).
“ Transmission Gross Plant ” means electric transmission plant as determined in accordance with the FERC Uniform System of Accounts.
“ Transmission Net Plant in Service ” means Transmission Gross Plant in service less accumulated depreciation as determined in accordance with the FERC Uniform System of Accounts.
“ TRE ” means the Texas Reliability Entity, or its successor entity.
“ TRS ” means taxable REIT subsidiary.
“ Unadjusted Gross Revenues ” has the meaning set forth in Section 3.1(d)(i).
“ Undisputed Rent ” means the greater of (i) the undisputed amount of Rent the Parties agree is due and payable and (ii) during the term of the Debt Agreements, the amount necessary, when taken together with Rent payments made by Lessee to Lessor under other leases between the Parties, required for Lessor to comply with the covenants set forth in Section 9.08 of the 2009 Note Purchase Agreement, Section 9.8 of the 2010 Note Purchase Agreement and Section 7.10 of the Credit Agreement.
 
Appendix A – Page 11

EXHIBIT A
SUBORDINATED DEBT TERMS
Reference is made to that certain Second Amended and Restated Collateral Agency Agreement (as amended, restated, supplemented or otherwise modified, the “ Collateral Agency Agreement ”), to be entered into by and among The Bank of New York Mellon Trust Company, N.A., as collateral agent (together with its successors and assigns, the “ Collateral Agent ”), Sharyland Distribution & Transmission Services, L.L.C., a Texas limited liability company (the “ Company ”), and the holders of the Permitted Secured Indebtedness (as defined therein) from time to time party thereto.
Section 1. Definitions and Rules of Interpretation . Capitalized terms used herein without definition shall have the meanings assigned to such terms in the Collateral Agency Agreement. The rules of interpretation set forth in Schedule A of the Collateral Agency Agreement shall apply to this Exhibit A as if fully set forth herein. In addition, the following terms shall have the following meanings:
 
1.1	“ Entitled Party ” shall mean the Company unless the Collateral Agent or the Company has given notice to the Subordinated Lender that the Collateral Agent has, on behalf of the Secured Parties and pursuant to the Collateral Agency Agreement or related documents, properly exercised its remedies to foreclose on the Company’s interest in any System Lease and receive payments pursuant to any System Lease directly from Sharyland, in which case the Entitled Party shall mean the Collateral Agent, acting for the benefit of the Secured Parties.	
 
1.2	“ Governmental Authority ” shall mean	
 
 	(a)	the government of:	
 
 	(i)	The United States of America or any State or other political subdivision thereof, or	
 
 	(ii)	any other jurisdictions in which the Company conducts all or any part of its business, or which asserts jurisdiction over any properties of the Company, or	
 
 	(b)	any entity exercising executive, legislative, judicial, taxing, regulatory or administrative functions of, or pertaining to, any such government, or	
 
 	(c)	the Electric Reliability Council of Texas or any successor thereto (“ ERCOT ”), or	
 
 	(d)	the Texas Regional Entity.	
 
1.3	“ Insolvency Event ” means the occurrence of any of the following:	
 
 	(a)	Sharyland (i) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any	
 
ERCOT T RANSMISSION A SSETS L EASE A GREEMENT
 
Exhibit A – Page 1

 	other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes a corporate action for the purpose of any of the foregoing; or	
 
 	(b)	a court or Governmental Authority of competent jurisdiction enters an order appointing, without consent by Sharyland, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of Sharyland or any such petition shall be filed against Sharyland and such petition shall not be dismissed within 60 days.	
 
1.4	“ Reorganization Securities ” shall mean any debt or equity securities issued on account of all or any portion of the Subordinated Indebtedness in connection with an Insolvency Event that are in each case subordinated in liquidation to the Obligations (or any debt or equity securities issued on account of any Obligations) to at least the same extent that the Subordinated Indebtedness are subordinated to the Obligations hereunder.	
 
1.5	“ Sharyland ” shall mean Sharyland Utilities, L.P.	
 
1.6	“ Subordinated Indebtedness ” shall mean, with respect to Sharyland, Indebtedness (as defined under the applicable Financing Agreement or such other similar term) that is incurred in accordance with the terms of such Financing Agreement and is required to be subordinated to the applicable Obligations.	
 
1.7	“ Subordinated Lenders ” shall mean each and every Person to whom any of the Subordinated Indebtedness are owed.	
 
1.8	“ Subordinated Loan Documents ” shall mean all documentation evidencing the Subordinated Indebtedness.	
 
1.9	“ System Leases ” shall mean any and all leases of transmission and distribution and related assets pursuant to which Sharyland is the lessee and the Company or any Subsidiary of the Company is a party as a lessor, and supplements thereto, each as amended, restated, supplemented or otherwise modified from time to time, or any new lease entered into in replacement thereof.	
 
1.10	“ System Lease Obligations ” shall mean any and all Rent or other similar term (as such term is defined in the System Leases) then due and payable under the System Leases.	
 
ERCOT T RANSMISSION A SSETS L EASE A GREEMENT
 
Exhibit A – Page 2

1.11	“ Texas Regional Entity ” shall mean the division of ERCOT authorized to develop, monitor, assess and enforce compliance with NERC Reliability Standards within geographic boundaries of ERCOT and any successor thereto.	
Section 2. Subordination of Subordinated Indebtedness . Until the indefeasible payment in full in cash of all the Obligations and the termination of any commitments to lend under any Permitted Secured Indebtedness, the Subordinated Lenders and Sharyland hereby agree that (i) all Subordinated Indebtedness is and shall be subordinated in right of liquidation in relation to all System Lease Obligations to the extent and in the manner hereinafter set forth, (ii) upon the occurrence and during the continuance of any default or event of default under any System Lease (or if after giving effect to a proposed distribution in respect of any part of the Subordinated Indebtedness, a default or event of default under any System Lease will exist), no payments or other distributions whatsoever in respect of any part of the Subordinated Indebtedness shall be made, (iii) upon the occurrence and during the continuance of an Insolvency Event, no payments or other distributions whatsoever in respect of any part of the Subordinated Indebtedness shall be made nor shall any property or assets of Sharyland be applied to the purchase or other acquisition or retirement of any part of the Subordinated Indebtedness, and (iv) upon the occurrence and during the continuance of an Insolvency Event, the Subordinated Lenders shall not accept any payment by or on behalf of Sharyland on account of the principal of, premium or interest on, or any other amount in respect of, the Subordinated Indebtedness other than the payment of indemnity obligations and reasonable out of pocket costs and expenses (including reasonable attorney’s fees) in each case as and when due and payable in accordance with the terms of the Subordinated Debt Documents.
Section 3. Liquidation, Dissolution, Bankruptcy . Until the indefeasible payment in full in cash of all the Obligations and the termination of any commitments to lend under any Permitted Secured Indebtedness, and without limitation to the rights of the Secured Parties under the terms of the Financing Agreements or the rights of Company under the System Leases:
 
3.1	upon the occurrence and during the continuance of any Insolvency Event:	
 
 	3.1.1	the System Lease Obligations then due and payable shall first be irrevocably and indefeasibly paid in full to the Entitled Party before any of the Subordinated Lenders shall be entitled to receive any payment (other than Reorganization Securities) on account of the Subordinated Indebtedness whether in cash, securities or other assets (other than Reorganization Securities);	
 
 	3.1.2	any payment or distribution of assets of Sharyland of any kind or character in respect of the Subordinated Indebtedness to which any of the Subordinated Lenders would be entitled if the Subordinated Indebtedness were not subordinated pursuant to the terms hereof shall be made by the trustee, liquidator or agent or other Person making such payment or distribution, directly to the Entitled Party until the System Lease Obligations then due and payable are paid in full and each of the Subordinated Lenders and, unless the Company is the Entitled Party, Sharyland irrevocably authorizes and empowers the Entitled Party to receive and collect on its behalf any and all such payments or distributions; and	
 
ERCOT T RANSMISSION A SSETS L EASE A GREEMENT
 
Exhibit A – Page 3

 	3.1.3	the Subordinated Lenders agree not to, directly or indirectly, initiate, prosecute or participate in any claim, action or other proceeding challenging the enforceability, validity or priority of the System Lease Obligations then due and payable.	
Section 4. Incorrect Payments . If, for any reason whatsoever and whether pursuant to an Insolvency Event or otherwise, Sharyland shall make or any of the Subordinated Lenders shall receive any payment or distribution of any kind or character, whether in cash, securities or other property (other than Reorganization Securities), on account or in respect of the Subordinated Indebtedness in contravention of any of the terms set forth herein, such Subordinated Lender shall hold any such payment or distribution in trust for the benefit of the Secured Parties, promptly notify the Entitled Party of the receipt of such payment or distribution and promptly pay over or deliver such distribution or payment to the Entitled Party or to any other Person nominated by the Entitled Party, to hold for the account of the Secured Parties.
Section 5. Non-Impairment . To the fullest extent permitted by applicable Law, no change of law or circumstances shall release or diminish any of the Subordinated Lender’s obligations, liabilities, agreements or duties hereunder, or affect the provisions set forth herein in any way.
Section 6. Benefit of Subordination Provisions . These subordination provisions are intended solely to define the relative rights of the Secured Parties, the Collateral Agent, the Company, the Subordinated Lenders, and their respective successors and permitted assigns.
Section 7. Termination and Reinstatement . Notwithstanding anything to the contrary contained herein, the Subordinated Indebtedness shall no longer be subordinated in right of liquidation pursuant to the terms contained herein otherwise at such time as the Secured Parties no longer have a lien on or security interest in the System Lease Obligations. If any payment to any of the Entitled Party, the Company, the Collateral Agent or the Secured Parties by Sharyland or any other Person in respect of any of the System Lease Obligations is held to constitute a preference or a voidable transfer under applicable Law, or if for any other reason any such party is required to refund such payment to Sharyland or to such Person or to pay the amount thereof to any other Person, each Subordinated Lender agrees and acknowledges that the provisions set forth herein shall continue to be effective or shall be reinstated, as the case may be, to the extent of any such payment or payments.
Section 8. Restrictions on Transfers . None of the Subordinated Lenders may transfer (by sale, novation or otherwise) any of its rights or obligations under the Subordinated Indebtedness unless the transferee of such interest first agrees in writing to be bound by the terms of this Exhibit A applicable to the transferor of such interest and executes an instrument to that effect.
Section 9. Exercise of Powers .
 
9.1	After the occurrence and during the continuance of an Insolvency Event, the Entitled Party shall be entitled to exercise its rights and powers under these subordination provisions in such a manner and at such times as the Entitled Party in its absolute discretion may determine.	
 
9.2	The Subordinated Lenders alone shall be responsible for their contracts, engagements, acts, omissions, defaults and losses and for liabilities incurred by them.	
 
ERCOT T RANSMISSION A SSETS L EASE A GREEMENT
 
Exhibit A – Page 4

EXHIBIT B
INSURANCE
Subject to Section 6.2(b) of this Agreement, during the term of the Note Purchase Agreements, the Credit Agreement or until otherwise agreed by Lessee and Lessor, Lessee shall comply with the insurance requirements set forth in this Exhibit B . Capitalized terms used herein but not otherwise defined in this Agreement have the meanings assigned to such terms in the Note Purchase Agreements or the Credit Agreement, as applicable.
 
A.	Coverages .	
Property Insurance (Operational):

Cover:	  	All assets comprising the ERCOT Transmission Assets against “all risks” of physical loss or damage (including but not limited to machinery breakdown, earthquake, flood, windstorm and terrorism)	
		
Principal Exclusions:	  	War and civil war	
		
	  	Nuclear risks	
		
	  	Theft and mysterious disappearance revealed in the course of inventory undertaking	
		
	  	The cost of making good wear and tear, gradual deterioration, etc., but not the consequential damage	
		
	  	Consequential loss not otherwise excluded	
		
	  	Fraud and misrepresentation	
		
Sum Insured:	  	Full replacement cost subject to the following sublimits.	
		
Sublimits:	  	Earthquake – full replacement cost
Flood – full replacement cost
Windstorm – full replacement cost	
		
Deductible:	  	$250,000 per loss or occurrence, except $250,000 earthquake and flood and $250,000 windstorm	
		
Insured:	  	Lessee
Lessor	
		
Additional Insured:	  	The Prudential Insurance Company of America, as Purchaser Prudential Retirement Insurance and Annuity Company, as Purchaser Royal Bank of Canada, as Lender	
 
ERCOT T RANSMISSION A SSETS L EASE A GREEMENT
 
Exhibit B – Page 1

			
	  	The Bank of New York Mellon Trust Company, N. A., as Collateral Agent
The Secured Parties to the Note Purchase Agreement
The Secured Parties to the Credit Agreement	
		
Mortgagee:	  	Bank of New York Mellon Trust Company, N.A. as Collateral Agent for the benefit of the Secured Parties	
		
Loss Payee:	  	The Bank of New York Mellon Trust Company, N.A. as Collateral Agent, as first loss payee	
		
Conditions:	  	30 days’ notice of cancellation or non-renewal except 10 days for non-payment of premium	
		
	  	Acceptable loss payable clause	
		
	  	Non-vitiation wording in favor of the Collateral Agent and the Secured Parties	
		
	  	Waiver of subrogation in favor of the additional insureds	
	
General Liability Insurance:	
		
Cover:	  	Lessee against any liability arising out of claims for personal injury and property damage.	
		
Sum Insured:	  	$1,000,000 per occurrence up to a minimum of $2,000,000 aggregate limit (except that the fire damage legal liability coverage may be limited to $100,000 per fire and the medical expense coverage may be limited to $5,000 for any one injured person).	
		
Insured:	  	Lessee
Lessor	
		
Additional Insured:	  	The Prudential Insurance Company of America, as Purchaser Prudential Retirement Insurance and Annuity Company, as Purchaser The Bank of New York Mellon Trust Company, N. A., as Collateral Agent Royal Bank of Canada, as Lender The Secured Parties	
		
Conditions:	  	Occurrence policy wording or Aegis claims-first-made policy form Worldwide territory	
 
ERCOT T RANSMISSION A SSETS L EASE A GREEMENT
 
Exhibit B – Page 2

			
Automobile Liability Insurance:	
		
Cover:	  	Lessee for liability arising out of claims for personal injury (including bodily injury and death) and property damage covering all owned (if any), leased, non-owned and hired vehicles of Lessee, including loading and unloading.	
		
Sum Insured:	  	$1,000,000 each accident.	
		
Deductible:	  	$1,000 each accident.	
		
Insured:	  	Lessee
Lessor	
		
Additional Insured:	  	The Prudential Insurance Company of America, as Purchaser Prudential Retirement Insurance and Annuity Company, as Purchaser The Bank of New York Mellon Trust Company, N. A., as Collateral Agent Royal Bank of Canada, as Lender The Secured Parties	
	
Workers’ Compensation and Employer’s Liability Insurance:	
		
Cover:	  	Lessee will maintain workers’ compensation insurance as required by applicable state laws and employer’s liability insurance insuring Lessee for liability arising out of injury to or death of employees.	
		
Sum Insured:	  	$1,000,000 each accident.	
		
Insured:	  	Lessee
Lessor	
	
Excess or Umbrella Insurance:	
		
Cover:	  	Insurance covering claims in excess of the underlying insurance described in the foregoing.	
		
Sum Insured:	  	$25,000,000 each occurrence and in the aggregate	
		
Deductible:	  	$1,000,000 any one occurrence or amount of underlying insurance.	
		
Insured:	  	Lessee
Lessor	
		
Additional Insured:	  	The Prudential Insurance Company of America, as Purchaser Prudential Retirement Insurance and Annuity Company, as Purchaser The Bank of New York Mellon Trust Company, N. A., as Collateral Agent	
	  	Royal Bank of Canada, as Lender
The Secured Parties	
		
Conditions:	  	Following form	
 
ERCOT T RANSMISSION A SSETS L EASE A GREEMENT
 
Exhibit B – Page 3

B.	Company Conditions and Requirements.	
1. Loss Notification . Lessee shall promptly notify Lessor of any single loss or event likely to give rise to a claim against an insurer for an amount in excess of $1,000,000 covered by any insurance policies required by this Exhibit B .
2. Payment of Loss Proceeds . The Collateral Agent, on behalf of the Secured Parties, shall be named as the first loss payee in applicable insurance policies (pursuant to a standard lender’s loss payable endorsement equivalent to a CP 1218).
3. Compliance With Policy Requirements . Lessee shall not violate or permit to be violated any of the conditions, provisions or requirements of any insurance policy required by this Exhibit B , and Lessee shall perform, satisfy and comply with, or cause to be performed, satisfied and complied with, all conditions, provisions and requirements of all insurance policies.
4. Waiver of Subrogation . Lessee hereby waives any and every claim for recovery from the Secured Parties for any and all loss or damage covered by any of the insurance policies to be maintained under this Agreement to the extent that such loss or damage is recovered under any such policy. If the foregoing waiver will preclude the assignment of any such claim to the extent of such recovery, by subrogation (or otherwise), to an insurance company (or other Person), Lessee shall give written notice of the terms of such waiver to each insurance company which has issued, or which may issue in the future, any such policy of insurance (if such notice is required by the insurance policy) and shall cause each such insurance policy to be properly endorsed by Lessee to, or to otherwise contain one or more provisions that prevent the invalidation of the insurance coverage provided thereby by reason of such waiver.
5. Notices . Lessee will advise Lessor in writing promptly of (i) any material changes in the coverage or limits provided under any policy required by Section 6.2 of this Agreement and this Exhibit B and (ii) any default in the payment of any premium and of any other act or omission on the part of Lessee which may invalidate or render unenforceable, in whole or in part, any insurance being maintained by Lessee pursuant to this Exhibit B .
C. Insurance Policy Conditions and Requirements .
1. Permitted Insurers . Lessee shall obtain the insurance required by this Exhibit B from responsible insurance companies authorized to do business in Texas (if required by law or regulation) with an A.M. Best Insurance Reports rating of A-, 8 or better.
2. Control of Loss . If commercially feasible all policies of insurance required to be maintained pursuant to this Exhibit B , wherein more than one insurer provides the coverage on any single policy, shall have a clause (or a separate agreement among the insurers) wherein all insurers have agreed that the lead insurer shall have full settlement authority on behalf of the other insurers.
 
ERCOT T RANSMISSION A SSETS L EASE A GREEMENT
 
Exhibit B – Page 4

3. Loss Survey . All policies of insurance required to be maintained pursuant to this Exhibit B , wherein more than one insurer provides the coverage on any single policy, shall have a clause (or a separate agreement among the insurers) wherein all insurers have agreed upon the employment of a single firm to survey and investigate all losses on behalf of the insurers.
4. Policy Cancellation and Change . All policies of insurance required to be maintained pursuant to this Exhibit B shall be endorsed so that if at any time they are canceled, or their coverage is reduced (by any party including the insured) so as to affect the interests of the Collateral Agent, the Holders and any other Secured Party, such cancellation or reduction shall not be effective as to the Secured Parties for thirty (30) days, except for non-payment of premium which shall be for ten (10) days, after receipt by the Collateral Agent and the Secured Parties of written notice from such insurer of such cancellation or reduction.
5. Miscellaneous Policy Provisions . All insurance policies providing operational property damage, (i) shall name the Collateral Agent, on behalf of the Secured Parties, as the first loss payee, (ii) shall include a Lender’s loss payable clause in favor of the Collateral Agent, on behalf of the Secured Parties.
6. Separation of Interests . All policies (other than in respect to workers compensation insurance) shall insure the interests of the Secured Parties regardless of any breach or violation by Lessee or any other party of warranties, declarations or conditions contained in such policies, any action or inaction of Lessee or others, or any foreclosure relating to the ERCOT Transmission Assets.
7. Waiver of Subrogation . All policies of insurance required by this Exhibit B shall provide for waivers of subrogation in favor of the Secured Parties and their respective officers and employees.
8. Liability Insurance Endorsements . All policies of liability insurance required to be maintained by Lessee shall be endorsed as follows:
(i) To name the Secured Parties as additional insureds;
(ii) To provide a severability of interests and cross liability clause; and
(iii) That the insurance shall be primary and not excess to or contributing with any insurance or self-insurance maintained by Lessee.
D. Acceptable Policy Terms and Conditions . All policies of insurance required to be maintained pursuant to this Exhibit B shall contain terms and conditions reasonably acceptable to Lessor.
 
ERCOT T RANSMISSION A SSETS L EASE A GREEMENT
 
Exhibit B – Page 5

SCHEDULE 3.2(b)
FORM OF RENT SUPPLEMENT
Rent Supplement
Pursuant to Section 3.2(b) of Lease
[Date of Supplement]
Description of assets added pursuant to Rent Supplement:
Incremental CapEx:
Lessee CapEx:
Base Rent:
Percentage Rent Percentages:
Annual Percentage Rent Breakpoints:
Revenues Attributable to Lessee CapEx:
ERCOT Transmission Rate Allocation:
Term of Rent Supplement:

Executed this      day of              , 20      .	
	
SHARYLAND UTILITIES, L.P.	
		
By:	 	 	
Name:	 	 	
Title:	 	 	
	
SHARYLAND DISTRIBUTION &	
TRANSMISSION SERVICES, L.L.C.	
		
By:	 	 	
Name:	 	 	
Title:	 	 	
 
ERCOT T RANSMISSION A SSETS L EASE A GREEMENT
 
Schedule 3.2(b)

Exhibit 10.17
EXECUTION VERSION

 
THIRD AMENDED AND RESTATED CREDIT AGREEMENT
among
SHARYLAND DISTRIBUTION & TRANSMISSION SERVICES, L.L.C.,
as Borrower,
The Several Lenders from Time to Time Parties Hereto
and
ROYAL BANK OF CANADA,
as Administrative Agent
Dated as of December 10, 2014

 

TABLE OF CONTENTS

 	 	 	  	Page	 	
			
Section 1	 	Amount and Terms of Credit	  	 	1	  	
1.1.	 	Revolving Commitment	  	 	1	  	
1.2.	 	Procedure for Revolving Loan Borrowing	  	 	1	  	
1.3.	 	Swingline Commitment	  	 	2	  	
1.4.	 	Procedure for Swingline Borrowing; Refunding of Swingline Loans	  	 	2	  	
1.5.	 	Termination or Reduction of Revolving Commitments	  	 	4	  	
1.6.	 	Conversion and Continuation Options	  	 	4	  	
1.7.	 	Limitations on Eurodollar Tranches	  	 	5	  	
1.8.	 	Interest Rates and Payment Dates	  	 	5	  	
1.9.	 	Computation of Interest and Fees	  	 	5	  	
1.10.	 	Inability to Determine Interest Rate	  	 	6	  	
1.11.	 	Pro Rata Treatment and Payments	  	 	6	  	
1.12.	 	Requirements of Law	  	 	7	  	
1.13.	 	Change of Lending Office	  	 	8	  	
1.14.	 	Indemnity	  	 	9	  	
1.15.	 	Replacement of Lenders	  	 	9	  	
1.16.	 	Defaulting Lenders	  	 	9	  	
1.17.	 	Increase in Commitments	  	 	11	  	
			
Section 2	 	Letters of Credit	  	 	12	  	
2.1.	 	L/C Commitment	  	 	12	  	
2.2.	 	Procedure for Issuance of Letter of Credit	  	 	12	  	
2.3.	 	L/C Participations	  	 	13	  	
2.4.	 	Reimbursement Obligation of the Borrower	  	 	14	  	
2.5.	 	Obligations Absolute	  	 	14	  	
2.6.	 	Letter of Credit Payments	  	 	14	  	
2.7.	 	Applications	  	 	15	  	
			
Section 3	 	Fees	  	 	15	  	
			
Section 4	 	PREPAYMENT; TAXES	  	 	15	  	
4.1.	 	Voluntary Prepayments	  	 	15	  	
4.2.	 	Mandatory Prepayments	  	 	16	  	
4.3.	 	Taxes	  	 	17	  	
			
Section 5	 	Conditions Precedent	  	 	21	  	
5.1.	 	Conditions to Effectiveness	  	 	21	  	
5.2.	 	Conditions to All Credit Events	  	 	24	  	
			
Section 6	 	Representations, Warranties and Agreements	  	 	24	  	
6.1.	 	Organization; Power and Authority	  	 	24	  	
6.2.	 	Power and Authority	  	 	24	  	
6.3.	 	Disclosure	  	 	25	  	
6.4.	 	Organization and Ownership of Interests	  	 	25	  	
6.5.	 	Financial Condition; Financial Statements	  	 	25	  	
6.6.	 	Compliance with Laws, Other Instruments, Etc.	  	 	26	  	
 
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 	 	 	  	Page	 	
			
6.7.	 	Governmental Authorizations, Etc.	  	 	26	  	
6.8.	 	Litigation; Observance of Agreements, Statutes and Orders	  	 	26	  	
6.9.	 	Taxes	  	 	27	  	
6.10.	 	Title to Property	  	 	27	  	
6.11.	 	Insurance	  	 	27	  	
6.12.	 	Licenses, Permits, Etc.; Leases; IP Rights	  	 	27	  	
6.13.	 	Compliance with ERISA	  	 	27	  	
6.14.	 	Intentionally omitted	  	 	28	  	
6.15.	 	Intentionally Omitted	  	 	28	  	
6.16.	 	Foreign Assets Control Regulations, Etc.	  	 	28	  	
6.17.	 	Status under Certain Statutes	  	 	29	  	
6.18.	 	Environmental Matters	  	 	29	  	
6.19.	 	Force Majeure Events; Employees	  	 	30	  	
6.20.	 	Collateral	  	 	30	  	
6.21.	 	Collateral Agency Agreement	  	 	30	  	
6.22.	 	Margin Regulations	  	 	30	  	
6.23.	 	OFAC	  	 	30	  	
			
Section 7	 	Affirmative Covenants	  	 	30	  	
7.1.	 	Information Covenants	  	 	31	  	
7.2.	 	Use of Proceeds	  	 	34	  	
7.3.	 	Compliance with Law	  	 	34	  	
7.4.	 	Insurance	  	 	34	  	
7.5.	 	Maintenance of Properties	  	 	34	  	
7.6.	 	Payment of Taxes and Claims	  	 	35	  	
7.7.	 	Existence, Etc.	  	 	35	  	
7.8.	 	Books and Records; Inspection Rights	  	 	35	  	
7.9.	 	Collateral; Further Assurances	  	 	35	  	
7.10.	 	Material Project Documents	  	 	37	  	
7.11.	 	Financial Ratios	  	 	37	  	
			
Section 8	 	Negative Covenants	  	 	37	  	
8.1.	 	Transactions with Affiliates	  	 	37	  	
8.2.	 	Merger, Consolidation, etc.	  	 	38	  	
8.3.	 	Line of Business	  	 	38	  	
8.4.	 	Terrorism Sanctions Regulations	  	 	38	  	
8.5.	 	Liens	  	 	39	  	
8.6.	 	Indebtedness	  	 	40	  	
8.7.	 	Loans, Advances, Investments and Contingent Liabilities	  	 	41	  	
8.8.	 	No Subsidiaries	  	 	41	  	
8.9.	 	Restricted Payments	  	 	41	  	
8.10.	 	Sale of Assets, etc.	  	 	41	  	
8.11.	 	Sale or Discount of Receivables	  	 	42	  	
8.12.	 	Amendments to Organizational Documents	  	 	42	  	
8.13.	 	Sale and Lease-Back	  	 	43	  	
8.14.	 	ERISA Compliance	  	 	43	  	
8.15.	 	No Margin Stock	  	 	44	  	
8.16.	 	Material Project Documents	  	 	44	  	
8.17.	 	Regulation	  	 	44	  	
8.18.	 	Swaps	  	 	45	  	
8.19.	 	Additional Financial Covenants	  	 	45	  	
8.20.	 	Burdensome Agreements	  	 	45	  	
 
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 	 	 	  	Page	 	
			
Section 9	 	Events of Default	  	 	46	  	
			
Section 10	 	Definitions	  	 	49	  	
10.1.	 	Defined Terms	  	 	49	  	
10.2.	 	Other Definitional Provisions	  	 	74	  	
			
Section 11	 	THE ADMINISTRATIVE AGENT	  	 	75	  	
11.1.	 	Appointment	  	 	75	  	
11.2.	 	Delegation of Duties	  	 	75	  	
11.3.	 	Exculpatory Provisions	  	 	75	  	
11.4.	 	Reliance by Administrative Agent	  	 	75	  	
11.5.	 	Notice of Default	  	 	76	  	
11.6.	 	Non-Reliance on Administrative Agent and Other Lenders	  	 	76	  	
11.7.	 	Indemnification	  	 	76	  	
11.8.	 	The Administrative Agent in Its Individual Capacity	  	 	77	  	
11.9.	 	Successor Administrative Agent	  	 	77	  	
11.10.	 	Arranger	  	 	77	  	
11.11.	 	Credit Bidding	  	 	77	  	
			
Section 12	 	Miscellaneous	  	 	78	  	
12.1.	 	Payment of Expenses, etc.	  	 	78	  	
12.2.	 	Right of Setoff	  	 	79	  	
12.3.	 	Notices	  	 	79	  	
12.4.	 	Benefit of Agreement	  	 	80	  	
12.5.	 	No Waiver; Remedies Cumulative	  	 	82	  	
12.6.	 	Payments Pro Rata	  	 	82	  	
12.7.	 	Calculations; Computations	  	 	83	  	
12.8.	 	Governing Law; Submission to Jurisdiction; Venue; Waiver of Jury Trial	  	 	83	  	
12.9.	 	USA PATRIOT Act	  	 	84	  	
12.10.	 	Counterparts	  	 	84	  	
12.11.	 	Headings	  	 	84	  	
12.12.	 	Amendment or Waiver	  	 	84	  	
12.13.	 	Survival	  	 	85	  	
12.14.	 	Domicile of Loans	  	 	85	  	
12.15.	 	Confidentiality	  	 	85	  	
12.16.	 	Integration	  	 	86	  	
12.17.	 	Acknowledgments	  	 	86	  	
12.18.	 	Severability	  	 	87	  	
12.19.	 	Amendment and Restatement	  	 	87	  	
 
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ANNEXES :	
		
1.1A	  	Lenders’ Commitments and Addresses	
6.4	  	Organization and Ownership of Interests	
6.7	  	Governmental Authorizations	
6.12	  	Leases	
8.5	  	Liens	
8.20	  	Burdensome Agreements	
	
EXHIBITS :	
		
A	  	Form of Assignment Agreement	
B	  	Form of Closing Certificate	
C	  	Form of Opinion of Baker Botts L.L.P.	
D	  	Form of Compliance Certificate	
E	  	Form of Opinion of Sutherland Asbill & Brennan LLP	
F-1 ~ 4	  	Forms of Tax Certificates	
G	  	Subordination Terms	
H	  	Form of Subsidiary Guaranty	
I	  	Form of Prepayment Notice	
J-1	  	Form of Notice of Revolving Loan Borrowing	
J-2	  	Form of Notice of Swingline Borrowing	
K	  	Form of Notice of Conversion/Continuation	

THIRD AMENDED AND RESTATED CREDIT AGREEMENT, dated as of December 10, 2014, among SHARYLAND DISTRIBUTION & TRANSMISSION SERVICES, L.L.C. (the “ Borrower ”), a Texas limited liability company and a Subsidiary of Transmission and Distribution Company L.L.C. (“ Holdings ”), the several lenders from time to time parties hereto (the “ Lenders ”), and ROYAL BANK OF CANADA (the “ Administrative Agent ”). Unless otherwise defined herein, all capitalized terms used herein and defined in Section 10 are used herein as so defined.
W I T N E S S E T H :
WHEREAS, the Borrower entered into that certain Second Amended and Restated Credit Agreement, dated as of June 28, 2013, between the Borrower, the Administrative Agent and the several lenders from time to time parties thereto (the “ Existing Lenders ”) (as amended, supplemented or modified from time to time prior to the date hereof, the “ Original Credit Agreement ”); and
WHEREAS, subject to and on the terms and conditions set forth herein, the parties thereto wish to amend and restate the Original Credit Agreement in its entirety upon the terms and conditions set forth herein, with the Original Credit Agreement, as so amended and restated, and as may be further amended, restated, supplemented or otherwise modified, being hereinafter referred to as the “ Agreement ”;
NOW, THEREFORE, in consideration of the premises and the mutual covenants herein set forth, the Existing Lenders and the Borrower agree that the Original Credit Agreement is hereby amended and restated as of the Restatement Date (as hereinafter defined) to read in its entirety as follows:
SECTION 1 AMOUNT AND TERMS OF CREDIT .
1.1. Revolving Commitment .
(a) Subject to the terms and conditions hereof, each Revolving Lender severally agrees to make revolving credit loans in U.S. dollars (“ Revolving Loans ”) to the Borrower from time to time during the Revolving Commitment Period in an aggregate principal amount at any one time outstanding which, when added to such Lender’s Revolving Percentage of the sum of (i) the Letter of Credit Outstandings and (ii) the aggregate principal amount of the Swingline Loans then outstanding, does not exceed the amount of such Lender’s Revolving Commitment. During the Revolving Commitment Period the Borrower may use the Revolving Commitments by borrowing, prepaying the Revolving Loans in whole or in part, and reborrowing, all in accordance with the terms and conditions hereof. The Revolving Loans may from time to time be Eurodollar Loans or ABR Loans, as determined by the Borrower and notified to the Administrative Agent in accordance with Sections 1.2 and 1.6, provided that all Revolving Loans made as part of the same Borrowing shall, unless otherwise specifically provided herein, consist of Revolving Loans of the same Type.
(b) The Borrower shall repay all outstanding Revolving Loans, together with all accrued and unpaid interest thereon and all other amounts payable hereunder, on the Revolving Facility Final Maturity Date.
1.2. Procedure for Revolving Loan Borrowing .
The Borrower may borrow under the Revolving Commitment during the Revolving Commitment Period on any Business Day, provided that the Borrower shall give the Administrative

Agent irrevocable notice substantially in the form of Exhibit J-1 (which notice must be received by the Administrative Agent prior to 11:00 A.M., New York City time, (a) three Business Days prior to the requested Borrowing Date, in the case of Eurodollar Loans, or (b) one Business Day prior to the requested Borrowing Date, in the case of ABR Loans) (provided that any such notice of a Borrowing of ABR Loans under the Revolving Facility to finance payments required by Section 2.4 and Section 5.1(e) may be given not later than 10:00 A.M., New York City time, on the Borrowing Date), specifying (i) the amount and Type of Revolving Loans to be borrowed, (ii) the requested Borrowing Date and (iii) in the case of Eurodollar Loans, the respective amounts of each such Type of Loan and the respective lengths of the initial Interest Period therefor. Any Revolving Loans made on the Restatement Date shall initially be ABR Loans. Each Borrowing under the Revolving Commitment shall be in an amount equal to (x) in the case of ABR Loans, $500,000 or a whole multiple thereof (or, if the Total Unutilized Revolving Commitments at such time are less than $500,000, such lesser amount) and (y) in the case of Eurodollar Loans, $500,000 or a whole multiple of $100,000 in excess thereof; provided, that (i) the Swingline Lender may request, on behalf of the Borrower, ABR Loans in other amounts pursuant to Section 1.4 and (ii) the Borrower may request ABR Loans in an amount required to finance payments required by Section 2.4 and Section 5.1(e). Upon receipt of any such notice from the Borrower, the Administrative Agent shall promptly notify each Revolving Lender thereof. Each Revolving Lender will make the amount of its pro rata share of each Borrowing available to the Administrative Agent for the account of the Borrower at the Funding Office prior to 12:00 Noon, New York City time, on the Borrowing Date requested by the Borrower in funds immediately available to the Administrative Agent. The Administrative Agent shall make the proceeds of such Borrowing available to the Borrower on such Borrowing Date by depositing such proceeds in the Specified Account of the Borrower on such Borrowing Date in immediately available funds.
1.3. Swingline Commitment .
(a) Subject to the terms and conditions hereof, the Swingline Lender agrees to make a portion of the credit otherwise available to the Borrower under the Revolving Commitments from time to time during the Revolving Commitment Period by making swing line loans (“ Swingline Loans ”) to the Borrower; provided that (i) the aggregate principal amount of Swingline Loans outstanding at any time shall not exceed the Swingline Commitment then in effect (notwithstanding that the Swingline Loans outstanding at any time, when aggregated with the Swingline Lender’s other outstanding Revolving Loans, may exceed the Swingline Commitment then in effect) and (ii) the Borrower shall not request, and the Swingline Lender shall not make, any Swingline Loan if, after giving effect to the making of such Swingline Loan, the Total Revolving Extensions of Credit would exceed the Total Revolving Commitments. During the Revolving Commitment Period, the Borrower may use the Swingline Commitment by borrowing, repaying and reborrowing, all in accordance with the terms and conditions hereof. Swingline Loans shall be ABR Loans only.
(b) The Borrower shall repay to the Swingline Lender the then unpaid principal amount of each Swingline Loan on the earlier of the Revolving Facility Final Maturity Date and the first date after such Swingline Loan is made that is the 15th or last day of a calendar month and is at least two Business Days after such Swingline Loan is made; provided that on each date that a Revolving Loan is borrowed, the Borrower shall repay all Swingline Loans then outstanding.
1.4. Procedure for Swingline Borrowing; Refunding of Swingline Loans .
(a) Whenever the Borrower desires that the Swingline Lender make Swingline Loans it shall give the Swingline Lender irrevocable telephonic notice confirmed promptly in writing substantially in the form of Exhibit J-2 (which telephonic notice must be received by the Swingline Lender not later than 1:00 P.M., New York City time, on the proposed Borrowing Date), specifying (i)
 
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the amount to be borrowed and (ii) the requested Borrowing Date (which shall be a Business Day during the Revolving Commitment Period). Each Borrowing under the Swingline Commitment shall be in an amount equal to $250,000 or a whole multiple of $50,000 in excess thereof. Not later than 3:00 P.M., New York City time, on the requested Borrowing Date, the Swingline Lender shall make available to the Administrative Agent at the Funding Office an amount in immediately available funds equal to the amount of the Swingline Loan to be made by the Swingline Lender. The Administrative Agent shall make the proceeds of such Swingline Loan available to the Borrower on such Borrowing Date by depositing such proceeds in the Specified Account of the Borrower on such Borrowing Date in immediately available funds.
(b) The Swingline Lender, at any time and from time to time in its sole and absolute discretion may, on behalf of the Borrower (which hereby irrevocably directs the Swingline Lender to act on its behalf), on one Business Day’s notice given by the Swingline Lender no later than 12:00 Noon, New York City time, request each Revolving Lender to make, and each Revolving Lender hereby agrees to make, a Revolving Loan, in an amount equal to such Revolving Lender’s Revolving Percentage of the aggregate amount of the Swingline Loans (the “Refunded Swingline Loans”) outstanding on the date of such notice, to repay the Swingline Lender. Each Revolving Lender shall make the amount of such Revolving Loan available to the Administrative Agent at the Funding Office in immediately available funds, not later than 10:00 A.M., New York City time, one Business Day after the date of such notice. The proceeds of such Revolving Loans shall be immediately made available by the Administrative Agent to the Swingline Lender for application by the Swingline Lender to the repayment of the Refunded Swingline Loans. The Borrower irrevocably authorizes the Swingline Lender to charge the Specified Account (up to the amount available in each such account) in order to immediately pay the amount of such Refunded Swingline Loans to the extent amounts received from the Revolving Lenders are not sufficient to repay in full such Refunded Swingline Loans.
(c) If prior to the time a Revolving Loan would have otherwise been made pursuant to Section 1.4(b), one of the events described in Section 9(j) or Section 9(k) shall have occurred and be continuing with respect to the Borrower or if for any other reason, as determined by the Swingline Lender in its sole discretion, Revolving Loans may not be made as contemplated by Section 1.4(b), each Revolving Lender shall, on the date such Revolving Loan was to have been made pursuant to the notice referred to in Section 1.4(b), purchase for cash an undivided participating interest in the then outstanding Swingline Loans by paying to the Swingline Lender an amount (the “ Swingline Participation Amount ”) equal to (i) such Revolving Lender’s Revolving Percentage times (ii) the sum of the aggregate principal amount of Swingline Loans then outstanding that were to have been repaid with such Revolving Loans.
(d) Whenever, at any time after the Swingline Lender has received from any Revolving Lender such Lender’s Swingline Participation Amount, the Swingline Lender receives any payment on account of the Swingline Loans, the Swingline Lender will distribute to such Lender its Swingline Participation Amount (appropriately adjusted, in the case of interest payments, to reflect the period of time during which such Lender’s participating interest was outstanding and funded and, in the case of principal and interest payments, to reflect such Lender’s pro rata portion of such payment if such payment is not sufficient to pay the principal of and interest on all Swingline Loans then due); provided , however , that in the event that such payment received by the Swingline Lender is required to be returned, such Revolving Lender will return to the Swingline Lender any portion thereof previously distributed to it by the Swingline Lender.
(e) Each Revolving Lender’s obligation to make the Loans referred to in Section 1.4(b) and to purchase participating interests pursuant to Section 1.4(c) shall be absolute and unconditional and shall not be affected by any circumstance, including (i) any setoff, counterclaim,
 
3

recoupment, defense or other right that such Revolving Lender or the Borrower may have against the Swingline Lender, the Borrower or any other Person for any reason whatsoever, (ii) the occurrence or continuance of a Default or an Event of Default or the failure to satisfy any of the other conditions specified in Section 5, (iii) any adverse change in the condition (financial or otherwise) of the Borrower, (iv) any breach of this Agreement or any other Credit Documents by the Borrower, any other Revolving Lender or (v) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing.
1.5. Termination or Reduction of Revolving Commitments .
The Borrower shall have the right, upon not less than three Business Days’ notice to the Administrative Agent, to terminate the Revolving Commitments or, from time to time, to reduce the amount of the Revolving Commitments; provided that no such termination or reduction of Revolving Commitments shall be permitted if, after giving effect thereto and to any prepayments of the Revolving Loans and Swingline Loans made on the effective date thereof, the Total Revolving Extensions of Credit would exceed the Total Revolving Commitments. Any partial reduction of the Revolving Commitments shall be in an amount equal to $500,000, or a whole multiple thereof, and shall reduce permanently the Revolving Commitments then in effect.
1.6. Conversion and Continuation Options .
(a) The Borrower may elect from time to time to convert Eurodollar Loans to ABR Loans by giving the Administrative Agent prior irrevocable notice of such election substantially in the form of Exhibit K no later than 11:00 A.M., New York City time, on the Business Day preceding the proposed conversion date, provided that any such conversion of Eurodollar Loans may only be made on the last day of an Interest Period with respect thereto. The Borrower may elect from time to time to convert ABR Loans to Eurodollar Loans by giving the Administrative Agent prior irrevocable notice of such election substantially in the form of Exhibit K no later than 11:00 A.M., New York City time, on the third Business Day preceding the proposed conversion date (which notice shall specify the length of the initial Interest Period therefor), provided that no ABR Loan under a particular Facility may be converted into a Eurodollar Loan when any Event of Default has occurred and is continuing and the Administrative Agent or the Required Lenders have determined in its or their sole discretion not to permit such conversions. Upon receipt of any such notice the Administrative Agent shall promptly notify each relevant Lender thereof.
(b) Any Eurodollar Loan may be continued as such upon the expiration of the then current Interest Period with respect thereto by the Borrower giving irrevocable notice to the Administrative Agent substantially in the form of Exhibit K, in accordance with the applicable provisions of the term “Interest Period” set forth in Section 10, of the length of the next Interest Period to be applicable to such Eurodollar Loans, provided that no Eurodollar Loan under a particular Facility may be continued as such (i) when any Event of Default has occurred and is continuing and the Administrative Agent has or the Required Lenders have determined in its or their sole discretion not to permit such continuations or (ii) if an Event of Default specified in Section 9(j) or 9(k) with respect to the Borrower is in existence, and provided , further , that if the Borrower shall fail to give any required notice as described above in this paragraph or if such continuation is not permitted pursuant to the preceding proviso such Loans shall be automatically converted to ABR Loans on the last day of such then expiring Interest Period. Upon receipt of any such notice the Administrative Agent shall promptly notify each relevant Lender thereof.
 
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1.7. Limitations on Eurodollar Tranches .
Notwithstanding anything to the contrary in this Agreement, all Borrowings, conversions and continuations of Eurodollar Loans and all selections of Interest Periods shall be in such amounts and be made pursuant to such elections so that, (a) after giving effect thereto, the aggregate principal amount of the Eurodollar Loans comprising each Eurodollar Tranche shall be equal to $500,000 or a whole multiple of $100,000 in excess thereof and (b) no more than seven Eurodollar Tranches shall be outstanding at any one time.
1.8. Interest Rates and Payment Dates . (a) Each Eurodollar Loan shall bear interest for each day during each Interest Period with respect thereto at a rate per annum equal to the Eurodollar Rate determined for such day plus the Applicable Margin.
(b) Each ABR Loan shall bear interest at a rate per annum equal to the ABR plus the Applicable Margin.
(c) (i) If all or a portion of the principal amount of any Loan or Reimbursement Obligation shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such amount shall bear interest at a rate per annum equal to (x) in the case of the Revolving Loans, the rate that would otherwise be applicable thereto pursuant to the foregoing provisions of this Section plus 2% or (y) in the case of Reimbursement Obligations, the rate applicable to ABR Loans under the Revolving Facility plus 2%, and (ii) if all or a portion of any interest payable on any Loan or Reimbursement Obligation or any Commitment Fee or other amount payable hereunder shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate per annum equal to the rate then applicable to ABR Loans under the Revolving Facility plus 2%, in each case, with respect to clauses (i) and (ii) above, from the date of such non-payment until such amount is paid in full (as well after as before judgment).
(d) Interest shall be payable in arrears on each Interest Payment Date, provided that interest accruing pursuant to paragraph (c) of this Section shall be payable from time to time on demand.
1.9. Computation of Interest and Fees . (a) Interest and fees payable pursuant hereto shall be calculated on the basis of a 360-day year for the actual days elapsed, except that, with respect to ABR Loans the rate of interest on which is calculated on the basis of the Prime Rate, the interest thereon shall be calculated on the basis of a 365- (or 366-, as the case may be) day year for the actual days elapsed. The Administrative Agent shall as soon as practicable notify the Borrower and the relevant Lenders of each determination of a Eurodollar Rate. Any change in the interest rate on a Loan resulting from a change in the ABR or the Eurocurrency Reserve Requirements shall become effective as of the opening of business on the day on which such change becomes effective. The Administrative Agent shall as soon as practicable notify the Borrower and the relevant Lenders of the effective date and the amount of each such change in interest rate.
(b) Each determination of an interest rate by the Administrative Agent pursuant to any provision of this Agreement shall be conclusive and binding on the Borrower and the Lenders in the absence of manifest error. The Administrative Agent shall, at the request of the Borrower, deliver to the Borrower a statement showing the quotations used by the Administrative Agent in determining any interest rate pursuant to Section 1.8(a).
 
5

1.10. Inability to Determine Interest Rate .
If prior to the first day of any Interest Period for any Eurodollar Loan:
(a) the Administrative Agent shall have determined (which determination shall be conclusive and binding upon the Borrower) that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for such Interest Period, or
(b) the Administrative Agent shall have received notice from the Required Lenders that the Eurodollar Rate determined or to be determined for such Interest Period will not adequately and fairly reflect the cost to such Lenders (as conclusively certified by such Lenders) of making or maintaining their affected Loans during such Interest Period,
(c) the Administrative Agent shall give telecopy or telephonic notice thereof to the Borrower and the relevant Lenders as soon as practicable thereafter. If such notice is given (x) any Eurodollar Loans under the Revolving Facility requested to be made on the first day of such Interest Period shall be made as ABR Loans, (y) any Loans under the Revolving Facility that were to have been converted on the first day of such Interest Period to Eurodollar Loans shall be continued as ABR Loans and (z) any outstanding Eurodollar Loans under the Revolving Facility shall be converted, on the last day of the then current Interest Period with respect to such Eurodollar Loans, to ABR Loans. Until such notice has been withdrawn by the Administrative Agent, no further Eurodollar Loans under the Revolving Facility shall be made or continued as such, nor shall the Borrower have the right to convert Loans under the Revolving Facility to Eurodollar Loans.
1.11. Pro Rata Treatment and Payments .
(a) Each Borrowing by the Borrower from the Lenders hereunder, each payment by the Borrower on account of any Commitment Fee and any reduction of the Commitments of the Lenders shall be made pro rata.
(b) All payments (including prepayments) to be made by the Borrower hereunder, whether on account of principal, interest, fees or otherwise, shall be made without setoff or counterclaim and shall be made prior to 1:00 P.M., New York City time, on the due date thereof to the Administrative Agent, for the account of the Lenders, at the Funding Office, in Dollars and in immediately available funds. The Administrative Agent shall distribute such payments to each relevant Lender promptly upon receipt in like funds as received, net of any amounts owing by such Lender pursuant to Section 11.7. If any payment hereunder (other than payments on the Eurodollar Loans) becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day. If any payment on a Eurodollar Loan becomes due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day unless the result of such extension would be to extend such payment into another calendar month, in which event such payment shall be made on the immediately preceding Business Day. In the case of any extension of any payment of principal pursuant to the preceding two sentences, interest thereon shall be payable at the then applicable rate during such extension.
(c) Unless the Administrative Agent shall have been notified in writing by any Lender prior to a Borrowing that such Lender will not make the amount that would constitute its share of such Borrowing available to the Administrative Agent, the Administrative Agent may assume that such Lender is making such amount available to the Administrative Agent, and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower a corresponding amount. If such amount is not made available to the Administrative Agent by the required time on the Borrowing Date therefor, such Lender shall pay to the Administrative Agent, on demand, such amount with interest thereon, at a rate equal to the greater of (i) the Federal Funds Effective Rate and (ii) a rate determined by the Administrative Agent in accordance with banking industry rules on interbank
 
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compensation, for the period until such Lender makes such amount immediately available to the Administrative Agent. A certificate of the Administrative Agent submitted to any Lender with respect to any amounts owing under this paragraph shall be conclusive in the absence of manifest error. If such Lender’s share of such Borrowing is not made available to the Administrative Agent by such Lender within three Business Days after such Borrowing Date, the Administrative Agent shall also be entitled to recover such amount with interest thereon at the rate per annum applicable to ABR Loans under the Revolving Facility, on demand, from the Borrower.
(d) Unless the Administrative Agent shall have been notified in writing by the Borrower prior to the date of any payment due to be made by the Borrower hereunder that the Borrower will not make such payment to the Administrative Agent, the Administrative Agent may assume that the Borrower is making such payment, and the Administrative Agent may, but shall not be required to, in reliance upon such assumption, make available to the Lenders their respective pro rata shares of a corresponding amount. If such payment is not made to the Administrative Agent by the Borrower within three Business Days after such due date, the Administrative Agent shall be entitled to recover, on demand, from each Lender to which any amount which was made available pursuant to the preceding sentence, such amount with interest thereon at the rate per annum equal to the daily average Federal Funds Effective Rate. Nothing herein shall be deemed to limit the rights of the Administrative Agent or any Lender against the Borrower.
(e) If any Lender shall fail to make any payment required to be made by it pursuant to Section 1.4(b), 1.4(c), 1.11(d), 1.11(e), 2.3(a), 4.3(e) or 11.7, then the Administrative Agent may, in its discretion and notwithstanding any contrary provision hereof, (i) apply any amounts thereafter received by the Administrative Agent for the account of such Lender for the benefit of the Administrative Agent, the Swingline Lender or the Issuing Lender to satisfy such Lender’s obligations to it under such Sections until all such unsatisfied obligations are fully paid, and/or (ii) hold any such amounts in a segregated account as cash collateral for, and application to, any future funding obligations of such Lender under any such Section, in the case of each of clauses (i) and (ii) above, in any order as determined by the Administrative Agent in its discretion.
1.12. Requirements of Law .
(a) If the adoption or taking effect of or any change in any Requirement of Law or in the implementation, administration, interpretation or application thereof or compliance by any Lender or other Credit Party with any request or directive (whether or not having the force of law) from any central bank or other Governmental Entity made subsequent to the date hereof:
(i) shall subject any Credit Party to any Taxes (other than (A) Indemnified Taxes, (B) Taxes described in clauses (b) through (d) of the definition of Excluded Taxes and (C) Connection Income Taxes) on its loans, loan principal, letters of credit, commitments, or other obligations, or its deposits, reserves, other liabilities or capital attributable thereto;
(ii) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan, insurance charge or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit (or participations therein) by, or any other acquisition of funds by, any office of such Lender that is not otherwise included in the determination of the Eurodollar Rate; or
(iii) shall impose on such Lender any other condition, cost or expense (other than Taxes);
 
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and the result of any of the foregoing is to increase the cost to such Lender or such other Credit Party, by an amount that such Lender or other Credit Party deems to be material, of making, converting into, continuing or maintaining Loans or issuing or participating in Letters of Credit, or to reduce any amount receivable hereunder in respect thereof, then, in any such case, the Borrower shall promptly pay such Lender or such other Credit Party, upon its demand, any additional amounts necessary to compensate such Lender or such other Credit Party for such increased cost or reduced amount receivable. If any Lender or such other Credit Party becomes entitled to claim any additional amounts pursuant to this paragraph, it shall promptly notify the Borrower (with a copy to the Administrative Agent) of the event by reason of which it has become so entitled.
(b) If any Lender shall have determined that the adoption of or any change in any Requirement of Law regarding capital or liquidity requirements or in the interpretation or application thereof or compliance by such Lender or any corporation controlling such Lender with any request or directive regarding capital or liquidity requirements (whether or not having the force of law) from any Governmental Entity made subsequent to the date hereof shall have the effect of reducing the rate of return on such Lender’s or such corporation’s capital as a consequence of its obligations hereunder or under or in respect of any Letter of Credit to a level below that which such Lender or such corporation could have achieved but for such adoption, change or compliance (taking into consideration such Lender’s or such corporation’s policies with respect to capital adequacy or liquidity) by an amount deemed by such Lender to be material, then from time to time, after submission by such Lender to the Borrower (with a copy to the Administrative Agent) of a written request therefor, the Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender or such corporation for such reduction.
(c) Notwithstanding anything herein to the contrary, (i) all requests, rules, guidelines, requirements and directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or by United States or foreign regulatory authorities, in each case pursuant to Basel III, and (ii) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines, requirements and directives thereunder or issued in connection therewith or in implementation thereof, shall in each case be deemed to be a change in a Requirement of Law, regardless of the date enacted, adopted, issued or implemented.
(d) A certificate as to any additional amounts payable pursuant to this Section submitted by any Lender to the Borrower (with a copy to the Administrative Agent) shall be conclusive in the absence of manifest error. Notwithstanding anything to the contrary in this Section, the Borrower shall not be required to compensate a Lender pursuant to this Section for any amounts incurred more than nine months prior to the date that such Lender notifies the Borrower of such Lender’s intention to claim compensation therefor; provided that, if the circumstances giving rise to such claim have a retroactive effect, then such nine-month period shall be extended to include the period of such retroactive effect. The obligations of the Borrower pursuant to this Section shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder.
1.13. Change of Lending Office . Each Lender agrees that, upon the occurrence of any event giving rise to the operation of Section 1.12 or 4.3(a) or (d) with respect to such Lender, it will, if requested by the Borrower, use reasonable efforts (subject to overall policy considerations of such Lender) to designate another lending office for any Loans affected by such event with the object of avoiding the consequences of such event; provided , that such designation is made on terms that, in the sole judgment of such Lender, cause such Lender and its lending offices to suffer no economic, legal or regulatory disadvantage, and provided , further , that nothing in this Section shall affect or postpone any of the obligations of the Borrower or the rights of any Lender pursuant to Section 1.12 or 4.3(a) or (d).
 
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1.14. Indemnity . The Borrower agrees to indemnify each Lender for, and to hold each Lender harmless from, any loss or expense that such Lender may sustain or incur as a consequence of (a) default by the Borrower in making a borrowing of, conversion into or continuation of Eurodollar Loans after the Borrower has given a notice requesting the same in accordance with the provisions of this Agreement, (b) default by the Borrower in making any prepayment of or conversion from Eurodollar Loans after the Borrower has given a notice thereof in accordance with the provisions of this Agreement or (c) the making of a prepayment of Eurodollar Loans on a day that is not the last day of an Interest Period with respect thereto. Such indemnification may include an amount equal to the excess, if any, of (i) the amount of interest that would have accrued on the amount so prepaid, or not so borrowed, converted or continued, for the period from the date of such prepayment or of such failure to borrow, convert or continue to the last day of such Interest Period (or, in the case of a failure to borrow, convert or continue, the Interest Period that would have commenced on the date of such failure) in each case at the applicable rate of interest for such Loans provided for herein (excluding, however, the Applicable Margin included therein, if any) over (ii) the amount of interest (as reasonably determined by such Lender) that would have accrued to such Lender on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank eurodollar market. A certificate as to any amounts payable pursuant to this Section submitted to the Borrower by any Lender shall be conclusive in the absence of manifest error. This covenant shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder.
1.15. Replacement of Lenders . The Borrower shall be permitted to replace any Lender if (a) such Lender requests reimbursement for amounts owing pursuant to Section 1.12 or the Borrower is required to pay any Indemnified Taxes or additional amounts to such Lender or any Governmental Entity for the account of such Lender pursuant to Section 4.3(a) or (d), (b) such Lender becomes a Defaulting Lender, or (c) such Lender does not consent to any proposed amendment, supplement, modification, consent or waiver of any provision of this Agreement or any other Credit Document that requires the consent of each of the Lenders or each of the Lenders affected thereby (so long as the consent of the Required Lenders has been obtained), with a replacement financial institution; provided that (i) such replacement does not conflict with any Requirement of Law, (ii) no Event of Default shall have occurred and be continuing at the time of such replacement, (iii) prior to any such replacement, such Lender shall have taken no action under Section 1.13 so as to eliminate the continued need for payment of amounts owing pursuant to Section 1.12 or 4.3(a) or (d), (iv) the replacement financial institution shall purchase, at par, all Loans and other amounts owing to such replaced Lender on or prior to the date of replacement, (v) the Borrower shall be liable to such replaced Lender under Section 1.14 if any Eurodollar Loan owing to such replaced Lender shall be purchased other than on the last day of the Interest Period relating thereto, (vi) the replacement financial institution shall, subject to Section 12.4(b)(ii) and (iii), be reasonably satisfactory to the Administrative Agent and the Issuing Lender, (vii) the replaced Lender shall be obligated to make such replacement in accordance with the provisions of Section 12.4 (provided that the Borrower shall be obligated to pay the registration and processing fee referred to therein), (viii) until such time as such replacement shall be consummated, the Borrower shall pay all additional amounts (if any) required pursuant to Section 1.12 or 4.3(a) or (d), as the case may be, and (ix) any such replacement shall not be deemed to be a waiver of any rights that the Borrower, the Administrative Agent or any other Lender shall have against the replaced Lender. Each party hereto agrees that an assignment required pursuant to this paragraph may be effected pursuant to an Assignment and Assumption executed by the Borrower, the Administrative Agent and the assignee, and that the Lender required to make such assignment need not be a party thereto in order for such assignment to be effective.
1.16. Defaulting Lenders . Notwithstanding any provision of this Agreement to the contrary, if any Lender becomes a Defaulting Lender, then the following provisions shall apply for so long as such Lender is a Defaulting Lender:
(a) fees shall cease to accrue on the unfunded portion of the Revolving Commitment of such Defaulting Lender pursuant to Section 3;
 
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(b) the Revolving Commitment and Revolving Extensions of Credit of such Defaulting Lender shall not be included in determining whether the Required Lenders have taken or may take any action hereunder (including any consent to any amendment, waiver or other modification pursuant to Section 12.12); provided , that this clause (b) shall not apply to the vote of a Defaulting Lender in the case of an amendment, waiver or other modification requiring the consent of such Lender or each Lender affected thereby;
(c) if any Swingline Exposure or L/C Exposure exists at the time such Lender becomes a Defaulting Lender then:
(i) all or any part of the Swingline Exposure and L/C Exposure of such Defaulting Lender shall be reallocated among the non-Defaulting Lenders in accordance with their respective Revolving Percentages but only to the extent (x) the sum of all non-Defaulting Lenders’ Revolving Extensions of Credit plus such Defaulting Lender’s Swingline Exposure and L/C Exposure does not exceed the total of all non-Defaulting Lenders’ Revolving Commitments and (y) such reallocation does not cause the Revolving Extensions of Credit of any non-Defaulting Lender to exceed such Lender’s Revolving Commitment;
(ii) if the reallocation described in clause (i) above cannot, or can only partially, be effected, the Borrower shall within one Business Day following notice by the Administrative Agent (x) first, prepay such Swingline Exposure and (y) second, in a manner consistent with the Collateral Agency Agreement, cash collateralize for the benefit of the Issuing Lender only the Borrower’s obligations corresponding to such Defaulting Lender’s L/C Exposure (after giving effect to any partial reallocation pursuant to clause (i) above) in accordance with the procedures set forth in Section 8.1 for so long as such L/C Exposure is outstanding;
(iii) if the Borrower cash collateralizes any portion of such Defaulting Lender’s L/C Exposure pursuant to clause (ii) above, the Borrower shall not be required to pay any fees to such Defaulting Lender pursuant to Section 3(b) with respect to such Defaulting Lender’s L/C Exposure during the period such Defaulting Lender’s L/C Exposure is cash collateralized;
(iv) if the L/C Exposure of the non-Defaulting Lenders is reallocated pursuant to clause (i) above, then the fees payable to the Lenders pursuant to Section 3 shall be adjusted in accordance with such non-Defaulting Lenders’ Revolving Percentages; and
(v) if all or any portion of such Defaulting Lender’s L/C Exposure is neither reallocated nor cash collateralized pursuant to clause (i) or (ii) above, then, without prejudice to any rights or remedies of the Issuing Lender or any other Lender hereunder, all fees payable under Section 3(b) with respect to such Defaulting Lender’s L/C Exposure shall be payable to the Issuing Lender until and to the extent that such L/C Exposure is reallocated and/or cash collateralized; and
(d) so long as such Lender is a Defaulting Lender, the Swingline Lender shall not be required to fund any Swingline Loan and the Issuing Lender shall not be required to issue, amend or increase any Letter of Credit, unless it is satisfied that the related exposure and the Defaulting Lender’s then outstanding L/C Exposure will be 100% covered by the Revolving Commitments of the non-Defaulting Lenders and/or cash collateral will be provided by the Borrower in accordance with Section 1.16(c), and participating interests in any newly made Swingline Loan or any newly issued or increased Letter of Credit shall be allocated among non-Defaulting Lenders in a manner consistent with Section 1.16(c) (and such Defaulting Lender shall not participate therein).
 
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If (i) a Bankruptcy Event with respect to a Lender Parent of any Lender shall occur following the date hereof and for so long as such event shall continue or (ii) the Swingline Lender or the Issuing Lender has a good faith belief that any Lender has defaulted in fulfilling its obligations under one or more other agreements in which such Lender commits to extend credit, the Swingline Lender shall not be required to fund any Swingline Loan and the Issuing Lender shall not be required to issue, amend or increase any Letter of Credit, unless the Swingline Lender or the Issuing Lender, as the case may be, shall have entered into arrangements with the Borrower or such Lender, satisfactory to the Swingline Lender or the Issuing Lender, as the case may be, to defease any risk to it in respect of such Lender hereunder.
In the event that the Administrative Agent, the Borrower, the Swingline Lender and the Issuing Lender each agrees that a Defaulting Lender has adequately remedied all matters that caused such Lender to be a Defaulting Lender, then the Swingline Exposure and L/C Exposure of the Lenders shall be readjusted to reflect the inclusion of such Lender’s Revolving Commitment and on such date such Lender shall purchase at par such of the Loans of the other Lenders (other than Swingline Loans) as the Administrative Agent shall determine may be necessary in order for such Lender to hold such Loans in accordance with its Revolving Percentage.
1.17. Increase in Commitments
(a) Request for Increase . Provided no Event of Default has occurred and is continuing, upon notice to the Administrative Agent (which shall promptly notify the Lenders), the Borrower may from time to time request an increase in the Total Revolving Commitments by an amount (for all such requests) not exceeding $75,000,000 in the aggregate; provided that (i) any such request for an increase shall be in a minimum amount of $10,000,000, (ii) the Borrower may make a maximum of three such requests, and (iii) the new or increased Commitment of each new or increasing Lender shall be on terms and conditions identical to those of the existing Lenders immediately prior to such increase (other than with respect to fees). At the time of sending such notice, the Borrower (in consultation with the Administrative Agent) shall specify the time period within which each Lender is requested to respond (which shall in no event be less than ten Business Days from the date of delivery of such notice to the Lenders).
(b) Lender Elections to Increase . Each Lender shall notify the Administrative Agent within such time period whether or not it agrees to increase its Commitment and, if so, whether by an amount equal to, greater than, or less than its Revolving Percentage of such requested increase. Any Lender not responding within such time period shall be deemed to have declined to increase its Commitment.
(c) Notification by Administrative Agent; Additional Lenders . The Administrative Agent shall notify the Borrower and each Lender of the Lenders’ responses to each request made hereunder. To achieve the full amount of a requested increase and subject to the approval of the Administrative Agent and the Issuing Lender, such approval not to be unreasonably withheld or delayed, the Borrower may also invite additional Eligible Assignees to become Lenders pursuant to a joinder agreement in form and substance reasonably satisfactory to the Administrative Agent and its counsel.
(d) Effective Date and Allocations . If the Total Revolving Commitments are increased in accordance with this Section, the Administrative Agent and the Borrower shall determine the effective date (the “Increase Effective Date”) and the final allocation of such increase. The Administrative Agent shall promptly notify the Borrower and the Lenders of the final allocation of such increase and the Increase Effective Date.
 
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(e) Conditions to Effectiveness of Increase . As a condition precedent to such increase, the Borrower shall deliver to the Administrative Agent a certificate of each Loan Party dated as of the Increase Effective Date (in sufficient copies for each Lender) signed by a Responsible Officer of such Loan Party (i) certifying and attaching the resolutions adopted by such Loan Party approving or consenting to such increase, and (ii) in the case of the Borrower, certifying that, before and after giving effect to such increase, (A) the representations and warranties contained in Section 6 and the other Credit Documents are true and correct on and as of the Increase Effective Date, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they are true and correct as of such earlier date, and except that for purposes of this Section 1.17, the representations and warranties contained in subsections (a)(i) and (a)(ii) of Section 6.5 shall be deemed to refer to the most recent statements furnished pursuant to subsections (a) and (b), respectively, of Section 7.1, and (B) no Default or Event of Default has occurred and is continuing or would result therefrom. On the Increase Effective Date, each Lender (including any new Lender) participating in such Commitment increase shall purchase and assume from each existing Lender having Loans outstanding on such Increase Effective Date, without recourse or warranty, an undivided interest and participation, to the extent of such Lender’s ratable portion of the Total Revolving Commitments (after giving effect to such Commitment increase), in the aggregate Loans then outstanding, so as to ensure that, on the Increase Effective Date after giving effect to such Commitment increase, each Lender is owed only its ratable portion of the Loans outstanding on such Increase Effective Date.
(f) Conflicting Provisions . This Section shall supersede any provisions in Section 12.6 or 12.12 to the contrary.
SECTION 2 LETTERS OF CREDIT .
2.1. L/C Commitment . (a) Subject to the terms and conditions hereof, the Issuing Lender, in reliance on the agreements of the other Revolving Lenders set forth in Section 2.3(a), agrees to issue letters of credit (“ Letters of Credit ”) for the account of the Borrower on any Business Day during the Revolving Commitment Period in such form as may be approved from time to time by the Issuing Lender; provided that the Issuing Lender shall have no obligation to issue any Letter of Credit if, after giving effect to such issuance, (i) the Letter of Credit Outstandings would exceed the L/C Commitment or (ii) the Total Revolving Extensions of Credit would exceed the Total Revolving Commitments. Each Letter of Credit shall (i) be denominated in Dollars and (ii) expire no later than the earlier of (x) the first anniversary of its date of issuance and (y) the date that is five Business Days prior to the Revolving Facility Final Maturity Date, provided that any Letter of Credit with a one-year term may provide for the renewal thereof for additional one-year periods (which shall in no event extend beyond the date referred to in clause (y) above).
(b) The Issuing Lender shall not at any time be obligated to issue any Letter of Credit if such issuance would conflict with, or cause the Issuing Lender or any L/C Participant to exceed any limits imposed by, any applicable Requirement of Law.
2.2. Procedure for Issuance of Letter of Credit .
The Borrower may from time to time request that the Issuing Lender issue a Letter of Credit by delivering to the Issuing Lender at its address for notices specified herein an Application therefor, completed to the satisfaction of the Issuing Lender, and such other certificates, documents and other papers and information as the Issuing Lender may request. Upon receipt of any Application, the Issuing Lender will process such Application and the certificates, documents and other papers and information delivered to it in connection therewith in accordance with its customary procedures and shall promptly issue the Letter of Credit requested thereby (but in no event shall the Issuing Lender be required
 
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to issue any Letter of Credit earlier than three Business Days after its receipt of the Application therefor and all such other certificates, documents and other papers and information relating thereto) by issuing the original of such Letter of Credit to the beneficiary thereof or as otherwise may be agreed to by the Issuing Lender and the Borrower. The Issuing Lender shall furnish a copy of such Letter of Credit to the Borrower promptly following the issuance thereof. The Issuing Lender shall promptly furnish to the Administrative Agent, which shall in turn promptly furnish to the Lenders, notice of the issuance of each Letter of Credit (including the amount thereof).
2.3. L/C Participations .
(a) The Issuing Lender irrevocably agrees to grant and hereby grants to each L/C Participant, and, to induce the Issuing Lender to issue Letters of Credit, each L/C Participant irrevocably agrees to accept and purchase and hereby accepts and purchases from the Issuing Lender, on the terms and conditions set forth below, for such L/C Participant’s own account and risk an undivided interest equal to such L/C Participant’s Revolving Percentage in the Issuing Lender’s obligations and rights under and in respect of each Letter of Credit and the amount of each draft paid by the Issuing Lender thereunder. Each L/C Participant agrees with the Issuing Lender that, if a draft is paid under any Letter of Credit for which the Issuing Lender is not reimbursed in full by the Borrower in accordance with the terms of this Agreement (or in the event that any reimbursement received by the Issuing Lender shall be required to be returned by it at any time), such L/C Participant shall pay to the Issuing Lender upon demand at the Issuing Lender’s address for notices specified herein an amount equal to such L/C Participant’s Revolving Percentage of the amount that is not so reimbursed (or is so returned). Each L/C Participant’s obligation to pay such amount shall be absolute and unconditional and shall not be affected by any circumstance, including (i) any setoff, counterclaim, recoupment, defense or other right that such L/C Participant may have against the Issuing Lender, the Borrower or any other Person for any reason whatsoever, (ii) the occurrence or continuance of a Default or an Event of Default or the failure to satisfy any of the other conditions specified in Section 9, (iii) any adverse change in the condition (financial or otherwise) of the Borrower, (iv) any breach of this Agreement or any other Credit Document by the Borrower, any other Loan Party (to the extent applicable) or any other L/C Participant or (v) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing.
(b) If any amount required to be paid by any L/C Participant to the Issuing Lender pursuant to Section 2.3(a) in respect of any unreimbursed portion of any payment made by the Issuing Lender under any Letter of Credit is paid to the Issuing Lender within three Business Days after the date such payment is due, such L/C Participant shall pay to the Issuing Lender on demand an amount equal to the product of (i) such amount, times (ii) the daily average Federal Funds Effective Rate during the period from and including the date such payment is required to the date on which such payment is immediately available to the Issuing Lender, times (iii) a fraction the numerator of which is the number of days that elapse during such period and the denominator of which is 360. If any such amount required to be paid by any L/C Participant pursuant to Section 2.3(a) is not made available to the Issuing Lender by such L/C Participant within three Business Days after the date such payment is due, the Issuing Lender shall be entitled to recover from such L/C Participant, on demand, such amount with interest thereon calculated from such due date at the rate per annum applicable to ABR Loans under the Revolving Facility. A certificate of the Issuing Lender submitted to any L/C Participant with respect to any amounts owing under this Section shall be conclusive in the absence of manifest error.
(c) Whenever, at any time after the Issuing Lender has made payment under any Letter of Credit and has received from any L/C Participant its pro rata share of such payment in accordance with Section 2.3(a), the Issuing Lender receives any payment related to such Letter of Credit (whether directly from the Borrower or otherwise, including proceeds of collateral applied
 
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thereto by the Issuing Lender), or any payment of interest on account thereof, the Issuing Lender will distribute to such L/C Participant its pro rata share thereof; provided, however, that in the event that any such payment received by the Issuing Lender shall be required to be returned by the Issuing Lender, such L/C Participant shall return to the Issuing Lender the portion thereof previously distributed by the Issuing Lender to it.
2.4. Reimbursement Obligation of the Borrower .
If any draft is paid under any Letter of Credit, the Borrower shall reimburse the Issuing Lender for the amount of (a) the draft so paid and (b) any taxes, fees, charges or other costs or expenses incurred by the Issuing Lender in connection with such payment, not later than 12:00 Noon, New York City time, on (i) the Business Day that the Borrower receives notice of such draft, if such notice is received on such day prior to 10:00 A.M., New York City time, or (ii) if clause (i) above does not apply, the Business Day immediately following the day that the Borrower receives such notice. Each such payment shall be made to the Issuing Lender at its address for notices referred to herein in Dollars and in immediately available funds. Interest shall be payable on any such amounts from the date on which the relevant draft is paid until payment in full at the rate set forth in (x) until the Business Day next succeeding the date of the relevant notice, Section 1.8(b) and (y) thereafter, Section 1.8(c).
2.5. Obligations Absolute .
The Borrower’s obligations under this Section 2 shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment that the Borrower may have or have had against the Issuing Lender, any beneficiary of a Letter of Credit or any other Person. The Borrower also agrees with the Issuing Lender that the Issuing Lender shall not be responsible for, and the Borrower’s Reimbursement Obligations under Section 3 shall not be affected by, among other things, the validity or genuineness of documents or of any endorsements thereon, even though such documents shall in fact prove to be invalid, fraudulent or forged, or any dispute between or among the Borrower and any beneficiary of any Letter of Credit or any other party to which such Letter of Credit may be transferred or any claims whatsoever of the Borrower against any beneficiary of such Letter of Credit or any such transferee. The Issuing Lender shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit, except for errors or omissions found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of the Issuing Lender. The Borrower agrees that any action taken or omitted by the Issuing Lender under or in connection with any Letter of Credit or the related drafts or documents, if done in the absence of gross negligence or willful misconduct, shall be binding on the Borrower and shall not result in any liability of the Issuing Lender to the Borrower.
2.6. Letter of Credit Payments .
If any draft shall be presented for payment under any Letter of Credit, the Issuing Lender shall promptly notify the Borrower of the date and amount thereof. The responsibility of the Issuing Lender to the Borrower in connection with any draft presented for payment under any Letter of Credit shall, in addition to any payment obligation expressly provided for in such Letter of Credit, be limited to determining that the documents (including each draft) delivered under such Letter of Credit in connection with such presentment are substantially in conformity with such Letter of Credit.
 
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2.7. Applications .
To the extent that any provision of any Application related to any Letter of Credit is inconsistent with the provisions of this Section 2, the provisions of this Section 2 shall apply.
SECTION 3 FEES . (a) The Borrower agrees to pay to the Administrative Agent a commitment fee for the account of each Lender for the period from and including the Restatement Date to but not including the date the Total Revolving Commitment has been terminated, computed at a rate per annum equal to the Applicable Fee Rate per annum times the average daily Unutilized Commitment of such Lender (the “ Commitment Fee ”). Such Commitment Fee shall be due and payable in arrears on the last Business Day of each March, June, September and December and on the first date upon which the Total Revolving Commitment shall have been terminated, commencing with the first such date to fall after the Restatement Date.
(b) The Borrower agrees to pay to the Administrative Agent for the account of each Lender pro rata on the basis of its Revolving Percentage a fee in respect of each outstanding Letter of Credit (the “ Letter of Credit Fee ”) for each day computed at the rate per annum equal to the Applicable Margin for Revolving Loans that are Eurodollar Loans for such day on the Stated Amount of such Letter of Credit on such day. Accrued Letter of Credit Fees shall be due and payable quarterly in arrears on the last Business Day of each March, June, September and December of each year and on the date upon which the Total Revolving Commitment is terminated, commencing with the first such date to fall after the Restatement Date. Such fee shall be shared ratably among the Lenders participating in the Revolving Facility.
(c) The Borrower agrees to pay to the Issuing Lender a fee in respect of each Letter of Credit (the “ Fronting Fee ”) computed at the rate of 0.25% per annum on the average daily Stated Amount of such Letter of Credit. Accrued Fronting Fees shall be due and payable quarterly in arrears on the last Business Day of each March, June, September and December of each year and on the date upon which the Total Revolving Commitment is terminated, commencing with the first such date to fall after the Restatement Date.
(d) The Borrower agrees to pay directly to the Issuing Lender upon each issuance of, drawing under, and/or amendment or transfer by a beneficiary of, a Letter of Credit such amount as shall at the time of such issuance, drawing, transfer or amendment be the administrative charge which the Issuing Lender is customarily charging for issuances of, drawings under or amendments or transfers of, letters of credit issued by it.
(e) The Borrower shall pay to the Administrative Agent (x) on the Restatement Date for its own account and/or for distribution to the Lenders the fees referred to in the Fee Letter and such other fees, if any, as have heretofore been agreed to by the Borrower and the Administrative Agent and (y) for its own account such other fees as may be agreed to from time to time between the Borrower and the Administrative Agent, when and as due.
(f) All computations of Fees shall be made in accordance with Section 1.9(a).
SECTION 4 PREPAYMENT; TAXES .
4.1. Voluntary Prepayments . The Borrower shall have the right to prepay Loans, in whole or in part, without premium or penalty, from time to time on the following terms and conditions: (i) the Borrower shall give the Administrative Agent (and the Swingline Lender, in the case of Swingline Loans) at the Notice Office written notice of its intent to prepay the Loans, whether such Loans are Revolving Loans or Swingline Loans, the amount of such prepayment and (in the case of Eurodollar Loans) the specific Borrowing(s) pursuant to which such prepayment is made, which notice shall be
 
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substantially in the form of Exhibit I hereto and received by the Administrative Agent by 11:00 A.M. (New York time) one Business Day prior to the date of such prepayment or in the case of Eurodollar Loans, three Business Days prior to the date of such prepayment; (ii) each partial prepayment of any Borrowing shall be in an aggregate principal amount of at least $250,000 in the case of Eurodollar Loans or $100,000 in the case of ABR Loans or $100,000 in the case of Swingline Loans and shall include accrued interest to such date on the amount prepaid, provided that no partial prepayment of Eurodollar Loans made pursuant to a Borrowing shall reduce the aggregate principal amount of the Loans outstanding pursuant to such Borrowing to an amount less than the Minimum Borrowing Amount applicable thereto; (iii) if a Eurodollar Loan is prepaid on any day other than the last day of the Interest Period applicable thereto, the Borrower shall also pay any amounts owing pursuant to Section 1.14 and (iv) each prepayment in respect of any Loans made pursuant to a Borrowing shall be applied pro rata among such Loans
4.2. Mandatory Prepayments .
(a) Requirements for Revolving Loans . If on any date (after giving effect to any other repayments or prepayments on such date) the sum of (i) the aggregate outstanding principal amount of Revolving Loans and Swingline Loans plus (ii) the aggregate amount of Letter of Credit Outstandings exceeds the Total Revolving Commitment as then in effect, the Borrower shall repay on such date that principal amount of Swingline Loans and, after the Swingline Loans have been paid in full, Unpaid Drawings and, after Unpaid Drawings have been paid in full, Revolving Loans, in an aggregate amount equal to such excess. If, after giving effect to the prepayment of all outstanding Swingline Loans, Unpaid Drawings and Revolving Loans, the aggregate amount of Letter of Credit Outstandings exceeds the Total Revolving Commitment as then in effect (any such excess, a “ Total Revolving Commitment Excess Amount ”), the Borrower shall pay to the Administrative Agent an amount in cash and/or Cash Equivalents equal to such Total Revolving Commitment Excess Amount, and the Administrative Agent shall hold such payment as security for the obligations of the Borrower hereunder pursuant to a cash collateral agreement to be entered into in form and substance reasonably satisfactory to the Administrative Agent and the Borrower with terms that are not inconsistent with the Collateral Agency Agreement, until the proceeds are applied to the Obligations under the Credit Documents, and which shall provide that a portion of the balance, if any, held in a cash collateral account established under such cash collateral agreement equal to the amount by which such balance exceeds the Total Revolving Commitment Excess Amount from time to time, shall be released to the Borrower, provided that (x) as a result of such release, a mandatory prepayment shall not be required under the first sentence of this paragraph (b) unless such prepayment is made concurrently with such release, and (y) immediately after giving effect thereto, no Default or Event of Default shall have occurred and be continuing or would result from such release.
(b) Application for Prepayments of Loans . With respect to each prepayment of Loans required by this Section 4.2, the Borrower may designate the Types of Loans which are to be prepaid and the specific Borrowing(s) under the affected Facility pursuant to which made, provided that (i) the Borrower shall first so designate all ABR Loans and Eurodollar Loans under an affected Facility with Interest Periods ending on the date of repayment prior to designating any other Eurodollar Loans and (ii) each prepayment of any Loans made pursuant to a Borrowing shall be applied pro rata among such Loans. If the Borrower is required by this Section 4.2 to repay any Eurodollar Loans and such prepayment will result in the Borrower being required to pay breakage costs under Section 1.14 (any such Eurodollar Loans, “ Affected Loans ”), the Borrower may elect, by notice to the Administrative Agent, to have the provisions of the following sentence be applicable. At the time any Affected Loans are otherwise required to be prepaid, the Borrower may elect to deposit 100% (or such lesser percentage elected by the Borrower) of the principal amounts that otherwise would have been paid in respect of the Affected Loans with the Administrative Agent to be held as security for the obligations of the Borrower
 
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hereunder pursuant to a cash collateral agreement to be entered into in form and substance reasonably satisfactory to the Administrative Agent with terms that are not inconsistent with the Collateral Agency Agreement, with such cash collateral to be released from such cash collateral account (and applied to repay the principal amount of such Loans) upon each occurrence thereafter of the last day of an Interest Period applicable to the relevant Loans (or such earlier date or dates as shall be requested by the Borrower), with the amount to be so released and applied on the last day of each Interest Period to be the amount of the relevant Loans to which such Interest Period applies (or, if less, the amount remaining in such cash collateral account). In the absence of a designation and/or election by the Borrower as described in the preceding sentences, the Administrative Agent shall, subject to the first sentence of this paragraph, make such designation in its sole discretion with a view, but no obligation, to minimize breakage costs owing under Section 1.14.
4.3. Taxes . (a) Any and all payments by or on account of any obligation of any Borrower Party under any Credit Document shall be made without deduction or withholding for any Taxes, except as required by applicable law. If any applicable law (as determined in the good faith discretion of an applicable Withholding Agent) requires the deduction or withholding of any Tax from any such payment by a Withholding Agent, then the applicable Withholding Agent shall be entitled to make such deduction or withholding and shall timely pay the full amount deducted or withheld to the relevant Governmental Entity in accordance with applicable law and, if such Tax is an Indemnified Tax, then the sum payable by the applicable Borrower Party shall be increased as necessary so that, after such deduction or withholding has been made (including such deductions and withholdings applicable to additional sums payable under this Section 4.3), the applicable Credit Party receives an amount equal to the sum it would have received had no such deduction or withholding been made.
(b) The Borrower Parties shall timely pay to the relevant Governmental Entity in accordance with applicable law, or at the option of the Administrative Agent timely reimburse it for the payment of, Other Taxes.
(c) As soon as practicable after any payment of Taxes by any Borrower Party to a Governmental Entity pursuant to this Section 4.3, such Borrower Party shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Entity evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent.
(d) The Borrower Parties shall jointly and severally indemnify each Credit Party, within 10 days after demand therefor, for the full amount of any Indemnified Taxes (including Indemnified Taxes imposed or asserted on or attributable to amounts payable under this Section) payable or paid by such Credit Party or required to be withheld or deducted from a payment to such Credit Party and any reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes were correctly or legally imposed or asserted by the relevant Governmental Entity. A certificate as to the amount of such payment or liability delivered to the Borrower by a Lender (with a copy to the Administrative Agent), or by the Administrative Agent on its own behalf or on behalf of a Lender, shall be conclusive absent manifest error.
(e) Each Lender shall severally indemnify the Administrative Agent, within 10 days after demand therefor, for (i) any Indemnified Taxes attributable to such Lender (but only to the extent that any Borrower Party has not already indemnified the Administrative Agent for any such Taxes which are Indemnified Taxes and without limiting the obligation of the Borrower Parties to do so), (ii) any Taxes attributable to such Lender’s failure to comply with the provisions of Section 12.4(a) relating to the maintenance of a Participant Register and (iii) any Excluded Taxes attributable to such lender, in each case, that are payable or paid by the Administrative Agent in connection with any Credit
 
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Document, and any reasonable expenses arising therefrom or with respect thereto, whether or not such Taxes were correctly or legally imposed or asserted by the relevant Governmental Entity. A certificate as to the amount of such payment or liability delivered to any Lender by the Administrative Agent shall be conclusive absent manifest error. Each Lender hereby authorizes the Administrative Agent to set off and apply any and all amounts at any time owing to such Lender under any Credit Document or otherwise payable by the Administrative Agent to the Lender from any other source against any amount due to the Administrative Agent under this paragraph (e).
(f) (i) Any Lender that is entitled to an exemption from or reduction of withholding Tax with respect to payments made under any Credit Document shall deliver to the Borrower and the Administrative Agent, at the time or times reasonably requested by the Borrower or the Administrative Agent, such properly completed and executed documentation reasonably requested by the Borrower or the Administrative Agent as will permit such payments to be made without withholding or at a reduced rate of withholding. In addition, any Lender, if reasonably requested by the Borrower or the Administrative Agent, shall deliver such other documentation prescribed by applicable law or reasonably requested by the Borrower or the Administrative Agent as will enable the Borrower or the Administrative Agent to determine whether or not such Lender is subject to backup withholding or information reporting requirements. Notwithstanding anything to the contrary in the preceding two sentences, the completion, execution and submission of such documentation (other than such documentation set forth in Section 4.3(f)(ii)(A), (ii)(B) and (ii)(D) below) shall not be required if in the Lender’s reasonable judgment such completion, execution or submission would subject such Lender to any material unreimbursed cost or expense or would materially prejudice the legal or commercial position of such Lender.
(ii) Without limiting the generality of the foregoing,
(A) any Lender that is a U.S. Person shall deliver to the Borrower and the Administrative Agent on or prior to the date on which such Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of the Borrower or the Administrative Agent), executed originals of IRS Form W-9 certifying that such Lender is exempt from U.S. federal backup withholding tax;
(B) any Non-U.S. Lender shall, to the extent it is legally entitled to do so, deliver to the Borrower and the Administrative Agent (in such number of copies as shall be requested by the recipient) on or prior to the date on which such Non-U.S. Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of the Borrower or the Administrative Agent), whichever of the following is applicable:
(1) in the case of a Non-U.S. Lender claiming the benefits of an income tax treaty to which the United States is a party (x) with respect to payments of interest under any Credit Document, executed originals of IRS Form W-8BEN or IRS Form W-8BEN-E establishing an exemption from, or reduction of, U.S. federal withholding Tax pursuant to the “interest” article of such tax treaty and (y) with respect to any other applicable payments under any Credit Document, executed originals of IRS Form W-8BEN or IRS Form W-8BEN-E establishing an exemption from, or reduction of, U.S. federal withholding Tax pursuant to the “business profits” or “other income” article of such tax treaty;
(2) executed originals of IRS Form W-8ECI;
 
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(3) in the case of a Non-U.S. Lender claiming the benefits of the exemption for portfolio interest under Section 881(c) of the Code, (x) a certificate substantially in the form of Exhibit F-1 to the effect that such Non-U.S. Lender is not (i) a “bank” within the meaning of Section 881(c)(3)(A) of the Code, (ii) a “10 percent shareholder” of the Borrower (or, if the Borrower is disregarded as an entity separate from its owner for U.S. federal income tax purposes, the Borrower’s tax owner for U.S. federal income tax purposes) within the meaning of Section 881(c)(3)(B) of the Code, or (iii) a “controlled foreign corporation” described in Section 881(c)(3)(C) of the Code (a “U.S. Tax Compliance Certificate”) and (y) executed originals of IRS Form W-8BEN or IRS Form W-8BEN-E; or
(4) to the extent a Non-U.S. Lender is not the beneficial owner, executed originals of IRS Form W-8IMY, accompanied by IRS Form W-8ECI, IRS Form W-8BEN or IRS Form W-8BEN-E, a U.S. Tax Compliance Certificate substantially in the form of Exhibit F-2 or Exhibit F-3, IRS Form W-9, and/or other certification documents from each beneficial owner, as applicable; provided that if the Non-U.S. Lender is a partnership and one or more direct or indirect partners of such Non-U.S. Lender are claiming the portfolio interest exemption, such Non-U.S. Lender may provide a U.S. Tax Compliance Certificate substantially in the form of Exhibit F-4 on behalf of each such direct and indirect partner;
(C) any Non-U.S. Lender shall, to the extent it is legally entitled to do so, deliver to the Borrower and the Administrative Agent (in such number of copies as shall be requested by the recipient) on or prior to the date on which such Non-U.S. Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of the Borrower or the Administrative Agent), executed originals of any other form prescribed by applicable law as a basis for claiming exemption from or a reduction in U.S. federal withholding Tax, duly completed, together with such supplementary documentation as may be prescribed by applicable law to permit the Borrower or the Administrative Agent to determine the withholding or deduction required to be made; and
(D) if a payment made to a Lender under any Credit Document would be subject to U.S. federal withholding Tax imposed by FATCA if such Lender were to fail to comply with the applicable reporting requirements of FATCA (including those contained in Section 1471(b) or 1472(b) of the Code, as applicable), such Lender shall deliver to the Borrower and the Administrative Agent at the time or times prescribed by law and at such time or times reasonably requested by the Borrower or the Administrative Agent such documentation prescribed by applicable law (including as prescribed by Section 1471(b)(3)(C)(i) of the Code) and such additional documentation reasonably requested by the Borrower or the Administrative Agent as may be necessary for the Borrower and the Administrative Agent to comply with their obligations under FATCA and to determine that such Lender has complied with such Lender’s obligations under FATCA or to determine the amount to deduct and withhold from such payment. Solely for purposes of this clause (D), “FATCA” shall include any amendments made to FATCA after the date of this Agreement.
Each Lender agrees that if any form or certification it previously delivered expires or becomes obsolete or inaccurate in any respect, it shall update such form or certification or promptly notify the Borrower and the Administrative Agent in writing of its legal inability to do so.
 
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(iii) The Administrative Agent shall, to the extent it is legally entitled to do so, deliver to the Borrower on or prior to the Restatement Date (and from time to time thereafter upon the reasonable request of the Borrower),
(A) with respect to any amounts payable to the Administrative Agent for its own account, an executed original of any form prescribed by applicable law as a basis for claiming exemption from or a reduction in U.S. federal withholding Tax, duly completed, together with such supplementary documentation as may be prescribed by applicable law to permit the Borrower to determine the withholding or deduction required to be made; and
(B) if a payment made to the Administrative Agent under any Credit Document would be subject to U.S. federal withholding Tax imposed by FATCA if the Administrative Agent were to fail to comply with the applicable reporting requirements of FATCA (including those contained in Section 1471(b) or 1472(b) of the Code, as applicable), the Administrative Agent shall deliver to the Borrower at the time or times prescribed by law and at such time or times reasonably requested by the Borrower such documentation prescribed by applicable law (including as prescribed by Section 1471(b)(3)(C)(i) of the Code) and such additional documentation reasonably requested by the Borrower as may be necessary for the Borrower to comply with its obligations under FATCA and to determine that the Administrative Agent has complied with its obligations under FATCA or to determine the amount to deduct and withhold from such payment. Solely for purposes of this clause (B), “FATCA” shall include any amendments made to FATCA after the date of this Agreement; and
(C) with respect to any amounts payable to the Administrative Agent for the account of others, an executed original of IRS Form W-8IMY (or applicable successor form) certifying in Part I, line 4 that the Administrative Agent is a U.S. branch of a foreign bank, certifying in Part VI, Line 17b, that the Administrative Agent agrees to be treated as a U.S. Person with respect to any such payments made to it under any Credit Document and certifying in Part I, line 5 the appropriate Chapter 4 status, all of the foregoing in order to permit the Borrower to make payments to the Administrative Agent without deduction or withholding of any Taxes imposed by the United States.
The Administrative Agent agrees that if any form or certification it previously delivered pursuant to this Section 4.3(f)(iii) expires or becomes obsolete or inaccurate in any respect, it shall upon request from the Borrower update or replace such form, as applicable, or promptly notify the Borrower in writing of its legal inability to do so.
(g) If any party determines, in its sole discretion exercised in good faith, that it has received a refund of any Taxes as to which it has been indemnified pursuant to this Section 4.3 (including by the payment of additional amounts pursuant to this Section 4.3), it shall pay to the indemnifying party within 30 days from the date of such receipt an amount equal to such refund (but only to the extent of indemnity payments made under this Section with respect to the Taxes giving rise to such refund), net of all out-of-pocket expenses (including Taxes) of such indemnified party and without interest (other than any interest paid by the relevant Governmental Entity with respect to such refund). Such indemnifying party, upon the request of such indemnified party, shall repay to such indemnified party the amount paid over pursuant to this paragraph (g) (plus any penalties, interest or other charges imposed by the relevant Governmental Entity) in the event that such indemnified party is required to repay such refund to such Governmental Entity. Notwithstanding anything to the contrary in this paragraph (g), in no event will the indemnified party be required to pay any amount to an indemnifying party pursuant to this paragraph (g) the payment of which would place the indemnified party in a less favorable net after-Tax position than the indemnified party would have been in if the Tax
 
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subject to indemnification and giving rise to such refund had not been deducted, withheld or otherwise imposed and the indemnification payments or additional amounts with respect to such Tax had never been paid. This paragraph shall not be construed to require any indemnified party to make available its Tax returns (or any other information relating to its Taxes that it deems confidential) to the indemnifying party or any other Person.
(h) Each party’s obligations under this Section 4.3 shall survive the resignation or replacement of the Administrative Agent or any assignment of rights by, or the replacement of, a Lender, the termination of the Commitments and the repayment, satisfaction or discharge of all obligations under the Credit Documents.
(i) For purposes of this Section 4.3, the term “Lender” includes the Issuing Lender and the term “applicable law” includes FATCA.
(j) For purposes of determining withholding Taxes imposed under FATCA, from and after the effective date of the Agreement, the Borrower and the Administrative Agent shall treat (and the Lenders hereby authorize the Administrative Agent to treat) the Agreement as not qualifying as a “grandfathered obligation” within the meaning of Treasury Regulation Section 1.1471-2(b)(2)(i).
SECTION 5 CONDITIONS PRECEDENT .
5.1. Conditions to Effectiveness . The effectiveness of this Agreement is subject to the satisfaction of each of the following conditions precedent:
(a) Credit Documents . The Administrative Agent shall have received (i) this Agreement, executed and delivered by the Administrative Agent, the Borrower and each Person listed on Annex 1.1A, (ii) each other Credit Document (including amended and restated Security Documents and the Security Agreement), executed and delivered by the Borrower and each other Person party thereto.
(b) Opinions of Counsel . The Administrative Agent shall have received (i) an opinion, addressed to the Administrative Agent and each of the Lenders and dated the Restatement Date, from Baker Botts L.L.P., counsel to the Borrower, which opinion shall cover the matters covered in Exhibit C and (ii) an opinion, addressed to the Administrative Agent and dated the Restatement Date, from Sutherland Asbill & Brennan LLP, regulatory counsel to the Borrower, which opinion shall cover the matters covered in Exhibit E.
(c) Proceedings . (i) The Administrative Agent shall have received from the Borrower a certificate, dated the Restatement Date, signed by the President or any Vice-President and the Secretary or Assistant Secretary of the Borrower in the form of Exhibit B or in a form acceptable to the parties hereto, together with (w) copies of the certificate of formation, limited liability company agreement, or other organizational documents of the Borrower, (x) the resolutions, or such other administrative approval, of the Borrower referred to in such certificate to be reasonably satisfactory to the Administrative Agent, (y) an incumbency certificate which shall include the name, position and specimen signature of each officer of the Borrower executing the Credit Documents or any other document delivered in connection herewith on behalf of the Borrower and (z) a statement that all of the applicable conditions set forth in Section 5.2 have been satisfied as of such date; and
(ii) All corporate, limited liability company and legal proceedings and all instruments and agreements in connection with the transactions contemplated by this Agreement and the other Credit Documents shall be reasonably satisfactory in form and substance to the
 
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Administrative Agent, and the Administrative Agent shall have received all information and copies of all certificates, documents and papers, including long-form good standing certificates and any other records of corporate or limited liability company proceedings and governmental approvals, if any, which the Administrative Agent may have reasonably requested in connection therewith, such documents and papers, where appropriate, to be certified by proper corporate or governmental authorities.
(d) Adverse Change, etc. During the period from December 31, 2013 to the Restatement Date, there shall have been no development or event that has had or could reasonably be expected to have a Material Adverse Effect.
(e) Repayment of Existing Indebtedness . The Administrative Agent shall have received satisfactory evidence that all existing Indebtedness other than Indebtedness permitted pursuant to Section 8.6, of or related to the Borrower and its Subsidiaries, shall have been repaid or cancelled and all documentation representing such indebtedness shall have been terminated.
(f) Security Documents . The Borrower shall have delivered to the Administrative Agent:
 
 	(i)	certified copies of Requests for Information or Copies (Form UCC-11), or equivalent reports, each of recent date listing all effective financing statements that name the Borrower as a debtor and that are filed in the jurisdictions in which filing of a financing statement is necessary to perfect the security interests purported to be created by the Security Documents, together with copies of such financing statements (none of which shall cover the Collateral except (x) those with respect to which appropriate termination statements executed by the secured lender thereunder have been delivered to the Administrative Agent and (y) to the extent evidencing Permitted Liens);	
 
 	(ii)	copies of Financing Statements (Form UCC-1) in appropriate form for filing in each jurisdiction as may be necessary to perfect the first priority security interests purported to be created by the Security Documents on the UCC Collateral described therein (subject to no Liens other than Permitted Liens and the rights of holders of Permitted Secured Indebtedness in compliance with the Collateral Agency Agreement) that have not been so perfected prior to the Restatement Date;	
 
 	(iii)	evidence of the completion of, or arrangements to complete, all other recordings and filings of, or with respect to, any Security Document as may be necessary or, in the reasonable opinion of the Administrative Agent, desirable to perfect the security interests intended to be created by such Security Document; and	
 
 	(iv)	evidence that all other actions reasonably necessary or, in the reasonable opinion of the Administrative Agent, desirable to perfect and protect the first priority security interests purported to be created by any Security Document on the Collateral described therein (subject to no Liens other than Permitted Liens and the rights of holders of Permitted Secured Indebtedness in compliance with the Collateral Agency Agreement) have been, or are in the process of being, taken.	
(g) Solvency . The Administrative Agent shall have received a customary solvency certificate from the chief financial officer, treasurer or another senior financial or accounting officer of
 
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the Borrower certifying as to the solvency of the Borrower and its Subsidiaries on a consolidated basis after giving effect to the transactions contemplated hereby in form reasonably satisfactory to the Administrative Agent.
(h) Insurance Policies . The Administrative Agent shall have received evidence of insurance complying with the requirements of Section 7.4.
(i) Fees.  The Borrower shall have paid to the Arranger, the Administrative Agent and the Lenders all Fees and expenses required hereunder to be paid or reimbursed by the Borrower or its affiliates and for which invoices have been presented on or before the Restatement Date. Additionally, on the Restatement Date, the Borrower shall have paid to Royal Bank of Canada and RBC Capital Markets, the fees under the Fee Letter.
(j) Financial Information . The Administrative Agent shall have received copies of:
(i) (a) the audited consolidated balance sheet of the Borrower for the fiscal years ended December 31, 2011, 2012 and 2013, the related consolidated statement of operations, the related consolidated statement of members’ capital and the related consolidated statement of cash flows for the fiscal years ended on such dates, each prepared in accordance with GAAP applied on a consistent basis in accordance with past practice except for any changes required by GAAP or as noted in the notes to the financial statements, accompanied by an unqualified report of Ernst & Young LLP and (b) the audited consolidated balance sheet of Sharyland for the fiscal years ended December 31, 2011, 2012 and 2013, and the related consolidated statement of operations, the related consolidated statement of members’ capital and the related consolidated statement of cash flows for the calendar years ended on such dates, each prepared in accordance with GAAP applied on a consistent basis in accordance with past practice except for any changes required by GAAP or as noted in the notes to the financial statements, accompanied by an unqualified report of Ernst & Young LLP;
(ii) unaudited consolidated financial statements of the Borrower and the unaudited consolidated financial statements of Sharyland for each fiscal quarter ended after the latest calendar year referred to above in Section 5.1(i), as applicable, ended at least 45 days prior to the Restatement Date and the related unaudited consolidated statement of operations, the related consolidated statement of members’ capital and the related consolidated statement of cash flows for the corresponding period certified by an Authorized Officer of Sharyland and the Borrower, as applicable, as being prepared in good faith and in accordance with GAAP applied on a consistent basis except for any changes required by GAAP or as noted in the notes to the financial statements; and
(iii) projections of the Borrower through 2018 that are not, in the reasonable determination of the Administrative Agent, materially inconsistent in an adverse manner with any comparable projections delivered to the Administrative Agent prior to the Restatement Date.
(k) USA PATRIOT Act . The Administrative Agent shall have received, at least 5 days prior to the Restatement Date, all documentation and other information required by regulatory authorities under applicable “know your customer” and anti-money laundering rules and regulations, including the USA PATRIOT Act.
(l) Financial Covenants . The Borrower shall be in compliance with the financial covenants contained in Section 7.11 on a pro forma basis as of the Restatement Date.
 
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5.2. Conditions to All Credit Events . The obligation of the Lenders to make each Loan hereunder, the Swingline Lender to make Swingline Loans hereunder and the obligation of the Issuing Lender to issue Letters of Credit hereunder, is subject, at the time of each such Credit Event, to the satisfaction of the following conditions:
(a) at the time of such Credit Event and also immediately after giving effect thereto, there shall exist no Default or Event of Default;
(b) all representations and warranties contained herein or in the other Credit Documents in effect at such time shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on and as of the date of such Credit Event, except to the extent that such representations and warranties expressly relate to an earlier date; and
(c) the Administrative Agent shall have received, (i) with respect to any Revolving Loan Borrowing, a borrowing notice in accordance with Section 1.2, (ii) with respect to any Swingline Borrowing, a swingline notice in accordance with Section 1.4 and (iii) with respect to any Letter of Credit, an Application in accordance with Section 2.2.
The acceptance of the benefits of each Credit Event shall constitute a representation and warranty by the Borrower to each of the Lenders that all of the conditions specified in Section 5.2 (other than the required satisfaction of the Administrative Agent or any Lender as specified therein or as waived), exist as of that time. All of the certificates, legal opinions and other documents and papers referred to in this Section 5, unless otherwise specified, shall be delivered to the Administrative Agent at its Notice Office for the account of each of the Lenders.
SECTION 6 REPRESENTATIONS, WARRANTIES AND AGREEMENTS .
To induce the Administrative Agent and the Lenders to enter into this Agreement and to make the Loans and issue or participate in the Letter of Credit, the Borrower hereby represents and warrants to the Administrative Agent and each Lender that:
6.1. Organization; Power and Authority . Each of the Borrower and each Subsidiary is duly organized, validly existing and in good standing under the laws of its jurisdiction of formation, and is duly qualified and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Each of the Borrower and each Subsidiary has the limited liability company, limited partnership or other organizational, as applicable, power and authority to own or hold under lease the properties it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver this Agreement and the other Transaction Documents to which it is a party and to perform the provisions hereof and thereof.
6.2. Power and Authority . Each of the Borrower and each Subsidiary has the requisite power and authority to execute, deliver and carry out the terms and provisions of the Transaction Documents to which it is a party and has taken all necessary corporate or other organizational action to authorize the execution, delivery and performance of the Transaction Documents to which it is a party. Each of the Borrower and each Subsidiary has duly executed and delivered each Transaction Document to which it is a party, and each such Transaction Document constitutes the legal, valid and binding obligation of such Person enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law).
 
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6.3. Disclosure . No report, financial statement, certificate or other information furnished in writing by the Borrower or its Subsidiaries or their respective counsel to the Administrative Agent or any Lender in connection with the transactions contemplated hereby and the negotiation of this Agreement (in each case, as modified or supplemented by other information so furnished) contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that, with respect to projected financial information, the Borrower represents only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time.
6.4. Organization and Ownership of Interests . As of the Restatement Date, Annex 6.4 contains a complete and correct list and description of the Borrower’s and each Subsidiary’s jurisdiction of organization and ownership structure. As of the Restatement Date, the Borrower has no Subsidiaries except as shown on Annex 6.4.
6.5. Financial Condition; Financial Statements .
(a) On and as of the Restatement Date, on a pro forma basis after giving effect to the transactions contemplated hereby, (x) the sum of the assets, at a fair market valuation, of the Borrower and its Subsidiaries on a consolidated basis will exceed its debts, (y) the Borrower and its Subsidiaries on a consolidated basis will not have incurred or intended to, or believes that it will, incur debts beyond its ability to pay such debts as such debts mature and (z) the Borrower and its Subsidiaries taken on a consolidated basis will have sufficient capital with which to conduct its business. For purposes of this Section 6.5, “debt” means any liability on a claim, and “claim” means (i) right to payment whether or not such a right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured; or (ii) right to an equitable remedy for breach of performance if such breach gives rise to a payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured or unsecured.
(i) (a) The audited consolidated balance sheet of the Borrower for the fiscal years ended December 31, 2011, 2012 and 2013, and the related consolidated statement of operations, the related consolidated statement of members’ capital and the related consolidated statement of cash flows for the fiscal years ended on such dates, accompanied by an unqualified report of Ernst & Young LLP and (b) the audited consolidated balance sheet of Sharyland for the fiscal years ended December 31, 2011, 2012 and 2013, and the related consolidated statement of operations, the related consolidated statement of members’ capital and the related consolidated statement of cash flows for the fiscal years ended on such dates, were certified by an Authorized Officer of the Borrower and Sharyland, respectively, as being prepared in good faith and in accordance with GAAP, applied on a consistent basis except for any changes required by GAAP or as noted in the notes to the financial statements and, with respect to the items described in clause (a), fairly presents in all material respects the consolidated financial position of the Borrower and its Subsidiaries as of its date in accordance with GAAP, except for the absence of footnotes and subject to changes resulting from audit and normal year-end adjustments.
(ii) The unaudited consolidated financial statements of the Borrower and the unaudited consolidated financial statements of Sharyland for each fiscal quarter ended after the latest calendar year referred to in Section 5.1(i), as applicable, ended at least 45 days prior to the Restatement Date and the related unaudited consolidated statement of operations, the related
 
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consolidated statement of members’ capital and the related consolidated statement of cash flows for the corresponding period were certified by an Authorized Officer of the Borrower and Sharyland, respectively, as being prepared in good faith and in accordance with GAAP, applied on a consistent basis except for any changes required by GAAP or as noted in the notes to the financial statements and, with respect to such financial statements of the Borrower, fairly presents in all material respects the consolidated financial position of the Borrower and its Subsidiaries as of its date in accordance with GAAP, except for the absence of footnotes and subject to changes resulting from audit and normal year-end adjustments.
(iii) Since December 31, 2013, there has been no development or change that has had or could reasonably be expected to have a Material Adverse Effect.
6.6. Compliance with Laws, Other Instruments, Etc. The execution, delivery and performance by each of the Borrower and each Subsidiary of this Agreement and the other Transaction Documents to which such Person is a party, do not and will not (i) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of such Person under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter or limited partnership or limited liability company agreement, or any other agreement or instrument to which such Person is bound or by which such Person or any of its properties may be bound or affected, (ii) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to such Person or (iii) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to such Person, which in the case of any of the foregoing clauses (i) through (iii), individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.
6.7. Governmental Authorizations, Etc. Except as set forth on Annex 6.7, no consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority is required in connection with the execution, delivery or performance by the Borrower or any Subsidiary of this Agreement or any of the other Transaction Documents to which it is a party.
6.8. Litigation; Observance of Agreements, Statutes and Orders .
(a) There are no actions, suits, investigations or proceedings pending or, to the knowledge of any Responsible Officer of the Borrower, threatened against or affecting the Borrower or any Subsidiary or, to the knowledge of any Responsible Officer of the Borrower, any Qualified Lessee, or any of their respective property in any court or before any arbitrator of any kind or before or by any Governmental Authority that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. The representation in this clause (a) excludes any reference to Environmental Laws or ERISA, each of which is separately addressed in this Section 6.
(b) Neither the Borrower nor any Subsidiary is in default under any term of any Material Project Document or any other agreement or any order, judgment, decree or ruling of any court, arbitrator or Governmental Authority or is in violation of any Applicable Law, ordinance, rule or regulation (including without limitation Environmental Laws or the USA PATRIOT Act) of any Governmental Authority, which default or violation, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.
(c) To the knowledge of the Borrower, after due inquiry, no breach or default under any of the Material Project Documents to which it or any of its Subsidiaries is a party has occurred and is continuing, which breach or default, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.
 
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6.9. Taxes . Each of the Borrower and each Subsidiary has filed all material Tax returns that are required to have been filed by it (or timely requests for extensions have been filed, have been granted and are not expired) in any jurisdiction, and has paid all Taxes shown to be due and payable by it on such returns and all other material Taxes levied upon them or their properties, assets, income or franchises, to the extent such Taxes have become due and payable and before they have become delinquent, (other than (i) the amount of which is not individually or in the aggregate material or (ii) those which are being contested in good faith by appropriate proceedings and with respect to which such Person has established adequate reserves in accordance with GAAP), except to the extent the failure to do so could not reasonably be expected to have a Material Adverse Effect. The Borrower knows of no proposed tax assessment against the Borrower or any of its Subsidiaries that would, if made, have a Material Adverse Effect.
6.10. Title to Property . The Borrower and its Subsidiaries have good and sufficient title to their respective properties and assets that individually or in the aggregate are material to them, free and clear of Liens (other than Permitted Liens).
6.11. Insurance . Each of the Borrowers and each Subsidiary have all insurance coverage required by Section 7.4.
6.12. Licenses, Permits, Etc.; Leases; IP Rights . The Borrower and its Subsidiaries own or possess all governmental licenses, permits, franchises and authorizations that are necessary for the operation of their respective businesses (collectively, the “ Required Permits ”), without known conflict with the rights of others. The Leases listed on Annex 6.12 constitute and include all of the Leases to which the Borrower and its Subsidiaries are parties as of the Restatement Date. As of the Restatement Date, each such Lease is in full force and effect, and constitutes the legal, valid and binding obligation of each Loan Party that is a party thereto. The Borrower and its Subsidiaries own, or possess the right to use, all of the material trademarks, service marks, trade names, copyrights, patents, patent rights, franchises, licenses and other intellectual property rights (collectively, “ IP Rights ”) that are necessary for the operation of their respective businesses, without any conflict, to the knowledge of the Borrower, with the rights of any other Person, except for any IP Rights or any conflicts that, either individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect.
6.13. Compliance with ERISA . (a) Each Loan Party and each ERISA Affiliate has operated and administered each Plan in compliance with the terms of the Plan and with all Applicable Laws except for such instances of noncompliance as have not resulted in and could not reasonably be expected to result in a Material Adverse Effect. Neither any Loan Party nor any ERISA Affiliate has incurred any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code applicable to employee benefit plans (as defined in section 3 of ERISA) and there has been no “prohibited transaction” (as such term is defined in Section 406 of ERISA and Section 4975(c) of the Code) or violation of the fiduciary responsibility rules with respect to any Plan or that has resulted or could reasonably be expected to result in a Material Adverse Effect, and no event, transaction or condition has occurred or exists that could reasonably be expected to result in the incurrence of any such liability by any Loan Party or any ERISA Affiliate, or in the imposition of any Lien on any of the rights, properties or assets of any Loan Party or any ERISA Affiliate, in either case pursuant to Title I or IV of ERISA or to such penalty or excise tax provisions of the Code or to Sections 401(a)(29), 412 or 430(k) of the Code or Section 4068 of ERISA, and no liability to the PBGC (other than required premium payments), the IRS, any Plan or any trust established under Title IV of ERISA has been or is expected to be incurred by any Loan Party or any of their ERISA Affiliates, other than such liabilities or Liens as would not be individually or in the aggregate reasonably be expected to result in a Material Adverse Effect.
 
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(b) The present value of the aggregate benefit liabilities under each Plan (other than a Multiemployer Plan) (determined in accordance with Section 430 of the Code and the Treasury Regulations promulgated thereunder as of the end of such Plan’s most recently ended plan year on the basis of the actuarial assumptions specified for funding purposes in such Plan’s most recent actuarial valuation report) did not exceed the aggregate actuarial value of assets as determined in accordance with Section 430(g)(3) of the Code (and the Treasury Regulations promulgated thereunder) under each such Plan by an amount that could reasonably be expected to result in a Material Adverse Effect.
(c) No Loan Party or any ERISA Affiliate has incurred Withdrawal Liabilities (and is not subject to contingent Withdrawal Liabilities) of ERISA in respect of Multiemployer Plans that individually or in the aggregate could reasonably be expected to result in a Material Adverse Effect. Neither any Loan Party nor any of its ERISA Affiliates has failed to make by its due date any required contribution to a Multiemployer Plan or received notice that any Multiemployer Plan is, or is expected to be, insolvent (within the meaning of Section 4245 of ERISA), in reorganization (within the meaning of Section 4241 of ERISA), or in endangered or critical status (within the meaning of Section 432 of the Code or Section 305 of ERISA).
(d) The expected postretirement benefit obligation (determined as of the last day of the Borrower’s most recently ended calendar year in accordance with ASC Topic 715-60, without regard to liabilities attributable to continuation coverage mandated by Section 4980B of the Code) of the Borrower is not material to it.
6.14. Intentionally omitted .
6.15. Intentionally Omitted .
6.16. Foreign Assets Control Regulations, Etc.
(a) The use of the proceeds from the Loans hereunder will not violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto.
(b) None of the Borrower, the Subsidiaries or, to the knowledge of any Responsible Officer of the Borrower, any Qualified Lessee: (i) is a Person described or designated in the Specially Designated Nationals and Blocked Persons List of the Office of Foreign Assets Control or in Section 1 of the Anti-Terrorism Order or (ii) engages in any dealings or transactions with any such Person. The Borrower, the Subsidiaries and, to the knowledge of any Responsible Officer of the Borrower, the Qualified Lessees are in compliance, in all material respects, with the USA PATRIOT Act applicable to them.
(c) No part of the proceeds from the Loans hereunder will be used, directly or indirectly, for any payments to any governmental official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977, as amended, assuming in all cases that such Act applies to the Borrower and each other Loan Party.
 
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6.17. Status under Certain Statutes .
(a) No Loan Party is, or is required to be registered as, an “investment company” under the Investment Company Act of 1940 (the “ICA”), as amended.
(b) The Borrower is not a “public utility” under the FPA and the regulations of FERC thereunder. The execution, delivery and performance of the Borrower’s obligations under the Credit Documents requires no authorization of approval by, or notice to, and is not subject to the jurisdiction of, FERC under the FPA.
(c) Sharyland and the holding company system of which it is a part have obtained a waiver of the requirements of 18 CFR 366.21, 366.22 and 366.23 (FERC Docket Nos. PH06-59-000 & PH10-18-000), but are subject to the FERC regulations relating to regulatory access to books and records. Sharyland and the holding company system of which it is a part have filed a notice of holding company status under FERC Docket No. HC06-1-000 and a revised notice of holding company status under FERC Docket No. HC10-1-000. Under FERC’s currently effective regulations, the Borrower will be deemed not to be a “public-utility company” and as a result Holdings is not a “holding company” under PUHCA.
(d) The Borrower is subject to regulation as an “electric utility” by the Public Utility Commission of Texas. The execution, delivery and performance of the Borrower’s obligations under the Financing Documents requires no authorization or approval by, or notice to, the Public Utility Commission of Texas or under the Public Utility Regulatory Act of Texas other than those that have been obtained.
(e) Solely by virtue of the execution, delivery and performance of the Credit Documents to which it is a party, the Administrative Agent or any Lender will not become subject to any of the provisions of the FPA, PUHCA (based on FERC’s currently effective definitions under PUHCA) or the Public Utility Regulatory Act of Texas, or to regulation under any such statute.
(f) The Borrower does not own, operate or control any electrical generating, transmitting or distribution facility, or effect or control any sale of electricity, outside of the ERCOT balancing area authority except (i) as permitted by FERC, as set forth in its declaratory order issued in Docket no. EL07-93-000 or (ii) interconnected transmission or distribution assets or systems located substantially in the State of Texas or deriving a majority of their revenue from customers within the State of Texas.
6.18. Environmental Matters .
(a) The Borrower has no knowledge of any claims nor has it received any notice of any claim, and no proceeding has been instituted raising any claim against the Borrower or any Subsidiary or any of their real properties now or formerly owned, leased or operated by any of them or other assets, alleging any damage to the environment or violation of any Environmental Laws, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect.
(b) The Borrower has no knowledge of any facts which would give rise to any claim, public or private, of violation of Environmental Laws or damage to the environment emanating from, occurring on or in any way related to real properties now or formerly owned, leased or operated by the Borrower or any Subsidiary or to other assets or its use, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect.
(c) Neither the Borrower nor any Subsidiary has stored any Hazardous Materials on real properties now or formerly owned, leased or operated by any of them and has not disposed of any Hazardous Materials in a manner contrary to any Environmental Laws in each case in any manner that could reasonably be expected to result in a Material Adverse Effect; and
(d) All buildings on all real properties now owned, leased or operated by the Borrower or any of the Subsidiaries are in compliance with applicable Environmental Laws, except where failure to comply could not reasonably be expected to result in a Material Adverse Effect.
 
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6.19. Force Majeure Events; Employees . None of the assets of the Borrower or the Subsidiaries, including the System, has suffered any Force Majeure Event that is continuing. Neither the Borrower nor any Subsidiary has any employees.
6.20. Collateral . As of the Restatement Date, (i) the security interests in the UCC Collateral granted to the Collateral Agent (for the benefit of the Secured Parties): (a) constitute, as to such Collateral, a valid security interest and Lien under the New York UCC, and (b) constitute first priority Liens on such Collateral described in the Security Documents, subject to no Liens other than Permitted Liens and the rights of holders of Permitted Secured Indebtedness in compliance with the Collateral Agency Agreement, (ii) all action as is required pursuant to the Security Documents has been taken to establish and perfect the Collateral Agent’s rights in and to, and the first priority of its Lien (subject to Permitted Liens) on, the Collateral as set forth in the immediately preceding clause (i), including any recording, filing, registration, delivery to the Collateral Agent, giving of notice or other similar action, and (iii) the Deeds of Trust create in favor of the Trustee named therein, for the benefit of the Collateral Agent and the other Secured Parties, a valid security interest and first priority Lien in all the Borrower’s right, title and interest in and to the real property subject thereto and the proceeds thereof, subject to no Liens other than Permitted Liens and the rights of holders of Permitted Secured Indebtedness in compliance with the Collateral Agency Agreement.
6.21. Collateral Agency Agreement . Each of this Agreement and each other Credit Document is a “Financing Agreement”, as such term is defined in the Collateral Agency Agreement. All of the obligations of the Borrower hereunder and under the other Credit Documents are “Obligations”, as such term is defined in the Collateral Agency Agreement, and “Permitted Secured Indebtedness”, as such term is defined in the Collateral Agency Agreement.
6.22. Margin Regulations . The Borrower is not engaged, principally or as one of its important activities, in the business of purchasing or carrying margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System of the United States), or extending credit for the purpose of purchasing or carrying margin stock. Following the application of the proceeds of each Borrowing or drawing under each Letter of Credit, not more than 25% of the value of the assets of the Borrower and its Subsidiaries on a consolidated basis subject to the provisions of Section 8.5 or Section 8.10 or subject to any restriction contained in any agreement or instrument between the Borrower and any Lender or any Affiliate of any Lender relating to Indebtedness and within the scope of Section 9(i) will be margin stock.
6.23. OFAC . None of the Borrower or any of its Subsidiaries, or any director, officer, employee, agent, affiliate or representative thereof, is an individual or entity currently the subject of any Sanctions, nor is the Borrower or any of its Subsidiaries located, organized or resident in a Designated Jurisdiction.
SECTION 7 AFFIRMATIVE COVENANTS .
The Borrower covenants and agrees that until the Commitments have terminated, no Letters of Credit or Promissory Notes are outstanding and the Loans and Unpaid Drawings, together with
 
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interest, Fees and all other Obligations under the Credit Documents (other than contingent obligations (including indemnification obligations) for which no claims have been made) incurred hereunder, are paid in full:
7.1. Information Covenants . The Borrower will furnish to the Administrative Agent (on behalf of each Lender):
(a) Annual Financial Statements . Within 90 days after the close of each fiscal year of the Borrower and each Qualified Lessee (other than a Consolidated Qualified Lessee), as applicable, the consolidated balance sheet of the Borrower and its Subsidiaries and each such Qualified Lessee, as the case may be (in each case, with a separately scheduled consolidating balance sheet and income statement for each Project Finance Subsidiary), as at the end of such fiscal year, the related consolidated statement of operations, the related consolidated statement of members’ capital and the related consolidated statement of cash flows for such fiscal year, in each case setting forth comparative consolidated figures for the preceding fiscal year, and, other than the separately scheduled consolidating balance sheet and income statement of each Project Finance Subsidiary, examined by independent certified public accountants of recognized national standing whose opinion shall not be qualified as to the scope of audit and as to the status of the Borrower or any of its Subsidiaries or such Qualified Lessees, as applicable, as a going concern, together with a certificate of such accounting firm stating that in the course of its regular audit of the business of the Borrower or such Qualified Lessees, which audit was conducted in accordance with generally accepted auditing standards, such accounting firm has obtained no knowledge of any Default or Event of Default which has occurred and is continuing or, if in the opinion of such accounting firm such a Default or Event of Default has occurred and is continuing, a statement as to the nature thereof (which certificate may be limited to the extent required by accounting rules or guidelines).
(b) Quarterly Financial Statements . As soon as available and in any event within 45 days after the close of each of the first three quarterly accounting periods in each fiscal year, the consolidated balance sheet of the Borrower and its Subsidiaries and each Qualified Lessee (other than a Consolidated Qualified Lessee), as the case may be (in each case, with a separately scheduled supplemental consolidating balance sheet and income statement for each Project Finance Subsidiary), as at the end of such quarterly period, the related consolidated statement of operations, the related consolidated statement of members’ capital and the related consolidated statement of cash flows for such quarterly period, and for the elapsed portion of the fiscal year ended with the last day of such quarterly period, and in each case setting forth comparative consolidated figures for the related periods in the prior fiscal year, all of which shall be certified by the chief financial officer, controller, chief accounting officer or other Authorized Officer of the Borrower or such Qualified Lessee, as applicable, except for the absence of footnotes and subject to changes resulting from audit and normal year-end audit adjustments.
(c) Annual Budgets . As soon as available and in any event within 30 days after the close of each fiscal year of the Borrower and each Qualified Lessee (other than a Consolidated Qualified Lessee), as the case may be, the annual budget of the Borrower and its Subsidiaries and each such Qualified Lessee, as applicable, which shall include details on capital expenditures to be made by the Borrower and its Subsidiaries and each such Qualified Lessee, as applicable, in the next twelve months.
(d) Management Discussion and Analysis . Within 45 days after the close of each of the first three fiscal quarters in each fiscal year, a management discussion and analysis of each of each Qualified Lessee’s (other than a Consolidated Qualified Lessee) and the Borrower’s consolidated performance for that fiscal quarter and a comparison of performance for that financial quarter to the
 
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corresponding fiscal quarter of the previous fiscal year (in form and substance reasonably acceptable to the Administrative Agent, which shall not be unacceptable solely because it does not contain all of the information required to be included in unaudited interim financial statements by Item 303 of Regulation S-K of the Securities Act of 1933, as amended). Within 90 days after the close of each fiscal year, a management discussion and analysis of each of each such Qualified Lessee’s and the Borrower’s consolidated performance for that fiscal year and a comparison of performance for that fiscal year to the prior year.
All such financial statements delivered pursuant to paragraphs (a) and (b) above shall present fairly in all material respects in accordance with GAAP the consolidated financial condition of such Qualified Lessees or the Borrower and their respective consolidated Subsidiaries, as applicable, as at the applicable dates, and the consolidated results of their operations, their changes in equity (deficit) and their consolidated cash flows for the periods reflected therein, and shall be prepared in accordance with GAAP applied consistently throughout the periods reflected therein and with prior periods (except as approved by such accountants or officer, as the case may be, and disclosed therein).
(e) Officer’s Certificates . At the time of the delivery of the financial statements provided for in Section 7.1(a) and (b), a certificate of the Senior Financial Officer of each Qualified Lessee (other than a Consolidated Qualified Lessee) or of the Borrower, as applicable, substantially in the form of Exhibit D, to the effect that no Default or Event of Default has occurred and is continuing (or in the case of each such Qualified Lessees, no default or event of default has occurred and is continuing under any Leases to which it is a party, which default or event of default constitutes an Event of Default pursuant to Section 9(f)) or, if any Default or Event of Default has occurred and is continuing (or in the case of each such Qualified Lessees, any default or event of default has occurred and is continuing under any Leases to which it is a party, which default or event of default constitutes an Event of Default pursuant to Section 9(f)), specifying the nature and extent thereof, which certificate shall set forth the calculations required to establish whether the Borrower and its Subsidiaries were in compliance with the provisions of Section 7.11 as at the end of such fiscal period or year, as the case may be. Each such certificate shall also include a list of deposit accounts and securities accounts held by any Loan Party.
(f) Notice of Default or Litigation . Promptly, and in any event within five Business Days after a Responsible Officer of the Borrower or any of its Subsidiaries obtains knowledge thereof, notice of (v) the occurrence of any event which constitutes a Default or Event of Default, which notice shall specify the nature thereof, the period of existence thereof and what action the Borrower or such Subsidiary proposes to take with respect thereto, (x)(i) the commencement of or any material development in any litigation or governmental proceeding pending against the Borrower or any of its Subsidiaries in which the amount involved is $750,000 or more (other than proceedings under the Texas Public Utility Act before the Public Utility Commission of Texas or condemnation proceedings in which a Qualified Lessee, the Borrower or any of its Subsidiaries is the condemning party) or is reasonably likely to have a Material Adverse Effect on the ability of the Borrower or any Loan Party to perform its obligations hereunder or under any other Credit Document and (ii) the commencement of any proceeding under the Texas Public Utility Act before the Public Utility Commission of Texas involving the Borrower (other than proceedings that are in the ordinary course of business or that are not material) and the issuance of any final order of the Public Utility Commission of Texas with respect to such proceeding, and (y) any development or event that has had or could reasonably be expected to have a Material Adverse Effect. Promptly, and in any event within five Business Days after the Borrower receives a written notice of default under a System Lease from the applicable Qualified Lessee, a copy of such notice of default or a written notice specifying the nature and period of existence of such default and what action the Borrower is taking or proposes to take with respect thereto.
 
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(g) Insurance Certificates . At the time of the delivery of the financial statements provided for in Section 7.1(a), the certification required to be delivered at such time pursuant to Section 7.4(b).
(h) Other Information . (i) Promptly upon transmission thereof, copies of any reportings or filings by the Borrower or any of its Subsidiaries with regulatory agencies (including the Securities and Exchange Commission or any successor thereto (the “ SEC ”)) but excluding the Public Utility Commission of Texas (and the Federal Energy Regulatory Commission, if applicable); provided that the Borrower shall furnish such reports or filings as the Administrative Agent may reasonably request from time to time, (ii) promptly upon their becoming available, each report and filing made by the Company to holders of other Permitted Secured Indebtedness and (iii) such other information or documents (financial or otherwise) as the Administrative Agent on its own behalf or on behalf of the Required Lenders may reasonably request from time to time.
Documents required to be delivered pursuant to Section 7.1(a) or (b) or Section 7.1(g) may be delivered electronically and if so delivered, shall be deemed to have been delivered on the date (i) on which such documents are posted on the Borrower’s behalf on an Internet or intranet website, if any, to which each Lender and the Administrative Agent have access (whether a commercial, third-party website or whether sponsored by the Administrative Agent); provided that: (i) the Borrower shall deliver paper copies of such documents to the Administrative Agent or any Lender upon its request to the Borrower to deliver such paper copies until a written request to cease delivering paper copies is given by the Administrative Agent or such Lender and (ii) the Borrower shall notify the Administrative Agent and each Lender (by facsimile or electronic mail) of the posting of any such documents and provide to the Administrative Agent by electronic mail electronic versions (i.e., soft copies) of such documents. The Administrative Agent shall have no obligation to request the delivery of or to maintain paper copies of the documents referred to above, and in any event shall have no responsibility to monitor compliance by the Borrower with any such request by a Lender for delivery, and each Lender shall be solely responsible for requesting delivery to it or maintaining its copies of such documents.
The Borrower hereby acknowledges that (a) the Administrative Agent and/or the Arranger may, but shall not be obligated to, make available to the Lenders and the Issuing Lender materials and/or information provided by or on behalf of the Borrower hereunder (collectively, “ Borrower Materials ”) by posting the Borrower Materials on Debt Domain, IntraLinks, Syndtrak or another similar electronic system (the “ Platform ”) and (b) certain of the Lenders (each, a “ Public Lender ”) may have personnel who do not wish to receive material non-public information with respect to the Borrower or its Affiliates, or the respective securities of any of the foregoing, and who may be engaged in investment and other market-related activities with respect to such Persons’ securities. The Borrower hereby agrees that so long as the Borrower is the issuer of any outstanding debt or equity securities that are registered or issued pursuant to a private offering or is actively contemplating issuing any such securities (w) all Borrower Materials that are to be made available to Public Lenders shall be clearly and conspicuously marked “PUBLIC” which, at a minimum, shall mean that the word “PUBLIC” shall appear prominently on the first page thereof; (x) by marking Borrower Materials “PUBLIC,” the Borrower shall be deemed to have authorized the Administrative Agent, the Arranger, the Issuing Lender and the Lenders to treat such Borrower Materials as not containing any material non-public information with respect to the Borrower or its securities for purposes of United States federal and state securities laws (provided, however, that to the extent such Borrower Materials constitute Information, they shall be treated as set forth in Section 12.15); (y) all Borrower Materials marked “PUBLIC” are permitted to be made available through a portion of the Platform designated “Public Side Information;” and (z) the Administrative Agent and the Arranger shall be entitled to treat any Borrower Materials that are not marked “PUBLIC” as being suitable only for posting on a portion of the Platform not designated “Public Side Information.”
 
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7.2. Use of Proceeds . All proceeds of the Loans shall be used to refinance any outstanding amounts under the Original Credit Agreement and to finance the working capital needs, capital expenditures, dividends and distributions of, and for the general corporate purposes of, the Borrower and its Subsidiaries, including future acquisitions not prohibited under this Agreement, but not to fund, directly or indirectly, any Project Finance Subsidiary.
7.3. Compliance with Law . Without limiting Section 8.4, the Borrower will, and will cause its Subsidiaries to, comply with all laws, ordinances or governmental rules or regulations to which it is subject, including, without limitation, ERISA, the USA PATRIOT Act and Environmental Laws, and will obtain and maintain in effect all licenses, certificates, permits, franchises and other governmental authorizations necessary to the ownership of its properties or to the conduct of its businesses to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
7.4. Insurance .
(a) Maintenance of Insurance . The Borrower will maintain or cause to be maintained and will cause its Subsidiaries to, maintain, with financially sound and reputable insurers, insurance with respect to their respective properties and businesses against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated.
(b) Evidence of Insurance . At the time of the delivery of the certificate required under Section 7.1(e) for financial statements provided for in Section 7.1(a) or promptly upon request by the Administrative Agent, the Borrower shall furnish the Administrative Agent and the Collateral Agent with approved certification of all required insurance. Such certification shall be executed by each insurer or by an authorized representative of each insurer where it is not practical for such insurer to execute the certificate itself. Such certification shall identify underwriters, the type of insurance, the insurance limits, and the policy term, and shall specifically list the special provisions enumerated for such insurance required by this Section 7.4. Upon request, the Borrower will promptly furnish the Administrative Agent and the Collateral Agent with copies of all insurance certificates, binders, and cover notes or other evidence of such insurance relating to the Collateral.
(c) No Duty of any Lender to Verify : No provision of this Section 7.4 or any other provision of this Agreement, any other Financing Document or any Lease shall impose on the Administrative Agent, the Collateral Agent or any Lender any duty or obligation to verify the existence or adequacy of the insurance coverage maintained by the Borrower, nor shall the Administrative Agent or the Collateral Agent nor any Lender be responsible for any representations or warranties made by or on behalf of the Borrower to any insurance company or underwriter.
7.5. Maintenance of Properties . The Borrower will and will cause its Subsidiaries to, and will use commercially reasonable efforts to cause the Qualified Lessees to, (a) maintain, preserve and protect all of its respective properties (including any such properties comprising any portion of the System) and equipment necessary in the operation of its respective business in good working order and condition, ordinary wear and tear excepted; and (b) make all necessary repairs thereto and renewals and replacements thereof, except in the case of clauses (a) and (b) where the failure to do so could not reasonably be expected to have a Material Adverse Effect.
 
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7.6. Payment of Taxes and Claims . The Borrower will, and will cause each of its Subsidiaries to, file all Tax returns required to be filed by it in any jurisdiction and to pay and discharge all Taxes shown to be due and payable by it on such returns and all other Taxes imposed on them or any of their properties, assets, income or franchises, to the extent the same have become due and payable and before they have become delinquent and all claims for which sums have become due and payable that have or might become a Lien on properties or assets of the Borrower or any Subsidiary, provided that none of the Borrower or any Subsidiary need pay any such Tax or claim if (i) the amount, applicability or validity thereof is contested by such Person on a timely basis in good faith and in appropriate proceedings, and such Person has established adequate reserves therefor in accordance with GAAP on its books or (ii) the nonpayment of all such Taxes and claims in the aggregate could not reasonably be expected to have a Material Adverse Effect.
7.7. Existence, Etc. Except as permitted under Section 8.2, the Borrower will and will cause each of its Subsidiaries at all times preserve and keep in full force and effect its respective limited liability company, corporate or limited partnership existence and all rights and franchises of the Borrower unless (other than with respect to the Borrower’s existence), in the good faith judgment of the Borrower, the termination of or failure to preserve and keep in full force and effect such limited liability company, corporate or limited partnership existence, right or franchise could not, individually or in the aggregate, have a Material Adverse Effect.
7.8. Books and Records; Inspection Rights . The Borrower will, and will cause each of its Subsidiaries to, and will use commercially reasonable efforts to cause any Qualified Lessee to, maintain proper books of record and account in conformity with GAAP and all applicable requirements of any Governmental Authority having legal or regulatory jurisdiction over such Person. The Borrower will permit representatives and independent contractors of the Administrative Agent and each Lender to visit and inspect any of its properties, to examine its corporate, financial and operating records, and make copies thereof or abstracts therefrom, and to discuss its affairs, finances and accounts with its directors, officers, and independent public accountants, all at the expense of the Borrower and at such reasonable times during normal business hours no more than once per each calendar year, upon reasonable advance notice to the Borrower; provided , however , that when an Event of Default has occurred and is continuing the Administrative Agent or any Lender (or any of their respective representatives or independent contractors) may do any of the foregoing at the expense of the Borrower at any time during normal business hours and as often as may be reasonably desired.
7.9. Collateral; Further Assurances .
(a) The Borrower shall take all actions necessary to ensure that the Collateral Agent, on behalf of the Secured Parties (or in the case of Real Property Collateral, the Trustee named in the Deeds of Trust, for the benefit of the Collateral Agent and the other Secured Parties), has and continues to have in all relevant jurisdictions duly and validly created, attached, perfected and enforceable first-priority Liens on the Collateral constituting UCC Collateral and Real Property Collateral, in each case, to the extent required under the Security Documents (including, in accordance with clauses (c) and (d) of this Section 7.9, after-acquired Collateral), subject to no Liens other than Permitted Liens and rights of holders of Permitted Secured Indebtedness in compliance with the Collateral Agency Agreement. The Borrower shall cause the Obligations to constitute direct senior secured obligations of the Borrower and to be senior in right of payment and to rank senior in right of security (other than Permitted Liens) with respect to Collateral granted in the Security Documents to all other Indebtedness of the Borrower (other than Permitted Secured Indebtedness, with which it shall be pari passu in accordance with the terms of the Collateral Agency Agreement).
 
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(b) Upon completion of each New Project of a Project Finance Subsidiary, the Borrower may cause any such Project Finance Subsidiary to Transfer the New Project to the Borrower and upon such Transfer, the Borrower shall take all actions necessary to ensure that (w) the New Project becomes a part of the Collateral to the extent required under the Security Documents and Section 7.9(c), subject to the first priority Lien of the Security Documents (subject to no Liens other than Permitted Liens and rights of holders of Permitted Secured Indebtedness in accordance with the Collateral Agency Agreement), (x) no Default or Event of Default occurs as a result of such Transfer, (y) the Indebtedness of the Project Finance Subsidiary is either repaid in full at the time of the Transfer or becomes Permitted Secured Indebtedness, and (z) the Project Finance Subsidiary is liquidated or merged with and into the Borrower.
(c) If, after the Restatement Date, the Borrower acquires any Real Property Collateral, the Borrower shall forthwith (and in any event, within five Business Days of such acquisition, or such longer period of time as reasonably agreed by the Administrative Agent) deliver to the Collateral Agent a fully executed mortgage or deed of trust over such real property, in form and substance substantially similar to a previously delivered Deed of Trust or otherwise satisfactory to the Required Secured Parties and the Collateral Agent, together with such surveys, environmental reports and other documents and certificates with respect to such Real Property Collateral as may be reasonably required by the Required Secured Parties. The Borrower further agrees to take all other actions necessary to create in favor of the Trustee named therein, for the benefit of the Collateral Agent and the other Secured Parties a valid and enforceable first priority Lien on such Real Property Collateral, free and clear of all Liens except for Permitted Liens and rights of holders of Permitted Secured Indebtedness in compliance with the Collateral Agency Agreement.
(d) If (A) after the Restatement Date, the Borrower acquires or creates any new Subsidiary that is a Wholly-Owned Subsidiary (other than any Foreign Subsidiary, any Project Finance Subsidiary and any other Subsidiary that is prohibited from providing a Guaranty of the Obligations by any Applicable Law), within 30 days of such creation or acquisition (or such longer time as the Administrative Agent may agree), or (B) (x) the Cross Valley Project Transfer has not occurred and CV Project Entity, L.L.C. has not obtained binding commitments for Non-Recourse Debt to finance the Cross Valley Project or (y) the Golden Spread Project Transfer has not occurred and the GS Project Entity has not obtained binding commitments for Non-Recourse Debt to finance the Golden Spread Project, in either case by January 31, 2015 (or such later date as the Administrative Agent may agree), then, in each case of the foregoing clauses (A) and (B), the Borrower shall cause such Wholly-Owned Subsidiary or such Project Finance Subsidiary, as applicable:
(i) to execute and deliver to the Administrative Agent a Subsidiary Guaranty;
(ii) to deliver to the Administrative Agent a certificate of such Wholly-Owned Subsidiary, substantially consistent with those delivered on the Restatement Date pursuant to Section 5.1(c), with appropriate insertions and attachments;
(iii) to take such actions reasonably necessary or advisable to grant to the Collateral Agent for the benefit of the Secured Parties (or in the case of Real Property Collateral, the Trustee named in the Deeds of Trust, for the benefit of the Collateral Agent and the other Secured Parties) a perfected and enforceable first-priority Lien in the Collateral to the extent required in the Security Documents with respect to such new Wholly-Owned Subsidiary, subject to no Liens other than Permitted Liens and rights of holders of Permitted Secured Indebtedness, and including the filing of UCC financing statements in such jurisdictions as may be required by such Security Documents or by law or as may be reasonably requested by the Administrative Agent;
 
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(iv) to deliver to the Collateral Agent the stock certificates (if any) representing Capital Stock issued by such Wholly-Owned Subsidiary, together with undated stock (or other transfer) powers, in blank, executed and delivered by a duly authorized officer of the Borrower; and
(v) if reasonably requested by the Administrative Agent, to deliver to the Administrative Agent legal opinions relating to the matters described above, which opinions shall be in form and substance reasonably satisfactory to the Administrative Agent.
(e) Subject to the provisions of this Agreement and the Security Documents, a Loan Party shall, prior to the occurrence of an Event of Default, be free to manage its deposit accounts and security accounts in its sole discretion.
7.10. Material Project Documents .
(a) The Borrower shall at all times (i) perform and observe all of the covenants under the Material Project Documents to which it is a party, (ii) take reasonable actions to enforce all of its rights thereunder, and (iii) maintain the Leases to which it or any of its Subsidiaries is a party in full force and effect, except to the extent the same could not reasonably be expected to have a Material Adverse Effect.
(b) If the term of a Lease with the Borrower or one of its Subsidiaries expires and the Qualified Lessee under such Lease has either ceased operating the related assets or has ceased paying rent as required under the applicable Lease, the Borrower shall or shall cause a Subsidiary to enter into a supplement or a new Lease with respect to the related Leasehold assets with a Qualified Lessee that provides for rent that, when combined with all other expected revenue, will, in the reasonable judgment of the Borrower, as of the commencement date of such supplement or new Lease, generate sufficient revenue to satisfy the requirements of Section 7.11(b). Notwithstanding the foregoing, if (i) such expired Lease relates to transmission and/or distribution assets that are not generating significant revenue, (ii) the failure to renew such Lease would not constitute a Material Adverse Effect and (iii) the Borrower reasonably believes it will generate sufficient revenue and hold sufficient assets (without giving effect to the Leasehold assets with respect to such Lease) to satisfy the requirements of Section 7.11, then this Section 7.10(b) will not require a supplement or new lease with respect to such Leasehold assets.
7.11. Financial Ratios .
(a) The Borrower shall at all times maintain, on a consolidated basis, a Total Debt to Capitalization Ratio of not more than 0.65 to 1.00.
(b) The Borrower shall maintain, for each period of four consecutive fiscal quarters, a Debt Service Coverage Ratio of at least 1.40 to 1.00.
SECTION 8 NEGATIVE COVENANTS . Until the Commitments have terminated, no Letters of Credit or Promissory Notes are outstanding and the Loans and Unpaid Drawings, together with interest, Fees and all other Obligations under the Credit Documents (other than contingent obligations (including indemnification obligations) for which no claims have been made) incurred hereunder, are paid in full:
8.1. Transactions with Affiliates . The Borrower will not and will not permit any Subsidiary to enter into directly or indirectly any transaction or group of related transactions (including without limitation the purchase, lease, sale or exchange of properties of any kind or the rendering of any
 
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service) with any Affiliate, other than, (i) transactions with Project Finance Subsidiaries as permitted by Section 7.9(b) and other transactions between or among the Borrower and one or more Subsidiaries, or any subset thereof, to the extent permitted under Sections 8.2, 8.6, 8.7, 8.10 and 8.14, (ii) any Qualified Lessee Affiliate Loan and any Indebtedness permitted under Section 8.6(d)(ii), (iii) payment of customary fees and reasonable out of pocket costs to, and indemnities for the benefit of, directors, officers and employees of the Borrower and its Subsidiaries in the ordinary course of business, (iv) transactions entered into in connection with the Cross Valley Project on or prior to the Cross Valley Project Transfer and the Golden Spread Project on or prior to the Golden Spread Project Transfer, (v) ROFO Transfers, and (vi) upon fair and reasonable terms no less favorable to the Borrower or such Subsidiary than would be obtained in a comparable arms-length transaction with a Person not an Affiliate; provided that any transaction will be deemed to meet the requirements of this clause (vi) if, (x) prior to a Qualifying IPO, such transaction is on terms approved by the holders of a majority of the Capital Stock of InfraREIT held by Persons who do not have a separate material interest in such transaction other than by virtue of their ownership of such Capital Stock, or by a majority of the directors nominated by such Persons, and (y) upon the completion of a Qualifying IPO and thereafter, such transaction is on terms approved by a majority of the board of directors (or comparable governing body) of InfraREIT or an Affiliate thereof who are “independent” (as such term is defined pursuant to the rules of the primary exchange on which the Capital Stock is listed for trading), or a majority of the “independent” members of a committee of any such board of directors (or comparable governing body).
8.2. Merger, Consolidation, etc. The Borrower will not nor will it cause or permit any of its Subsidiaries to consolidate with or merge with any other Person or Transfer all or substantially all of its assets in a single transaction or series of transactions to any Person, except (i) pursuant to the System Leases or any other Lease, (ii) as permitted pursuant to Section 7.9(b), (iii) that so long as both before and after giving effect to such merger or consolidation or Transfer of all or substantially all of its assets no Default or Event of Default exists, the Borrower or any Subsidiary may merge or consolidate with another Person, and the Borrower or any Subsidiary may Transfer all or substantially all of its assets to another Person, so long as, after giving effect to such merger or consolidation, or such Transfer of all or substantially all of its assets, (A) with respect to any merger or consolidation to which the Borrower is a party, the Borrower shall be the surviving entity, (B) with respect to any merger or consolidation to which a Subsidiary is a party but the Borrower is not, a Subsidiary (other than a Project Finance Subsidiary) shall be the surviving entity and (C) with respect to any Transfer of all or substantially all of its assets by the Borrower or a Subsidiary, the Borrower or another Subsidiary (other than a Project Finance Subsidiary) shall be the transferee or lessee of such assets (except to the extent permitted by clauses (i) and (ii) of this Section 8.2), or (iv) the FERC Merger.
8.3. Line of Business . The Borrower will not and will not permit any Subsidiary to engage in any business if, as a result, the general nature of the business in which the Borrower and its Subsidiaries, taken as a whole, would then be engaged would be substantially changed from the transmission and distribution of electric power and the provision of ancillary services.
8.4. Terrorism Sanctions Regulations . The Borrower will not and will not permit any Subsidiary to, and will use commercially reasonable efforts not to permit any Qualified Lessee to (a) become a Person described or designated in the Specially Designated Nationals and Blocked Persons List of the Office of Foreign Assets Control or in Section 1 of the Anti–Terrorism Order or (b) engage in any dealings or transactions with any such Person. The Borrower will not directly or indirectly, use the proceeds of any Loans hereunder, or lend, contribute or otherwise make available such proceeds to the parent of the Borrower or any Subsidiary, joint venture partner or other individual or entity, to fund any activities of or business with any individual or entity, or in any Designated Jurisdiction, that, at the time of such funding, is the subject of Sanctions, or in any other manner that will result in a violation by any individual or entity (including any individual or entity participating in the transaction, whether as Lender, the Arranger, Administrative Agent, Issuing Lender, or otherwise) of Sanctions.
 
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8.5. Liens . The Borrower will not, nor will it cause or permit any Subsidiary to, directly or indirectly create, incur, assume or permit to exist (upon the happening of a contingency or otherwise) any Lien on or with respect to the Collateral or any other property of the Borrower or such Subsidiary, whether now owned or held or hereafter acquired, or any income or profits therefrom, or assign or otherwise convey any right to receive income or profits, or on any other asset now owned or hereafter acquired by the Borrower or such Subsidiary, except (each, a “ Permitted Lien ” ):
(a) solely in the case of any Borrower Party, Liens created or permitted by the Credit Documents, 2010 Financing Documents or the 2009 Financing Documents on the assets of such Borrower Party; and
(b) (i) solely in the case of a Project Finance Subsidiary, Liens on assets owned by that Project Finance Subsidiary and (ii) Liens on the Capital Stock in that Project Finance Subsidiary to secure its Non-Recourse Debt;
(c) [Reserved]
(d) Liens for Taxes which are not yet due and payable or the payment of which is not at the time required by Section 7.6;
(e) any attachment or judgment Lien, unless such attachment or judgment Lien constitutes an Event of Default under Section 9(l) ;
(f) Liens existing on the date of this Agreement set forth in Annex 8.5 hereto;
(g) Liens of a lessor of equipment to the Borrower or any Subsidiary on such lessor’s leased equipment (but excluding equipment leased pursuant to a Capital Lease), including any of the foregoing which is evidenced by a protective UCC filing;
(h) Mechanics’, warehousemen’s, carriers’, workers’, repairers’, landlords’, and other similar liens arising or incurred in the ordinary course of business and (i) which do not in the aggregate materially detract from the value of property or assets subject to such Liens or materially impair the continued use thereof in the operation of the business or (ii) which are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property or asset subject to such Liens, or other Liens incurred or deposits made in the ordinary course of business in connection with workers’ compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, trade contracts, leases, government contracts, performance and return-of-money bonds and other similar obligations incurred in the ordinary course of business (exclusive of obligations in respect of the payment for borrowed money);
(i) zoning, entitlement, restriction, and other land use and environmental regulations by Governmental Authorities and encroachments, easements, rights of way, covenants, restrictions or agreements which do not materially interfere with the continued use of any asset as currently used in the conduct of the business;
 
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(j) any encumbrances set forth in any franchise or governing ordinance under which any portion of the business is conducted which could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect;
(k) all rights of condemnation, eminent domain, or other similar right of any Person
(l) any interest of title of a lessor under leases; and
(m) Liens securing Permitted Secured Indebtedness.
8.6. Indebtedness . The Borrower will not, and will not cause or permit any Subsidiary to incur any Indebtedness and will use commercially reasonable efforts not to permit any Qualified Lessee (other than Qualified Lessees (1) with an Investment Grade Credit Rating or (2) whose obligations under the applicable Leases have been Guaranteed by an entity with an Investment Grade Credit Rating) or Subsidiaries of Specified Qualified Lessees to incur Indebtedness for borrowed money, in each case except the following Indebtedness, which may be incurred subject to the requirements of the last paragraph of this section:
(a) Indebtedness evidenced by the Credit Documents, the 2010 Financing Documents and the 2009 Financing Documents;
(b) Indebtedness of the Borrower (i) that is not related to, and does not support, Non-Recourse Debt of a Project Finance Subsidiary and (ii) if incurred, would not result in a breach of Section 7.11; provided that, if the Indebtedness is proposed to be secured by any of the Collateral, then at least five Business Days (or such shorter period reasonably agreed by the Administrative Agent) prior to the incurrence of such Indebtedness, the Borrower shall (x) notify the Administrative Agent of its intent to incur such Indebtedness, which notice shall set forth in reasonable detail (A) the amount and proposed economic terms of such Indebtedness, (B) by type of lender or purchaser and (C) the proposed collateral for such Indebtedness (which proposed collateral may include any or all of the Collateral) and (y) deliver to the Collateral Agent and the Administrative Agent an executed joinder agreement substantially in the form of Exhibit A attached to the Collateral Agency Agreement pursuant to which all the proposed holders of such Indebtedness have become party to the Collateral Agency Agreement;
(c) (i) Non-Recourse Debt incurred by a Project Finance Subsidiary of the Borrower (including Non-Recourse Debt incurred by such Project Finance Subsidiary prior to being acquired by the Borrower or a Subsidiary) to fund a New Project, (ii) any Indebtedness in the form of a pledge of Capital Stock in a Project Finance Subsidiary as security for Non-Recourse Debt of such Project Finance Subsidiary and (iii) Indebtedness of a Subsidiary (other than a Project Finance Subsidiary of the Borrower) owed to the Borrower;
(d) Indebtedness of any such Qualified Lessee (i) in an aggregate principal amount for such Qualified Lessee of up to the greater of (A) $5,000,000 and (B) an amount equal to 1% of the sum of, without duplication, (x) the total amount of the Consolidated Net Plant of such Qualified Lessee, plus (y) the total amount of the Consolidated Net Plant of any guarantor(s) of such Qualified Lessee’s obligations under the applicable Leases, plus (z) the total amount of Leased Consolidated Net Plant, in each case on a senior secured basis and (ii) in an aggregate principal amount for such Qualified Lessee of up to the greater of (A) $10,000,000 and (B) an amount equal to 1.5% of the sum of, without duplication, (x) the total amount of the Consolidated Net Plant of such Qualified Lessee, plus (y) the total amount of the Consolidated Net Plant of any guarantor(s) of such Qualified Lessee’s obligations under the applicable Leases, plus (z) the total amount of Leased Consolidated Net Plant, in each case on an
 
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unsecured subordinated basis on terms substantially similar to the terms set forth on Exhibit G, to the extent allowed under the Leases to which such Qualified Lessee is a party as a lessee or tenant thereunder; provided , that for purposes of this clause (d), all Consolidated Qualified Lessees will be treated as one Qualified Lessee;
(e) Indebtedness of the Borrower to any of its Subsidiaries (other than a Project Finance Subsidiary), which by its terms is expressly subordinated to the Obligations, and Indebtedness of any Subsidiary (other than a Project Finance Subsidiary) to the Borrower or any other Subsidiary of the Borrower (other than a Project Finance Subsidiary) not to exceed $5,000,000 at any one time outstanding and in each case to have a maturity date of less than one year;
(f) Qualified Lessees may also incur Indebtedness associated with Qualified Lessee Affiliate Loans; and
(g) Indebtedness of Subsidiaries of Specified Qualified Lessees incurred in an aggregate principal amount for each such Specified Qualified Lessee of up to the product of (x) such Specified Qualified Lessee’s Consolidated Net Plant (derived from its most recently prepared consolidated balance sheet, prepared in accordance with GAAP but adjusted to reverse the effects of failed sale-leaseback accounting in a manner reasonably determined by such Specified Qualified Lessee in good faith) multiplied by (y) the lesser of (A) the sum of such Specified Qualified Lessee’s then-current PUCT-regulated debt-to-equity ratio (expressed as a percentage) and 5% or (B) 65%; provided , that such Indebtedness must be Non-Recourse Debt to such Specified Qualified Lessee.
Indebtedness may be incurred under this Section 8.6 only if no Default or Event of Default is, or as a result of such incurrence would be, existing.
8.7. Loans, Advances, Investments and Contingent Liabilities . The Borrower will not make or permit to remain outstanding any loan or advance to, or extend credit other than credit extended in the ordinary course of business to any Person, or own, purchase or acquire any stock, obligations or securities of, or any other interest in, or make any capital contribution to, any Person (collectively, “ Investments ”), or commit to do any of the foregoing, except (a) Permitted Investments, (b) ownership, purchase, and acquisition of equity interests in and capital contributions to Project Finance Subsidiaries and Wholly-Owned Subsidiaries, (c) loans, advances and extensions of credit to Wholly-Owned Subsidiaries (other than Project Finance Subsidiaries), (d) any Qualified Lessee Affiliate Loan or (e) Investments made in connection with the Cross Valley Project and the Golden Spread Project prior to the Cross Valley Project Transfer and the Golden Spread Project Transfer and (f) the ROFO Transfers.
8.8. No Subsidiaries . The Borrower shall have no subsidiaries other than Project Finance Subsidiaries and Wholly-Owned Subsidiaries.
8.9. Restricted Payments . The Borrower will not, directly or indirectly, make or declare any Distribution unless there does not exist and, after giving effect to the proposed Distribution, there will not exist, a Default or an Event of Default.
The Borrower shall deliver to the Administrative Agent and the Collateral Agent before a Distribution is made a certificate of a Responsible Officer of the Borrower stating that the foregoing condition has been satisfied and, if requested, providing supporting data and calculations.
8.10. Sale of Assets, etc. The Borrower will not, nor will it cause or permit any Subsidiary to, Transfer, or agree or otherwise commit to Transfer, any of its assets with a fair market value of greater than $15,000,000, in the aggregate during the term of this Agreement, (“ Asset Sale ”) except;
(a) the Borrower or a Subsidiary shall lease Systems or other transmission and distribution assets and related assets pursuant to a Lease to which the Borrower or a Subsidiary thereof is a party;
 
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(b) (i) each Project Finance Subsidiary of the Borrower may Transfer its assets to the Borrower or its Wholly-Owned Subsidiaries in accordance with Section 7.9(b); and (ii) the Borrower may Transfer, or suffer the Transfer of, its ownership interests in a Project Finance Subsidiary and such Project Finance Subsidiary may Transfer, or suffer the Transfer of its assets, in each case in connection with and pursuant to the exercise of remedies under the documentation governing Non-Recourse Debt incurred by such Project Finance Subsidiary;
(c) Asset Sales (i) among the Borrower and Subsidiary Guarantors (or a subset thereof), (ii) among Subsidiaries that are not Subsidiary Guarantors and (iii) from Subsidiaries to the Borrower or a Subsidiary Guarantor;
(d) in connection with an acquisition that is not prohibited under this Agreement, (i) Asset Sales of operating assets and related assets to a Qualified Lessee and (ii) Asset Sales that are not electric transmission or distribution assets, in each case (x) which are, in the aggregate, not material in relation to the assets acquired and (y) upon fair and reasonable terms no less favorable to such Person than would be obtained in a comparable arms-length transaction with a Person not an Affiliate;
(e) Permitted Liens;
(f) Investments permitted by Section 8.7, transactions permitted by Section 8.2 and Distributions permitted by Section 8.9;
(g) Asset Sales made in connection with the Cross Valley Project Transfer and the Golden Spread Project Transfer;
(h) ROFO Transfers; and
(i) Asset Sales of assets that are obsolete or no longer used or useful in such Person’s business.
8.11. Sale or Discount of Receivables . The Borrower will not nor will it cause or permit any Subsidiary to sell with recourse, or discount or otherwise sell for less than the face value thereof, any of its notes or accounts receivable.
8.12. Amendments to Organizational Documents . The Borrower will not nor will it cause or permit any of its Subsidiaries to, and shall use commercially reasonable efforts not to permit any Qualified Lessee or any of its Subsidiaries to, amend, supplement, terminate, replace or waive any provision of its operating agreement or other organization documents after the Restatement Date. Notwithstanding, this Section 8.12, the Borrower, its Subsidiaries, any Qualified Lessee and its Subsidiaries may, without the consent of the Administrative Agent, amend their respective operating agreement or similar organizational documents as may be required to facilitate or implement any of the following:
(a) reflect (i) the contribution of any new capital or additional capital by new or existing members or partners of such Person, (ii) the addition of new members or partners of such Person, or (iii) any adjustment, termination, reduction or redemption of equity interests of its members or partners or the issuance of additional equity interests in such Person; provided , that after giving effect to any such changes, no Event of Default would exist under Sections 8.8, 9.1(n) or 9.1(o);
 
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(b) to reflect a change that does not adversely affect TDC, the Administrative Agent or the Lenders in any material respect, or to cure any ambiguity, or correct or supplement any provision, not inconsistent with law or with the provisions of this Agreement;
(c) to satisfy any requirements, conditions, or guidelines contained in any order, directive, opinion, ruling or regulation of a federal or state agency or contained in federal or state law;
(d) to take actions to avoid any material adverse consequences to such Person as a result of any change in law or interpretation of law applicable to a Person subject to regulation by the PUCT and FERC; and
(e) to effect the dissolution, liquidation, merger, or consolidation of any Person that is otherwise not prohibited under this Agreement.
The Borrower will provide prompt notice to the Administrative Agent upon taking any such action under the foregoing sentence of this Section 8.12.
8.13. Sale and Lease-Back . Except for the System Leases, the CREZ Lease and any other Lease, the Borrower will not, nor will it cause or permit any Subsidiary to, enter into any arrangement providing for the leasing by the Borrower or any Subsidiary of real or personal property which has been or is to be Transferred by the Borrower or such Subsidiary to a lender or investor or to any Person to whom funds have been or are to be advanced by such lender or investor on the security of such property or rental obligations of the Borrower or any Subsidiary.
8.14. ERISA Compliance .
(a) Relationship of Vested Benefits to Plan Assets . No Loan Party or ERISA Affiliate will permit any Plan to be “at risk” within the meaning of Section 303 of ERISA to the extent such action could reasonably be expected to result in a Material Adverse Effect. The Loan Parties and their ERISA Affiliates will not incur Withdrawal Liabilities (and will not become subject to contingent Withdrawal Liabilities) in respect of Multiemployer Plans that individually or in the aggregate could reasonably be expected to result in a Material Adverse Effect.
(b) Valuations . For the purposes of clause (a) above, all assumptions and methods used to determine the actuarial valuation of vested and unvested employee benefits under any Plan at any time maintained by a Loan Party or any ERISA Affiliate and the present value of assets of any such Plan shall be reasonably consistent with those determinations made for purposes of Section 6.13 and shall comply with all requirements of law.
(c) Prohibited Actions . Neither the Loan Parties nor any ERISA Affiliate, nor any Plan at any time maintained by any Loan Party or ERISA Affiliate, will:
(i) engage in any action that could reasonably be expected to cause any transaction contemplated hereunder to result in a non-exempt “prohibited transaction” (as such term is defined in Section 406 of ERISA and Section 4975(c) of the Code);
 
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(ii) fail to meet the minimum funding standards of Section 302 of ERISA or Sections 412 and 430 of the Code, or seek or obtain a waiver thereof, or fail to make any required contribution to a Multiemployer Plan; or
(iii) terminate any such Plan in a manner which could result in the imposition of a Lien on the Property of the Borrower or any other Loan Party or ERISA Affiliate pursuant to Section 4068 of ERISA that could reasonably be expected to result in a Material Adverse Effect.
8.15. No Margin Stock . Anything herein contained to the contrary notwithstanding, the Borrower will not, nor will it permit any Subsidiary to, make or authorize any investment in, or otherwise purchase or carry, any margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System of the United States) that violates the provisions, or for any purpose that violates the provisions, of Regulation U of the Board of Governors of the Federal Reserve System of the United States.
8.16. Material Project Documents .
(a) The Borrower will not, and will not permit any Subsidiary to, amend, modify, supplement, replace, terminate or waive any provision of any Lease (other than an Immaterial Lease) to which the Borrower or such Subsidiary is party, or consent to any amendment, modification, supplement, replacement, termination or waiver of any such Lease (other than an Immaterial Lease), other than (x) the Approved Lease Amendments, (y) amendments, modifications, supplements, replacements or waivers that do not cause such Lease (or its replacement) to be less favorable to the Borrower, taken as a whole, in any material respect and (z) terminations of any such Lease if the Borrower or such Subsidiary enters into a replacement Lease within 90 days of such termination, so long as (A) such replacement Lease contains then-prevailing market terms and (B) the Borrower reasonably believes that it will be in compliance with Section 7.11 as of the commencement date of such replacement Lease.
(b) The Borrower shall use commercially reasonable efforts to ensure that no Specified Qualified Lessee enters into any lease of transmission or distribution facilities other than (i) the Leases (including maintaining or entering into new Leases or replacement Leases and amending or modifying Leases to the extent not prohibited under this Agreement) and (ii) any other leases consented to by Required Lenders.
8.17. Regulation .
(a) The Borrower shall not be or become, and shall use commercially reasonable efforts not to permit any Specified Qualified Lessee to be or become, subject to FERC jurisdiction as a public utility under the FPA; provided , however , that the Borrower shall not be in default of the forgoing negative covenant if the Borrower or any Specified Qualified Lessee becomes subject to FERC jurisdiction under the FPA solely as a result of a change to the FPA or in FERC’s interpretation thereof or regulations thereunder, if the Borrower or any Specified Qualified Lessee takes all necessary actions to comply with applicable FERC requirements and the operation of the System is uninterrupted; and
(b) The Borrower shall not, and shall use commercially reasonable efforts to cause any Specified Qualified Lessee not to, violate in any material respect any regulation or order of the Public Utility Commission of Texas applicable to it.
(c) None of the Borrower nor any Specified Qualified Lessee shall own, operate or control any electrical generating, transmitting or distribution facility, nor effect or control any sale of electricity, outside of the ERCOT balancing area authority except (i) as permitted by FERC, as set forth
 
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in its declaratory order issued in Docket no. EL07-93-000 or (ii) interconnected transmission or distribution assets or systems located substantially in the State of Texas or deriving a majority of their revenue from customers within the State of Texas.
8.18. Swaps . The Borrower will not, nor will it permit any Subsidiary (other than Project Finance Subsidiaries of the Borrower) to, enter into any Swap Contracts, except that the Borrower may enter into Swap Contracts solely to hedge interest rate risk and not for speculative purposes.
8.19. Additional Financial Covenants . If the Borrower shall at any time enter into one or more agreements pursuant to which Indebtedness in an aggregate principal amount greater than $25,000,000 shall be outstanding and such agreement contains one or more financial covenants which are more restrictive on the Borrower and its Subsidiaries than the financial covenants contained in Section 7.11 of this Agreement, then such more restrictive financial covenants and any related definitions (the “ Additional Financial Covenants ”) shall automatically be deemed to be incorporated into Section 7.11 of this Agreement by reference from the time such other agreement becomes binding upon the Borrower until such time as such other Indebtedness is repaid in full and all commitments related thereto are terminated; provided , that if at the time of any such repayment or the termination of any such commitment a Default or Event of Default shall exist under this Agreement, then such Additional Financial Covenants shall continue in full force and effect under this Agreement so long as such Default or Event of Default continues to exist. So long as such Additional Financial Covenants shall be in effect, no modification or waiver of such Additional Financial Covenants shall be effective unless the Required Lenders shall have consented thereto pursuant to Section 12.12 hereof. Promptly but in no event more than 5 Business Days following the execution of any agreement providing for Additional Financial Covenants, the Borrower shall furnish Administrative Agent with a copy of such agreement. Upon written request of the Required Lenders, the Borrower will enter into an amendment to this Agreement pursuant to which this Agreement will be formally amended to incorporate the Additional Financial Covenants on the terms set forth herein.
8.20. Burdensome Agreements . The Borrower will not enter into or permit any Subsidiary Guarantor or Subsidiary of a Subsidiary Guarantor to enter into any Contractual Obligation that limits the right (a) of such Subsidiary to make Distributions to the Borrower or any Subsidiary Guarantor or to otherwise transfer property to the Borrower or any Subsidiary Guarantor, (b) of any Subsidiary of the Borrower to guarantee the Indebtedness of the Borrower or (c) of the Borrower or any Subsidiary Guarantor to create, incur, assume or suffer to exist Liens on property of such Person, in each case except for (i) restrictions arising under Applicable Law, (ii) customary restrictions and conditions contained in any agreement relating to the sale or other disposition of assets not prohibited under this Agreement pending the consummation of such sale or other disposition, (iii) this Agreement, the other Credit Documents, Permitted Liens (other than Liens permitted under Section 8.5(l)), any document or instrument evidencing or granting any such Permitted Liens and the agreements listed on Annex 8.20; (iv) any Contractual Obligation relating to Indebtedness permitted pursuant to Section 8.6 (including Liens permitted pursuant to Section 8.5) to the extent, in the good faith judgment of the Borrower, such limitations and requirements described in clauses (a), (b) or (c) above (x) are on customary market terms for Indebtedness of such type at the time entered into, so long as the Borrower has determined in good faith that such restrictions would not reasonably be expected to impair in any material respect the ability of the Loan Parties to meet their ongoing payment obligations under the Credit Documents, or (y) are not materially more restrictive, taken as a whole with respect to the Borrower and the Subsidiaries than the restrictions in the Credit Documents, (v) with respect to clause (c), any negative pledge incurred or provided in favor of any holder of Indebtedness permitted under Section 8.6(c) solely to the extent any such negative pledge relates to the property financed by or the subject of such Indebtedness and (vi) non-assignment provisions in franchise agreements, licenses, easements, leases, indemnities or other agreements (other than any System Leases).
 
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SECTION 9 EVENTS OF DEFAULT .
If any of the following conditions or events (each, an “ Event of Default ”) shall occur and be continuing:
(a) the Borrower defaults in the payment of any principal on any Unpaid Drawing, Loan or Promissory Note when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise; or
(b) the Borrower defaults in the payment of any interest on any Unpaid Drawing, Loan or Promissory Note, fees or other amounts for more than five days after the same becomes due and payable; or
(c) the Borrower defaults in the performance of or compliance with any term contained in Section 7.1(f), Section 7.11 or Section 8; or
(d) the Borrower defaults in the performance of or compliance with any term contained herein (other than those referred to in Sections 9(a), (b) and (c)) or in any other Credit Document (other than those referred to in another paragraph of this Section 9) and such default is not remedied within 30 days after the earlier of (i) a Responsible Officer obtaining actual knowledge of such default and (ii) the Borrower receiving written notice of such default from the Collateral Agent or Administrative Agent (any such written notice to be identified as a “notice of default” and to refer specifically to this Section 9(d)); or
(e) any representation or warranty made in writing by or on behalf of the Borrower or by any officer of the Borrower in this Agreement or any other Transaction Document or in any writing furnished in connection with the transactions contemplated hereby proves to have been false or incorrect in any material respect on the date as of which made; or
(f) with respect to any Lease to which the Borrower or a Subsidiary thereof is a party (other than Immaterial Leases), (i) any such Lease is declared to be null and void or is otherwise unenforceable, or any party thereto claims that any such agreement is unenforceable (unless, within 90 days after such declaration or claim, replaced by a Lease that complies with the provisions of Section 8.16), (ii) one or more payment defaults in an amount in excess of $10,000,000 in the aggregate occurs across all such Leases, after giving effect to any cure periods specified therefor or (iii) any default or event of default (other than those referred to in clause (i) or (ii) of this Section 9.01(f)) occurs under any such Lease that could reasonably be expected to have a Material Adverse Effect and such failure continues for more than 90 days; or
(g) (i) the Certificate of Convenience and Necessity (#30192, #30026, #30114 and #30191) issued or transferred by the Public Utility Commission of Texas to Sharyland and, prior to the FERC Merger, the FERC Operator, is terminated without being timely replaced, revoked or otherwise is not in effect; or (ii) except as could not reasonably be expected to result in a Material Adverse Effect, any other Required Permit is terminated without being timely replaced (if such terminated Permit continues to be a Required Permit), revoked or otherwise is not in effect; provided , however , that the termination without immediate renewal of any franchise agreement pursuant to which the Qualified Lessee operating the applicable portion of the System is authorized to operate the System and collect fees for services shall not constitute an Event of Default if the parties to the franchise agreement continue to perform in accordance with the terms of such agreement notwithstanding the termination; or
 
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(h) any Security Document or any other security document entered into pursuant to Section 7.9 ceases to give the Collateral Agent perfected first priority Liens (subject to Permitted Liens) purported to be created thereby in a material portion of the Collateral, taken as a whole, for any reason other than as expressly permitted hereunder or thereunder (including by amendment, waiver and/or consent granted in accordance with the terms hereunder or thereunder) or satisfaction in full of the Obligations under the Credit Documents; or any Credit Document, at any time after its execution and delivery and for any reason other than as expressly permitted hereunder or thereunder (including by amendment, waiver and/or consent granted in accordance with the terms hereunder or thereunder) or satisfaction in full of all the Obligations under the Credit Documents, ceases to be in full force and effect; or any Loan Party contests in any manner the validity or enforceability of any Credit Document; or any Loan Party denies that it has any or further liability or obligation under any Credit Document, or purports to revoke, terminate or rescind any Credit Document, other than, for each of the foregoing, as expressly permitted hereunder or thereunder (including by amendment, waiver and/or consent granted in accordance with the terms hereunder or thereunder) or satisfaction in full of the Obligations under the Credit Documents; or
(i) without limiting clause (h), (i) the Borrower or any Qualified Lessee is in default (as principal or as guarantor or other surety) in the payment of any principal of or premium or make-whole amount or interest on any Indebtedness that is outstanding in an aggregate principal amount of at least the Threshold Amount applicable to it beyond any period of grace provided with respect thereto, or (ii) the Borrower or any Qualified Lessee is in default in the performance of or compliance with any term of any evidence of any Indebtedness (including any mortgage, indenture or other agreement relating thereto), which Indebtedness, in the case of the Borrower, is in an aggregate outstanding principal amount of at least $10,000,000 or, in the case of any Qualified Lessee, is in an amount that could reasonably be expected to result in a Material Adverse Effect, and as a consequence of such default or condition one or more Persons are entitled to declare such Indebtedness to be due and payable before its stated maturity or before its regularly scheduled dates of payment, or (iii) as a consequence of the occurrence or continuation of any event or condition (other than the passage of time or the right of the holder of Indebtedness to convert such Indebtedness into equity interests), Indebtedness of the Borrower in an aggregate outstanding principal amount of at least $10,000,000 has become or has been declared due and payable before its stated maturity or before its regularly scheduled dates of payment, or (iv) a default or an event of default occurs under any Note Purchase Agreement, and such failure continues beyond any period of grace provided with respect thereto and has not otherwise been waived; or
(j) the Borrower or any Qualified Lessee (other than a Qualified Lessee that is a lessee solely under Immaterial Leases) (i) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the filing against it or, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes corporate action for the purpose of any of the foregoing; or
(k) a court or Governmental Authority of competent jurisdiction enters an order appointing, without consent by the Borrower, any Subsidiary or any Qualified Lessee (other than a Qualified Lessee that is a lessee solely under Immaterial Leases), a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any
 
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jurisdiction, or ordering the dissolution, winding-up or liquidation of any such Person or any such petition shall be filed against any such Person and such petition shall not be dismissed within 60 days; or
(l) a final judgment or judgments for the payment of money aggregating in excess of the applicable Threshold Amount are rendered against the Borrower or, any Qualified Lessee (other than a Qualified Lessee that is a lessee solely under Immaterial Leases), other than, in each case, judgments payable by the Borrower or such Qualified Lessee, if applicable, rendered in connection with condemnations in favor thereof, and which judgments are not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay; or
(m) if (i) any Plan shall fail to satisfy the minimum funding standards of ERISA or the Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under Section 412 of the Code, (ii) a notice of intent to terminate any Plan shall have been or is reasonably expected to be filed with the PBGC or the PBGC shall have instituted proceedings under ERISA section 4042 to terminate or appoint a trustee to administer any Plan or the PBGC shall have notified any Loan Party or any ERISA Affiliate that a Plan may become a subject of any such proceedings, (iii) any Plan shall be “at-risk” within the meaning of Section 303 of ERISA as of the last day of any calendar year, (iv) any Loan Party or any ERISA Affiliate shall have incurred or is reasonably expected to incur any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans (as defined in Section 3 of ERISA) or Sections 401(a)(29), 412 or 430(k) of the Code, (v) any Loan Party or any ERISA Affiliate receives any notice concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent (within the meaning of section 4245 of ERISA), in reorganization (within the meaning of section 4241 of ERISA), or in endangered or critical status (within the meaning of Section 432 of the Code or Section 305 of ERISA), or (vi) the Borrower establishes or amends any employee welfare benefit plan (as defined in Section 3 of ERISA) that provides post-employment welfare benefits in a manner that would increase the liability of the Borrower thereunder; and any such event or events described in clauses (i) through (vi) above, either individually or together with any other such event or events, could reasonably be expected to have a Material Adverse Effect; or
(n) Hunt Family Members cease to Control Sharyland, or any Person other than a Qualified Lessee shall be the lessee under any lease with respect to the System; or
(o) (i) InfraREIT Partners shall cease to own or control, directly or indirectly, 90% of the outstanding equity interest of the Borrower; or (ii) Hunt Family Members cease to own and control, directly or indirectly, at least 5% of the outstanding equity interests of InfraREIT Partners, unless in case of clause (ii), (x) the general partner of InfraREIT Partners has become a publicly held company, or (y) the Borrower has total assets on its balance sheet valued at $1,000,000,000 or greater;
(p) the Borrower defaults in the performance of or compliance with Section 7.10(b),
then, and in any such event, (A) if such event is an Event of Default specified in clause (i) or (ii) of paragraph (j) above or paragraph (k) above, in each case with respect to the Borrower, automatically the Commitments shall immediately terminate and the Loans (with accrued interest thereon) and all other amounts owing under this Agreement and the other Credit Documents (including all amounts of Letter of Credit Outstandings, whether or not the beneficiaries of the then outstanding Letters of Credit shall have presented the documents required thereunder) shall immediately become due and payable, and (B) if such event is any other Event of Default, either or both of the following actions may be taken: (i) with the
 
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consent of the Required Lenders, the Administrative Agent may, or upon the request of the Required Lenders, the Administrative Agent shall, by notice to the Borrower declare the Commitments to be terminated forthwith, whereupon the Commitments shall immediately terminate; and (ii) with the consent of the Required Lenders, the Administrative Agent may, or upon the request of the Required Lenders, the Administrative Agent shall, by notice to the Borrower, declare the Loans (with accrued interest thereon) and all other amounts owing under this Agreement and the other Credit Documents (including all amounts of Letter of Credit Outstandings, whether or not the beneficiaries of the then outstanding Letters of Credit shall have presented the documents required thereunder) to be due and payable forthwith, whereupon the same shall immediately become due and payable. With respect to all Letters of Credit with respect to which presentment for honor shall not have occurred at the time of an acceleration pursuant to this paragraph, the Borrower shall at such time, in a manner consistent with the Collateral Agency Agreement and the other Security Documents, deposit in a cash collateral account opened by the Administrative Agent an amount equal to the aggregate then undrawn and unexpired amount of such Letters of Credit. Amounts held in such cash collateral account shall be applied to the payment of drafts drawn under such Letters of Credit, and the unused portion thereof after all such Letters of Credit shall have expired or been fully drawn upon, if any (to the extent received in accordance with Section 4.1 of the Collateral Agency Agreement), shall be applied to repay other obligations of the Borrower hereunder and under the other Credit Documents. After all such Letters of Credit shall have expired or been fully drawn upon, all Reimbursement Obligations shall have been satisfied and all other obligations of the Borrower hereunder and under the other Credit Documents shall have been paid in full, the balance, if any, in such cash collateral account shall be returned to the Borrower (or such other Person as may be lawfully entitled thereto) in accordance with the terms of the Collateral Agency Agreement. Except as expressly provided above in this Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived by the Borrower.
SECTION 10 DEFINITIONS .
10.1. Defined Terms . As used herein, the following terms shall have the meanings herein specified unless the context otherwise requires. Defined terms in this Agreement shall include in the singular number the plural and in the plural the singular:
“ 2009 Financing Documents ” shall mean, collectively, the 2009 Note Purchase Agreement, the 2029 Notes.
“ 2009 Note Purchase Agreement ” shall mean the Note Purchase Agreement, dated December 31, 2009, among the Borrower and the holders of the Borrower’s 2029 Notes issued thereunder, as the same may be amended, restated, supplemented or otherwise modified from time to time.
“ 2010 Financing Documents ” shall mean, collectively, the 2010 Note Purchase Agreement, the 2030 Notes.
“ 2010 Note Purchase Agreement ” shall mean the Note Purchase Agreement, dated as of the Original Closing Date, among the Borrower and purchasers listed therein, as the same may be amended, restated, supplemented or otherwise modified from time to time.
“ 2029 Notes ” shall mean 7.25% Senior Notes due December 30, 2029 of the Borrower.
“ 2030 Notes ” shall mean 6.47% Senior Notes due December 30, 2030 of the Borrower.
 
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“ ABR ” shall mean, for any day, a rate per annum equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Effective Rate in effect on such day plus  1 ⁄ 2 of 1% and (c) the Eurodollar Rate for a one month Interest Period in effect on such day plus 1%. If for any reason the Administrative Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate, for any reason, including the inability or failure of the Administrative Agent to obtain sufficient quotations in accordance with the terms hereof, ABR shall be determined without regard to clause (b) of the first sentence of this definition, as appropriate, until the circumstances giving rise to such inability no longer exist. Any change in ABR due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective on the effective day of such change in the Prime Rate or the Federal Funds Effective Rate, respectively.
“ ABR Loans ” shall mean Loans the rate of interest applicable to which is based upon ABR.
“ Act ” shall have the meaning provided in Section 12.9.
“ Additional Financial Covenant ” shall have the meaning provided in Section 8.19.
“ Administrative Agent ” shall mean Royal Bank of Canada (“RBC”), together with its affiliates, as the arranger of the Commitments and as the administrative agent for the Lenders under this Agreement and the other Credit Documents, together with any of its successors.
“ Affected Loan ” shall have the meaning provided in Section 4.2(b).
“ Affiliate ” shall mean, at any time, and with respect to any Person, any other Person that at such time directly or indirectly through one or more intermediaries Controls, or is Controlled by, or is under common Control with, such first Person.
“ Agreement ” shall have the meaning provided in the recitals.
“ Applicable Fee Rate ” shall mean (i) from the Restatement Date until the third Business Day that immediately follows the date on which an officer’s certificate is delivered pursuant to Section 7.1(e) in respect of the first full fiscal quarter ending after the Restatement Date, 0.375%  per annum , and (ii) thereafter, the applicable percentage per annum set forth below, as determined by reference to the Total Debt to Capitalization Ratio as set forth in the most recent officer’s certificate received by the Administrative Agent pursuant to Section 7.1(e).

Fee Level	  	Total Debt to Capitalization Ratio	  	Applicable Fee Rate	 	
1	  	£ 0.50:1.00	  	 	0.375	% 	
2	  	>0.50:1.00	  	 	0.500	% 	
Any increase or decrease in the Applicable Fee Rate resulting from a change in the Total Debt to Capitalization Ratio shall become effective as of the third Business Day immediately following the date an officer’s certificate is delivered pursuant to Section 7.1(e); provided, however, that “Fee Level 2” shall apply (x) as of the first Business Day at any time after the date on which an officer’s certificate was required to have been delivered but was not delivered (or was delivered but did not contain the calculations of the Total Debt to Capitalization Ratio) until the first Business Day immediately following the date on which such officer’s certificate (which includes calculations of the Total Debt to Capitalization Ratio) is delivered and (y) at all times during the existence of an Event of Default.
 
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“ Applicable Law ” shall mean as to any Person, any local, state or federal law, regulation, rule, ordinances or determination, interpretation or order of an arbitrator or a court or other Governmental Authority, and any Required Permit, in each case applicable to or binding upon such Person or any of its properties or its business or to which such Person or any of its properties or its business is subject.
“ Applicable Margin ” shall mean (i) from the Restatement Date until the third Business Day that immediately follows the date on which an officer’s certificate is delivered pursuant to Section 7.1(e) in respect of the first full fiscal quarter ending after the Restatement Date, 0.75%, in the case of ABR Loans, and 1.75%, in the case of Eurodollar Loans, and (ii) thereafter, the applicable percentage set forth below, as determined by reference to the Total Debt to Capitalization Ratio as set forth in the most recent officer’s certificate received by the Administrative Agent pursuant to Section 7.1(e).

Applicable Margin	 	
Pricing Level	  	Total Debt to Capitalization Ratio	  	ABR Loans	 	 	Eurodollar Loans	 	
1	  	£ 0.50:1.00	  	 	0.75	% 	 	 	1.75	% 	
2	  	>0.50:1.00	  	 	1.00	% 	 	 	2.00	% 	
Any increase or decrease in the Applicable Margin resulting from a change in the Total Debt to Capitalization Ratio shall become effective as of the third Business Day immediately following the date an officer’s certificate is delivered pursuant to Section 7.1(e); provided, however, that “Pricing Level 2” shall apply (x) as of the first Business Day at any time after the date on which an officer’s certificate was required to have been delivered but was not delivered (or was delivered but did not contain the calculations of the Total Debt to Capitalization Ratio) until the first Business Day immediately following the date on which such officer’s certificate (which includes calculations of the Total Debt to Capitalization Ratio) is delivered and (y) at all times during the existence of an Event of Default.
“ Application ” shall mean an application, in such form as the Issuing Lender may specify from time to time, requesting the Issuing Lender to open a Letter of Credit.
“ Approved Lease Amendments ” shall mean the CREZ Lease Amendment and Restatement, the McAllen Lease Amendment and Restatement, the Stanton/Brady/Celeste Lease Amendment and Restatement and, to the extent the FERC Merger has been completed, the FERC Lease Amendment and Restatement.
“ Arranger ” shall mean RBC Capital Markets.
“ Asset Sale ” shall have the meaning set forth in Section 8.10.
“ Authorized Officer ” shall mean any senior officer of the Borrower designated as such in writing to the Administrative Agent by the Borrower, in each case to the extent reasonably acceptable to the Administrative Agent.
 
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“ Bankruptcy Event ” shall mean, with respect to any Person, such Person becomes the subject of a bankruptcy or insolvency proceeding, or has had a receiver, conservator, trustee, administrator, custodian, assignee for the benefit of creditors or similar Person charged with the reorganization or liquidation of its business appointed for it, or, in the good faith determination of the Administrative Agent, has taken any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any such proceeding or appointment, provided that a Bankruptcy Event shall not result solely by virtue of any ownership interest, or the acquisition of any ownership interest, in such Person by a Governmental Authority or instrumentality thereof, provided, further, that such ownership interest does not result in or provide such Person with immunity from the jurisdiction of courts within the United States of America or from the enforcement of judgments or writs of attachment on its assets or permit such Person (or such Governmental Authority or instrumentality) to reject, repudiate, disavow or disaffirm any contracts or agreements made by such Person.
“ Borrower ” shall have the meaning provided in the first paragraph of this Agreement.
“ Borrower Materials ” shall have the meaning specified in Section 7.1 .
“ Borrower Party ” shall mean the Borrower and each Subsidiary Guarantor.
“ Borrowing ” shall mean the incurrence of a Loan under the Revolving Facility by the Borrower from all of the Lenders having Commitments thereunder on a pro rata basis on a given date (or resulting from conversions on a given date), having, in the case of Eurodollar Loans, the same Interest Period; provided that ABR Loans incurred pursuant to Section 1.10 shall be considered part of any related Borrowing of Eurodollar Loans.
“ Borrowing Date ” shall mean any Business Day specified by the Borrower as a date on which the Borrower requests the relevant Lenders to make Loans hereunder.
“ Business Day ” shall mean (i) for all purposes other than as covered by clause (ii) below, any day excluding Saturday, Sunday and any day which shall be in the City of New York a legal holiday or a day on which banking institutions are authorized by law or other governmental actions to close and (ii) with respect to all notices and determinations in connection with, and payments of principal and interest on, Eurodollar Loans, any day which is a Business Day described in clause (i) and which is also a day for trading by and between banks in Dollar deposits in the interbank Eurodollar market.
“ Capital Lease ” shall mean, at any time, a lease with respect to which the lessee is required concurrently to recognize the acquisition of an asset and the incurrence of a liability in accordance with GAAP.
“ Capital Stock ” of any Person shall mean any and all shares, interests, rights to purchase, warrants, options, participation, patronage capital or other equivalents of or interests in (however designated) equity of such Person, including any preferred stock, any limited or general partnership interest and any limited liability company membership interest.
“ Cash Equivalents ” shall mean (i) securities issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof ( provided that the full faith and credit of the United States of America is pledged in support thereof) having maturities of not more than six months from the date of acquisition, (ii) Dollar denominated demand or time deposits, certificates of deposit and bankers’ acceptances of (x) any domestic commercial bank of recognized standing having capital and surplus in excess of $500,000,000 or (y) any bank whose short-term commercial paper rating from Standard & Poor’s Ratings Service or its successor or assign which remains
 
52

in the business of rating creditworthiness of commercial paper (“ S&P ”) is at least A-1 or the equivalent thereof or from Moody’s Investors Service or its successor or assign which remains in the business of rating creditworthiness of commercial paper (“ Moody’s ”) is at least P-1 or the equivalent thereof, in each case with maturities of not more than six months from the date of acquisition, (iii) commercial paper issued by any Lender or by the parent company of any Lender and commercial paper issued by, or guaranteed by, any industrial or financial company with a short-term commercial paper rating of at least A-1 or the equivalent thereof by S&P or at least P-1 or the equivalent thereof by Moody’s, or guaranteed by any industrial company with a long term unsecured debt rating of at least A or A2, or the equivalent of each thereof, from S&P or Moody’s, as the case may be, and in each case maturing within six months after the date of acquisition and (iv) money market funds that (x) comply with the criteria set forth in SEC Rule 2a-7 under the ICA, (y) are rated at least AA+ by S&P and at least, Aa1 by Moody’s and (z) have portfolio assets of at least $5,000,000,000.
“ Cash Flow ” shall mean, for any period, the sum of the following (without duplication): (i) all cash paid to the Borrower during such period under the System Leases, (ii) all cash distributions received by the Borrower from Project Finance Subsidiaries of the Borrower during such period, (iii) all interest and investment earnings, if any, paid to the Borrower during such period on amounts on deposit in the account created under the Deposit Agreement, (iv) revenues, if any, received by or on behalf of the Borrower during such period under any insurance policy as business interruption insurance proceeds, and (v) direct cash equity investments made by Holdings in the Borrower (excluding equity contributed to a Project Finance Subsidiary) in an amount not greater than the amount necessary to cause the Borrower to be in compliance with the financial covenants set forth in Section 7.11(b) for such period (each such an investment, an “ Equity Cure ”); provided , however , that during any period of four consecutive fiscal quarters, “Cash Flow” shall include an Equity Cure in no more than two of such quarters.
“ Cash Flow Available for Debt Service ” for any period, shall mean (i) Cash Flow received during such period minus (ii) (A) all O&M Costs paid during such period and (B) if an Equity Cure has been made with respect to any fiscal quarter for which Cash Flow Available for Debt Service is calculated, the lesser of (x) the aggregate amount of such Equity Cure for such period and (y) the aggregate amount of cash distributions paid by the Borrower during such period.
“ Code ” shall mean the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder from time to time.
“ Collateral ” shall mean all of the Collateral as defined in each of the Security Documents.
“ Collateral Agency Agreement ” shall mean the Second Amended and Restated Collateral Agency Agreement, dated as of the Restatement Date, among the Collateral Agent, the Borrower and the holders (or agents thereof) of Permitted Secured Indebtedness from time to time party thereto (as may be amended, restated, amended and restated, supplemented, joined or otherwise modified from time to time).
“ Collateral Agent ” shall mean The Bank of New York Mellon Trust Company, N.A., a national association, acting in its capacity as collateral agent for itself and the other Secured Parties, or its successors in such capacity appointed pursuant to the terms of the Collateral Agency Agreement.
“ Commitment ” shall mean with respect to each Lender, such Lender’s Revolving Commitment and in the case of the Swingline Lender, the Swingline Commitment.
“ Commitment Fee ” shall have the meaning provided in Section 3(a).
 
53

“ Connection Income Taxes ” shall mean Other Connection Taxes that are imposed on or measured by net income (however denominated) or that are franchise Taxes or branch profits Taxes.
“ Consolidated Net Plant ” shall mean, with respect to any Person, as of the date of determination, the net plant set forth on the face of the consolidated balance sheet of such Person or absent such amount on the consolidated balance sheet, the total plant of such Person on a consolidated basis minus accumulated depreciation as set forth in the footnotes of the consolidated financial statements, in each case, for the fiscal quarter ended on the date of the last financial statements delivered pursuant to Section 7.1.
“ Consolidated Net Worth ” shall mean at any date, the sum of all amounts that would, in conformity with GAAP, be included on a consolidated balance sheet of the Borrower and its consolidated Subsidiaries (and, if positive, of Sharyland and its consolidated Subsidiaries) under stockholders’ equity at such date, plus minority interests, as determined in accordance with GAAP minus any stockholders equity attributable to any Project Finance Subsidiary, provided , however , that any effects resulting from SFAS 158 shall be excluded for purposes of the calculation of Consolidated Net Worth.
“ Consolidated Qualified Lessee ” shall mean any Qualified Lessee that is consolidated into the financial statements of another Qualified Lessee.
“ Contractual Obligation ” shall mean as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound.
“ Control ” shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise.
“ Credit Documents ” shall mean this Agreement, the Promissory Notes, the Security Documents, the Subsidiary Guaranties and the Fee Letter and any amendment, waiver, supplement or other modification to any of the foregoing.
“ Credit Event ” shall mean and include the making of a Loan or the issuance of a Letter of Credit.
“ Credit Party ” shall mean the Administrative Agent, the Issuing Lender, the Swingline Lender or any other Lender, as applicable.
“ CREZ Lease ” shall mean (A) prior to the effectiveness of the CREZ Lease Amendment and Restatement, the Amended and Restated Lease Agreement (CREZ Assets) dated as of April 30, 2013, between SP, as lessor, and Sharyland, as lessee, and (B) upon the effectiveness of the CREZ Lease Amendment and Restatement, the CREZ Lease Amendment and Restatement, as such lease may be amended, restated, supplemented or otherwise modified from time to time, or any new lease entered into in replacement thereof, in accordance with Section 7.10(b) and/or 8.16 of this Agreement, as applicable.
“ CREZ Lease Amendment and Restatement ” shall mean the Second Amended and Restated Lease Agreement (CREZ Assets), between SP, as lessor, and Sharyland, as lessee, with respect to the CREZ Project.
 
54

“ CREZ Project ” shall mean the five transmission lines, four substations and other facilities in Texas identified and awarded to Sharyland by the Public Utility Commission of Texas (the “PUCT”) in Docket Number 37902.
“ Cross Valley Project ” shall mean the approximately 49 mile transmission line in South Texas near the Mexican border, known as the “North Edinburg to Loma Alta 345 kV single-circuit transmission line” project, subsequently, renamed as the “North Edinburg to Palmito 345 kV double-circuit transmission line” project, which is built on double-circuit capable structures and the Palmito substation located on the eastern terminus of the Cross Valley Project. The Cross Valley Project is part of a 100 mile transmission line, which is jointly developed and permitted by Sharyland and Electric Transmission Texas.
“ Cross Valley Project Transfer ” shall mean the sale and Transfer of all of the Capital Stock of CV Project Entity, L.L.C., a Project Finance Subsidiary of the Borrower, to Cross Valley Partnership, L.P., a Person Controlled by one or more Hunt Family Members, for a purchase price at least equal to the Cross Valley Project’s rate base cost at such time.
“ Debt Service ” shall mean, for any period, the aggregate (without duplication) of (i) all amounts of interest on the Loans and in respect of other Indebtedness of the Borrower required to be paid during such period, plus (ii) all amounts of principal on the Loans and in respect of other Indebtedness of the Borrower or required to be paid during such period, excluding any optional prepayments of principal during such period, plus (iii) all other premiums, fees, costs, charges, expenses and indemnities due and payable to the Administrative Agent or the other Secured Parties and holders of other Indebtedness of the Borrower or and agents acting on their behalf during such period; provided , however , that for purposes of calculating the Debt Service Coverage Ratio, the Debt Service shall exclude Non-Recourse Debt of a Project Finance Subsidiary.
“ Debt Service Coverage Ratio ” shall mean, for each period of four most recent consecutive fiscal quarters, the quotient of (i) Cash Flow Available for Debt Service for such period to (ii) Debt Service for such period.
“ Deed of Trust ” shall mean (i) the Amended and Restated First Lien Deed of Trust, Security Agreement and Fixture Filing (Texas) and each First Lien Deed of Trust, Security Agreement, Assignment of Rents and Leases and Fixture Filing (Texas) by and from the Borrower, as grantor, to Peter M. Oxman, as trustee, for the benefit of the Collateral Agent and the other Secured Parties, dated as of July 13, 2010, in each case as the same may be amended, restated, supplemented or otherwise modified from time to time and (ii) each other deed of trust by and from the Borrower, as grantor, for the benefit of the Collateral Agent and the other Secured Parties entered into from time to time.
“ Default ” shall mean any event or condition which would, with lapse of time or giving of notice or both, become an Event of Default.
“ Defaulting Lender ” shall mean any Lender that (a) has failed, within two Business Days of the date required to be funded or paid, to (i) fund any portion of its Revolving Loans, (ii) fund any portion of its participations in Letters of Credit or Swingline Loans or (iii) pay over to any Credit Party any other amount required to be paid by it hereunder, unless, in the case of clause (i) above, such Lender notifies the Administrative Agent in writing that such failure is the result of such Lender’s good faith determination that a condition precedent to funding (specifically identified and including the particular default, if any) has not been satisfied, (b) has notified the Borrower or any Credit Party in writing, or has made a public statement to the effect, that it does not intend or expect to comply with any of its funding obligations under this Agreement (unless such writing or public statement indicates that such position is
 
55

based on such Lender’s good faith determination that a condition precedent (specifically identified and including the particular default, if any) to funding a loan under this Agreement cannot be satisfied) or generally under other agreements in which it commits to extend credit, (c) has failed, within three Business Days after request by a Credit Party, acting in good faith, to provide a certification in writing from an authorized officer of such Lender that it will comply with its obligations (and is financially able to meet such obligations) to fund prospective Revolving Loans and participations in then outstanding Letters of Credit and Swingline Loans under this Agreement, provided that such Lender shall cease to be a Defaulting Lender pursuant to this clause (c) upon such Credit Party’s receipt of such certification in form and substance satisfactory to it and the Administrative Agent, or (d) has become the subject of a Bankruptcy Event.
“ Deposit Agreement ” shall mean that certain Amended and Restated Deposit Account Control Agreement, dated as of the Restatement Date, by and among the Borrower, The Bank of New York Mellon Trust Company, N.A. and Bank of America, N.A.
“ Depositary ” shall mean Bank of America, N.A.
“ Designated Jurisdiction ” shall mean any country or territory to the extent that such country or territory itself is the subject of any Sanction.
“ Development Agreement ” shall mean that certain Development Agreement to be entered into among Hunt Transmission Services, L.L.C., Sharyland, InfraREIT and/or InfraREIT Partners in connection with one or more New Projects, a copy of which has been provided to the Lenders, pursuant to which Hunt Transmission Services, L.L.C. has granted InfraREIT a right of first offer related to the New Projects identified therein, as amended from time to time in accordance with its terms.
“ Distribution” shall mean any dividend or other distribution (whether in cash, securities or other property) with respect to any Capital Stock of any Person, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, defeasance, acquisition, cancellation or termination of any such Capital Stock or on account of any return of capital to such Person’s stockholders, partners or members (or the equivalent Person thereof), or any option, warrant or other right to acquire any such dividend or other distribution or payment.
“ Dollars ” and “ $ ” shall mean dollars in lawful currency of the United States.
“ Eligible Assignee ” shall mean any Person that meets the requirements to be an assignee under Section 12.4.
“ Environmental Law ” shall mean any federal, state, foreign or local statute, law, rule, regulation, ordinance, code and rule of common law formerly, now or hereafter in effect and in each case as amended, including, without limitation, any judicial or administrative order, consent decree or judgment, relating to the environment, including but not limited to Hazardous Materials.
“ ERCOT ” shall mean Electric Reliability Council of Texas or any successor thereto.
“ ERISA ” shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to ERISA are to ERISA, as in effect at the Restatement Date and any subsequent provisions of ERISA, amendatory thereof, supplemental thereto or substituted therefor.
 
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“ ERISA Affiliate ” shall mean (a) any entity, whether or not incorporated, that is under common control with a Loan Party within the meaning of Section 4001(a)(14) of ERISA; (b) any corporation which is a member of a controlled group of corporations within the meaning of Section 414(b) of the Code of which a Loan Party is a member; (c) any trade or business (whether or not incorporated) which is a member of a group of trades or businesses under common control within the meaning of Section 414(c) of the Code of which a Loan Party is a member; and (d) with respect to any Loan Party, any member of an affiliated service group within the meaning of Section 414 (m) or (o) of the Code of which that Loan Party, any corporation described in clause (a) above or any trade or business described in clause (b) above is a member.
“ Eurocurrency Reserve Requirements ” shall mean, for any day as applied to a Eurodollar Loan, the aggregate (without duplication) of the rates (expressed as a decimal) of the maximum reserve requirements in effect on such day (including, without limitation, basic, supplemental, marginal and emergency reserves under any regulations of the Board of Governors of the Federal Reserve System or other Governmental Authority having jurisdiction with respect thereto) dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as “Eurocurrency Liabilities” in Regulation D of such Board) maintained by a member bank of such Federal Reserve System.
“ Eurodollar Loans ” shall mean Loans the rate of interest applicable to which is based upon the Eurodollar Rate.
“ Eurodollar Rate ” shall mean, for any Interest Period for all Eurodollar Loans comprising part of the same Borrowing (a) the rate of interest per annum expressed on the basis of a year of 360 days, determined by the Administrative Agent, which is equal to the offered rate that appears on the page of the Reuters LIBOR01 screen (or any successor thereto as may be selected by the Administrative Agent) that displays an average ICE Benchmark Administration Interest Settlement Rate for deposits in Dollars with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two (2) Business Days prior to the first day of such Interest Period or (b) if the rates referenced in the preceding clause (a) are not available, the rate per annum determined by the Administrative Agent as the rate of interest, expressed on a basis of a year of 360 days, at which deposits in Dollars for delivery on the first day of such Interest Period in same day funds in the approximate amount of the Eurodollar Loan being made, continued or converted by the Administrative Agent and with a term and amount comparable to such Interest Period and principal amount of such Eurodollar Loan as would be offered by the Administrative Agent’s London Branch to major banks in the offshore Dollar market at their request at approximately 11:00 a.m. (London time) two (2) Business Days prior to the first day of such Interest Period; provided that if the rate determined pursuant to either clause (a) or clause (b) above, as applicable, is below zero, the Eurodollar Rate shall be deemed to be zero.
“ Eurodollar Tranche ” shall mean the collective reference to Eurodollar Loans under a particular Facility the then current Interest Periods with respect to all of which begin on the same date and end on the same later date (whether or not such Loans shall originally have been made on the same day).
“ Event of Default ” shall have the meaning provided in Section 9.
“ Excluded Taxes ” shall mean any of the following Taxes imposed on or with respect to a Credit Party or required to be withheld or deducted from a payment to a Credit Party, (a) Taxes imposed on or measured by net income (however denominated), franchise Taxes, and branch profits Taxes, in each case, (i) imposed as a result of such Credit Party being organized under the laws of, or having its principal office or, in the case of any Lender, its applicable lending office located in, the jurisdiction imposing such Tax (or any political subdivision thereof) or (ii) that are Other Connection Taxes, (b) in the case of a Lender, U.S. federal withholding Taxes imposed on amounts payable to or for the account of such Lender
 
57

with respect to an applicable interest in a Loan or Commitment (including, for the avoidance of doubt, an interest in a Letter of Credit) pursuant to a law in effect on the date on which (i) such Lender acquires such interest in the Loan or Commitment, including, for the avoidance of doubt, an interest in a Letter of Credit (other than pursuant to an assignment request by the Borrower under Section 1.15) or (ii) such Lender changes its lending office, except in each case to the extent that, pursuant to Section 4.3, amounts with respect to such Taxes were payable either to such Lender’s assignor immediately before such Lender acquired the applicable interest in a Loan or Commitment, including, for the avoidance of doubt, an interest in a Letter of Credit, or to such Lender immediately before it changed its lending office, (c) Taxes attributable to such Credit Party’s failure to comply with Section 4.3(f) and (d) any U.S. federal withholding Taxes imposed under FATCA.
“ Existing Lenders ” shall have the meaning provided in the recitals.
“ Facility ” shall mean any of the credit facilities established under this Agreement, i.e. , the Revolving Facility.
“ FATCA ” shall mean Sections 1471 through 1474 of the Code, as of the date of this Agreement (or any amended or successor version that is substantively comparable and not materially more onerous to comply with), any current or future regulations or official interpretations thereof, any agreements entered into pursuant to Section 1471(b)(1) of the Code, and any intergovernmental agreements between the United States and another country which modify the provisions of the foregoing.
“ Federal Funds Effective Rate ” shall mean, for any day, the weighted average of the rates on overnight Federal Funds transactions with members of the Federal Reserve System arranged by Federal Funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by the Administrative Agent from three Federal Funds brokers of recognized standing selected by it.
“ Fee Letter ” shall mean the Fee Letter, dated November 7, 2014, between the Borrower and Royal Bank of Canada.
“ Fees ” shall mean all amounts payable pursuant to, or referred to in, Section 3.
“ FERC ” shall mean the Federal Energy Regulatory Commission, or any successor agency to its duties and responsibilities.
“ FERC Lease ” shall mean (A) prior to the effectiveness of the FERC Lease Amendment and Restatement, the Second Amended and Restated Lease Agreement, dated as of July 1, 2012, between FERC Owner and FERC Operator and (B) upon the effectiveness of the FERC Lease Amendment and Restatement, the FERC Lease Amendment and Restatement, as such lease may be amended, restated, supplemented or otherwise modified from time to time, or any new lease entered into in replacement thereof, in accordance with Section 7.10(b) and/or 8.16 of this Agreement, as applicable.
“ FERC Lease Amendment and Restatement ” shall mean the Third Amended and Restated Lease Agreement (Stanton Transmission Loop Assets) between FERC Owner, as lessor, and FERC Operator, as lessee.
“ FERC Merger ” shall mean the anticipated transaction or series of transactions pursuant to which SDTS FERC L.L.C. will merge into the Borrower and SU FERC L.L.C. will merge into Sharyland.
 
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“ FERC Operator ” shall mean (A) prior to the FERC Merger, SU FERC, L.L.C., a Subsidiary of Sharyland, and (B) upon the completion of the FERC Merger, Sharyland.
“ FERC Owner ” shall mean (A) prior to the FERC Merger, SDTS FERC, L.L.C., a Subsidiary of the Borrower, and (B) upon the completion of the FERC Merger, the Borrower.
“ Financing Documents ” shall mean, collectively, the Credit Documents and the Note Purchase Agreements.
“ Force Majeure Event ” shall mean any claim of force majeure by any Person under any Material Project Document, which would allow such Person to avoid all or any material part of its obligations thereunder and any other fire, explosion, accident, strike, slowdown or stoppage, lockout or other labor dispute (whether pending or, to the Borrower’s knowledge threatened), drought, storm, hail, earthquake, embargo, act of God or of the public enemy, or other casualty (whether or not covered by insurance), that could reasonably be expected to result in a Material Adverse Effect.
“ Foreign Subsidiary ” shall mean any Subsidiary of the Borrower that is not organized under the laws of the United States, any state thereof or the District of Columbia.
“ FPA ” shall mean the Federal Power Act, 16 U.S.C. §§791 et seq., as amended, and the regulations of the FERC thereunder.
“ Fronting Fee ” shall have the meaning provided in Section 3(c).
“ Funding Office ” shall mean the office of the Administrative Agent specified in Section 12.3 or such other office as may be specified from time to time by the Administrative Agent as its funding office by written notice to the Borrower and the Lenders.
“ GAAP ” shall mean generally accepted accounting principles as in effect in the United States of America. In the event that any “Accounting Change” (as defined below) shall occur and such change results in a change in the method of calculation of financial covenants, ratios, standards or terms in this Agreement, then the Borrower and the Administrative Agent agree to enter into negotiations in order to amend such provisions of this Agreement so as to reflect equitably such Accounting Changes with the desired result that the criteria for evaluating the Borrower’s financial condition shall be the same after such Accounting Changes as if such Accounting Changes had not been made. Until such time as such an amendment shall have been executed and delivered by the Borrower and the Administrative Agent, all financial covenants, ratios, standards and terms in this Agreement shall continue to be calculated or construed as if such Accounting Changes had not occurred. “Accounting Changes” refers to changes in accounting principles required by the promulgation of any rule, regulation, pronouncement or opinion by the Financial Accounting Standards Board of the American Institute of Certified Public Accountants or, if applicable, the SEC. For purposes of determining compliance with any covenant (including the computation of any financial covenant) contained herein, Indebtedness of a Person shall be deemed to be carried at 100% of the outstanding principal amount thereof, and the effects of FASB ASC 825 and FASB ASC 470-20 on financial liabilities shall be disregarded.
“ Golden Spread Project ” shall mean a new 345 kilovolt transmission line that will be approximately 55 miles long and will connect the Golden Spread Electric Cooperative, Inc. Antelope-Elk Energy Center in Hale County, approximately 1.6 miles north of the City of Abernathy on County Road P, to the proposed White River Station that will be built by Sharyland in Floyd County, approximately 9 miles northeast of the City of Floydada and 1.1 miles east of the intersection of County Road 231 and County Road 200 and the Abernathy substation that is located in the western portion of the transmission line.
 
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“ Golden Spread Project Transfer ” shall mean the sale and Transfer of all of the Capital Stock of the GS Project Entity to a Person Controlled by one or more Hunt Family Members for a purchase price at least equal to the Golden Spread Project’s rate base cost at such time.
“ Governmental Authority ” shall mean
(a) the government of:
 
 	(i)	the United States of America or any State or other political subdivision thereof, or	
 
 	(ii)	any other jurisdiction in which the Borrower conducts all or any part of its business, or which asserts jurisdiction over any properties of the Borrower, or	
(b) any entity exercising executive, legislative, judicial, taxing, regulatory or administrative functions of, or pertaining to, any such government, or
(c) ERCOT, or
(d) the Texas Regional Entity.
“ Governmental Entity ” shall mean the government of the United States of America or any other nation, or of any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government (including any supra-national bodies such as the European Union or the European Central Bank).
“ GS Project Entity ” shall mean a Project Finance Subsidiary of the Borrower created to finance and develop the Golden Spread Project.
“ Guaranty ” shall mean, with respect to any Person, any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing any Indebtedness of any other Person in any manner, whether directly or indirectly, including (without limitation) obligations incurred through an agreement, contingent or otherwise, by such Person:
(a) to purchase such Indebtedness or any property constituting security therefor;
(b) to advance or supply funds (i) for the purchase or payment of such indebtedness or obligation, or (ii) to maintain any working capital or other balance sheet condition or any income statement condition of any other Person or otherwise to advance or make available funds for the purchase or payment of such Indebtedness;
(c) to lease properties or to purchase properties or services primarily for the purpose of assuring the owner of such Indebtedness of the ability of any other Person to make payment of the Indebtedness; or
(d) otherwise to assure the owner of such Indebtedness against loss in respect thereof.
 
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The amount of any Guaranty shall be deemed to be an amount equal to the stated or determinable amount of the related primary obligation, or portion thereof, in respect of which such Guaranty is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by the guaranteeing Person in good faith. In any computation of the indebtedness or other liabilities of the obligor under any Guaranty, the indebtedness or other obligations that are the subject of such Guaranty shall be assumed to be direct obligations of such obligor. The term “Guarantee” as a verb has a corresponding meaning.
“ Hazardous Materials ” shall mean any and all pollutants, toxic or hazardous wastes or other substances that might pose a hazard to health and safety, the removal of which may be required or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage or filtration of which is or shall be restricted, prohibited or penalized by any Applicable Law including, but not limited to, asbestos, urea formaldehyde foam insulation, petroleum, petroleum products, lead based paint, radon gas or similar restricted, prohibited or penalized substances.
“ Holdings ” shall have the meaning provided in the preamble.
“ Hunt Family Members ” shall mean (i) Ray L. Hunt; (ii) the spouse of Ray L. Hunt and each of his children and siblings; (iii) the spouse and lineal descendants of any Person identified in the foregoing clause (ii); (iv) any trust or account primarily for the benefit of any Person or Persons identified in the foregoing clauses (i), (ii) or (iii); (v) any corporation, partnership or other entity in which any of the Persons identified in the foregoing clauses (i), (ii), (iii) or (iv) are the beneficial owners of and Control substantially all of the shares of capital stock, membership interests, partnership interests or other equity interests and options or warrants to acquire, or securities convertible into, capital stock, membership interests, partnership interests or other equity securities of an entity; and (vi) the personal representative or guardian of any of the Persons identified in the foregoing clauses (i), (ii) and (iii) upon such Person’s death for purposes of the administration of such Person’s estate or upon such Person’s disability or incompetency for purposes of the protection and management of the assets of such Person.
“ ICA ” shall have the meaning provided in Section 6.17.
“ Immaterial Leases ” shall mean Leases pursuant to which the Borrower recognized revenue, in the aggregate, that constituted 10% or less of the total consolidated revenue of the Borrower and its Subsidiaries (other than Project Finance Subsidiaries) as set forth on the face of the consolidated statements of operations for the four consecutive fiscal quarter periods that ended on the date of the last financial statements delivered pursuant to Section 7.1 prior to the date on which the determination of whether such Lease falls within the scope of this definition is required to be made under the Credit Documents.
“ Increase Effective Date ” shall have the meaning specified in Section 1.17(d) .
“ Indebtedness ” shall mean, with respect to any Person, at any time, without duplication, (a) its liabilities for borrowed money and its redemption obligations in respect of Preferred Stock that is mandatorily redeemable prior to the date that is 91 days after the Maturity Date; (b) its liabilities for the deferred purchase price of property acquired by such Person (excluding accounts payable arising in the ordinary course of business but including all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property); (c) (i) all liabilities appearing on its
 
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balance sheet in accordance with GAAP in respect of Capital Leases and (ii) all liabilities which would appear on its balance sheet in accordance with GAAP in respect of Synthetic Leases assuming such Synthetic Leases were accounted for as Capital Leases; provided , however , that for purposes of this definition (including with respect to clauses (i) and (ii) hereof), the System Leases, any other Lease and any similar lease shall not be treated as a capital lease; (d) all liabilities for borrowed money secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities); (e) all its liabilities in respect of letters of credit or instruments serving a similar function issued or accepted for its account by banks and other financial institutions (whether or not representing obligations for borrowed money); provided , however , that for purposes of this definition, any surety bonds or indemnification agreements entered into by any Qualified Lessee (with respect to which the Borrower or a subsidiary thereof has a reimbursement or backstop obligation) in connection with condemnation proceedings shall be excluded; (f) the aggregate Swap Termination Value of all Swap Contracts of such Person; and (g) any Guaranty of such Person with respect to liabilities of a type described in any of clauses (a) through (f) hereof. Indebtedness of any Person shall include all obligations of such Person of the character described in clauses (a) through (g) to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is deemed to be extinguished under GAAP. For all purposes hereof, the Indebtedness of any Person shall include the Indebtedness of any partnership or joint venture (other than a joint venture that is itself a corporation or limited liability company) in which such Person is a general partner or a joint venturer, unless such Indebtedness is expressly made non-recourse to such Person. The amount of any Capital Lease or Synthetic Lease obligation (in each case, to the extent the same is considered Indebtedness hereunder) as of any date shall be deemed to be the amount of Attributable Indebtedness in respect thereof as of such date.
“ Indemnified Taxes ” shall mean (a) Taxes, other than Excluded Taxes, imposed on or with respect to any payment made by or on account of any obligation of any Borrower Party under any Credit Document and (b) to the extent not otherwise described in clause (a) above, Other Taxes.
“ Information ” shall mean all information other than the financial projections relating to the transactions contemplated hereby that has been or will be made available to the Lenders.
“ InfraREIT ” shall mean (x) prior to a Qualifying IPO, InfraREIT, L.L.C., a Delaware limited liability company, and (y) upon and after a Qualifying IPO, InfraREIT, Inc., a Maryland corporation and in both cases, any successors to the foregoing.
“ InfraREIT Partners ” shall mean InfraREIT Partners, LP, a Delaware limited partnership.
“ Interest Payment Date ” shall mean (a) as to any ABR Loans (other than any Swingline Loan), the last day of each March, June, September and December to occur while such Loan is outstanding and the final maturity date of such Loan, (b) as to any Eurodollar Loans having an Interest Period of three months or less, the last day of such Interest Period, (c) as to any Eurodollar Loans having an Interest Period longer than three months, each day that is three months, or a whole multiple thereof, after the first day of such Interest Period and the last day of such Interest Period, (d) as to any Loan (other than any Revolving Loan that is an ABR Loan and any Swingline Loan), the date of any repayment or prepayment made in respect thereof and (e) as to any Swingline Loan, the day that such Loan is required to be repaid.
“ Interest Period ” shall mean as to any Eurodollar Loan, (a) initially, the period commencing on the borrowing or conversion date, as the case may be, with respect to such Eurodollar Loan and ending one, two, three or six (or, if agreed to by all Lenders under the Revolving Facility twelve) months thereafter, as selected by the Borrower in its notice of borrowing or notice of conversion, as the case may be, given with respect thereto; and (b) thereafter, each period commencing on the last day
 
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of the next preceding Interest Period applicable to such Eurodollar Loan and ending one, two, three or six (or, if agreed to by all Lenders under the Revolving Facility, twelve) months thereafter, as selected by the Borrower by irrevocable notice to the Administrative Agent not later than 11:00 A.M., New York City time, on the date that is three Business Days prior to the last day of the then current Interest Period with respect thereto; provided that, all of the foregoing provisions relating to Interest Periods are subject to the following:
1. if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day;
2. the Borrower may not select an Interest Period under a particular Facility that would extend beyond the Revolving Facility Final Maturity Date;
3. any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month; and
4. the Borrower shall select Interest Periods so as not to require a payment or prepayment of any Eurodollar Loan during an Interest Period for such Loan;
provided , further , that if the Borrower does not make an Interest Period election prior to the time indicated in the foregoing clause (b), then the Borrower shall be deemed to have elected an Interest Period of one month.
“ Investments ” shall have the meaning given to it in Section 8.7.
“ Investment Grade Credit Rating ” shall mean with respect to any Person, a rating of the long-term unsecured debt securities of such Person (or if such rating is unavailable, issuer rating) equal to or higher than (1) “BBB-” (or the equivalent) with a stable or better outlook by Standard & Poor’s Financial Services LLC, or (2) “Baa3” (or the equivalent) with a stable or better outlook by Moody’s Corporation; provided , that if such Person has a rating from both Standard & Poor’s Financial Services LLC and Moody’s Corporation, then the applicable rating shall be deemed to be the lower of the two.
“ IRS ” shall mean the United States Internal Revenue Service.
“ Issuing Lender ” shall mean Royal Bank of Canada or any affiliate of Royal Bank of Canada.
“ L/C Commitment ” shall mean $25,000,000.
“ L/C Exposure ” shall mean, at any time, the total Letter of Credit Outstandings. The L/C Exposure of any Revolving Lender at any time shall be its Revolving Percentage of the total L/C Exposure at such time.
“L/C Participants ” shall mean the collective reference to all the Revolving Lenders other than the Issuing Lender.
“ Leased Consolidated Net Plant ” shall mean that portion of the Consolidated Net Plant of the lessor of a Lease between such lessor and a Qualified Lessee that is the subject of such Lease.
 
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“ Leases ” shall mean (i) the System Leases, the CREZ Lease, the FERC Lease and any other leases of transmission and distribution and related assets to a Qualified Lessee under which the Borrower or any Subsidiary of the Borrower is a party as a lessor, and (ii) any lease of transmission and distribution and related assets pursuant to which Sharyland is the lessee and a Subsidiary of Sharyland or another Person Controlled by one or more Hunt Family Members is the lessor; provided , no such lease will qualify as a “Lease” hereunder if each of the three following criteria apply: (x) Sharyland is the lessee, (y) cash rental payments have become due and payable pursuant thereto and (z) none of the Borrower, a Subsidiary of the Borrower or a Subsidiary of Sharyland is the lessor.
“ Leasehold ” of any Person, shall mean all of the right, title and interest of such Person as lessee or licensee in, to and under leases or licenses of land, improvements and/or fixtures.
“ Lender ” shall have the meaning defined in the preamble hereto. Unless the context otherwise requires, the term “Lender” shall include a Swingline Lender.
“ Lender Affiliate ” shall mean (a) any Affiliate of any Lender and (b) any Person that is administered or managed by any Lender or any Affiliate of any Lender and that is engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business and (c) with respect to any Lender which is a fund that invests in commercial loans and similar extensions of credit, any other fund that invests in a commercial loans and similar extensions of credit and is managed or advised by the same investment advisor as such Lender or by an Affiliate of such Lender or investment advisor.
“ Lender Parent ” shall mean, with respect to any Lender, any Person as to which such Lender is, directly or indirectly, a Subsidiary.
“ Letter of Credit ” shall have the meaning provided in Section 2.1(a).
“ Letter of Credit Fee ” shall have the meaning provided in Section 3(b).
“ Letter of Credit Outstandings ” shall mean, at any time, an amount equal to the sum of (a) the aggregate then undrawn and unexpired amount of the then outstanding Letters of Credit and (b) the aggregate amount of drawings under Letters of Credit that have not then been reimbursed pursuant to Section 2.4 at such time.
“ Lien ” shall mean, with respect to any Person, any mortgage, lien, pledge, charge, security interest, or other encumbrance, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or Capital Lease, upon or with respect to any property or asset of such Person, in each case in the nature of a security interest of any kind whatsoever.
“ Loan ” shall mean a loan made by the Lenders to the Borrower pursuant to this Agreement.
“ Loan Party ” shall mean the Borrower and each Subsidiary that is a party to a Credit Document, as applicable.
“ Material Adverse Effect ” shall mean a material adverse effect upon and/or material adverse developments with respect to (a) the operations, business, assets, properties, liabilities or financial condition of the Borrower and its Subsidiaries (taken as a whole), (b) the ability of the Borrower and the Guarantors (taken as a whole) to perform their obligations under the Credit Documents, (c) the legality,
 
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validity or enforceability of any material provision of this Agreement or any other Credit Document, (d) the rights or remedies of the Administrative Agent or the Lenders under the Credit Documents or (e) the validity, perfection or priority of the Collateral Agent’s Liens on any material Collateral.
“ Material Project Document ” shall mean (i) any contract or agreement that is related to the ownership, operation, management service, maintenance, repair or use of the System entered into by the Borrower or any Subsidiary subsequent to the Restatement Date that involves full payments or obligations of Borrower or any Subsidiary in excess of $5,000,000 in any calendar year, and (ii) System Leases, but shall exclude any documents subject to Section 8.12 herein.
“ McAllen Lease ” shall mean (A) prior to the effectiveness of the McAllen Lease Amendment and Restatement, the Second Amended and Restated Master System Lease Agreement, dated as of July 1, 2012, between the Borrower, as lessor, and Sharyland, as lessee, and (B) upon the effectiveness of the McAllen Lease Amendment and Restatement, the McAllen Lease Amendment and Restatement, as such lease may be amended, restated, supplemented or otherwise modified from time to time, or any new lease entered into in replacement thereof, in accordance with Section 7.10(b) and/or 8.16 of this Agreement, as applicable.
“ McAllen Lease Amendment and Restatement ” shall mean the Third Amended and Restated Master System Lease Agreement (McAllen System), between the Borrower, as lessor, and Sharyland, as lessee.
“ Minimum Borrowing Amount ” shall mean $500,000 or a whole multiple of $100,000 in excess thereof.
“ Multiemployer Plan ” shall mean a multiemployer plan as defined in Section 4001(a)(3) of ERISA.
“ Negative Pledge Agreement ” shall mean the Amended and Restated Negative Pledge Agreement, dated as of the Restatement Date among FERC Owner and the Collateral Agent.
“ New Project ” shall mean any transmission or distribution project, including any such project acquired or built by a Project Finance Subsidiary, any “New Project” or “Footprint Project” (as defined in the Leases) that the Borrower or a Subsidiary of the Borrower funds pursuant to a Lease and any such project that InfraREIT or a Subsidiary thereof acquires pursuant to the Development Agreement.
“ Non-Defaulting Lender ” shall mean each Lender other than a Defaulting Lender.
“ Non-Recourse Debt ” shall mean Indebtedness of a Project Finance Subsidiary or a Subsidiary of Sharyland, as the case may be, that, if secured, is secured solely by a pledge of collateral owned by such Project Finance Subsidiary or such Subsidiary of Sharyland, as the case may be, and the Capital Stock in such Project Finance Subsidiary or such Subsidiary of Sharyland, as the case may be, and for which no Person other than such Project Finance Subsidiary or such Subsidiary of Sharyland, as the case may be, is personally liable.
“ Non-U.S. Lender ” shall mean a Lender that is not a U.S. Person.
“ Note Purchase Agreements ” shall mean, collectively, the 2009 Note Purchase Agreement and the 2010 Note Purchase Agreement.
 
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“ Notice Office ” shall mean the office of the Administrative Agent at 4th Floor, 20 King Street West, Toronto, Ontario M5H 1C4 or such other office as the Administrative Agent may designate to the Borrower from time to time.
“ Obligations ” shall mean the unpaid principal of and interest on (including interest accruing after the maturity of the Loans, including Revolving Loans, and Reimbursement Obligations and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) the Loans and all other obligations and liabilities of the Borrower to the Administrative Agent or to any Lender (or, in the case of Specified Swap Contracts or Specified Cash Management Contracts, any affiliate of any Lender), whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, this Agreement, any other Credit Document, the Letters of Credit, any Specified Swap Contracts or any Specified Cash Management Contracts whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including all fees, charges and disbursements of counsel to the Administrative Agent or to any Lender that are required to be paid by the Borrower pursuant hereto) or otherwise.
“ Original Closing Date ” shall mean July 13, 2010.
“ Original Credit Agreement ” shall have the meaning provided in the recitals.
“ Other Connection Taxes ” shall mean with respect to any Credit Party, Taxes imposed as a result of a present or former connection between such Credit Party and the jurisdiction imposing such Tax (other than connections arising from such Credit Party having executed, delivered, become a party to, performed its obligations under, received payments under, received or perfected a security interest under, engaged in any other transaction pursuant to, or enforced, any Credit Document, or sold or assigned an interest in any Loan or Credit Document).
“ Other Taxes ” shall mean all present or future stamp, court, or documentary, intangible, recording, filing or similar Taxes that arise from any payment made under, from the execution, delivery, performance, enforcement or registration of, from the receipt or perfection of a security interest under, or otherwise with respect to, any Credit Document, except any such Taxes that are Other Connection Taxes imposed with respect to an assignment (other than an assignment made pursuant to Section 1.15).
“ O&M Costs ” shall mean actual cash management and operation costs of the Borrower, taxes payable by the Borrower, insurance premiums, consumables, fees and expenses of, and other amounts owing to, the Administrative Agent, the Collateral Agent and the Depositary, and other costs and expenses in connection with the management or operation of the Borrower, but exclusive in all cases of (a) non-cash charges, including depreciation or obsolescence charges or reserves therefor, amortization of intangibles or other bookkeeping entries of a similar nature, (b) all other payments of Debt Service, (c) costs of repair or replacement paid with insurance proceeds and (d) development costs related to any Project Finance Subsidiary.
“ Participant Register ” shall have the meaning provided in Section 12.4(a).
“ PBGC ” shall mean the Pension Benefit Guaranty Corporation established pursuant to Section 4002 of ERISA, or any successor thereto.
 
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“ Permit ” shall mean any action, approval, consent, waiver, exemption, variance, franchise, order, permit, authorization, right or license of or from a Governmental Authority, provided that interests or estates in real property, shall not be considered Permits.
“ Permitted Investments ” shall mean any (a) marketable direct obligation of the United States of America, (b) marketable obligation directly and fully guaranteed as to interest and principal by the United States of America, (c) demand deposit with Depositary, or time deposit, certificate of deposit and banker’s acceptance issued by any member bank of the Federal Reserve System which is organized under the laws of the United States of America or any state thereof or any United States branch of a foreign bank, in each case whose equity capital is in excess of $500,000,000 and whose long-term debt securities are rated “A” or better by S&P and “A2” or better by Moody’s, (d) commercial paper or tax exempt obligations given the highest rating by Moody’s and S&P, (e) obligations of a commercial bank described in clause (c) above, in respect of the repurchase of obligations of the type as described in clauses (a) and (b) hereof, provided that such repurchase obligation shall be fully secured by obligations of the type described in said clauses (a) and (b) and the possession of such obligation shall be transferred to, and segregated from other obligations owned by, any such bank, (f) instrument rated “AAA” by S&P and “Aaa” by Moody’s issued by investment companies and having an original maturity of 180 days or less, (g) eurodollar certificates of deposit issued by any bank described in clause (c) above, and (h) marketable security rated not less than “A-1” by S&P or not less than “Prime-1” by Moody’s. In no event shall Permitted Investments include any obligation, certificate of deposit, acceptance, commercial paper or instrument which by its terms matures (A) more than 180 days after the date of investment, unless a bank meeting the requirements of clause (c) above shall have agreed to repurchase such obligation, certificate of deposit, acceptance, commercial paper or instrument at its purchase price plus earned interest within no more than 90 days after its purchase thereunder or (B) after the next payment date.
“ Permitted Liens ” shall mean all Liens permitted pursuant to Section 8.5.
“ Permitted Secured Indebtedness ” shall have the meaning given to it in the Collateral Agency Agreement.
“ Person ” shall mean any individual, partnership, joint venture, firm, cooperative corporation, association, trust or other enterprise or any government or political subdivision or any agency, department or instrumentality thereof.
“ Plan ” shall mean any single-employer plan as defined in Section 4001 of ERISA, which is maintained or contributed to by (or to which there is an obligation to contribute of) a Loan Party, a Subsidiary of a Loan Party or an ERISA Affiliate, and each such plan for the five year period immediately following the latest date on which a Loan Party, a Subsidiary of a Loan Party or an ERISA Affiliate maintained, contributed to or had an obligation to contribute to such plan.
“ Pledge Agreement ” shall mean the Amended and Restated Assignment of Membership Interests and Pledge Agreement, dated as of the Restatement Date, by TDC, with respect to its membership interests in the Borrower, to the Collateral Agent.
“ Pledge Agreement (FERC) ” shall mean the Amended and Restated Assignment of Membership Interests and Pledge Agreement, dated as of the Restatement Date, by the Borrower, with respect to its membership interests in the FERC Owner, to the Collateral Agent.
“ Preferred Stock ” shall mean any class of capital stock of a Person that is preferred over any other class of capital stock (or similar equity interests) of such Person as to the payment of dividends or the payment of any amount upon liquidation or dissolution of such Person.
 
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“ Prime Rate ” shall mean the rate of interest per annum publicly announced from time to time by the Administrative Agent as its prime rate in effect at its principal office in New York City.
“ Project Finance Subsidiary ” shall mean a special purpose Subsidiary of a Person created to develop a New Project and to finance such New Project solely with Non-Recourse Debt and equity (including, for the avoidance of doubt, CV Project Entity, L.L.C. and GS Project Entity).
“ Promissory Notes ” shall mean the collective reference to any promissory note evidencing Loans.
“ Public Lender ” shall have the meaning specified in Section 7.1 .
“ Qualified Lessee ” shall mean Sharyland and/or any other utility that is (x) approved or authorized by the applicable public utility commission or similar regulatory authority to operate and/or lease the transmission and/or distribution assets of Borrower or any Subsidiary and (y) a party to a then-effective lease agreement with the Borrower or a Subsidiary thereof pursuant to which such utility leases and operates such entity’s transmission and/or distribution assets.
“ Qualified Lessee Affiliate Loan ” shall mean loans made by InfraREIT Partners or a Subsidiary thereof to Qualified Lessees from time to time in an aggregate principal amount not to exceed $10,000,000 at any time outstanding as long as the use of proceeds of such loans is limited to the acquisition or financing of equipment or other assets used in the Qualified Lessee’s operation or lease of transmission or distribution assets from the Borrower or a Subsidiary thereof pursuant to a Lease.
“ Qualifying IPO ” shall mean an initial public offering of the Capital Stock of InfraREIT pursuant to a registration statement filed with the SEC.
“ Real Property Collateral ” shall mean (i) any fee owned material real property (other than easements and rights of way) and (ii) any material lease of real property (other than easements and rights of way) which lease relates to or arises in connection with any transmission and distribution assets, excluding (x) leases otherwise prohibiting the transfer or granting of a Lien on or security interest in such leasehold interest pursuant to the terms of any agreement permitted under Section 8.20 and (y) leases with respect to which the Borrower is unable, after commercially reasonable efforts, to obtain such landlord consents as may be reasonably required so as to enable the Borrower to comply with the requirements of Section 7.9(c).
“ Refunded Swingline Loans ” shall have the meaning provided in Section 1.4(b).
“ Register ” shall have the meaning set forth in Section 12.4(c).
“ Regulation D ” shall mean Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof establishing reserve requirements.
“ Reimbursement Obligation ” shall mean the obligation of the Borrower to reimburse the Issuing Lender pursuant to Section 2.4 for amounts drawn under Letters of Credit.
“ Required Lenders ” shall mean Non-Defaulting Lenders whose outstanding Revolving Commitments (or, if after the Total Revolving Commitment has been terminated, Revolving Extensions of Credit) constitute more than 50% of the total outstanding Revolving Commitments of Non-Defaulting Lenders (or, if after the Total Revolving Commitment has been terminated, the total Revolving Extensions of Credit of Non-Defaulting Lenders).
 
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“ Required Permit ” shall have the meaning provided in Section 6.12.
“ Required Secured Parties ” shall have the meaning provided in the Collateral Agency Agreement.
“ Requirement of Law ” shall mean as to any Person, the certificate of incorporation or formation and by-laws or partnership or operating agreement or other organizational or governing documents of such Person, and any local, state or federal law, regulation, rule, ordinances or determination, interpretation or order of an arbitrator or a court or other Governmental Authority, and any Required Permit, in each case applicable to or binding upon such Person or any of its properties or its business or to which such Person or any of its properties or its business is subject.
“ Responsible Officer ” shall mean any Senior Financial Officer and any other officer of the Borrower with responsibility for the administration of the relevant portion of this Agreement.
“ Restatement Date ” shall mean the date on which the conditions precedent set forth in Section 5.1 shall have been satisfied, which date is December 10, 2014.
“ Revolving Commitment ” shall mean, as to any Lender, the obligation of such Lender, if any, to make Revolving Loans and participate in Swingline Loans and Letters of Credit in an aggregate principal and/or face amount not to exceed the amount set forth under the heading “Revolving Commitment” opposite such Lender’s name on Annex 1.1A, as the same may be adjusted from time to time as a result of assignments to or from each Lender pursuant to Section 12.4.
“ Revolving Commitment Period ” shall mean the period from and including the Restatement Date to the Revolving Facility Final Maturity Date.
“ Revolving Extensions of Credit ” shall mean as to any Revolving Lender at any time, an amount equal to the sum of (a) the aggregate principal amount of all Revolving Loans held by such Lender then outstanding, (b) such Lender’s Revolving Percentage of the Letter of Credit Outstandings then outstanding and (c) such Lender’s Revolving Percentage of the aggregate principal amount of Swingline Loans then outstanding.
“ Revolving Facility ” shall mean the Facility evidenced by the Total Revolving Commitment and the Swingline Facility.
“ Revolving Facility Final Maturity Date ” shall mean the fifth anniversary of the Restatement Date or, if earlier, the date on which the Revolving Commitments are terminated pursuant to Section 9 hereof.
“ Revolving Lender ” shall mean each Lender that has a Revolving Commitment or that holds Revolving Loans.
“ Revolving Loan ” shall have the meaning provided in Section 1.1(a).
“ Revolving Percentage ” shall mean as to any Revolving Lender at any time, the percentage which such Lender’s Revolving Commitment then constitutes of the Total Revolving Commitments or, at any time after the Revolving Commitments shall have expired or terminated, the
 
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percentage which the aggregate principal amount of such Lender’s Revolving Loans then outstanding constitutes of the aggregate principal amount of the Revolving Loans then outstanding. Notwithstanding the foregoing, in the case of Section 1.16 when a Defaulting Lender shall exist, Revolving Percentages shall be determined without regard to any Defaulting Lender’s Revolving Commitment.
“ ROFO Transfer ” shall mean the sale and Transfer to Persons Controlled by one or more Hunt Family Members of any assets located in the Texas Panhandle related to the CREZ Project that are categorized as ROFO projects under the Development Agreement with an aggregate fair market value not to exceed $5,000,000.
“ Sanction(s) ” shall mean any international economic sanction administered or enforced by the United States Government (including without limitation, OFAC), the United Nations Security Council, the European Union, Her Majesty’s Treasury or other relevant sanctions authority.
“ SEC ” shall have the meaning provided in Section 7.1(g).
“ Secured Parties ” shall mean the Collateral Agent, Administrative Agent, the Lenders, the Issuing Lender and any other Persons that become parties to the Collateral Agency Agreement.
“ Security Agreement ” shall mean the Security Agreement, dated as of the Restatement Date, among the Collateral Agent and the Borrower.
“ Security Documents ” shall mean (i) the Collateral Agency Agreement, the Deeds of Trust, the Pledge Agreement, the Deposit Agreement, the Security Agreement, (ii) prior to the completion of the FERC Merger, the Pledge Agreement (FERC) and the Negative Pledge Agreement and (iii) other security documents entered into pursuant to Section 7.9 and any other security documents, financing statements and the like filed or recorded in connection with the foregoing.
“ Senior Financial Officer ” shall mean means the chief financial officer, principal accounting officer, treasurer or comptroller of the Borrower or a Qualified Lessee, as applicable.
“ Sharyland ” shall mean Sharyland Utilities, L.P., a Texas limited partnership.
“ SP ” shall mean Sharyland Projects, L.L.C., a Project Finance Subsidiary.
“ Specified Account ” shall mean deposit account number 4426868026 maintained with Bank of America, N.A. in the name of the Borrower, or such other account designated by the Borrower from time to time.
“ Specified Cash Management Contracts ” shall mean any cash management service agreements entered into by the Borrower and any Person that is a Lender or an affiliate of a Lender at the time such agreement is entered into.
“ Specified Swap Contracts ” shall mean any Swap Contracts entered into by the Borrower and any Person that is a Lender or an affiliate of a Lender at the time such Swap Contract is entered into.
“ Specified Qualified Lessee ” shall mean Sharyland and any Qualified Lessee (a) (i) without an Investment Grade Credit Rating or (ii) whose obligations under the applicable Leases are not guaranteed by an entity with an Investment Grade Rating and (b) whose business is limited to the leasing of transmission and/or distribution assets from the Borrower or any of its Subsidiaries or Affiliates.
 
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“ Stanton/Brady/Celeste Lease ” shall mean (A) prior to the effectiveness of the Stanton/Brady/Celeste Lease Amendment and Restatement, the Amended and Restated Lease Agreement (Stanton/Brady/Celeste Assets), dated as of July 1, 2012, between the Borrower, as lessor, and Sharyland, as lessee, and (B) upon the effectiveness of the Stanton/Brady/Celeste Lease Amendment and Restatement, the Stanton/Brady/Celeste Lease Amendment and Restatement, as such lease may be amended, restated, supplemented or otherwise modified from time to time, or any new lease entered into in replacement thereof, in accordance with Section 7.10(b) and/or 8.16 of this Agreement, as applicable.
“ Stanton/Brady/Celeste Lease Amendment and Restatement ” shall mean the Second Amended and Restated Lease Agreement (Stanton/Brady/Celeste Assets), between the Borrower, as lessor, and Sharyland, as lessee.
“ Stated Amount ” of each Letter of Credit shall mean the maximum available to be drawn thereunder (regardless of whether any conditions for drawing could then be met).
“ Subsidiary ” shall mean, as to any Person, any other Person in which such first Person or one or more of its Subsidiaries or such first Person and one or more of its Subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar functions) or such second Person and any partnership or joint venture if more than a 50% interest in the profits or capital thereof is owned by such first Person or one or more of its Subsidiaries or such first Person and one or more of its Subsidiaries (unless such partnership or joint venture can and does ordinarily take major business actions without the prior approval of such Person or one or more of its Subsidiaries). Unless otherwise expressly provided, all references herein to a “Subsidiary” shall mean a Subsidiary of the Borrower and, prior to the completion of the FERC Merger, shall include the FERC Owner. Prior to the completion of the FERC Merger, all references herein to a Subsidiary of Sharyland shall include the FERC Operator.
“ Subsidiary Guaranties ” shall mean, collectively or individually, depending on the context, the guaranties provided by the Subsidiary Guarantors pursuant to Section 7.9, if any, substantially in the form of Exhibit H attached hereto.
“ Subsidiary Guarantor ” shall mean any Subsidiary of the Borrower that is a guarantor under a guaranty pursuant to Section 7.9.
“ Swap Contract ” shall mean (a) any and all interest rate swap transactions, basis swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward foreign exchange transactions, cap transactions, floor transactions, currency options, spot contracts or any other similar transactions or any of the foregoing (including, but without limitation, any options to enter into any of the foregoing), and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., or any International Foreign Exchange Master Agreement.
“ Swap Termination Value ” shall mean, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a), the amount(s) determined as the mark-to-market value(s) for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts (which may include a Lender or any Affiliate of a Lender).
 
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“ Swingline Commitment ” shall mean the obligation of the Swingline Lender to make Swingline Loans pursuant to Section 1.3 in an aggregate principal amount at any one time outstanding not to exceed $5,000,000.
“ Swingline Exposure ” shall mean, at any time, the sum of the aggregate amount of all outstanding Swingline Loans at such time. The Swingline Exposure of any Revolving Lender at any time shall be its Revolving Percentage of the total Swingline Exposure at such time.
“ Swingline Facility ” shall mean the Facility evidenced by the Swingline Commitment.
“ Swingline Lender ” shall mean Royal Bank of Canada.
“ Swingline Loans ” shall have the meaning provided in Section 1.3(a).
“ Swingline Participation Amount ” shall have the meaning provided in Section 1.4(c).
“ Synthetic Lease ” shall mean, at any time, any lease (including leases that may be terminated by the lessee at any time) of any property (a) that is accounted for as an operating lease under GAAP and (b) in respect of which the lessee retains or obtains ownership of the property so leased for U.S. federal income tax purposes, other than any such lease under which such Person is the lessor.
“ System ” shall mean the Borrower’s and/or any Subsidiary’s (other than a Project Finance Subsidiary’s) integrated electrical transmission and distribution facilities located primarily in the State of Texas and the systems and other property necessary to operate the transmission and distribution facilities, and all improvements to and expansions of such facilities, and each New Project (upon its completion) owned by the Borrower or a Subsidiary thereof; provided that, for purposes hereof, “System” shall not be deemed to include any easements held by the Borrower or any Subsidiary.
“ System Leases ” shall mean (1) the McAllen Lease, (2) the Stanton/Brady/Celeste Lease, (3) upon the effectiveness thereof, the Lease Agreement (ERCOT Transmission Assets), between the Borrower, as lessor, and Sharyland, as lessee, (4) upon the completion of the FERC Merger, the FERC Lease and (5) any and all other leases and supplements thereto in connection with the System and the transmission and distribution facilities ancillary thereto and any easements associated therewith, each as amended, restated, supplemented or otherwise modified from time to time, or any new lease entered into in replacement thereof, in accordance with Section 7.10(b) and/or 8.16 of this Agreement, as applicable.
“ Taxes ” shall mean all present or future taxes, levies, imposts, duties, deductions, withholdings (including backup withholding), assessments, fees or other charges imposed by any Governmental Entity, including any interest, additions to tax or penalties applicable thereto.
“ TDC ” shall mean Transmission and Distribution Company, L.L.C., a Texas limited liability company.
“ Texas Regional Entity ” shall mean the division of ERCOT authorized to develop, monitor, assess and enforce compliance with NERC Reliability Standards within the geographic boundaries of ERCOT and any successor thereto.
 
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“ Threshold Amount ” shall mean (a) $10,000,000 with respect to the Borrower, (b) $2,000,000 with respect to any Specified Qualified Lessee and (c) with respect to any Qualified Lessee (other than a Specified Qualified Lessee), an amount that could reasonably be expected to result in a Material Adverse Effect.
“ Total Debt ” shall mean, at any date, with respect to the Borrower, all Indebtedness of the Borrower on a consolidated basis; provided , however , that for purposes of calculating the Borrowers’ Total Debt to Capitalization Ratio, the Borrower’s Total Debt shall (i) exclude Non-Recourse Debt of a Project Finance Subsidiary of the Borrower and that portion of the Swap Termination Value defined in clause (b) of the definition of “Swap Termination Value” and (ii) include Indebtedness of Sharyland on a consolidated basis (excluding, for the avoidance of doubt, Non-Recourse Debt of a Project Finance Subsidiary of Sharyland).
“ Total Debt to Capitalization Ratio ” shall mean the Borrower’s Total Debt, divided by the sum of Total Debt plus the Borrower’s Consolidated Net Worth.
“ Total Revolving Commitment ” shall mean the sum of the Revolving Commitments of the Lenders. The amount of the Total Revolving Commitments as of the Restatement Date is $250,000,000, as the same may be reduced from time to time pursuant to Section 1.5 and/or Section 9 and increased from time to time pursuant to Section 1.17.
“ Total Revolving Commitment Excess Amount ” shall have the meaning provided in Section 4.2(a).
“ Total Revolving Extensions of Credit ” shall mean at any time, the aggregate amount of the Revolving Extensions of Credit of the Revolving Lenders outstanding at such time.
“ Total Unutilized Revolving Commitment ” shall mean, at any time, (i) the Total Revolving Commitment at such time less (ii) the sum of the aggregate principal amount of all Revolving Loans and Swingline Loans at such time plus the Letter of Credit Outstandings at such time.
“ Transaction Documents ” shall mean, collectively the Financing Documents and the Leases to which the Borrower or a Subsidiary thereof is a party.
“ Transfer ” shall mean, with respect to any item, the sale, exchange, conveyance, lease, transfer or other disposition of such item.
“ Type ” shall mean any type of Loan determined with respect to the interest option applicable thereto, i.e. , an ABR Loan or Eurodollar Loan.
“ UCC ” shall mean, with respect to any jurisdiction, the Uniform Commercial Code as in effect in such jurisdiction.
“ UCC Collateral ” shall mean Collateral that is of a type in which a valid security interest can be created under Article 9 of the New York UCC.
“ Unpaid Drawing ” shall mean any payment or disbursement made by the Issuing Lender under any Letter of Credit that has not been reimbursed by the Borrower.
“ Unutilized Commitment ” for any Lender at any time shall mean the excess of (i) the Commitment of such Lender over (ii) the sum of (x) the aggregate outstanding principal amount of Loans
 
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made by such Lender plus (y) an amount equal to such Lender’s Revolving Percentage, if any, of the Letter of Credit Outstandings at such time, provided that solely for purposes of calculating the Commitment Fee pursuant to Section 3(a) Swingline Loans shall be deemed not to be outstanding and the Swingline Commitment shall not constitute a “Commitment”.
“ USA PATRIOT Act ” shall mean United States Public Law 107-56, Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 2001, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.
“ U.S. Person ” shall mean a “United States person” within the meaning of Section 7701(a)(30) of the Code.
“ U.S. Tax Compliance Certificate ” shall have the meaning provided in Section 4.3(f)(ii)(B)(3).
“ Wholly-Owned Subsidiary ” shall mean, at any time, any Subsidiary one hundred percent of all of the voting interests of which are owned by any one or more of the Borrower and the Borrower’s other Wholly-Owned Subsidiaries at such time.
“ Withdrawal Liability ” shall mean a liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA.
“ Withholding Agent ” shall mean any Borrower Party and the Administrative Agent.
“ Written ” or “ in writing ” shall mean any form of written communication or a communication by means of telex, facsimile transmission, telegraph or cable.
10.2. Other Definitional Provisions .
(a) Unless otherwise specified therein, all terms defined in this Agreement shall have the defined meanings set forth herein when used in the other Credit Documents or any certificate or other document made or delivered pursuant hereto or thereto.
(b) As used herein and in the other Credit Documents, and any certificate or other document made or delivered pursuant hereto or thereto, (i) accounting terms relating to any Loan Party not defined in Section 10.1 and accounting terms partly defined in Section 10.1, to the extent not defined, shall have the respective meanings given to them under GAAP (provided that all terms of an accounting or financial nature used herein shall be construed, and all computations of amounts and ratios referred to herein shall be made, without giving effect to (A) any election under Accounting Standards Codification 825-10-25 (previously referred to as Statement of Financial Accounting Standards 159) (or any other Accounting Standards Codification or Financial Accounting Standard having a similar result or effect) to value any Indebtedness or other liabilities of the Borrower or any Subsidiary at “fair value”, as defined therein and (B) any treatment of Indebtedness in respect of convertible debt instruments under Accounting Standards Codification 470-20 (or any other Accounting Standards Codification or Financial Accounting Standard having a similar result or effect) to value any such Indebtedness in a reduced or bifurcated manner as described therein, and such Indebtedness shall at all times be valued at the full stated principal amount thereof), (ii) the words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”, (iii) the word “incur” shall be construed to mean incur, create, issue, assume, become liable in respect of or suffer to
 
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exist (and the words “incurred” and “incurrence” shall have correlative meanings), (iv) the words “asset” and “property” shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, Capital Stock, securities, revenues, accounts, Leasehold interests and contract rights, and (v) references to agreements or other Contractual Obligations shall, unless otherwise specified, be deemed to refer to such agreements or Contractual Obligations as amended, supplemented, restated or otherwise modified from time to time.
(c) The words “hereof”, “herein” and “hereunder” and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, Annex and Exhibit references are to this Agreement unless otherwise specified.
SECTION 11 THE ADMINISTRATIVE AGENT
11.1. Appointment . Each Lender hereby irrevocably designates and appoints the Administrative Agent as the agent of such Lender under this Agreement and the other Credit Documents, and each such Lender irrevocably authorizes the Administrative Agent, in such capacity, to take such action on its behalf under the provisions of this Agreement and the other Credit Documents and to exercise such powers and perform such duties as are expressly delegated to the Administrative Agent by the terms of this Agreement and the other Credit Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement, the Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Credit Document or otherwise exist against the Administrative Agent.
11.2. Delegation of Duties . The Administrative Agent may execute any of its duties under this Agreement and the other Credit Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Administrative Agent shall not be responsible for the negligence or misconduct of any agents or attorneys in-fact selected by it with reasonable care.
11.3. Exculpatory Provisions . Neither the Administrative Agent nor any of its respective officers, directors, employees, agents, advisors, attorneys-in-fact or affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or any other Credit Document (except to the extent that any of the foregoing are found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from its or such Person’s own gross negligence or willful misconduct) or (ii) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by the Borrower or any Subsidiary or any officer thereof contained in this Agreement or any other Credit Document or in any certificate, report, statement or other document referred to or provided for in, or received by the Administrative Agent under or in connection with, this Agreement or any other Credit Document or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Credit Document or for any failure of any Borrower a party thereto to perform its obligations hereunder or thereunder. The Administrative Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Credit Document, or to inspect the properties, books or records of any Borrower.
11.4. Reliance by Administrative Agent . The Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any instrument, writing, resolution, notice, consent,
 
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certificate, affidavit, letter, telecopy or email message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including counsel to the Borrower), independent accountants and other experts selected by the Administrative Agent. The Administrative Agent may deem and treat the payee of any Promissory Note as the owner thereof for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with the Administrative Agent. The Administrative Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Credit Document unless it shall first receive such advice or concurrence of the Required Lenders (or, if so specified by this Agreement, all Lenders) as it deems appropriate or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. The Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Credit Documents in accordance with a request of the Required Lenders (or, if so specified by this Agreement, all Lenders), and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Loans.
11.5. Notice of Default . The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default unless the Administrative Agent has received notice from a Lender or the Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a “notice of default”. In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give notice thereof to the Lenders. The Administrative Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders (or, if so specified by this Agreement, all Lenders); provided that unless and until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lenders.
11.6. Non-Reliance on Administrative Agent and Other Lenders . Each Lender expressly acknowledges that neither the Administrative Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates have made any representations or warranties to it and that no act by the Administrative Agent hereinafter taken, including any review of the affairs of the Borrower or any Subsidiary, shall be deemed to constitute any representation or warranty by the Administrative Agent to any Lender. Each Lender represents to the Administrative Agent that it has, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, assets, operations, property, financial and other conditions, prospects and creditworthiness of the Borrower and its Subsidiaries and made its own decision to make its Loans hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement, and to make such investigation as it deems necessary to inform itself as to the business, assets, operations, property, financial and other conditions, prospects and creditworthiness of the Borrower and its Subsidiaries. The Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, assets, property, financial and other conditions, prospects or creditworthiness of the Borrower or any Subsidiary which may come into the possession of the Administrative Agent or any of its officers, directors, employees, agents, attorneys-in-fact or affiliates.
11.7. Indemnification . The Lenders agree to indemnify the Administrative Agent and its affiliates and their respective officers, directors, employees, affiliates, agents, advisors and controlling persons (each, an “ Agent Indemnitee ”) (to the extent not reimbursed by the Borrower and without
 
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limiting the obligation of the Borrower to do so), ratably according to their respective Revolving Percentages in effect on the date on which indemnification is sought under this Section (or, if indemnification is sought after the date upon which the Commitments shall have terminated and the Loans shall have been paid in full, ratably in accordance with such Aggregate Exposure Percentages immediately prior to such date), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever that may at any time (whether before or after the payment of the Loans) be imposed on, incurred by or asserted against such Agent Indemnitee in any way relating to or arising out of, the Commitments, this Agreement, any of the other Credit Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by such Agent Indemnitee under or in connection with any of the foregoing; provided that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements that are found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from such Agent Indemnitee’s gross negligence or willful misconduct. The agreements in this Section shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder.
11.8. The Administrative Agent in Its Individual Capacity . The Administrative Agent and its affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Borrower and its Subsidiaries as though the Administrative Agent were not the Administrative Agent hereunder. With respect to the Loans made by it and all Obligations owing to it, the Administrative Agent shall have the same rights and powers under this Agreement as any Lender and may exercise the same as though it were not the Administrative Agent, and the terms “Lender” and “Lenders” shall include the Administrative Agent in their individual capacity.
11.9. Successor Administrative Agent . The Administrative Agent may resign as Administrative Agent upon 10 days’ notice to the Lenders and the Borrower. If the Administrative Agent shall resign as Administrative Agent under this Agreement and the other Credit Documents, then the Required Lenders shall appoint from among the Lenders a successor agent for the Lenders, which successor agent shall (unless an Event of Default under Section 9(a) or Section 9(f) with respect to the Borrower shall have occurred and be continuing) be subject to approval by the Borrower (which approval shall not be unreasonably withheld or delayed), whereupon such successor agent shall succeed to the rights, powers and duties of the Administrative Agent, and the term “Administrative Agent” shall mean such successor agent effective upon such appointment and approval, and the former Administrative Agent’s rights, powers and duties as Administrative Agent shall be terminated, without any other or further act or deed on the part of such former Administrative Agent or any of the parties to this Agreement or any holders of the Loans. If no successor agent has accepted appointment as Administrative Agent by the date that is 10 days following a retiring Administrative Agent’s notice of resignation, the retiring Administrative Agent’s resignation shall nevertheless thereupon become effective, and the Lenders shall assume and perform all of the duties of the Administrative Agent hereunder until such time, if any, as the Required Lenders appoint a successor agent as provided for above. After any retiring Administrative Agent’s resignation as Administrative Agent, the provisions of this Section 11.9 and of Section 12.1 shall continue to inure to its benefit.
11.10. Arranger . The Arranger shall have no duties or responsibilities hereunder in their respective capacities as such.
11.11. Credit Bidding . In each case, subject to the provisions of the Collateral Agency Agreement, the Lenders hereby irrevocably authorize the Administrative Agent, at the direction of the Required Lenders, to credit bid all or any portion of the Obligations (including accepting some or all of the Collateral in satisfaction of some or all of the Obligations pursuant to a deed in lieu of foreclosure or
 
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otherwise) and in such manner purchase (either directly or through one or more acquisition vehicles) all or any portion of the Collateral (a) at any sale thereof conducted under the provisions of the Bankruptcy Code of the United States, including under Sections 363, 1123 or 1129 of the Bankruptcy Code of the United States, or any similar Laws in any other jurisdictions to which a Loan Party is subject, (b) at any other sale or foreclosure or acceptance of collateral in lieu of debt conducted by (or with the consent or at the direction of) the Administrative Agent (whether by judicial action or otherwise) in accordance with any applicable Law. In connection with any such credit bid and purchase, the Obligations owed to the Secured Parties shall be entitled to be, and shall be, credit bid on a ratable basis (with Obligations with respect to contingent or unliquidated claims receiving contingent interests in the acquired assets on a ratable basis that would vest upon the liquidation of such claims in an amount proportional to the liquidated portion of the contingent claim amount used in allocating the contingent interests) in the asset or assets so purchased (or in the Capital Stock or debt instruments of the acquisition vehicle or vehicles that are used to consummate such purchase). In connection with any such bid (i) the Administrative Agent shall be authorized to form one or more acquisition vehicles to make a bid, (ii) to adopt documents providing for the governance of the acquisition vehicle or vehicles (provided that any actions by the Administrative Agent with respect to such acquisition vehicle or vehicles, including any disposition of the assets or Capital Stock thereof shall be governed, directly or indirectly, by the vote of the Required Lenders, irrespective of the termination of this Agreement and without giving effect to the limitations on actions by the Required Lenders contained in clauses (a) through (g) of Section 12.12 of this Agreement), (iii) the Administrative Agent shall be authorized to assign the relevant Obligations to any such acquisition vehicle pro rata by the Lenders, as a result of which each of the Lenders shall be deemed to have received a pro rata portion of any Capital Stock and/or debt instruments issued by such an acquisition vehicle on account of the assignment of the Obligations to be credit bid, all without the need for any Secured Party or acquisition vehicle to take any further action, and (iv) to the extent that Obligations that are assigned to an acquisition vehicle are not used to acquire Collateral for any reason (as a result of another bid being higher or better, because the amount of Obligations assigned to the acquisition vehicle exceeds the amount of debt credit bid by the acquisition vehicle or otherwise), such Obligations shall automatically be reassigned to the Lenders pro rata and the Capital Stock and/or debt instruments issued by any acquisition vehicle on account of the Obligations that had been assigned to the acquisition vehicle shall automatically be cancelled, without the need for any Secured Party or any acquisition vehicle to take any further action.
SECTION 12 MISCELLANEOUS .
12.1. Payment of Expenses, etc . The Borrower agrees to: (i) pay all reasonable out-of-pocket costs and expenses of the Administrative Agent and Arranger in connection with the syndication of the facilities, negotiation, preparation, execution and delivery of the Credit Documents and the documents and instruments referred to therein and any amendment, waiver or consent relating thereto (including, without limitation, the reasonable fees and disbursements of Simpson Thacher & Bartlett LLP, counsel to the Administrative Agent and the Arranger); (ii) pay all reasonable out-of-pocket costs and expenses of the Administrative Agent, the Arranger and each of the Lenders in connection with the enforcement (including pursuant to the administration of any bankruptcy proceeding relating to the Borrower) or preservation of any rights under the Credit Documents and the documents and instruments referred to therein (including, without limitation, the reasonable fees and disbursements of counsel for the Administrative Agent, the Issuing Lender and for each of the Lenders); (iii) indemnify the Administrative Agent, each Lender, the Issuing Lender, any of their respective Affiliates and its respective officers, directors, employees, advisors, trustees, representatives and agents (collectively, the “ Indemnitees ”) from and hold each of them harmless against any and all losses, costs, liabilities, claims, damages or expenses, including without limitation, those incurred under Environmental Law, incurred by any of them relating in any way to any Loan, Credit Document, Letter of Credit, or any transaction contemplated under any Credit Document including, without limitation, any and all losses, costs, liabilities, claims, damages or
 
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expenses as a result of, or arising out of, or in any way related to, or by reason of, any investigation, litigation or other proceeding (whether or not any Lender or the Issuing Lender is a party thereto and whether or not such investigation, litigation or other proceeding is brought by the Borrower, any Loan Party or any other Person) related to the entering into and/or performance of any Credit Document or the use of the proceeds of any Loans or Letters of Credit hereunder, the consummation of any transactions contemplated in any Credit Document, including, without limitation, the reasonable fees, charges and disbursements of counsel incurred in connection with any such investigation, litigation or other proceeding (but excluding any such losses, costs, liabilities, claims, damages or expenses to the extent incurred by reason of the gross negligence or willful misconduct, found by a final and nonappealable decision of a court of competent jurisdiction, of the Person to be indemnified or of any other Indemnitee who is such Person or an affiliate, agent or representative of such Person). No Indemnitee shall be liable for any indirect, special, exemplary, punitive or consequential damages in connection with this Agreement or the other Credit Documents or the transactions contemplated hereby or thereby. Section 12.1(iii) shall not apply with respect to Taxes other than any Taxes that represent losses or damages arising from any non-Tax claim. No Indemnitee shall be liable for any damages arising from the use of unintended recipients of any information or other materials distributed by it through telecommunications, electronic or other information transmission systems in connection with this Agreement or the other Credit Documents or the transactions contemplated hereby or thereby other than for direct or actual damages resulting from the gross negligence or willful misconduct of such Indemnitee as determined by a final and nonappealable judgment of a court of competent jurisdiction.
12.2. Right of Setoff . In addition to any rights now or hereafter granted under Applicable Law or otherwise, and not by way of limitation of any such rights, during the continuance of an Event of Default, the Administrative Agent and each Lender is hereby authorized at any time or from time to time, without presentment, demand, protest or other notice of any kind to any Loan Party or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and apply any and all deposits (general or special) and any liabilities at any time held or owing by the Administrative Agent or such Lender (including, without limitation, by branches and agencies of the Administrative Agent or such Lender wherever located) to or for the credit or the account of any Loan Party against and on account of the Obligations and liabilities of such Loan Party then due and payable to the Administrative Agent or such Lender under this Agreement or under any of the other Credit Documents, including, without limitation, all interests in Obligations of such Loan Party purchased by such Lender pursuant to Section 12.4, and all other claims of any nature or description then due and payable arising out of or connected with this Agreement or any other Credit Document, irrespective of whether or not the Administrative Agent or such Lender shall have made any demand hereunder and although said deposits or liabilities owing by the Administrative Agent or such Lender, or any of them, shall be contingent or unmatured. Each Lender hereby agrees to hold any such setoff or appropriation amounts to the extent constituting Collateral under the Collateral Agency Agreement or proceeds thereof in trust for the Administrative Agent to be turned over to the Collateral Agent to be applied in accordance with the terms of the Collateral Agency Agreement.
12.3. Notices . (a) Except as otherwise expressly provided herein, all notices and other communications provided for hereunder shall be in writing (including telecopier or email communication) and mailed, telecopied or delivered, if to the Borrower, at the address specified opposite its signature below; if to any Lender, at its address specified in the administrative questionnaire; or, at such other address as shall be designated by any party in a written notice to the other parties hereto. All such notices and communications shall be mailed, telecopied or (subject to Section 12.3(b)) electronically communicated or sent by overnight courier, and shall be effective when received.
 
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(b) Notices and other communications to the Administrative Agent and the Lenders hereunder may be delivered or furnished by electronic communications pursuant to procedures approved by the Administrative Agent; provided that the foregoing shall not apply to notices pursuant to Section 1 unless otherwise agreed by the Administrative Agent and the applicable Lender. The Administrative Agent or the Borrower may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it; provided that approval of such procedures may be limited to particular notices or communications.
12.4. Benefit of Agreement. (a) This Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, provided that the Borrower may not assign or transfer any of its rights or obligations hereunder without the prior written consent of all the Lenders. Each Lender may, in accordance with Applicable Law, at any time grant participations in any of its rights hereunder or under any of the Promissory Notes to another financial institution, provided that in the case of any such participation, the participant shall not have any rights under this Agreement or any of the other Credit Documents (the participant’s rights against such Lender in respect of such participation to be those set forth in the agreement executed by such Lender in favor of the participant relating thereto) and all amounts payable by the Borrower hereunder shall be determined as if such Lender had not sold such participation, except that the participant shall be entitled to the benefits of Sections 1.12, 1.14 and 4.3 of this Agreement (subject to the requirements and limitations therein, including the requirements under Section 4.3(f) (it being understood that the documentation required under Section 4.3(f) shall be delivered to the participating Lender)) to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b) of this section; provided that such participant (i) agrees to be subject to the provisions of Sections 1.12, 1.14 and 4.3 as if it were an assignee under paragraph (b) of this Section and (ii) shall not be entitled to receive any greater payment under Sections 1.12, 1.14 and 4.3, with respect to any participation, than its participating Lender would have been entitled to receive, except to the extent such entitlement to receive a greater payment results from an adoption of or any change in any Requirement of Law or in the interpretation or application thereof or compliance by any Lender with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority made subsequent to the date hereof that occurs after the participant acquired the applicable participation. Each Lender that sells a participation agrees, at the Borrower’s request and expense, to use reasonable efforts to cooperate with the Borrower to effectuate the provisions of Section 1.15 with respect to any participant. The participant shall, to the maximum extent permitted by Applicable Law, be deemed to have the right of setoff in respect of its participation in amounts owing under this Agreement to the same extent as if the amount of its participation were owing directly to it as a Lender under this Agreement provided that, in purchasing such participation, such participant shall be deemed to have agreed to share with the Lenders the proceeds thereof as provided in Section 12.6(b) as fully as if it were a Lender hereunder, and, provided, further, that no Lender shall transfer, grant or assign any participation under which the participant shall have rights to approve any amendment to or waiver of this Agreement or any other Credit Document except to the extent such amendment or waiver would (i) extend the final scheduled maturity of any Loan or Promissory Note in which such participant is participating, or reduce the rate or extend the time of payment of interest or Fees thereon (except in connection with a waiver of the applicability of any post-default increase in interest rates), or reduce the principal amount thereof, or increase such participant’s participating interest in any Commitment over the amount thereof then in effect (it being understood that a waiver of any Default or Event of Default or of a mandatory reduction in the Total Revolving Commitment, or a mandatory prepayment, shall not constitute a change in the terms of any Commitment), (ii) release all or substantially all of the Collateral except in accordance with the Credit Documents or (iii) consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement or any other Credit Document. Each Lender that sells a participation shall, acting solely for this purpose as a nonfiduciary agent of the Borrower, maintain a register on which it enters the name and address of each participant and the
 
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principal amounts (and stated interest) of each participant’s interest in the Loans or other obligations under the Credit Documents (the “ Participant Register ”); provided that no Lender shall have any obligation to disclose all or any portion of the Participant Register to any Person (including the identity of any participant or any information relating to a participant’s interest in any Commitments, Loans, Letters of Credit or its other obligations under any Credit Document) except to the extent that such disclosure is necessary to establish that such Commitment, Loan, Letter of Credit or other obligation is in registered form under Section 5f.103-1(c) of the United States Treasury Regulations. The entries in the Participant Register shall be conclusive absent manifest error, and such Lender shall treat each Person whose name is recorded in the Participant Register as the owner of such participation for all purposes of this Agreement notwithstanding any notice to the contrary. For the avoidance of doubt, the Administrative Agent (in its capacity as Administrative Agent) shall have no responsibility for maintaining a Participant Register.
(b) Notwithstanding the foregoing, in accordance with Applicable Law at any time and from time to time, any Lender may assign all or a portion of its Loans and/or Commitments and its rights and obligations under this Agreement to one or more other Persons with the prior written consent (such consent not to be unreasonably withheld or delayed) of:
(i) the Borrower, provided that, no consent of the Borrower shall be required in either case for an assignment to a Lender, an Affiliate of a Lender or, if an Event of Default under Section 9(a), 9(b), 9(j) or 9(k) has occurred and is continuing, any other assignee;
(ii) the Administrative Agent, provided that no consent of the Administrative Agent shall be required for an assignment of any Revolving Commitment to an assignee that is a Lender with a Revolving Commitment immediately prior to giving effect to such assignment; and
(iii) in the case of any assignment of any Revolving Commitment only, the Issuing Lender (such consent not to be reasonably withheld or delayed);
and, provided further , that no such assignment shall be made (A) to the Borrower or any of the Borrower’s Affiliates or Subsidiaries (including, without limitation, any Hunt Family Member), (B) to any Defaulting Lender or any of its Subsidiaries, or any Person who, upon becoming a Lender hereunder, would constitute any of the foregoing Persons described in this clause (B), or (C) to a natural Person.
Any assignment pursuant to this Section 12.4(b) need not be ratable as among the Revolving Commitments of the assigning Lender. Unless the Borrower and the Administrative Agent otherwise agree, no assignment pursuant to this Section 12.4(b) shall, to the extent such assignment represents an assignment to an institution other than one or more Lenders hereunder, be in an aggregate amount less than $5,000,000 unless the entire Commitment and Loans and other interests of the assigning Lender are so assigned. If any Lender so sells or assigns all or a part of its interests hereunder or under the Promissory Notes, any reference in this Agreement or the Promissory Notes to such assigning Lender shall thereafter refer to such Lender and to the respective assignee to the extent of their respective interests, and the assignee shall have, to the extent of such assignment (unless otherwise provided therein), the same rights and benefits as it would if it were such assigning Lender and the assignee shall be treated as a Lender and a party to this Agreement. Each assignment pursuant to this Section 12.4(b) shall be effected by the assigning Lender and the assignee Lender executing an Assignment Agreement substantially in the form of Exhibit A (appropriately completed), subject to acceptance and recording thereof by the Administrative Agent. In the event of any such assignment to a Person not previously a Lender hereunder, either the assigning or the assignee Lender shall pay to the Administrative Agent a nonrefundable assignment fee of $3,500 which may, in the Administrative Agent’s sole discretion, be
 
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waived (and shall deliver any information, to be provided by the assignee, requested by the Administrative Agent), and at the time of any assignment pursuant to this Section 12.4(b), (i) Annex 1.1A shall be deemed to be amended to reflect the Commitment of the respective assignee (which shall result in a direct reduction to the Commitment of the assigning Lender) and of the other Lenders, and (ii) if any such assignment occurs after the Restatement Date, the Borrower will, if requested by the assignee or assignor, issue new Promissory Notes to the respective assignee and, if applicable, to the assigning Lender. Each Lender and the Borrower agree to execute such documents (including, without limitation, amendments to this Agreement) as shall be necessary to effect the foregoing. Nothing in this clause (b) shall prevent or prohibit any Lender from pledging its Promissory Notes or Loans, including, without limitation, to a Federal Reserve Bank in support of borrowings made by such Lender from such Federal Reserve Bank.
(c) The Administrative Agent acting on behalf of the Borrower shall maintain at one of its offices a copy of each Assignment Agreement delivered to it (as required hereby) and a register (the “ Register ”) for the recordation of the names and addresses of the Lenders and the Commitment of, and principal amount (and stated interest) of the Loans owing to, each Lender from time to time (whether or not evidenced by a Promissory Note). The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register as the owner of the Loan recorded therein for all purposes of this Agreement, notwithstanding any notice to the contrary. Any assignment of any Loan whether or not evidenced by a Promissory Note shall be effective only upon appropriate entries with respect thereto being made in the Register (and each Promissory Note shall expressly so provide). The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice.
(d) Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement (including under a note, if any) to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank; provided that no such pledge or assignment shall release such Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.
12.5. No Waiver; Remedies Cumulative . No failure or delay on the part of the Administrative Agent or any Lender in exercising any right, power or privilege hereunder or under any other Credit Document and no course of dealing between any Loan Party and the Administrative Agent or any Lender shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Credit Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. The rights and remedies herein expressly provided are cumulative and not exclusive of any rights or remedies which the Administrative Agent or any Lender would otherwise have. No notice to or demand on any Loan Party in any case shall entitle any Loan Party to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Administrative Agent or the Lenders to any other or further action in any circumstances without notice or demand.
12.6. Payments Pro Rata . (a) The Administrative Agent agrees that promptly after its receipt of each payment from or on behalf of any Loan Party in respect of any Obligations of such Loan Party hereunder, it shall distribute such payment to the Lenders (other than any Lender that has expressly waived its right to receive its pro rata share thereof) pro rata based upon their respective shares, if any, of the Obligations with respect to which such payment was received.
(b) Each of the Lenders agrees that, if it should receive any amount hereunder (whether by voluntary payment, by realization upon security, by the exercise of the right of setoff or
 
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banker’s lien, by counterclaim or cross action, by the enforcement of any right under the Credit Documents, or otherwise but excluding any amounts received pursuant to Section 1.15 or 12.4) which is applicable to the payment of the principal of, or interest on, the Loans, Fees or reimbursement obligations in respect of the Letters of Credit, of a sum which with respect to the related sum or sums received by other Lenders is in a greater proportion than the total of such Obligation then owed and due to such Lender bears to the total of such Obligation then owed and due to all of the Lenders immediately prior to such receipt, then such Lender receiving such excess payment shall purchase for cash without recourse or warranty from the other Lenders an interest in the Obligations of the respective Loan Party to such Lenders in such amount as shall result in a proportional participation by all of the Lenders in such amount, provided that if all or any portion of such excess amount is thereafter recovered from such Lender, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest.
12.7. Calculations; Computations . The financial statements to be furnished to the Lenders pursuant hereto shall be made and prepared in accordance with GAAP consistently applied throughout the periods involved (except for the absence of notes and normal year-end adjustments in the case of unaudited financial statements and except as set forth in the notes thereto or as otherwise disclosed in writing by the Borrower to the Lenders), provided that, except as otherwise specifically provided herein, all computations determining compliance with Section 8, including definitions used therein, shall utilize accounting principles and policies in effect at the time of the preparation of, and in conformity with those used to prepare, the December 31, 2013 historical financial statements of the Borrower delivered to the Administrative Agent pursuant to Section 6.5.
12.8. Governing Law; Submission to Jurisdiction; Venue; Waiver of Jury Trial . (a) THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER AND ANY CLAIM OR CONTROVERSY RELATED TO THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK. Any legal action or proceeding with respect to this Agreement or any other Credit Documents may be brought in the courts of the State of New York sitting in New York County or of the United States for the Southern District of New York, and, by execution and delivery of this Agreement, the Borrower hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. The Borrower further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to it at its address for notices pursuant to Section 12.3, such service to become effective 30 days after such mailing. Nothing herein shall affect the right of the Administrative Agent or any Lender to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against any Loan Party in any other jurisdiction.
(b) The Borrower hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Agreement or any other Credit Document brought in the courts referred to in clause (a) above and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum.
(c) EACH OF THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE OTHER CREDIT DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
(d) The Borrower hereby irrevocably waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this Section any indirect, special, exemplary, punitive or consequential damages.
 
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12.9. USA PATRIOT Act . Each Lender, which is subject to Section 326 of the USA PATRIOT Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the “ Act ”), hereby notifies the Borrower that, pursuant to the requirements of the Act, it is required to obtain, verify and record information that identifies the Borrower, which information includes the name and address of the Borrower and other information that will allow such Lender to identify the Borrower in accordance with the Act.
12.10. Counterparts . This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A set of counterparts executed by all the parties hereto shall be lodged with the Borrower and the Administrative Agent. Delivery of an executed counterpart of a signature page of this Agreement by telecopy or electronic transmission shall be effective as delivery of a manually executed counterpart of this Agreement.
12.11. Headings . The headings of the several sections and subsections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement.
12.12. Amendment or Waiver . Neither this Agreement, any other Credit Document, nor any terms hereof or thereof may be amended or modified except in accordance with the provisions of this Section 12.12. The Required Lenders (or, with the written consent of the Required Lenders, the Administrative Agent) and each Loan Party party to the relevant Credit Document may, from time to time (i) enter into written amendments, supplements or modifications hereto and to the other Credit Documents for the purpose of adding any provisions to this Agreement or the other Credit Documents or changing in any manner the rights of the Lenders or of the Loan Parties hereunder or thereunder; provided that with respect to any amendment or supplement that adversely affects the Collateral Agent, the written consent of the Collateral Agent shall be required and with respect to any amendment or supplement that adversely affects the Issuing Lender or Swingline Lender, the written consent of the Issuing Lender or the Swingline Lender, as applicable, shall be required or (ii) waive, on such terms and conditions as the Required Lenders or the Administrative Agent, as the case may be, may specify in such instrument, any of the requirements of this Agreement or the other Credit Documents or any Default or Event of Default and its consequences; provided, however, that no such waiver and no such amendment, supplement or modification shall:
(a) extend the final scheduled date of maturity of any Loan, reduce the principal, stated rate of any interest or fee payable hereunder (except in connection with the waiver of applicability of any post-default increase in interest rates (which waiver shall be effective with the consent of the Required Lenders)), or extend the scheduled date of any payment thereof, or increase the amount or extend the expiration date of any Lender’s Commitment, in each case without the consent of each Lender directly affected thereby;
(b) eliminate or reduce the voting rights of any Lender under this Section 12.12 without the written consent of such Lender;
 
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(c) release all or substantially all of the Subsidiary Guarantors or all or substantially all of the Collateral in any transaction or series of related transactions without the consent of each Lender;
(d) consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement and the other Credit Documents;
(e) amend, modify or waive any provision affecting the rights or duties of an Issuing Lender or Swingline Lender hereunder without the written consent of the Issuing Lender or Swingline Lender, as relevant;
(f) change any provision of this Section or the definition of “Required Lenders” or any other provision hereof specifying the number or percentage of Lenders required to amend, waive or otherwise modify any rights hereunder or make any determination or grant any consent hereunder, without the written consent of each Lender;
(g) amend, modify or waive any provision of Section 1.11 or Section 12.6 without the written consent of each Lender; or
(h) amend, modify or waive any provision of Article 11 or any other provision of any Credit Document that affects the Administrative Agent without the written consent of the Administrative Agent.
Notwithstanding anything to the contrary contained in this Section 12.12, (i) any Credit Document, this Agreement or any related document may be amended, supplemented or waived with the consent of the Administrative Agent at the request of the Borrower without the need to obtain the consent of any other Lender if such amendment, supplement or waiver is delivered in order (x) to comply with local law or advice of local counsel, (y) to cure ambiguities, omissions, mistakes or defects or (z) to cause such Credit Document or other document to be consistent with this Agreement and the other Credit Documents, (ii) the Administrative Agent may direct the Collateral Agent to (x) release any Subsidiary Guarantor from its Guaranty of the Obligations if, in compliance with this Agreement, such Subsidiary Guarantor ceases to be a Wholly-Owned Subsidiary or becomes a Foreign Subsidiary, a Project Finance Subsidiary or any other Subsidiary that is prohibited from providing a Guaranty of the Obligations by any Applicable Law and (y) release the liens on or security interests in any Collateral that is sold, transferred, or otherwise disposed of in accordance with this Agreement and (iii) the Credit Parties hereto hereby direct the Collateral Agent, upon the completion of the FERC Merger, to terminate the Pledge Agreement (FERC) and the Negative Pledge Agreement.
12.13. Survival . All indemnities set forth herein including, without limitation, in Section 1.14, 4.3 or 12.1 shall survive the execution and delivery of this Agreement and the making and repayment or assignment of the Loans.
12.14. Domicile of Loans . Each Lender may transfer and carry its Loans at, to or for the account of any branch office, subsidiary or affiliate of such Lender, provided that the Borrower shall not be responsible for costs arising under Sections 1.12 or 1.14 resulting from any such transfer to the extent not otherwise applicable to such Lender prior to such transfer.
12.15. Confidentiality . The Administrative Agent and each Lender agrees to keep confidential all non-public information provided to it by any Loan Party pursuant to this Agreement that is designated by such Loan Party as confidential; provided that nothing herein shall prevent the Administrative Agent or any Lender from disclosing any such information (a) to the Administrative
 
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Agent, any other Lender or, subject to an agreement to comply with the provisions of this Section, any Lender Affiliate (b) subject to an agreement to comply with the provisions of this Section, to any assignee or participant or prospective assignee or participant or any actual or prospective direct or indirect counterparty to any Specified Swap Contracts or Specified Cash Management Contracts (or any professional advisor to such counterparty), (c) on a need-to-know basis, to its employees involved in the administration of this Agreement or any other Credit Document, directors, agents, attorneys, accountants, consultants and other professional advisors or those of any of its Affiliates (each of whom shall be instructed to hold the same in confidence), (d) upon the request or demand of any Governmental Entity having jurisdiction over such Lender, (e) in response to any order of any court or other Governmental Entity or as may otherwise be required pursuant to any Requirement of Law, (f) that has been publicly disclosed other than in breach of this Agreement, or becomes available to the Administrative Agent, any Lender, the Issuing Lender or any of their respective Affiliates on a nonconfidential basis from a source other than the Borrower, (g) to the National Association of Insurance Commissioners or any similar organization or any nationally recognized rating agency that requires access to information about a Lender’s investment portfolio in connection with ratings issued with respect to such Lender, (h) in connection with the exercise of any remedy hereunder or under any other Credit Document, (i) subject to an agreement to comply with the provisions of this Section, any actual or prospective party (or its related parties) to any swap, derivative or other transaction under which payments are to be made by reference to the Borrower and its obligations, this Agreement or payments hereunder, or (j) on a confidential basis to (i) any rating agency in connection with rating the Borrower or its Subsidiaries or the credit facilities provided hereunder or (ii) the CUSIP Service Bureau or any similar agency in connection with the issuance and monitoring of CUSIP numbers or other market identifiers with respect to the credit facilities provided hereunder. For purposes of this Section, “information” means all information received from the Borrower or any Subsidiary relating to the Borrower or any Subsidiary or any of their respective businesses, other than any such information that is available to the Administrative Agent, any Lender or the Issuing Lender on a nonconfidential basis prior to disclosure by the Borrower or any Subsidiary, provided that, in the case of information received from the Borrower or any Subsidiary after the date hereof, such information is not designated as “Public Side Information” or is clearly identified at the time of delivery as confidential. Any Person required to maintain the confidentiality of information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information.
12.16. Integration . This Agreement and the other Credit Documents represent the agreement of the Borrower, the other Loan Parties, the Administrative Agent and the other Credit Parties with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Borrower, any of its Affiliates, the Administrative Agent or any Lender relative to the subject matter hereof not expressly set forth or referred to herein or in the other Credit Documents.
12.17. Acknowledgments . The Borrower hereby acknowledges that:
(a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Credit Documents;
(b) neither the Administrative Agent nor any Lender has any fiduciary relationship with or duty to the Borrower arising out of or in connection with this Agreement or any of the other Credit Documents, and the relationship between the Administrative Agent and Lenders, on one hand, and the Borrower, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and
(c) no joint venture is created hereby or by the other Credit Documents or otherwise exists by virtue of the transactions contemplated hereby among the Lenders or among the Borrower and the Lenders.
 
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12.18. Severability . If any provision of this Agreement or the other Credit Documents is held to be illegal, invalid or unenforceable, (a) the legality, validity and enforceability of the remaining provisions of this Agreement and the other Credit Documents shall not be affected or impaired thereby and (b) the parties shall endeavor in good faith negotiations to replace the illegal, invalid or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the illegal, invalid or unenforceable provisions. The invalidity of a provision in a particular jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Without limiting the foregoing provisions of this Section 12.18, if and to the extent that the enforceability of any provisions in this Agreement relating to Defaulting Lenders shall be limited by Bankruptcy Event, as determined in good faith by the Administrative Agent or the Issuing Lender, then such provisions shall be deemed to be in effect only to the extent not so limited.
12.19. Amendment and Restatement . This Agreement amends and restates the Original Credit Agreement. All indebtedness, obligations, liabilities and liens created by the Original Credit Agreement and the Credit Documents referred to therein owing to Lenders under this Agreement shall continue unimpaired and in full force and effect, as amended and described in this Agreement and the other Credit Documents. All references made to the Original Credit Agreement in any Credit Document or in any other instrument or document shall, without more, be deemed to refer to this Agreement. This Agreement amends and restates the Original Credit Agreement and is not intended to be or operate as a novation or an accord and satisfaction of the Original Credit Agreement or the indebtedness, obligations and liabilities of the Borrower or any Loan Party evidenced or provided for thereunder.
[ signature page follows ]
 
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IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Agreement to be duly executed and delivered as of the date first above written.

Address:	 		 		 		
1807 Ross Avenue, 4 th Floor
Dallas, Texas 75201	 		 	SHARYLAND DISTRIBUTION & TRANSMISSION SERVICES, L.L.C.	
				
Attention: Brant Meleski	 		 		 		
E-mail: bmeleski@huntutility.com	 		 		 		
cc: Greg Imhoff	 		 	By:	 	/s/ Brant Meleski	
	 		 	Name:	 	Brant Meleski	
	 		 	Title:	 	Senior Vice President and Chief Financial Officer	

							
Address:
Royal Bank of Canada
20 King Street West, 4 th Floor
Toronto, Ontario M5H 1C4	 		 	 
ROYAL BANK OF CANADA, as Administrative Agent	
Attention: Manager, Agency Services Group	 		 		 		
Email: ann.hurley@rbccm.com	 		 		 		
Telecopy: 416-842-4023	 		 		 		
	 		 	By:	 	/s/ Ann Hurley	
	 		 	Name:	 	Ann Hurley	
	 		 	Title:	 	Manager, Agency	
				
with a copy to:	 		 		 		
 
RBC Capital Markets	 		 	ROYAL BANK OF CANADA, as Swingline Lender, Issuing Lender and a Lender	
200 Vesey Street	 		 		 		
New York, NY 10281	 		 		 		
Attention: Frank Lambrinos	 		 		 		
Email: frank.lambrinos@rbccm.com	 		 	By:	 	/s/ Frank Lambrinos	
Telecopy: 212-428-6270	 		 	Name:	 	Frank Lambrinos	
	 		 	Title:	 	Authorized Signatory	
 
[Signature Page - SDTS Credit Agreement]
 
89

					
AMEGY BANK NA,	
	
as a Lender	
		
By:	 	/s/ Claire Harrison	
	 	Name:	 	Claire Harrison	
	 	Title:	 	Vice President	
 
[Signature Page - SDTS Credit Agreement]
 
90

					
BANK OF AMERICA, N.A.,	
	
as a Lender	
		
By:	 	/s/ Jerry Wells	
			
Name:	 		 	Jerry Wells	
			
Title:	 		 	Vice President	
 
[Signature Page - SDTS Credit Agreement]
 
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CANADIAN IMPERIAL BANK OF COMMERCE, NEW YORK BRANCH,	
as a Lender	
		
By:	 	/s/ Anju Abraham	
	 	Name:	 	Anju Abraham	
	 	Title:	 	Authorized Signatory	
		
By:	 	/s/ Robert Casey	
	 	Name:	 	Robert Casey	
	 	Title:	 	Authorized Signatory	
 
[Signature Page - SDTS Credit Agreement]
 
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CITIBANK, NA.,	
as a Lender	
		
By:	 	/s/ Sandip Sen	
	 	Name:	 	Sandip Sen	
	 	Title:	 	Vice President	
 
[Signature Page - SDTS Credit Agreement]
 
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DNB CAPITAL LLC,	
as a Lender	
		
By:	 	/s/ Einar Gulstad	
	 	Name:	 	Einar Gulstad	
	 	Title:	 	Senior Vice President	
		
By:	 	/s/ Joe Hykle	
	 	Name:	 	Joe Hykle	
	 	Title:	 	Senior Vice President	
 
[Signature Page - SDTS Credit Agreement]
 
94

					
MIZUHO BANK, LTD	
as a Lender	
		
By:	 	/s/ Leon Mo	
	 	Name:	 	Leon Mo	
	 	Title:	 	Authorized Signatory	
 
[Signature Page - SDTS Credit Agreement]
 
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SOCIETE GENERALE,	
as a Lender	
		
By:	 	/s/ Yao Wang	
	 	Name:	 	Yao Wang	
	 	Title:	 	Director	
 
[Signature Page - SDTS Credit Agreement]
 
96

					
THE BANK OF NOVA SCOTIA,	
as a Lender	
		
By:	 	/s/ Thane Rattew	
	 	Name:	 	Thane Rattew	
	 	Title:	 	Managing Director	

					
WELLS FARGO BANK, NATIONAL ASSOCIATION	
as a Lender	
		
By:	 	/s/ Yann Blindert	
	 	Name:	 	Yann Blindert	
	 	Title:	 	Director	
 
[Signature Page - SDTS Credit Agreement]
 
98

					
MORGAN STANLEY BANK, N.A.,	
as a Lender	
		
By:	 	/s/ Michael King	
	 	Name:	 	Michael King	
	 	Title:	 	Authorized Signatory	
 
[Signature Page - SDTS Credit Agreement]
 
99

					
SUMITOMO MITSUI BANKING CORPORATION,	
as a Lender	
		
By:	 	/s/ James D. Weinstein	
	 	Name:	 	James D. Weinstein	
	 	Title:	 	Managing Director	
 
[Signature Page - SDTS Credit Agreement]
 
100

					
UBS AG, STAMFORD BRANCH,	
as a Lender	
		
By:	 	/s/ Lana Gifas	
	 	Name:	 	Lana Gifas	
	 	Title:	 	Director	
		
By:	 	/s/ Jennifer Anderson	
	 	Name:	 	Jennifer Anderson	
	 	Title:	 	Associate Director	
 
[Signature Page - SDTS Credit Agreement]
 
101

Exhibit 10.18
EXECUTION VERSION

 
CREDIT AGREEMENT
among
SHARYLAND PROJECTS, L.L.C.,
as Borrower,
The Several Lenders from Time to Time Parties Hereto,
SOCIÉTÉ GÉNÉRALE,
as Administrative Agent and Collateral Agent for the Financing Parties,
THE ROYAL BANK OF SCOTLAND PLC,
as Issuing Bank,
ROYAL BANK OF CANADA and THE ROYAL BANK OF SCOTLAND PLC,
as Co-Syndication Agents,
THE BANK OF NOVA SCOTIA, MIZUHO CORPORATE BANK LTD. AND SUMITOMO MITSUI
BANKING CORPORATION,
as Co-Documentation Agents, and
PRUDENTIAL INVESTMENT MANAGEMENT, INC.,
as Structuring and Documentation Advisor
Dated as of June 20, 2011

 
RBC CAPITAL MARKETS, RBS SECURITIES INC., and SG AMERICAS SECURITIES, LLC
as Joint Lead Arrangers and Joint Bookrunners

TABLE OF CONTENTS

 	 	 	  	Page	 	
		
ARTICLE 1. DEFINITIONS	  	 	1	  	
			
1.1.	 	Definitions	  	 	1	  	
1.2.	 	Rules of Interpretation	  	 	34	  	
		
ARTICLE 2. THE CREDIT FACILITIES	  	 	36	  	
			
2.1.	 	Construction Loan Commitments	  	 	36	  	
2.2.	 	Procedures for Construction Loan Borrowing	  	 	36	  	
2.3.	 	Repayment of Construction Loans	  	 	37	  	
2.4.	 	Term Loans	  	 	37	  	
2.5.	 	Term Loan Conversion	  	 	37	  	
2.6.	 	Repayment of Term Loans	  	 	38	  	
2.7.	 	Fixed Rate Notes	  	 	38	  	
2.8.	 	Sale and Purchase of Fixed Rate Notes	  	 	38	  	
2.9.	 	Repayment of Fixed Rate Note	  	 	38	  	
2.10.	 	Fees	  	 	38	  	
2.11.	 	Optional Prepayments	  	 	39	  	
2.12.	 	Mandatory Prepayments; Change of Control Offer	  	 	40	  	
2.13.	 	Terms of All Prepayments	  	 	42	  	
2.14.	 	Termination or Reduction of Commitments	  	 	43	  	
2.15.	 	Conversion and Continuation Options	  	 	43	  	
2.16.	 	Limitations on LIBOR Rate Tranches	  	 	44	  	
2.17.	 	Interest Rates and Payment Dates	  	 	44	  	
2.18.	 	Computation of Interest and Fees	  	 	44	  	
2.19.	 	General Loan Funding Terms; Pro Rata Treatment and Payments	  	 	45	  	
2.20.	 	Inability to Determine Interest Rate	  	 	47	  	
2.21.	 	Legal Requirements	  	 	47	  	
2.22.	 	Taxes	  	 	49	  	
2.23.	 	Indemnity	  	 	52	  	
2.24.	 	Change of Lending Office	  	 	53	  	
2.25.	 	Incremental Facilities	  	 	53	  	
2.26.	 	Replacement of Lenders	  	 	54	  	
2.27.	 	Defaulting Lenders	  	 	54	  	
		
ARTICLE 3. LETTERS OF CREDIT	  	 	56	  	
			
3.1.	 	L/C Commitment	  	 	56	  	
3.2.	 	Procedure for Issuance of Letter of Credit	  	 	56	  	
3.3.	 	Fees and Other Charges	  	 	56	  	
3.4.	 	Reimbursement Obligation of the Borrower	  	 	57	  	
3.5.	 	Obligations Absolute	  	 	57	  	
3.6.	 	Letter of Credit Payments	  	 	58	  	
3.7.	 	Applications	  	 	58	  	
3.8.	 	Letter of Credit Interest	  	 	58	  	
3.9.	 	Cash Collateralization	  	 	58	  	
 
i

							
		
ARTICLE 4. CONDITIONS PRECEDENT	  	 	59	  	
			
4.1.	 	Conditions Precedent to the Closing Date	  	 	59	  	
4.2.	 	Conditions Precedent to First Phase Construction Loans and Letters of Credit	  	 	64	  	
4.3.	 	Conditions Precedent to the Second Phase Construction Loans	  	 	65	  	
4.4.	 	Conditions Precedent to the Term Conversion Date	  	 	68	  	
4.5.	 	Confirmation	  	 	70	  	
		
ARTICLE 5. REPRESENTATIONS AND WARRANTIES	  	 	70	  	
			
5.1.	 	Existence; Compliance with Laws	  	 	70	  	
5.2.	 	Power; Authorization; Enforceable Obligations; No Legal Bar	  	 	70	  	
5.3.	 	Ownership of Equity Interests	  	 	71	  	
5.4.	 	Financial Statements; Material Adverse Effect	  	 	71	  	
5.5.	 	Disclosure	  	 	71	  	
5.6.	 	No Material Adverse Effect	  	 	72	  	
5.7.	 	Governmental Approvals	  	 	72	  	
5.8.	 	ERISA and Labor Matters	  	 	72	  	
5.9.	 	Taxes	  	 	73	  	
5.10.	 	Title to Properties; Eminent Domain Authority; Possession Under Leases; Investments	  	 	73	  	
5.11.	 	Security Documents	  	 	74	  	
5.12.	 	Filings	  	 	74	  	
5.13.	 	Investment Company	  	 	75	  	
5.14.	 	Governmental Regulation	  	 	75	  	
5.15.	 	Federal Reserve Requirements	  	 	75	  	
5.16.	 	Compliance with Legal Requirements	  	 	76	  	
5.17.	 	OFAC	  	 	76	  	
5.18.	 	PUCT; ERCOT	  	 	77	  	
5.19.	 	Permits	  	 	77	  	
5.20.	 	Litigation	  	 	78	  	
5.21.	 	No Default	  	 	78	  	
5.22.	 	Insurance	  	 	78	  	
5.23.	 	Certain Environmental Matters	  	 	78	  	
5.24.	 	Utilities	  	 	79	  	
5.25.	 	Material Project Documents	  	 	79	  	
5.26.	 	Intellectual Property	  	 	80	  	
5.27.	 	Partnerships and Joint Ventures; Separateness	  	 	80	  	
5.28.	 	Accounts	  	 	80	  	
5.29.	 	Solvency	  	 	80	  	
5.30.	 	Private Offering by the Borrower	  	 	80	  	
		
ARTICLE 6. AFFIRMATIVE COVENANTS OF BORROWER	  	 	81	  	
			
6.1.	 	Financial Information	  	 	81	  	
6.2.	 	Certificates; Other Information	  	 	82	  	
6.3.	 	Maintenance of Existence, Properties; Etc.	  	 	84	  	
6.4.	 	Compliance with Legal Requirements; Etc.	  	 	84	  	
 
ii

							
6.5.	 	Insurance; Events of Loss	  	 	85	  	
6.6.	 	Taxes; Assessments and Utility Charges	  	 	86	  	
6.7.	 	Properties, Books and Records	  	 	86	  	
6.8.	 	Use of Proceeds	  	 	87	  	
6.9.	 	Payment of Obligations	  	 	88	  	
6.10.	 	Material Project Documents	  	 	88	  	
6.11.	 	OFAC	  	 	88	  	
6.12.	 	Operation of Project	  	 	89	  	
6.13.	 	PUCT; ERCOT	  	 	89	  	
6.14.	 	Separateness Provisions	  	 	89	  	
6.15.	 	Further Assurances	  	 	89	  	
6.16.	 	Additional Collateral	  	 	90	  	
6.17.	 	Equity Commitment	  	 	90	  	
6.18.	 	Consultants	  	 	90	  	
6.19.	 	Construction of Project	  	 	90	  	
6.20.	 	Net Cash Proceeds	  	 	91	  	
6.21.	 	Interest Rate Protection	  	 	91	  	
		
ARTICLE 7. NEGATIVE COVENANTS OF BORROWER	  	 	91	  	
			
7.1.	 	Indebtedness	  	 	91	  	
7.2.	 	Liens	  	 	91	  	
7.3.	 	Investments	  	 	91	  	
7.4.	 	Prohibition of Fundamental Changes; Sale of Assets, Fiscal Year, Etc.	  	 	91	  	
7.5.	 	Nature of Business	  	 	92	  	
7.6.	 	Transactions With Affiliates	  	 	92	  	
7.7.	 	No Distributions	  	 	92	  	
7.8.	 	Debt to Total Capitalization Ratio	  	 	93	  	
7.9.	 	Material Project Documents	  	 	93	  	
7.10.	 	Amendments to Organizational Documents	  	 	94	  	
7.11.	 	Amendments to Construction Budget and Schedule	  	 	94	  	
7.12.	 	Additional Project Agreements	  	 	94	  	
7.13.	 	Swap Agreements	  	 	94	  	
7.14.	 	ERISA	  	 	94	  	
7.15.	 	No Subsidiaries	  	 	94	  	
7.16.	 	Accounts	  	 	94	  	
7.17.	 	Terrorism Sanctions Regulations	  	 	94	  	
7.18.	 	Regulations	  	 	95	  	
7.19.	 	Negative Pledge Clauses	  	 	95	  	
7.20.	 	Remaining Equity Commitment	  	 	95	  	
		
ARTICLE 8. EVENTS OF DEFAULT; REMEDIES	  	 	95	  	
			
8.1.	 	Failure to Make Payments	  	 	95	  	
8.2.	 	Misrepresentations	  	 	95	  	
8.3.	 	Breach of Terms of This Agreement, Other Financing Documents	  	 	96	  	
8.4.	 	Cross Default	  	 	96	  	
8.5.	 	Bankruptcy; Insolvency	  	 	96	  	
8.6.	 	ERISA Events	  	 	97	  	
 
iii

							
8.7.	 	Judgments	  	 	97	  	
8.8.	 	Financing Documents; Security	  	 	97	  	
8.9.	 	Loss of Applicable Permits or CCNs	  	 	97	  	
8.10.	 	Equity Commitment	  	 	98	  	
8.11.	 	Abandonment of Project	  	 	98	  	
8.12.	 	Breach of Material Project Documents	  	 	98	  	
8.13.	 	Loss of Material Project Document	  	 	99	  	
8.14.	 	Loss of Collateral	  	 	99	  	
8.15.	 	Failure to Satisfy Conditions to Second Phase Construction Loans	  	 	99	  	
8.16.	 	Term Conversion	  	 	99	  	
8.17.	 	Remedies	  	 	99	  	
8.18.	 	Application of Proceeds	  	 	100	  	
		
ARTICLE 9. ADMINISTRATIVE AGENT AND COLLATERAL AGENT; OTHER AGENTS	  	 	101	  	
			
9.1.	 	Appointment	  	 	101	  	
9.2.	 	Delegation of Duties	  	 	101	  	
9.3.	 	Exculpatory Provisions	  	 	101	  	
9.4.	 	Reliance by Agents	  	 	102	  	
9.5.	 	Notice of Default	  	 	102	  	
9.6.	 	Non-Reliance on the Agents and Other Financing Parties	  	 	102	  	
9.7.	 	Indemnification	  	 	103	  	
9.8.	 	Agents in Their Individual Capacity	  	 	103	  	
9.9.	 	Successor Agents	  	 	104	  	
9.10.	 	Agents under Security Documents	  	 	104	  	
9.11.	 	Collateral Agent’s Duties	  	 	105	  	
9.12.	 	Right to Realize on Collateral	  	 	105	  	
9.13.	 	Other Agents	  	 	105	  	
		
ARTICLE 10. MISCELLANEOUS	  	 	105	  	
			
10.1.	 	Amendments	  	 	105	  	
10.2.	 	Addresses	  	 	107	  	
10.3.	 	No Waiver; Cumulative Remedies	  	 	108	  	
10.4.	 	Survival of Representations and Warranties	  	 	109	  	
10.5.	 	Payment of Expenses and Taxes	  	 	109	  	
10.6.	 	Attorney In Fact	  	 	110	  	
10.7.	 	Successors and Assigns; Participations and Assignments	  	 	111	  	
10.8.	 	Representations and Warranties of the Fixed Rate Note Purchasers; Registration and Exchange of Fixed Rate Notes	  	 	115	  	
10.9.	 	Adjustments; Set-off	  	 	116	  	
10.10.	 	Entire Agreement	  	 	117	  	
10.11.	 	APPLICABLE LAW	  	 	117	  	
10.12.	 	Submission To Jurisdiction; Waivers	  	 	117	  	
10.13.	 	Severability	  	 	118	  	
10.14.	 	Interpretation	  	 	118	  	
10.15.	 	Acknowledgements	  	 	118	  	
10.16.	 	Security Documents	  	 	118	  	
 
iv

							
10.17.	 	Limitation on Liability	  	 	118	  	
10.18.	 	Waiver of Jury Trial	  	 	119	  	
10.19.	 	Usury	  	 	119	  	
10.20.	 	Confidentiality	  	 	119	  	
10.21.	 	Counterparts	  	 	120	  	
10.22.	 	Third Party Beneficiaries	  	 	120	  	
10.23.	 	Patriot Act Compliance	  	 	120	  	

INDEX OF EXHIBITS	
		
Exhibit A-1	  	Form of First Phase Construction Loan Notice of Borrowing	
Exhibit A-2	  	Form of Second Phase Construction Loan Notice of Borrowing	
Exhibit A-3	  	Form of Notice of Term Conversion	
Exhibit B	  	Form of Fixed Rate Note	
Exhibit C	  	Form of Assignment and Assumption	
Exhibit D	  	Form of Construction Budget and Schedule	
Exhibit E	  	Form of Exemption Certificate	
Exhibit F	  	Form of Closing Date Certificate	
Exhibit G	  	Form of Pledge Agreement	
Exhibit H	  	Form of Security Agreement	
Exhibit I	  	Form of Mortgage	
Exhibit J	  	Form of New Lender Supplement	
Exhibit K	  	Form of Increased Facility Activation Notice	
Exhibit L	  	Form of Consent and Agreement	
Exhibit M	  	Form of Lessee Consent	
	
INDEX OF SCHEDULES	
		
Schedule 1.1A	  	Commitments	
Schedule 1.1B	  	Environmental Reports	
Schedule 1.1C	  	Fixed Rate Note Commitments	
Schedule 1.1D	  	Transmission Line Segments	
Schedule 1.1E	  	Mortgaged Properties	
Schedule 1.1F	  	Material Project Documents	
Schedule 5.10(a)	  	Project Properties	
Schedule 5.11	  	UCC Filing Jurisdictions	
Schedule 5.19	  	Permits	
Schedule 6.5	  	Insurance	
Schedule 6.21	  	Swap Agreements	
Schedule 7.6	  	Transactions with Affiliates	
	
INDEX OF ANNEXES	
		
Annex 1	  	Lenders; Lending Offices; Issuing Bank	
 
v

CREDIT AGREEMENT
This CREDIT AGREEMENT (this “ Agreement ”), dated as of June 20, 2011, by and among SHARYLAND PROJECTS, L.L.C., a Texas limited liability company (the “ Borrower ”), the several banks and other financial institutions or entities from time to time parties to this Agreement as Lenders, SOCIÉTÉ GÉNÉRALE, as Administrative Agent and Collateral Agent, ROYAL BANK OF CANADA and THE ROYAL BANK OF SCOTLAND PLC, as co-syndication agents, (in such capacities, “ Co-Syndication Agents ”), THE ROYAL BANK OF SCOTLAND PLC, as Issuing Bank, THE BANK OF NOVA SCOTIA, MIZUHO CORPORATE BANK LTD. AND SUMITOMO MITSUI BANKING CORPORATION, as Co-Documentation Agents, the Fixed Rate Note Holders and PRUDENTIAL INVESTMENT MANAGEMENT, INC., as Structuring and Documentation Advisor.
The parties hereto hereby agree as follows:
ARTICLE 1.
DEFINITIONS
1.1. Definitions . Except as otherwise expressly provided, capitalized terms used in this Agreement (including in the preamble hereto) and its exhibits shall have the meanings given in this Section 1.1.
“ 1934 Act ” means the Securities Exchange Act of 1934, as in effect on the Closing Date.
“ Acceptable Owner ” means (i) the Founding Equity Investors or (ii) any Person (1) that has (a) ratings from Moody’s and S&P not less than the higher of (x) the then-current rating of the Borrower and (y) a rating of Baa2 from Moody’s and BBB from S&P at the time that such Person acquires directly or indirectly more than 50% of the economic and voting interests of the Borrower and (b) demonstrated experience in the business of owning, managing and operating transmission facilities substantially similar to the Project or (2) if such Person does not meet the foregoing criteria, such Person is acceptable, at the time that such Person acquires directly or indirectly more than 50% of the economic and voting interests of the Borrower, to the Required Financing Parties.
“ Additional Costs and Expenses ” means additional costs and expenses of the Project.
“ Additional Project Agreements ” means, collectively, any contract or agreement entered into by the Borrower subsequent to the Closing Date that either (a) replaces or is entered into in substitution of an existing Material Project Document, and any further replacement or substitution thereof or (b) obligates the Borrower to make payments in an aggregate amount exceeding $1,000,000 in any fiscal year or $10,000,000 in the aggregate over the term of such contract or provides for payments to the Borrower in an aggregate amount exceeding $1,000,000 in any fiscal year or $10,000,000 in the aggregate over the term of such contract, provided that in the case of this clause (b), no Required Financing Party consent shall be required pursuant to

Section 7.12 for contracts or agreements relating to the purchase of materials, equipment, insurance, parts or other personal property or real property of any nature necessary or useful to the operation, maintenance, service or repair of the Project and that are included in the Construction Budget and Schedule; provided , however , that any contract or agreement entered into between the Borrower and any Affiliate shall be deemed an Additional Project Agreement.
“ Administrative Agent ” means Société Générale, in its capacity as administrative agent for the Financing Parties and the Issuing Bank, or its successors or assigns appointed pursuant to the terms of this Agreement.
“ Affiliate ” means, as to any Person, any other Person that, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. For purposes of this definition, “ control ” of a Person means the power, directly or indirectly, either to (a) vote more than 30% of the securities having ordinary voting power for the election of directors (or Persons performing similar functions) of such Person or (b) direct or cause the direction of the management and policies of such Person, whether by contract or otherwise.
“ Affiliated Financing Party ” shall mean the Borrower, a Financing Party that is an Affiliate of the Borrower, a Founding Equity Investor, or any Affiliate of a Founding Equity Investor.
“ Agent Indemnitee ” has the meaning given to such term in Section 9.7.
“ Agents ” means, collectively or individually, depending on the context, the Administrative Agent, the Collateral Agent, the Co-Syndication Agents, the Co-Documentation Agents, and the Structuring and Documentation Advisor.
“ Agreement ” has the meaning given to such term in the preamble hereto.
“ Anti-Money Laundering Laws ” has the meaning given to such term in Section 5.17(c).
“ Applicable Margin ” means for each Type of Loan during each applicable period set forth in the table shown below, the applicable per annum percentage under the relevant column heading below:

 	  	Base Rate Loans	 	 	LIBOR Loans	 	
From the Closing Date until Term Conversion:	  	 	1.00	% 	 	 	2.00	% 	
From Term Conversion until the third anniversary thereof:	  	 	1.25	% 	 	 	2.25	% 	
On the third anniversary of Term Conversion and thereafter:	  	 	1.50	% 	 	 	2.50	% 	
“ Applicable Permit ” means, at any time, any Permit to be obtained by or on behalf of the Borrower or SU, including any such Permit relating to zoning, environmental or natural resource protection, pollution, sanitation, FERC, PUCT, ERCOT, PUHCA 2005, safety, siting or building, importation of technology, equipment and materials, that is (a) material and necessary at such time to the development, construction or operation of the Project to construct,
 
2

test, operate, maintain, repair, own or use the Project as contemplated by the Operative Documents, to enter into any Operative Document or to consummate any transaction contemplated thereby, (b) necessary so that (i) none of the Agents, the Financing Parties, or any Affiliate of any of them may be deemed by any Governmental Authority to be subject to regulation under the FPA or the PUHCA 2005 or under any state laws or regulations in respect of the rates or the financial or organizational regulation of electric utilities solely as a result of the construction, operation, ownership, leasing or control of the Project, or (ii) none of the Borrower nor any Affiliate of the Borrower that is a party to an Operative Document may be deemed by any Governmental Authority to be subject to, or not exempt from, regulation under PUHCA2005 (other than the FERC regulations implementing PUHCA 2005 relating to notice of holding company status and regulatory access to books and records), or under any state laws or regulations respecting the rates or the financial or organizational regulation of electric utilities (other than as provided for in Section 5.14(c)), or (c) listed as such on Schedule 5.19.
“ Application ” means an application, in such form as the Issuing Bank may specify from time to time, requesting the Issuing Bank to issue a Letter of Credit.
“ Approved Fund ” has the meaning given to such term in Section 10.7(b)(iii).
“ Arranger ” means each of RBC Capital Markets, RBS Securities Inc. and SG Americas Securities, LLC.
“ Asset Sale ” means any disposition of property or series of related dispositions of property that yields gross proceeds to the Borrower (valued at the initial principal amount thereof in the case of non-cash proceeds consisting of notes or other debt securities and valued at fair market value in the case of other non-cash proceeds) in excess of $5,000,000.
“ Assignee ” has the meaning given such term in Section 10.7(b)(i).
“ Assignment and Assumption ” means an Assignment and Assumption, substantially in the form of Exhibit C to this Agreement.
“ Availability Expiration Date ” means the earlier of the TCOS Approval Date and June 30, 2014.
“ Bankruptcy Event ” means, with respect to any Person, such Person becomes the subject of a bankruptcy or insolvency proceeding, or has had a receiver, conservator, trustee, administrator, custodian, assignee for the benefit of creditors or similar Person charged with the reorganization or liquidation of its business appointed for it, or, in the good faith determination of the Administrative Agent, has taken any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any such proceeding or appointment; provided that a Bankruptcy Event shall not result solely by virtue of any ownership interest, or the acquisition of any ownership interest, in such Person by a Governmental Authority or instrumentality thereof; provided , further , that such ownership interest does not result in or provide such Person with immunity from the jurisdiction of courts within the United States or from the enforcement of judgments or writs of attachment on its assets or permit such Person (or such Governmental Authority or instrumentality) to reject, repudiate, disavow or disaffirm any contracts or agreements made by such Person.
 
3

“ Base CREZ Budget ” means Project Costs approved by the Borrower in an amount of at least $737,000,000.
“ Base Rate ” means, for any day, a rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greater of (a) the Prime Rate in effect on such day, (b) the Federal Funds Effective Rate for such day plus 0.50% and (c) the LIBOR Rate for a LIBOR Loan with a one-month interest period commencing on such day plus 1%. Any change in the Base Rate due to a change in the Prime Rate, the Federal Funds Effective Rate or the LIBOR Rate shall be effective as of the opening of business on the day of such change in the Prime Rate, the Federal Funds Effective Rate or the LIBOR Rate, respectively.
“ Base Rate Loans ” means Loans that bear interest at rates based upon the Base Rate.
“ Benefited Financing Party ” has the meaning given to such term in Section 10.9(a).
“ Board ” means the Board of Governors of the Federal Reserve System of the United States (or any successor).
“ Borrower ” has the meaning given to such term in the preamble hereto.
“ Borrower’s Engineer ” means Black & Veatch Corporation, or another engineering firm of nationally recognized standing reasonably acceptable to the Administrative Agent.
“ Borrowing ” means a borrowing or advance of credit under this Agreement other than the issuance or purchase of the Fixed Rate Notes.
“ Borrowing Date ” means the day on which a Borrowing is made.
“ Breakage Costs ” has the meaning given to such term in Section 2.23.
“ Business Day ” means a day other than a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to close; provided , that with respect to notices and determinations in connection with, and payments of principal and interest on, LIBOR Loans, such day is also a day for trading by and between banks in Dollar deposits in the interbank eurodollar market.
“ Capital Lease Obligations ” means, as to any Person, the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP and, for the purposes of this Agreement, the amount of such obligations at any time shall be the capitalized amount thereof at such time determined in accordance with GAAP.
“ Cash Equivalents ” means (a) marketable direct obligations issued by, or unconditionally guaranteed by, the United States Government or issued by any agency thereof
 
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and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition, (b) certificates of deposit, time deposits, eurodollar time deposits or overnight bank deposits having maturities of six months or less from the date of acquisition issued by any Lender or by any commercial bank organized under the laws of the United States or any state thereof having combined capital and surplus of not less than $500,000,000, (c) commercial paper of an issuer rated at least A-1 by S&P or P-1 by Moody’s, or carrying an equivalent rating by a nationally recognized rating agency, if both of the two named rating agencies cease publishing ratings of commercial paper issuers generally, and maturing within six months from the date of acquisition, (d) repurchase obligations of any Lender or of any commercial bank satisfying the requirements of clause (b) of this definition, having a term of not more than 30 days, with respect to securities issued or fully guaranteed or insured by the United States government, (e) securities with maturities of one year or less from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States, by any political subdivision or taxing authority of any such state, commonwealth or territory or by any foreign government, the securities of which state, commonwealth, territory, political subdivision, taxing authority or foreign government (as the case may be) are rated at least A by S&P or A by Moody’s, (f) securities with maturities of six months or less from the date of acquisition backed by standby letters of credit issued by any Lender or any commercial bank satisfying the requirements of clause (b) of this definition, (g) money market mutual or similar funds that invest exclusively in assets satisfying the requirements of clauses (a) through (f) of this definition, or (h) money market funds that (i) comply with the criteria set forth in SEC Rule 2a-7 under the Investment Company Act of 1940, as amended, (ii) are rated AAA by S&P and Aaa by Moody’s and (iii) have portfolio assets of at least $5,000,000,000.
“ CCN ” means a Certificate of Convenience and Necessity or amendment thereto issued by the PUCT in respect of the Project.
“ Change of Control ” means (a) at any time prior to the Term Conversion (i) (1) and prior to the completion of a Qualified IPO, the Founding Equity Investors shall cease to own (within the meaning of Rule 13d-5 of the 1934 Act), directly or indirectly, 70% or more of the economic and voting interests of the Borrower and (2) after completion of a Qualified IPO, the Founding Equity Investors shall cease to own (within the meaning of Rule 13d-5 of the 1934 Act), directly or indirectly, more than 50% of the economic and voting interests of the Borrower or (ii) members of the Ray L. Hunt family, or trusts for the benefit of the Ray L. Hunt family, shall cease to own, directly or indirectly, 75% of the economic and voting interests of SU or (b) at any time following Term Conversion (i) the Founding Equity Investors or an Acceptable Owner shall cease to own, directly or indirectly, more than 50% of the economic and voting interests of the Borrower or (ii) members of the Ray L. Hunt family or trusts for the benefit of the Ray L. Hunt family shall cease to own, directly or indirectly, more than 50% of the economic and voting interests of SU.
“ Closing Date ” means the date when each of the conditions set forth in Section 4.1 has been satisfied (or waived in writing by the Administrative Agent and the Financing Parties).
“ COD ” means the date on which the Project commences operations.
 
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“ Code ” means the Internal Revenue Code of 1986, as amended from time to time.
“ Co-Documentation Agents ” has the meaning given to such term in the preamble hereto.
“ Co-Syndication Agents ” has the meaning given to such term in the preamble hereto.
“ Collateral ” means all property of the Borrower, now owned or hereafter acquired, upon which a Lien is purported to be created by any Security Document.
“ Collateral Accounts ” has the meaning given to such term in Section 2.2 of the Depositary Agreement.
“ Collateral Agent ” means Société Générale, as collateral agent for the Secured Parties, together with any of its successors appointed pursuant to the Financing Documents.
“ Collection Station ” has the meaning given to such term in the CREZ Master Lease.
“ Commitment Fee Rate ” means 0.75% per annum.
“ Commitment Fees ” has the meaning given to such term in Section 3.3(a).
“ Commitments ” means the Construction Loan Commitments, the Term Loan Commitments and the L/C Commitments.
“ Conduit Lender ” means any special purpose corporation organized and administered by any Lender for the purpose of making Loans otherwise required to be made by such Lender and designated by such Lender in a written instrument; provided , that the designation by any Lender of a Conduit Lender shall not relieve the designating Lender of any of its obligations to fund a Loan under this Agreement if, for any reason, its Conduit Lender fails to fund any such Loan, and the designating Lender (and not the Conduit Lender) shall have the sole right and responsibility to deliver all consents and waivers required or requested under this Agreement with respect to its Conduit Lender, and provided , further , that no Conduit Lender shall (a) be entitled to receive any greater amount pursuant to Sections 2.23, 2.24 or 10.5 than the designating Lender would have been entitled to receive in respect of the extensions of credit made by such Conduit Lender or (b) be deemed to have any Commitment.
“ Consent and Agreement ” shall mean each third party consent to assignment or estoppel certificate contemplated by the Financing Documents and, with respect to any Additional Project Agreement, to the extent required pursuant to Section 7.12, a consent and agreement of each such party to such Additional Project Agreement (other than the Borrower), substantially in the form of Exhibit L, with such modifications as may be reasonably acceptable to the Administrative Agent.
 
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“ Consolidated Net Worth ” means, at any date, all amounts that would, in conformity with GAAP, be included on a consolidated balance sheet of the Borrower under members’ equity at such date.
“ Construction Budget and Schedule ” means a reasonably detailed schedule of the development and construction of the Project, a detailed total budget for the Project and an indicative monthly schedule for contemplated Borrowings of the Construction Loans, each as prepared by the Borrower and approved by the Administrative Agent (in consultation with the Independent Engineer) delivered on or before the Closing Date, in the form of Exhibit D hereto (as modified in accordance with Section 7.11), and containing a detailed description of Project Costs incurred and expected to be incurred with respect to the development and construction of the Project, in each case for the period commencing on the date of such Construction Budget and Schedule through the expected date of the TCOS Approval Date.
“ Construction Loan ” has the meaning given to such term in Section 2.1(b).
“ Construction Loan Availability Period ” means the period commencing on the date upon which the Borrower satisfies the conditions precedent set forth in Section 4.2 (or such conditions precedent are waived in accordance therewith) and ending on the earlier of (a) the Construction Loan Termination Date and (b) the date the Construction Loan Commitments are cancelled or expire pursuant to this Agreement.
“ Construction Loan Commitment ” means, with respect to any Lender, the commitment of such Lender, if any, to make Construction Loans in an aggregate principal amount not to exceed the amount, expressed as a Dollar amount, set forth under the heading “Construction Loan Commitment” opposite such Lender’s name on Schedule 1.1 A, or in the Assignment and Assumption pursuant to which such Lender shall have assumed its Construction Loan Commitment, as applicable, as such commitment may be reduced or increased from time to time pursuant to assignments by or to such Lender under Section 10.7, or as may be increased from time to time pursuant to Section 2.25(a); provided that on the L/C Termination Date, the Construction Loan Commitment of the Lender that is also the Issuing Bank and the aggregate amount of the Construction Loan Commitments shall be increased by the amount of its unused L/C Commitment on such date. The aggregate amount of the Construction Loan Commitments on the Closing Date is $617,000,000 and the aggregate amount of the Construction Loan Commitment and the L/C Commitment is $667,000,000.
“ Construction Loan Commitment Fees ” has the meaning given to such term in Section 2.10(c).
“ Construction Loan Notice of Borrowing ” means a First Phase Construction Loan Notice of Borrowing or a Second Phase Construction Loan Notice of Borrowing, as applicable.
“ Construction Loan Termination Date ” means the earliest of (a) the Date Certain, (b) the Term Conversion Date and (c) the date of acceleration of the Construction Loans under Section 8.17.
 
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“ Contractual Obligation ” means, as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound.
“ Credit Party ” means the Administrative Agent, the Issuing Bank, or any other Lender.
“ CREZ II Budget ” means the budget approved by the Borrower providing for Project Costs in excess of the costs included in the Base CREZ Budget.
“ CREZ Master Lease ” means the lease between the Borrower and Lessee relating to the Project, including all amendments, modifications and lease supplements entered into in accordance with the terms hereof.
“ Date Certain ” means June 30, 2014.
“ Debt ” means, at any time and without duplication, the aggregate of all Indebtedness of the Borrower which would at such time be classified in whole or in part as a liability on the consolidated balance sheet of the Borrower in accordance with GAAP (it being understood for avoidance of doubt that any liability or obligation excluded from the definition of Indebtedness shall not constitute Indebtedness for purposes of this definition), excluding Letters of Credit which are outstanding but not drawn.
“ Debt Service ” means, for any period, an amount equal to all principal (other than the final principal payment of the Term Loans on the Term Loan Maturity Date, but including, without duplication, all amounts overdue and not paid from any prior period and all Scheduled Repayment Amounts of the unpaid principal amount of the Loans), and any interest and fees accrued with respect to the Loans, the Fixed Rate Notes, and any Letters of Credit, then scheduled to be due and payable by the Borrower under any Financing Document, ordinary course settlement amounts payable by the Borrower under the Swap Agreements (without duplication of interest amounts payable under this Agreement) net of ordinary course settlement amounts received by the Borrower thereunder during the relevant period.
“ Debt Service Coverage Ratio ” means, at any time, the ratio of (i) Operating Cash Flow Available for Debt Service for any period to (ii) the amount of Debt Service for such period.
“ Debt to Total Capitalization Ratio ” means, at any time, the ratio of Debt of the Borrower to Total Capitalization of the Borrower.
“ Default ” means any occurrence, circumstance or event, or any combination thereof, which, with the lapse of time, the giving of notice or both, would constitute an Event of Default.
“ Default Rate ” has the meaning given to such term in Section 2.17(d).
“ Defaulting Lender ” means any Lender that (a) has failed, within two Business Days of the date required to be funded or paid, to (i) fund any portion of its Loans, or (ii) pay
 
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over to any Credit Party any other amount required to be paid by it hereunder, absent a good faith dispute, unless, in the case of clause (i) above, such Lender notifies the Administrative Agent in writing that such failure is the result of such Lender’s good faith determination that a condition precedent to funding (specifically identified and including the particular default, if any) has not been satisfied, (b) has notified the Borrower or any Credit Party in writing, or has made a public statement to the effect, that it does not intend or expect to comply with any of its funding obligations under this Agreement (unless such writing or public statement indicates that such position is based on such Lender’s good faith determination that a condition precedent (specifically identified and including the particular default, if any) to funding a loan under this Agreement cannot be satisfied) or generally under other agreements in which it commits to extend credit, (c) has failed, within three Business Days after request by a Credit Party, acting in good faith, to provide a certification in writing from an authorized officer of such Lender that it will comply with its obligations to fund prospective Loans under this Agreement, provided that such Lender shall cease to be a Defaulting Lender pursuant to this clause (c) upon such Credit Party’s receipt of such certification in form and substance satisfactory to it and the Administrative Agent, or (d) has become the subject of a Bankruptcy Event.
“ Depositary Agreement ” means the agreement among the Borrower, the Collateral Agent, the Administrative Agent and Société Générale, in its capacity as Depositary Bank, and dated as of even date herewith.
“ Disbursement Account ” has the meaning given to such term in Section 2.2 of the Depositary Agreement.
“ Distribution Account ” has the meaning given to such term in Section 2.2 of the Depositary Agreement.
“ Dollars ” and “ $ ” means United States dollars or such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts in the United States of America.
“ Effective Material Project Document ” means a Material Project Document that has been executed and delivered by each party thereto and with respect to which the Borrower has certified to the Administrative Agent on behalf of the Financing Parties that all conditions precedent to the effectiveness of such Material Project Document have been satisfied.
“ Engineering Services Agreement ” means the Master Service Agreement, dated February 25, 2009, as amended, modified and supplemented in accordance with the terms hereof, between the Borrower and the Borrower’s Engineer.
“ Environmental Claim ” means any and all actions, suits, demands, demand letters, claims, Liens, notices of non-compliance or violation, notices of liability or potential liability, investigations, or proceedings, under or relating to any Environmental Law, or regarding the investigation or remediation or release of, or human exposure to, any Materials of Environmental Concern.
“ Environmental Law ” means any and all Legal Requirements regulating, relating to or imposing liability or standards of conduct concerning protection of natural resources or the environment, or environmental impacts on human health as now or may at any time hereafter be in effect.
 
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“ Environmental Reports ” means the Environmental Reports identified on Schedule 1.1B, including all exhibits and appendices and all other attachments thereto.
“ Equity Commitment ” has the meaning given to such term in the Equity Contribution Agreement.
“ Equity Contribution ” has the meaning given to such term in the Equity Contribution Agreement.
“ Equity Contribution Agreement ” means the Equity Contribution Agreement, dated as of even date herewith, among the Equity Investors, the Borrower, the Administrative Agent and the Collateral Agent.
“ Equity Contribution Documents ” means, collectively, the Equity Contribution Agreement, the Equity Guaranty and the Equity Letter of Credit.
“ Equity Guaranty ” has the meaning given to such term in the Equity Contribution Agreement.
“ Equity Interest ” means any and all shares, interests, participations or other equivalents (however designated) in a corporation, any and all equivalent ownership interests in a Person (other than a corporation) and any and all warrants, rights or options to purchase any of the foregoing.
“ Equity Investor ” has the meaning given to such term in the Equity Contribution Agreement.
“ Equity Letter of Credit ” has the meaning given to such term in the Equity Contribution Agreement.
“ ERCOT ” means the Electric Reliability Council of Texas, Inc. or any other succeeding entity thereof.
“ ERISA ” means the Employee Retirement Income Security Act of 1974, as amended from time to time.
“ ERISA Affiliate ” means any trade or business (whether or not incorporated) that, together with the Borrower, is treated as a single employer under Section 414 of the Code.
“ ERISA Event ” means (a) any Reportable Event, (b) the existence with respect to any ERISA Plan of a non-exempt Prohibited Transaction, (c) the failure of any insured medical Plan to satisfy the non-discrimination requirements of Section 105 of the Code, (d) any failure by any Pension Plan to satisfy the minimum funding standards (within the meaning of Section 412 or 430 of the Code or Section 302 of ERISA) applicable to such Pension Plan), whether or not waived, (e) the filing pursuant to Section 412(c) of the Code or Section 302(c) of ERISA of an
 
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application for a waiver of the minimum funding standard with respect to any Pension Plan, the failure to make by its due date a required installment under Section 430(j) of the Code with respect to any Pension Plan or the failure by the Borrower or any of its ERISA Affiliates to make any required contribution to a Multiemployer Plan pursuant to Sections 431 or 432 of the Code, (f) the incurrence by the Borrower or any of its ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Pension Plan, including but not limited to the imposition of any Lien in favor of the PBGC or any Pension Plan, (g) a determination that any Pension Plan is, or is expected to be, in “at risk” status (within the meaning of Section 430 of the Code or Section 303 of ERISA), (h) the receipt by the Borrower or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Pension Plan or to appoint a trustee to administer any Pension Plan under Section 4042 of ERISA, (i) the incurrence by the Borrower or any ERISA Affiliate of any liability with respect to the withdrawal or partial withdrawal from any Pension Plan or Multiemployer Plan, (j) the receipt by the Borrower or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from the Borrower or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, Insolvent, in Reorganization or in endangered or critical status, within the meaning of Section 432 of the Code or Section 305 of ERISA, and (k) with respect to any Foreign Plan or Foreign Benefit Arrangement, (A) the failure to make or, if applicable, accrue in accordance with normal accounting practices, any employer or employee contributions required by applicable law or by the terms of such Foreign Plan or Foreign Benefit Arrangement, (B) the failure to register or loss of good standing with applicable regulatory authorities of any such Foreign Plan or Foreign Benefit Arrangement required to be registered, or (C) the failure of any Foreign Plan or Foreign Benefit Arrangement to comply with any material provisions of applicable law and regulations or with the material terms of such Foreign Plan or Foreign Benefit Arrangement.
“ ERISA Plan ” means any employee benefit plan as defined in Section 3(3) of ERISA, (whether or not subject to ERISA) including any employee welfare benefit plan (as defined in Section 3(1) of ERISA), any employee pension benefit plan (as defined in Section 3(2) of ERISA), and any plan which is both an employee welfare benefit plan and an employee pension benefit plan, and in respect of which the Borrower or any ERISA Affiliate is (or if such plan were terminated, would under Section 4062 or 4069 of ERISA be deemed to be) an “ employer ” as defined in Section 3(5) of ERISA.
“ Event of Default ” and “ Events of Default ” have the meanings given to such terms in Article 8.
“ Event of Loss ” means a single insured event or a related series of insured events causing any loss of, destruction of or damage to, or any condemnation or other taking of (including by eminent domain), all or any portion of the property or assets of the Borrower in excess of $20,000,000.
“ Excluded Taxes ” has the meaning given to such term in Section 2.22(a).
“ Facilities ” means each of (a) the Construction Loan Commitments and the Construction Loans made thereunder (including the Incremental Facility and any Incremental Loans made thereunder) (the “ Construction Loan Facility ”) and (b) the Term Loan Commitments and the Term Loans made thereunder (the “ Term Loan Facility ”).
 
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“ FATCA ” means Sections 1471 through 1474 of the Code, as of the date of this Agreement, and any current or future regulations or official interpretations thereof.
“ Federal Funds Effective Rate ” means, for any day, the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for the day of such transactions received by the Administrative Agent from three (3) federal funds brokers of recognized standing selected by it.
“ Fee Letter ” means the Fee Letter Agreement, dated as of April 29, 2011, by and among the Borrower, Electric Infrastructure Alliance of America, L.L.C., Société Générale, RBC Capital Markets LLC, Royal Bank of Canada, RBS Securities Inc., The Royal Bank of Scotland plc, and SG Americas Securities, LLC.
“ Fee Payment Date ” means (a) the last day of each March, June, September and December of each year falling after the date hereof and (b) as applicable, the Construction Loan Termination Date and the Term Loan Maturity Date.
“ FERC ” means the Federal Energy Regulatory Commission, or its successor.
“ Financial Model ” means the financial model of the Borrower dated June 16, 2011, as approved by the Administrative Agent.
“ Financing Documents ” means this Agreement, the Notes, the Fixed Rate Notes, the Security Documents, the Equity Contribution Documents, the Fee Letter, the Prudential Letter, the Specified Swap Agreements, the Consents and Agreements, the Lessee Consent and any other documents, agreements or instruments entered into in connection with any of the foregoing.
“ Financing Parties ” means, collectively, the Lenders and the Fixed Rate Note Holders.
“ First Phase Construction Loan ” has the meaning given to such term in Section 2.1(a).
“ First Phase Construction Loan Sublimit ” means $130,000,000 minus the principal amount of the Fixed Rate Note.
“ First Phase Construction Loan Availability Period ” means the period commencing on the date upon which the Borrower satisfies the conditions precedent set forth in Section 4.2 (or such conditions precedent are waived in accordance therewith) and ending on the earlier of (a) the period commencing on the date upon which the Borrower satisfies the conditions precedent set forth in Section 4.3 (or such conditions precedent are waived in accordance therewith) and (b) the date the Construction Loan Commitments are cancelled or expire pursuant to this Agreement.
 
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“ First Phase Construction Loan Notice of Borrowing ” has the meaning given to such term in Section 2.2.
“ First Phase Loan Agreement Obligations Amount ” means the sum of (i) the principal of the Fixed Rate Notes, interest on the Fixed Rate Notes through October 15, 2011 and estimated Make-Whole Amount on the Fixed Rate Notes in the amount of $8,827,047.30, (ii) the principal amount of all outstanding Loans and interest thereon (after giving effect to the Swap Agreements) through October 15, 2011, commitment fees under the Credit Agreement through October 15, 2011 and (iii) the stated amount of all issued and undrawn Letters of Credit and all fees with respect thereto.
“ First Repayment Date ” means the thirtieth (30 th ) day of March, June, September or December, whichever shall first occur not less than 90 days after the Term Conversion Date.
“ Fixed Rate Notes ” has the meaning given to such term in Section 2.7.
“ Fixed Rate Note Commitment ” means, with respect to any Fixed Rate Note Purchaser, the commitment of such Fixed Rate Note Purchaser to purchase all or a portion of the Fixed Rate Notes in an aggregate principal amount not to exceed the amount, expressed as a Dollar amount, set forth under the heading “Fixed Rate Note Commitment” opposite such Fixed Rate Note Holder’s name on Schedule 1.1C, or in the Assignment and Assumption pursuant to which such Fixed Rate Note Holder shall have assumed its Fixed Rate Note Commitment, as applicable, as such commitment may be reduced or increased from time to time pursuant to assignments by or to such Fixed Rate Note Holders under Section 10.7. The aggregate amount of the Fixed Rate Note Commitment on the Closing Date is $60,000,000.
“ Fixed Rate Note Holder ” means, initially, a Fixed Rate Note Purchaser, and from and after the issuance and purchase of the Fixed Rate Notes, a financial institution or other Person that holds a Fixed Rate Note pursuant to this Agreement.
“ Fixed Rate Note Purchaser ” means a financial institution that purchases a Fixed Rate Note from the Borrower pursuant to this Agreement.
“ Foreign Plan ” means each employee benefit plan (within the meaning of Section 3(3) of ERISA, whether or not subject to ERISA) that is not subject to U.S. law and is maintained or contributed to by the Borrower or any ERISA Affiliate.
“ Founding Equity Investor ” has the meaning given to such term in the Equity Contribution Agreement.
“ FPA ” means the Federal Power Act, as amended.
“ GAAP ” means generally accepted accounting principles in the United States as in effect from time to time. In the event that any “Accounting Change” (as defined below) shall occur and such change results in a change in the method of calculation of financial covenants,
 
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ratios, standards or terms in this Agreement, then the Borrower and the Financing Parties agree to enter into negotiations in order to amend such provisions of this Agreement so as to reflect equitably such Accounting Changes with the desired result that the criteria for evaluating the Borrower’s financial condition shall be the same after such Accounting Changes as if such Accounting Changes had not been made. Until such time as such an amendment shall have been executed and delivered by the Borrower and the Required Financing Parties, all financial covenants, ratios, standards and terms in this Agreement shall continue to be calculated or construed as if such Accounting Changes had not occurred. “Accounting Changes” refers to changes in accounting principles required by the promulgation of any rule, regulation, pronouncement or opinion by the Financial Accounting Standards Board of the American Institute of Certified Public Accountants or, if applicable, the SEC.
“ General Partner ” means Electric Infrastructure Alliance of America, L.L.C.
“ Good Utility Practice ” means Good Utility Practice as defined from time to time by the PUCT and, as of the date hereof, means any of the practices, methods, and acts engaged in or approved by a significant portion of the electric utility industry during the relevant time period, or any of the practices, methods, and acts that, in the exercise of reasonable judgment in light of the facts known at the time the decision was made, could have been expected to accomplish the desired result at a reasonable cost consistent with good business practices, reliability, safety, and expedition; provided that Good Utility Practice is not intended to be limited to the optimum practice, method, or act, to the exclusion of all others, but rather is intended to include acceptable practices, methods, and acts generally accepted in the region.
“ Governmental Authority ” means any nation or government, any state or other political subdivision thereof, any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative functions of or pertaining to government, any securities exchange, the PUCT and any self-regulatory organization (including the National Association of Insurance Commissioners and ERCOT).
“ Governmental Rule ” means any law, rule, regulation, ordinance, order, code interpretation, judgment, decree, directive, guideline, protocol, policy or similar form of decision of any Governmental Authority, including the PUCT and ERCOT.
“ Guarantee ” as to any Person (the “ guaranteeing person ”) means any obligation, including a reimbursement, counterindemnity or similar obligation, of the guaranteeing Person that guarantees or in effect guarantees, or which is given to induce the creation of a separate obligation by another Person (including any bank under any letter of credit) that guarantees or in effect guarantees, any Indebtedness, leases, dividends or other obligations (the “ primary obligations ”) of any other third Person (the “ primary obligor ”) in any manner, whether directly or indirectly, including any obligation of the guaranteeing person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (1) for the purchase or payment of any such primary obligation or (2) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the
 
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ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the owner of any such primary obligation against loss in respect thereof; provided , however , that the term Guarantee shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guarantee of any guaranteeing person shall be deemed to be the lower of (a) an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee is made and (b) the maximum amount for which such guaranteeing person may be liable pursuant to the terms of the instrument embodying such Guarantee, unless such primary obligation and the maximum amount for which such guaranteeing person may be liable are not stated or determinable, in which case the amount of such Guarantee shall be such guaranteeing person’s maximum reasonably anticipated liability in respect thereof as determined by the Borrower in good faith.
“ Increased Facility Activation Date ” means any Business Day on which any Lender shall execute and deliver to the Administrative Agents an Increased Facility Activation Notice pursuant to Section 2.25(a).
“ Increased Facility Activation Notice ” means a notice substantially in the form of Exhibit K.
“ Increased Facility Closing Date ” means any Business Day designated as such in an Increased Facility Activation Notice.
“ Incremental Facility ” means the Loans issued under Section 2.25.
“ Incremental Loans ” has the meaning given to such term in Section 2.25(a).
“ Incremental Term Facility ” has the meaning given to such term in the definition of “Facilities”.
“ Incremental Term Lenders ” means (a) on any Increased Facility Activation Date, the Lenders signatory to the relevant Increased Facility Activation Notice and (b) thereafter, each Lender that is a holder of an Incremental Term Loan.
“ Incremental Term Maturity Date ” means with respect to the Incremental Loans to be made pursuant to any Increased Facility Activation Notice, the maturity date specified in such Increased Facility Activation Notice, which date shall not be earlier than the Term Loan Maturity Date.
“ Indebtedness ” of any Person at any date, means, without duplication, (a) all indebtedness of such Person for borrowed money, (b) all obligations of such Person for the deferred purchase price of property or services (other than current trade payables incurred in the ordinary course of such Person’s business), (c) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments, (d) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (e) all Capital Lease Obligations of such Person, (f) all obligations of such Person, contingent or otherwise, as an
 
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account party or applicant under or in respect of acceptances, letters of credit, surety bonds or similar arrangements, (g) the liquidation value of all redeemable preferred Equity Interest of such Person, (h) all Guarantee obligations of such Person in respect of obligations of the kind referred to in clauses (a) through (g) above, (i) all obligations of the kind referred to in clauses (a) through (h) above secured by (or for which the holder of such obligation has an existing right, contingent or otherwise, to be secured by) any Lien on property (including accounts and contract rights) owned by such Person, whether or not such Person has assumed or become liable for the payment of such obligation, and (j) for the purposes of Section 8.4 only, all obligations of such Person in respect of Swap Agreements. The Indebtedness of any Person shall include the Indebtedness of any other entity (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such Person’s ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness expressly provide that such Person is not liable therefor.
“ Indemnified Liabilities ” has the meaning given such term in Section 10.5.
“ Indemnitee ” has the meaning given such term in Section 10.5.
“ Independent Engineer ” means E3 Consulting, LLC or its successor.
“ Insolvent ” means, with respect to any Multiemployer Plan, the condition that such Multiemployer Plan is insolvent within the meaning of Section 4245 of ERISA.
“ Insurance Consultant ” means Moore-McNeil, LLC, or its successor.
“ Intellectual Property ” means the collective reference to all rights, priorities and privileges relating to intellectual property, whether arising under United States, multinational or foreign laws or otherwise, including without limitation, copyrights, copyright licenses, patents, patent licenses, trademarks, trademark licenses, domain names, technology, know-how and processes, and any other confidential or proprietary information, all registrations and applications thereof, and all rights to sue at law or in equity for any past, present or future infringement or other impairment thereof, including the right to receive all proceeds and damages therefrom.
“ Interest Payment Date ” means (a) as to any Base Rate Loan or Fixed Rate Notes, the thirtieth (30 th ) day of each March, June, September and December to occur while such Loan or Fixed Rate Note is outstanding and the final maturity date of such Loan or Fixed Rate Notes, (b) as to any LIBOR Loan having an Interest Period of three (3) months or less, the last day of such Interest Period, (c) as to any LIBOR Loan having an Interest Period longer than three (3) months, each day that is three (3) months, or a whole multiple thereof, after the first day of such Interest Period and the last day of such Interest Period, and (d) as to any Loan or Fixed Rate Notes, the date of any repayment or prepayment made in respect thereof (including Term Conversion in respect of Construction Loans).
“ Interest Period ” means as to any LIBOR Loan, (a) initially, the period commencing on the Borrowing Date or on the Term Conversion Date, as the case may be, with respect to such LIBOR Loan and ending one (1), two (2), three (3) or six (6) months thereafter, as selected by the Borrower in its Construction Loan Notice of Borrowing or Notice of Term
 
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Conversion, as the case may be, given with respect thereto, and (b) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such LIBOR Loan and ending one (1), two (2), three (3) or six (6) months thereafter, as selected by the Borrower by irrevocable notice to the Administrative Agent not later than 11:00 a.m., New York time, on the date that is three (3) Business Days prior to the last day of the then current Interest Period with respect thereto; provided that, all of the foregoing provisions relating to Interest Periods are subject to the following:
(i) if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day;
(ii) the Borrower may not select an Interest Period with respect to Construction Loans, Term Loans, or Letters of Credit that would extend beyond the Construction Loan Termination Date or the Term Loan Maturity Date, as the case may be;
(iii) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month;
(iv) the Borrower shall select Interest Periods so as not to require a payment or prepayment of any LIBOR Loan during an Interest Period for such Loan; and
(v) the Borrower shall select Interest Periods with respect to Term Loans to match corresponding periods under the Specified Swap Agreements.
“ Investments ” has the meaning given to such term in Section 7.3.
“ Issuing Bank ” means The Royal Bank of Scotland plc, or any affiliate thereof, in its capacity as issuer of any Letter of Credit and its successors in such capacity.
“ Land Use Services Agreement ” means the Master Service Agreement, dated January 14, 2009, between SU and Atkins, as amended, modified and supplemented in accordance with the terms hereof and as assigned by SU to the Borrower and dated January 18, 2010.
“ L/C Commitment ” means $50,000,000, as such amount may be reduced pursuant to Section 3.4.
“ L/C Commitment Fees ” has the meaning given to such term in Section 3.3(a).
“ L/C Obligations ” means at any time, an amount equal to the sum of (a) the aggregate then undrawn and unexpired amount of the then outstanding Letters of Credit and (b) the aggregate amount of drawings under Letters of Credit that have not then been reimbursed pursuant to Section 3.4.
 
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“ L/C Termination Date ” means January 31, 2013 unless, on or prior to the date that is ten Business Days prior thereto, the Borrower shall have delivered a certificate, countersigned by the Independent Engineer, which together with the supporting documentation attached thereto, demonstrates that there are sufficient unused Construction Loan Commitment and Equity Commitment to pay all remaining Project Costs, in which case L/C Termination Date shall mean the Construction Loan Termination Date.
“ Legal Requirements ” means, as to any Person, the certificate of incorporation and by-laws, limited liability company agreement, partnership agreement or other organizational or governing documents of such Person, any law (including common law), statute, code, treaty, rule, regulation, ordinance including any Governmental Rule (including, without limitation, the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines or directives thereunder or issued in connection therewith), or determination of an arbitrator or a court or other Governmental Authority, or any requirement under a Permit, in each case applicable to or binding upon such Person or any of its properties or to which such Person or any of its property is subject.
“ Lenders ” means the banks and other financial institutions or entities that lend to the Borrower pursuant to this Agreement from time to time; provided that the term “Lender” shall not include any Fixed Rate Note Holder.
“ Lending Office ” means the office designated as such beneath the name of a Lender set forth on Annex 1 of this Agreement or such other office of such Lender as such Lender may specify in writing from time to time to the Administrative Agent and the Borrower.
“ Lessee ” means SU or such other Person acceptable to the Required Financing Parties who becomes the lessee under the CREZ Master Lease.
“ Lessee Consent ” means the consent to assignment of the CREZ Master Lease in substantially the form of Exhibit M.
“ Letters of Credit ” has the meaning given to such term in Section 3.1(a).
“ LIBOR Base Rate ” means, with respect to each day during each Interest Period pertaining to a LIBOR Loan, the British Bankers’ Association Interest Settlement Rate per annum for deposits in Dollars for a period equal to such Interest Period appearing on the display designated as the Reuters LIBOR01 page (or such other page on that service or such other service designated by the British Bankers’ Association for the display of such Association’s Interest Settlement Rates for Dollar deposits) as of 11:00 a.m., New York time, on the day that is two Business Days prior to the first day of such Interest Period. In the event that such rate does not appear on such page (or otherwise on such screen), the “ LIBOR Base Rate ” shall mean the rate of interest determined by the Administrative Agent to be the average (rounded upward, if necessary, to the nearest 1/100th of 1%) of the rates per annum at which deposits in Dollars are offered to the Administrative Agent two Business Days preceding the first day of such Interest Period by leading banks in the London interbank market as of 10:00 a.m., New York time, for
 
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delivery on the first day of such Interest Period, for the number of days comprised therein and in an amount comparable to the amount of the LIBOR Loan of the Administrative Agent (in its capacity as a Lender).
“ LIBOR Loans ” means Loans that bear interest at rates based upon the LIBOR Rate.
“ LIBOR Rate ” means, with respect to each day during each Interest Period pertaining to a LIBOR Loan, a rate per annum determined for such day in accordance with the following formula:

LIBOR Base Rate	
1.00 - LIBOR Reserve Requirements	
“ LIBOR Rate Tranche ” means the collective reference to LIBOR Loans under a particular Facility the then current Interest Periods with respect to all of which begin on the same date and end on the same later date (whether or not such Loans shall originally have been made on the same day).
“ LIBOR Reserve Requirements ” means, for any day as applied to a LIBOR Loan, the aggregate (without duplication) of the maximum rates (expressed as a decimal fraction) of reserve requirements in effect on such day (including basic, supplemental, marginal and emergency reserves) under any regulations of the Board or other Governmental Authority having jurisdiction with respect thereto dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as “ Eurocurrency Liabilities ” in Regulation D of the Board) maintained by a member bank of the Federal Reserve System.
“ LIBOR Term Loan ” means any LIBOR Loan that is a Term Loan.
“ Lien ” means any mortgage, deed of trust, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), charge or other security interest or any preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including any conditional sale or other title retention agreement and any capital lease having substantially the same economic effect as any of the foregoing), whether or not filed, recorded or otherwise perfected or effective under applicable law.
“ Liquidated Damages ” shall mean all delay-related liquidated damages and the proceeds of any payment (or series of related payments) in connection with any buy-out payments, termination payments and other similar damages or indemnification received by the Borrower pursuant to or in connection with the CREZ Master Lease or any other Material Project Document.
“ Loans ” means the loans made by the Lenders under this Agreement, including Construction Loans and Term Loans.
“ Margin Stock ” has the meaning given to such term in Regulation U.
 
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“ Make-Whole Amount ” means, with respect to any Fixed Rate Note, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Fixed Rate Note over the amount of such Called Principal, provided that the Make-Whole Amount may in no event be less than zero. For the purposes of determining the Make-Whole Amount, the following terms have the following meanings:
A. “ Called Principal ” means, with respect to any Fixed Rate Note, the principal of such Fixed Rate Note that is to be prepaid pursuant to Section 2.11 or has become or is declared to be immediately due and payable pursuant to Section 8.17, as the context requires.
B. “ Discounted Value ” means, with respect to the Called Principal of any Fixed Rate Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Fixed Rate Notes is payable) equal to the Reinvestment Yield with respect to such Called Principal.
C. “ Reinvestment Yield ” means, with respect to the Called Principal of any Fixed Rate Note, 0.50% greater than the yield to maturity implied by the yield(s) reported as of 10:00 a.m. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the display designated as “Page PX1” (or such other display as may replace Page PX1) on Bloomberg Financial Markets for the most recently issued actively traded on-the-run U.S. Treasury securities (“ Reported ”) having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date. If there are no such U.S. Treasury securities Reported having a maturity equal to such Remaining Average Life, then such implied yield to maturity will be determined by (a) converting U.S. Treasury bill quotations to bond equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between the yields Reported for the applicable most recently issued actively traded on-the-run U.S. Treasury securities with the maturities (1) closest to and greater than such Remaining Average Life and (2) closest to and less than such Remaining Average Life. The Reinvestment Yield shall be rounded to the number of decimal places as appears in the interest rate of the applicable Fixed Rate Note.
If such yields are not Reported or the yields Reported as of such time are not ascertainable (including by way of interpolation), then “ Reinvestment Yield ” means, with respect to the Called Principal of any Fixed Rate Note, the yield to maturity implied by the U.S. Treasury constant maturity yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (or any comparable successor publication) for the U.S. Treasury constant maturity having a term equal to the Remaining Average Life of such Called Principal as of such Settlement Date. If there is no such U.S. Treasury constant maturity having a term equal to such Remaining Average Life, such implied yield to maturity will be determined by interpolating linearly between (1) the U.S. Treasury constant maturity so reported with
 
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the term closest to and greater than such Remaining Average Life and (2) the U.S. Treasury constant maturity so reported with the term closest to and less than such Remaining Average Life. The Reinvestment Yield shall be rounded to the number of decimal places as appears in the interest rate of the applicable Fixed Rate Note.
D. “ Remaining Average Life ” means, with respect to any Called Principal, the number of years obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (a) the principal component of each Remaining Scheduled Payment with respect to such Called Principal by (b) the number of years, computed on the basis of a 360-day year composed of twelve 30-day months, that will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment.
E. “ Remaining Scheduled Payments ” means, with respect to the Called Principal of any Fixed Rate Note, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, provided that if such Settlement Date is not a date on which interest payments are due to be made under the terms of the Fixed Rate Notes, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date.
F. “ Settlement Date ” means, with respect to the Called Principal of any Fixed Rate Note, the date on which such Called Principal is to be prepaid pursuant to Section 2.11 or Section 2.12 or has become or is declared to be immediately due and payable pursuant to Section 8.17, as the context requires.
“ Material Adverse Effect ” means a material adverse effect on (a) the business, assets, property, operations, or financial condition of the Borrower or the Project, (b) the validity, legality, binding effect or enforceability against the Borrower of this Agreement or any of the other Financing Documents to which it is a party, (c) the validity, perfection or enforceability of Liens granted under the Financing Documents, (d) the ability of any Agent or any Financing Party to enforce any of the Obligations, or any of its material rights and remedies under the Financing Documents or (e) the ability of the Borrower to perform its obligations under any Financing Documents to which it is a party.
“ Material Project Documents ” means the collective reference to the CREZ Master Lease, the Project Management Agreement, the Engineering Services Agreement, the Real Property Services Agreement, the Surveying and Mapping Services Agreement, the Land Use Services Agreement, each Substation Construction Contract, each Transmission Line Construction Contract and any Additional Project Agreements including those listed on Schedule 1.1F, as of the applicable time of determination, then in force and effect.
“ Material Project Participants ” means SU, each Founding Equity Investor, Borrower’s Engineer, each Substation Contractor and each Transmission Line Contractor; provided , however , that a Person shall cease to be a Material Project Participant when all obligations of such Person under all Operative Documents to which it is a party have been indefeasibly performed and/or paid in full and all warranty periods if applicable have expired.
 
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“ Materials of Environmental Concern ” means all pollutants, contaminants, wastes, chemicals, explosive or radioactive substances, petroleum or petroleum distillates, asbestos or asbestos containing materials, polychlorinated biphenyls, radon gas or electromagnetic fields, to the extent subject to regulation or which can give rise to liability under any Environmental Law.
“ Moody’s ” means Moody’s Investors Service, Inc.
“ Mortgage ” means a mortgage and deed of trust made by the Borrower in favor of, or for the benefit of, the Collateral Agent for the benefit of the Financing Parties, substantially in the form of Exhibit I.
“ Mortgaged Properties ” means the Project Properties listed on Schedule 1.1E, as such Schedule shall be updated from time to time hereunder, as to which the Collateral Agent for the benefit of the Lenders shall be granted a Lien pursuant to the Mortgages either on the Closing Date or subsequently pursuant to the provisions of Section 6.16. of this Agreement.
“ Multiemployer Plan ” means a multiemployer plan (as defined in Section 4001(a)(3) of ERISA).
“ Net Cash Proceeds ” means the proceeds of any Asset Sale or any Event of Loss in the form of cash and Cash Equivalents (including any such proceeds received by way of deferred payment of principal pursuant to a note or installment receivable or purchase price adjustment receivable or otherwise, but only as and when received), net of attorneys’ fees, accountants’ fees, investment banking fees, amounts required to be applied to the repayment of Indebtedness secured by a Lien expressly permitted hereunder on any asset that is the subject of such Asset Sale or Event of Loss (other than any Lien pursuant to a Security Document) and other customary fees and expenses actually incurred in connection therewith and net of taxes paid or reasonably estimated to be payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements).
“ New Lender ” has the meaning given to such term in Section 2.25(b).
“ New Lender Supplement ” has the meaning given to such term in Section 2.25(b).
“ Non-Defaulting Lender ” shall mean, at any time, each Lender that is not a Defaulting Lender at such time.
“ Non-Excluded Taxes ” has the meaning given to such term in Section 2.22(a).
“ Non-U.S. Financing Party ” has the meaning given to such term in Section 2.22(e).
“ Notes ” means the collective reference to any promissory notes evidencing Loans.
 
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“ Notice of Term Conversion ” has the meaning given to such term in Section 2.5(a).
“ Obligations ” means the unpaid principal of and interest on (including interest accruing after the maturity of the Loans, the Fixed Rate Notes and any Letters of Credit and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) the Loans, the Fixed Rate Notes, Letters of Credit, and all other obligations and liabilities of the Borrower to the Agents, the Issuing Bank or to any Financing Party (or, in the case of Specified Swap Agreements any affiliate of any Lender), whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, this Agreement, any other Financing Document, any Specified Swap Agreement, or any other document made, delivered or given in connection herewith or therewith, whether on account of principal, interest, Reimbursement Obligations, Breakage Costs, Swap Obligations, Make Whole Amount, indemnities, costs, expenses (including all fees, charges and disbursements of counsel to the Administrative Agent or to any Financing Party that are required to be paid by the Borrower pursuant hereto) or otherwise (whether or not evidenced by any note or instrument and whether or not for the payment of money).
“ OFAC ” means the U.S. Department of Treasury Office of Foreign Assets Control.
“ OFAC Laws ” means any laws, regulations, and Executive Orders relating to the economic sanctions programs administered by OFAC or other U.S. federal Governmental Authorities, including without limitation, the International Emergency Economic Powers Act, 50 U.S.C. Sections 1701 et seq.; the Trading with the Enemy Act, 50 App. U.S.C. Sections 1 et seq.; and the Office of Foreign Assets Control, Department of the Treasury Regulations, 31 C.F.R. Parts 500 et seq. (implementing the economic sanctions programs administered by OFAC).
“ OFAC SDN List ” means the list of “ Specially Designated Nationals and Blocked Persons ” maintained by OFAC.
“ OFAC Violation ” has the meaning given to such term in Section 6.11.
“ Operating Cash Flow Available for Debt Service ” means, for any period, the excess of (a) Project Revenues over (b) Operating Costs.
“ Operating Costs ” means, for any period, the sum, computed without duplication among any of the following categories or from period to period, of the following actual cash operating and maintenance costs, in each case, paid by the Borrower: (a) general and administrative expenses and ordinary course fees, royalties and costs, plus (b) expenses for operating the Project and maintaining the Project in good repair and operating condition in accordance with Good Utility Practice paid during such period, including to the counterparties to the Material Project Documents as required pursuant to the Material Project Documents (including (x) capital expenditures incurred in connection with required maintenance of the Project, (y) capital expenditures required by applicable Legal Requirements or any Applicable
 
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Permit and (z) capital expenditures which the Borrower is required to make pursuant to the terms of the Operative Documents plus (c) insurance costs paid in respect of insurance maintained or required to be maintained in respect of the Project during such period, plus (d) applicable sales and excise taxes (if any) paid or reimbursable by the Borrower during such period, plus (e) franchise taxes paid by the Borrower during such period, plus (f) property taxes paid by the Borrower during such period, plus (g) any other direct taxes (if any) paid by the Borrower during such period, plus (h) costs and fees attendant to the obtaining and maintaining in effect the Permits paid during such period, plus (i) legal, accounting and other professional fees attendant to any of the foregoing items paid during such period, plus (j) all other cash expenses paid by the Borrower in the ordinary course of business in connection with the Project, plus (k) expenses incurred as necessary to prevent or mitigate an emergency situation plus (l) any other expenses not included in (a) through (k) above, which under the CREZ Master Lease are for the account of the Borrower. Operating Costs shall exclude, to the extent included above: (i) payments into any of the Collateral Accounts during such period, (ii) payments of any kind with respect to Restricted Payments during such period, (iii) depreciation and other non-cash charges for such period, (iv) payments made in respect of Debt Service, and (v) payments of any kind with respect to any necessary restoration of the Project during such period funded from the proceeds of insurance, equity contributions or the proceeds of Indebtedness.
“ Operating Partnership ” means Electric Infrastructure Alliance of America, L.P.
“ Operative Documents ” means the Financing Documents and the Material Project Documents.
“ Other Taxes ” means any and all present or future stamp or documentary taxes or any other similar excise or property taxes, charges or levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement or any other Financing Document.
“ Participant ” has the meaning given to such term in Section 10.7(e).
“ Participant Register ” has the meaning given to such term in Section 10.7(e).
“ Patriot Act ” means the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act), Pub. L. 107-56 and all other United States laws and regulations relating to money-laundering and terrorist activities.
“ PBGC ” means the Pension Benefit Guaranty Corporation referred to and defined in ERISA and any successor entity performing similar functions.
“ Pension Plan ” means any ERISA Plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA, and in respect of which the Borrower or any ERISA Affiliate is (or, if such ERISA Plan were terminated, would under Section 4062 or 4069 of ERISA be deemed to be) an “ employer ” as defined in Section 3(5) of ERISA.
 
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“ Permit ” means any and all franchises, licenses, CCNs, leases, permits, approvals, notifications, certifications, registrations, authorizations, exemptions, qualifications, easements, rights of way, Liens and other rights, privileges and approvals required to be obtained from a Governmental Authority under any Legal Requirement.
“ Permitted Indebtedness ” means:
(i) Indebtedness under or in respect of the Financing Documents;
(ii) obligations incurred under the Material Project Documents; and
(iii) trade accounts payable (other than for borrowed money) arising, and accrued expenses incurred, in the ordinary course of the Borrower’s business operation so long as such trade accounts payable are payable within forty-five (45) days of the date the respective goods are delivered or the respective services are rendered and are not more than sixty (60) days past due.
“ Permitted Investments ” means (a) marketable direct obligations issued by, or unconditionally guaranteed by, the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition, (b) certificates of deposit, time deposits, eurodollar time deposits or overnight bank deposits having maturities of six (6) months or less from the date of acquisition issued by any commercial bank organized under the laws of the United States or any state thereof having combined capital and surplus of not less than $1,000,000,000 and rated at least A by S&P or A2 by Moody’s, (c) repurchase obligations of any Financing Party or of any commercial bank satisfying the requirements of clause (b) of this definition, having a term of not more than thirty (30) days, with respect to securities issued or fully guaranteed or insured by the United States government, (d) securities with maturities of one (1) year or less from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States, by any political subdivision or taxing authority of any such state, commonwealth, or territory, the securities of which state, commonwealth, territory, political subdivision, taxing authority or foreign government (as the case may be) are rated at least A by S&P or A2 by Moody’s, (e) securities with maturities of six (6) months or less from the date acquisition backed by standby letters of credit issued by any commercial bank satisfying the requirements of clause (b) of this definition, (f) money market, mutual or similar funds that invest exclusively in assets satisfying the requirements of clauses (a) through (e) of this definition, or (g) money market funds that (i) comply with the criteria set forth in SEC Rule 2a-7 under the Investment Company Act of 1940, as amended, (ii) are rated AAA by S&P and Aaa by Moody’s and (iii) have portfolio assets of at least $5,000,000,000.
“ Permitted Liens ” means:
(i) the Liens created pursuant to the Security Documents;
(ii) Liens imposed by any Governmental Authority for any tax, assessment or other charge to the extent not yet past due or being contested in good faith and by appropriate proceedings, so long as (a) cash reserves consistent with GAAP have been established on the Borrower’s books, in an amount sufficient to pay any such taxes,
 
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assessments or other charges, accrued interest thereon and potential penalties or other costs relating thereto, or other provision for the payment thereof reasonably satisfactory to the Administrative Agent shall have been made, (b) enforcement of the contested tax, assessment or other charge is effectively stayed for the entire duration of such contest and (c) any tax, assessment or other charge determined to be due, together with any interest or penalties thereon, is immediately paid after resolution of such contest;
(iii) mechanics’, warehousemen’s, carriers’, workers’, repairers’, landlords’, and other similar liens arising or incurred in the ordinary course of business and (i) which do not in the aggregate materially detract from the value of property or assets subject to such Liens or materially impair the continued use thereof in the operation of the business or (ii) which are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property or asset subject to such Liens and for which cash reserves consistent with GAAP have been established on the Borrower’s books, or other Liens incurred or deposits made in the ordinary course of business in connection with workers’ compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, trade contracts, leases, government contracts, performance and return-of-money bonds and other similar obligations incurred in the ordinary course of business (exclusive of obligations in respect of the payment for borrowed money);
(iv) Liens arising out of judgments or awards so long as an appeal or proceeding for review is being prosecuted in good faith and for the payment of which adequate cash reserves consistent with GAAP have been established on the Borrower’s books, bonds or other security acceptable to the Administrative Agent in its reasonable discretion have been provided or are fully covered by insurance;
(v) Liens, deposits or pledges to secure mandatory statutory obligations or performance of bids, tenders, the Borrower’s obligations under the Material Project Documents (other than for the repayment of borrowed money) or leases, or in the ordinary course of its business, not to exceed $5,000,000 in the aggregate at any time, and with any such Lien to be released within 30 days of its attachment;
(vi) zoning, entitlement, restriction, and other land use and environmental regulations by Governmental Authorities and encroachments, easements, rights of way, covenants, restrictions or agreements which do not materially interfere with the continued use of any asset as currently used in the conduct of the business of the Borrower;
(vii) any encumbrances set forth in any franchise or governing ordinance under which any portion of the business of the Borrower, is conducted and which could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; and
(viii) all rights of condemnation, eminent domain, or other similar right of any Person.
 
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“ Person ” means any natural person, corporation, limited liability company, partnership, firm, association, Governmental Authority or any other entity whether acting in an individual, fiduciary or other capacity.
“ Pledge Agreement ” means the Pledge Agreement, dated as of the Closing Date, executed and delivered by the Pledgor, substantially in the form of Exhibit G.
“ Pledgor ” means Sharyland Distribution and Transmission Services, L.L.C.
“ Pledgor Acquisition ” means the merger or amalgamation of the Borrower into, or the consolidation of the Borrower with, the Pledgor, or the acquisition by the Pledgor of all or any substantial part of the assets of the Borrower, in each case pursuant to a transaction whereby the Pledgor expressly assumes the Obligations of the Borrower with respect to the Fixed Rate Notes and the CREZ Master Lease.
“ Pledgor Required Note Holders ” means Required Holders as defined in the Pledgor Note Purchase Agreement.
“ Pledgor Note Purchase Agreement ” means the Amended and Restated Note Purchase Agreement, dated July 13, 2010, between the Pledgor and the purchasers named therein, as in effect on the date hereof.
“ Pledged Stock ” has the meaning given to such term in the Pledge Agreement.
“ Prepayment Account ” has the meaning given to such term in Section 2.2 of the Depositary Agreement.
“ Prime Rate ” means the rate of interest per annum publicly announced from time to time by the Administrative Agent as its prime rate in effect at its principal office in New York City (the Prime Rate not being intended to be the lowest rate of interest charged by the Administrative Agent in connection with extensions of credit to debtors).
“ Prohibited Transaction ” has the meaning given to such term in Section 406 of ERISA and Section 4975(c) of the Code.
“ Project ” means the construction of five transmission line segments and four substations in the Panhandle and South Plains portions of Texas as part of the transmission projects comprising the Texas Competitive Renewable Energy Zones approved by the Public Utility Commission of Texas.
“ Project Costs ” means the cost of developing, designing, engineering, equipping, procuring, constructing, starting up, commissioning, acquiring and testing the Project in accordance with Good Utility Practice, including (a) the cost of all labor, services, materials, supplies, equipment, tools, transportation, supervision, storage, training, contingency, demolition, site preparation, civil works, and remediation in connection therewith, (b) the cost of acquiring and using any real property, lease, easement and any other necessary real property interests related to the Project, (c) real and personal property taxes, ad valorem taxes, sales, use and excise taxes and insurance (including title insurance) premiums payable with respect to the
 
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Project during the period prior to the Term Conversion Date (the “ Construction Period ”), (d) interest payable on any Loans, the Fixed Rate Notes and financing-related fees and costs during the Construction Period (including any and all Commitment Fees, fees paid in connection with Letters of Credit and other fees, interest and other amounts payable by the Borrower under this Agreement and Swap Agreements), (e) the costs of acquiring Permits for the Project during the Construction Period, (f) all Operating Costs attributable to the Project during the Construction Period and in accordance with the Construction Budget and Schedule, including the permitted variances thereto, (g) the cost of establishing a spare parts inventory for the Project (if any), (h) other fees (but only fees payable to third parties) and expenses relating to the development, construction, acquisition and closing of financing of the Project, including financial, legal and consulting fees, costs and expenses in accordance with the Construction Budget and Schedule, including the permitted variances thereto, and (i) expenses incurred to prevent or mitigate an emergency situation; provided , however , that the total aggregate amount of such Project Costs shall not exceed the Project Costs set forth in the Construction Budget and Schedule, including the permitted variances thereto. The term “Project Costs” shall include amounts used to repay Pledgor for Project Costs incurred on behalf of the Borrower prior to or after the Closing Date.
“ Project Management Agreement ” means that certain Construction Management Agreement dated as of June 20, 2011, as amended, modified and supplemented in accordance with the terms hereof, by and between the Borrower and SU.
“ Project Properties ” means the Real Properties in Texas on which the Project will be located.
“ Project Revenues ” means all income and cash revenues received by the Borrower from the ownership, or, if any, operation of the Project, including (a) all interest earned on Permitted Investments held in the Collateral Accounts, (b) payments due to the Borrower (or refunds received by the Borrower) under the CREZ Master Lease and any other Material Project Document (including any proceeds from liquidated damages and warranty payments due to the Borrower under any Material Project Document), (c) proceeds from any Event of Loss from any business interruption insurance maintained by or on behalf of Borrower and (d) all other operating income, however earned or received, by the Borrower during such period; provided that Project Revenues shall not include (i) any funds of the Borrower, whether contributed to the Borrower by the Pledgor or an Affiliate thereof or any other Person, (ii) the proceeds of the Loans and (iii) any other proceeds from any Event of Loss (other than proceeds of any business interruption insurance as set forth above).
“ Property ” means any right or interest in or to property of any kind whatsoever, whether real, personal or mixed and whether tangible or intangible.
“ Proportionate Share ” means, with respect to any Facility, and with respect to any Lender under such Facility, the proportion that such Lender’s Commitment with respect to such Facility then constitutes of the total Commitments with respect to such Facility (or, at any time after the Commitments with respect to such Facility shall have expired or terminated, the proportion which the aggregate principal amount of such Lender’s outstanding Loans with respect to such Facility constitutes of the aggregate outstanding principal amount of the Loans with respect to such Facility); provided that in the case of Section 2.27 when a Defaulting Lender
 
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shall exist, “ Proportionate Share ” shall mean the percentage of the total Commitments under any Facility (disregarding any Defaulting Lender’s Commitment) represented by such Lender’s Commitment under such Facility. If the Commitments have terminated or expired, the Proportionate Share shall be determined based upon the Commitments most recently in effect, giving effect to any assignments and to any Lender’s status as a Defaulting Lender at the time of determination.
“ Prudential Letter ” means the letter, dated as of April 29, 2011, by and among the Borrower, Electric Infrastructure Alliance of America, L.L.C. and the Structuring and Documentation Advisor.
“ PUCT ” means Public Utility Commission of Texas.
“ PUHCA 2005 ” means the Public Utility Holding Company Act of 2005.
“ Qualified IPO ” means an underwritten public offering of the equity interests of Electric Infrastructure Alliance of America, L.L.C. and any other Person of which the Pledgor is a Subsidiary.
“ Real Property ” means all right, title and interest of the Borrower in and to any and all parcels of real property owned or leased by the Borrower or on which the Borrower has any easement (including easements acquired by rights of eminent domain), rights-of-way, crossing permits, licenses in real property, and other rights of use and occupancy, together with all improvements and fixtures thereon, and rights appurtenant to the ownership thereof.
“ Real Property Services Agreement ” means the Master Service Agreement, dated January 27, 2009, as amended, modified and supplemented in accordance with the terms hereof, between the Pledgor and Coates Field Service, Inc., as assigned to the Borrower as of January 18, 2010.
“ Register ” has the meaning given to such term in Section 10.7(b)(iv).
“ Regulation D ” means Regulation D of the Board as in effect from time to time.
“ Regulation U ” means Regulation U of the Board as in effect from time to time.
“ Reimbursement Obligation ” means the obligation of the Borrower to reimburse the Issuing Bank pursuant to Section 3.4 for amounts drawn under Letters of Credit.
“ Reinvestment Deferred Amount ” means with respect to any Reinvestment Event, the aggregate Net Cash Proceeds received by the Borrower in connection therewith that are not applied to prepay the Construction Loans or the Term Loans, as applicable, pursuant to Section 2.12 as a result of the delivery of a Reinvestment Notice.
“ Reinvestment Event ” means any Asset Sale or Event of Loss in respect of which the Borrower has delivered a Reinvestment Notice.
 
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“ Reinvestment Notice ” means a written notice executed by a Responsible Officer stating that no Event of Default has occurred and is continuing and that the Borrower intends and expects to use all or a specified portion of the Net Cash Proceeds of an Asset Sale or Event of Loss to acquire or repair assets useful in its business.
“ Reinvestment Prepayment Amount ” means with respect to any Reinvestment Event, the Reinvestment Deferred Amount relating thereto less any amount expended prior to the relevant Reinvestment Prepayment Date to acquire or repair assets useful in the Borrower’s business.
“ Reinvestment Prepayment Date ” means with respect to any Reinvestment Event, the earlier of (a) the date occurring six months after such Reinvestment Event and (b) the date on which the Borrower shall have determined not to, or shall have otherwise ceased to, acquire or repair assets useful in the Borrower’s business with all or any portion of the relevant Reinvestment Deferred Amount.
“ Release ” means any placing, spilling, leaking, seepage, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, disposing or depositing into or onto the indoor or outdoor environment.
“ Remaining Equity Commitment ” has the meaning given to such term in the Equity Contribution Agreement.
“ Reorganization ” means with respect to any Multiemployer Plan, the condition that such plan is in reorganization within the meaning of Section 4241 of ERISA.
“ Repayment Date ” means the First Repayment Date and the thirtieth (30 th ) day of March, June, September and December, and the Term Maturity Date.
“ Reportable Event ” means any “reportable event,” as defined in Section 4043(c) of ERISA or the regulations issued thereunder, other than those events as to which the 30-day notice period referred to in Section 4043(c) of ERISA has been waived, with respect to a Pension Plan.
“ Required Financing Parties ” means at any time, and at all times excluding Loans and any portion of the Fixed Rate Notes held by Affiliated Financing Parties, (a) prior to the Term Conversion Date, the holders of more than 50% of the sum of (i) the aggregate unpaid principal amount of the Construction Loans then outstanding, (ii) the aggregate unused amount of the Commitments (other than the Term Loan Commitments) then in effect, and (iii) the aggregate principal amount of the Fixed Rate Notes and (b) on or after the Term Conversion Date, the holders of more than 50% of the sum of (i) the aggregate unpaid principal amount of the Term Loans then outstanding and (ii) the aggregate principal amount of the Fixed Rate Note. The Commitments, Loans and Letters of Credit of any Defaulting Lender shall be disregarded in determining Required Financing Parties at any time.
“ Requisite Project Properties ” means, as of any date of determination, Project Properties as to which on the date 45 days prior to such date of determination, there shall be readily available to Borrower, the information (book and page number, instrument number, document number, etc.) evidencing the recordation of the Borrower’s right, title and interest in such Project Properties.
 
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“ Responsible Officer ” means the chief executive officer, president, any senior vice-president or chief financial officer of the Borrower, but in any event, with respect to financial matters, the chief financial officer or treasurer of the Borrower.
“ Restricted Payment ” has the meaning given to such term in Section 7.7.
“ Revenue Account ” has the meaning given to such term in Section 2.2 of the Depositary Agreement.
“ S&P ” means Standard and Poor’s Rating Services.
“ Scheduled Repayment Amount ” means on each Repayment Date other than the Term Loan Maturity Date, an amount equal to 0.75% of the original principal amount of the Term Loan, to be paid quarterly on each Repayment Date, and on the Term Maturity Date means the then remaining principal of the Term Loans.
“ Second Phase Construction Loan ” has the meaning given to such term in Section 2.1(b).
“ Second Phase Construction Loan Availability Period ” means the period commencing on the date upon which the Borrower satisfies the conditions precedent set forth in Section 4.3 (or such conditions precedent are waived in accordance therewith) and ending on the earlier of (a) the period commencing on the date upon which the Borrower satisfies the conditions precedent set forth in Section 4.4 (or such conditions precedent are waived in accordance therewith) and (b) the date the Construction Loan Commitments are earlier cancelled or expire pursuant to this Agreement.
“ Second Phase Construction Loan Notice of Borrowing ” has the meaning given to such term in Section 2.2.
“ Secured Parties ” means the Agents, the Issuing Bank, the Financing Parties and any Lenders party to a Specified Swap Agreement.
“ Secured Obligations ” shall have the meaning given to such term in the Security Agreement.
“ Securities Act ” means the Securities Act of 1933, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.
“ Security Agreement ” means the Security Agreement, dated as of the Closing Date, by and among the Borrower, the Administrative Agent and the Collateral Agent (for the benefit of the Secured Parties), substantially in the form of Exhibit H.
 
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“ Security Documents ” means the Security Agreement, the Pledge Agreement, the Depositary Agreement and any other security documents, financing statements and the other instruments filed or recorded in connection with the foregoing.
“ Segment ” means a transmission line segment described on Schedule 1.1D.
“ Solvent ” when used with respect to any Person, means that, as of any date of determination, (a) the amount of the “present fair saleable value” of the assets of such Person will, as of such date, exceed the amount of all “liabilities of such Person, contingent or otherwise”, as of such date, as such quoted terms are determined in accordance with applicable federal and state laws governing determinations of the insolvency of debtors, (b) the present fair saleable value of the assets of such Person will, as of such date, be greater than the amount that will be required to pay the liability of such Person on its debts as such debts become absolute and matured, (c) such Person will not have, as of such date, an unreasonably small amount of capital with which to conduct its business, and (d) such Person will be able to pay its debts as they mature. For purposes of this definition, (i) “ debt ” means liability on a “ claim ” and (ii) “ claim ” means any (x) right to payment, whether or not such a right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured or (y) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured or unmatured, disputed, undisputed, secured or unsecured.
“ Specified Swap Agreement ” means any Swap Agreement in respect of interest rates entered into by the Borrower and any Person that is a Lender or an affiliate of a Lender at the time such Swap Agreement is entered into.
“ SU ” means Sharyland Utilities, L.P.
“ Subsidiary ” means, as to any Person, a corporation, partnership, limited liability company or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person.
“ Substation Construction Contract ” means each construction contract for construction of each of the Collection Stations to be entered into between the Borrower and a Substation Contractor, which contracts shall be in form and substance satisfactory to the Administrative Agent in consultation with the Independent Engineer, as such contract may be amended, modified or supplemented in accordance with the terms hereof.
“ Substation Contractor ” means each contractor, if any, under a Substation Construction Contract, reasonably acceptable to the Administrative Agent in consultation with the Independent Engineer.
 
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“ Substation Sites ” means the Project Properties referred to on Schedule 1.1E, owned in fee by the Borrower and denominated as the Hereford Substation, the Nazareth Substation, the Silverton Substation or the White Deer Substation, where the Collection Stations will be located.
“ Surveying and Mapping Services Agreement ” means the Master Service Agreement, dated February 27, 2009, as amended, modified and supplemented in accordance with the terms hereof, between the Pledgor and Surveying and Mapping, Inc., as assigned to the Borrower as of January 18, 2010.
“ SVO ” means the Securities Valuation Office of the National Association of Insurance Commissioners or any successor to such Office.
“ Swap Agreement ” means any agreement with respect to any swap, forward, future or derivative transaction or option or similar agreement involving, or settled by reference to, one or more rates, currencies, commodities, equity or debt instruments or securities, or economic, financial or pricing indices or measures of economic, financial or pricing risk or value or any similar transaction or any combination of these transactions; provided that no phantom stock or similar plan providing for payments only on account of services provided by current or former directors, officers, employees or consultants of the Borrower shall be a “Swap Agreement”.
“ Swap Obligations ” means all costs, fees, expenses and other amounts due and payable by the Borrower under the Swap Agreements, including any costs, fees, expenses or other amounts (including increased interest payments) due and payable in connection with any unwinding, breach or termination of such Swap Agreements as required under such Swap Agreements.
“ System Lease ” shall mean the Master System Lease Agreement, dated as of December 31, 2009, between the Pledgor, as lessor, and SU, as amended, modified, supplemented, renewed and replaced from time to time.
“ TCOS Approval Date ” means the date the PUCT issues its order, or if more than one order, the last order, of approval of SU’s application to update transmission rates and transmission cost of service (“ TCOS ”) on an interim basis, pursuant to PUCT Substantive Rule § 25.192, entitled “Transmission Service Rates,” or any amended, similar, or successor PUCT regulation, by which the invested capital amounts for all Segments of the Project have all been included in the approved adjusted TCOS and the wholesale transmission rates that may be billed by SU.
“ TCOS ” has the meaning given to such term in Section 4.4(d).
“ TDC ” means Transmission and Distribution Company, L.L.C.
“ Term Conversion ” means the satisfaction (or waiver by Administrative Agent with the consent of the Required Financing Parties) of the conditions set forth in Section 4.4.
“ Term Conversion Date ” means the date of Term Conversion.
 
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“ Term Convert ” is the verb form of “ Term Conversion. ”
“ Term Loan ” has the meaning given to such term in Section 2.4.
“ Term Loan Commitments ” means, with respect to any Lender, the commitment of such Lender, if any, to make Term Loans on the Term Conversion Date in an aggregate principal amount not to exceed the amount, expressed as a Dollar amount, equal to such Lender’s Proportionate Share of the Construction Loans outstanding on the Term Conversion Date.
“ Term Loan Maturity Date ” means the seventh anniversary of the Closing Date (which date shall also be the maturity of the Fixed Rate Notes).
“ Title Company ” means Chicago Title Insurance Company.
“ Total Capitalization ” means Debt plus Consolidated Net Worth.
“ Transferee ” means any Assignee or Participant.
“ Transmission Line Construction Contract ” means each construction contract for construction of each of the Segments to be entered into between the Borrower and a Transmission Line Contractor, which contracts shall be in form and substance satisfactory to the Administrative Agent in consultation with the Independent Engineer, as amended, modified or supplemented in accordance with the terms hereof.
“ Transmission Line Contractor ” means each of Irby Construction Company and each other contractor, if any, under a Transmission Line Construction Contract, reasonably acceptable to the Administrative Agent in consultation with the Independent Engineer.
“ Type ” means LIBOR Loans or Base Rate Loans, as applicable, each of which constitutes a Type of Loan.
“ UCC ” means the Uniform Commercial Code as in effect in the applicable state of jurisdiction.
“ U.S. Financing Party ” has the meaning given to such term Section 2.22(e).
“ Voluntary Equity Contributions ” has the meaning provided in the Equity Contribution Agreement.
“ Withdrawal Liability ” means any liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Title IV of ERISA.
1.2. Rules of Interpretation . Except as otherwise expressly provided, the following rules of interpretation shall apply to this Agreement and the other Financing Documents:
(a) The singular includes the plural and the plural includes the singular.
 
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(b) The word “ or ” is not exclusive. Thus, if a party “may do (a) or (b)”, then the party may do either or both. The party is not limited to a mutually exclusive choice between the two alternatives.
(c) A reference to a Governmental Rule includes any amendment or modification to such Governmental Rule, and all regulations, rulings and other Governmental Rules promulgated under such Governmental Rule.
(d) A reference to a Person includes its successors and permitted assigns.
(e) Accounting terms have the meanings given to them by GAAP, as applied by the accounting entity to which they refer. For purposes of determining compliance with any financial covenants contained in this Agreement, any election by the Borrower to measure an item of Indebtedness using fair value (as permitted by Statement of Financial Accounting Standards No. 159 or any similar accounting standard) shall be disregarded and such determination shall be made as if such election had not been made.
(f) The words “include,” “includes” and “including” are not limiting.
(g) A reference in a document to an Article, Section, Exhibit, Schedule, Annex or Appendix is to the Article, Section, Exhibit, Schedule, Annex or Appendix of such document unless otherwise indicated. Exhibits, Schedules, Annexes or Appendices to any document shall be deemed incorporated by reference in such document.
(h) References to any document, instrument or agreement (a) shall include all exhibits, schedules and other attachments thereto, (b) shall include all documents, instruments or agreements issued or executed in replacement thereof, and (c) means such document, instrument or agreement, or replacement or predecessor thereto, as amended, modified and supplemented from time to time and in effect at any given time.
(i) The words “hereof,” “herein” and “hereunder” and words of similar import when used in any document shall refer to such document as a whole and not to any particular provision of such document.
(j) References to “days” means calendar days, unless the term “Business Days” shall be used. References to a time of day means such time in New York, New York, unless otherwise specified. If the Borrower or any Affiliate of the Borrower is required to perform an action, deliver a document or take such other action by a calendar day and such day is not a Business Day, then the Borrower or such Affiliate shall take such action by the next succeeding “Business Day”.
(k) The Financing Documents are the result of negotiations between, and have been reviewed by the Borrower, the Pledgor, the Agents, the Issuing Bank, the Financing Parties and their respective counsel. Accordingly, the Financing Documents shall be deemed to be the product of all parties thereto, and no ambiguity shall be construed in favor of or against Borrower, the Pledgor, the Agents, the Issuing Bank, or any Financing Party.
 
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ARTICLE 2.
THE CREDIT FACILITIES
2.1. Construction Loan Commitments .
(a) First Phase Construction Loans . Subject to the terms and conditions hereof, each Lender severally agrees to make loans to the Borrower (each such loan, individually, a “ First Phase Construction Loan ”, and collectively, the “ First Phase Construction Loans ”) from time to time during the First Phase Construction Loan Availability Period, but not more often than twice in any calendar month, in an aggregate principal amount that (i) shall not exceed the First Phase Construction Loan Sublimit and (ii) will not result in such Lender’s Construction Loans exceeding such Lender’s Construction Loan Commitment. The First Phase Construction Loans may from time to time be LIBOR Loans or Base Rate Loans, as determined by the Borrower and notified to the Administrative Agent in accordance with Sections 2.2 and 2.15.
(b) Second Phase Construction Loans . Subject to the terms and conditions hereof, each Lender severally agrees to make loans to the Borrower (each such loan, individually, a “ Second Phase Construction Loan ”, collectively, the “ Second Phase Construction Loans ”, and together with the First Phase Construction Loans and the Incremental Loans, the “ Construction Loans ”) from time to time during the Second Phase Construction Loan Availability Period, but not more often than twice in any calendar month, in an aggregate principal amount that will not result in such Lender’s Construction Loans exceeding such Lender’s Construction Loan Commitment. Each Lender’s remaining Construction Loan Commitment shall be reduced to zero on the last Business Day of the Construction Loan Availability Period. The Construction Loans may from time to time be LIBOR Loans or Base Rate Loans, as determined by the Borrower and notified to the Administrative Agent in accordance with Sections 2.2 and 2.15.
2.2. Procedures for Construction Loan Borrowing . Subject to Sections 4.2 and 4.3, as applicable, the Borrower may borrow under the Construction Loan Commitments during the Construction Loan Availability Period on any Business Day (subject to the limitations in Section 2.1) provided that the Borrower shall give the Administrative Agent an irrevocable appropriately completed written notice substantially in the form of Exhibit A-1 (a “ First Phase Construction Loan Notice of Borrowing ”) or Exhibit A-2 (a “ Second Phase Construction Loan Notice of Borrowing ”), as applicable, which notice must be received by the Administrative Agent prior to 11:00 a.m., New York time, (a) three (3) Business Days prior to the requested Borrowing Date, in the case of LIBOR Loans, or (b) one (1) Business Day prior to the requested Borrowing Date, in the case of Base Rate Loans, specifying, among other things: (a) the amount of the requested Borrowing, which shall be in the minimum amount of $5,000,000 (except for the Borrower’s final requested Borrowing) and in whole multiples of $1,000,000 in excess thereof, (b) the estimated date of the requested Borrowing, which shall be a Business Day, and whether such Borrowing shall consist of Base Rate Loans and/or LIBOR Loans, (c) in the case of LIBOR Loans, the initial Interest Period(s) selected by the Borrower, and (d) the Project Costs to be paid with the proceeds of such Construction Loan. If the Borrower elects a LIBOR Loan and changes the date of a Borrowing, the Borrower shall promptly reimburse the Lenders for Breakage Costs, if any, incurred as a result thereof in accordance with Section 2.23. The Administrative Agent shall promptly notify each Lender of the contents of such notice.
 
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2.3. Repayment of Construction Loans . The Borrower shall prepay all outstanding Construction Loans on the Construction Loan Termination Date, including any prepayment in accordance with Section 2.12(f).
2.4. Term Loans .
Subject to the terms and conditions hereof, each Lender severally agrees to make to the Borrower on the Term Conversion Date only such Loans as the Borrower may request under Section 2.5 (individually, a “ Term Loan ” and, collectively, the “ Term Loans ”), in an aggregate principal amount not to exceed such Lender’s Proportionate Share of the aggregate amount of the Construction Loans outstanding on the Term Conversion Date. Each Lender shall make its Term Loan by converting to a Term Loan the unpaid principal amount of its Construction Loans then outstanding, in an amount not to exceed its Term Loan Commitment, Each Lender’s Term Loan Commitment shall be irrevocably terminated upon the making of such Term Loan by such Lender. Unless terminated on or before such date in connection with Term Conversion, the Term Loan Commitments shall terminate on the Date Certain. Subject to Section 2.16, the Term Loans shall be LIBOR Loans.
2.5. Term Loan Conversion .
(a) The Borrower shall request the Term Loans by delivering to the Administrative Agent an irrevocable written notice substantially in the form of Exhibit A-3 (the “ Notice of Term Conversion ”), which shall include: (i) the aggregate principal amount of the requested Term Loans, calculated in accordance with paragraph (b) below, (ii) the proposed Term Conversion Date, which shall be a Business Day, and (iii) the initial Interest Period(s) applicable thereto. The Borrower shall give the Notice of Term Conversion to the Administrative Agent by 11:00 a.m., New York time, at least ten (10) Business Days before the proposed Term Conversion Date; provided , however , that the Borrower may not provide a Notice of Term Conversion more than thirty (30) Business Days prior to the proposed Term Conversion Date.
(b) The Term Loan Commitment available to the Borrower on the Term Conversion Date shall be the sum of the aggregate principal amount of the Construction Loans outstanding as of the Term Conversion Date plus the amount of any outstanding and undrawn Letters of Credit elected by the Borrower to be converted to Term Loans.
(c) If the conditions set forth in Section 4.4 have been met (or waived in accordance with the terms hereof), then, on the Term Conversion Date specified in the Notice of Term Conversion, all Construction Loans and Letters of Credit being Term Converted shall be deemed repaid or cancelled, as applicable, and the Lenders shall be deemed to have made Term Loans to the Borrower, in each case in an amount equal to the amount of the Construction Loans deemed paid off and the Letters of Credit deemed cancelled, pro rata according to the Lenders’ Commitments.
 
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2.6. Repayment of Term Loans . The Borrower shall repay (i) principal of the Term Loans on each Repayment Date in an amount equal to the Scheduled Repayment Amount and (ii) all outstanding Term Loans on the Term Loan Maturity Date.
2.7. Fixed Rate Notes . On the Closing Date, the Borrower will authorize the issuance and sale of $60,000,000 aggregate principal amount of its 5.04% Fixed Rate Notes (the “ Fixed Rate Notes ”). Each Note shall be substantially in the form set out in Exhibit B. The proceeds of the Fixed Rate Notes will be applied first to Project Costs then due and payable, and second , deposited into the Disbursement Account.
2.8. Sale and Purchase of Fixed Rate Notes . Subject to the terms and conditions of this Agreement, the Borrower will issue and sell to each Fixed Rate Note Holder and each Fixed Rate Note Holder will purchase from the Borrower, on the Closing Date provided for in Section 4.1, Fixed Rate Notes in the principal amount specified opposite such Fixed Rate Note Holder’s name in Schedule 1.1C at the purchase price of 100% of the principal amount thereof. The Fixed Rate Note Holders’ obligations hereunder are several and not joint, and no Fixed Rate Holder shall have any liability to any Person for the performance or non-performance of any obligation by any other Fixed Rate Note Holder hereunder.
2.9. Repayment of Fixed Rate Note . The Borrower shall repay the full principal amount of the Fixed Rate Notes to the Administrative Agent for the account of each Fixed Rate Note Holder on the earlier to occur of the date of acceleration of the Fixed Rate Notes under Section 8.17 and the Term Loan Maturity Date.
2.10. Fees .
(a) Arrangement Fees . On the Closing Date, the Borrower shall pay to the Administrative Agent (for the benefit of the applicable parties to each Fee Letter) the arranging fees in the amount set forth in the Fee Letter. Such fees may be paid out of the proceeds of the Fixed Rate Notes.
(b) Administrative Agency Fees . The Borrower shall pay to the Administrative Agent on the Closing Date and on each other date as specified in the Fee Letter entered into by and between the Administrative Agent and the Borrower, solely for the account of the Administrative Agent, an agency fee payable at the times and in the amounts set forth in the Fee Letter. Such fees may be paid out of the proceeds of the Construction Loans and the Fixed Rate Notes.
(c) Commitment Fees . The Borrower shall pay to the Administrative Agent for the account of each Lender a commitment fee for the period from and including the date hereof to but excluding the last day of the Construction Loan Availability Period, computed at the Commitment Fee Rate on the average daily unused amount of the Construction Loan Commitment of such Lender during the period for which payment is made (the “ Construction Loan Commitment Fees ”), payable on each Fee Payment Date during the Construction Loan Availability Period and including the Construction Loan Termination Date (or, if the Construction Loan Commitments are cancelled or expire prior to a Fee Payment Date, on the date of such cancellation or expiration).
(d) Prudential Fees . On the Closing Date, the Borrower shall pay to the Structuring and Documentation Advisor, for the account of each Fixed Rate Note Purchaser, the fees in the amount set forth in the Prudential Letter. Such fees may be paid out of the proceeds of the Construction Loans or Fixed Rate Notes.
 
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2.11. Optional Prepayments . (a) Subject to Section 2.13, the Borrower may at any time and from time to time prepay the Loans, in whole or in part, without premium or penalty (except for any Breakage Costs or Swap Obligations, as applicable), upon irrevocable notice delivered to the Administrative Agent no later than 11:00 a.m., New York time, two (2) Business Days prior thereto, in the case of LIBOR Loans, and no later than 11:00 a.m., New York time, one (1) Business Day prior thereto, in the case of Base Rate Loans, which notice shall specify the date and amount of prepayment and whether the prepayment is of LIBOR Loans or Base Rate Loans and the amount of the estimated Swap Obligations, calculated in accordance with the Swap Agreements described in Section 6.21, due in connection with such optional prepayment, if applicable (calculated as if the date of such notice were the date of the optional prepayment) setting forth the details of such computation. Upon receipt of any such notice, the Administrative Agent shall promptly notify each relevant Lender thereof. If any such notice is given, the amount specified in such notice shall be due and payable on the date specified therein, together with accrued interest to such date on the amount prepaid. Partial prepayments of Loans shall be in an aggregate principal amount of $5,000,000 or whole multiples of $1,000,000 in excess thereof.
(b) At any time after the Borrower has repaid or prepaid the Loans in their entirety, the Borrower may prepay the Fixed Rate Notes in accordance with this Section 2.11(b). At any time when the Borrower prepays Loans pursuant to Section 2.11(a), the Borrower may, at its option, upon notice as provided below, prepay at any time all, or from time to time any part of, the Fixed Rate Notes, in an amount not less than $5,000,000 of the aggregate principal amount of the Fixed Rate Notes then outstanding, or any amount in multiples of $1,000,000 in excess thereof, at 100% of the principal amount so prepaid, and the Make-Whole Amount determined for the prepayment date with respect to such principal amount. The Borrower will give each Fixed Rate Note Holder written notice of each optional prepayment under this Section 2.11(b) not less than 30 days and not more than 60 days prior to the date fixed for such prepayment. Each such notice shall specify such prepayment date (which shall be a Business Day), the aggregate principal amount of the Fixed Rate Notes to be prepaid on such date, the principal amount of each Fixed Rate Note held by such Fixed Rate Note Holder to be prepaid, and the interest to be paid on the prepayment date with respect to such principal amount being prepaid, and shall be accompanied by a certificate of a Responsible Officer as to the estimated Make-Whole Amount due in connection with such prepayment (calculated as if the date of such notice were the date of the prepayment), setting forth the details of such computation. Two Business Days prior to such prepayment, the Borrower shall deliver to each holder of Fixed Rates Notes a certificate of a Responsible Officer specifying the calculation of such Make- Whole Amount as of the specified prepayment date.
(c) The Borrower will not and will not permit any of its Affiliates to purchase, redeem, prepay or otherwise acquire, directly or indirectly, any of the outstanding Fixed Rate Notes except upon the payment or prepayment of the Fixed Rate Notes in accordance with the terms of this Agreement and the Fixed Rate Notes and except as provided pursuant to Section
 
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10.7(b)(ii) hereunder or pursuant to Article 4 of the Equity Contribution Agreement. The Borrower will promptly cancel all Fixed Rate Notes acquired by it or by any of its Affiliates pursuant to any payment or prepayment of Fixed Rate Notes pursuant to any provision of this Agreement (other than pursuant to Section 10.7(b)(ii) hereunder or Article 4 of the Equity Contribution Agreement) and no Fixed Rate Notes may be issued in substitution or exchange for any such Fixed Rate Notes.
2.12. Mandatory Prepayments; Change of Control Offer . The Borrower shall make the following mandatory prepayments of the Loans, without premium or penalty (except for any Breakage Costs and Swap Obligations, as applicable) and, subject to Section 2.12(e), the Fixed Rate Notes, together with the Make-Whole Amount, as applicable:
(a) If on any date the Borrower shall receive Net Cash Proceeds from any Asset Sale or Event of Loss then, unless a Reinvestment Notice shall be delivered in respect thereof (in which case the Borrower shall notify the Collateral Agent of the amounts to be deposited in accordance with Section 3.4(b)(ii)(B) of the Depositary Agreement), the Borrower shall notify the Collateral Agent of the amounts to be deposited in accordance with Section 3.4(b)(ii)(A) of the Depositary Agreement, and such Net Cash Proceeds shall be applied on such date to the prepayment of the Loans and, subject to Section 2.12(e), the Fixed Rate Notes, as set forth in Section 2.13; provided , that, notwithstanding the foregoing, (i) to the extent that aggregate Net Cash Proceeds of Asset Sales (in excess of the amount provided in the definition of Asset Sale) in any fiscal year of the Borrower do not exceed $1,000,000, the Borrower may reinvest such Net Cash Proceeds without delivering a Reinvestment Notice pursuant to this clause so long as the Borrower notifies the Collateral Agent of such amounts and deposits such amounts in accordance with Section 3.4(b)(i) of the Depositary Agreement and (ii) on each Reinvestment Prepayment Date, an amount equal to the Reinvestment Prepayment Amount with respect to the relevant Reinvestment Event shall be applied toward the prepayment of the Loans and the Fixed Rate Notes, as set forth in Section 2.13.
(b) If on any date the Equity Investors shall be required to make an Equity Contribution pursuant to Section 2.1 (a)(iii) or (iv) of the Equity Contribution Agreement, the Borrower shall at such time prepay Construction Loans and, subject to Section 2.12(e), the Fixed Rate Notes, pro rata, with any and all proceeds thereof, promptly upon receipt thereof, in accordance with Section 2.1(b)(ii) of the Equity Contribution Agreement.
(c) (i) If at any time the Borrower shall merge or be amalgamated into, or consolidate with, any Person, or if any Person shall at any time acquire all or any substantial part of the assets or any class of stock of (or other Equity Interest in) the Borrower, automatically the Commitments shall immediately terminate and the Loans (with accrued interest thereon, and including all amounts of L/C Obligations, whether or not the beneficiaries of then outstanding Letters of Credit shall have presented the documents required thereunder) and, except to the extent provided in Section 2.12(c)(ii) in connection with a Pledgor Acquisition, but subject to Section 2.12(e), the Fixed Rate Notes (with accrued interest thereon and the Make-Whole Amount and all other amounts owing under this Agreement and the other Financing Documents) shall become immediately due and payable and the Administrative Agent shall be deemed to have made a demand for cash collateral to the full extent permitted under Section 3.9.
 
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(ii) Anything in Section 2.12(c)(i) to the contrary notwithstanding, the Borrower shall not be required to repay or redeem the Fixed Rate Notes on the occurrence of a Pledgor Acquisition, if in connection therewith the Pledgor (x) complies with its obligations under Section 9.7(b) of the Pledgor Note Purchase Agreement, (y) after giving effect to the Pledgor Acquisition, is in compliance with Section 9.9 of the Pledgor Note Purchase Agreement and (z) delivers such opinions and other documentation as the Fixed Rate Note Holders may reasonably request and as is reasonably satisfactory to the Fixed Rate Note Holders, the Pledgor Required Holders and New York Mellon Trust Company, N.A. (“ Mellon ”), in its capacity as collateral agent pursuant to that certain Amended and Restated Collateral Agency Agreement dated as of July 13, 2010 (as amended from time to time) among the Pledgor, Mellon, and the various secured lenders thereunder; provided , that in the event that the Fixed Rate Notes become Permitted Secured Indebtedness (as defined in the Pledgor Note Purchase Agreement), the appropriate terms of this Agreement shall be amended to conform the affirmative covenants, negative covenants and Events of Default contained herein to the affirmative covenants, negative covenants and events of default contained in the Pledgor Note Purchase Agreement.
(d) The Borrower shall, on or prior to the date falling 30 days prior to the date a Change of Control shall occur, by notice in writing to each Lender and each Fixed Rate Note Holder (which shall include the date on which such Change of Control shall occur (the “ Change of Control Date ”)), shall offer (i) to each Lender to prepay in full the Loans held by such Lender (with accrued interest thereon to the date of repayment) and all other Obligations owed to such Lender, (ii) to the Issuing Bank to deposit in an account with the Issuing Bank, an amount in Dollars in cash equal to the aggregate then undrawn and unexpired amount of all Letters of Credit as of such date plus any accrued and unpaid interest thereon (the “ Change of Control Cash Deposit ”) and (iii) to each Fixed Rate Note Holder, subject to Section 2.12(e), to redeem the Fixed Rate Notes held by such Fixed Rate Note Holder (with accrued interest thereon to the date of redemption but without the requirement to pay any Make-Whole Amount). Each Lender and each Fixed Rate Note Holder may accept or decline such offer to prepay in its sole discretion by delivering written notice to the Borrower on or prior to the Change of Control Date, with a copy of such notice delivered simultaneously therewith to the Administrative Agent. On the Change of Control Date, the Borrower shall prepay all Loans and Fixed Rate Notes with respect to which a Lender or Fixed Rate Note Holder has accepted the offer of prepayment or redemption and shall make the Change of Control Cash Deposit if the Issuing Bank shall have accepted such offer.
(e) To the extent the Borrower is required to prepay Loans pursuant to Section 2.12(a) or 2.12(b), the Borrower shall be required to offer to redeem and prepay a pro rata portion of the Fixed Rate Notes (together with accrued interest thereon and, with respect to prepayments made pursuant to Section 2.12(b), the Make Whole Amount), which offer to prepay may be accepted or rejected in the Fixed Rate Note Holders’ sole discretion.
(f) The Borrower shall prepay the Construction Loans in full on the Date Certain if the Term Conversion Date shall not occur on or prior to the Date Certain.
(g) The Borrower shall apply all Liquidated Damages disbursed from the Prepayment Account pursuant to Section 3.5(b) of the Depositary Agreement, promptly upon receipt thereof, to the prepayment of the Loans, in accordance with Section 2.13.
 
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2.13. Terms of All Prepayments .
(a) Amounts to be applied in connection with prepayments made pursuant to Section 2.11 shall be applied as the Borrower shall direct. Except as otherwise provided in this Agreement, amounts to be applied in connection with prepayments made pursuant to Section 2.12 shall be applied in accordance with Section 2.13(b) and to cash collateralize Letters of Credit, if applicable, in accordance with Section 3.9.
(b) All prepayments of Loans and Fixed Rate Notes shall be applied among the Financing Parties according to their pro rata portion of the aggregate principal amount of Loans and Fixed Rate Notes outstanding at the time of the applicable prepayment. All prepayments of Loans shall be applied among the Lenders according to their respective Proportionate Shares of the Loans being repaid at the time of the applicable prepayment and all prepayments of the Fixed Rate Notes shall be applied among the Fixed Rate Note Holders according to the pro rata portion of the Fixed Rate Notes held by each Fixed Rate Note Holder at the time of the applicable prepayment. All prepayments of Loans shall be applied to the installments thereof in inverse order of maturity.
(c) Upon the prepayment of any Loan (whether such prepayment is an optional prepayment or a mandatory prepayment), the Borrower shall pay to the Administrative Agent for the account of each Lender which made such Loan (i) all accrued interest to the date of such prepayment owed pursuant to the terms of this Agreement on the amount prepaid, (ii) all accrued fees to the date of such prepayment owed pursuant to the terms of this Agreement corresponding to the amount being prepaid, and (iii) if such prepayment is the prepayment of a LIBOR Loan on a day other than the last day of an Interest Period for such LIBOR Loan, all Breakage Costs incurred by such Lender as a result of such prepayment. With the exception of Letters of Credit, Loans prepaid or repaid may not be re-borrowed.
(d) In the case of each prepayment of Fixed Rate Notes pursuant to this Agreement, the principal amount of each Fixed Rate Note to be prepaid shall mature and become due and payable on the date fixed for such prepayment, together with interest on such principal amount accrued to such date and the applicable Make-Whole Amount, if any, which shall be paid to the Administrative Agent for the account of each Fixed Rate Note Holder. From and after such date, unless the Borrower shall fail to pay such principal amount when so due and payable, together with the interest and Make-Whole Amount, if any, as aforesaid, interest on such principal amount shall cease to accrue. Any Fixed Rate Note paid or prepaid in full shall be surrendered to the Borrower and cancelled and shall not be reissued, and no Fixed Rate Note shall be issued in lieu of any prepaid principal amount of any Fixed Rate Note.
(e) In the event of any prepayment of Loans under this Agreement, such prepayment shall be accompanied by a concurrent reduction by the Borrower of the notional amount of the Swap Agreements (including the payment of any Swap Obligations that become due and payable as a result thereof) then in effect, pro rata, to the extent that such a reduction is necessary so that after such prepayment the aggregate notional amounts under such Swap Agreements would not exceed one hundred percent (100%) of all Term Loans outstanding.
(f) Except for Construction Loans that are Term Converted pursuant to the terms of this Agreement, in no event shall any mandatory or optional prepayments be funded from the proceeds of any Loan.
 
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2.14. Termination or Reduction of Commitments . (a) The Borrower shall have the right, if the Incremental Facility shall have expired or been terminated and subject to Section 2.14(b), upon not less than three Business Days’ notice to the Administrative Agent, to terminate or reduce the Construction Loan Commitments and the L/C Commitment, as applicable, from time to time; provided that no such termination or reduction shall be permitted if, after giving effect thereto and to any prepayments of the Loans made on the effective date thereof, the Loans and outstanding Letters of Credit would exceed the Construction Loan Commitments, as applicable. Any such reduction shall be in an amount equal to $5,000,000, or a whole multiple of $1,000,000 in excess thereof, and shall reduce permanently the Construction Loan Commitments and the L/C Commitment on a pro rata basis, as applicable, then in effect.
(b) In connection with any reduction or termination of the Commitments or the L/C Commitment pursuant to Sections 2.14(a), the Borrower shall be required to certify, and shall deliver a certificate of the Independent Engineer certifying, that such Commitments are not necessary for the timely completion of the Project or compliance with the Material Project Documents.
(c) Commitments reduced or terminated pursuant to this Section 2.14 shall not be reinstated.
2.15. Conversion and Continuation Options . (a) The Borrower may elect from time to time to convert LIBOR Loans to Base Rate Loans by giving the Administrative Agent prior irrevocable notice of such election no later than 11:00 a.m., New York time, on the Business Day preceding the proposed conversion date; provided that any such conversion of LIBOR Loans may only be made on the last day of an Interest Period with respect thereto. The Borrower may elect from time to time to convert Base Rate Loans to LIBOR Loans by giving the Administrative Agent prior irrevocable notice of such election no later than 11:00 a.m., New York time, on the third Business Day preceding the proposed conversion date (which notice shall specify the length of the initial Interest Period therefor); provided further that no Base Rate Loan may be converted into a LIBOR Loan when any Event of Default has occurred and is continuing. Upon receipt of any such notice, the Administrative Agent shall notify each relevant Lender thereof.
(b) Any LIBOR Loan may be continued as such upon the expiration of the then current Interest Period with respect thereto by the Borrower giving irrevocable notice to the Administrative Agent, in accordance with the applicable provisions of the term “ Interest Period ” set forth in Section 1.1, of the length of the next Interest Period to be applicable to such Loans; provided that no LIBOR Loan may be continued as such when any Event of Default has occurred and is continuing; and provided , further , that if the Borrower shall fail to give any required notice as described above in this paragraph or if such continuation is not permitted pursuant to the
 
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preceding proviso such Loans shall be automatically converted to Base Rate Loans on the last day of such then expiring Interest Period. Upon receipt of any such notice the Administrative Agent shall promptly notify each relevant Lender thereof.
2.16. Limitations on LIBOR Rate Tranches . Notwithstanding anything to the contrary in this Agreement, all borrowings, conversions and continuations of LIBOR Loans and all selections of Interest Periods shall be in such amounts and be made pursuant to such elections so that, (a) after giving effect thereto, the aggregate principal amount of the LIBOR Loans comprising each LIBOR Rate Tranche shall be equal to $5,000,000 or a whole multiple of $1,000,000 in excess thereof and (b) no more than six (6) LIBOR Rate Tranches shall be outstanding at any one time.
2.17. Interest Rates and Payment Dates . (a) Each LIBOR Loan shall bear interest for each day during each Interest Period with respect thereto at a rate per annum equal to the LIBOR Rate determined for such day plus the Applicable Margin.
(b) Each Base Rate Loan shall bear interest at a rate per annum equal to the Base Rate plus the Applicable Margin.
(c) The Fixed Rate Notes shall bear interest at a fixed rate of 5.04%.
(d) Upon the occurrence and during the continuance of an Event of Default, all outstanding Loans and amounts outstanding under the Fixed Rate Notes, as applicable, (whether or not overdue) shall bear interest at a rate per annum equal to the rate that would otherwise be applicable thereto pursuant to the foregoing provisions of this Section plus 2% (such applicable rate, the “ Default Rate ”).
(e) Interest shall be payable in arrears on each Interest Payment Date; provided that interest accruing pursuant to paragraph (d) of this Section shall be payable from time to time on demand.
2.18. Computation of Interest and Fees . (a) Interest and fees payable pursuant hereto in respect of the Loans shall be calculated on the basis of a 360-day year for the actual days elapsed, except that, with respect to Base Rate Loans the rate of interest on which is calculated on the basis of the Prime Rate, the interest thereon shall be calculated on the basis of a 365- (or 366-, as the case may be) day year for the actual days elapsed. Interest and fees payable pursuant hereto in respect of the Fixed Rate Notes shall be calculated on a 30/360 basis. The Administrative Agent shall as soon as practicable notify the Borrower and the relevant Financing Parties of each determination of a LIBOR Rate. Any change in the interest rate on a Loan resulting from a change in the Base Rate or the LIBOR Reserve Requirements shall become effective as of the opening of business on the day on which such change becomes effective. The Administrative Agent shall as soon as practicable notify the Borrower and the relevant Financing Parties of the effective date and the amount of each such change in interest rate.
(b) Each determination of an interest rate by the Administrative Agent pursuant to any provision of this Agreement shall be conclusive and binding on the Borrower and the Financing Parties in the absence of manifest error. The Administrative Agent shall, at the request of the Borrower, deliver to the Borrower a statement showing the quotations used by the Administrative Agent in determining any interest rate pursuant to Section 2.17(a).
 
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2.19. General Loan Funding Terms; Pro Rata Treatment and Payments .
(a) Each Construction Loan Notice of Borrowing and the Notice of Term Conversion shall be delivered to the Administrative Agent in accordance with the notice provisions of Section 10.2. The Administrative Agent shall promptly notify each Lender, and, if applicable, the Issuing Bank and each Fixed Rate Note Holder, of the contents of such notices.
(i) No later than 11:00 a.m., New York time, on a date of a requested Borrowing of First Phase Construction Loans set forth in a timely delivered Construction Loan Notice of Borrowing, if the applicable conditions precedent listed in Section 4.2 have been satisfied or waived, each Lender shall make available the First Phase Construction Loans requested in the Construction Loan Notice of Borrowing in Dollars by deposit into an account with the Administrative Agent in immediately available funds. The Administrative Agent shall deposit such funds into the Disbursement Account.
(ii) No later than 11:00 a.m., New York time, on a date of a requested Borrowing of Second Phase Construction Loans set forth in a timely delivered Construction Loan Notice of Borrowing, if the applicable conditions precedent listed in Section 4.3 have been satisfied or waived, each Lender shall make available the Second Phase Construction Loans requested in the Construction Loan Notice of Borrowing in Dollars by deposit into an account with the Administrative Agent in immediately available funds. The Administrative Agent shall deposit such funds into the Disbursement Account.
(iii) Subject to the satisfaction of the conditions precedent set forth in Section 4.4, no later than 11:00 a.m., New York time, on the date of the requested Term Conversion set forth in a timely delivered Notice of Term Conversion, each Lender shall make available its Proportionate Share of the Term Loans in the amount equal to the aggregate amount of the Construction Loans being Term Converted, as requested in the relevant Notice of Term Conversion, in Dollars in immediately available funds. The making of such Term Loans shall be effected by each Lender converting to a Term Loan the unpaid principal amount of its Construction Loans in accordance with Section 2.4(a) and Section 2.5.
(b) Each Borrowing by the Borrower from the Lenders hereunder and each payment by the Borrower on account of any commitment fee shall be made pro rata according to the respective Proportionate Shares of such Loans, as the case may be, of the relevant Lenders; provided that on any Borrowing Date subsequent to the L/C Termination Date, Borrowings shall be allocated among the Lenders, including the Issuing Bank, in its capacity as a Lender, so that after giving effect to such Borrowings in so near as is practicable, Construction Loans are held by the Lenders (including the Issuing Bank, in its capacity as Lender) in pro rata proportion to the Construction Loan Commitments of the Lenders (including the Issuing Bank, in its capacity as a Lender).
(c) Each payment (including each prepayment) by the Borrower on account of principal of and interest on the Construction Loans, Term Loans, or reimbursement obligations in respect of Letters of Credit shall be made pro rata according to the respective outstanding principal amounts of such Loans then held by the Lenders or the Issuing Bank, as applicable. Amounts prepaid on account of the Construction Loans and Term Loans may not be re-borrowed.
 
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All payments (including prepayments) to be made by the Borrower hereunder, whether on account of principal, interest, fees or otherwise, shall be made without set-off or counterclaim and shall be made prior to 12:00 Noon, New York time, on the due date thereof to the Administrative Agent for the account of each Agent, each Lender and the Issuing Bank (as the case may be) at its account identified in Annex 1 from time to time, in Dollars and in immediately available funds. The Administrative Agent shall distribute such payments to each relevant Person promptly upon receipt in like funds as received, net of any amounts owing by such Lender pursuant to Section 10.9. If any payment hereunder (other than payments on the LIBOR Loans) becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day without including the additional days elapsed in the calculation of amounts owed on such next succeeding Business Day; provided that if the Term Loan Maturity Date is on a day other than a Business Day, the payment due on the next succeeding Business Day shall include the additional days elapsed for purposes of calculating the amounts owed on such day. In the case of any extension of any payment of principal pursuant to the preceding sentence or the definition of Interest Period, interest thereon shall be payable at the then applicable rate during such extension.
(d) Unless the Administrative Agent shall have been notified in writing by any Lender prior to a Borrowing that such Lender will not make the amount that would constitute its share of such Borrowing available to the Administrative Agent, the Administrative Agent may assume that such Lender is making such amount available to the Administrative Agent, and the Administrative Agent may (but shall not be obligated to), in reliance upon such assumption, make available to the Borrower a corresponding amount. If such amount is not made available to the Administrative Agent by the required time on the Borrowing Date therefor, such Lender shall pay to the Administrative Agent, on demand, such amount with interest thereon, at a rate equal to the greater of (i) the Federal Funds Effective Rate and (ii) a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation, for the period until such Lender makes such amount immediately available to the Administrative Agent. A certificate of the Administrative Agent submitted to any Lender with respect to any amounts owing under this paragraph shall be conclusive in the absence of manifest error. If such Lender’s share of such Borrowing is not made available to the Administrative Agent by such Lender within three (3) Business Days after such Borrowing Date, the Administrative Agent shall also be entitled to recover such amount with interest thereon at the rate per annum applicable to Base Rate Loans, on demand, from the Borrower.
(e) Unless the Administrative Agent shall have been notified in writing by the Borrower prior to the date of any payment due to be made by the Borrower hereunder that the Borrower will not make such payment to the Administrative Agent, the Administrative Agent may assume that the Borrower is making such payment, and the Administrative Agent may, but shall not be required to, in reliance upon such assumption, make available to the Lenders their
 
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respective pro rata shares of a corresponding amount. If such payment is not made to the Administrative Agent by the Borrower within three (3) Business Days after such due date, the Administrative Agent shall be entitled to recover, on demand, from each Lender to which any amount which was made available pursuant to the preceding sentence, such amount with interest thereon at the rate per annum equal to the daily average Federal Funds Effective Rate. Nothing herein shall be deemed to limit the rights of the Administrative Agent or any Lender against the Borrower.
(f) If any Lender shall fail to make any payment required to be made by it pursuant to Section 2.19(e) or 10.8, then the Administrative Agent may, in its discretion (notwithstanding any contrary provision of this Agreement), apply any amounts thereafter received by the Administrative Agent or the Issuing Bank for the account of such Lender to satisfy such Lender’s obligations under such Sections until all such unsatisfied obligations are fully paid.
2.20. Inability to Determine Interest Rate . If prior to the first day of any Interest Period:
(a) the Administrative Agent shall have determined (which determination shall be conclusive and binding upon the Borrower) that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the LIBOR Rate for such Interest Period, or
(b) the Administrative Agent shall have received notice from the Required Financing Parties that the LIBOR Rate determined or to be determined for such Interest Period will not adequately and fairly reflect the cost to such Financing Parties (as conclusively certified by such Financing Parties) of making or maintaining their affected Loans during such Interest Period, the Administrative Agent shall give telecopy or telephonic notice thereof to the Borrower and the relevant Financing Parties as soon as practicable thereafter. If such notice is given (x) any LIBOR Loans requested to be made on the first day of such Interest Period shall be made as Base Rate Loans, (y) any Loans that were to have been converted on the first day of such Interest Period to LIBOR Loans shall be continued as Base Rate Loans and (z) any outstanding LIBOR Loans shall be converted, on the last day of the then-current Interest Period, to Base Rate Loans. Until such notice has been withdrawn by the Administrative Agent (at the direction or with the consent of such notifying Lenders), no further LIBOR Loans shall be made or continued as such, nor shall the Borrower have the right to convert Loans to LIBOR Loans.
2.21. Legal Requirements .
(a) If the adoption of or any change in any Legal Requirement or in the interpretation or application thereof or compliance by any Financing Party with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority made subsequent to the date hereof:
(i) shall subject any Financing Party to any tax of any kind whatsoever with respect to this Agreement, the Fixed Rate Notes or any LIBOR Loan made by it, or change the basis of taxation of payments to such Financing Party in respect thereof (except for Non-Excluded Taxes covered by Section 2.22 and changes in the net income tax rate or franchise tax rate of such Financing Party);
 
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(ii) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of such Financing Party that is not otherwise included in the determination of the LIBOR Rate; or
(iii) shall impose on such Financing Party any other condition; and the result of any of the foregoing is to increase the cost to such Financing Party, by an amount that such Financing Party deems to be material, of making, converting into, continuing or maintaining LIBOR Loans or the Fixed Rate Notes or to reduce any amount receivable hereunder in respect thereof, then, in any such case, the Borrower shall promptly pay such Financing Party, upon its demand, any additional amounts necessary to compensate such Financing Party for such increased cost or reduced amount receivable. If any Financing Party becomes entitled to claim any additional amounts pursuant to this paragraph, it shall promptly notify the Borrower (with a copy to the Administrative Agent) of the event by reason of which it has become so entitled.
(b) If any Financing Party shall have determined that the adoption of or any change in any Legal Requirement regarding capital adequacy or in the interpretation or application thereof or compliance by such Financing Party or any corporation controlling such Financing Party with any request or directive regarding capital adequacy (whether or not having the force of law) from any Governmental Authority made subsequent to the date hereof shall have the effect of reducing the rate of return on such Financing Party’s or such corporation’s capital as a consequence of its obligations hereunder to a level below that which such Financing Party or such corporation could have achieved but for such adoption, change or compliance (taking into consideration such Financing Party’s or such corporation’s policies with respect to capital adequacy) by an amount deemed by such Financing Party to be material, then from time to time, after submission by such Financing Party to the Borrower (with a copy to the Administrative Agent) of a written request therefor, the Borrower shall pay to such Financing Party such additional amount or amounts as will compensate such Financing Party or such corporation for such reduction.
(c) A certificate describing in reasonable detail the basis and calculation of any additional amounts payable pursuant to this Section submitted by any Financing Party to the Borrower (with a copy to the Administrative Agent) shall be conclusive in the absence of manifest error. Notwithstanding anything to the contrary in this Section, the Borrower shall not be required to compensate a Financing Party pursuant to this Section for any amounts incurred more than nine (9) months prior to the date that such Financing Party notifies the Borrower of such Financing Party’s intention to claim compensation therefor; provided that, if the circumstances giving rise to such claim have a retroactive effect, then such nine-month period shall be extended to include the period of such retroactive effect. The obligations of the Borrower pursuant to this Section shall survive the termination of this Agreement, the payment of the Loans, the redemption of the Fixed Rate Notes and all other amounts payable hereunder.
 
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For the avoidance of doubt, this Section 2.21 shall apply to all requests, rules, guidelines or directives concerning capital adequacy issued in connection with the Dodd-Frank Wall Street Reform and Consumer Protection Act, regardless of the date adopted, issued, promulgated or implemented and this Section shall apply to all requests, rules, guidelines or directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the United States regulatory authorities, in each case pursuant to Basel III, regardless of the date enacted, adopted or issued or implemented.
2.22. Taxes . (a) All payments made by or on behalf of the Borrower under this Agreement or any other Financing Document shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority, excluding net income taxes and franchise taxes (imposed in lieu of net income taxes) imposed on the Administrative Agent or any Financing Party as a result of a present or former connection between the Administrative Agent or such Financing Party and the jurisdiction of the Governmental Authority imposing such tax or any political subdivision or taxing authority thereof or therein (other than any such connection arising solely from the Administrative Agent or such Financing Party having executed, delivered or performed its obligations or received a payment under, or enforced, this Agreement or any other Financing Document)(“ Excluded Taxes ”); provided that, if any such non-excluded taxes, levies, imposts, duties, charges, fees, deductions or withholdings (“ Non-Excluded Taxes ”) or Other Taxes are required to be withheld from any amounts payable to the Administrative Agent or any Financing Party hereunder, (i) the amounts so payable by the applicable Borrower to the Administrative Agent or such Financing Party shall be increased to the extent necessary to yield to the Administrative Agent or such Financing Party (after payment of all Non-Excluded Taxes and Other Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement as if such withholding or deduction had not been made and (ii) if such Non-Excluded Taxes or Other Taxes are required to be paid by the Borrower, the Borrower shall pay such amounts to the relevant Governmental Authority in accordance with applicable law; provided , however , that the Borrower shall not be required to increase any such amounts payable to any Financing Party with respect to any Non-Excluded Taxes (i) that are attributable to such Financing Party’s failure to comply with the requirements of paragraph (f) or (g) of this Section, (ii) that are United States withholding taxes imposed on amounts payable to such Financing Party at the time such Financing Party becomes a party to this Agreement, except to the extent that such Financing Party’s assignor (if any) was entitled, at the time of assignment, to receive additional amounts from the Borrower with respect to such Non-Excluded Taxes pursuant to this paragraph, (iii) that are imposed pursuant to FATCA or (iv) that are United States withholding taxes to the extent imposed as a result of the Administrative Agent or any Financing Party voluntarily designating a different Lending Office (other than at the request of the Borrower or any of its Affiliates), except to the extent that the Administrative Agent or such Financing Party was entitled, immediately prior to the designation, to receive additional amounts from the Borrower with respect to such Non-Excluded Taxes pursuant to this paragraph.
 
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(b) In addition, the Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law.
(c) The Borrower shall indemnify the Administrative Agent, and each Financing Party, within fifteen (15) days after written demand therefor, for the full amount of any Non-Excluded Taxes or Other Taxes (including Non-Excluded Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section 2.22) paid by the Administrative Agent or such Financing Party and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Non-Excluded Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority; provided that the Borrower will not be obligated to indemnify the Administrative Agent or Financing Party for any penalties, interest or expenses directly related to Non-Excluded Taxes or Other Taxes, but only to the extent such penalties, interest or expenses are directly and solely caused by and arise from the indemnitee’s gross negligence, willful misconduct or material breach of its obligations hereunder, as determined by a final, non-appealable judgment of a court of competent jurisdiction. The Administrative Agent and each Financing Party agree to use reasonable efforts to give notice to the Borrower of the assertion of any claim against the Administrative Agent or such Financing Party, as applicable, relating to such Non-Excluded Taxes or Other Taxes reasonably promptly after the principal officer of the Administrative Agent or such Financing Party responsible for administering this Agreement has actual knowledge of such claim; provided that the Administrative Agent’s or such Financing Party’s failure to notify Borrower of such assertion shall not relieve Borrower of its obligation under this Section 2.22(c). A certificate as to the amount of such payment or liability delivered to the Borrower by a Financing Party (with a copy to the Administrative Agent) or by the Administrative Agent on its own behalf shall be conclusive absent manifest error.
(d) Whenever any Non-Excluded Taxes or Other Taxes are payable by the Borrower, as promptly as possible thereafter the Borrower shall send to the Administrative Agent for its own account or for the account of the relevant Financing Party, as the case may be, a certified copy of an original official receipt received by the Borrower showing payment thereof or such other evidence of payment that is reasonably satisfactory to the Administrative Agent or the relevant Financing Party. If the Borrower fails to pay any Non-Excluded Taxes or Other Taxes when due to the appropriate taxing authority or fails to remit to the Administrative Agent the required receipts or other required documentary evidence, the Borrower shall indemnify the Administrative Agent and the Financing Parties for such amounts and any incremental taxes, interest or penalties that may become payable by the Administrative Agent or any Financing Party as a result of any such failure.
(e) Each Financing Party shall indemnify the Administrative Agent for any Excluded Taxes attributable to such Financing Party and that are payable or paid by the Administrative Agent, together with any penalties, interest and reasonable expenses arising therefrom or with respect thereto, as determined by the Administrative Agent in good faith. A certificate as to the amount of such payment or liability delivered to any Financing Party by the Administrative Agent shall be conclusive absent manifest error.
 
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(f) To the extent required by this paragraph (f) of Section 2.22, each Financing Party (or Transferee) shall deliver to the Borrower and the Administrative Agent (or, in the case of a Participant, to the Financing Party from which the related participation shall have been purchased) either (A) if such Financing Party or Transferee is a “United States Person” as defined in Section 7701(a)(30) of the Code (a “ U.S. Financing Party ”) (other than a corporation established under the laws of the United States or any political subdivision thereof or other exempt holders that so certify), two copies of a U.S. Internal Revenue Service Form W-9 or any successor form, properly completed and duly executed by such U.S. Financing Party or (B) if such Financing Party or Transferee is not a U.S. Financing Party (a “ Non-U.S. Financing Party ”), (i) two copies of either U.S. Internal Revenue Service Form W-8BEN, Form W-8IMY or Form W-8ECI (together with any applicable underlying Internal Revenue Service forms), (ii) in the case of a Non-U.S. Financing Party claiming exemption from U.S. federal withholding tax under Section 871(h) or 881(c) of the Code with respect to payments of “portfolio interest”, a statement substantially in the form of Exhibit E-1, E-2, E-3 or E-4, as applicable, and the applicable Internal Revenue Service Form W-8, or any subsequent versions thereof or successors thereto, properly completed and duly executed by such Non-U.S. Financing Party claiming complete exemption from, or a reduced rate of, U.S. federal withholding tax on all payments under this Agreement and the other Financing Documents or (iii) any other form prescribed by applicable requirements of U.S. federal income tax law as a basis for claiming exemption from or a reduction in U.S. federal withholding tax duly completed together with such supplementary documentation as may be prescribed by applicable requirements of law to permit the Borrower and the Administrative Agent to determine the withholding or deduction required to be made. Such forms shall be delivered by each U.S. Financing Party or Non-U.S. Financing Party on or before the date it becomes a party to this Agreement (or, in the case of any Participant, on or before the date such Participant purchases the related participation). In addition, each U.S. Financing Party or Non-U.S. Financing Party shall deliver such forms promptly upon the obsolescence or invalidity of any form previously delivered by such Financing Party, and shall deliver extensions or renewals thereof as may reasonably be requested by the Borrower or the Administrative Agent. Each U.S. Financing Party or Non-U.S. Financing Party shall promptly notify the Borrower and the Administrative Agent at any time it determines that it is no longer in a position to provide any previously delivered certificate to the Borrower (or any other form of certification adopted by the U.S. taxing authorities for such purpose). Notwithstanding any other provision of this paragraph, a U.S. Financing Party or Non-U.S. Financing Party shall not be required to deliver any form pursuant to this paragraph that such Financing Party is not legally able to deliver. If a payment made to a Financing Party under this Agreement would be subject to U.S. Federal withholding tax imposed by FATCA if such Financing Party were to fail to comply with the applicable reporting requirements of FATCA (including those contained in Section 1471(b) or 1472(b) of the Code, as applicable), such Financing Party shall deliver to the Borrower and the Administrative Agent, at the time or times prescribed by law and at such time or times reasonably requested by the Borrower or the Administrative Agent, such documentation prescribed by applicable law (including as prescribed by Section 1471(b)(3)(C)(i) of the Code) and such additional documentation reasonably requested by the Borrower or the Administrative Agent as may be necessary for the Borrower or the Administrative Agent to comply with its obligations under FATCA, to determine that such Financing Party has or has not complied with such Financing Party’s obligations under FATCA or to determine the amount to deduct and withhold from such payment. Solely for purposes of this Section 2.22(f), “FATCA” shall include any amendments made to FATCA after the date of this Agreement.
 
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(g) A Financing Party that is entitled to an exemption from or reduction of non-U.S. withholding tax under the law of the jurisdiction in which the Borrower is located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to the Borrower (with a copy to the Administrative Agent), at the time or times prescribed by applicable law or reasonably requested by the Borrower or the Administrative Agent, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate, provided that such Financing Party is legally entitled to complete, execute and deliver such documentation and in such Financing Party’s judgment such completion, execution or submission would not materially prejudice the legal or commercial position of such Financing Party.
(h) If the Administrative Agent or any Financing Party determines, in its sole discretion, that it has received a refund of any Non-Excluded Taxes or Other Taxes as to which it has been indemnified by the Borrower or with respect to which the Borrower has paid additional amounts pursuant to this Section 2.22, it shall pay over such refund to the Borrower (but only to the extent of indemnity payments made, or additional amounts paid, by the Borrower under this Section 2.22 with respect to the Non-Excluded Taxes or Other Taxes giving rise to such refund), net of all reasonable out-of-pocket expenses of the Administrative Agent or such Financing Party and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund); provided , that the Borrower, upon the request of the Administrative Agent or such Financing Party, agrees to repay the amount paid over to the Borrower (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) to the Administrative Agent or such Financing Party in the event the Administrative Agent or such Financing Party is required to repay such refund to such Governmental Authority. This paragraph shall not be construed to require the Administrative Agent or any Financing Party to make available its tax returns (or any other information relating to its taxes which it deems confidential) to the Borrower or any other Person.
(i) The agreements in this Section 2.22 shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder.
2.23. Indemnity . The Borrower agrees to indemnify each Financing Party for, and to hold each Financing Party harmless from, any loss or expense that such Financing Party may sustain or incur as a consequence of (a) default by the Borrower in making a borrowing of, conversion into or continuation of LIBOR Loans after the Borrower has given a notice requesting the same in accordance with the provisions of this Agreement, (b) default by the Borrower in making any prepayment of or conversion from LIBOR Loans after the Borrower has given a notice thereof in accordance with the provisions of this Agreement or (c) the making of a prepayment of LIBOR Loans on a day that is not the last day of an Interest Period with respect thereto (“ Breakage Costs ”). Such indemnification may include an amount equal to the excess, if any, of (i) the amount of interest that would have accrued on the amount so prepaid, or not so borrowed, converted or continued, for the period from the date of such prepayment or of such failure to borrow, convert or continue to the last day of such Interest Period (or, in the case of a
 
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failure to borrow, convert or continue, the Interest Period that would have commenced on the date of such failure) in each case at the applicable rate of interest for such Loans provided for herein (excluding, however, the Applicable Margin included therein, if any) over (ii) the amount of interest (as reasonably determined by such Financing Party) that would have accrued to such Financing Party on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank eurodollar market. A certificate as to any amounts payable pursuant to this Section submitted to the Borrower by any Financing Party shall be conclusive in the absence of manifest error. This covenant shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder.
2.24. Change of Lending Office . Each Lender agrees that, upon the occurrence of any event giving rise to the operation of Section 2.21 or 2.22(a) with respect to such Lender, it will, if requested by the Borrower, use reasonable efforts (subject to overall policy considerations of such Lender) to designate another lending office for any Loans affected by such event with the object of avoiding the consequences of such event; provided , that such designation is made on terms that, in the sole judgment of such Lender, cause such Lender and its lending office(s) to suffer no economic, legal or regulatory disadvantage; and provided , further , that nothing in this Section shall affect or postpone any of the obligations of the Borrower or the rights of any Lender pursuant to Section 2.21 or 2.22(a).
2.25. Incremental Facilities . (a) The Borrower and any one or more Lenders (including New Lenders) may from time to time during the Construction Loan Availability Period agree that due to Additional Costs and Expenses of the Borrower, such Lenders shall make or increase the amount of their Loans (the “ Incremental Loans ”) by executing and delivering to the Administrative Agent an Increased Facility Activation Notice specifying (i) the amount of such Incremental Loans, (ii) the proposed Increased Facility Closing Date, (iii) the applicable Incremental Term Maturity Date and (iv) the Applicable Margin for such Incremental Loans. Notwithstanding the foregoing, (i) without the consent of the Required Financing Parties, the aggregate amount of borrowings of Incremental Loans shall not exceed $75,000,000 and (ii) without the consent of the Administrative Agent, each increase effected pursuant to this paragraph shall be in a minimum amount of $15,000,000 or, if less, the remaining amount permitted to be borrowed under the proceeding clause (i). Increased Facility Closing Dates may be selected by the Borrower. The Lenders party hereto shall have a “right of first refusal” with respect to any proposed Incremental Facility exercisable during the fifteen (15) Business Day period commencing on the date the Borrower notifies the Administrative Agent that it intends to create an Incremental Facility, it being understood that that no Lender shall have any obligation to participate in any new Incremental Facility unless it agrees to do so in its sole discretion. The effectiveness of any Incremental Facility shall be subject to receipt by the Administrative Agent of (i) additional equity provided by the Founding Equity Investors in an amount not less than 30% of such Additional Costs and Expenses, (ii) a certificate of the Independent Engineer certifying that such Additional Costs and Expenses are consistent and in accordance with Good Utility Practice and (iii) a certificate of the Borrower certifying that no Default or Event of Default has occurred and is continuing or would occur as a result of the effectiveness of such Incremental Facility.
 
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(b) Any additional bank, financial institution or other entity which, with the consent of the Administrative Agent (which consent shall not be unreasonably withheld), elects to become a “Lender” under this Agreement in connection with any transaction described in Section 2.25(a) shall execute a New Lender Supplement (each, a “ New Lender Supplement ”), substantially in the form of Exhibit J, whereupon such bank, financial institution or other entity (a “ New Lender ”) shall become a Lender for all purposes and to the same extent as if originally a party hereto and shall be bound by and entitled to the benefits of this Agreement. Each New Lender Supplement shall specify the terms of the applicable Incremental Facility; provided that other than with respect to margin, pricing, or fees, the Incremental Loans shall have the same terms as the Construction Loans issued hereunder.
(c) Notwithstanding anything to the contrary in this Agreement, each of the parties hereto hereby agrees that, on each Increased Facility Activation Date, this Agreement shall be amended to the extent (but only to the extent) necessary to reflect the existence and terms of the Incremental Loans evidenced thereby. Any such deemed amendment may be effected in writing by the Administrative Agent with the Borrower’s consent (not to be unreasonably withheld) and furnished to the other parties hereto.
2.26. Replacement of Lenders . The Borrower shall be permitted to replace any Lender that (a) requests reimbursement for amounts owing pursuant to Section 2.21 or 2.22, (b) becomes a Defaulting Lender, or (c) does not consent to any proposed amendment, supplement, modification, consent or waiver of any provision of this Agreement or any other Financing Document that requires the consent of each of the Financing Parties or each of the Financing Parties affected thereby (so long as the consent of the Required Financing Parties has been obtained), with a replacement financial institution; provided that (i) such replacement does not conflict with any Legal Requirement, (ii) no Event of Default shall have occurred and be continuing at the time of such replacement, (iii) prior to any such replacement, such Lender shall have taken no action under Section 2.24 so as to eliminate the continued need for payment of amounts owing pursuant to Section 2.21 or 2.22, (iv) the replacement financial institution shall purchase, at par, all Loans and other amounts owing to such replaced Lender on or prior to the date of replacement, (v) the Borrower shall be liable to such replaced Lender under Section 2.23 if any LIBOR Loan owing to such replaced Lender shall be purchased other than on the last day of the Interest Period relating thereto, (vi) the replacement financial institution shall be reasonably satisfactory to the Administrative Agent, (vii) the replaced Lender shall be obligated to make such replacement in accordance with the provisions of Section 10.7 ( provided that the Borrower shall be obligated to pay the registration and processing fee referred to therein), (viii) until such time as such replacement shall be consummated, the Borrower shall pay all additional amounts (if any) required pursuant to Section 2.21 or 2.22, as the case may be, and (ix) any such replacement shall not be deemed to be a waiver of any rights that the Borrower, the Administrative Agent or any Financing Party shall have against the replaced Lender.
2.27. Defaulting Lenders . Notwithstanding any provision of this Agreement to the contrary, if any Lender becomes a Defaulting Lender, then the following provisions shall apply for so long as such Lender is a Defaulting Lender:
(a) fees shall cease to accrue on the Commitment of such Defaulting Lender pursuant to Section 2.10(c);
 
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(b) the Commitment of such Defaulting Lender shall not be included in determining whether the Required Financing Parties have taken or may take any action hereunder (including any consent to any amendment, waiver or other modification pursuant to Section 10.1); provided , that this clause (b) shall not apply to the vote of a Defaulting Lender in the case of an amendment, waiver or other modification requiring the consent of such Lender or each Lender affected thereby;
(c) Such Defaulting Lender’s right to approve or disapprove any amendment, waiver or consent with respect to this Agreement shall be restricted as set forth in the definition of Required Financing Parties.
(d) Any payment of principal, interest, fees or other amounts received by the Administrative Agent for the account of such Defaulting Lender or received by the Administrative Agent from a Defaulting Lender shall be applied at such time or times as may be determined by the Administrative Agent as follows: first , to the payment of any amounts owing by such Defaulting Lender to the Administrative Agent hereunder; second , to the funding of any Loan in respect of which such Defaulting Lender has failed to fund its portion thereof as required by this Agreement, as determined by the Administrative Agent; third , if so determined by the Administrative Agent and the Borrower, to be held in a deposit account and released pro rata in order to satisfy such Defaulting Lender’s potential future funding obligations with respect to Loans under this Agreement; fourth , to the payment of any amounts owing to the Lenders as a result of any judgment of a court of competent jurisdiction obtained by any Lender against such Defaulting Lender as a result of such Defaulting Lender’s breach of its obligations under this Agreement; fifth , so long as no Default exists, to the payment of any amounts owing to the Borrower as a result of any judgment of a court of competent jurisdiction obtained by the Borrower against such Defaulting Lender as a result of such Defaulting Lender’s breach of its obligations under this Agreement; and sixth , to such Defaulting Lender or as otherwise directed by a court of competent jurisdiction; provided that if (x) such payment is a payment of the principal amount of any Loans in respect of which such Defaulting Lender has not fully funded its appropriate share and (y) such Loans were made at a time when the applicable conditions set forth in Article 4 were satisfied and waived, such payment shall be applied solely to pay the Loans of all Non-Defaulting Lenders on a pro rata basis prior to being applied to the payment of any Loans of such Defaulting Lender until such time as all Loans are held by the Lenders in accordance with their respective shares of the Commitment. Any payments, prepayments or other amounts paid or payable to a Defaulting Lender that are applied (or held) to pay amounts owed by a Defaulting Lender pursuant to this Section shall be deemed paid to and redirected by such Defaulting Lender, and each Lender irrevocably consents hereto.
In the event that the Administrative Agent and the Borrower each agrees that a Defaulting Lender has adequately remedied all matters that caused such Lender to be a Defaulting Lender, then on such date such Lender shall purchase at par such of the Loans of the other Lenders as the Administrative Agent shall determine may be necessary in order for such Lender to hold such Loans in accordance with its Proportionate Share.
 
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ARTICLE 3.
LETTERS OF CREDIT
3.1. L/C Commitment . (a) Subject to the terms and conditions hereof, the Issuing Bank, agrees to issue letters of credit (“ Letters of Credit ”) for the account of the Borrower on any Business Day, but not more often than twice in a calendar month, during the Construction Loan Availability Period in such form as may be approved from time to time by the Issuing Bank; provided that the Issuing Bank shall have no obligation to issue, amend or extend any Letter of Credit if, after giving effect to such issuance, (i) the L/C Obligations would exceed the L/C Commitment or (ii) the aggregate amount of the Construction Loan Commitments would be less than zero. Each Letter of Credit shall (i) be denominated in Dollars and (ii) expire no later than the earlier of (x) the first anniversary of its date of issuance and (y) the date that is five Business Days prior to the Availability Expiration Date; provided that any Letter of Credit with a one-year term may provide for the renewal thereof for additional one-year periods (which shall in no event extend beyond the date referred to in clause (y) above).
(b) The Issuing Bank shall not at any time be obligated to issue any Letter of Credit if such issuance would conflict with, or cause the Issuing Bank to exceed any limits imposed by, any applicable Legal Requirement.
3.2. Procedure for Issuance of Letter of Credit . The Borrower may from time to time, but not more often than twice in a calendar month, request that the Issuing Bank issue a Letter of Credit by delivering to the Issuing Bank at its address for notices specified herein an Application therefor, with a copy of such Application to be simultaneously delivered to the Administrative Agent, completed to the satisfaction of the Issuing Bank, and such other certificates, documents and other papers and information as the Issuing Bank may reasonably request. Upon receipt of any Application, the Issuing Bank will process such Application and the certificates, documents and other papers and information delivered to it in connection therewith in accordance with its customary procedures and shall promptly issue the Letter of Credit requested thereby (but in no event shall the Issuing Bank be required to issue any Letter of Credit earlier than three Business Days after its receipt of the Application therefor and all such other certificates, documents and other papers and information relating thereto) by issuing the original of such Letter of Credit to the beneficiary thereof or as otherwise may be agreed to by the Issuing Bank and the Borrower. The Issuing Bank shall furnish a copy of such Letter of Credit to the Borrower promptly following the issuance thereof. The Issuing Bank shall promptly furnish to the Administrative Agent notice of the issuance of each Letter of Credit (including the amount thereof).
3.3. Fees and Other Charges . (a) The Borrower shall pay to the Issuing Bank for its own account a commitment fee for the period from and including the date hereof to but excluding the L/C Termination Date, computed at the Commitment Fee Rate on the average daily unused amount of the L/C Commitment during the period for which payment is made (the “ L/C Commitment Fees ” and, together with the Construction Loan Commitment Fees, the “ Commitment Fees ”), payable on each Fee Payment Date until and including the L/C Termination Date (or, if the L/C Commitment is cancelled or expires prior to a Fee Payment Date, on the date of such cancellation or expiration).
 
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(b) The Borrower will pay a fee to the Issuing Bank for its own account on all outstanding Letters of Credit at a per annum rate equal to the Applicable Margin then in effect with respect to LIBOR Loans on the undrawn and unexpired amount of each Letter of Credit, payable quarterly in arrears on each Fee Payment Date after the issuance date. In addition to the foregoing fees, the Borrower shall pay or reimburse the Issuing Bank for such normal and customary costs and expenses as are incurred or charged by the Issuing Bank in issuing, negotiating, effecting payment under, amending or otherwise administering any Letter of Credit.
3.4. Reimbursement Obligation of the Borrower . If any draft is paid under any Letter of Credit, the Borrower shall reimburse the Issuing Bank for the amount of (a) the draft so paid and (b) any taxes, fees, charges or other costs or expenses incurred by the Issuing Bank in connection with such payment, not later than 12:00 Noon, New York time, on (i) the Business Day that the Borrower receives notice of such draft, if such notice is received on such day prior to 10:00 A.M., New York time, or (ii) if clause (i) above does not apply, the Business Day immediately following the day that the Borrower receives such notice. Each such payment shall be made to the Issuing Bank at its address for notices referred to herein in Dollars and in immediately available funds. Interest shall be payable on any such amounts from the date on which the relevant draft is paid until payment in full at the rate set forth in (x) until the Business Day next succeeding the date of the relevant notice, Section 2.17(a) and (y) thereafter, Section 2.17(d). If at any time a draft is paid under any Letter of Credit, so long as no Default or Event of Default shall have occurred and be continuing, the Issuing Bank shall be deemed to have made a Construction Loan to the Borrower in an amount equal to the amount of the Reimbursement Obligation in respect thereof, which shall be on the same terms and conditions as all other Construction Loans and the L/C Commitment shall be permanently reduced by the amount of such Construction Loan.
3.5. Obligations Absolute . The Borrower’s obligations under this Section 3 shall be absolute and unconditional under any and all circumstances and irrespective of any set-off, counterclaim or defense to payment that the Borrower may have or have had against the Issuing Bank, any beneficiary of a Letter of Credit or any other Person. The Borrower also agrees with the Issuing Bank that the Issuing Bank shall not be responsible for, and the Borrower’s Reimbursement Obligations under Section 3.4 shall not be affected by, among other things, the validity or genuineness of documents or of any endorsements thereon, even though such documents shall in fact prove to be invalid, fraudulent or forged, or any dispute between or among the Borrower and any beneficiary of any Letter of Credit or any other party to which such Letter of Credit may be transferred or any claims whatsoever of the Borrower against any beneficiary of such Letter of Credit or any such transferee. The Issuing Bank shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit, except for errors or omissions found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of the Issuing Bank. The Borrower agrees that any action taken or omitted by the Issuing Bank under or in connection with any Letter of Credit or the related drafts or documents, if done in the absence of gross negligence or willful misconduct, shall be binding on the Borrower and shall not result in any liability of the Issuing Bank to the Borrower.
 
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3.6. Letter of Credit Payments . If any draft shall be presented for payment under any Letter of Credit, the Issuing Bank shall promptly notify the Borrower and the Administrative Agent of the date and amount thereof. The responsibility of the Issuing Bank to the Borrower in connection with any draft presented for payment under any Letter of Credit shall, in addition to any payment obligation expressly provided for in such Letter of Credit, be limited to determining that the documents (including each draft) delivered under such Letter of Credit in connection with such presentment are substantially in conformity with such Letter of Credit.
3.7. Applications . To the extent that any provision of any Application related to any Letter of Credit is inconsistent with the provisions of this Section 3, the provisions of this Section 3 shall apply.
3.8. Letter of Credit Interest . The Borrower shall pay interest with respect to all Reimbursement Obligations resulting from all drafts pursuant to Section 3.4; provided , however , that, upon the occurrence of any draft, the Borrower shall be deemed to have elected the interest rate based on then-applicable Base Rate. Thereafter, the interest rate applicable thereto may from time to time be LIBOR or Base Rate, as determined by the Borrower and notified to the Administrative Agent in accordance with Section 2.15.
3.9. Cash Collateralization . If any Event of Default shall occur and be continuing, without demand or other notice of any kind, the Borrower shall deposit in an account with the Administrative Agent, in the name of the Administrative Agent and for the benefit of the Issuing Bank, an amount in Dollars in cash equal to the aggregate then undrawn and unexpired amount of such Letters of Credit as of such date plus any accrued and unpaid fees or other amounts due thereon. Each such deposit pursuant to this paragraph shall be held by the Administrative Agent as collateral for the payment and performance of the obligations of the Borrower under this Agreement. The Administrative Agent shall have exclusive dominion and control, including the exclusive right of withdrawal, over such account. Other than any interest earned on the investment of such deposits, which investments shall be made at the option and sole discretion of (i) for so long as an Event of Default shall be continuing, the Administrative Agent and (ii) at any other time, the Borrower, in each case, in Permitted Investments and at the risk and expense of the Borrower, such deposits shall not bear interest. Interest or profits, if any, on such investments shall accumulate in such account. Moneys in such account shall be applied by the Administrative Agent to reimburse the Issuing Bank for payments in respect of drawings for which the Issuing Bank has not been repaid and, to the extent not so applied, shall be held for the satisfaction of the Reimbursement Obligations of the Borrower or, if the maturity of the Loans has been accelerated, be applied to satisfy other obligations of the Borrower under this Agreement. If the Borrower is required to provide an amount of cash collateral hereunder as a result of the occurrence of an Event of Default, such amount (to the extent not applied as aforesaid) shall be returned to the Borrower within three (3) Business Days after all Events of Default have been cured or waived.
 
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ARTICLE 4.
CONDITIONS PRECEDENT
4.1. Conditions Precedent to the Closing Date . The obligation of the Fixed Rate Note Purchasers to purchase the Fixed Rate Notes, the Lenders to make Construction Loans and the Issuing Bank to issue Letters of Credit, is subject to the prior satisfaction of each of the following conditions (unless waived in writing by the Administrative Agent and the Required Financing Parties):
(a) The Administrative Agent shall have received this Agreement, the Fixed Rate Notes and each other Financing Document, duly authorized, executed and entered into by the Borrower, the Fixed Rate Note Purchasers, the Lenders, the Issuing Bank and each of the Agents;
(b) The Administrative Agent shall have received the Base CREZ Budget and the Construction Budget and Schedule (certified as true, correct and complete by a Responsible Officer of the Borrower), in form and substance satisfactory to the Administrative Agent, the Issuing Bank, the Financing Parties and the Independent Engineer;
(c) Each representation and warranty set forth in the Financing Documents is true and correct on the Closing Date (or, if any representation or warranty is stated to have been made as of a specific date, as of such specific date);
(d) No Default or Event of Default shall have occurred and be continuing or will result from the issuance of the Fixed Rate Note;
(e) The Administrative Agent shall have received:
(i) a copy of the certificate of formation, certificate of limited partnership, certificate of registration or other formation documents, including all amendments thereto, of each of the Borrower, the Pledgor, TDC, the Operating Partnership and the General Partner, each certified as of a recent date by the Secretary of State of Texas or Delaware, as applicable, and a certificate as to the good standing of the Borrower as of a recent date from such Secretary of State;
(ii) a certificate of a Responsible Officer, Secretary or Assistant Secretary, or, if applicable, a Managing Member, of each of the Borrower, the Pledgor, TDC, the Operating Partnership and the General Partner, and solely with respect to clauses (B) and (D) below, each Founding Equity Investor, substantially in the form of Exhibit F hereto, dated the Closing Date and certifying (A) that attached thereto is a true and complete copy of the limited liability company operating agreement, bylaws or partnership agreement of such Person (which shall be in form and substance reasonably satisfactory to the Administrative Agent, the other Agents, the Issuing Bank and the Financing Parties), as in effect on the Closing Date and at all times since, as of, or prior to, the date of the resolutions described in clause (B) below, (B) that attached thereto is a true and complete copy of resolutions duly adopted by the appropriate governing entity or body of such Person, authorizing the execution, delivery and performance of the
 
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Operative Documents to which such Person is a party and, the issuance of the Fixed Rate Notes, request for Letters of Credit and the Borrowings of the Loans hereunder and the granting of the Liens contemplated to be granted by the Borrower and the Pledgor under the Security Documents, and that such resolutions have not been modified, rescinded or amended and are in full force and effect, (C) that the articles of incorporation, certificate of formation, certificate of limited partnership, certificate of registration or other formation documents of such Person have not been amended since the date of the last amendment thereto shown on the certificate of good standing furnished pursuant to clause (i) above, (D) as to the incumbency and specimen signature of each officer executing any Operative Document or any other document delivered in connection herewith on behalf of such Person and (E) as to the absence of any pending proceeding for the dissolution or liquidation of such Person or, to the knowledge of such Secretary or Assistant Secretary, threatening the existence of such Person; and
(iii) a certificate of another officer as to the incumbency and specimen signature of the Secretary or Assistant Secretary executing the certificate pursuant to clause (ii) above;
(f) The Administrative Agent shall have received certificates issued by the jurisdiction of formation of the Borrower, the Pledgor, TDC, the Operating Partnership, the General Partner and, to the extent issued by such jurisdiction for any Founding Equity Investor organized outside of the U.S., each Founding Equity Investor, certifying that each such Person is in good standing and is authorized to transact business in such state;
(g) The Administrative Agent shall have received a true, complete and correct copy of each Effective Material Project Document on the Closing Date and any existing supplements or amendments thereto, all of which shall be satisfactory in form and substance to the Administrative Agent, the Issuing Bank and the Financing Parties, such documents shall have been duly authorized, executed and delivered by the parties thereto and shall be in full force and effect on the Closing Date and shall be certified by a Responsible Officer of the Borrower as being true, complete and correct copies and in full force and effect, such delivery to the Administrative Agent to be accompanied by a certificate of a Responsible Officer of the Borrower, that to the best of the Borrower’s knowledge no party to any such Material Project Document is, or but for the passage of time or giving of notice or both will be, in breach of any obligation thereunder which could reasonably be expected to have a Material Adverse Effect;
(h) The Administrative Agent shall have received the results of a recent lien search in each of the jurisdictions where assets of the Borrower are located, and such searches shall reveal no Liens on any of the assets of the Borrower except for Permitted Liens or Liens discharged on or prior to the Closing Date pursuant to documentation satisfactory to the Administrative Agent, the Issuing Bank and the Financing Parties;
(i) To the extent that there is any Mortgaged Property that is Requisite Project Property at the time all other conditions in this Section 4.1 are met:
(i) The Administrative Agent shall have received a Mortgage with respect to each Mortgaged Property, executed and delivered by a duly authorized officer of the Borrower;
 
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(ii) If requested by the Administrative Agent, the Administrative Agent shall have received, and the title insurance company issuing the policy referred to in clause (iii) below (the “ Title Insurance Company ”) shall have received, maps or plats of an as-built survey of each such Mortgaged Property that is a Substation Site, certified to the Administrative Agent and the Title Insurance Company in a manner satisfactory to them, dated a date satisfactory to the Administrative Agent and the Title Insurance Company by an independent professional licensed land surveyor satisfactory to the Administrative Agent and the Title Insurance Company;
(iii) The Administrative Agent shall have received in respect of each such Mortgaged Property that is a Substation Site a mortgagee’s title insurance policy (or policies) or marked up unconditional binder for such insurance, in each case in form and substance satisfactory to the Administrative Agent and shall have received evidence satisfactory to it that all premiums in respect of each such policy, all charges for mortgage recording tax, and all related expenses, if any, have been paid;
(iv) If requested by the Administrative Agent, the Administrative Agent shall have received (A) a policy of flood insurance that (1) covers any Substation Site that is encumbered by any Mortgage and that is shown to be in a flood plain by flood certificates delivered to the Administrative Agent, (2) is written in an amount not less than the portion of the outstanding principal amount of the indebtedness secured by such Mortgage that is reasonably allocable to such Substation Site or the maximum limit of coverage made available with respect to the particular type of property under the National Flood Insurance Act of 1968, whichever is less and (3) has a term ending not sooner than the maturity of the Indebtedness secured by such Mortgage (or such shorter term that is the maximum term then available with respect to the particular type of property under the National Flood Insurance Act of 1968) and (B) confirmation that the Borrower has received the notice required pursuant to Section 208.25(i) of Regulation H of the Board; and
(v) The Administrative Agent shall have received a copy of all recorded documents referred to, or listed as exceptions to title in, the title policy or policies referred to in clause (iii) above and a copy of all other material documents affecting the Substation Sites covered by such title policy or policies.
(j) Each document (including any UCC financing statement) required by the Security Documents or under law or reasonably requested by the Administrative Agent to be filed, registered or recorded in order to create in favor of the Collateral Agent, for the benefit of the Secured Parties, a perfected Lien on the Collateral described therein, prior and superior in right to any other Person (subject only to Permitted Liens that, pursuant to applicable law, are entitled to a higher priority than the Lien of the Collateral Agent) shall be in proper form for filing, registration or recordation;
 
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(k) The Collateral Agent shall have received the certificates representing the Equity Interests in the Borrower pledged pursuant to the Pledge Agreement, together with an undated transfer power for each such certificate executed in blank by a duly authorized officer of the Pledgor;
(l) The Administrative Agent shall have received evidence that all filing, recordation, subscription and inscription fees and all recording and other similar fees, and all recording, stamp and other taxes and other expenses related to such filings, registrations and recordings necessary for and related to the transactions contemplated by this Agreement and the other Financing Documents to be consummated on or prior to the Closing Date have been paid in full (to the extent the obligation to make such payment then exists) by or on behalf of the Borrower or are to be paid in full on the Closing Date;
(m) The Administrative Agent shall have received copies of the Environmental Reports;
(n) The Administrative Agent shall have received the Independent Engineer’s report, dated June 14, 2011 (in form and substance acceptable to the Administrative Agent, the Issuing Bank and the Financing Parties) of its satisfactory review of the Project, such review confirming, without limitation, the reasonableness of operating costs, the adequacy of the proposed construction contingency, the useful life estimate for the Project, technical aspects of the Project, including the adequacy of the proposed construction budget and the construction plan, the equipment and the proposed civil, mechanical and electrical works, confirming the adequacy of the Environmental Reports and any remediation programs necessary for the Project, the Material Project Documents and the ability of the counterparties to execute construction schedule in a timely manner;
(o) The Administrative Agent shall have received the Project Management Agreement in form and substance satisfactory to the Administrative Agent;
(p) The Administrative Agent shall have received the Financial Model, including satisfactory projections through 2020;
(q) The Administrative Agent shall have received the (i) unaudited consolidated financial statements of the Borrower and audited consolidated financial statements of each of the Pledgor, TDC, SU, the Operating Partnership and the General Partner, in each case, for the fiscal year ended December 31, 2010 and (ii) unaudited interim consolidated financial statements of each of the Borrower (certified by a Responsible Officer thereof), Pledgor, TDC, SU, the Operating Partnership and the General Partner for each fiscal quarter ended after the date of the latest applicable financial statements delivered pursuant to clause (i) of this paragraph as to which such financial statements are available, and the financial statements delivered pursuant to clauses (i) and (ii) shall not, in the reasonable judgment of the Financing Parties, reflect any material adverse change in the consolidated financial condition of the Borrower, the Pledgor, TDC, SU, the Operating Partnership and the General Partner as reflected in the financial statements;
 
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(r) The Borrower shall have disclosed to the Financing Parties all agreements, instruments and corporate or other restrictions to which it is subject on the Closing Date, and all other matters known to it, that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. None of the reports, financial statements, certificates or other information furnished by or on behalf of the Borrower to the Administrative Agent, the Issuing Bank or any Financing Party in connection with the negotiation of this Agreement or any other Financing Document (as modified or supplemented by other information so furnished) shall have contained any material misstatement of fact or omitted to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, and taken as a whole, not misleading; provided that, with respect to projected financial information, the Borrower shall have certified only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time delivered and, if such projected financial information was delivered prior to the Closing Date, as of the Closing Date;
(s) The Administrative Agent shall have received the following opinions, dated the Closing Date, of:
(i) Mayer Brown LLP, counsel for the Borrower, in form and substance satisfactory to the Administrative Agent, the Issuing Bank and the Financing Parties, and addressing such matters as the Administrative Agent may request, including the Financing Documents and the CREZ Master Lease (as to the Borrower and SU) and a conforming ACIC Opinion;
(ii) Sutherland Asbill & Brennan LLP, special counsel for the Borrower, in form and substance satisfactory to the Administrative Agent, the Issuing Bank and the Financing Parties, and addressing such matters as the Administrative Agent may request, including federal utility and regulatory matters relevant to the Borrower and the Project, and other federal and state matters relevant to the Borrower and the Project; and
(iii) such other opinions as the Administrative Agent may reasonably request.
(t) No action, suit, proceeding, claim or investigation shall have been instituted or threatened, nor shall any rule, regulation, order, judgment or decree have been issued or proposed to be issued by any Governmental Authority that, (i) could, if such action, suit, proceeding, claim or investigation were adversely determined, reasonably be expected to have a Material Adverse Effect or (ii) solely as a result of the construction, ownership, leasing or operation of the Project or the entering into of any Operative Document or any transaction contemplated hereby or thereby by the Borrower or SU, would cause or deem the Administrative Agent or the other Financing Parties or any Affiliate of any of them to be subject to regulation under the FPA, PUHCA 2005 or any financial, organizational or rate regulation as a “public utility” or “electric utility” under Texas law or under any other state laws and regulations respecting the rates or the financial or organizational regulation of electric utilities;
(u) No event, condition or circumstance that would reasonably be expected to constitute a Material Adverse Effect shall have occurred and be continuing;
 
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(v) The Borrower shall have paid all fees, costs and other expenses and all other amounts then due and payable by the Borrower pursuant to this Agreement, the Fee Letter and the Prudential Letter;
(w) Delivery by the Borrower to the Administrative Agent of all such documentation and information requested by the Administrative Agent and the Financing Parties that are necessary (including the names and addresses of the Borrower) for the Administrative Agent and the Financing Parties to identify the Borrower in accordance with the requirements of the Patriot Act (including the “know your customer” and similar regulations thereunder); and
(x) The Borrower shall have demonstrated with supporting calculation to the reasonable satisfaction of the Administrative Agent that the Debt Service Coverage Ratio calculated on a pro forma basis for each period of four consecutive fiscal quarters from the anticipated Term Conversion Date through the fiscal year ending December 31, 2020 shall not be less than 1.40 to 1.00
(y) A private placement number issued by Standard & Poor’s CUSIP Service Bureau (in cooperation with the SVO) shall have been obtained for the Fixed Rate Note.
(z) At least three Business Days prior to the Closing Date, each Fixed Rate Note Holder shall have received written instructions signed by a Responsible Officer on letterhead of the Borrower specifying (i) the name and address of the transferee bank, (ii) such transferee bank’s ABA number and (iii) the account name and number into which the purchase price for the Fixed Rate Notes is to be deposited.
(aa) The Administrative Agent shall have received the Lessee Consent executed and delivered by SU.
4.2. Conditions Precedent to First Phase Construction Loans and Letters of Credit . The obligation of the Lenders to make First Phase Construction Loans and the Issuing Bank to issue Letters of Credit, is subject to the prior satisfaction of the conditions set forth in Section 4.1 and each of the following conditions (unless waived in writing by the Administrative Agent, the Issuing Bank and the Required Financing Parties):
(a) The Administrative Agent shall have received a duly completed and executed First Phase Construction Loan Notice of Borrowing, which shall include, without limitation, any lien waivers with respect to such requested Borrowing;
(b) Each representation and warranty of the Borrower set forth in the Financing Documents shall be true and correct in all material respects as of the date of such Borrowing or issuance of such Letter of Credit (or, if any representation or warranty is stated to have been made as of a specific date, as of such specific date);
(c) No Default or Event of Default shall have occurred and be continuing or shall occur as a result of the Borrowing of such First Phase Construction Loans or the issuance of such Letter of Credit;
 
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(d) No event, condition or circumstance that would reasonably be expected to constitute a Material Adverse Effect shall have occurred and be continuing;
(e) The TCOS Approval Date for the Project is expected to be no later than June 30, 2014;
(f) The Fixed Rate Notes shall have been issued by the Borrower and the proceeds thereof applied to the payment of Project Costs or deposited in the Disbursement Account;
(g) The Borrower shall have demonstrated with supporting calculations that, after giving effect to the Fixed Rate Notes, the First Phase Construction Loans which have been borrowed (including the First Phase Construction Loans to be borrowed as of the date of such Borrowing) and the funding by the Equity Investors of their pro rata share of the Project Costs as required by the Equity Contribution Agreement, the Debt to Total Capitalization Ratio shall not exceed 0.70 to 1.00;
(h) (i) The Equity Contribution Agreement shall be in full force and effect and the Remaining Equity Commitment shall be greater than 105% of the First Phase Loan Agreement Obligations Amount and (ii) the Equity Investors shall have funded their pro rata share of the Project Costs as required by the Equity Contribution Agreement such that, after giving effect to the First Phase Construction Loans (and any other First Phase Construction Loans to be made in the same calendar month as such First Phase Construction Loan), the Debt to Total Capitalization Ratio shall not exceed 0.70 to 1.00;
(i) The aggregate amount of the outstanding Construction Loans and the stated amount of issued and undrawn Letters of Credit shall not exceed the First Phase Construction Loan Sublimit;
(j) The Borrower shall have delivered all Mortgages, supplements to Mortgages, title insurance and surveys required to be delivered pursuant to Section 6.16(b); and
4.3. Conditions Precedent to the Second Phase Construction Loans . The obligation of the Lenders to make Second Phase Construction Loans and the Issuing Bank to issue Letters of Credit, is subject to the prior satisfaction of each of the following conditions (unless waived in writing by the Administrative Agent and the Required Financing Parties):
(a) The Administrative Agent shall have received a duly completed and executed Second Phase Construction Loan Notice of Borrowing, which shall include, without limitation, any lien waivers with respect to such requested Borrowing;
(b) Each representation and warranty of the Borrower set forth in the Financing Documents shall be true and correct in all material respects as of the date of such Borrowing (or, if any representation or warranty is stated to have been made as of a specific date, as of such specific date);
 
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(c) No Default or Event of Default shall have occurred and be continuing or shall occur as a result of such Borrowing;
(d) No event, condition or circumstance that would reasonably be expected to constitute a Material Adverse Effect shall have occurred and be continuing;
(e) The TCOS Approval Date for the Project shall be expected to be no later than June 30, 2014;
(f) The Fixed Rate Notes shall have been issued by the Borrower and the proceeds thereof fully drawn;
(g) The Borrower shall have demonstrated with supporting calculations that after giving effect to the Second Phase Construction Loans (and any other Second Phase Construction Loans to be made in the same calendar month as such Second Phase Construction Loan) and the funding by the Equity Investors of their pro rata share of the Project Costs as required by the Equity Contribution Agreement, the Debt to Total Capitalization Ratio shall not exceed 0.70 to 1.00;
(h) The Equity Contribution Agreement shall be in full force and effect and there shall be no default thereunder and (x) shall have remaining unfunded Equity Commitments thereunder equal to (A) 30% of the Base CREZ Budget plus the CREZ II Budget minus (B) the aggregate of all prior Equity Contributions (including any Voluntary Equity Contributions, if any) as provided thereunder or (y) any Founding Equity Investor or other Person acceptable to the Administrative Agent shall have irrevocably committed, on terms and conditions no less favorable to the Financing Parties than the terms and conditions set forth in the Equity Contribution Agreement, to fund any shortfall with respect thereto, as determined by the Administrative Agent in consultation with counsel;
(i) The Administrative Agent shall have in consultation with the Independent Engineer reviewed and approved any deviations in the final Base CREZ Budget, the final CREZ II Budget and the final Construction Budget and Schedule from the Base CREZ Budget, CREZ II Budget and Construction Budget and Schedule;
(j) The Administrative Agent shall have received a true, complete and correct copy of each Material Project Document then in effect not delivered pursuant to Section 4.1(g) and any supplements or amendments thereto, all of which shall be satisfactory in form and substance to the Administrative Agent, the Issuing Bank and the Financing Parties, such documents shall have been duly authorized, executed and delivered by the parties thereto and shall be in full force and effect and shall be certified by a Responsible Officer of the Borrower as being true, complete and correct copies and in full force and effect, such delivery to the Administrative Agent to be accompanied by a certificate of a Responsible Officer of the Borrower, that to the best of the Borrower’s knowledge no party to any such Material Project Document is, or but for the passage of time or giving of notice or both will be, in breach of any obligation thereunder which could reasonably be expected to have a Material Adverse Effect;
(k) (i) The Administrative Agent shall have received a certificate, duly executed by the Borrower, in form and substance reasonably satisfactory to the Administrative
 
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Agent, confirming that all insurance premium payments then due and payable have been paid and that the insurance complies with the requirements of Section 6.5(a) and Schedule 6.5 and the Material Project Documents set forth in Section 3 of the Insurance Consultant’s report delivered pursuant to this Section 4.3(k), (ii) the Administrative Agent shall have received certified copies of all policies evidencing such insurance (or a binder, commitment or certificates signed by the insurer or a broker authorized to bind the insurer) then in effect, in form and substance reasonably satisfactory to the Administrative Agent and (iii) the Administrative Agent shall have received a certificate of the Insurance Consultant with the Insurance Consultant’s report, dated as of the initial Borrowing Date for Second Phase Construction Loans, attached thereto, in each such case, in form and substance reasonably satisfactory to the Administrative Agent, and confirming that all insurance policies required by such Insurance Consultant’s report are in full force and effect, are not subject to cancellation without thirty (30) days’ prior notice (ten (10) days for non-payment of premiums) and otherwise materially conform with the insurance requirements set forth in Section 6.5(a) and Schedule 6.5 and the Material Project Documents set forth in Section 5 of the Insurance Consultant’s report delivered pursuant to this Section 4.3(k);
(l) The Project Costs incurred and to be incurred are substantially as provided in, and the Project shall be substantially on schedule as provided in the Construction Budget and Schedule (or if the Project is not substantially in compliance with such schedule, the Independent Engineer shall have delivered the certification referred to in the succeeding sentence), which shall be reasonably satisfactory to the Administrative Agent (in consultation with the Independent Engineer). The Independent Engineer, after consultation with the Borrower and the Administrative Agent, shall have certified at each draw that the Project is reasonably likely to achieve COD by the Construction Loan Termination Date in compliance with such schedule in the Construction Budget and Schedule and, if Project Costs in excess of those contemplated by such budget (including the contingency) are required to be expended to achieve COD by the Construction Loan Termination Date, the Borrower has certified that sufficient funds are available pursuant to the Construction Loan Commitments and the Equity Commitment to so complete the Project (or has certified that sufficient funds are available pursuant to the Construction Loan Commitments, the Equity Commitment plus any other irrevocable and unconditional funding commitment in form and substance acceptable to the Administrative Agent and the Required Financing Parties for any shortfall);
(m) All Applicable Permits with respect to the construction and operation of the Project required to have been obtained from any Governmental Authority for the development and construction activities with respect to the Project up to the date of the Borrowing of such Construction Loans shall have been issued and shall be in full force and effect and no appeal of such Applicable Permits shall be pending and such Applicable Permits shall not be subject to any unsatisfied conditions that could reasonably be expected to allow for material modification or revocation; the Borrower shall be in material compliance with all such Applicable Permits then in effect; and with respect to any of the Applicable Permits not at that time required to have been issued and in full force and effect, the Administrative Agent, acting reasonably shall have concluded that any such Applicable Permits are reasonably likely to be obtained by the time required, all of which shall be reasonably satisfactory to the Administrative Agent (in consultation with the Independent Engineer and legal counsel);
 
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(n) The Borrower shall have delivered all Mortgages, supplements to Mortgages, Title Insurance and surveys required to be delivered pursuant to Section 6.16(b); and
(o) To the extent not previously delivered, the Administrative Agent shall have received Consents and Agreements in substantially the form of Exhibit L from counterparties to the Material Project Documents.
4.4. Conditions Precedent to the Term Conversion Date . The Construction Loans shall Term Convert to Term Loans upon the satisfaction of the conditions precedent set forth in this Section 4.4 (unless waived in writing by the Administrative Agent and the Required Financing Parties):
(a) Delivery to the Administrative Agent of (i) a duly completed and executed Notice of Term Conversion and (ii) a certificate from the Borrower dated the date such Construction Loans are proposed to be Term Converted, certifying that:
(i) Each representation and warranty of the Borrower set forth in the Financing Documents is true and correct in all material respects as if made on such date (unless such representation or warranty relates solely to an earlier date, in which case it shall have been true and correct in all material respects as of such earlier date); and
(ii) No Default or Event of Default has occurred and is continuing or will result from the Term Conversion;
(b) The Borrower shall have obtained and delivered to Administrative Agent, in form and substance reasonably satisfactory to the Administrative Agent, copies of all Applicable Permits not previously delivered by the Borrower to Administrative Agent and a certificate executed by a Responsible Officer of the Borrower certifying that all such Applicable Permits are in full force and effect;
(c) Evidence reasonably satisfactory to the Administrative Agent shall have been received by the Administrative Agent that all material work in connection with the Project requiring inspection by any Governmental Authorities having jurisdiction has been duly inspected and approved in all material respects by such authorities and that any certificates or notices required by Governmental Rules to be issued in connection therewith have been issued by such Governmental Authorities;
(d) Delivery by the Borrower to the Administrative Agent of a certificate certifying the occurrence of the TCOS Approval Date. Such certificate shall include the following information: the PUCT docket number of each relevant PUCT order granting the application for interim update of transmission rates; the date of signing of each such PUCT order; the effective date the wholesale transmission rate and the TCOS are adjusted on an interim basis pursuant to such PUCT order; the dollar amount of transmission cost of service (“ TCOS ”) as a result of the last of such PUCT orders; and a certification that as a result of such PUCT orders the invested capital amounts, as utilized in PUCT Substantive Rule Section 25.192, for all Segments of the Project have all been included in the approved adjusted TCOS and the wholesale transmission rates that may be billed by SU.
 
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(e) Each Equity Investor or its Guarantor or another Person on its behalf shall have performed all of its obligations under the Equity Contribution Agreement required to be performed as of the Term Conversion Date (including the making of the Equity Contribution pursuant to Section 2.1(a)(v) of the Equity Contribution Agreement).
(f) Delivery to the Administrative Agent of a certificate, dated as of the Term Conversion Date, duly executed by the Borrower, in form and substance reasonably satisfactory to the Administrative Agent, confirming that all insurance premium payments due and payable as of the Term Conversion Date have been paid and that the insurance complies with the requirements of Section 6.5(a) and Schedule 6.5 and the Material Project Documents set forth in Section 3 of the Insurance Consultant’s report delivered pursuant to this Section 4.4(f). The Administrative Agent shall have received certified copies of all policies evidencing such insurance (or a binder, commitment or certificates signed by the insurer or a broker authorized to bind the insurer) in effect as of the Term Conversion Date, in form and substance reasonably satisfactory to the Administrative Agent and the Financing Parties. The Administrative Agent shall have received a certificate of the Insurance Consultant with the Insurance Consultant’s report, dated as of the Term Conversion Date, attached thereto, in each such case, in form and substance reasonably satisfactory to the Administrative Agent and the Financing Parties, and confirming that all insurance policies required by such Insurance Consultant’s report are in full force and effect, are not subject to cancellation without thirty (30) days’ prior notice (ten (10) days for non-payment of premiums) and otherwise materially conform with the insurance requirements set forth in Section 6.5(a) and Schedule 6.5 and the Material Project Documents set forth in Section 5 of the Insurance Consultant’s report delivered pursuant to this Section 4.4(f).
(g) There has not been filed with or served upon the Borrower with respect to the Project or any part thereof any notice of any Lien or claim of any Lien (other than Permitted Liens) that has not been released or for which a bond has not been obtained.
(h) The Borrower shall have demonstrated with supporting calculations that the Debt to Total Capitalization Ratio shall not exceed 0.70 to 1.00.
(i) The Administrative Agent shall have received a report of the Independent Engineer demonstrating satisfactory completion of performance and reliability tests of the Project.
(j) The Administrative Agent shall have received duly executed supplements to the CREZ Master Lease in form and substance satisfactory to the Administrative Agent for all Segments and Collection Stations, which provide for quarterly rent payments in an amount sufficient for the Borrower to demonstrate with supporting calculation to the reasonable satisfaction of the Administrative Agent compliance with a Debt Service Coverage Ratio, calculated on a pro forma basis, of not less than 1.4 to 1.00 for each period of four consecutive fiscal quarters from the Term Conversion Date through the fiscal year ending December 31, 2020.
(k) The Administrative Agent shall have received first priority Mortgages, in favor of the Collateral Agent, for the benefit of the Lenders, in respect of all Project Properties (other than Project Properties then subject to a condemnation, eminent domain or similar involuntary taking proceeding diligently prosecuted by or on behalf of the Borrower).
 
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(l) The Borrower shall have confirmed to the Administrative Agent that all Project Costs have been paid other than taxes and other charges that are the responsibility of the Lessee under the CREZ Master Lease.
(m) All Letters of Credit shall have been terminated or fully cash collateralized.
4.5. Confirmation . The purchase of the Fixed Rate Notes, each Borrowing (including Term Conversion), and the issuance of each Letter of Credit hereunder shall constitute a representation and warranty by the Borrower as of the relevant date thereof that the applicable conditions contained in this Article 4 have been satisfied.
ARTICLE 5.
REPRESENTATIONS AND WARRANTIES
The Borrower hereby makes the following representations and warranties to and in favor of the Administrative Agent, the Collateral Agent, the Issuing Bank and the Financing Parties, All of these representations and warranties shall survive the Closing Date, the issuance of the Fixed Rate Notes, the issuance of any Letters of Credit, and the making of the Loans:
5.1. Existence; Compliance with Laws . The Borrower (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has the power and authority, and the legal right, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, (c) is duly qualified as a foreign corporation or other organization and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification and (d) is in compliance with all Legal Requirements except to the extent that the failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect.
5.2. Power; Authorization; Enforceable Obligations; No Legal Bar . (a) The Borrower has the power and authority, and the legal right, to make, deliver and perform the Operative Documents to which it is a party, to consummate the transactions contemplated thereby, to issue the Fixed Rate Notes and obtain the Construction Loans, Term Loans and Letters of Credit hereunder. The Borrower has taken all necessary organizational action to authorize the execution, delivery and performance of the Operative Documents to which it is a party and to consummate the transactions contemplated thereby and to authorize the Fixed Rate Notes, the Construction Loans, Term Loans and the incurrence of its Reimbursement Obligations with respect to the Letters of Credit and the Letters of Credit on the terms and conditions of this Agreement. Each Operative Document has been duly executed and delivered on behalf of the Borrower. This Agreement constitutes, and each other Operative Document upon execution will constitute, a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, except as enforceability may be limited by applicable
 
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bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law).
(b) The execution, delivery and performance of this Agreement and the other Operative Documents, the issuance of the Fixed Rate Notes, the Borrowings hereunder and the use of the proceeds thereof will not violate any Legal Requirements applicable to the Borrower or any Contractual Obligation, in each case, as could not reasonably be expected to result in a Material Adverse Effect, of the Borrower and will not result in, or require, the creation or imposition of any Lien on any of its properties or revenues pursuant to any Legal Requirement or any such Contractual Obligation (other than the Liens created by the Security Documents).
5.3. Ownership of Equity Interests . The Equity Interests in the Borrower have been duly authorized and validly issued and are fully paid and non-assessable. There are no outstanding subscriptions, options, warrants, calls, rights or other agreements or commitments (other than stock options granted to employees or directors and directors’ qualifying shares) of any nature relating to any Equity Interest of the Borrower, except as created by the Financing Documents. As of the Closing Date, (i) the Pledgor owns 100% of all issued and outstanding Equity Interests in the Borrower, (ii) the Operating Partnership indirectly owns 90% and SU owns 10% of all issued and outstanding Equity Interests in the Pledgor (directly) and the Borrower (indirectly) and (iii) the General Partner and Hunt EIAA, LLC own 100% of all issued and outstanding Equity Interests of the Operating Partnership.
5.4. Financial Statements; Material Adverse Effect . The financial statements of the Borrower, the Pledgor, TDC, the Operating Partnership and the General Partner heretofore delivered to the Administrative Agent with copies for the Financing Parties, were prepared in accordance with GAAP, as applicable, and fairly present the financial condition and operations of the Borrower at such date and, where applicable, the results of its operations for the period then ended (subject, where applicable, to normal year-end audit adjustments). Since the date of each financial statement of the Borrower, there has been no change in the business, Property, condition (financial or otherwise) or results of operations of the Borrower that could reasonably be expected to have a Material Adverse Effect.
5.5. Disclosure . No statement or information contained in this Agreement, any other Financing Document, or any other document, certificate or statement prepared and furnished by the Borrower or any Affiliate thereof to the Administrative Agent or the Financing Parties, or any of them, for use in connection with the transactions contemplated by this Agreement or the other Financing Documents, contained as of the date such statement, information, document or certificate was so furnished any untrue statement of a material fact or omitted to state a material fact necessary to make the statements contained herein or therein not misleading at the time made. The projections and pro forma financial information contained in the materials referenced above are based upon good faith estimates and assumptions believed by management of the Borrower to be reasonable at the time made, it being recognized by the Financing Parties that such financial information as it relates to future events is not to be viewed as fact and that actual results during the period or periods covered by such financial information may differ from the projected results set forth therein by a material amount. There is no fact known to the Borrower or any Affiliate thereof that could reasonably be expected to have a Material Adverse Effect that
 
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has not been expressly disclosed herein, in the other Financing Documents or in any other documents, certificates and statements furnished to the Administrative Agent and the Financing Parties for use in connection with the transactions contemplated hereby and by the other Financing Documents.
5.6. No Material Adverse Effect . No event, condition or circumstance that could reasonably be expected to constitute a Material Adverse Effect has occurred and is continuing.
5.7. Governmental Approvals . No action, consent or approval of, registration or filing with, Permit from, notice to, or any other action by, any Governmental Authority is or will be required in connection with (a) the due execution, delivery and performance by any of the Operative Documents to which it is a party, (b) the development, construction, ownership and operation of the Project as contemplated by the Operative Documents (to the extent required to be obtained by or on behalf of the Borrower), (c) the consummation of the transactions contemplated by the Operative Documents by the Borrower or (d) the grant by the Borrower of the Liens granted under the Security Documents or the validity, perfection and enforceability thereof or for the exercise by the Collateral Agent of its rights and remedies thereunder, except, in each case, (i) the filing of UCC financing statements, (ii) such as have been made or obtained and are in full force and effect, (iii) any Permits that are not yet Applicable Permits as of the date of this representation, (iv) such as are required by securities, regulatory or applicable law in connection with an exercise of remedies, and (v) as contemplated by Section 5.19.
5.8. ERISA and Labor Matters .
(a) Except as could not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect: (i) the Borrower and each of its ERISA Affiliates is in compliance with the applicable provisions of ERISA and the provisions of the Code relating to ERISA Plans and the regulations and published interpretations thereunder; (ii) no ERISA Event has occurred or is reasonably expected to occur; and (iii) all amounts required by applicable law with respect to, or by the terms of, any retiree welfare benefit arrangement maintained by the Borrower or any ERISA Affiliate or to which the Borrower or any ERISA Affiliate has an obligation to contribute have been accrued in accordance with Statement of Financial Accounting Standards No. 106. The present value of all accumulated benefit obligations under each Pension Plan (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 715) did not, as of the date of the most recent financial statements reflecting such amounts, exceed by more than a material amount the fair market value of the assets of such Pension Plan allocable to such accrued benefits, and the present value of all accumulated benefit obligations of all underfunded Pension Plans did not, as of the date of the most recent financial statements reflecting such amounts, exceed by more than a material amount the fair market value of the assets of all such underfunded Pension Plans.
(b) Except as, in the aggregate, could not reasonably be expected to have a Material Adverse Effect, (i) all employer and employee contributions required by applicable law or by the terms of any Foreign Benefit Arrangement or Foreign Plan have been made, or, if applicable, accrued in accordance with normal accounting practices; (ii) the accrued benefit obligations of each Foreign Plan (based on those assumptions used to fund such Foreign Plan) with respect to all current and former participants do not exceed the assets of such Foreign Plan;
 
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(iii) each Foreign Plan that is required to be registered has been registered and has been maintained in good standing with applicable regulatory authorities; and (iv) each such Foreign Benefit Arrangement and Foreign Plan is in compliance (A) with all material provisions of applicable law and all material applicable regulations and published interpretations thereunder with respect to such Foreign Benefit Arrangement or Foreign Plan and (B) with the terms of such plan or arrangement.
(c) Except as, in the aggregate, could not reasonably be expected to have a Material Adverse Effect: (a) there are no strikes or other labor disputes against the Borrower pending or, to the knowledge of the Borrower, threatened; (b) hours worked by and payment made to employees of the Borrower have not been in violation of the Fair Labor Standards Act or any other applicable Legal Requirement dealing with such matters; (c) all payments due from the Borrower on account of employee health and welfare insurance have been paid or accrued as a liability on the books of the Borrower, and (d) the Borrower is in material compliance with all Legal Requirements, agreements, contracts, policies, plans, and programs relating to employment, employment practices, compensation, benefits, hours, terms and conditions of employment, and the termination of employment, including but not limited to the proper classification of employees as exempt or non-exempt under applicable law and the proper classification of individuals as employees or independent contractors.
5.9. Taxes . The Borrower has filed or caused to be filed all Federal, state and other material tax returns that are required to be filed and has paid all taxes shown to be due and payable on said returns or on any assessments made against it or any of its property and all other material taxes, fees or other charges imposed on it or any of its property by any Governmental Authority (other than any the amount or validity of which are currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided on the books of the Borrower); no tax Lien has been filed (other than Permitted Liens), and to the knowledge of the Borrower, no claim is being asserted, with respect to any such tax, fee or other charge.
5.10. Title to Properties; Eminent Domain Authority; Possession Under Leases; Investments .
(a) The Borrower has good title to all its material properties and assets (other than Real Property), except for Permitted Liens. The Borrower has good and marketable fee simple title to, or valid leasehold and easement interests in, or other valid rights to use or occupy, as applicable, all the Project Properties set forth on Schedule 5.10(a) (as such Schedule may be updated after the Closing Date by the Borrower with a copy to the Administrative Agent and the Collateral Agent), in each case in accordance with the applicable deed, lease, easement (including condemnation or eminent domain judgments), right-of-way, license agreement, crossing permit or other operating right or similar right of use or occupancy, except for Permitted Liens.
(b) No landlord Lien has been filed, and, to the knowledge of the Borrower, no claim is being asserted, with respect to any lease payment, subject to Permitted Liens. To the knowledge of the Borrower, other than Permitted Liens, none of the Project Properties is subject to any lease, sublease, license or other agreement granting to any Person any right to the use,
 
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occupancy, possession or enjoyment of the Project Properties or any portion thereof in a manner that would impair the ability of the Borrower or the Lessee to develop, construct, own, use or maintain the Project in accordance with the Operative Documents in any material respect.
(c) The Borrower has not received any written notice of, nor has any knowledge of, (i) any pending or contemplated condemnation proceeding affecting the Project Properties or any sale or disposition thereof in lieu of condemnation (except that, with respect to any Loan made other than on the Closing Date, the Borrower has not received any written notice of, nor has any knowledge of, any pending or contemplated condemnation proceeding affecting the Project Properties or any sale or disposition thereof in lieu of condemnation that could reasonably be expected to have a Material Adverse Effect) or (ii) any existing or threatened change in the zoning classification of any of the Project Properties.
(d) All the Project Properties set forth on Schedule 5.10(a) (as such Schedule may be updated after the Closing Date by the Borrower with a copy to the Administrative Agent and the Collateral Agent) that are owned by a governmental entity that is a unit of state government, including a governmental authority or a political subdivision, is subject to an applicable lease, easement, right of way, crossing permit, license agreement or other operating right or similar right of use in favor of the Borrower, and the Borrower does not and will not need any additional lease, easement, right of way, crossing permit, license agreement or other operating right or similar right of use or occupancy with regard to Real Property owned by a governmental entity that is a unit of state government in order to complete and operate the Project.
(e) As of the Closing Date, the Borrower does not have any Investment other than Investments permitted by Section 7.3.
5.11. Security Documents . The Security Agreement and the Pledge Agreement are each effective to create in favor of the Collateral Agent, for the benefit of the Secured Parties, a legal, valid and enforceable security interest in the Collateral described therein and proceeds thereof. In the case of the Pledged Stock described in the Pledge Agreement, the Pledge Agreement shall constitute a fully perfected Lien on, and security interest in, all right, title and interest of the Pledgor in such Pledged Stock and the proceeds thereof, as security for the Secured Obligations (as defined in the Pledge Agreement), and in the case of the other Collateral described in the Security Agreement, when financing statements and other filings specified on Schedule 5.11 in appropriate form are filed in the offices specified on Schedule 5.11, the Security Agreement and the Pledge Agreement shall constitute a fully perfected Lien on, and security interest in, all right, title and interest of the Borrower and the Pledgor in such Collateral and the proceeds thereof, as security for the Secured Obligations (as defined in the Security Agreement or Pledge Agreement, as applicable), in each case prior and superior in right to any other Person (except, in the case of Collateral other than Pledged Stock, Permitted Liens that pursuant to applicable law are entitled to a higher priority than the Liens created by the Security Documents).
5.12. Filings . All filings and recordings, re-filings or re-recordings necessary to perfect and maintain the perfection and priority of the interest, title or Liens of the Collateral Agent (for the benefit of the Secured Parties), subject to Permitted Liens that pursuant to applicable law are entitled to a higher priority than the Liens created by the Security Documents, have been made or will be made as required by the Financing Documents in the offices set forth on Schedule 5.11.
 
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5.13. Investment Company . The Borrower is not an “investment company”, or a company “controlled” by an “investment company”, within the meaning of the Investment Company Act of 1940, as amended. The Borrower is not subject to regulation under any Legal Requirement (other than Regulation X of the Board and subject to Section 5.15 below) that limits its ability to incur Indebtedness.
5.14. Governmental Regulation .
(a) Neither the Pledgor nor the Borrower is a “public utility” under the FPA and the regulations of FERC thereunder. The execution, delivery and performance of the Pledgor’s and the Borrower’s respective obligations under the Financing Documents and the Material Project Documents require no authorization of approval by, or notice to, and are not subject to the “public utility” jurisdiction of, FERC under the FPA.
(b) Under FERC’s currently effective regulations, neither the Pledgor nor the Borrower is or, as a result of the execution, delivery and performance of the Pledgor’s and the Borrower’s respective obligations under the Financing Documents and the Material Project Documents and SU’s obligations under the Material Project Documents to which it is a party, will be deemed to be a “public-utility company” and as a result the Pledgor is not and will not be a “holding company” under PUHCA 2005.
(c) The Borrower is subject to regulation as an “electric utility” by the Public Utility Commission of Texas. The execution, delivery and performance of the Borrower’s obligations under the Operative Documents requires no authorization or approval by, or notice to or filing with, the PUCT or under the Public Utility Regulatory Act of Texas other than those that have been obtained or made and are in full force and effect.
(d) Solely by virtue of the construction, ownership, leasing or operation of the Project by the Borrower or the execution, delivery and performance of the Financing Documents to which it is a party, none of the Agents, the Issuing Bank, the Financing Parties or their Affiliates or any of them will become subject to any of the provisions of the FPA, PUHCA 2005 (based on FERC’s currently effective definitions under PUHCA 2005) or the Public Utility Regulatory Act of Texas, or to regulation under any such statute, or subject to any other laws or regulations respecting the rates or the financial or organizational regulation of public utilities.
5.15. Federal Reserve Requirements . No part of the proceeds of any Loans, and no other extensions of credit hereunder, will be used (a) for “buying” or “carrying” any “margin stock” within the respective meanings of each of the quoted terms under Regulation U as now and from time to time hereafter in effect for any purpose that violates the provisions of the Regulations of the Board or (b) for any purpose that violates the provisions of the Regulations of the Board. If requested by any Financing Party or the Administrative Agent, the Borrower will furnish to the Administrative Agent and each Lender a statement to the foregoing effect in conformity with the requirements of FR Form G-3 or FR Form U-1, as applicable, referred to in Regulation U.
 
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5.16. Compliance with Legal Requirements .
(a) The Borrower is not in violation of any laws relating to terrorism or money laundering, including Executive Order No. 13224 on Terrorist Financing, effective September 23, 2001, and the Patriot Act.
(b) The use of the proceeds of the Loans and the Fixed Rate Notes by the Borrower will not violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 C.F.R., Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto.
(c) Neither the Borrower nor its properties or assets has violated or is in violation of (nor will the continued operation of its material properties and assets as currently conducted violate) any currently applicable Legal Requirements (including any zoning, building, or Environmental Law, ordinance, code or approval or any building permit) or any restriction of record, or is in default with respect to any judgment, writ, injunction or decree of any Governmental Authority, where such violation or default could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.
5.17. OFAC . (a) The Borrower has established, implemented and will maintain in place processes and procedures to determine that the Borrower (i) does not appear on the OFAC SDN List, (ii) is not included in, owned by, controlled by, acting for or on behalf of, providing assistance, support, sponsorship, or services of any kind to, or otherwise associated with any of the Persons or entities referred to or described in the OFAC SDN List or (iii) does not conduct business or engages in any transaction with any Person or entity named in the OFAC SDN List or with or relating to any country or territory that is the subject of any sanctions under OFAC Laws or in any other manner that would result in a violation of OFAC Laws by any Person.
(b) No part of the proceeds from the sale of the Fixed Rate Notes or Borrowing of Loans hereunder constitutes or will constitute funds obtained on behalf of any Person appearing on the OFAC SDN List or will otherwise be used, directly by the Borrower or indirectly through any of the Borrower’s Affiliates, in connection with any investment in, or any transactions or dealings with, any of the Persons appearing on the SDN List.
(c) To the Borrower’s actual knowledge after making due inquiry, neither the Borrower nor any of the Borrower’s Affiliates (i) is under investigation by any Governmental Authority for, or has been charged with, or convicted of, money laundering, drug trafficking, terrorist-related activities or other money laundering predicate crimes under any applicable law (collectively, “ Anti-Money Laundering Laws ”), (ii) has been assessed civil penalties under any Anti-Money Laundering Laws or (iii) has had any of its funds seized or forfeited in an action under any Anti-Money Laundering Laws. The Borrower has taken reasonable measures appropriate to the circumstances (in any event as required by applicable law) to ensure that the Borrower and each of its Affiliates is and will continue to be in compliance with all applicable current and future Anti-Money Laundering Laws.
(d) No part of the proceeds from the sale of the Fixed Rate Notes or Borrowings of Loans hereunder will be used, directly or indirectly, for any improper payments to
 
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any governmental official or employee, political party, official of a political party, candidate for political office, official of any public international organization or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage. The Borrower has taken reasonable measures appropriate to the circumstances (in any event as required by applicable law) to ensure that the Borrower and each of its Affiliates is and will continue to be in compliance with all applicable current and future anti-corruption laws and regulations.
5.18. PUCT; ERCOT . The Borrower has complied and is in compliance with the Texas Public Utility Regulatory Act and applicable PUCT and ERCOT regulations and orders and any Governmental Rule applicable to it as a public utility, except in each case for instances of noncompliance that, individually and in the aggregate, have not had, and are not reasonably likely to have, a Material Adverse Effect.
5.19. Permits .
(a) There are no material Permits issued to or required by the Borrower under any Governmental Rule, including any Environmental Laws, as the Project is currently designed and contemplated to be developed, constructed, owned, leased and operated that are or will become Applicable Permits other than the Permits described in Schedule 5.19 or Permits described in (ii) and (iii) of the next succeeding sentence. Each Permit described on Schedule 5.19 is either (i) a Permit in full force and effect and is not the subject of any current material legal proceeding and, if an appeal period is specified by a Governmental Rule, the appeal period has expired and no proceedings are pending seeking material modification or revocation, in the case of those Permits listed in Part I of Schedule 5.19, (ii) a Permit that has not yet been obtained and has not been required for Project development activities up to the date of this Agreement and is not required to commence construction of the Project, and which the Borrower has no current actual knowledge indicating that such Permit is required, or if circumstances arise which require Borrower to obtain such Permit, Borrower has no current actual knowledge that such Permit will not timely be obtained in the case of those Permits listed in Part II of Schedule 5.19 or (iii) a Permit of a type that is routinely granted on application and that would not normally be obtained before the commencement of construction of the Project or that is, to the knowledge of the Borrower, reasonably likely to become an Applicable Permit, as applicable, as in the case of those Permits listed in Part III of Schedule 5.19. The Borrower reasonably believes that any Permit so indicated in clauses (ii) and (iii) of the preceding sentence will be obtained before it becomes an Applicable Permit. The Borrower is not in material violation of any Applicable Permit then in effect.
(b) To the Borrower’s knowledge, each Material Project Participant possesses all Permits, or rights thereto necessary to perform its duties under the Operative Documents to which it is a party, other than those Applicable Permits listed in Schedule 5.19, and, to the Borrower’s knowledge, such party is not in violation of any valid rights of others with respect to any of the foregoing.
(c) The Borrower has not entered into any stipulations with any Governmental Authority issuing any Applicable Permit(s) which are not expressly set forth in such Permit(s) to construct the Project or which have not otherwise been disclosed to the Administrative Agent by the Borrower in writing.
 
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5.20. Litigation . (a) No litigation, action, suit, investigation, claim or proceeding at law or equity of or before any arbitrator or Governmental Authority is pending or, to the knowledge of the Borrower, threatened by or against the Borrower or any of its properties or revenues (including any Material Project Document or Applicable Permit) (i) with respect to any of the Operative Documents or any of the transactions contemplated hereby or thereby or any Applicable Permit, or (ii) that could, if adversely determined, reasonably be expected to have a Material Adverse Effect.
(b) There are no condemnation proceedings by or before any Governmental Authority now pending or, to the knowledge of the Borrower, threatened with respect to the Project, or any portion thereof material to the construction, ownership or operation of the Project, unless (i) solely with respect to a condemnation proceeding occurring prior to COD, in the reasonable opinion of the Administrative Agent and the Independent Engineer, such condemnation is capable of being remedied within a satisfactory period without affecting COD with respect to the Project in accordance with the Construction Budget and Schedule and (ii) an adequate reserve, in an amount acceptable to the Administrative Agent and the Independent Engineer, has been established for remedying such condemnation.
5.21. No Default .
The Borrower is not in default under or with respect to any of its Contractual Obligations, including, without limitation, the Material Project Documents, in any respect that could reasonably be expected to have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing.
5.22. Insurance . All policies of insurance required to be obtained by the Borrower pursuant to Section 6.5 and under the Operative Documents have been obtained, and are in full force and effect, all premiums due thereon have been paid and, except with respect to policies that have been replaced with other policies in compliance with this Agreement, no notice from any insurer or its representative as to any cancellation or reduction or other change in coverage has been received.
5.23. Certain Environmental Matters .
(a) (i) The Borrower is not in material violation (and has not received any notice that it is in material violation) of any Environmental Law and has not in the past been in material violation of any Environmental Law, which violation remains unresolved, (ii) the Borrower has not (and has not received any notice that it or any third party has) used, Released, discharged, generated, manufactured, produced, stored or disposed of in, on, under or affecting the Project Properties or the improvements or any other Real Property owned, operated or leased by the Borrower, or transported thereto or therefrom, any Materials of Environmental Concern that would reasonably be expected to subject the Borrower to liability or interfere with the Project, (iii) to the knowledge of the Borrower after reasonable inquiry, there are no species of organism protected under any applicable Environmental Laws, historical or cultural artifacts,
 
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wetlands or underground tanks (whether operative or temporarily or permanently closed) located on the Substation Sites or the improvements thereon or, to the knowledge of the Borrower, any other Real Property owned, operated or leased by the Borrower, the presence of which would have a material impact on the Project and (iv) there are no Materials of Environmental Concern used, stored or present at, on or affecting the Substation Sites or the improvements thereon or to the knowledge of the Borrower, any other Real Property owned, operated or leased by the Borrower other than those Materials of Environmental Concern used, stored or otherwise managed in material compliance with the requirements of all applicable Environmental Laws, and in a manner that could not reasonably be expected to result in any material liability to the Borrower.
(b) There is no pending or, to the knowledge of the Borrower, threatened action or proceeding by any Governmental Authority (including the U.S. Environmental Protection Agency) or any other third party with respect to the presence or Release of Materials of Environmental Concern in, on, from, to, or affecting the Project Properties or the improvements, or any other Real Property owned, operated or leased by the Borrower, or with respect to Environmental Laws, natural resources or Materials of Environmental Concern, which could reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect.
(c) The Borrower does not have knowledge of any past or existing material violations, or any past material violations which remain unresolved, of any Environmental Laws by any Person relating in any way to the Project Properties (in the case of the Substation Sties, after due inquiry) or the improvements or any other Real Property owned, operated or leased by the Borrower. The Borrower has delivered to the Agents the Environmental Reports. As of the Closing Date, the Environmental Reports are the most recent environmental site assessments the Borrower has knowledge or possession of with respect to the Project Properties or any of the Real Property.
5.24. Utilities . All utility services necessary for the construction and operation of the Project for its intended purposes are available or will be so available as and when required upon commercially reasonable terms or market rates.
5.25. Material Project Documents .
(a) The Borrower has delivered to the Administrative Agent a complete and correct copy of each Material Project Document, including any amendments, supplements or modifications with respect thereto. None of the Material Project Documents to which the Borrower is a party has been amended or modified since the Closing Date, except in accordance with this Agreement.
(b) As of the Closing Date and as of each date upon which this representation is made, each Material Project Document is an Effective Material Project Documents and constitutes the legal, valid and binding obligation of the Borrower, and, to the knowledge of the Borrower, the other parties thereto. The Borrower is in compliance with all Effective Material Project Documents, and to the knowledge of the Borrower, each other party to an Effective Material Project Document is in compliance with its obligations thereunder and no defaults have occurred and are continuing thereunder, except to the extent any such non-compliance could not reasonably be expected to result in a Material Adverse Effect.
(c) The rights granted to the Borrower pursuant to the Material Project Documents are sufficient to enable the Project to be located, constructed, operated and routinely maintained as contemplated by the Operative Documents.
 
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5.26. Intellectual Property . The Borrower owns, or is licensed to use, all Intellectual Property necessary for the conduct of its business as currently conducted. No material claim has been asserted and is pending by any Person challenging or questioning the use of any Intellectual Property or the validity or effectiveness of any Intellectual Property, nor does the Borrower know of any valid basis for any such claim. The use of Intellectual Property by the Borrower and the conduct of its business does not infringe on the rights of any Person in any material respect.
5.27. Partnerships and Joint Ventures; Separateness . (a) The Borrower is not a general partner or a limited partner in any general or limited partnership or a joint venturer in any joint venture.
(b) The Borrower has no Subsidiaries.
(c) The Borrower maintains separate bank accounts and separate books account from all other Persons. The separate liabilities of the Borrower are readily distinguishable from the liabilities of all other Persons.
(d) The Borrower conducts its business solely in its own name in a manner not misleading to other Persons as to its identity.
5.28. Accounts . The Borrower does not have any “deposit account” with a “bank” (within the meaning of Section 9-102 of the UCC) other than the Collateral Accounts, as applicable, established in accordance with the Depositary Agreement and the other Financing Documents.
5.29. Solvency . The Borrower is, and after giving effect to the incurrence of all Indebtedness and obligations being incurred in connection herewith and therewith will be and will continue to be, Solvent.
5.30. Private Offering by the Borrower. Neither the Borrower nor anyone acting on its behalf has offered the Fixed Rate Notes for sale to, or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof with, any Person other than the Fixed Rate Purchasers. Neither the Borrower nor anyone acting on its behalf has taken, or will take, any action that would subject the issuance or sale of the Fixed Rate Notes to the registration requirements of section 5 of the Securities Act or to the registration requirements of any securities or blue sky laws of any applicable jurisdiction.
 
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ARTICLE 6.
AFFIRMATIVE COVENANTS OF BORROWER
The Borrower hereby agrees that, so long as the Commitments remain in effect, any Letter of Credit, Loan or the Fixed Rate Notes remains outstanding or any other amount is owing to any Financing Party, the Issuing Bank or the Administrative Agent hereunder, the Borrower shall:
6.1. Financial Information . The Borrower shall deliver to the Administrative Agent and each Financing Party:
(a) as soon as available and in any event within 105 days after the close of each fiscal year of the Borrower, the consolidated balance sheet of the Borrower as at the end of such fiscal year, the related consolidated statement of operations and the related consolidated statement of changes in shareholder’s equity (deficit) and of cash flows for such fiscal year, in each case setting forth comparative consolidated figures for the preceding fiscal year, and examined by Ernst & Young LLP or other independent certified public accountants of recognized national standing whose opinion shall not be qualified as to the scope of audit and as to the status of the Borrower as a going concern, together with a certificate of such accounting firm stating that in the course of its regular audit of the business of the Borrower, which audit was conducted in accordance with generally accepted auditing standards, such accounting firm has obtained no knowledge of any Default or Event of Default which has occurred and is continuing or, if in the opinion of such accounting firm such a Default or Event of Default has occurred and is continuing, a statement as to the nature thereof (which certificate may be limited to the extent required by accounting rules or guidelines); and
(b) as soon as available but in any event within forty-five (45) days after the end of each of the first three quarterly periods of each fiscal year of the Borrower, the unaudited consolidated balance sheet of the Borrower as at the end of such quarterly period, the related consolidated statement of operations and the related consolidated statement of changes in shareholder’s equity (deficit) and of cash flows for such quarterly period, and for the elapsed portion of the fiscal year ended with the last day of such quarterly period, and in each case setting forth comparative consolidated figures for the related periods in the prior fiscal year, all of which shall be certified by the chief financial officer, controller, chief accounting officer or other Responsible Officer of the Borrower, except for the absence of footnotes and subject to changes resulting from audit and normal year-end audit adjustments;
All such financial statements shall be complete and correct in all material respects and shall be prepared in reasonable detail and in accordance with GAAP applied (except as approved by such accountants or officer, as the case may be, and disclosed in reasonable detail therein) consistently throughout the periods reflected therein and with prior periods.
 
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6.2. Certificates; Other Information . The Borrower shall deliver to the Administrative Agent and each Financing Party:
(a) concurrently with the delivery of any financial statements pursuant to Section 6.1(a)(i) and 6.1(b)(i), a certificate of a Responsible Officer of the Borrower attaching supporting calculations and stating that, to the best of each such Responsible Officer’s knowledge, the Borrower during such period has observed or performed all of its covenants and other agreements, and satisfied every condition contained in this Agreement, the other Financing Documents, the CREZ Master Lease and the other Operative Documents in each case to which it is a party to be observed, performed or satisfied by it, and that such Responsible Officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate;
(b) promptly upon the Borrower acquiring notice or obtaining knowledge that any Default or Event of Default has occurred, a notice of such event (which should, in accordance with Section 9.5, indicate that such notice is a “notice of default”);
(c) promptly upon the Borrower acquiring notice or obtaining knowledge thereof, notice (including to the Independent Engineer) of (i) any material breach or default under any Material Project Document, (ii) any termination or material amendment of any Material Project Document, (iii) any litigation, arbitration, material events or material notices with respect to any Material Project Document, and (iv) any event of force majeure asserted under any Material Project Document which exists for more than two Business Days (and, to the extent reasonably requested by the Administrative Agent and reasonably available to the Borrower, copies of related invoices, statements, supporting documentation, schedules, data or affidavits delivered under any Material Project Document);
(d) promptly upon the Borrower (i) acquiring notice or obtaining knowledge thereof, notice (x) of any dispute between the Borrower and any Governmental Authority involving the revocation, modification, failure to renew or the like of any material Applicable Permit or the imposition of additional material conditions with respect thereto and (y) that any Applicable Permit related to the Project may be cancelled, suspended, terminated or impaired, except that no such notice shall be required with respect to the expiration, in the ordinary course of business at the stated expiration date, of a Permit that is no longer required for construction or operation and (ii) obtaining any Applicable Permit, a copy of such Applicable Permit;
(e) promptly upon the Borrower acquiring notice or obtaining knowledge of the commencement of proceedings against the Borrower or involving the Project before FERC, PUCT, or ERCOT alleging a violation of the Governmental Rules of FERC, ERCOT or PUCT, or asserting jurisdiction over the Borrower under the Texas Public Utility Regulatory Act, PUHCA 2005 or under the FPA, a copy of any documentation or correspondence relevant to such proceeding;
(f) promptly upon the Borrower acquiring notice or obtaining knowledge thereof, notice of the filing or commencement of, or any written threat or written notice of intention of any Person to file or commence any action, suit or proceeding, whether at law or equity or by or before any Governmental Authority or in arbitration, against the Borrower or SU or involving the Project, which involves claims in excess of $20,000,000 in the aggregate or as to which an adverse determination is reasonably probable and which, if adversely determined, could reasonably be expected to have a Material Adverse Effect;
 
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(g) promptly upon the Borrower acquiring notice or obtaining knowledge thereof, notice of any casualty, damage or loss to the Project, whether or not insured, through fire, theft, other hazard or casualty, or any act or omission of the Borrower, its employees, agents, contractors, consultants or representatives, or of any other Person, if such casualty, damage or loss affects the Borrower or the Project in excess of $5,000,000 for any one such event, or $20,000,000 in the aggregate in any policy period, and the Borrower shall keep the Administrative Agent timely apprised of any insurance claim proceedings related to such casualty or loss, including any notice received from any insurance company indicating that it is not obligated to pay any named insured, or that it is withholding any amounts that the Borrower is claiming are due and payable under any insurance policy maintained by the Borrower;
(h) promptly, but in no event later than seven (7) Business Days after the execution and delivery to the Borrower thereof, a copy of each Additional Project Agreement;
(i) promptly upon the Borrower acquiring notice or obtaining knowledge thereof, notice of any other development specific to the Borrower or the Project that has had, or could reasonably be expected to have, a Material Adverse Effect;
(j) promptly following receipt thereof, copies of any documents described in Section 101(k) and/or Section 101(1) of ERISA that the Borrower or any ERISA Affiliate may request with respect to any Multiemployer Plan; provided , that if the Borrower or ERISA Affiliate has not requested such documents or notices from the administrator or sponsor of the applicable Multiemployer Plan, then, upon reasonable request of the Administrative Agent, the Borrower or the ERISA Affiliate shall promptly make a request for such documents or notices from such administrator or sponsor and the Borrower shall provide copies of such documents and notices promptly after receipt thereof;
(k) promptly upon the Borrower acquiring notice or obtaining knowledge thereof, of the occurrence of any ERISA Event that, alone or together with any other ERISA Events that have occurred, could reasonably be expected to result in liability of the Borrower or any ERISA Affiliates in excess of $5,000,000;
(l) promptly upon the Borrower acquiring notice or obtaining knowledge of any Environmental Claims against it or otherwise affecting the Project that could reasonably be expected to have a Material Adverse Effect;
(m) notice of material changes in the Borrower’s accounting or financial reporting practices;
(n) promptly, but in any event no later than five (5) Business Days after the required filing thereof with the PUCT, a copy of each cost estimate in respect of such CCN;
(o) promptly, the Borrower’s monthly construction report including each attachment thereto; and
(p) promptly, such additional financial and other information with respect to the Borrower or the Project as is reasonably requested by the Administrative Agent or any Financing Party.
 
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Each notice pursuant to Section 6.2(e)-6.2(j), (l) and (n) shall be accompanied by a statement of a Responsible Officer setting forth details of the occurrence referred to therein and stating what action the Borrower proposes to take with respect thereto.
6.3. Maintenance of Existence, Properties; Etc. (a) The Borrower shall (i) preserve, renew and keep in full force and effect its organizational existence, (ii) take all reasonable action to maintain or cause to be maintained all rights, privileges and franchises necessary or desirable in the normal conduct of its business, except, in each case, as otherwise permitted by Section 7.4 and except, in the case of clause (ii) above, to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect.
(b) The Borrower shall maintain good, valid, defensible (subject to the terms of the Operative Documents) and insurable title in all of its properties and assets, including Intellectual Property (that are individually or in the aggregate material), subject only to Permitted Liens, in each case other than those properties and assets disposed of in accordance with this Agreement or any other Financing Document.
(c) The Borrower shall keep or cause to be kept all material property useful and necessary in its business in good working order and condition in accordance with Good Utility Practice, ordinary wear and tear excepted.
6.4. Compliance with Legal Requirements; Etc.
(a) The Borrower shall comply in all material respects with all applicable Legal Requirements, including, without limitation, those referenced in Section 5.17 and exercise diligent good faith efforts to make such alterations to the Project as may be required for such compliance.
(b) The Borrower shall obtain all Applicable Permits as promptly as possible, have when required all Applicable Permits necessary for the development, construction, ownership, maintenance and operation of the Project under applicable Legal Requirements and comply with all Applicable Permits. The Borrower shall promptly upon receipt or publication furnish a copy (certified by a Responsible Officer of the Borrower) of each such Applicable Permit to the Administrative Agent.
(c) The Borrower shall promptly upon receipt or publication furnish a copy (certified by a Responsible Officer of the Borrower) of each amendment, supplement or modification to any such Applicable Permit to the Administrative Agent and shall promptly furnish copies to the Administrative Agent of all material documents furnished to the Borrower by any Governmental Authority or furnished to any Governmental Authority by the Borrower.
(d) The Borrower shall (i) comply in all material respects with, and ensure compliance in all material respects by all tenants and subtenants, if any, with all applicable Environmental Laws, (ii) obtain and comply in all material respects with and maintain, and ensure that all tenants and subtenants obtain and comply in all material respects with and maintain, any and all material Permits required by applicable Environmental Laws and (iii) generate, use, treat, store, release, transport, dispose of, and otherwise manage all Materials of Environmental Concern in a manner that would not reasonably be expected to result in a material
 
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liability or to adversely affect the Project Properties, and take reasonable efforts to prevent any other Person from generating, using, treating, storing, releasing, transporting, disposing of, or otherwise managing Materials of Environmental Concern in a manner that could reasonably be expected to result in a material liability with respect to, or to materially and adversely affect the Project Properties owned or operated by the Borrower.
(e) The Borrower shall conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Laws and promptly comply in all material respects with all orders and directives of all Governmental Authorities regarding Environmental Laws, other than such orders and directives as may be contested in good faith, provided that the pendency of such proceedings, either individually or in the aggregate, could not reasonably be expected to have to have a Material Adverse Effect.
6.5. Insurance; Events of Loss .
(a) Without cost to the Financing Parties, the Borrower shall (i) maintain or cause to be maintained on its behalf in effect at all times the types of insurance required pursuant to Schedule 6.5, in the amounts and on the terms and conditions specified therein and (ii) cause each party to a Material Project Document to procure at its own expense and maintain in full force and effect, at all times on and after the Closing Date the insurance required to be procured and maintained by such Person under the relevant Material Project Documents.
(b) If the Borrower fails to take out or maintain, or to cause each Material Project Participant or other party to a Material Project Document to take out or maintain, the full insurance coverage required by this Section 6.5, the Administrative Agent may (but shall not be obligated to) take out the required policies of insurance and pay the premiums on the same. All amounts so advanced by the Administrative Agent shall become an additional obligation of the Borrower to the Administrative Agent, and the Borrower shall forthwith pay such amounts to the Administrative Agent, together with interest from the date of payment by the Administrative Agent at the Default Rate.
(c) No later than five (5) days following the renewal of each policy, the Borrower shall deliver to the Administrative Agent an acceptable (to the Administrative Agent) certificate of insurance from each insurer or a representative of each insurer, certifying that (i) the insurance requirements of this Section 6.5 (including Schedule 6.5) have been implemented and are being complied with, (ii) the Borrower has paid all insurance premiums then due and payable and (iii) the Borrower is in compliance with the insurance policies required by this Section 6.5 (including Schedule 6.5).
(d) The Administrative Agent shall be entitled at its option to participate in any compromise, adjustment or settlement in connection with any Event of Loss under any policy or policies of insurance or any proceeding with respect to any condemnation or other taking of property of the Borrower or otherwise, in each such case, in excess of $20,000,000, and the Borrower shall, within five (5) Business Days after the Administrative Agent’s request, reimburse the Administrative Agent for all reasonable out of pocket expenses (including reasonable attorneys’ and experts’ fees) incurred by the Administrative Agent in connection with
 
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such participation. The Borrower shall not make any compromise, adjustment or settlement in connection with any such claim in excess of $20,000,000 without the approval of the Administrative Agent (acting on behalf of the Required Financing Parties).
(e) No provision of this Section 6.5 or any other provision of any Financing Document shall impose on the Administrative Agent or the Financing Parties any duty or obligation to verify the existence or adequacy of the insurance coverage maintained by the Borrower (nor shall any action taken, or not taken, by the Administrative Agent or the Financing Parties to verify the existence or adequacy of the insurance coverage maintained by the Borrower affect the obligations of the Borrower pursuant to this Section 6.5), nor shall the Administrative Agent or the Financing Parties be responsible for any representations or warranties made by or on behalf of the Borrower to any insurance company or underwriter.
6.6. Taxes; Assessments and Utility Charges . The Borrower shall pay, or cause to be paid, as and when due and prior to delinquency, all taxes, assessments and governmental charges of any kind that may at any time be lawfully assessed or levied against or with respect to the Borrower or the Project (including all assessments and charges lawfully made by any Governmental Authority for public improvements that may be secured by a Lien on the Project), and all utility and other charges incurred in the operation, maintenance, use, occupancy and upkeep of the Project; provided , however , that the Borrower may contest or cause to be contested in good faith any such taxes, assessments and other charges and, in such event, may permit the taxes, assessments or other charges so contested to remain unpaid during any period, including appeals, when the Borrower is in good faith contesting or causing to be contested the same by appropriate proceedings, so long as (a) reserves reasonably satisfactory to the Administrative Agent have been established on the Borrower’s books in an amount sufficient to pay any such taxes, assessments or other charges, accrued interest thereon and potential penalties or other costs relating thereto, or other provision for the payment thereof reasonably satisfactory to the Administrative Agent shall have been made, (b) enforcement of the contested tax, assessment or other charge is effectively stayed for the entire duration of such contest and (c) any tax, assessment or other charge determined to be due, together with any interest or penalties thereon, is immediately paid after resolution of such contest.
6.7. Properties, Books and Records . (a) The Borrower shall (i) keep proper books of record and account in conformity with GAAP and all Legal Requirements and proper books and record and account shall be made of all dealings and transactions in relation to its business and activities and (ii) permit representatives of the Administrative Agent or any Financing Party to visit and inspect, at the Borrower’s expense, the Borrower’s financial records, the Project (including the Project Properties) and any other properties of the Borrower at any reasonable time and as often as may reasonably be desired and to make extracts from and copies of such financial records, and permit any Person designated by the Administrative Agent or any Financing Party upon reasonable prior notice to the Borrower to discuss the affairs, finances and condition of the Borrower with the officers thereof and independent accountants therefor (subject to reasonable requirements of confidentiality, safety requirements and other requirements imposed by law or by contract); provided that so long as no Default shall have occurred and be continuing, any such visit in excess of one such visit in any calendar year by any Financing Party shall be at the expense of such Financing Party. The Independent Engineer shall have the right to visit and inspect the Project and the books, records and documents of the Borrower from time to
 
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time, and to witness the construction, installation, testing, start up, commissioning and operation of the Project; provided that the Independent Engineer will comply with all reasonable safety requirements of the Project, whether imposed by contract or Governmental Rule and will maintain reasonable and customary liability insurance.
(b) The Borrower shall permit employees or agents of the Administrative Agent or the Financing Parties the right of access to the Borrower’s facilities and to any pertinent books, documents, papers or other records (electronic or otherwise) of the Borrower in order to conduct audits, examinations and evaluations.
(c) If an Event of Default has occurred or is reasonably anticipated, or if any event or circumstance has occurred or is reasonably suspected that could reasonably be expected to result in a material diminution in the value of any Project Properties subject to any Mortgage, the Borrower shall allow the Administrative Agent (if requested thereby), at Borrower’s expense, to conduct such investigations as the Administrative Agent deems appropriate to determine the nature and extent of any noncompliance with applicable Environmental Laws, the nature and extent of the presence of any Materials of Environmental Concern, and the nature and extent of any other environmental conditions that may exist at or affect any of the Project Properties subject to any of the Mortgages, and the Borrower shall cooperate with the Administrative Agent in the conduct of any such investigations (which may include, without limitation, a detailed visual inspection of such Project Properties, including all storage areas, storage tanks, drains and dry wells and other structures and locations, as well as the taking of soil samples, surface water samples, and ground water samples and such other investigations or analyses as the Administrative Agent deems appropriate); provided that in the case of any easement or right of way such activities are in the scope of the easement or right of way agreement. If the Borrower does not promptly address any noncompliance with applicable Environmental Laws, any presence of any Materials of Environmental Concern, or any other environmental conditions so identified in a manner satisfactory to the Administrative Agent, then the Administrative Agent may undertake, at the Borrower’s expense, any measures it deems necessary to address such matters consistent with applicable Environmental Laws. The Administrative Agent and its officers, employees, agents and contractors shall have and are hereby granted the right to enter upon any Project Properties subject to any of the Mortgages for the foregoing purposes; provided that in the case of any easement or right of way such activities are in the scope of the easement or right of way agreement.
6.8. Use of Proceeds .
(a) The Borrower shall use the proceeds of the Fixed Rate Notes and each Construction Loan solely to pay a portion of, and shall request issuances of Letters of Credit solely with respect to payment of, the Project Costs (whether incurred prior to or following the Closing Date) specified in the related Construction Loan Notice of Borrowing and related certificates delivered by the Borrower in connection with such Construction Loan.
(b) The Borrower shall use the proceeds of the Term Loans to repay Construction Loans outstanding upon Term Conversion.
 
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6.9. Payment of Obligations . The Borrower shall duly and punctually pay and discharge its obligations in respect of its Indebtedness permitted by Section 7.1, subject to the terms and conditions of this Agreement and the other Financing Documents.
6.10. Material Project Documents . (a) The Borrower shall (i) perform and observe all of its material covenants and material obligations contained in each of the Material Project Documents to which it is a party, (ii) take all reasonable and necessary action to prevent the termination or cancellation of any Material Project Documents to which the Borrower is a party in accordance with the terms of such Material Project Documents or otherwise (except for the expiration of any Material Project Document in accordance with its terms and not as a result of a breach or default thereunder) and (iii) enforce against the relevant Material Project Participant each material covenant or obligation of such Material Project Document to which it is a party in accordance with its terms, including enforcing the rights and remedies of the Borrower under the Material Project Documents to maximize the amount of liquidated damages available to the Borrower under the Material Project Documents.
(b) Upon expiration or termination of the initial or any renewal term of the CREZ Master Lease (or any supplement or new lease entered into in replacement thereof in accordance with this Section 6.10(b)), the Borrower and the Lessee shall enter into a supplement or new lease with respect to the Project: (i) having an initial term of at least five years, (ii) providing for renewal terms, (iii) requiring payment of a rent that is sufficient during the initial and all renewal terms of such supplement or new lease to such that the Debt Service Coverage Ratio shall not be less than 1.40 to 1.00, and (iv) (x) substantially in the form of the existing CREZ Master Lease with respect to all non-economic provisions; provided that notwithstanding the foregoing, provisions that are administrative or ministerial in nature and provisions that are of an inconsequential nature and which do not adversely affect any Financing Party or which satisfy any requirements, conditions or guidelines contained in any order, directive, opinion, ruling or regulation of a Federal or state agency or contained in Federal or state law shall be deemed to be substantially in the form of the existing CREZ Master Lease, or (y) otherwise in form and substance satisfactory to the Required Financing Parties, which consent shall not be unreasonably withheld. If the Required Financing Parties have a consent right pursuant to clause (iv)(y) hereof, the Financing Parties shall make commercially reasonable efforts to respond to the Borrower’s request for such review within ten Business Days, provided that failure to so respond shall not be deemed a consent to such supplement or new lease.
6.11. OFAC . If the Borrower obtains actual knowledge or receives any written notice that the Borrower, any affiliate, subsidiary or any Person or entity holding any legal or beneficial interest whatsoever therein (whether directly or indirectly) is named on the OFAC SDN List (such occurrence, an “ OFAC Violation ”), the Borrower shall immediately (x) give written notice to the Administrative Agent of such OFAC Violation and (y) comply with all applicable laws with respect to such OFAC Violation (regardless of whether the party included on the OFAC SDN List is located within the jurisdiction of the United States of America), including the OFAC Laws, and the Borrower hereby authorizes and consents to the Agents and Financing Parties taking any and all steps such Person deems necessary, in its sole discretion, to comply with all applicable laws with respect to any such OFAC Violation, including the requirements of the OFAC Laws (including the “freezing” and/or “blocking” of assets and reporting such action to OFAC).
 
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6.12. Operation of Project . Following the Term Conversion Date, the Borrower shall cause the Project to be operated and maintained in good operating condition consistent in all material respects with (i) Good Utility Practice, (ii) all Applicable Permits, (iii) Legal Requirements and (iv) all applicable requirements of the Operative Documents (including the warranties provided for thereunder), and make or cause to be made all repairs (structural and non-structural, extraordinary or ordinary) necessary to operate and maintain the Project in such condition (subject to the Borrower’s other rights hereunder, including the Borrower’s rights to access amounts in the Collateral Accounts in accordance with the terms of this Agreement).
6.13. PUCT; ERCOT . The Borrower shall and shall cause the Lessee to comply with the Texas Public Utility Regulatory Act and applicable PUCT and ERCOT regulations and orders and any other law or order or other Governmental Rule applicable to it as a public utility, including the prudent and timely making of all filings with PUCT and ERCOT that are customary for transmission service providers (according to PUCT or ERCOT), except in each case for instances of noncompliance that, individually and in the aggregate, have not had, and are not reasonably likely to have, a Material Adverse Effect.
6.14. Separateness Provisions . (a) The Borrower shall conduct its business solely in its own name in a manner not misleading to other Persons as to its identity. Without limiting the generality of the foregoing, all oral and written communications (if any), including letters, invoices, purchase orders, contracts, statements, and applications shall be made solely in the name of the Borrower.
(b) The Borrower shall maintain entity records and books of account separate from those of any other entity which is an Affiliate of the Borrower and shall not commingle its funds or assets with those of any other entity which is an Affiliate of the Borrower.
(c) The Borrower shall provide that its board of directors or other analogous governing body will hold all appropriate meetings to authorize and approve the Borrower’s actions, which meetings will be separate from those of other entities; provided that the Borrower shall not be required to have an independent director on its board of directors or other analogous governing body.
6.15. Further Assurances . (a) The Borrower shall promptly upon request by the Administrative Agent, correct any material defect or error that may be discovered in any Financing Document or in the execution, acknowledgement, filing or recordation thereof.
(b) The Borrower shall promptly upon request by the Administrative Agent, do, execute, acknowledge, deliver, record, re-record, file, re-file, register and re-register any and all such further acts, deeds, conveyances, pledge agreements, mortgages, deeds of trust, trust deeds, assignments, financing statements and continuations thereof, termination statements, notices of assignment, transfers, certificates, assurances and other instruments as the Administrative Agent may reasonably require from time to time in order to (i) carry out more effectively the purposes of the Financing Documents, (ii) to the fullest extent permitted by applicable Legal Requirements, subject any Collateral to the Liens now or hereafter intended to be covered by any of the Security Documents, (iii) perfect and maintain the validity, effectiveness and priority of any of the Security Documents and any of the Liens intended to be
 
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created thereunder and (iv) assure, convey, grant, assign, transfer, preserve, protect and confirm more effectively unto the Secured Parties the rights granted or now or hereafter intended to be granted to the Secured Parties under any Financing Document or under any other instrument executed in connection with any Financing Document to which the Borrower is or is to be a party.
6.16. Additional Collateral . (a) With respect to any property acquired after the Closing Date by the Borrower (other than any Real Property described in paragraph (b) below) as to which the Collateral Agent, for the benefit of the Secured Parties, does not have a perfected Lien, promptly (i) execute and deliver to the Collateral Agent such amendments to the Security Agreement as the Administrative Agent deems necessary or advisable to grant to the Collateral Agent, for the benefit of the Secured Parties, a security interest in such property, subject to Permitted Liens and (ii) take all actions necessary or advisable to grant to the Collateral Agent, for the benefit of the Secured Parties, a perfected first priority security interest in such property, including the filing of UCC financing statements in such jurisdictions as may be required by the applicable Security Agreement or by law or as may be requested by the Collateral Agent or the Administrative Agent, except for Permitted Liens.
(b) On or prior to the first Borrowing Date in each month until a first priority Mortgage has been recorded for all Project Properties, the Borrower shall (i) execute and deliver an executed first priority Mortgage (or supplement thereto), in favor of the Administrative Agent, for the benefit of the Secured Parties, with respect to Project Properties so that after giving effect to the recordation of such Mortgage (or supplement) not less than 90% by number of the Requisite Project Properties on such Borrowing Date shall then be subject to a Mortgage and (ii) if requested by the Administrative Agent, provide the Financing Parties with (x) in respect of Project Properties acquired in fee, title and extended coverage insurance covering such Project Properties constituting Substation Sites in an amount at least equal to the purchase price of the Substation Sites, and with respect to any Project Properties acquired that are Substation Sites, a current ALTA survey thereof, together with a surveyor’s certificate and (y) any consents or estoppels reasonably deemed necessary or advisable by the Administrative Agent in connection with such Mortgage, each of the foregoing in form and substance reasonably satisfactory to the Administrative Agent.
6.17. Equity Commitment . The Borrower shall use its best efforts to cause each Equity Investor to fund its Equity Commitment as and to the extent required under the Equity Contribution Agreement. The Borrower shall apply all proceeds of the Equity Contributions in accordance with the Equity Contribution Agreement.
6.18. Consultants . The Borrower shall provide such documents and information to the Independent Engineer, the Insurance Consultant and the Financing Parties as they may reasonably request and consider necessary to deliver annually to the Administrative Agent a report on the status of the Project or compliance with applicable insurance requirements, as the case may be.
6.19. Construction of Project . The Borrower shall construct, or cause the construction of, the Project in accordance with the Material Project Documents, the approved plans and specifications thereunder, the Construction Budget and Schedule and Good Utility Practice, and without limiting the force or effect of Section 8.16, use commercially reasonable efforts to cause Term Conversion and TCOS Approval Date to occur no later than June 30, 2014.
 
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6.20. Net Cash Proceeds . The Borrower shall apply all Net Cash Proceeds in accordance with the requirements of the Depositary Agreement and the other Financing Documents.
6.21. Interest Rate Protection . Prior to the end of the First Phase Construction Loan Availability Period, the Borrower shall have entered into one or more Specified Swap Agreements pursuant to which the Borrower shall be a fixed rate payer and recipient in an accreting notional amount corresponding substantially to the schedule set forth in Schedule 6.21.
ARTICLE 7.
NEGATIVE COVENANTS OF BORROWER
The Borrower hereby agrees that, so long as the Commitments remain in effect, the Fixed Rate Notes, Loan or any Letter of Credit remains outstanding or other amount is owing to any Financing Party, the Issuing Bank or the Administrative Agent hereunder, the Borrower shall:
7.1. Indebtedness . The Borrower shall not directly or indirectly create, incur, assume, suffer to exist or otherwise be or become liable with respect to any Indebtedness except for Permitted Indebtedness.
7.2. Liens . The Borrower shall not create, incur, assume or suffer to exist (a) any Lien on any of its Property (including any Collateral) except for Permitted Liens or (b) any Lien on its Equity Interests, except Liens granted by the Pledge Agreement.
7.3. Investments . The Borrower shall not make any advance, loan, extension of credit (by way of guaranty or otherwise) or capital contribution to, or purchase any Equity Interest, bonds, notes, debentures or other debt securities of, or any other assets constituting a business unit of, or make any other investment in, any Person (all of the foregoing, “ Investments ”), except Investments in Permitted Investments.
7.4. Prohibition of Fundamental Changes; Sale of Assets, Fiscal Year, Etc.
(a) The Borrower shall not change its legal form, merge into or consolidate with, or acquire all or any substantial part of the assets or any class of stock of (or other equity interest in), any other Person and shall not liquidate or dissolve and shall not modify its organizational documents in any manner adverse to the Agents, the Issuing Bank or the Financing Parties; provided that, subject to Section 2.12(c), the Borrower may merge into or consolidate with the Pledgor.
(b) The Borrower shall not convey, sell, lease, license, transfer or otherwise dispose of, in one transaction or a series of transactions, any assets of the Borrower except (i) pursuant to the Financing Documents, (ii) pursuant to the CREZ Master Lease, (iii) the disposition of obsolete, worn out or replaced property not used or useful in the Project, (iv) in the
 
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ordinary course of business and which assets have a fair market value not in excess of $1,000,000 per transaction and $10,000,000 in the aggregate during each subsequent 12-month period commencing on the date of this Agreement, (v) sales, leases or transfers of assets as expressly contemplated by the CREZ Master Lease, and (vi) the liquidation, sale or use of cash for Permitted Investments.
(c) The Borrower shall not purchase or acquire any assets other than the purchase of assets required for the development, construction, completion, operation and maintenance of the Project in accordance with the Material Project Documents and as contemplated by the Construction Budget and Schedule, including budget deviations permitted by this Agreement.
(d) The Borrower shall not change its name, jurisdiction of formation, principal place of business, its fiscal year, its method of determining fiscal quarters or its federal employer identification number.
7.5. Nature of Business . The Borrower shall not enter into any activities other than the ownership, development, construction, leasing and financing of the Project and any activities incidental to the foregoing.
7.6. Transactions With Affiliates . Other than the CREZ Master Lease, the Project Management Agreement and transactions listed on Schedule 7.6 hereto, the Borrower shall not enter into any transaction, including any purchase, sale, lease or exchange of property, the rendering of any service or the payment of any management, advisory or similar fees, with any Affiliate unless such transaction is (a) (i) otherwise permitted under this Agreement, (ii) in the ordinary course of business of the Borrower, and (iii) upon fair and reasonable terms no less favorable to the Borrower than it would obtain in a comparable arm’s length transaction with a Person that is not an Affiliate or (b) an obligation under any Material Project Document or Equity Contribution Document as in existence on the Closing Date.
7.7. No Distributions . The Borrower shall not directly or indirectly, make or declare any dividend, payment or distribution (in cash, property or obligation) to the Pledgor or any of its Affiliates (including any distributions contemplated under the Borrower’s limited liability company operating agreement and any payments in respect of management (or other) fees to any of its Affiliates) (each such payment, a “ Restricted Payment ”) unless:
(i) such Restricted Payment is made after the Term Conversion Date from funds on deposit in the Distribution Account;
(ii) no Default or Event of Default has occurred and is continuing and such Restricted Payment will not result in a Default or an Event of Default; and
(iii) (x) if the Term Conversion Date occurs in the fourth quarter of a fiscal year, the Restricted Payment made in respect of such fiscal quarter shall not exceed the least of (A) an amount equal to the pro rata share of the Pledgor’s taxable income attributable to the Borrower for the fiscal year ending at the end of such fiscal quarter, (B) an amount equal to the amount, after giving effect to the payment thereof, that will not cause the Borrower to have insufficient funds on deposit in the Revenue Account
 
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(determined on the date of the payment of such Restricted Payment) to make all payments required to be made in respect of items (i) through (vi) as specified in Section 3.2(c) of the Depositary Agreement through the end of the first full fiscal quarter of the immediately following fiscal year and (C) the amount then on deposit in the Distribution Account and (y) if clause (x) shall not apply, and one full fiscal quarter has ended since the Term Conversion Date, the amount of such Restricted Payment shall not exceed the amount then on deposit in the Distribution Account and the Debt Service Coverage Ratio of the Borrower for the period of the immediately preceding four fiscal quarters most recently ended (or, if less, the number of full fiscal quarters ended following the Term Conversion Date) shall be demonstrated by the Borrower with supporting calculation to be equal to or greater than 1.20 to 1.00.
7.8. Debt to Total Capitalization Ratio .
(a) At the time of any Borrowing of Construction Loans, the Borrower shall demonstrate with supporting calculations that the Debt to Total Capitalization Ratio, calculated on a pro forma basis giving effect to such Borrowing, shall not exceed 0.70 to 1.00.
(b) At any time on or after the Term Conversion Date, the Debt to Total Capitalization Ratio shall not exceed 0.70 to 1.00 at the end of any fiscal quarter.
7.9. Material Project Documents . The Borrower shall not (i) cancel or terminate the CREZ Master Lease or any other Material Project Document to which it is a party or consent to or accept any cancellation or termination of the CREZ Master Lease or any Material Project Document, (ii) sell, assign (other than pursuant to the Security Documents) or otherwise dispose of (by operation of law or otherwise) any part of its interest in the CREZ Master Lease or any Material Project Document to which it is a party or consent to any assignment by the other party thereto, (iii) waive any material default under, or material breach of, the CREZ Master Lease or any Material Project Document to which it is a party or waive, fail to enforce, forgive, compromise, settle, adjust or release any material right, interest or entitlement, howsoever arising, under, or in respect of the CREZ Master Lease or any Material Project Document or in any way vary, or consent or agree to the variation of, any material provision of the CREZ Master Lease or Material Project Document or of the performance of any material covenant or obligation by any other Person or consent to any assignment by any other Person under the CREZ Master Lease or any Material Project Document, (iv) petition, request or take any other legal or administrative action that seeks, or may be expected, to impair the CREZ Master Lease or any Material Project Document to which it is a party or seeks to amend, modify or supplement the CREZ Master Lease or any Material Project Document, (v) amend, supplement or modify the CREZ Master Lease or any Material Project Document (in each case as in effect when originally delivered to and accepted by the Administrative Agent); it being understood and agreed that the entering into and completion of lease supplements in accordance with the CREZ Master Lease, including pursuant to Section 6.10(b) hereof, is not an amendment, supplement or modification of the CREZ Master Lease for purposes hereof to which it is a party; provided that (x) work orders or notices to proceed entered under Material Project Documents and (y) change orders to the Material Project Documents consented to by the Independent Engineer are not amendments, supplements or modifications of Material Project Documents for purposes hereof and provided further that, with respect to any such change orders the dollar value of which is not greater than
 
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$500,000 individually and $2,000,000 in the aggregate for the applicable Material Project Document and which are included in or within the Construction Budget and Schedule, the consent of the Independent Engineer will not be required or (vi) enter into any new agreement or instrument replacing or supplementing the CREZ Master Lease or any Material Project Document other than in accordance with Section 6.10(b); in each case of clauses (i) through (vi) above without first obtaining the prior written approval of the Required Financing Parties.
7.10. Amendments to Organizational Documents . The Borrower shall not amend its certificate of formation or other formation documents, limited liability company agreement or any other organizational document without the consent of the Required Financing Parties.
7.11. Amendments to Construction Budget and Schedule . The Borrower shall not amend the Base CREZ Budget, the CREZ II Budget or the Construction Budget and Schedule without the consent of the Required Financing Parties; provided that amendments solely requiring the funding of additional equity shall be permitted.
7.12. Additional Project Agreements . The Borrower shall not enter into any Additional Project Agreement without first (a) delivering to the Administrative Agent, in no event later, than ten (10) Business Days before the anticipated execution date of such Additional Project Agreement, a final draft thereof and (b) obtaining the prior written approval of the Required Financing Parties. Concurrently with the delivery of each such Additional Project Agreement, the Borrower shall use its commercially reasonable efforts to cause each other party to such agreement to execute and deliver to the Administrative Agent a Consent and Agreement to collateral assignment in form and substance reasonably satisfactory to the Administrative Agent. In addition, the Borrower shall deliver to the Administrative Agent promptly, but in no event later than seven (7) days after the receipt thereof by the Borrower, copies of any Additional Project Agreements obtained or entered into by the Borrower after the Closing Date (which copy shall be subject to Section 7.9) and any material amendment, supplement or other modification to any Additional Project Agreement received by the Borrower after the Closing Date.
7.13. Swap Agreements . The Borrower shall not enter into any Swap Agreement other than as contemplated by Section 6.21.
7.14. ERISA . The Borrower shall not engage in or suffer any ERISA Event that would subject the Borrower to any tax, penalty or other liabilities in an amount that could reasonably be expected to have a Material Adverse Effect.
7.15. No Subsidiaries . The Borrower shall not create, form or acquire any Subsidiary or enter into any partnership or joint venture.
7.16. Accounts . The Borrower shall not have any “deposit accounts” with a “bank” (within the meaning of Section 9-102 of the UCC) other than the Collateral Accounts, as applicable, established in accordance with the Depositary Agreement and the other Financing Documents.
7.17. Terrorism Sanctions Regulations . The Borrower will not (a) become listed on the OFAC SDN List or (b) have any investments in or engage in any dealings or transactions with any Persons listed on the OFAC SDN List if such investments, dealings or transactions would cause any Lender or any holder of a Note to be in violations of any laws or regulations that are applicable to such Lender or holder.
 
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7.18. Regulations . The Borrower shall not directly or indirectly apply any part of the proceeds of any Loan or other extensions of credit hereunder or other revenues to the purchasing or carrying of any Margin Stock.
7.19. Negative Pledge Clauses . The Borrower shall not enter into or suffer to exist or become effective any agreement that prohibits or limits the Borrower’s ability to create, incur, assume or suffer to exist any Lien upon any of its property or revenues, whether now owned or hereafter acquired, to secure its obligations under the Financing Documents to which it is a party other than this Agreement and the other Financing Documents.
7.20. Remaining Equity Commitment . Prior to the commencement of the Second Phase Construction Loan Availability Period, the Borrower shall not incur Project Costs the payment for which is due prior to October 15, 2011, unless after giving effect to the payment of such Project Costs, the Remaining Equity Commitment shall be greater than 105% of the First Phase Loan Agreement Obligations Amount.
ARTICLE 8.
EVENTS OF DEFAULT; REMEDIES
The occurrence of any of the following events, described in Sections 8.1 through 8.16 inclusive, shall constitute an event of default (individually, an “ Event of Default, ” and collectively, the “ Events of Default ”) hereunder:
8.1. Failure to Make Payments . (a) (i) The Borrower shall fail to pay any principal of any Loan or the Fixed Term Notes or any reimbursement obligation in respect of any Letter of Credit when due in accordance with the terms hereof; the Borrower shall fail to pay any Make-Whole Amount when due in accordance with the terms hereof; or (ii) the Borrower shall fail to pay any interest on any Loan or in respect of the Fixed Term Notes, or any other amount payable hereunder or under any other Financing Document, within three (3) days after any such interest or other amount becomes due in accordance with the terms hereof.
(b) An Event of Default or Termination Event (as defined under the Swap Agreements) by the Borrower shall have occurred and be continuing under any Swap Agreement as the result of the Borrower’s failure to pay any amount due under such Swap Agreement.
8.2. Misrepresentations . Any representation or warranty made or deemed made by the Borrower herein or in any other Financing Document, any amendment or modification thereof or waiver thereto or that is contained in any certificate, document or financial or other statement furnished by it or at any time under or in connection with this Agreement or any such other Financing Document shall prove to have been inaccurate in any material respect on or as of the date made or deemed hereunder to be made and, if such misrepresentation is susceptible to cure, the adverse effect of the misrepresentation is not remedied within thirty (30) days of the Borrower receiving notice or knowledge thereof or as remedied, could reasonably be expected to have a Material Adverse Effect.
 
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8.3. Breach of Terms of This Agreement, Other Financing Documents .
(a) The Borrower shall default in the observance or performance of any agreement contained in Sections 6.2(b), 6.3(a), 6.5(a) or (b), 6.8, 6.17, 6.21 or Article 7 hereof.
(b) The Borrower shall default in the observance or performance of any other agreement contained in this Agreement or any other Financing Document (other than as provided elsewhere in this Article 8), and such default shall continue unremedied for a period of thirty (30) days after notice to the Borrower from the Administrative Agent or the Required Financing Parties.
8.4. Cross Default . The Borrower shall (i) default in making any payment of any principal of any Indebtedness (including any Guarantee obligation, but excluding the Loans) on the scheduled or original due date with respect thereto; or (ii) default in making any payment of any interest on any such Indebtedness beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness was created; or (iii) default in the observance or performance of any other agreement or condition relating to any such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or beneficiary of such Indebtedness (or a trustee or agent on behalf of such holder or beneficiary) to cause, with the giving of notice if required, such Indebtedness to become due prior to its stated maturity or (in the case of any such Indebtedness constituting a Guarantee obligation) to become payable; provided , that a default, event or condition described in clause (i), (ii) or (iii) above shall not at any time constitute an Event of Default unless, at such time, one or more defaults, events or conditions of the type described in clauses (i), (ii) and (iii) above shall have occurred and be continuing with respect to Indebtedness the outstanding principal amount of which exceeds in the aggregate $2,000,000.
8.5. Bankruptcy; Insolvency . (a) The Borrower or any of the Pledgor, TDC, General Partner, Operating Partnership or the Lessee (each, a “ Borrower Party ”) shall commence any case, proceeding or other action (i) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (ii) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, or (b) there shall be commenced against the Borrower or any Borrower Party any case, proceeding or other action of a nature referred to in clause (a) above that (i) results in the entry of an order for relief or any such adjudication or appointment or (ii) remains undismissed or undischarged for a period of 60 days, or (c) there shall be commenced against the Borrower or any Borrower Party any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets that results in the entry of an order for any such relief that shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof, or (d) the Borrower or any Borrower Party shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (a), (b), or (c) above, or (e) either the Borrower or the Lessee shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due, or (f) or the Borrower or any Borrower Party shall make a general assignment for the benefit of its creditors.
 
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8.6. ERISA Events . (a) An ERISA Event shall have occurred, (b) a trustee shall be appointed by a United States district court to administer any Pension Plan, (c) the PBGC shall institute proceedings to terminate any Pension Plan(s), (d) the Borrower or any of its ERISA Affiliates shall have been notified by the sponsor of a Multiemployer Plan that it has incurred or will be assessed Withdrawal Liability to such Multiemployer Plan and such entity does not have reasonable grounds for contesting such Withdrawal Liability or is not contesting such Withdrawal Liability in a timely and appropriate manner; or (e) any other event or condition shall occur or exist with respect to an ERISA Plan, a Foreign Plan or a Foreign Benefit Arrangement; and in each case in clauses (a) through (e) above, such event or condition, together with all other such events or conditions, if any, could, in the sole judgment of the Required Financing Parties, reasonably be expected to result in a Material Adverse Effect.
8.7. Judgments . (a) One or more monetary judgments or decrees shall be entered against the Borrower involving in the aggregate a liability (which liability is not paid or is not covered by available insurance as acknowledged in writing by the provider of such insurance or as certified to the Administrative Agent by the Insurance Consultant) of $10,000,000 or more, and all such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal within 30 days from the entry thereof.
(b) One or more non-monetary judgments or decrees shall be entered against the Borrower which can reasonably be expected to result in a Material Adverse Effect, and all such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal within 30 days from the entry thereof.
8.8. Financing Documents; Security . Any of the Financing Documents shall cease, for any reason, to be in full force and effect, the Borrower or any Affiliate thereof shall so assert or any security interest in the Collateral purported to be created by any Security Document shall cease to be, or shall be asserted in writing by the Borrower or the Pledgor not to be, a valid and perfected security interest having the priority required by this Agreement or the relevant Security Document in the securities, assets or properties covered thereby.
8.9. Loss of Applicable Permits or CCNs . Any Applicable Permit or CCN necessary for the construction or operation of the Project shall be materially modified in an adverse manner, revoked, suspended, terminated, non-renewed, or cancelled by the issuing agency or other Governmental Authority having jurisdiction or the Borrower shall fail to obtain, renew, maintain or comply in all respects with any Applicable Permit or CCN, as applicable, if such event, together with all such other events, could, in the sole judgment of the Required Financing Parties be materially adverse to the Required Financing Parties; provided , however , that an Event of Default with respect to an Applicable Permit or CCN shall not be deemed to have occurred if such Applicable Permit or CCN, as applicable, has been replaced within thirty (30) days of the occurrence of a Default under this Section 8.9 by a replacement Applicable Permit or CNN, as applicable, in form and substance reasonably acceptable to the Required Financing Parties, so long as no Material Adverse Effect shall have occurred during such thirty (30) day period.
 
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8.10. Equity Commitment . (a) Any Founding Equity Investor, Guarantor thereof or any other Person paying the obligations of the foregoing, the Operating Partnership, TDC, or the Pledgor shall default in the observance or performance of any agreement contained in Section 2.1 of the Equity Contribution Agreement or any other provision of the Equity Contribution Agreement requiring any such party to make payments or fund equity thereunder unless within five (5) Business Days of such default one or more Founding Equity Investors, the Operating Partnership, TDC, the Pledgor or another Person shall have made any necessary payment or funding to cure such default or (b) the Equity Letter of Credit shall cease to be in full force and effect for any reason in an amount at least equal to the Remaining Equity Commitment in accordance with the Equity Contribution Agreement (unless such Equity Letter of Credit has been fully drawn by the Administrative Agent or the Equity Commitment is cash collateralized as contemplated by the Equity Contribution Agreement in an amount at least equal to the Remaining Equity Commitment), and the circumstances described in clause (a) or (b) above shall remain unremedied for five (5) Business Days.
8.11. Abandonment of Project . The Borrower shall have affirmatively abandoned the development, construction or operation of the Project for a period of at least ten (10) consecutive days.
8.12. Breach of Material Project Documents .
(a) A default or event of default shall occur and be continuing under the CREZ Master Lease.
(b) Subject to Section 8.13, the Borrower or any other party thereto shall breach or be in default under any material term, condition, provision, covenant, representation or warranty contained in any Material Project Document and the Required Financing Parties shall have determined that the effect of such breach or default could be reasonably expected to have a Material Adverse Effect on the Borrower or the Project and such breach or default shall continue unremedied for thirty (30) days after notice from the Administrative Agent or the Financing Parties to the Borrower; provided , however , that if (a) such breach or default cannot be cured within such thirty (30) day period, (b) such breach or default is susceptible to cure within 90 days, (c) such breach or default is by any party other than the Borrower, (d) such breach or default has not resulted, and could not, with the additional cure time contemplated by this proviso, be reasonably expected to result, in a Material Adverse Effect, and (e) such other party is proceeding with all requisite diligence and in good faith to cure such failure, then the time within which such failure may be cured shall be extended to such date, not to exceed a total of sixty (60) days after the end of the initial thirty (30) day period, as shall be necessary for such party diligently to cure such failure.
(c) A Material Project Participant has delivered to the Borrower a written notice of default pursuant to the relevant Material Project Document (or the occurrence of any default that does not require a notice to affect a termination of such Material Project Document), such default, if not cured, gives such Material Project Participant the right to terminate such Material Project Document, the cure period provided thereunder in respect of such default has expired (or there is no cure period), and such default continues unremedied.
 
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8.13. Loss of Material Project Document . Notwithstanding Section 8.12, any Material Project Document shall cease for any reason to be in full force and effect unless terminated in accordance with its terms and not as a result of a default thereunder; provided , however , that such Event of Default with respect to a Material Project Document shall not be deemed to have occurred if such Material Project Document has been replaced within thirty (30) days of the occurrence of a Default under this Section 8.13 by a replacement Material Project Document in form and substance reasonably acceptable to the Required Financing Parties.
8.14. Loss of Collateral . Any material portion of the Borrower’s property is damaged, seized or appropriated without fair value being paid therefor such as to allow replacement of such property and to allow the Borrower to continue satisfying its obligations hereunder and under the other Operative Documents, in each case after giving effect to any cash contributions to the common equity of the Borrower (other than pursuant to the Equity Contribution Agreement) made to the Borrower after the Closing Date and applied to such replacement.
8.15. Failure to Satisfy Conditions to Second Phase Construction Loans . The Borrower shall have failed to satisfy the conditions to the initial Borrowing of Second Phase Construction Loans on or prior to October 15, 2011.
8.16. Term Conversion . Term Conversion shall not have occurred on or prior to June 30, 2014.
8.17. Remedies . Upon the occurrence and during the continuation of (a) an Event of Default specified in Section 8.5(a) or (b) with respect to the Borrower, automatically the Commitments shall immediately terminate and the Loans (with accrued interest thereon, and including all amounts of L/C Obligations, whether or not the beneficiaries of the then outstanding Letters of Credit shall have presented the documents required thereunder) and all other amounts owing under this Agreement and the other Financing Documents shall become immediately due and payable and the Administrative Agent shall be deemed to have made a demand for cash collateral to the full extent permitted under Section 3.9, without presentment, demand, protest or other notice of any kind, all of which are expressly waived by the Borrower, anything contained herein or in any other Financing Document to the contrary notwithstanding and (b) an Event of Default with respect to any Person other than the Borrower or an Event of Default with respect to the Borrower other than the Events of Default specified in clause (a) above, either or all of the following actions may be taken: (i) with the consent of the Required Financing Parties, the Administrative Agent may, or upon the request of the Required Financing Parties, the Administrative Agent shall, by notice to the Borrower, declare the Commitments to be terminated forthwith, whereupon the Commitments shall immediately terminate, (ii) with the consent of the Required Financing Parties, the Administrative Agent may, or upon the request of the Required Financing Parties, the Administrative Agent shall, declare the Loans and the Fixed Rate Notes (with accrued interest thereon and the Make-Whole Amount) and all other amounts owing under this Agreement and the other Financing Documents to be due and payable forthwith, whereupon the same shall immediately become due and payable, (iii) with the consent of the Required Financing Parties, the Administrative Agent may, or upon the request of the Required Financing Parties, the Administrative Agent shall, cause the Collateral Agent to draw in whole or in part upon each Equity Letter of Credit, (iv) the Borrower shall provide cash collateral pursuant to Section 3.9, (v) with the consent of the Required Financing Parties, and
 
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after taking action in accordance with clauses (i) or (ii) above, the Administrative Agent may, or upon the request of the Required Financing Parties, the Administrative Agent shall, upon one (1) Business Day prior notice to the Borrower, enter into possession of the Project and perform any and all work and labor necessary to complete the Project or operate and maintain the Project, and all sums expended by the Administrative Agent in so doing, together with interest on such total amount at the Default Rate, shall be repaid by the Borrower to the Administrative Agent upon demand and shall be secured by the Financing Documents, notwithstanding that such expenditures may, together with amounts advanced under this Agreement, exceed the amount of the total Commitments and the principal amount of the Fixed Rate Notes, (vi) with the consent of the Required Financing Parties, the Administrative Agent may, or upon the request of the Required Financing Parties, shall, cause the Collateral Agent to, apply or execute upon any amounts on deposit in any Collateral Account, any proceeds from an Event of Loss or any other moneys of the Borrower on deposit with the Agents or any Secured Party in the manner provided in the UCC and other relevant statutes and decisions and interpretations thereunder with respect to cash collateral, and (vii) with the consent of the Required Financing Parties, the Administrative Agent may, or upon the request of the Required Financing Parties, the Administrative Agent shall, cause the Collateral Agent to, draw upon or make a demand under any Security Document or any Material Project Document collaterally assigned to Collateral Agent by the Borrower. Upon the occurrence and during the continuation of an Event of Default specified in Section 8.1(a)(i) or Section 8.1 (a)(ii) for 365 days, the Administrative Agent may declare the Loans (with accrued interest thereon to the Lenders) and all other amounts owing under this Agreement and any Fixed Rate Note Holder may declare its Fixed Rate Notes (with accrued interest thereon and Make-Whole Amount) and all other amounts owing under this Agreement and the other Financing Documents to such Fixed Rate Note Holder to be due and payable, and the other Financing Documents to be due and payable forthwith, whereupon the same shall immediately become due and payable. Notwithstanding anything to the contrary contained herein, (i) the Lenders may make disbursements or Loans to or on behalf of the Borrower to cure any Event of Default hereunder and to cure any default and render any performance required by the Borrower under any Material Project Documents to which it is party as the Lenders in their sole discretion may consider necessary or appropriate, whether to preserve and protect the Collateral or the Lenders’ interests therein or for any other reason, and all sums so expended, together with interest on such total amount at the Default Rate (but in no event shall the rate exceed the maximum lawful rate), shall be repaid by the Borrower to the Administrative Agent on demand and shall be secured by the Financing Documents, notwithstanding that such expenditures may, together with amounts advanced under this Agreement, exceed the amount of the total Commitments and the principal amount of the Fixed Rate Notes and (ii) the Administrative Agent and the Collateral Agent may exercise any and all rights and remedies available to them under any of the Financing Documents at law or in equity, including judicial or non-judicial foreclosure or public or private sale of any of the Collateral pursuant to the Security Documents.
8.18. Application of Proceeds . The Proceeds (as defined in the Security Agreement) received by the Collateral Agent in respect of any sale of, collection from or other realization upon all or any part of the Collateral pursuant to the exercise by the Collateral Agent of its remedies shall be applied, in full or in part, together with any other sums then held by the Collateral Agent pursuant to this Agreement in accordance with Section 4.14 of the Security Agreement.
 
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ARTICLE 9.
ADMINISTRATIVE AGENT AND COLLATERAL AGENT; OTHER AGENTS
9.1. Appointment .
(a) Each Financing Party hereby irrevocably designates and appoints the Administrative Agent as the agent of such Financing Party under this Agreement and the other Financing Documents, and each such Financing Party irrevocably authorizes the Administrative Agent, in such capacity, to take such action on its behalf under the provisions of this Agreement and the other Financing Documents and to exercise such powers and perform such duties as are expressly delegated to the Administrative Agent by the terms of this Agreement and the other Financing Documents, together with such other powers as are reasonably incidental thereto.
(b) Each Financing Party hereby irrevocably designates and appoints the Collateral Agent as the agent of such Financing Party under this Agreement and the other Financing Documents, and each such Financing Party irrevocably authorizes the Collateral Agent, in such capacity, to take such action on its behalf under the provisions of this Agreement and the other Financing Documents and to exercise such powers and perform such duties as are expressly delegated to the Collateral Agent by the terms of this Agreement and the other Financing Documents, together with such other powers as are reasonably incidental thereto.
(c) Notwithstanding any provision to the contrary elsewhere in this Agreement, the Agents shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Financing Party, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Financing Document or otherwise exist against the Agents.
9.2. Delegation of Duties . Each of the Agents may execute any of its duties under this Agreement and the other Financing Documents by or through agents or attorneys in fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. No Agent shall be responsible for the negligence or misconduct of any agents or attorneys-in fact selected by it with reasonable care.
9.3. Exculpatory Provisions . None of the Agents nor any of its respective officers, directors, employees, agents, advisors, attorneys-in-fact or affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or any other Financing Document (except to the extent that any of the foregoing are found by a final and non-appealable decision of a court of competent jurisdiction to have resulted from its or such Person’s own gross negligence or willful misconduct) or (ii) responsible in any manner to any of the Financing Parties for any recitals, statements, representations or warranties made by the Borrower or any officer thereof contained in this Agreement or any other Financing Document or in any certificate, report, statement or other document referred to or provided for in, or received by such Agent under or in connection with, this Agreement or any other Financing Document or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Financing Document or for any failure of the Borrower to perform its obligations hereunder or thereunder. The Agents shall not be under any
 
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obligation to any Financing Party to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Financing Document, or to inspect the properties, books or records of the Borrower.
9.4. Reliance by Agents . Each of the Agents shall be entitled to rely, and shall be fully protected in relying, upon any instrument, writing, resolution, notice, consent, certificate, affidavit, letter, telecopy or email message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including counsel to the Borrower), independent accountants and other experts selected by such Agent. Each of the Agents may deem and treat the payee of any Note as the owner thereof for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with the Administrative Agent. Each of the Agents shall be fully justified in failing or refusing to take any action under this Agreement or any other Financing Document unless such Agent shall first receive such advice or concurrence of the Required Financing Parties (or, if so specified by this Agreement, all Financing Parties) in the case of the Administrative Agent, or of the Administrative Agent in the case of the Collateral Agent, as it deems appropriate or it shall first be indemnified to its satisfaction by the Financing Parties against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. The Agents shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Financing Documents in accordance with a request of the Required Financing Parties (or, if so specified by this Agreement, all Financing Parties), and such request and any action taken or failure to act in the case of the Administrative Agent, or of the Administrative Agent in the case of the Collateral Agent, pursuant thereto shall be binding upon all the Financing Parties and all future holders of the Loans and Fixed Rate Note.
9.5. Notice of Default . The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default unless the Administrative Agent has received notice from a Financing Party or the Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a “notice of default”. In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give notice thereof to the Financing Parties and the Collateral Agent. The Administrative Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Financing Parties (or, if so specified by this Agreement, all Financing Parties); provided that unless and until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Financing Parties.
9.6. Non-Reliance on the Agents and Other Financing Parties . Each Financing Party expressly acknowledges that none of the Administrative Agent, the Collateral Agent nor any of their respective officers, directors, employees, agents, advisors, attorneys-in-fact or affiliates have made any representations or warranties to it and that no act by the Agents hereafter taken, including any review of the affairs of the Borrower or any of its Affiliates, shall be deemed to constitute any representation or warranty by the Agents to any Financing Party. Each Financing Party represents to the Agents that it has, independently and without reliance upon any other Financing Party, and based on such documents and information as it has deemed appropriate,
 
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made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Borrower and its Affiliates and made its own decision to make its Loans or purchase the Fixed Rate Notes hereunder and enter into this Agreement. Each Financing Party also represents that it will, independently and without reliance upon the Agents or any other Financing Party, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Financing Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Borrower and its Affiliates. Except for notices, reports and other documents expressly required to be furnished to the Financing Parties by the Agents hereunder, the Agents shall not have any duty or responsibility to provide any Financing Party with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of the Borrower or any of its Affiliates that may come into the possession of the Agents or any of their officers, directors, employees, agents, advisors, attorneys-in-fact or affiliates.
9.7. Indemnification . The Financing Parties agree to indemnify each of the Administrative Agent, the Collateral Agent and their officers, directors, employees, affiliates, agents, advisors and controlling Persons (each, an “ Agent Indemnitee ”) (to the extent not reimbursed by the Borrower and without limiting the obligation of the Borrower to do so), ratably according to their respective pro rata share in effect on the date on which indemnification is sought under this Section (with such pro rata share calculated as (i) prior to the Term Conversion Date, such Financing Party’s pro rata share of the aggregate outstanding Construction Loans and Fixed Rate Notes and (ii) on or after the Term Conversion Date, such Financing Party’s pro rata share of the aggregate outstanding Term Loans and Fixed Rate Note), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, claims, including Environmental Claims, expenses or disbursements of any kind whatsoever that may at any time (whether before or after the payment of the Loans or redemption of the Fixed Rate Note) be imposed on, incurred by or asserted against such Agent Indemnitee in any way relating to or arising out of, the Commitments, this Agreement, any of the other Financing Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by such Agent Indemnitee under or in connection with any of the foregoing; provided that no Financing Party shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements that are found by a final and non-appealable decision of a court of competent jurisdiction to have resulted from such Agent Indemnitee’s gross negligence or willful misconduct. The agreements in this Section shall survive the payment of the Loans, the redemption of the Fixed Rate Notes, and all other amounts payable hereunder.
9.8. Agents in Their Individual Capacity . Each of the Agents and its affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Borrower as though such Agent were not an Agent. With respect to its Loans made or renewed by it, each of the Agents shall have the same rights and powers under this Agreement and the other Financing Documents as any Lender and may exercise the same as though it were not an Agent, and the terms “Lender” and “Lenders” shall include such Agent in its individual capacity.
 
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9.9. Successor Agents . The Administrative Agent may resign as Administrative Agent upon thirty (30) Business Days’ notice to the Financing Parties and the Borrower. If the Administrative Agent shall resign as Administrative Agent under this Agreement and the other Financing Documents, then the Required Financing Parties shall appoint from among the Lenders a successor agent for the Financing Parties, which successor agent shall (unless an Event of Default under Section 8.1 or 8.5 with respect to the Borrower shall have occurred and be continuing) be subject to approval by the Borrower (which approval shall not be unreasonably withheld or delayed), whereupon such successor agent shall succeed to the rights, powers and duties of the Administrative Agent, and the term “Administrative Agent” shall mean such successor agent effective upon such appointment and approval, and the former Administrative Agent’s rights, powers and duties as Administrative Agent shall be terminated, without any other or further act or deed on the part of such former Administrative Agent or any of the parties to this Agreement or any holders of the Loans. If no successor agent has accepted appointment as Administrative Agent by the date that is thirty (30) Business Days following a retiring Administrative Agent’s notice of resignation, the retiring Administrative Agent’s resignation shall nevertheless thereupon become effective, and the Financing Parties shall assume and perform all of the duties of the Administrative Agent hereunder until such time, if any, as the Required Financing Parties appoint a successor agent as provided for above. After any retiring Administrative Agent’s resignation as Administrative Agent, the provisions of this Article 9 and of Section 10.5 shall continue to inure to its benefit. The Collateral Agent may resign as Collateral Agent upon 30 days’ notice to the Administrative Agent, the Financing Parties and the Borrower. If the Collateral Agent shall resign as Collateral Agent under this Agreement and the other Financing Documents, then the Required Financing Parties shall appoint from among the Lenders a successor agent for the Financing Parties, which successor agent shall (unless an Event of Default under Section 8.1 or 8.5 with respect to the Borrower shall have occurred and be continuing) be subject to approval by the Borrower (which approval shall not be unreasonably withheld or delayed), whereupon such successor agent shall succeed to the rights, powers and duties of the Collateral Agent, and the term “Collateral Agent” shall mean such successor agent effective upon such appointment and approval, and the former Collateral Agent’s rights, powers and duties as Collateral Agent shall be terminated, without any other or further act or deed on the part of such former Collateral Agent or any of the parties to this Agreement or any holders of the Loans. If no successor agent has accepted appointment as Collateral Agent by the date that is 30 days following a retiring Collateral Agent’s notice of resignation, the retiring Collateral Agent’s resignation shall nevertheless thereupon become effective, and the Financing Parties shall assume and perform all of the duties of the Collateral Agent hereunder until such time, if any, as the Required Financing Parties appoint a successor agent as provided for above. After any retiring Collateral Agent’s resignation as Collateral Agent, the provisions of this Article 9 and of Section 10.5 shall continue to inure to its benefit.
9.10. Agents under Security Documents . Each Financing Party hereby authorizes the Administrative Agent or Collateral Agent, as applicable, on behalf of and for the benefit of the Secured Parties, to be the agent for and representative of the Financing Parties with respect to the Collateral and the Security Documents. For the avoidance of doubt, the Collateral Agent shall receive direction either from the Administrative Agent directly or from the Administrative Agent on behalf of the Required Financing Parties.
 
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9.11. Collateral Agent’s Duties . Whenever reference is made in this Agreement or any Security Document to any action by, consent, designation, specification, requirement or approval of, notice, request or other communication from, or other direction given or action to be undertaken or to be (or not to be) suffered or omitted by the Collateral Agent or to any amendment, waiver or other modification of this Agreement to be executed (or not to be executed) by the Collateral Agent or to any election, decision, opinion, acceptance, use of judgment, expression of satisfaction or other exercise of discretion or rights or remedies to be made (or not to be made) by the Collateral Agent, it is understood that in all cases the Collateral Agent shall be acting, giving, withholding, suffering, omitting, making or otherwise undertaking and exercising the same (or shall not be undertaking and exercising the same) as directed in accordance with this Agreement and the Security Documents. This provision is intended solely for the benefit of the Collateral Agent and its permitted successors and assigns and is not intended to, and will not, entitle the other parties hereto to any defense, claim or counterclaims under or in relation to any Security Documents, or confer any rights or benefits on any party hereto.
9.12. Right to Realize on Collateral . Notwithstanding anything to the contrary contained in any of the Financing Documents, the Borrower, the Administrative Agent, the Collateral Agent, and each Financing Party hereby agree that (i) no Financing Party shall have any right individually to realize upon any of the Collateral, it being understood and agreed that all powers, rights and remedies hereunder may be exercised solely by the Administrative Agent, on behalf of the Secured Parties in accordance with the terms hereof, and all powers, rights and remedies under the Security Documents may be exercised solely by the Collateral Agent, on behalf of the Secured Parties in accordance with the terms hereof, and (ii) in the event of a foreclosure by the Collateral Agent on any of the Collateral pursuant to a public or private sale or other disposition, the Collateral Agent or any Financing Party may be the purchaser or licensor of any or all of such Collateral at any such sale or other disposition and the Collateral Agent, as agent for and representative of the Secured Parties (but not any Financing Party or Financing Parties in its or their respective individual capacities unless the Required Financing Parties shall otherwise agree in writing) shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Obligations as a credit on account of the purchase price for any collateral payable by the Collateral Agent at such sale or other disposition.
9.13. Other Agents . None of the Co-Documentation Agents, Co-Syndication Agents shall have any duties or responsibilities hereunder in its capacity as such.
ARTICLE 10.
MISCELLANEOUS
10.1. Amendments . (a) Neither this Agreement, any other Financing Document, nor any terms hereof or thereof may be amended or modified except in accordance with the provisions of this Section 10.1. The Required Financing Parties and the Borrower party to the relevant Financing Document may, or with the written consent of the Required Financing Parties, the Administrative Agent and the Borrower party to the relevant Financing Document shall, from time to time (i) enter into written amendments, supplements or modifications hereto
 
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and to the other Financing Documents for the purpose of adding any provisions to this Agreement or the other Financing Documents or changing in any manner the rights of the Financing Parties or of the Borrower hereunder or thereunder; provided that with respect to any amendment or supplement that adversely affects the Collateral Agent, the written consent of the Collateral Agent shall be required and with respect to any amendment or supplement that adversely affects the Issuing Bank, the written consent of the Issuing Bank shall be required or (ii) waive, on such terms and conditions as the Required Financing Parties or the Administrative Agent, as the case may be, may specify in such instrument, any of the requirements of this Agreement or the other Financing Documents or any Default or Event of Default and its consequences; provided , however , that no such waiver and no such amendment, supplement or modification shall:
(A) Forgive the principal amount or extend the final scheduled date of maturity of any Loan, reduce the stated rate of any interest or fee payable hereunder (except in connection with the waiver of applicability of any post-default increase in interest rates (which waiver shall be effective with the consent of the Required Financing Parties)) or extend the scheduled date of any payment thereof, or increase the amount or extend the expiration date of any Lender’s Commitment, in each case without the written consent of each Lender directly affected thereby;
(B) Forgive the principal amount or extend the final scheduled date of maturity of the Fixed Rate Notes, reduce the stated rate of any interest or fee payable hereunder (except in connection with the waiver of applicability of any post-default increase in interest rates (which waiver shall be effective with the consent of the Required Financing Parties)) or extend the scheduled date of any payment thereof, in each case without the written consent of each Fixed Rate Note Holder directly affected thereby;
(C) eliminate or reduce the voting rights of any Financing Party under this Section 10.1 without the written consent of such Financing Party;
(D) (i) consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement and the other Financing Documents, or (ii) release a material portion of the Collateral or any of the Material Project Documents, in each case without the written consent of all Financing Parties;
(E) amend, modify or waive any provision of Section 2.19(b) or (c) without the written consent of all Financing Parties;
(F) amend, modify or waive any provision affecting the rights or duties of an Issuing Bank hereunder without the written consent of the Issuing Bank;
(G) reduce the percentage specified in the definition of Required Financing Parties without the written consent of all Financing Parties; or
 
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(H) amend, modify or waive any provision of Article 9 or any other provision of any Financing Document that affects the Agents without the written consent of the applicable Agent.
(b) Notwithstanding anything to the contrary contained in this Section 10.1, any Financing Document, this Agreement or any related document may be amended, supplemented or waived with the consent of the Administrative Agent at the request of the Borrower without the need to obtain the consent of any other Financing Party if such amendment, supplement or waiver is delivered in order (i) to comply with local law or advice of local counsel, (ii) to cure ambiguities, omissions, mistakes or defects or (iii) to cause such Financing Document or other document to be consistent with this Agreement and the other Financing Documents.
(c) Notwithstanding anything to the contrary contained in this Section 10.1, to the extent any amendment, supplement or modification hereto results in an increase in the interest rates provided in the definition of ‘Applicable Margin’, the interest rate applicable to the Fixed Rate Notes shall automatically be increased by the amount of such increase.
10.2. Addresses . All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing (including by telecopy), and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered, or three (3) Business Days after being deposited in the mail, postage prepaid, or, in the case of telecopy notice, when received during the recipient’s normal business hours, addressed as follows in the case of the Borrower, the Administrative Agent and the Collateral Agent, and as set forth in an administrative questionnaire delivered to the Administrative Agent in the case of the Lenders and the Fixed Rate Note Holders, or to such other address as may be hereafter notified by the respective parties hereto:

Borrower:	  	Sharyland Projects, L.L.C.
Address: 1900 North Akard Street
Dallas, TX 75201-2300
Attention: W. Kirk Baker
Telecopy: (214) 855-6968
Telephone: (214) 978-8918	
		
Administrative Agent and Collateral Agent:	  	Société Générale
Address: 1221 Avenue of the Americas,
11 th Floor
New York, NY 10020
Attention: Jay Leung
Telecopy: (212) 278-6136
Telephone: (212) 278-6976	
		
Structuring and Documentation Advisor:	  	Prudential Investment Management, Inc.
c/o Prudential Capital Group
Address: 2200 Ross Avenue, Suite 4200E
Dallas, TX 75201	
	  	Attention: Managing Director, Electric Finance Group
Telecopy: (214) 720-6200
Telephone: (214) 720-6297	
 
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	  	with a copy to:	
		
	  	Prudential Capital Group
Address: 2200 Ross Avenue, Suite 4200E
Dallas, TX 75201
Attention: William H. Bulmer
Telecopy: (214) 720-6200
Telephone: (214) 720-6296	
		
Issuing Bank:	  	The Royal Bank of Scotland plc
Address: 600 Washington Blvd.
Stamford, CT 06902
Attention: Richard Emmich
Telecopy: (212) 401-1494
Telephone: (203) 897-7619	
; provided that any notice, request or demand to or upon the Administrative Agent, the Collateral Agent, the Issuing Bank or the Financing Parties shall not be effective until received during its normal business hours.
Notices and other communications to the Financing Parties hereunder may be delivered or furnished by electronic communications pursuant to procedures approved by the Administrative Agent; provided that the foregoing shall not apply to notices pursuant to Article 2 unless otherwise agreed by the Administrative Agent and the applicable Financing Party. The Administrative Agent or the Borrower may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it; provided that approval of such procedures may be limited to particular notices or communications.
10.3. No Waiver; Cumulative Remedies .
(a) No failure or delay of the Collateral Agent, Issuing Bank, Administrative Agent or any Financing Party in exercising any right or power hereunder or under any other Financing Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce any such right or power, preclude any other or further exercise thereof or the exercise of any other right or power.
(b) The rights and remedies of the Collateral Agent, Issuing Bank, the Administrative Agent and the Secured Parties hereunder and under the other Financing Documents are cumulative and are not exclusive of any rights or remedies that they would otherwise have.
 
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10.4. Survival of Representations and Warranties . All representations and warranties made hereunder, in the other Financing Documents and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement and the making of the Loans and other extensions of credit hereunder.
10.5. Payment of Expenses and Taxes . The Borrower agrees (a) to pay or reimburse each of the Agents for all of such Agent’s reasonable costs and expenses incurred in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Agreement and the other Financing Documents and any other documents prepared in connection herewith or therewith, and the consummation and administration of the transactions contemplated hereby and thereby, including the reasonable fees and disbursements of one counsel and one regulatory counsel to the Administrative Agent and Collateral Agent on behalf of the Financing Parties, filing and recording fees and expenses, and the costs and expenses incurred in connection with the initial filing of this Agreement and all related documents and financial information with the SVO, with statements with respect to the foregoing to be submitted to the Borrower prior to the Closing Date (in the case of amounts to be paid on the Closing Date) and from time to time thereafter on a quarterly basis or such other periodic basis as each such Agent shall deem appropriate, (b) to pay or reimburse each Financing Party and each Agent for all its costs and expenses incurred in connection with the enforcement or preservation of any rights under this Agreement, the other Financing Documents and any such other documents, including the fees and disbursements of counsel (including the allocated fees and expenses of in-house counsel) to each Financing Party and of counsel to the Agents, (c) to pay, indemnify, and hold each Financing Party and each Agent harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other taxes, if any, that may be payable or determined to be payable in connection with the execution and delivery of, or consummation or administration of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, the other Financing Documents and any such other documents, and (d) to pay, indemnify, and hold each Financing Party and each Agent and their respective officers, directors, employees, affiliates, agents, advisors and controlling Persons (each, an “ Indemnitee ”) harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement, the other Financing Documents and any such other documents, including any of the foregoing relating to the use of proceeds of the Loans, the Fixed Rate Notes, any Letter of Credit, the Equity Letter of Credit, any of the transactions contemplated by the Operative Documents or the non-compliance by any party with the provisions thereof or the violation of, noncompliance with or liability under, any Environmental Law applicable to the operations of the Borrower and the reasonable fees and expenses of legal counsel in connection with claims (including Environmental Claims), actions or proceedings by any Indemnitee against the Borrower under any Financing Document (all the foregoing in this clause (d), collectively, the “ Indemnified Liabilities ”), provided , that the Borrower shall have no obligation hereunder to any Indemnitee with respect to Indemnified Liabilities to the extent such Indemnified Liabilities are found by a final and non-appealable decision of a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of such Indemnitee. Without limiting the foregoing, and to the extent permitted by applicable law, the Borrower agrees not to assert, and hereby waives, all rights for contribution or any other rights of recovery with respect to all
 
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claims, demands, penalties, fines, liabilities, settlements, damages, costs and expenses of whatever kind or nature, under or related to Environmental Laws, that it might have by statute or otherwise against any Indemnitee. All amounts due under this Section 10.5 shall be payable not later than ten (10) days after written demand therefor. Statements payable by the Borrower pursuant to this Section 10.5 shall be submitted to Kristin Dohn, at the address of the Borrower set forth in Section 10.2, or to such other Person or address as may be hereafter designated by the Borrower in a written notice to the Administrative Agent. The agreements in this Section 10.5 shall survive repayment of the Loans, the Fixed Rate Notes and all other amounts payable hereunder.
10.6. Attorney In Fact .
(a) For the purpose of allowing the Administrative Agent to exercise its rights and remedies provided in Article 8 following the occurrence and during the continuation of any Event of Default, the Borrower hereby constitutes and appoints the Administrative Agent its true and lawful attorney-in-fact, with full power of substitution, to complete any part or all of the Project in the name of the Borrower, and hereby empowers such attorney or attorneys, following the occurrence and during the continuation of any Event of Default, as follows:
(i) To use any unadvanced proceeds of the Loans for the purpose of completing, operating or maintaining any or all of the Project as required by the Material Project Documents.
(ii) To employ such contractors, subcontractors, agents, architects and inspectors as reasonably shall be required for such purposes;
(iii) To pay, settle or compromise all bills and claims which may be or become Liens or security interests against any or all of the Project or the Collateral, or any part thereof, unless a bond or other security satisfactory to the Administrative Agent has been provided;
(iv) To execute applications and certificates in the name of the Borrower which reasonably may be required by the Financing Documents or any other agreement or instrument executed by or on behalf of the Borrower in connection with any or all of the Project;
(v) To prosecute and defend all actions or proceedings in connection with any or all of the Project or the Collateral or any part thereof and to take such action and require such performance as such attorney reasonably deems necessary under any performance and payment bond and the Financing Documents;
(vi) To do any and every lawful act which the Borrower might do on its behalf with respect to the Collateral or any part thereof or any or all of the Project and to exercise any or all of the Borrower’s rights and remedies under any or all of the Material Project Documents; and
(vii) To use any funds contained in any Collateral Account, to pay interest and principal on the Loans and the Fixed Rate Note.
(b) This power of attorney shall be deemed to be a power coupled with an interest and shall be irrevocable.
 
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10.7. Successors and Assigns; Participations and Assignments .
(a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that (i) except in connection with a Pledgor Acquisition as provided in Section 2.12(c)(ii), the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of the Issuing Bank and each Financing Party (and any attempted assignment or transfer by the Borrower without such consent shall be null and void) and (ii) no Financing Party may assign or otherwise transfer its rights or obligations hereunder except in accordance with this Section 10.7.
(b)(i) Subject to the conditions set forth in paragraph (b)(iii) below, any Lender may assign to one or more assignees (each, an “ Assignee ”) all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitments and Loans) with the prior written consent of:
(A) the Borrower (such consent not to be unreasonably withheld), provided that no consent of the Borrower shall be required for an assignment to a Lender, an affiliate of a Lender, an Approved Fund (as defined below) or, if an Event of Default has occurred and is continuing, any other Person; and provided , further that the Borrower shall be deemed to have consented to any such assignment unless it shall object thereto by written notice to the Administrative Agent within five Business Days after having received notice thereof; and
(B) the Issuing Bank (such consent not to be unreasonably withheld), provided that no consent of the Issuing Bank shall be required for an assignment of all or any portion of a Loan to a Lender, an affiliate of a Lender or an Approved Fund; and
(C) the Administrative Agent (such consent not to be unreasonably withheld), provided that no consent of the Administrative Agent shall be required for an assignment of all or any portion of a Loan to a Lender, an affiliate of a Lender or an Approved Fund.
(ii) Any Fixed Rate Note Holder may assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Fixed Rate Note) with the prior written consent of the Administrative Agent; provided that the General Partner and Operating Partnership shall have a ‘right of first offer’ with respect to all assignments of the Fixed Rate Note.
(iii) Assignments shall be subject to the following additional conditions:
 
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(A) except in the case of an assignment to a Lender, an affiliate of a Lender or an Approved Fund or an assignment of the entire remaining amount of the assigning Lender’s Commitments or Loans, the amount of the Commitments or Loans of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent) shall not be less than $10,000,000 or shall be in whole multiples of $1,000,000 in excess thereof, unless each of the Borrower and the Administrative Agent otherwise consent, provided that (1) no such consent of the Borrower shall be required if an Event of Default has occurred and is continuing and (2) such amounts shall be aggregated in respect of each Lender and its affiliates or Approved Funds, if any;
(B)(1) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, together with a processing and recordation fee of $3,500 and (2) the assigning Lender shall have paid in full any amounts owing by it to the Administrative Agent;
(C) the Assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an administrative questionnaire in which the Assignee designates one or more credit contacts to whom all syndicate-level information (which may contain material non-public information about the Borrower and its Affiliates and their related parties or their respective securities) will be made available and who may receive such information in accordance with the assignee’s compliance procedures and applicable laws, including Federal and state securities laws; and
(D) no Lender (including any assignee of any Lender) may assign any portion of its Commitment or Loans to a new lender if such assignment would result, at the time of such transfer only, in claims made by such new lender for costs pursuant to Section 2.21 hereof in excess of those which could be made by the assigning Lender were it not to make such assignment, unless such new lender waives its right to claim such costs.
For the purposes of this Section 10.7, “ Approved Fund ” means any Person (other than a natural person) that is engaged in making, purchasing, holding or investing in bank loans and similar extensions of credit in the ordinary course of its business and that is administered or managed by (a) a Lender, (b) an affiliate of a Lender or (c) an entity or an affiliate of an entity that administers or manages a Lender.
(iv) Subject to acceptance and recording thereof pursuant to paragraph (b)(iv) below, from and after the effective date specified in each Assignment and Assumption the Assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender’s rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.21, 2.22, 2.23 and 10.5). Any assignment or transfer by a Lender of rights or
 
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obligations under this Agreement that does not comply with this Section 10.7 shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with paragraph (f) of this Section.
(v) The Administrative Agent, acting for this purpose as an agent of the Borrower, shall maintain at one of its offices a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Financing Parties, and the Commitments of, principal amount of the Loans owing to, and outstanding amount of Fixed Rate Notes, of each Financing Party pursuant to the terms hereof from time to time (the “ Register ”). The entries in the Register shall be conclusive, and the Borrower, the Administrative Agent and the Financing Parties shall treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Financing Party hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower and any Financing Party at any reasonable time and from time to time upon reasonable prior notice.
(vi) Upon its receipt of a duly completed Assignment and Assumption executed by an assigning Lender and an Assignee, the Assignee’s completed administrative questionnaire (unless the Assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) of this Section and any written consent to such assignment required by paragraph (b) of this Section, the Administrative Agent shall accept such Assignment and Assumption and record the information contained therein in the Register. No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this paragraph.
(c) The Issuing Bank may, without the consent of the Borrower or the Administrative Agent, assign its L/C Commitment to any Lender that meets the requirements of the applicable Material Project Documents for the issuance of letters of credit to the Borrower.
(d) For any assignment with respect to which the consent of the Borrower is not required, the assigning Financing Party or Issuing Bank shall, promptly after the effectiveness of any such assignment, notify the Borrower thereof; provided that the assignment shall be effective regardless of whether such notice is provided.
(e)(i) Any Financing Party or the Issuing Bank may, without the consent of the Borrower or the Administrative Agent, sell participations to one or more banks or other entities (a “ Participant ”) in all or a portion of such Financing Party’s rights and obligations under this Agreement (including all or a portion of its Commitments and the Loans owing to it, or all or a portion of its portion of the Fixed Rate Note); provided that (A) such Financing Party’s obligations under this Agreement shall remain unchanged, (B) such Financing Party shall remain solely responsible to the other parties hereto for the performance of such obligations and (C) the Borrower, the Administrative Agent and the other Financing Parties shall continue to deal solely and directly with such Financing Party in connection with such Financing Party’s rights and obligations under this Agreement. Any agreement pursuant to which a Financing Party sells such a participation shall provide that such Financing Party shall retain the sole right to enforce
 
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this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement may provide that such Financing Party will not, without the consent of the Participant, agree to any amendment, modification or waiver that (1) requires the consent of each Financing Party directly affected thereby pursuant to Section 10.1(a) and (2) directly affects such Participant. Subject to paragraph (c)(ii) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of, and the limitations of, Sections 2.21, 2.22 and 2.23 to the same extent as if it were a Financing Party and had acquired its interest by assignment pursuant to paragraph (b) of this Section. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 10.9(b) as though it were a Financing Party, provided such Participant shall be subject to Section 10.9(a) as though it were a Financing Party. Each Financing Party that sells a participation shall, acting solely for this purpose as an agent of the Borrower, maintain a register on which it enters the name and address of each Participant and the principal amounts (and stated interest) of each Participant’s interest in the Loans or other obligations under this Agreement (the “ Participant Register ”); provided that no Financing Party shall have any obligation to disclose all or any portion of the Participant Register to any Person (including the identity of any Participant or any information relating to a Participant’s interest in any Loans, Letters of Credit or its other obligations under this Agreement) except to the extent that such disclosure is necessary to establish that such Loan, Letter of Credit or other obligation is in registered form under Section 5f.103-1(c) of the United States Treasury Regulations. The entries in the Participant Register shall be conclusive absent manifest error, and such Financing Party shall treat each Person whose name is recorded in the Participant Register as the owner of such participation for all purposes of this Agreement notwithstanding any notice to the contrary.
(ii) A Participant shall not be entitled to receive any greater payment under Sections 2.21 or 2.22 than the applicable Financing Party would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower’s prior written consent. No Participant shall be entitled to the benefits of Section 2.22 unless such Participant complies with Section 2.22(f) and (g). In no event shall the Borrower be responsible for any costs or expenses of any counsel engaged by a Participant.
(f) Any Financing Party may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Financing Party, including any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release a Financing Party from any of its obligations hereunder or substitute any such pledgee or Assignee for such Financing Party as a party hereto.
(g) The Borrower, upon receipt of written notice from the relevant Financing Party, agrees to issue Notes to any Lender requiring Notes to facilitate transactions of the type described in paragraph (f) above.
(h) Notwithstanding the foregoing, any Conduit Lender may assign any or all of the Loans it may have funded hereunder to its designating Lender without the consent of the Borrower or the Administrative Agent and without regard to the limitations set forth in Section
 
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10.7(b). Each of the Borrower, each Lender and the Administrative Agent hereby confirms that it will not institute against a Conduit Lender or join any other Person in instituting against a Conduit Lender any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding under any state bankruptcy or similar law, for one year and one day after the payment in full of the latest maturing commercial paper note issued by such Conduit Lender; provided , however , that each Lender designating any Conduit Lender hereby agrees to indemnify, save and hold harmless each other party hereto for any loss, cost, damage or expense arising out of its inability to institute such a proceeding against such Conduit Lender during such period of forbearance.
(i) By its acquisition of Loans, Commitments or any part of the Fixed Rate Notes, an Affiliated Financing Party shall be deemed to have acknowledged and agreed that (i) it shall not have any right to make or bring (or participate in, other than as a passive participant in or recipient of its pro rata benefits of) any claim, in its capacity as a Lender or Fixed Rate Note Holder, against the Administrative Agent, the Collateral Agent or any other Lender or Fixed Rate Note Holder with respect to any duties or obligations or alleged duties or obligations of such Agent or any other such Lender or Fixed Rate Note Holder under the Financing Documents, (ii) the Loans and Fixed Rate Notes held by an Affiliated Financing Party shall be disregarded in both the numerator and denominator in the calculation of any Financing Party vote, (iii) each Affiliated Financing Party hereby irrevocably appoints the Administrative Agent (such appointment being coupled with an interest) as such Affiliated Financing Party’s attorney-in-fact, with full authority in the place and stead of such Affiliated Financing Party and in the name of such Affiliated Financing Party (solely in respect of Loans and participations therein and the Fixed Rate Notes and not in respect of any other claim or status such Affiliated Financing Party may otherwise have), from time to time in the Administrative Agent’s discretion to take any action and to execute any instrument that the Administrative Agent may deem reasonably necessary to carry out the provisions of this clause (j), and (iv) the aggregate principal amount of Loans and Fixed Rate Notes held at any one time by Affiliated Financing Party may not exceed 30% of the sum of (x) the aggregate principal amount of Loans outstanding at such time and (y) the principal amount of the Fixed Rate Notes outstanding at such time under this Agreement.
10.8. Representations and Warranties of the Fixed Rate Note Purchasers; Registration and Exchange of Fixed Rate Notes .
(a) Each Fixed Rate Note Purchaser severally represents that it is an “Accredited Investor” as defined in Rule 501 of Regulation D under the Securities Act. Each Fixed Rate Note Purchaser severally represents that it is purchasing the Fixed Rate Notes for its own account or for one or more separate accounts maintained by such Fixed Rate Note Purchaser or for the account of one or more pension or trust funds and not with a view to the distribution thereof, provided that the disposition of such Fixed Rate Note Purchaser’s property shall at all times be within such Fixed Rate Note Purchaser’s control. Each Fixed Rate Note Purchaser understands that the Fixed Rate Notes have not been registered under the Securities Act and may be resold only if registered pursuant to the provisions of the Securities Act or if an exemption from registration is available, except under circumstances where neither such registration nor such an exemption is required by law, and that the Borrower is not required to register the Fixed Rate Notes.
 
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(b) The Borrower shall keep at its principal executive office a register for the registration and registration of transfers of Fixed Rate Notes. The name and address of each Fixed Rate Note Holder of one or more Fixed Rate Notes, each transfer thereof and the name and address of each transferee of one or more Fixed Rate Notes shall be registered in such register. Prior to due presentment for registration of transfer, the Person in whose name any Fixed Rate Notes shall be registered shall be deemed and treated as the owner and Fixed Rate Note Holder thereof for all purposes hereof, and the Borrower shall not be affected by any notice or knowledge to the contrary. In addition to and not in limitation of any representations contained herein, each Fixed Rate Note Holder acknowledges and agrees that the Fixed Rate Notes have not been registered under the Securities Act and may not be transferred except pursuant to registration or an exemption therefrom and in compliance with Section 10.7 hereof.
(c) Subject to compliance with Section 10.7, upon surrender of any Fixed Rate Note to the Borrower at the address and to the attention of the designated officer (all as specified in Section 10.2) for registration of transfer or exchange (and in the case of a surrender for registration of transfer accompanied by a written instrument of transfer duly executed by the registered Fixed Rate Note Holder of such Fixed Rate Note or such Fixed Rate Note Holder’s attorney duly authorized in writing and accompanied by the relevant name, address and other information for notices of each transferee of such Fixed Rate Note or part thereof), within ten Business Days thereafter, the Borrower shall execute and deliver, at the Borrower’s expense (except as provided below), one or more new Fixed Rate Notes (as requested by the Fixed Rate Note Holder thereof) in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Fixed Rate Note. Each such new Fixed Rate Note shall be payable to such Person as such Fixed Rate Note Holder may request and shall be substantially in the form of Exhibit B. Each such new Fixed Rate Note shall be dated and bear interest from the date to which interest shall have been paid on the surrendered Fixed Rate Note or dated the date of the surrendered Fixed Rate Note if no interest shall have been paid thereon. The Borrower may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of Fixed Rate Notes. Any transferee, by its acceptance of a Fixed Rate Note registered in its name (or the name of its nominee), shall be deemed to have made the representations set forth in Section 10.8(a).
10.9. Adjustments; Set-off .
(a) Except to the extent that this Agreement, any other Financing Document or a court order expressly provides for payments to be allocated to a particular Financing Party or to the Financing Parties, if any Financing Party (a “ Benefited Financing Party ”) shall receive any payment of all or part of the Obligations owing to it (other than in connection with an assignment made pursuant to Section 10.7), or receive any collateral in respect thereof (whether voluntarily or involuntarily, by set-off, pursuant to events or proceedings of the nature referred to in Section 8.5, or otherwise), in a greater proportion than any such payment to or collateral received by any other Financing Party, if any, in respect of the Obligations owing to such other Financing Party, such Benefited Financing Party shall purchase for cash from the other Financing Parties a participating interest in such portion of the Obligations owing to each such other Financing Party, or shall provide such other Financing Parties with the benefits of any such collateral, as shall be necessary to cause such Benefited Financing Party to share the excess payment or benefits of such collateral ratably with each of the Financing Parties; provided , however , that if
 
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all or any portion of such excess payment or benefits is thereafter recovered from such Benefited Financing Party, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest.
(b) In addition to any rights and remedies of the Financing Parties provided by law, each Financing Party shall have the right, without notice to the Borrower, any such notice being expressly waived by the Borrower to the extent permitted by applicable law, upon any Obligations becoming due and payable by the Borrower (whether at the stated maturity, by acceleration or otherwise), to apply to the payment of such Obligations, by set-off or otherwise, any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by such Financing Party, any affiliate thereof or any of their respective branches or agencies to or for the credit or the account of the Borrower. Each Financing Party agrees promptly to notify the Borrower and the Administrative Agent after any such application made by such Financing Party, provided that the failure to give such notice shall not affect the validity of such application.
10.10. Entire Agreement . This Agreement, together with other agreements attached hereto or referred to herein and the other Financing Documents constitute the entire contract between the parties relative to the subject matter hereof. Any previous agreement among or representations from the parties or their Affiliates with respect to the subject matter hereof is superseded by this Agreement and the other Financing Documents.
10.11. APPLICABLE LAW . THIS AGREEMENT AND ANY CLAIM OR CONTROVERSY ARISING HEREUNDER OR RELATED HERETO SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
10.12. Submission To Jurisdiction; Waivers .
(a) The Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or federal court of the United States of America sitting in the Borough of Manhattan, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agree that all claims in respect of any such action or proceeding may be heard and determined in such New York state court or, to the extent permitted by law, in such federal court. The Borrower further irrevocably consents to the service of process in any action or proceeding in such courts in any manner permitted by Legal Requirements. The Borrower agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law.
(b) The Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement in any New York State or federal court. The Borrower hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.
 
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10.13. Severability . In the event any one or more of the provisions contained in this Agreement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions.
10.14. Interpretation . The section headings in this Agreement are for the convenience of reference only and shall not affect the meaning or construction of any provision hereof.
10.15. Acknowledgements . The Borrower hereby acknowledges that:
(a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Financing Documents;
(b) neither the Administrative Agent nor any Financing Party has any fiduciary relationship with or duty the Borrower arising out of or in connection with this Agreement or any of the other Financing Documents, and the relationship between Administrative Agent and Financing Parties, on the one hand, and the Borrower, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and
(c) no joint venture is created hereby or by the other Financing Documents or otherwise exists by virtue of the transactions contemplated hereby among the Financing Parties or among the Borrower and the Financing Parties.
10.16. Security Documents . Reference is hereby made to the Security Documents for the provisions, among others, relating to the nature and extent of the security provided thereunder, the rights, duties and obligations of the Borrower and the rights of the Agents and the Financing Parties with respect to such security.
10.17. Limitation on Liability . NO CLAIM SHALL BE MADE BY ANY PARTY HERETO, OR ANY OF SUCH PARTY’S AFFILIATES, DIRECTORS, EMPLOYEES, ATTORNEYS OR AGENTS AGAINST ANY OTHER PARTY HERETO OR ANY OF ITS AFFILIATES, DIRECTORS, EMPLOYEES, ATTORNEYS OR AGENTS FOR ANY SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES (WHETHER OR NOT THE CLAIM THEREFOR IS BASED ON CONTRACT, TORT, DUTY IMPOSED BY LAW OR OTHERWISE), IN CONNECTION WITH, ARISING OUT OF OR IN ANY WAY RELATED TO THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR THE OTHER OPERATIVE DOCUMENTS OR ANY ACT OR OMISSION OR EVENT OCCURRING IN CONNECTION THEREWITH; AND EACH PARTY HEREBY WAIVES, RELEASES AND AGREES NOT TO SUE UPON ANY SUCH CLAIM FOR ANY SUCH SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES, WHETHER OR NOT ACCRUED AND WHETHER OR NOT KNOWN OR SUSPECTED TO EXIST IN ITS FAVOR.
 
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10.18. Waiver of Jury Trial . EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER FINANCING DOCUMENTS. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 10.18.
10.19. Usury . Nothing contained in this Agreement or the Notes shall be deemed to require the payment of interest or other charges by the Borrower or any other Person in excess of the amount which the holders of the Notes may lawfully charge under any applicable usury laws. In the event that the holders of the Notes shall collect moneys which are deemed to constitute interest which would increase the effective interest rate to a rate in excess of that permitted to be charged by applicable law, all such sums deemed to constitute interest in excess of the legal rate shall, upon such determination, at the option of the holder of the Notes, be returned to the Borrower or credited against the principal balance of the Notes then outstanding.
10.20. Confidentiality . Each of the Agents and each Financing Party agrees to keep confidential all non-public information provided to it by the Borrower, any Agent or any Financing Party pursuant to or in connection with this Agreement that is designated by the provider thereof as confidential; provided that nothing herein shall prevent the Agents or any Financing Party from disclosing any such information (a) to another Agent, any other Financing Party or any affiliate thereof, (b) subject to an agreement to comply with the provisions of this Section, to any actual or prospective Transferee or any direct or indirect counterparty to any Swap Agreement (or any professional advisor to such counterparty), (c) to its employees, directors, agents, attorneys, accountants and other professional advisors or those of any of its affiliates, (d) upon the request or demand of any Governmental Authority, (e) in response to any order of any court or other Governmental Authority or as may otherwise be required pursuant to any Legal Requirement, (f) if requested or required to do so in connection with any litigation or similar proceeding, (g) that has been publicly disclosed, (h) to the National Association of Insurance Commissioners or the SVO, or, in each case, any similar organization or any nationally recognized rating agency that requires access to information about a Financing Party’s investment portfolio in connection with ratings issued with respect to such Financing Party, (i) in connection with the exercise of any remedy hereunder or under any other Financing Document, or (j) if agreed by the Borrower in its sole discretion, to any other Person.
Each Financing Party acknowledges that information furnished to it pursuant to this Agreement or the other Financing Documents may include material non-public information concerning the Borrower and its Affiliates and their related parties or their respective securities, and confirms that it has developed compliance procedures regarding the use of material non-public information and that it will handle such material non-public information in accordance with those procedures and applicable law, including Federal and state securities laws.
 
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All information, including requests for waivers and amendments, furnished by the Borrower or the Agents pursuant to, or in the course of administering, this Agreement or the other Financing Documents will be syndicate-level information, which may contain material non-public information about the Borrower and its Affiliates and their related parties or their respective securities. Accordingly, each Financing Party represents to the Borrower and the Agents that it has identified in its administrative questionnaire a credit contact who may receive information that may contain material non-public information in accordance with its compliance procedures and applicable law, including Federal and state securities laws.
10.21. Counterparts . This Agreement may be executed in two or more counterparts, each of which shall constitute an original but all of which, when taken together, shall constitute but one contract, and shall become effective when executed and delivered by each Person intended to be a party hereto. Delivery of an executed counterpart to this Agreement by facsimile transmission or “pdf” electronic format shall be as effective as delivery of a manually signed original.
10.22. Third Party Beneficiaries . Subject to Section 10.7(c) and Section 10.5 of this Agreement, there shall be no third party beneficiaries to this Agreement or any provision hereof.
10.23. Patriot Act Compliance . The Administrative Agent hereby notifies the parties hereto that, pursuant to the requirements of the Patriot Act, it and the Collateral Agent, the Issuing Bank and any Financing Party shall be required to obtain, verify and record information that identifies the party, which information includes the names and addresses and other information that will allow it, the Issuing Bank, the Collateral Agent or any Financing Party to identify the party in accordance with the requirements of the Patriot Act. The party shall promptly deliver information described in the immediately preceding sentence when requested by the Administrative Agent, the Issuing Bank, any other Agent or any Financing Party in writing pursuant to the requirements of the Patriot Act.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
 
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written.

Very truly yours,	
	
SHARYLAND PROJECTS, L.L.C.	
		
By:	 	/s/ W. Kirk Baker	
	 	Name:    W. Kirk Baker	
	 	Title:      President	
	
SOCIÉTÉ GÉNÉRALE, as Administrative Agent and Collateral Agent	
		
By:	 	/s/ Robert J Preminger	
	 	Name:    Robert J Preminger	
	 	Title:      Managing Director	
	
SOCIÉTÉ GÉNÉRALE, as Lender	
		
By:	 	/s/ ROBERTO S SIMON	
	 	Name:    ROBERTO S SIMON	
	 	Title:      Managing Director	
	
THE ROYAL BANK OF SCOTLAND PLC, as Issuing Bank, Co-Syndication Agent, and Lender	
		
By:	 	/s/ Jonathan Kim	
	 	Name:    Jonathan Kim	
	 	Title:      Director	
	 	Authorised Signatory	
	
ROYAL BANK OF CANADA, as Co-Syndication Agent and Lender	
		
By:	 	/s/ William J. Caggiano	
	 	Name:    William J. Caggiano	
	 	Title:      Authorised Signatory	
[CREZ Credit Agreement – Signature Page]
 
121

							
THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA	
		
By:	 	/s/ Richard Carrell	
	 	Name:	 	Richard Carrell	
	 	Title:	 	Vice President	
	
PRUCO LIFE INSURANCE COMPANY OF
NEW JERSEY	
		
By:	 	/s/ Richard Carrell	
	 	Name:	 	Richard Carrell	
	 	Title:	 	Vice President	
	
PRUDENTIAL ANNUITIES LIFE ASSURANCE CORPORATION	
		
By:	 	Prudential Investment Management, Inc., as investment manager	
			
	 	By:	 	/s/ Richard Carrell	
	 		 	Name:	 	Richard Carrell	
	 		 	Title:	 	Vice President	
 
[CREZ Credit Agreement – Signature Page]

					
MIZUHO CORPORATE BANK LTD	
		
By:	 	/s/ Christopher Stolarski	
	 	Name:	 	Christopher Stolarski	
	 	Title:	 	Senior Vice President	
 
[CREZ Credit Agreement – Signature Page]

					
THE BANK OF NOVA SCOTIA	
		
By:	 	/s/ Thane Rattew	
	 	Name:	 	Thane Rattew	
	 	Title:	 	Managing Director	
 
[CREZ Credit Agreement – Signature Page]

					
Sumitomo Mitsui Banking Corporation	
		
By:	 	/s/ Hiroshi Higuma	
	 	Name:	 	Hiroshi Higuma	
	 	Title:	 	Joint General Manager	
 
[CREZ Credit Agreement – Signature Page]

					
COBANK, ACB	
		
By:	 	/s/ Lori Kepner	
	 	Name:	 	Lori Kepner	
	 	Title:	 	Vice President	
 
[CREZ Credit Agreement – Signature Page]

			
DnB NOR Bank ASA	
		
By:	 	/s/ Mark Dennes	
Name:	 	Mark Dennes	
Title:	 	Senior Vice President	
		
By:	 	/s/ Evan Uhlick	
Name:	 	Evan Uhlick	
Title:	 	Vice President	
 
[CREZ Credit Agreement – Signature Page]

					
Natixis, New York Branch	
		
By:	 	/s/ Richard Garcia	
	 	Name:	 	Richard Garcia	
	 	Title:	 	Senior Managing Director	
		
By:	 	/s/ Amit Roy	
	 	Name:	 	Amit Roy	
	 	Title:	 	Director	
 
[CREZ Credit Agreement – Signature Page]

					
Sovereign Bank	
		
By:	 	/s/ Robert D. Lanigan	
	 	Name:	 	Robert D. Lanigan	
	 	Title:	 	SVP	
 
[CREZ Credit Agreement – Signature Page]

					
THE SUMITOMO TRUST and BANKING CO., LTD., NEW YORK BRANCH	
		
By:	 	/s/ Albert C. Tew II	
	 	Name:	 	ALBERT C. TEW II	
	 	Title:	 	VICE PRESIDENT	
 
[CREZ Credit Agreement – Signature Page]

					
SIEMENS FINANCIAL SERVICES, INC	
		
By:	 	/s/ David Kantes	
	 	Name:	 	David Kantes	
	 	Title:	 	Senior Vice President and Chief Risk Officer	
		
By:	 	/s/ Matthias Grossmann	
	 	Name:	 	Matthias Grossmann	
	 	Title:	 	Sr. VP & CFO	
 
[CREZ Credit Agreement – Signature Page]

					
CIBC INC.	
		
By:	 	/s/ Dominic J. Sorresso	
	 	Name:	 	Dominic J. Sorresso	
	 	Title:	 	Executive Director	
		
By:	 	/s/ Eoin Roche	
	 	Name:	 	Eoin Roche	
	 	Title:	 	Executive Director	
	
CIBC World Markets Corp.	
Authorized Signatory	
 
[CREZ Credit Agreement – Signature Page]

					
Wells Fargo Bank, National Association	
		
By:	 	/s/ Yann Blindert	
	 	Name:	 	Yann Blindert	
	 	Title:	 	Vice President	
 
[CREZ Credit Agreement – Signature Page]

Schedule 1.1A
Commitments

Lender	  	Construction Loan Commitment	 	
Royal Bank of Canada	  	$	55,000,000	  	
The Royal Bank of Scotland plc	  	$	5,000,000	  	
Société Générale	  	$	55,000,000	  	
Mizuho Corporate Bank Ltd.	  	$	50,000,000	  	
The Bank of Nova Scotia	  	$	50,000,000	  	
Sumitomo Mitsui Banking Corporation	  	$	50,000,000	  	
CoBank, ACB	  	$	44,000,000	  	
DnB NOR Bank ASA	  	$	44,000,000	  	
Natixis	  	$	44,000,000	  	
Sovereign Bank	  	$	44,000,000	  	
The Sumitomo Trust and Banking Co., Ltd., New York Branch	  	$	44,000,000	  	
Siemens Financial Services	  	$	44,000,000	  	
CIBC Inc.	  	$	44,000,000	  	
Wells Fargo Bank, National Association	  	$	44,000,000	  	
		
Issuing Bank	  	L/C Commitment	 	
The Royal Bank of Scotland plc	  	$	50,000,000	  	

Exhibit 10.19
AMENDMENT NO. 1 AND OMNIBUS AMENDMENT
AMENDMENT NO. 1 AND OMNIBUS AMENDMENT, dated as of October 11, 2011 (this “ Amendment ”), to (i) the Credit Agreement, dated as of June 20, 2011 (the “ Existing Credit Agreement ”), among SHARYLAND PROJECTS, L.L.C., a Texas limited liability company (the “ Borrower ”), the several banks and other financial institutions or entities from time to time parties hereto (the “ Lenders ”), SOCIÉTÉ GÉNÉRALE, as Administrative Agent (in such capacity, the “ Administrative Agent ”) and Collateral Agent for the Financing Parties, THE ROYAL BANK OF SCOTLAND PLC, as Issuing Bank, ROYAL BANK OF CANADA AND THE ROYAL BANK OF SCOTLAND PLC, as Co-Syndication Agents, THE BANK OF NOVA SCOTIA, MIZUHO CORPORATE BANK LTD. and SUMITOMO MITSUI BANKING CORPORATION, as Co-Documentation Agents, the Fixed Rate Note Holders and PRUDENTIAL INVESTMENT MANAGEMENT, INC., as Structuring and Documentation Advisor and (ii) the other Financing Documents. Capitalized terms used but not otherwise defined in this Amendment shall have the meanings set forth in the Existing Credit Agreement and the rules of interpretation set forth therein shall apply to this Amendment.
W I T N E S S E T H :
WHEREAS, the Borrower, the Administrative Agent and the Required Financing Parties have agreed to amend certain provisions of the Existing Credit Agreement and other Financing Documents; and
WHEREAS, the Borrower and the Administrative Agent are willing to agree to such amendments on the terms set forth herein;
NOW, THEREFORE, in consideration of the mutual agreements herein contained and other good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Amendments to Section 1.1 of the Existing Credit Agreement . Section 1.1 of the Existing Credit Agreement is hereby amended by
(a) replacing the following definitions in their entirety:
“ Financing Parties ” means, collectively, the Lenders and the Fixed Rate Note Holders and, solely for the purposes of the definitions of “Obligations” and “Secured Parties” hereunder, and as such definitions may be referenced in other Financing Documents, and Section 3.1(b)(iii)(E) of the Depositary Agreement and Paragraph 1(e) of the Withdrawal Certificate attached thereto, any Specified Swap Counterparty.
“ Secured Parties ” means the Agents, the Issuing Bank, the Financing Parties and the Specified Swap Counterparties.
(b) deleting the phrase “(or, in the case of Specified Swap Agreements any affiliate of any Lender)” from the term “Obligations” and inserting in lieu thereof “(or, in the case of Specified Swap Agreements any Specified Swap Counterparty)”; and

(c) adding the following definition:
“ Specified Swap Counterparty ” means any Person that is party to a Specified Swap Agreement with the Borrower.
2. Amendment to the Recitals of the Depositary Agreement . The second recital of the Depositary Agreement is hereby amended by deleting the parenthetical “(the ‘Financing Parties’)”.
3. Amendment to the Security Agreement . The Security Agreement is hereby amended as follows:
(a) The preamble is hereby amended by deleting the parenthetical “(as defined below)”.
(b) The second recital is hereby amended by deleting the parenthetical “(the ‘Financing Parties’)”.
(c) Section 1.01 is hereby amended by deleting the definition of “Financing Parties” in its entirety.
4. Amendment to the Pledge Agreement . The Pledge Agreement is hereby amended as follows:
(a) The second recital is hereby amended by deleting the parenthetical “(the ‘Financing Parties’)”.
(b) Section 1.01 is hereby amended by deleting the definition of “Financing Parties” in its entirety.
5. GOVERNING LAW; WAIVER OF JURY TRIAL . THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. EACH PARTY HERETO HEREBY AGREES AS SET FORTH IN SECTIONS 10.11, 10.12 AND 10.18 OF THE EXISTING CREDIT AGREEMENT AS IF SUCH SECTIONS WERE SET FORTH IN FULL HEREIN.
6. Amendments; Execution in Counterparts . (a) This Amendment shall not constitute an amendment of any other provision of the Existing Credit Agreement not referred to herein and shall not be construed as a waiver or consent to any further or future action on the part of the Borrower that would require a waiver or consent of the Financing Parties or the Administrative Agent. Except as expressly amended hereby, the provisions of the Existing Credit Agreement are and shall remain in full force and effect.

(b) The Borrower and the other parties hereto hereby acknowledge and agree that this Amendment shall constitute a “Financing Document” as such term is used in the Existing Credit Agreement, and each reference in the Existing Credit Agreement as amended hereby to the “Financing Documents” shall be deemed to include this Amendment and the security interests in the Collateral granted under each Financing Document are also for the benefit of the Specified Swap Counterparties.
(c) This Amendment may not be amended nor may any provision hereof be waived except pursuant to a writing signed by the Borrower, the Administrative Agent and the Required Financing Parties. This Amendment may be executed by one or more of the parties to this Amendment on any number of separate counterparts, including by means of facsimile or electronic transmission in .pdf format, and all of said counterparts taken together shall be deemed to constitute one and the same instrument.
[Remainder of page intentionally left blank]

IN WITNESS WHEREOF, the parties hereto have caused this Amendment be duly executed and delivered by their respective proper and duly authorized officers as of the date first above written.

SHARYLAND PROJECTS, L.L.C.,
as Borrower	
		
By:  	 	/s/ Greg Wilks	
	 	Name:	 	Greg Wilks	
	 	Title:	 	Senior Vice President	
 
[Signature Page to Amendment No. 1]

					
SOCIÉTÉ GÉNÉRALE,
as Administrative Agent and collateral Agent	
		
By:  	 	/s/ Carol Radice	
	 	Name:	 	Carol Radice	
	 	Title:	 	Director	
 
[Signature Page to Amendment No. 1]

					
SOCIÉTÉ GÉNÉRALE,
as Lender	
		
By:  	 	/s/ Carol Radice	
	 	Name:	 	Carol Radice	
	 	Title:	 	Director	
 
[Signature Page to Amendment No. 1]

					
SOCIÉTÉ GÉNÉRALE,
as Depositary Bank	
		
By:  	 	/s/ Carol Radice	
	 	Name:	 	Carol Radice	
	 	Title:	 	Director	
 
[Signature Page to Amendment No. 1]

					
MIZUHO CORPORATE BANK LTD.	
		
By:  	 	/s/ Willie Freeman	
	 	Name:	 	Willie Freeman	
	 	Title:	 	Senior Vice President	
 
[Signature Page to Amendment No. 1]

					
THE BANK OF NOVA SCOTIA	
		
By:  	 	/s/ Thane Rattew	
	 	Name:	 	Thane Rattew	
	 	Title:	 	Managing Director	
 
[Signature Page to Amendment No. 1]

					
SUMITOMO MITSUI BANKING
CORPORATION	
		
By:  	 	/s/ Hiroshi Higuma	
	 	Name:	 	Hiroshi Higuma	
	 	Title: Managing Director, Head of Structured Finance	
 
[Signature Page to Amendment No. 1]

					
COBANK, ACB	
		
By:  	 	/s/ Lori Kepner	
	 	Name:	 	Lori Kepner	
	 	Title:	 	Vice President	
 
[Signature Page to Amendment No. 1]

					
DnB NOR BANK ASA	
		
By:  	 	/s/ PHILIP F. KURPIEWSKI	
	 	Name:	 	PHILIP F. KURPIEWSKI	
	 	Title:	 	SENIOR VICE PRESIDENT	
		
By:  	 	/s/ Kristie Li	
	 	Name:	 	Kristie Li	
	 	Title:	 	Vice President	
 
[Signature Page to Amendment No. 1]

					
THE SUMITOMO TRUST AND BANKING CO., LTD. NEW YORK BRANCH	
		
By:  	 	/s/ ALBERT C. TEW II	
	 	Name:	 	ALBERT C. TEW II	
	 	Title:	 	VICE PRESIDENT	
 
[Signature Page to Amendment No. 1]

					
SIEMENS FINANCIAL SERVICES, INC.	
		
By:  	 	/s/ DOUGLAS MAHER	
	 	Name:	 	DOUGLAS MAHER	
	 	Title:	 	MANAGING DIRECTOR	
		
By:  	 	/s/ Guy R. Cirincione	
	 	Name:	 	Guy R. Cirincione	
	 	Title:	 	SVP & General Manager	
	 		 	Siemens Financial Services	
	 		 	Energy Finance	
 
[Signature Page to Amendment No. 1]

					
WELLS FARGO BANK, NATIONAL ASSOCIATION	
		
By:  	 	/s/ Yann Blindert	
	 	Name:	 	Yann Blindert	
	 	Title:	 	Vice President	
 
[Signature Page to Amendment No. 1]

Exhibit 10.20
AMENDMENT NO. 2 TO
CREDIT AGREEMENT
Amendment No. 2 to CREDIT AGREEMENT, dated as of October 1 st , 2013 (this “ Amendment No. 2” ) to the CREDIT AGREEMENT, dated as of June 20,2011 (as amended by the Amendment No. 1 and Omnibus Amendment, dated as of October 2011 and as further amended, supplemented or otherwise modified from time to time, the “ Credit Agreement ”), by and among SHARYLAND PROJECTS, L.L.C. (the “ Borrower ”), the several banks and other financial institutions or entities from time to time parties thereto (the “ Lenders ”), Société Générale, as administrative agent and collateral agent for the Lenders (in such capacity, the “ Administrative Agent ” or the “ Collateral Agent” ), the Fixed Rate Note Holders, Royal Bank of Scotland plc, as the issuing bank, and the other Persons from time to time parties thereto. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement and the rules of interpretation set forth therein shall apply to this Amendment No. 2.
RECITALS
WHEREAS, the Borrower and the Lenders are parties to the Credit Agreement;
WHEREAS, the Borrower has requested that the Required Financing Parties and the Administrative Agent amend the Credit Agreement, as more fully described herein;
WHEREAS, the Required Financing Parties, the Administrative Agent and the Borrower are willing to agree to such amendment, but only upon the terms and subject to the conditions set forth herein;
NOW THEREFORE, in consideration of the mutual agreement herein contained and other good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Amendment to Section 7.13 Swap Agreements . Section 7.13 of the Credit Agreement is hereby amended in its entirety as follows:
“The Borrower shall not enter into any Swap Agreement other than (i) as contemplated by Section 6.21 or (ii) to hedge interest rate risk exposure of the Borrower after giving effect to the Swap Agreement contemplated by Section 6.21 and not for speculative purposes.”
2. Conditions to this Amendment No. 2 Effective Date. This Amendment No. 2 shall become effective as of the date first set forth above (the “ Amendment No. 2 Effective Date ”) which shall be a date after the Required Financing Parties, the Administrative Agent and the Borrower shall have executed and delivered counterparts of this Amendment No. 2.
 
1

3. Representations and Warranties . In order to induce the Administrative Agent and the Required Financing Parties to enter into this Amendment No. 2, the Borrower hereby represents and warrants that (i) each of the representations and warranties made by the Borrower in the Financing Documents is true and correct in all material respects on and as of the date hereof, before and after giving effect to the effectiveness of this Amendment No. 2, as if made on and as of the date hereof, except to the extent such representations and warranties speak as of a particular date and were true and correct in all material respects as of such earlier date, and (ii) no Default or Event of Default has occurred and is continuing on the date hereof or after giving effect to the amendment contemplated herein.
4. Continuing Effect of Financing Documents . Except as expressly set forth herein, this Amendment No. 2 shall not constitute an amendment or waiver of any provision of the Credit Agreement and shall not be construed as an amendment, waiver or consent to any further or future action on the part of the Borrower that would require an amendment, waiver or consent of the Administrative Agent or the Required Financing Parties. Except as expressly amended hereby, the provisions of the Credit Agreement are and shall remain in full force and effect. This Amendment No. 2 shall be deemed a Financing Document for purposes of the Credit Agreement.
5. Fecs . In accordance with Section 10.5 of the Credit Agreement, the Borrower shall have paid the fees, charges and disbursements of the Administrative Agent’s special counsel in connection with this Amendment No. 2.
6. Counterparts . This Amendment No. 2 may be executed by one or more of the parties hereto on any number of separate counterparts (including by facsimile), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed signature page to this Amendment No. 2 by facsimile or electronic transmission shall be effective as the delivery of a manually executed counterpart of this Amendment No. 2.
7. Severability. Any provision of this Amendment No. 2 which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
8. Integration . This Amendment No. 2 and the other Financing Documents represent the agreement of the Borrower, the Administrative Agent and the Required Financing Parties with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Borrower, the Administrative Agent or any Required Financing Party relative to the subject matter hereof not expressly set forth or referred to herein or in the other Financing Documents.
9. GOVERNING LAW. THIS AMENDMENT NO. 2 AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AMENDMENT NO. 2 SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
[Signatures on Following Page]
 
2

IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 2 to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written.

BORROWER	
	
SHARYLAND PROJECTS, L.L.C.	
		
By:	 	/s/ Greg Wilks	
	 	Greg Wilks
Senior Vice President	
 
[Signature Page of Amendment No. 2 to Credit Agreement]

					
Administrative Agent	
	
Société Généralé	
		
By:	 	/s/ EDWARD J. GRIMM	
	 	Name:	 	EDWARD J. GRIMM	
	 	Title:	 	DIRECTOR	
 
[Signature Page of Amendment No. 2 to Credit Agreement]

					
REQUIRED FINANCING PARTY	
	
Societe Generale	
		
By:	 	/s/ EDWARD J. GRIMM	
	 	Name:	 	EDWARD J. GRIMM	
	 	Title:	 	DIRECTOR	
 
[Signature Page of Amendment No. 2 to Credit Agreement]

					
REQUIRED FINANCING PARTY	
	
Associated Bank N.A.	
		
By:	 	/s/ Yolanda Meza	
	 	Name:	 	Yolanda Meza	
	 	Title:	 	Vice President	
 
[Signature Page of Amendment No. 2 to Credit Agreement]

					
REQUIRED FINANCING PARTY	
	
CoBank, HCB	
		
By:	 	/s/ Lori A. Kepner	
	 	Name:	 	Lori A. Kepner	
	 	Title:	 	Vice President	
 
[Signature Page of Amendment No. 2 to Credit Agreement]

									
REQUIRED FINANCING PARTY	
		
DNB Bank, ASA	 	DNB Bank, ASA	
				
By:	 	/s/ Colleen Durkin	 		 	/s/ Kjell Tore Egge	
	 	Name:	 	Colleen Durkin	 		 	Kjell Tore Egge	
	 	Title:	 	Senior Vice President	 		 	Senior Vice President	
 
[Signature Page of Amendment No. 2 to Credit Agreement]

					
REQUIRED FINANCING PARTY	
	
Mizuho Bank, Ltd.	
		
By:	 	/s/ BRIAN CALDWELL	
	 	Name:	 	BRIAN CALDWELL	
	 	Title:	 	SENIOR VICE PRESIDENT	
 
[Signature Page of Amendment No. 2 to Credit Agreement]

					
REQUIRED FINANCING PARTY	
	
Royal Bank of Canada	
		
By:	 	/s/ Frank Lambrinos	
	 	Name:	 	Frank Lambrinos	
	 	Title:	 	Authorized Signatory	
 
[Signature Page of Amendment No. 2 to Credit Agreement]

					
REQUIRED FINANCING PARTY	
	
The Bank of Nova Scotia	
		
By:	 	/s/ THANE RATTEW	
	 	Name:	 	THANE RATTEW	
	 	Title:	 	MANAGING DIRECTOR	
 
[Signature Page of Amendment No. 2 to Credit Agreement]

					
REQUIRED FINANCING PARTY	
	
SIEMENS FINANCIAL SERVICES, INC.	
		
By:	 	/s/ Patrick N. Riley	
	 	Name:	 	Patrick N. Riley	
	 	Title:	 	Vice President	
		
By:	 	/s/ Angela Ellis	
	 	Name:	 	Angela Ellis	
	 	Title:	 	Vice President	
 
[Signature Page of Amendment No. 2 to Credit Agreement]

					
REQUIRED FINANCING PARTY	
	
S UMITOMO  M ITSUI  B ANKING  C ORPORATION	
		
By:	 	/s/ J AMES D. W EINSTEIN	
	 	Name:	 	J AMES D. W EINSTEIN	
	 	Title:	 	M ANAGING D IRECTOR	
 
[Signature Page of Amendment No. 2 to Credit Agreement]

					
REQUIRED FINANCING PARTY	
	
Wells Fargo Bank, N.A.	
		
By:	 	/s/ Gabriela A. Ramirez	
	 	Name:	 	Gabriela A. Ramirez	
	 	Title:	 	Assistant Vice President	
 
[Signature Page of Amendment No. 2 to Credit Agreement]

					
REQUIRED FINANCING PARTY	
	
/s/ Valerie Du Mars	
		
By:	 	NATIXIS	
	 	Name:	 	Valerie Du Mars	
	 	Title:	 	Executive Director	
	
/s/ Anthony Perna	
Anthony Perna	
Director	
 
[Signature Page of Amendment No. 2 to Credit Agreement]

Exhibit 10.21
AMENDMENT NO. 3 TO CREDIT AGREEMENT
AMENDMENT NO. 3 to CREDIT AGREEMENT, dated as of May 29, 2014 (this “ Amendment ”), to the Credit Agreement, dated as of June 20, 2011 (as amended by the Amendment No. 1 and Omnibus Amendment, dated as of October 2011, as amended by the Amendment No. 2, dated as of October 1, 2013 and as further amended, supplemented or otherwise modified from time to time, the “ Credit Agreement ”), by and among SHARYLAND PROJECTS, L.L.C., a Texas limited liability company (the “ Borrower ”), the several banks and other financial institutions or entities from time to time parties thereto (the “ Lenders ”), SOCIÉTÉ GÉNÉRALE, as Administrative Agent (in such capacity, the “ Administrative Agent ”) and Collateral Agent for the Financing Parties, THE ROYAL BANK OF SCOTLAND PLC, as Issuing Bank, the Fixed Rate Note Holders and the other Persons from time to time parties thereto. Capitalized terms used but not otherwise defined in this Amendment shall have the meanings set forth in the Credit Agreement and the rules of interpretation set forth therein shall apply to this Amendment.
W I T N E S S E T H :
WHEREAS, the Borrower and the Lenders are parties to the Credit Agreement;
WHEREAS, the Borrower has requested that the Required Financing Parties and the Administrative Agent amend the Credit Agreement, as more fully described therein; and
WHEREAS, the Required Financing Parties, the Administrative Agent and the Borrower are willing to agree to such amendment, but only upon the terms and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual agreements herein contained and other good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Amendment to Definition of “First Repayment Date” of the Credit Agreement . The definition of “First Repayment Date” in the Credit Agreement is hereby amended by deleting the stricken text as set forth below:
“ First Repayment Date ” means the thirtieth (30 th ) day of March, June, September or December, whichever shall first occur not less than 90 days after the Term Conversion Date.
2. Amendment to Section 7.7(iii) of the Credit Agreement . Section 7.7(iii) of the Credit Agreement is hereby amended by deleting the stricken text as set forth below:
(iii) (x) if the Term Conversion Date occurs in the fourth quarter of a fiscal year, the Restricted Payment made in respect of such fiscal quarter shall not exceed the least of (A) an amount equal to the pro rata share of the Pledgor’s taxable income attributable to the Borrower for the fiscal year ending at the end of such fiscal quarter, (B) an amount equal to the amount, after giving effect to the payment thereof, that will not cause the Borrower

Exhibit 10.21
 
to have insufficient funds on deposit in the Revenue Account (determined on the date of the payment of such Restricted Payment) to make all payments required to be made in respect of items (i) through (vi) as specified in Section 3.2(c) of the Depositary Agreement through the end of the first full fiscal quarter of the immediately following fiscal year and (C) the amount then on deposit in the Distribution Account and (y) if clause (x) shall not apply, and one full fiscal quarter has ended since the Term Conversion Date, the amount of such Restricted Payment shall not exceed the amount then on deposit in the Distribution Account and the Debt Service Coverage Ratio of the Borrower for the period of the immediately preceding four fiscal quarters most recently ended (or, if less, the number of full fiscal quarters ended following the Term Conversion Date) shall be demonstrated by the Borrower with supporting calculation to be equal to or greater than 1.20 to 1.00.
3. Amendment to Article 9 of the Credit Agreement . Article 9 of the Credit Agreement is hereby amended by adding Section 9.14 as set forth below:
“Section 9.14. Non-Disturbance Agreements . The Administrative Agent and the Collateral Agent, at the request of the Borrower, shall be permitted to enter into a non-disturbance agreement in the form attached hereto as Exhibit N (with such modifications thereto as may be reasonably acceptable to the Administrative Agent and the Collateral Agent) or in such other form that is reasonably satisfactory to the Administrative Agent and the Collateral Agent (a “ Non-Disturbance Agreement ”) with any party entering into an easement or right of way (or any amendment thereof) that (i) affects all or any portion of the land covered by a Mortgage, (ii) is used for the purpose of facilitating an interconnection with one of the Borrower’s substations or other electric utilities’ substation, or for other business purposes of the Borrower not otherwise prohibited under the Credit Agreement and reasonably satisfactory to the Administrative Agent and the Collateral Agent and (iii) is a Permitted Lien. The Borrower shall deliver to the Administrative Agent and the Collateral Agent a certificate of a Responsible Officer certifying that such Non-Disturbance Agreement satisfies the conditions set forth in clauses (i) through (iii) above. All actual and reasonable, out of pocket costs and expenses of the Administrative Agent and the Collateral Agent in connection with the negotiation, preparation, execution and delivery by the Administrative Agent and the Collateral Agent of any Non-Disturbance Agreement, including, without limitation, reasonable fees and disbursements of counsel and the current fee being assessed by the Administrative Agent and the Collateral Agent in connection therewith, if any, shall be paid by Borrower in accordance with Section 10.5.”
4. Amendment to Exhibits of the Credit Agreement . Exhibits to the Credit Agreement is hereby amended by adding an Exhibit N in the form attached hereto as Appendix A.
5. Representations and Warranties . In order to induce the Administrative Agent and the Required Financing Parties to enter into this Amendment, the Borrower hereby represents and warrants that (i) each of the representations and warranties made by the Borrower in the Financing Documents is true and correct in all material respects on and as of the date hereof, before and after giving effect to the effectiveness of this Amendment, as if made on and as of the

Exhibit 10.21
 
date hereof, except to the extent such representations and warranties speak as of a particular date and were true and correct in all material respects as of such earlier date, and (ii) no Default or Event of Default has occurred and is continuing on the date hereof or after giving effect to the amendment contemplated herein.
6. Continuing Effect of Financing Documents . Except as expressly set forth herein, this Amendment shall not constitute an amendment or waiver of any provision of the Credit Agreement and shall not be construed as an amendment, waiver or consent to any further or future action on the part of the Borrower that would require an amendment, waiver or consent of the Administrative Agent or the Required Financing Parties. Except as expressly amended hereby, the provisions of the Credit Agreement are and shall remain in full force and effect. This Amendment shall be deemed a Financing Document for purposes of the Credit Agreement.
7. Fees . In accordance with Section 10.5 of the Credit Agreement, the Borrower shall have paid the fees, charges and disbursements of the Administrative Agent’s special counsel in connection with this Amendment.
8. Counterparts . This Amendment may be executed by one or more of the parties hereto on any number of separate counterparts (including by facsimile), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed signature page to this Amendment by facsimile or electronic transmission shall be effective as the delivery of a manually executed counterpart of this Amendment.
9. Severability . Any provision of this Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
10. Integration . This Amendment and the other Financing Documents represent the agreement of the Borrower, the Administrative Agent and the Required Financing Parties with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Borrower, the Administrative Agent or any Required Financing Party relative to the subject matter hereof not expressly set forth or referred to herein or in the other Financing Documents.
9. GOVERNING LAW . THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
[Remainder of page intentionally left blank]

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective proper and duly authorized officers as of the date first above written.

SHARYLAND PROJECTS, L.L.C.,
as Borrower	
		
By:	 	/s/ Greg Wilks	
	 	Name: Greg Wilks	
	 	Title: Senior Vice President	
 
[Signature Page to Amendment No. 3]

			
SOCIÉTÉ GÉNÉRALE,
as Administrative Agent and Collateral Agent	
		
By:	 	/s/ Ellen Turkel	
	 	Name: Ellen Turkel	
	 	Title: Director	
 
[Signature Page to Amendment No. 3]

			
SOCIÉTÉ GÉNÉRALE,
as Lender	
		
By:	 	/s/ Ellen Turkel	
	 	Name: Ellen Turkel	
	 	Title: Director	
 
[Signature Page to Amendment No. 3]

			
ASSOCIATED BANK, N.A.,
as Lender	
		
By:	 	/a/ Jiwon Moon	
	 	Name: Jiwon Moon	
	 	Title: Senior Vice President	
 
[Signature Page to Amendment No. 3]

			
ROYAL BANK OF CANADA,	
as Co-Syndication Agent and Lender	
		
By:	 	/s/ Frank Lambrinos	
	 	Name: Frank Lambrinos	
	 	Title: Authorized Signatory	
 
[Signature Page to Amendment No. 3]

			
THE PRUDENTIAL INSURANCE COMPANY	
OF AMERICA	
		
By:	 	/s/ Richard Carrell	
	 	Name: Richard Carrell	
	 	Title: Vice President	
	
PRUCO LIFE INSURANCE COMPANY OF	
NEW JERSEY	
		
By:	 	/s/ Richard Carrell	
	 	Name: Richard Carrell	
	 	Title: Vice President	
	
PRUDENTIAL ANNUITIES LIFE ASSURANCE CORPORATION	
		
By:	 	Prudential Investment Management, Inc., as investment manager	
		
By:	 	/s/ Richard Carrell	
	 	Name: Richard Carrell	
	 	Title: Vice President	
 
[Signature Page to Amendment No. 3]

			
MIZUHO BANK LTD.	
		
By:	 	/a/ Brian Caldwell	
	 	Name: Brian Caldwell	
	 	Title: Senior Vice President	
 
[Signature Page to Amendment No. 3]

			
THE BANK OF NOVA SCOTIA	
		
By:	 	/s/ Thane Rattew	
	 	Name: Thane Rattew	
	 	Title: Managing Director	
 
[Signature Page to Amendment No. 3]

			
SUMITOMO MITSUI BANKING CORPORATION	
		
By:	 	/s/ James D. Weinstein	
	 	Name: James D. Weinstein	
	 	Title: Managing Director	
 
[Signature Page to Amendment No. 3]

			
COBANK, ACB	
		
By:	 	/s/ Lori Kepner	
	 	Name: Lori Kepner	
	 	Title: Vice President	
 
[Signature Page to Amendment No. 3]

			
CIBC INC.	
		
By:	 	/s/ Jonathan J. Kim	
	 	Name: Jonathan J. Kim	
	 	Title: Authorized Signatory	
		
By:	 	/s/ Darrel Ho	
	 	Name: Darrel Ho	
	 	Title: Authorized Signatory	
	
CIBC World Markets Corp.	
Authorized Signatory	
 
[Signature Page to Amendment No. 3]

			
DNB Capital LLC	
		
By:	 	/s/ Einar Gulstad	
	 	Name: Einar Gulstad	
	 	Title: Senior Vice President	
		
By:	 	/s/ Jill Iiski	
	 	Name: Jill Iiski	
	 	Title: Senior Vice President	
 
[Signature Page to Amendment No. 3]

			
NATIXIS, NEW YORK BRANCH	
		
By:	 	/s/ Amit Roy	
	 	Name: Amit Roy	
	 	Title: Executive Director	
		
By:	 	/s/ Valerie Du Mars	
	 	Name: Valerie Du Mars	
	 	Title: Executive Director	
 
[Signature Page to Amendment No. 3]

			
SANTANDER BANK, N.A.	
		
By:	 	/s/ Jorge Camina	
	 	Name: Jorge Camina	
	 	Title: Managing Director	
		
By:	 	/s/ Alberto Garcia	
	 	Name: Alberto Garcia	
	 	Title: Vice President	
 
[Signature Page to Amendment No. 3]

			
SUMITOMO MITSUI TRUST BANK, LIMITED, NEW YORK BRANCH	
		
By:	 	/s/ Albert C. Tew II	
	 	Name: Albert C. Tew II	
	 	Title: Vice President	
 
[Signature Page to Amendment No. 3]

			
SIEMENS FINANCIAL SERVICES, INC.	
		
By:	 	/s/ Patrick N. Riley	
	 	Name: Patrick N. Riley	
	 	Title: Vice President	
		
By:	 	/s/ Angela Ellis	
	 	Name: Angela Ellis	
	 	Title: Vice President	
 
[Signature Page to Amendment No. 3]

			
WELLS FARGO BANK, NATIONAL ASSOCIATION	
		
By:	 	/s/ Yann Blindert	
	 	Name: Yann Blindert	
	 	Title: Director	
 
[Signature Page to Amendment No. 3]

Appendix A
(See Attached)

Exhibit 10.22
Execution Version
AMENDMENT NO. 4 AND CONSENT TO
CREDIT AGREEMENT AND AMENDMENT NO. 1 TO SECURITY AGREEMENT
Amendment No. 4 and Consent to CREDIT AGREEMENT, dated as of December 11, 2014 (this “ Amendment No. 4 ”) to the CREDIT AGREEMENT, dated as of June 20, 2011 (as amended by Amendment No. 1 and Omnibus Amendment, dated as of October 11 2011, Amendment No. 2, dated as of October 1, 2013, and Amendment No. 3, dated as of May 29, 2014, the “ Credit Agreement ”), by and among SHARYLAND PROJECTS, L.L.C. (the “ Borrower ”), the several banks and other financial institutions or entities from time to time parties thereto (the “ ‘Lenders ”), Société Générale, as administrative agent and collateral agent for the Lenders (in such capacity, the “ Administrative Agent ” or the “ Collateral Agent ”), the Fixed Rate Note Holders, and the other Persons from time to time parties thereto, and Amendment No. 1 to SECURITY AGREEMENT, dated as of December 11, 2014 (this “ Amendment No. 1 ” and together with Amendment No. 4, this “ Amendment ”) to the SECURITY AGREEMENT, dated as of June 20, 2011, by and among the Borrower, the Administrative Agent and Collateral Agent, and the other Persons from time to time parties thereto. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement (after giving effect to this Amendment) and the rules of interpretation set forth therein shall apply to this Amendment.
RECITALS
WHEREAS, the Borrower, the Lenders party hereto and the Fixed Rate Note Holders party hereto are parties to the Credit Agreement;
WHEREAS, in connection with an anticipated Qualified IPO, the Borrower has requested that the Required Financing Parties and the Administrative Agent amend the Credit Agreement as more fully described herein;
WHEREAS, the Borrower desires to amend and restate that certain Amended and Restated Lease Agreement dated as of April 30, 2013 between the Borrower and Sharyland Utilities, L.P., which amendment and restatement will be substantially in the form attached hereto as Exhibit A (such amendment and restatement, the “CREZ Lease Amendment and Restatement”);
WHEREAS, the Borrower has further requested that the Required Financing Parties consent to the CREZ Lease Amendment and Restatement and amend the Credit Agreement in connection therewith, as more fully described herein;
WHEREAS, the Required Financing Parties, the Administrative Agent and the Borrower are willing to agree to such amendments and consent, but only upon the terms and subject to the conditions set forth herein;

NOW THEREFORE, in consideration of the mutual agreement herein contained and other good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Amendments to the Credit Agreement .
 
 	a.	Section 1.1 of the Credit Agreement is hereby amended by deleting the following definitions and replacing them in their entirety as follows:	
“ Change of Control ” means (i) the Operating Partnership shall cease to own or control, directly or indirectly, 90% of the outstanding equity interests of the Pledgor; (ii) Hunt Family Members shall cease to own and control, directly or indirectly, at least 5% of the outstanding equity interests of the Operating Partnership, unless (x) the General Partner has become a publicly held company, or (y) the Pledgor has total assets on its balance sheet valued at $1,000,000,000 or greater; (iii) Hunt Family Members cease to own or control, directly or indirectly, at least 50% of the voting interests of SU; or (iv) the Pledgor shall cease to directly own or control 100% of the outstanding equity interests of the Borrower.
“ Collateral Accounts ” has the meaning given to it in the Depositary Agreement.
“ CREZ Master Lease ” means (A) prior to the effectiveness of the CREZ Lease Amendment and Restatement, the Amended and Restated Lease Agreement (CREZ Assets) dated as of April 30, 2013, between the Borrower, as lessor, and SU, as lessee, and (B) upon the effectiveness of the CREZ Lease Amendment and Restatement, the CREZ Lease Amendment and Restatement, as such lease may be amended, restated, supplemented or otherwise modified from time to time, or any new lease entered into in replacement thereof.
“ General Partner ” means InfraREIT, L.L.C., a Delaware limited liability company, and its successors.
“ Operating Partnership ” means InfraREIT Partners, LP, a Delaware limited partnership.
“ Pledged Stock ” has the meaning given to the term “Pledged Collateral” in the Pledge Agreement.
“ Qualified IPO ” means an underwritten public offering of the equity interests of the General Partner or any other Person of which the Pledgor is a Subsidiary.
“ System Lease ” means (1) the McAllen Lease, (2) the Stanton/Brady/Celeste Lease, (3) upon the effectiveness thereof, the Lease Agreement (ERCOT Transmission Assets), between the Pledgor, as lessor, and SU, as lessee, (4) upon the completion of the FERC Merger, the FERC Lease and (5) any and all other leases and supplements thereto in connection with transmission and distribution and related assets pursuant to which SU is the lessee and either (A) the Pledgor or a Subsidiary of the Pledgor is the lessor or (B) a Subsidiary of SU or another Person Controlled by one or more Hunt Family Members is the lessor.
 
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 	b.	Section 1.1 of the Credit Agreement is hereby amended by adding the following definitions in alphabetical order:	
“ Control ” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise.
“ CREZ Lease Amendment and Restatement ” means the Second Amended and Restated Lease Agreement (CREZ Assets), between the Borrower, as lessor, and SU, as lessee, with respect to the CREZ Project.
“ FERC Lease ” means (A) prior to the effectiveness of the FERC Lease Amendment and Restatement, the Second Amended and Restated Lease Agreement, dated as of July 1, 2012, between FERC Owner and FERC Operator and (B) upon the effectiveness of the FERC Lease Amendment and Restatement, the FERC Lease Amendment and Restatement, as such lease may be amended, restated, supplemented or otherwise modified from time to time, or any new lease entered into in replacement thereof.
“ FERC Lease Amendment and Restatement ” shall mean the Third Amended and Restated Lease Agreement (Stanton Transmission Loop Assets) between FERC Owner, as lessor, and FERC Operator, as lessee.
“ FERC Merger ” means the anticipated transaction or series of transactions pursuant to which SDTS FERC, L.L.C. will merge into the Pledgor and SU FERC, L.L.C. will merge into SU.
“ FERC Operator ” means (A) prior to the FERC Merger, SU FERC, L.L.C., a Subsidiary of SU, and (B) upon the completion of the FERC Merger, SU.
“ FERC Owner ” means (A) prior to the FERC Merger, SDTS FERC, L.L.C., a Subsidiary of the Pledgor, and (B) upon the completion of the FERC Merger, the Pledgor.
“ Hunt Family Members ” means (i) Ray L. Hunt; (ii) the spouse of Ray L. Hunt and each of his children and siblings; (iii) the spouse and lineal descendants of any Person identified in the foregoing clause (ii); (iv) any trust or account primarily for the benefit of any Person or Persons identified in the foregoing clauses (i), (ii) or (iii); (v) any corporation, partnership or other entity in which any of the Persons identified in the foregoing clauses (i), (ii), (iii) or (iv) are the beneficial owners of and Control substantially all of the shares of capital stock, membership interests, partnership interests or other equity interests and options or warrants to acquire, or securities convertible into, capital stock, membership interests, partnership interests or other equity securities of an entity; and (vi) the personal representative or guardian of any of the Persons identified in the foregoing clauses (i), (ii) and (iii) upon such Person’s death for purposes of the administration of such Person’s estate or upon such Person’s disability or incompetency for purposes of the protection and management of the assets of such Person.
 
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“ McAllen Lease ” shall mean (A) prior to the effectiveness of the McAllen Lease Amendment and Restatement, the Second Amended and Restated Master System Lease Agreement, dated as of July 1, 2012, between the Pledgor, as lessor, and SU, as lessee, and (B) upon the effectiveness of the McAllen Lease Amendment and Restatement, the McAllen Lease Amendment and Restatement, as such lease may be amended, restated, supplemented or otherwise modified from time to time, or any new lease entered into in replacement thereof.
“ McAllen Lease Amendment and Restatement ” the Third Amended and Restated Master System Lease Agreement (McAllen System), between the Pledgor, as lessor, and SU, as lessee.
“ Stanton/Brady/Celeste Lease ” shall mean (A) prior to the effectiveness of the Stanton/Brady/Celeste Lease Amendment and Restatement, the Amended and Restated Lease Agreement (Stanton/Brady/Celeste Assets), dated as of July 1, 2012, between the Pledgor, as lessor, and SU, as lessee, and (B) upon the effectiveness of the Stanton/Brady/Celeste Lease Amendment and Restatement, the Stanton/Brady/Celeste Lease Amendment and Restatement, as such lease may be amended, restated, supplemented or otherwise modified from time to time, or any new lease entered into in replacement thereof.
“ Stanton/Brady/Celeste Lease Amendment and Restatement ” shall mean the Second Amended and Restated Lease Agreement (Stanton/Brady/Celeste Assets), between the Pledgor, as lessor, and SU, as lessee.
 
 	c.	Article 2 of the Credit Agreement is hereby amended by adding Section 2.22(j) as set forth below:	
“(j) For purposes of determining withholding Taxes imposed under FATCA, from and after the effective date of that Amendment No. 4 to the Credit Agreement, the Borrower and the Administrative Agent shall treat (and the Lenders hereby authorize the Administrative Agent to treat) the Credit Agreement as not qualifying as a “grandfathered obligation” within the meaning of Treasury Regulation Section 1.1471-2(b)(2)(i).”
 
 	d.	Section 5.11 of the Credit Agreement shall be amended by deleting the stricken text and adding the underlined text, each as set forth below:	
“Security Documents . The Security Agreement and the Pledge Agreement are each effective to create in favor of the Collateral Agent, for the benefit of the Secured Parties, a legal, valid and enforceable security interest in the Collateral described therein and proceeds thereof. In the case of the Pledged Stock, the Pledge Agreement shall be effective to
 
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create a fully perfected Lien on, and security interest in, all right, title and interest of the Pledgor in such Pledged Stock and the proceeds thereof upon delivery of certificates and appropriate transfer powers to the Collateral Agent representing any such Pledged Stock constituting a “certificated security” under Section 8-102(a)(4) of the Uniform Commercial Code as in effect in the State of New York , as security for the Secured Obligations (as defined in the Pledge Agreement), and in the case of the other Collateral described in the Security Agreement constituting Collateral that is of the type in which a valid security interest can be created under Article 9 of the Uniform Commercial Code as in effect in the State of New York, when financing statements and other filings specified on Schedule 5.11 in appropriate form are filed in the offices specified on Schedule 5.11, the Security Agreement and the Pledge Agreement shall be effective to create a fully perfected Lien on, and security interest in, all right, title and interest of the Borrower and the Pledgor in such Collateral and the proceeds thereof (to the extent a security interest in such Collateral may be perfected by the filing of a financing statement under the Uniform Commercial Code as in effect in such filing jurisdictions) , as security for the Secured Obligations (as defined in the Security Agreement or Pledge Agreement, as applicable), in each case prior and superior in right to any other Person (except, in the case of Collateral other than Pledged Stock, Permitted Liens that pursuant to applicable law are entitled to a higher priority than the Liens created by the Security Documents).”
 
 	e.	Section 8.8 of the Credit Agreement shall be amended by adding the underlined text as set forth below:	
“Any of the Financing Documents shall cease, for any reason, to be in full force and effect, the Borrower or any Affiliate thereof shall so assert or any security interest in the Collateral purported to be created by any Security Document shall cease to be, or shall be asserted in writing by the Borrower or the Pledgor not to be, a valid and perfected security interest having the priority required by this Agreement or the relevant Security Document in the securities, assets or properties covered thereby , in each case except as any such validity, perfection or priority is not required hereunder or thereunder (including by amendment, consent or waiver) .”
 
 	f.	Section 5.28 of the Credit Agreement shall be amended by adding the underlined text as set forth below:	
“The Borrower does not have any “deposit account” with a “bank” (within the meaning of Section 9-102 of the UCC) other than (a)  the Collateral Accounts, as applicable, established in accordance with the Depositary Agreement and the other Financing Documents and (b) any “deposit account”, the deposits of which are limited to disbursements from the Distribution Account made in accordance with Section 3.6(b) of the Depositary Agreement .”
 
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 	g.	Section 7.16 of the Credit Agreement shall be amended by adding the underlined text as set forth below:	
“The Borrower shall not have any “deposit accounts” with a “bank” (within the meaning of Section 9-102 of the UCC) other than (a)  the Collateral Accounts, as applicable, established in accordance with the Depositary Agreement and the other Financing Documents and (b) any “deposit account”, the deposits of which are limited to disbursements from the Distribution Account made in accordance with Section 3.6(b) of the Depositary Agreement. The Borrower shall provide prompt notice to the Administrative Agent with respect to any deposit accounts which qualify under clause (b) of the preceding sentence .”
2. Consent under Credit Agreement . Notwithstanding Section 7.9(v) of the Credit Agreement, the Financing Parties party hereto, which Financing Parties constitute the Required Financing Parties necessary to effect the consent hereinafter described, hereby consent to the CREZ Lease Amendment and Restatement.
3. Amendment to Security Agreement . Section 4.01(b) of the Security Agreement amended by deleting the stricken text and adding the underlined text, each as set forth below:
“maintain the Liens created by this Agreement as a perfected security interest having at least the priority described in Section 5.11 of the Credit Agreement and, at the sole cost and expense of the Borrower, (i) give, execute, deliver, file and/or record any Financing Statement (x) to create, preserve, perfect or validate and maintain the Liens granted pursuant hereto or (y) to enable the Collateral Agent to exercise and enforce its rights hereunder with respect to such Liens; provided that notices to account debtors in respect of any Accounts or Instruments shall be subject to the provisions of clause (d) below, (ii) in the case of Investment Property (other than securities accounts and commodities accounts) and Letter-of-Credit Rights , take any actions necessary to enable the Collateral Agent to obtain “control” (within the meaning of the applicable Uniform Commercial Code) with respect thereto and (iii) in the case of any Deposit Account, securities account or commodities account constituting a Collateral Account , take any actions necessary to enable the Collateral Agent to obtain “control” (within the meaning of the applicable Uniform Commercial Code);”
4. Conditions to this Amendment Effective Date . This Amendment shall become effective as of the date first set forth above (the “Amendment Effective Date”) which shall be a date after the Required Financing Parties, the Administrative Agent and the Borrower shall have executed and delivered counterparts of this Amendment.
5. Representations and Warranties of the Borrower . In order to induce the Administrative Agent and the Required Financing Parties to enter into this Amendment, the Borrower hereby represents and warrants that no Default or Event of Default has occurred and is continuing on the date hereof or after giving effect to the amendment contemplated herein.
6. Continuing Effect of Financing Documents . Except as expressly set forth herein, this Amendment shall not constitute an amendment or waiver of any provision of the Credit Agreement and shall not be construed as an amendment, waiver or consent to any further or future action on the part of the Borrower that would require an amendment, waiver or consent of
 
6

the Administrative Agent or the Required Financing Parties. Except as expressly amended hereby, the provisions of the Credit Agreement are and shall remain in full force and effect. This Amendment shall be deemed a Financing Document for purposes of the Credit Agreement.
7. Fees . In accordance with Section 10.5 of the Credit Agreement, the Borrower shall pay the fees, charges and disbursements of the Administrative Agent’s special counsel in connection with this Amendment.
8. Counterparts . This Amendment may be executed by one or more of the parties hereto in any number of separate counterparts (including by facsimile), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed signature page to this Amendment by facsimile or electronic transmission shall be effective as the delivery of a manually executed counterpart of this Amendment.
9. Severability . Any provision of this Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
10. Integration . This Amendment and the other Financing Documents represent the agreement of the Borrower, the Administrative Agent and the Required Financing Parties with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Borrower, the Administrative Agent or any Required Financing Party relative to the subject matter hereof not expressly set forth or referred to herein or in the other Financing Documents.
11. GOVERNING LAW . THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
[Signatures on Following Page]
 
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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written.

BORROWER	
	
SHARYLAND PROJECTS, L.L.C.	
		
By:	 	/s/ Brant Meleski	
	 	Name:	 	Brant Meleski	
	 	Title:	 	Senior Vice President and Chief Financial Officer	
 
Signature Page to Amendment No. 4 and Consent to Credit Agreement and Amendment No. 1 to Security Agreement

					
SOCIÉTÉ GÉNÉRALE,
as Administrative Agent and Collateral Agent	
		
By:	 	/s/ Edward J. Grimm	
	 	Name:	 	Edward J. Grimm	
	 	Title:	 	Director	
 
Signature Page to Amendment No. 4 and Consent to Credit Agreement and Amendment No. 1 to Security Agreement

					
SOCIÉTÉ GÉNÉRALE,
as a Lender	
		
By:	 	/s/ Edward J. Grimm	
	 	Name:	 	Edward J. Grimm	
	 	Title:	 	Director	
 
Signature Page to Amendment No. 4 and Consent to Credit Agreement and Amendment No. 1 to Security Agreement

					
ASSOCIATES BANK, N.A.,
 as Lender	
		
By:	 	/s/ Joel Makolin	
	 	Name:	 	Joel Makolin	
	 	Title:	 	Vice President	
 
Signature Page to Amendment No. 4 and Consent to Credit Agreement and Amendment No. 1 to Security Agreement

					
ROYAL BANK OF CANADA,
as Co-Syndication Agent and Lender	
		
By:	 	/s/ Frank Lambrinos	
	 	Name:	 	Frank Lambrinos	
	 	Title:	 	Authorized Signatory	
 
Signature Page to Amendment No. 4 and Consent to Credit Agreement and Amendment No. 1 to Security Agreement

					
THE BANK OF NOVA SCOTIA	
		
By:	 	/s/ Thane Rattew	
	 	Name:	 	Thane Rattew	
	 	Title:	 	Managing Director	
 
Signature Page to Amendment No. 4 and Consent to Credit Agreement and Amendment No. 1 to Security Agreement

					
SUMITOMO MITSUI BANKING CORPORATION	
		
By:	 	/s/ James D. Weinstein	
	 	Name:	 	James D. Weinstein	
	 	Title:	 	Managing Director	
 
Signature Page to Amendment No. 4 and Consent to Credit Agreement and Amendment No. 1 to Security Agreement

					
COBANK, ACB	
		
By:	 	/s/ Dustin Zubke	
	 	Name:	 	Dustin Zubke	
	 	Title:	 	Vice President	
 
Signature Page to Amendment No. 4 and Consent to Credit Agreement and Amendment No. 1 to Security Agreement

					
DNB CAPITAL LLC	
		
By:	 	/s/ Einar Gulstad	
	 	Name:	 	Einar Gulstad	
	 	Title:	 	Senior Vice President	
		
By:	 	/s/ Andrea Ozbolt	
	 	Name:	 	Andrea Ozbolt	
	 	Title:	 	First Vice President	
 
Signature Page to Amendment No. 4 and Consent to Credit Agreement and Amendment No. 1 to Security Agreement

					
SIEMENS FINANCIAL SERVICES, INC.	
		
By:	 	/s/ Patrick N. Riley	
	 	Name:	 	Patrick N. Riley	
	 	Title:	 	Vice President	
		
By:	 	/s/ Angela Ellis	
	 	Name:	 	Angela Ellis	
	 	Title:	 	Vice President	
 
Signature Page to Amendment No. 4 and Consent to Credit Agreement and Amendment No. 1 to Security Agreement

					
WELLS FARGO BANK, NATIONAL ASSOCIATION	
		
By:	 	/s/ Yann Blindert	
	 	Name:	 	Yann Blindert	
	 	Title:	 	Director	

Exhibit 10.23
Execution Version
Published CUSIP Number: 45683BAA2

CREDIT AGREEMENT
Dated as of December 10, 2014
among
INFRAREIT PARTNERS, LP
as the Borrower,
BANK OF AMERICA, N.A.,
as Administrative Agent,
and
L/C Issuer,
and
The Other Lenders Party Hereto
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED ,
as
Sole Lead Arranger and Sole Book Manager

 

TABLE OF CONTENTS

Section	  	 	  	Page	 	
		
ARTICLE I. DEFINITIONS AND ACCOUNTING TERMS	  	 	1	  	
1.01	  	Defined Terms	  	 	1	  	
1.02	  	Other Interpretive Provisions	  	 	29	  	
1.03	  	Accounting Terms	  	 	29	  	
1.04	  	Rounding	  	 	30	  	
1.05	  	Times of Day; Rates	  	 	30	  	
1.06	  	Letter of Credit Amounts	  	 	30	  	
		
ARTICLE II. THE COMMITMENTS AND CREDIT EXTENSIONS	  	 	30	  	
2.01	  	Loans	  	 	30	  	
2.02	  	Borrowings, Conversions and Continuations of Loans	  	 	31	  	
2.03	  	Letters of Credit	  	 	32	  	
2.04	  	Prepayments	  	 	40	  	
2.05	  	Repayment of Loans	  	 	41	  	
2.06	  	Interest	  	 	41	  	
2.07	  	Fees	  	 	42	  	
2.08	  	Computation of Interest and Fees	  	 	42	  	
2.09	  	Evidence of Debt	  	 	43	  	
2.10	  	Payments Generally; Administrative Agent’s Clawback	  	 	43	  	
2.11	  	Sharing of Payments by Lenders	  	 	45	  	
2.12	  	Cash Collateral	  	 	46	  	
2.13	  	Defaulting Lenders	  	 	47	  	
2.14	  	Increase in Commitments	  	 	49	  	
		
ARTICLE III. TAXES, YIELD PROTECTION AND ILLEGALITY	  	 	50	  	
3.01	  	Taxes	  	 	50	  	
3.02	  	Illegality	  	 	55	  	
3.03	  	Inability to Determine Rates	  	 	55	  	
3.04	  	Increased Costs; Reserves on Eurodollar Rate Loans	  	 	56	  	
3.05	  	Compensation for Losses	  	 	58	  	
3.06	  	Mitigation Obligations; Replacement of Lenders	  	 	58	  	
3.07	  	Survival	  	 	59	  	
		
ARTICLE IV. CONDITIONS PRECEDENT TO CREDIT EXTENSIONS	  	 	59	  	
4.01	  	Conditions of Initial Credit Extension	  	 	59	  	
4.02	  	Conditions to all Credit Extensions	  	 	62	  	
		
ARTICLE V. REPRESENTATIONS AND WARRANTIES	  	 	62	  	
5.01	  	Existence, Qualification and Power	  	 	62	  	
5.02	  	Authorization; No Contravention	  	 	63	  	
5.03	  	Governmental Authorization; Other Consents	  	 	63	  	
5.04	  	Binding Effect	  	 	63	  	
 
i

							
5.05	  	Financial Statements; No Material Adverse Effect	  	 	63	  	
5.06	  	Litigation	  	 	64	  	
5.07	  	No Default	  	 	64	  	
5.08	  	Ownership of Property	  	 	64	  	
5.09	  	Environmental Compliance	  	 	64	  	
5.10	  	Insurance	  	 	65	  	
5.11	  	Taxes	  	 	65	  	
5.12	  	ERISA Compliance	  	 	65	  	
5.13	  	Subsidiaries; Equity Interests	  	 	66	  	
5.14	  	Margin Regulations; Investment Company Act	  	 	66	  	
5.15	  	Disclosure	  	 	66	  	
5.16	  	Compliance with Laws	  	 	67	  	
5.17	  	Taxpayer Identification Number	  	 	67	  	
5.18	  	Intellectual Property; Licenses, Etc.	  	 	67	  	
5.19	  	OFAC	  	 	67	  	
5.20	  	Foreign Assets Control Regulations	  	 	67	  	
5.21	  	Status under Certain Statutes	  	 	68	  	
5.22	  	Collateral	  	 	68	  	
5.23	  	Collateral Agency Agreement	  	 	68	  	
		
ARTICLE VI. AFFIRMATIVE COVENANTS	  	 	69	  	
6.01	  	Information Covenants	  	 	69	  	
6.02	  	Use of Proceeds	  	 	72	  	
6.03	  	Compliance with Law	  	 	72	  	
6.04	  	Insurance	  	 	72	  	
6.05	  	Maintenance of Properties	  	 	72	  	
6.06	  	Payment of Taxes and Claims	  	 	72	  	
6.07	  	Existence, Etc.	  	 	73	  	
6.08	  	Books and Records; Inspection Rights	  	 	73	  	
6.09	  	Collateral; Further Assurances	  	 	73	  	
6.10	  	Leases	  	 	74	  	
6.11	  	Financial Ratios	  	 	75	  	
		
ARTICLE VII. NEGATIVE COVENANTS	  	 	75	  	
7.01	  	Transactions with Affiliates	  	 	75	  	
7.02	  	Merger, Consolidation, etc.	  	 	76	  	
7.03	  	Line of Business	  	 	76	  	
7.04	  	Terrorism Sanctions Regulations	  	 	76	  	
7.05	  	Liens	  	 	77	  	
7.06	  	Indebtedness	  	 	78	  	
7.07	  	Loans, Advances, Investments and Contingent Liabilities	  	 	79	  	
7.08	  	[Reserved]	  	 	79	  	
7.09	  	Distributions	  	 	80	  	
7.10	  	Sale of Assets, etc.	  	 	80	  	
7.11	  	Amendments to Organizational Documents	  	 	81	  	
7.12	  	ERISA Compliance	  	 	81	  	
7.13	  	No Margin Stock	  	 	82	  	
 
ii

							
7.14	  	Leases	  	 	82	  	
7.15	  	Regulation	  	 	82	  	
7.16	  	Swaps	  	 	83	  	
7.17	  	Burdensome Agreements	  	 	83	  	
		
ARTICLE VIII. EVENTS OF DEFAULT	  	 	83	  	
8.01	  	Events of Default	  	 	83	  	
8.02	  	Remedies Upon Event of Default	  	 	86	  	
8.03	  	Application of Funds	  	 	87	  	
		
ARTICLE IX. ADMINISTRATIVE AGENT	  	 	88	  	
9.01	  	Appointment and Authority	  	 	88	  	
9.02	  	Rights as a Lender	  	 	88	  	
9.03	  	Exculpatory Provisions	  	 	89	  	
9.04	  	Reliance by Administrative Agent	  	 	90	  	
9.05	  	Delegation of Duties	  	 	90	  	
9.06	  	Resignation of Administrative Agent	  	 	90	  	
9.07	  	Non-Reliance on Administrative Agent and Other Lenders	  	 	92	  	
9.08	  	No Other Duties, Etc.	  	 	92	  	
9.09	  	Administrative Agent May File Proofs of Claim; Credit Bidding	  	 	92	  	
9.10	  	Collateral and Guaranty Matters	  	 	94	  	
		
ARTICLE X. MISCELLANEOUS	  	 	94	  	
10.01	  	Amendments, Etc.	  	 	94	  	
10.02	  	Notices; Effectiveness; Electronic Communication	  	 	96	  	
10.03	  	No Waiver; Cumulative Remedies; Enforcement	  	 	98	  	
10.04	  	Expenses; Indemnity; Damage Waiver	  	 	99	  	
10.05	  	Payments Set Aside	  	 	101	  	
10.06	  	Successors and Assigns	  	 	101	  	
10.07	  	Treatment of Certain Information; Confidentiality	  	 	106	  	
10.08	  	Right of Setoff	  	 	106	  	
10.09	  	Interest Rate Limitation	  	 	107	  	
10.10	  	Counterparts; Integration; Effectiveness	  	 	107	  	
10.11	  	Survival of Representations and Warranties	  	 	108	  	
10.12	  	Severability	  	 	108	  	
10.13	  	Replacement of Lenders	  	 	108	  	
10.14	  	Governing Law; Jurisdiction; Etc.	  	 	109	  	
10.15	  	Waiver of Jury Trial	  	 	110	  	
10.16	  	No Advisory or Fiduciary Responsibility	  	 	110	  	
10.17	  	Electronic Execution of Assignments and Certain Other Documents	  	 	111	  	
10.18	  	USA PATRIOT Act	  	 	111	  	
10.19	  	ENTIRE AGREEMENT	  	 	111	  	
 
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SCHEDULES

2.01	 	Commitments and Applicable Percentages	
5.13	 	Subsidiaries; Other Equity Investments; Equity Interests in the Borrower	
7.06	 	Existing Indebtedness	
7.17	 	Burdensome Agreements	
10.02	 	Administrative Agent’s Office; Certain Addresses for Notices	
EXHIBITS

Form of	  		
A	  	Loan Notice	
B	  	Note	
C-1	  	Compliance Certificate (Borrower)	
C-1	  	Compliance Certificate (Qualified Lessee)	
D-1	  	Assignment and Assumption	
D-2	  	Administrative Questionnaire	
E	  	Guaranty	
F	  	Opinion Matters	
G-1 ~ G-4	  	Forms of U.S. Tax Compliance Certificate	
 
iv

CREDIT AGREEMENT
This CREDIT AGREEMENT (“ Agreement ”) is entered into as of December 10, 2014, among InfraREIT Partners, LP, a Delaware limited partnership (the “ Borrower ”), each lender from time to time party hereto (collectively, the “ Lenders ” and individually, a “ Lender ”), and BANK OF AMERICA, N.A., as Administrative Agent, and L/C Issuer.
The Borrower has requested that the Lenders provide a revolving credit facility, and the Lenders are willing to do so on the terms and conditions set forth herein.
In consideration of the mutual covenants and agreements herein contained, the parties hereto covenant and agree as follows:
ARTICLE I.
DEFINITIONS AND ACCOUNTING TERMS
1.01 Defined Terms . As used in this Agreement, the following terms shall have the meanings set forth below:
“ 2010 Note Purchase Agreement ” means the Note Purchase Agreement, dated as of July 13, 2010, among TDC and the holders of TDC’s 2020 Notes issued thereunder, as the same may be amended, restated, supplemented or otherwise modified from time to time.
“ 2010 Note Purchase Documents ” means, collectively, the 2010 Note Purchase Agreement, the 2020 Notes and the 2014 Joinder Agreement.
“ 2014 Joinder Agreement ” means a joinder agreement substantially in the form attached to the Collateral Agency Agreement, to which each of TDC and the Administrative Agent, on behalf of itself and the other Lenders, is a party, pursuant to which the Administrative Agent becomes a Secured Party under the Collateral Agency Agreement.
“ 2020 Notes ” means the 8.5% Senior Notes due December 30, 2020 of TDC.
“ Administrative Agent ” means Bank of America in its capacity as administrative agent under any of the Loan Documents, or any successor administrative agent.
“ Administrative Agent’s Office ” means the Administrative Agent’s address and, as appropriate, account as set forth on Schedule 10.02 , or such other address or account as the Administrative Agent may from time to time notify to the Borrower and the Lenders.
“ Administrative Questionnaire ” means an Administrative Questionnaire in substantially the form of Exhibit D-2 or any other form approved by the Administrative Agent.
“ Affiliate ” means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified.
 
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“ Aggregate Commitments ” means the Commitments of all the Lenders. The Aggregate Commitments on the Closing Date is $75,000,000.
“ Agreement ” means this Credit Agreement.
“ Applicable Percentage ” means with respect to any Lender at any time, the percentage (carried out to the ninth decimal place) of the Aggregate Commitments represented by such Lender’s Commitment at such time, subject to adjustment as provided in Section 2.13 . If the commitment of each Lender to make Loans and the obligation of the L/C Issuer to make L/C Credit Extensions have been terminated pursuant to Section 8.02 or if the Aggregate Commitments have expired, then the Applicable Percentage of each Lender shall be determined based on the Applicable Percentage of such Lender most recently in effect, giving effect to any subsequent assignments. The initial Applicable Percentage of each Lender is set forth opposite the name of such Lender on Schedule 2.01 or in the Assignment and Assumption pursuant to which such Lender becomes a party hereto, as applicable.
“ Applicable Rate ” means a per annum rate equal to:
(a) with respect to Base Rate Loans, 1.50%;
(b) with respect to Eurodollar Rate Loans and Letters of Credit, 2.50%; and
(c) with respect to the commitment fee, 0.50%.
“ Approved Fund ” means any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender.
“ Approved Lease Amendments ” means the CREZ Lease Amendment and Restatement, the McAllen Lease Amendment and Restatement, the Stanton/Brady/Celeste Lease Amendment and Restatement and, to the extent the FERC Merger has been completed, the FERC Lease Amendment and Restatement.
“ Arranger ” means Merrill Lynch, Pierce, Fenner & Smith Incorporated in its capacity as lead arranger and sole book manager.
“ Assignment and Assumption ” means an assignment and assumption entered into by a Lender and an Eligible Assignee (with the consent of any party whose consent is required by Section 10.06(b) ), and accepted by the Administrative Agent, in substantially the form of Exhibit D-1 or any other form (including electronic documentation generated by MarkitClear or other electronic platform) approved by the Administrative Agent.
“ Attributable Indebtedness ” means, on any date, (a) in respect of any capital lease of any Person, the capitalized amount thereof that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP, and (b) in respect of any Synthetic Lease Obligation, the capitalized amount of the remaining lease payments under the relevant lease that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP if such lease were accounted for as a capital lease.
 
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“ Audited Financial Statements ” means the audited consolidated balance sheets of each of (i) the Borrower and its Subsidiaries and (ii) Sharyland and its Subsidiaries for the fiscal years ended December 31, 2011, 2012 and 2013, and the related consolidated statements of operations, the related consolidated statements of partners’ capital and the related consolidated statements of cash flows for such fiscal years of the Borrower and its Subsidiaries, including the notes thereto.
“ Availability Period ” means the period from and including the Closing Date to the earliest of (a) the Maturity Date, (b) the date of termination of the Aggregate Commitments pursuant to Section 2.04 , and (c) the date of termination of the commitment of each Lender to make Loans and of the obligation of the L/C Issuer to make L/C Credit Extensions pursuant to Section 8.02 .
“ Bank of America ” means Bank of America, N.A. and its successors.
“ Base Rate ” means for any day a fluctuating rate per annum equal to the highest of (a) the Federal Funds Rate plus 1/2 of 1%, (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its “prime rate,” and (c) the Eurodollar Rate for a one month Interest Period in effect on such day plus 1.00%. The “prime rate” is a rate set by Bank of America based upon various factors including Bank of America’s costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. Any change in such prime rate announced by Bank of America shall take effect at the opening of business on the day specified in the public announcement of such change.
“ Base Rate Loan ” means a Loan that bears interest based on the Base Rate.
“ Borrower ” has the meaning specified in the introductory paragraph hereto.
“ Borrower Materials ” has the meaning specified in Section 6.01 .
“ Borrower Security Agreement ” means the Security Agreement, dated as of the date hereof, by and between the Borrower and the Administrative Agent.
“ Borrowing ” means a borrowing consisting of Loans of the same Type and, in the case of Eurodollar Rate Loans, having the same Interest Period made by each of the Lenders pursuant to Section 2.01 .
“ Business Day ” means any day other than a Saturday, Sunday or other day on which commercial banks are authorized to close under the Laws of, or are in fact closed in, the state where the Administrative Agent’s Office is located and, if such day relates to any Eurodollar Rate Loan, means any such day that is also a London Banking Day.
“ Capital Lease ” means, at any time, a lease with respect to which the lessee is required concurrently to recognize the acquisition of an asset and the incurrence of a liability in accordance with GAAP.
“ Cash Collateralize ” means to deposit in a Controlled Account or to pledge and deposit with or deliver to the Administrative Agent, for the benefit of one or more of the L/C Issuer or
 
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the Lenders, as collateral for L/C Obligations or obligations of the Lenders to fund participations in respect of L/C Obligations, cash or deposit account balances or, if the Administrative Agent and the L/C Issuer shall agree in their sole discretion, other credit support, in each case pursuant to documentation in form and substance satisfactory to the Administrative Agent and the L/C Issuer. “Cash Collateral” shall have a meaning correlative to the foregoing and shall include the proceeds of such cash collateral and other credit support.
“ Change in Law ” means the occurrence, after the date of this Agreement, of any of the following: (a) the adoption or taking effect of any law, rule, regulation or treaty, (b) any change in any law, rule, regulation or treaty or in the administration, interpretation, implementation or application thereof by any Governmental Authority or (c) the making or issuance of any request, rule, guideline or directive (whether or not having the force of law) by any Governmental Authority; provided that notwithstanding anything herein to the contrary, (x) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines or directives thereunder or issued in connection therewith and (y) all requests, rules, guidelines or directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the United States or foreign regulatory authorities, in each case pursuant to Basel III, shall in each case be deemed to be a “Change in Law”, regardless of the date enacted, adopted or issued.
“ Change of Control ” means an event or series of events by which:
(a) the General Partner or its successor shall cease to the sole general partner of the Borrower; or
(b) any Person other than a Qualified Lessee shall be the lessee under any lease with respect to the System; or
(c) the Borrower shall cease to own or control, directly or indirectly, at least 90% of the outstanding Equity Interests of SDTS; or
(d) Hunt Family Members cease to Control Sharyland.
“ Closing Date ” means the first date all the conditions precedent in Section 4.01 are satisfied or waived in accordance with Section 10.01 .
“ Code ” means the Internal Revenue Code of 1986.
“ Collateral ” means all of the Collateral as defined in each of the Security Documents.
“ Collateral Agency Agreement ” means the Amended and Restated Collateral Agency Agreement, dated as of February 21, 2014, by and among the Collateral Agent, TDC and the holders of the 2020 Notes (as may be amended, restated, amended and restated or otherwise modified from time to time).
“ Collateral Agent ” means The Bank of New York Mellon Trust Company, N.A., a national association, acting in its capacity as collateral agent for itself and the other Secured Parties under the Financing Agreements, or its successors in such capacity appointed pursuant to the terms of the Collateral Agency Agreement.
 
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“ Commitment ” means, as to each Lender, its obligation to (a) make Loans to the Borrower pursuant to Section 2.01 and (b) purchase participations in L/C Obligations, in an aggregate principal amount at any one time outstanding not to exceed the amount set forth opposite such Lender’s name on Schedule 2.01 or in the Assignment and Assumption pursuant to which such Lender becomes a party hereto, as applicable, as such amount may be adjusted from time to time in accordance with this Agreement.
“ Compliance Certificate ” means a certificate substantially in the form of Exhibit C .
“ Connection Income Taxes ” means Other Connection Taxes that are imposed on or measured by net income (however denominated) or that are franchise Taxes or branch profits Taxes.
“ Consolidated Cash Flow ” means, for any period, the sum of the following (without duplication): (i) all cash paid to Borrower and its Subsidiaries (other than Project Finance Subsidiaries) during such period under the Leases, (ii) all cash distributions received by the Borrower or any of its Subsidiaries during such period, (iii) all interest and investment earnings, if any, paid to SDTS during such period on amounts on deposit in the account created under the Deposit Agreement (as defined in the SDTS 2010 Note Agreement), if any, (iv) revenues, if any, received by or on behalf of the Borrower or any of its Subsidiaries during such period under any insurance policy as business interruption insurance proceeds, (v) direct cash equity investments made by partners of the Borrower or any Subsidiary (excluding equity contributed to a Project Finance Subsidiary) in an amount not greater than the amount necessary to cause the Borrower to be in compliance with the financial covenant set forth in Section 6.11(b) for such period (each such an investment, an “ Equity Cure ”); provided , however , that during any period of four consecutive fiscal quarters, “ Consolidated Cash Flow ” shall include an Equity Cure in no more than two of such quarters, (vi) proceeds of any Borrowing made after the date hereof to the extent used to finance the payment of bullet or balloon installments of Indebtedness for borrowed money and (vii) to the extent that a Subsidiary is formed or acquired in the future, (x) all cash paid to such Subsidiary during such period under leases of such Subsidiary’s assets, (y) all interest and investment earnings paid to such Subsidiary during such period (if any) and (z) revenues, if any, received by or on behalf of such Subsidiary during such period under any insurance policy as business interruption insurance proceeds.
“ Consolidated Cash Flow Available For Debt Service ” for any period, means (i) Consolidated Cash Flow received during such period minus (ii) (A) all O&M Costs paid during such period and (B) if an Equity Cure has been made with respect to any fiscal quarter for which Consolidated Cash Flow Available for Debt Service is calculated, the lesser of (x) the aggregate amount of such Equity Cure for such period and (y) the aggregate amount of cash distributions paid by the Borrower during such period.
“ Consolidated Debt Service Coverage Ratio ” means, for each period of four most recent consecutive fiscal quarters, the quotient of (a) Consolidated Cash Flow Available For Debt Service for such period to (b) Debt Service for such period.
 
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“ Consolidated Net Plant ” means, with respect to any Person, as of the date of determination, the net plant set forth on the face of the consolidated balance sheet of such Person or absent such amount on the consolidated balance sheet, the total plant of such Person on a consolidated basis minus accumulated depreciation as set forth in the footnotes of the consolidated financial statements, in each case, for the fiscal quarter ended on the date of the last financial statements delivered pursuant to Section 6.01 .
“ Consolidated Net Worth ” means at any date, the sum of all amounts that would, in conformity with GAAP, be included on a consolidated balance sheet of the Borrower and its consolidated Subsidiaries under partners’ equity at such date, plus minority interests, as determined in accordance with GAAP minus any partners’ equity attributable to any Project Finance Subsidiary; provided , however , that any effects resulting from SFAS 158 shall be excluded for purposes of the calculation of Consolidated Net Worth.
“ Consolidated Qualified Lessee ” means any Qualified Lessee that is consolidated into the financial statements of another Qualified Lessee.
“ Consolidated Revenue ” means, with respect to any Person, as of the date of determination, the total revenue set forth on the face of the consolidated statements of operations of such Person for the fiscal quarter ended on the date of the last financial statements delivered pursuant to Section 6.01 .
“ Consolidated Total Debt ” means at any date, all Indebtedness of the Borrower and its Subsidiaries on a consolidated basis; provided , however , that for purposes of calculating the Consolidated Total Debt to Capitalization Ratio, the Borrower’s Consolidated Total Debt shall exclude Non-Recourse Debt of a Project Finance Subsidiary and that portion of the Swap Termination Value defined in clause (b) of the definition of “Swap Termination Value”.
“ Consolidated Total Debt to Capitalization Ratio ” means the ratio of (a) the Consolidated Total Debt to (b) the sum of Consolidated Total Debt plus the Consolidated Net Worth for such period.
“ Contractual Obligation ” means, as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound.
“ Control ” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. “ Controlling ” and “ Controlled ” have meanings correlative thereto.
“ Controlled Account ” means each deposit account and securities account that is subject to an account control agreement in form and substance satisfactory to the Administrative Agent and the L/C Issuer.
“ Credit Extension ” means each of the following: (a) a Borrowing and (b) an L/C Credit Extension.
 
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“ CREZ Lease ” means (A) prior to the effectiveness of the CREZ Lease Amendment and Restatement, the Amended and Restated Lease Agreement (CREZ Assets) dated as of April 30, 2013, between Sharyland Projects, as lessor, and Sharyland, as lessee, and (B) upon the effectiveness of the CREZ Lease Amendment and Restatement, the CREZ Lease Amendment and Restatement, as such lease may be amended, restated, supplemented or otherwise modified from time to time, or any new lease entered into in replacement thereof, in accordance with Section 6.10 and/or 7.14 of this Agreement, as applicable.
“ CREZ Lease Amendment and Restatement ” means the Second Amended and Restated Lease Agreement (CREZ Assets), between Sharyland Projects, as lessor, and Sharyland, as lessee, with respect to the CREZ Project.
“ CREZ Project ” means the five transmission lines, four substations and other facilities in Texas identified and awarded to Sharyland by the PUCT in Docket Number 37902.
“ Cross Valley Project ” means the approximately 49 mile transmission line in South Texas near the Mexican border, known as the “North Edinburg to Loma Alta 345 kV single-circuit transmission line” project, subsequently, renamed as the “North Edinburg to Palmito 345 kV double-circuit transmission line” project, which is built on double-circuit capable structures and the Palmito substation located on the eastern terminus of the Cross Valley Project. The Cross Valley Project is part of a 100 mile transmission line, which is jointly developed and permitted by Sharyland and Electric Transmission Texas.
“ Cross Valley Project Transfer ” means the sale and transfer of all of the Equity Interests of CV Project Entity, L.L.C., a Project Finance Subsidiary of the Borrower, to Cross Valley Partnership, L.P., a Person Controlled by one or more Hunt Family Members, for a purchase price at least equal to the Cross Valley Project’s rate base cost at such time.
“ Debt Service ” for any period, the aggregate (without duplication) of (i) all amounts of interest on the Loans and in respect of other Indebtedness of the Borrower or its Subsidiaries required to be paid during such period, plus (ii) all amounts of principal on the Loans and in respect of other Indebtedness of the Borrower and its Subsidiaries required to be paid during such period, excluding any optional prepayments of principal during such period, plus (iii) all other premiums, fees, costs, charges, expenses and indemnities due and payable to the Administrative Agent or the other Secured Parties and holders of other Indebtedness of the Borrower and its Subsidiaries or agents acting on their behalf during such period; provided , however , that for purposes of calculating the Consolidated Debt Service Coverage Ratio, the Debt Service shall exclude Non-Recourse Debt of a Project Finance Subsidiary.
“ Debtor Relief Laws ” means the Bankruptcy Code of the United States, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief Laws of the United States or other applicable jurisdictions from time to time in effect.
“ Default ” means any event or condition that constitutes an Event of Default or that, with the giving of any notice, the passage of time, or both, would be an Event of Default.
 
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“ Default Rate ” means (a) when used with respect to Obligations under the Loan Documents other than Letter of Credit Fees, an interest rate equal to (i) the Base Rate plus (ii) the Applicable Rate, if any, applicable to Base Rate Loans plus (iii) 2% per annum; provided , however , that with respect to a Eurodollar Rate Loan, the Default Rate shall be an interest rate equal to the interest rate (including any Applicable Rate) otherwise applicable to such Loan plus 2% per annum, and (b) when used with respect to Letter of Credit Fees, a rate equal to the Applicable Rate plus 2% per annum.
“ Defaulting Lender ” means, subject to Section 2.13(b) , any Lender that (a) has failed to (i) fund all or any portion of its Loans within two Business Days of the date such Loans were required to be funded hereunder unless such Lender notifies the Administrative Agent and the Borrower in writing that such failure is the result of such Lender’s determination that one or more conditions precedent to funding (each of which conditions precedent, together with any applicable default, shall be specifically identified in such writing) has not been satisfied, or (ii) pay to the Administrative Agent, the L/C Issuer or any other Lender any other amount required to be paid by it hereunder (including in respect of its participation in Letters of Credit) within two Business Days of the date when due, (b) has notified the Borrower, the Administrative Agent or the L/C Issuer in writing that it does not intend to comply with its funding obligations hereunder, or has made a public statement to that effect (unless such writing or public statement relates to such Lender’s obligation to fund a Loan hereunder and states that such position is based on such Lender’s determination that a condition precedent to funding (which condition precedent, together with any applicable default, shall be specifically identified in such writing or public statement) cannot be satisfied), (c) has failed, within three Business Days after written request by the Administrative Agent or the Borrower, to confirm in writing to the Administrative Agent and the Borrower that it will comply with its prospective funding obligations hereunder ( provided that such Lender shall cease to be a Defaulting Lender pursuant to this clause (c)  upon receipt of such written confirmation by the Administrative Agent and the Borrower), or (d) has, or has a direct or indirect parent company that has, (i) become the subject of a proceeding under any Debtor Relief Law, or (ii) had appointed for it a receiver, custodian, conservator, trustee, administrator, assignee for the benefit of creditors or similar Person charged with reorganization or liquidation of its business or assets, including the Federal Deposit Insurance Corporation or any other state or federal regulatory authority acting in such a capacity; provided that a Lender shall not be a Defaulting Lender solely by virtue of the ownership or acquisition of any Equity Interest in that Lender or any direct or indirect parent company thereof by a Governmental Authority so long as such ownership interest does not result in or provide such Lender with immunity from the jurisdiction of courts within the United States or from the enforcement of judgments or writs of attachment on its assets or permit such Lender (or such Governmental Authority) to reject, repudiate, disavow or disaffirm any contracts or agreements made with such Lender. Any determination by the Administrative Agent that a Lender is a Defaulting Lender under any one or more of clauses (a)  through (d)  above, and of the effective date of such status, shall be conclusive and binding absent manifest error, and such Lender shall be deemed to be a Defaulting Lender (subject to Section 2.13(b) ) as of the date established therefor by the Administrative Agent in a written notice of such determination, which shall be delivered by the Administrative Agent to the Borrower, the L/C Issuer and each other Lender promptly following such determination.
“ Depositary ” means Bank of America.
 
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“ Designated Jurisdiction ” means any country or territory to the extent that such country or territory itself is the subject of any Sanction.
“ Development Agreement ” means that certain Development Agreement to be entered into among Hunt Transmission Services, L.L.C., Sharyland, the General Partner and/or the Borrower in connection with one or more New Projects, pursuant to which Hunt Transmission Services, L.L.C. has granted the General Partner a right of first offer related to the New Projects identified therein, as amended from time to time in accordance with its terms.
“ Disposition ” or “ Dispose ” means the sale, transfer, license, lease or other disposition (including any sale and leaseback transaction) of any property by any Person, including any sale, assignment, transfer or other disposal, with or without recourse, of any notes or accounts receivable or any rights and claims associated therewith.
“ Distribution ” means any dividend or other distribution (whether in cash, securities or other property) with respect to any Equity Interests of any Person, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, defeasance, acquisition, cancellation or termination of any such Equity Interests or on account of any return of capital to such Person’s stockholders, partners or members (or the equivalent Person thereof), or any option, warrant or other right to acquire any such dividend or other distribution or payment.
“ Dollar ” and “ $ ” means lawful money of the United States.
“ Domestic Subsidiary ” means any Subsidiary that is organized under the laws of any political subdivision of the United States.
“ Eligible Assignee ” means any Person that meets the requirements to be an assignee under Section 10.06(b)(iii) , and (v)  (subject to such consents, if any, as may be required under Section 10.06(b)(iii) ).
“ Environmental Laws ” means any and all federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including those related to hazardous substances or wastes, air emissions and discharges to waste or public systems.
“ Environmental Liability ” means any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of the Borrower, any other Loan Party or any of their respective Subsidiaries directly or indirectly resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened release of any Hazardous Materials into the environment or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing.
 
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“ Equity Interests ” means, with respect to any Person, all of the shares of capital stock of (or other ownership or profit interests in) such Person, all of the warrants, options or other rights for the purchase or acquisition from such Person of shares of capital stock of (or other ownership or profit interests in) such Person, all of the securities convertible into or exchangeable for shares of capital stock of (or other ownership or profit interests in) such Person or warrants, rights or options for the purchase or acquisition from such Person of such shares (or such other interests), and all of the other ownership or profit interests in such Person (including partnership, member or trust interests therein), whether voting or nonvoting, and whether or not such shares, warrants, options, rights or other interests are outstanding on any date of determination.
“ ERCOT ” means Electric Reliability Council of Texas or any successor thereto.
“ ERCOT Lease ” means the Lease Agreement (ERCOT Transmission Assets) between SDTS, as lessor, and Sharyland, as lessee, as such lease may be amended, restated, supplemented or otherwise modified from time to time, or any new lease entered into in replacement thereof, in accordance with Section 6.10 and/or 7.14 of this Agreement, as applicable.
“ ERISA ” means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to ERISA are to ERISA, as in effect at the Closing Date and any subsequent provisions of ERISA, amendatory thereof, supplemental thereto or substituted therefor.
“ ERISA Affiliate ” means any (a) any entity, whether or not incorporated, that is under common control with a Loan Party within the meaning of Section 4001(a)(14) of ERISA; (b) any corporation which is a member of a controlled group of corporations within the meaning of Section 414(b) of the Code of which a Loan Party is a member; (c) any trade or business (whether or not incorporated) which is a member of a group of trades or businesses under common control within the meaning of Section 414(c) of the Code of which a Loan Party is a member; and (d) with respect to any Loan Party, any member of an affiliated service group within the meaning of Section 414 (m) or (o) of the Code of which that Loan Party, any corporation described in clause (a) above or any trade or business described in clause (b) above is a member.
“ Eurodollar Rate ” means:
(a) for any Interest Period with respect to a Eurodollar Rate Loan, the rate per annum equal to the London Interbank Offered Rate (“ LIBOR ”) or a comparable or successor rate, which rate is approved by the Administrative Agent, as published on the applicable Bloomberg screen page (or such other commercially available source providing such quotations as may be designated by the Administrative Agent from time to time) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, for Dollar deposits (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period; and
(b) for any interest calculation with respect to a Base Rate Loan on any date, the rate per annum equal to LIBOR, at or about 11:00 a.m., London time determined two Business Days prior to such date for U.S. Dollar deposits with a term of one month commencing that day;
 
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provided that to the extent a comparable or successor rate is approved by the Administrative Agent in connection herewith, the approved rate shall be applied in a manner consistent with market practice; provided , further that , (i) to the extent such market practice is not administratively feasible for the Administrative Agent, such approved rate shall be applied in a manner as otherwise reasonably determined by the Administrative Agent, and (ii) if the Eurodollar Rate shall be less than zero, such rate shall be deemed zero for purposes of this Agreement.
“ Eurodollar Rate Loan ” means a Loan that bears interest at a rate based on clause (a)  of the definition of “Eurodollar Rate.”
“ Event of Default ” has the meaning specified in Section 8.01 .
“ Excluded Subsidiary ” means (i) SDTS and any of its Subsidiaries, (ii) any Project Finance Subsidiary, (iii) any Foreign Subsidiary and (iv) any other Subsidiary of the Borrower (including an owner of FERC regulated assets) that is regulated as a public utility in an applicable jurisdiction and Subsidiaries of such regulated utilities.
“ Excluded Taxes ” means any of the following Taxes imposed on or with respect to any Recipient or any other recipient of any payment to be made by or on account of any obligation of any Loan Party under any Loan Document (any of the foregoing, for purposes of this definition, a “recipient”) or required to be withheld or deducted from a payment to a recipient, (a) Taxes imposed on or measured by net income (however denominated), franchise Taxes, and branch profits Taxes, in each case, (i) imposed as a result of such recipient being organized under the laws of, or having its principal office or, in the case of any Lender, its Lending Office located in, the jurisdiction imposing such Tax (or any political subdivision thereof) or (ii) that are Other Connection Taxes, (b) in the case of a Lender, U.S. federal withholding Taxes imposed on amounts payable to or for the account of such Lender with respect to an applicable interest in a Loan or Commitment or otherwise under a Loan Document pursuant to a law in effect on the date on which (i) such Lender acquires such interest in the Loan or Commitment (other than pursuant to an assignment request by the Borrower under Section 3.06(b) ) or becomes a party to this Agreement or (ii) such Lender changes its Lending Office, except in each case to the extent that, pursuant to Section 3.01(a) or (c)(i) , amounts with respect to such Taxes were payable either to such Lender’s assignor immediately before such Lender became a party hereto or to such Lender immediately before it changed its Lending Office, (c) Taxes attributable to such recipient’s failure to comply with Section 3.01(e) and (d) any U.S. federal withholding Taxes imposed pursuant to FATCA.
“ Existing Facility Agreement ” means the Credit Agreement, dated as of January 3, 2014, between the Borrower, the lenders party thereto from time to time, and Bank of America, N.A., as administrative agent, as the same may be amended, restated, supplemented or otherwise modified from time to time.
“ FASB ASC ” means the Accounting Standards Codification of the Financial Accounting Standards Board.
 
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“ FATCA ” means Sections 1471 through 1474 of the Code, as of the date of this Agreement (or any amended or successor version that is substantively comparable and not materially more onerous to comply with), any current or future regulations or official interpretations thereof, any agreements entered into pursuant to Section 1471(b)(1) of the Code and any intergovernmental agreements that implement or modify the foregoing.
“ Federal Funds Rate ” means, for any day, the rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day; provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the immediately preceding Business Day as so published on the next succeeding Business Day, and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate (rounded upward, if necessary, to a whole multiple of 1/100 of 1%) charged to Bank of America on such day on such transactions as determined by the Administrative Agent.
“ Fee Letter ” means the letter agreement, dated December 19, 2013, between the Borrower and the Administrative Agent.
“ FERC ” means the Federal Energy Regulatory Commission, or any successor agency to its duties and responsibilities.
“ FERC Lease ” means (A) prior to the effectiveness of the FERC Lease Amendment and Restatement, the Second Amended and Restated Lease Agreement, dated as of July 1, 2012, between FERC Owner and FERC Operator and (B) upon the effectiveness of the FERC Lease Amendment and Restatement, the FERC Lease Amendment and Restatement, as such lease may be amended, restated, supplemented or otherwise modified from time to time, or any new lease entered into in replacement thereof, in accordance with Section 6.10 and/or 7.14 of this Agreement, as applicable.
“ FERC Lease Amendment and Restatement ” shall mean the Third Amended and Restated Lease Agreement (Stanton Transmission Loop Assets) between FERC Owner, as lessor, and FERC Operator, as lessee.
“ FERC Merger ” means the anticipated transaction or series of transactions pursuant to which SDTS FERC L.L.C. will merge into SDTS and SU FERC L.L.C. will merge into Sharyland.
“ FERC Operator ” means (A) prior to the FERC Merger, SU FERC, L.L.C., a Subsidiary of Sharyland, and (B) upon the completion of the FERC Merger, Sharyland.
“ FERC Owner ” means (A) prior to the FERC Merger, SDTS FERC, L.L.C., a Subsidiary of SDTS, and (B) upon the completion of the FERC Merger, SDTS.
“ Foreign Lender ” means a Lender that is not a U.S. Person.
 
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“ Foreign Subsidiary ” means any Subsidiary of the Borrower that is not organized under the laws of the United States, any state thereof or the District of Columbia.
“ FPA ” means the Federal Power Act, 16 U.S.C. §§791 et seq., as amended, and the regulations of the FERC thereunder.
“ FRB ” means the Board of Governors of the Federal Reserve System of the United States.
“ Fronting Exposure ” means, at any time there is a Defaulting Lender, with respect to the L/C Issuer, such Defaulting Lender’s Applicable Percentage of the outstanding L/C Obligations other than L/C Obligations as to which such Defaulting Lender’s participation obligation has been reallocated to other Lenders or Cash Collateralized in accordance with the terms hereof.
“ Fund ” means any Person (other than a natural Person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its activities.
“ GAAP ” means generally accepted accounting principles in the United States set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or such other principles as may be approved by a significant segment of the accounting profession in the United States, that are applicable to the circumstances as of the date of determination, consistently applied.
“ General Partner ” means, (A) prior to a Qualifying IPO, InfraREIT, L.L.C., a Delaware limited liability company, and (y) upon the completion of a Qualifying IPO, InfraREIT, Inc., a Maryland Corporation, and any successor thereto, in its capacity as sole general partner of the Borrower.
“ Golden Spread Project ” means a new 345 kilovolt transmission line that will be approximately 55 miles long and will connect the Golden Spread Electric Cooperative, Inc. Antelope-Elk Energy Center in Hale County, approximately 1.6 miles north of the City of Abernathy on County Road P, to the proposed White River Station that will be built by Sharyland in Floyd County, approximately 9 miles northeast of the City of Floydada and 1.1 miles east of the intersection of County Road 231 and County Road 200 and the Abernathy substation that is located in the western portion of the transmission line.
“ Golden Spread Project Transfer ” means the sale and Transfer of all of the Equity Interests of the GS Project Entity to a Person Controlled by one or more Hunt Family Members for a purchase price at least equal to the Golden Spread Project’s rate base cost at such time.
“ Good Utility Practices ” means “Good Utility Practice” as defined from time to time by the PUCT.
“ GP Note ” means a promissory note or other evidence of Indebtedness of the General Partner issued in connection with the Qualifying IPO.
 
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“ GS Project Entity ” means a Project Finance Subsidiary created to finance and develop the Golden Spread Project.
“ Governmental Authority ” means the government of the United States or any other nation, or of any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government (including any supra-national bodies such as the European Union or the European Central Bank).
“ Guarantee ” means, with respect to any Person, any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing any Indebtedness of any other Person in any manner, whether directly or indirectly, including (without limitation) obligations incurred through an agreement, contingent or otherwise, by such Person:
(a) to purchase such Indebtedness or any property constituting security therefor;
(b) to advance or supply funds (i) for the purchase or payment of such Indebtedness or obligation, or (ii) to maintain any working capital or other balance sheet condition or any income statement condition of any other Person or otherwise to advance or make available funds for the purchase or payment of such Indebtedness;
(c) to lease properties or to purchase properties or services primarily for the purpose of assuring the owner of such Indebtedness of the ability of any other Person to make payment of the Indebtedness; or
(d) otherwise to assure the owner of such Indebtedness against loss in respect thereof.
The amount of any Guarantee shall be deemed to be an amount equal to the stated or determinable amount of the related primary obligation, or portion thereof, in respect of which such Guarantee is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by the guaranteeing Person in good faith. In any computation of the indebtedness or other liabilities of the obligor under any Guarantee, the indebtedness or other obligations that are the subject of such Guarantee shall be assumed to be direct obligations of such obligor. The term “Guarantee” as a verb has a corresponding meaning.
“ Guarantor ” means (i) TDC, (ii) each Subsidiary (other than an Excluded Subsidiary) of the Borrower which is or becomes a party to the Guaranty pursuant to Section 6.09(b) or (c) and (iii) the General Partner upon its execution and delivery of the Guaranty pursuant to Section 6.09(d) .
“ Guaranty ” means the Guaranty made by each of the Guarantors in favor of the Administrative Agent and the Lenders, substantially in the form of Exhibit E .
 
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“ Hazardous Materials ” means all explosive or radioactive substances or wastes and all hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos-containing materials, polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law.
“ Hunt Family Members ” means (i) Ray L. Hunt; (ii) the spouse of Ray L. Hunt and each of his children and siblings; (iii) the spouse and lineal descendants of any Person identified in the foregoing clause (ii); (iv) any trust or account primarily for the benefit of any Person or Persons identified in the foregoing clauses (i), (ii) or (iii); (v) any corporation, partnership or other entity in which any of the Persons identified in the foregoing clauses (i), (ii), (iii), or (iv) are the beneficial owners of and Control substantially all of the shares of capital stock, membership interests, partnership interests or other equity interests and options or warrants to acquire, or securities convertible into, capital stock, membership interest, partnership interests or other equity securities of an entity, and (v) the personal representative or guardian of any of the Persons identified in the foregoing clause (i), (ii) and (iii) upon such Person’s death for purposes of the administration of such Person’s estate or upon such Person’s disability or incompetency for purposes of the protection and management of the assets of such Person.
“ Immaterial Leases ” means Leases pursuant to which the Borrower recognized revenue, in the aggregate, that constituted 10% or less of the Borrower’s Consolidated Revenue (excluding Project Finance Subsidiaries) as set forth on the face of the consolidated statements of operations for the four consecutive fiscal quarter period that ended on the date of the last financial statements delivered pursuant to Section 6.01 prior to the date on which the determination of whether such Lease falls within the scope of this definition is required to be made under the Loan Documents.
“ Increase Effective Date ” has the meaning specified in Section 2.14(d) .
“ Indebtedness ” with respect to any Person means, at any time, without duplication:
(a) its liabilities for borrowed money and its redemption obligations in respect of Preferred Stock that is mandatorily redeemable prior to the date that is 91 days after the Maturity Date;
(b) its liabilities for the deferred purchase price of property acquired by such Person (excluding accounts payable arising in the ordinary course of business but including all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property);
(c) (i) all liabilities appearing on its balance sheet in accordance with GAAP in respect of Capital Leases and (ii) all liabilities which would appear on its balance sheet in accordance with GAAP in respect of Synthetic Leases assuming such Synthetic Leases were accounted for as Capital Leases; provided , however , that for purposes of this definition, the Leases and any similar lease shall not be treated as a Capital Lease;
 
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(d) all liabilities for borrowed money secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities);
(e) all its liabilities in respect of letters of credit or instruments serving a similar function issued or accepted for its account by banks and other financial institutions (whether or not representing obligations for borrowed money); provided, however, that for purposes of this definition, any surety bonds or indemnification agreements entered into by any Qualified Lessee (with respect to which the Borrower or a Subsidiary thereof has a reimbursement or backstop obligation) in connection with condemnation proceedings shall be excluded;
(f) the aggregate Swap Termination Value of all Swap Contracts of such Person; and
(g) any Guarantee of such Person with respect to liabilities of a type described in any of clauses (a) through (f) hereof.
Indebtedness of any Person shall include all obligations of such Person of the character described in clauses (a) through (g) to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is deemed to be extinguished under GAAP. For all purposes hereof, the Indebtedness of any Person shall include the Indebtedness of any partnership or joint venture (other than a joint venture that is itself a corporation or limited liability company) in which such Person is a general partner or a joint venturer, unless such Indebtedness is expressly made non-recourse to such Person. The amount of any Capital Lease or Synthetic Lease Obligation (in each case, to the extent the same is considered Indebtedness hereunder) as of any date shall be deemed to be the amount of Attributable Indebtedness in respect thereof as of such date.
“ Indemnified Taxes ” means (a) Taxes, other than Excluded Taxes, imposed on or with respect to any payment made by or on account of any obligation of any Loan Party under any Loan Document and (b) to the extent not otherwise described in (a), Other Taxes.
“ Indemnitees ” has the meaning specified in Section 10.04(b) .
“ Information ” has the meaning specified in Section 10.07 .
“ Interest Payment Date ” means, (a) as to any Loan other than a Base Rate Loan, the last day of each Interest Period applicable to such Loan and the Maturity Date; provided , however , that if any Interest Period for a Eurodollar Rate Loan exceeds three months, the respective dates that fall every three months after the beginning of such Interest Period shall also be Interest Payment Dates; and (b) as to any Base Rate Loan, the last Business Day of each March, June, September and December and the Maturity Date.
 
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“ Interest Period ” means as to each Eurodollar Rate Loan, the period commencing on the date such Eurodollar Rate Loan is disbursed or converted to or continued as a Eurodollar Rate Loan and ending on the date one, two, three or six months thereafter (in each case, subject to availability), as selected by the Borrower in its Loan Notice; provided that:
(i) any Interest Period that would otherwise end on a day that is not a Business Day shall be extended to the next succeeding Business Day unless, in the case of a Eurodollar Rate Loan, such Business Day falls in another calendar month, in which case such Interest Period shall end on the immediately preceding Business Day;
(ii) any Interest Period pertaining to a Eurodollar Rate Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period; and
(iii) no Interest Period shall extend beyond the Maturity Date.
“ Investment ” shall have the meaning given to it in Section 7.07 .
“ Investment Grade Credit Rating ” means with respect to any Person, a rating of the long-term unsecured debt securities of such Person (or if such rating is unavailable, issuer rating) equal to or higher than (1) “BBB-” (or the equivalent) with a stable or better outlook by Standard & Poor’s Financial Services LLC, or (2) “Baa3” (or the equivalent) with a stable or better outlook by Moody’s Corporation; provided , that if such Person has a rating from both Standard & Poor’s Financial Services LLC and Moody’s Corporation, then the applicable rating shall be deemed to be the lower of the two.
“ IP Rights ” has the meaning specified in Section 5.18 .
“ IRS ” means the United States Internal Revenue Service.
“ ISP ” means, with respect to any Letter of Credit, the “International Standby Practices 1998” published by the Institute of International Banking Law & Practice, Inc. (or such later version thereof as may be in effect at the time of issuance).
“ Issuer Documents ” means with respect to any Letter of Credit, the Letter of Credit Application, and any other document, agreement and instrument entered into by the L/C Issuer and the Borrower (or any Subsidiary) or in favor of the L/C Issuer and relating to such Letter of Credit.
“ Laws ” means, collectively, all international, foreign, federal, state and local statutes, treaties, rules, guidelines, regulations, ordinances, codes and administrative or judicial precedents or authorities, including the interpretation or administration thereof by any Governmental Authority charged with the enforcement, interpretation or administration thereof, and all applicable administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authority, in each case whether or not having the force of law. For avoidance of doubt, any provision of any agreement or settlement to which the Borrower or any Subsidiary is a party or are otherwise bound which is approved by a Governmental Authority exercising authority in a regulatory jurisdiction over the Borrower or such Subsidiary, shall in each case, be deemed a Law for purposes of the Loan Documents.
“ L/C Advance ” means, with respect to each Lender, such Lender’s funding of its participation in any L/C Borrowing in accordance with its Applicable Percentage.
 
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“ L/C Borrowing ” means an extension of credit resulting from a drawing under any Letter of Credit which has not been reimbursed on the date when made or refinanced as a Borrowing.
“ L/C Credit Extension ” means, with respect to any Letter of Credit, the issuance thereof or extension of the expiry date thereof, or the increase of the amount thereof.
“ L/C Issuer ” means Bank of America in its capacity as issuer of Letters of Credit hereunder, or any successor issuer of Letters of Credit hereunder.
“ L/C Obligations ” means, as at any date of determination, the aggregate amount available to be drawn under all outstanding Letters of Credit plus the aggregate of all Unreimbursed Amounts, including all L/C Borrowings. For purposes of computing the amount available to be drawn under any Letter of Credit, the amount of such Letter of Credit shall be determined in accordance with Section 1.06 . For all purposes of this Agreement, if on any date of determination a Letter of Credit has expired by its terms but any amount may still be drawn thereunder by reason of the operation of Rule 3.14 of the ISP, such Letter of Credit shall be deemed to be “outstanding” in the amount so remaining available to be drawn.
“ Leased Consolidated Net Plant ” means that portion of the Consolidated Net Plant of the lessor of a Lease between such lessor and a Qualified Lessee that is the subject of such Lease.
“ Leases ” means the (i) the McAllen Lease, the Stanton/Brady/Celeste Lease, the ERCOT Lease, the CREZ Lease, the FERC Lease and any other leases of transmission and distribution and related assets to a Qualified Lessee under which the Borrower or any Subsidiary of the Borrower is a party as a lessor, and (ii) any lease of transmission and distribution and related assets pursuant to which Sharyland is the lessee and a Subsidiary of Sharyland or another Person Controlled by one or more Hunt Family Members is the lessor; provided , no such lease will qualify as a “Lease” hereunder if each of the three following criteria apply: (x) Sharyland is the lessee, (y) cash rental payments have become due and payable pursuant thereto, and (z) none of the Borrower, a Subsidiary of the Borrower or a Subsidiary of Sharyland is the lessor.
“ Lender ” has the meaning specified in the introductory paragraph hereto.
“ Lending Office ” means, as to any Lender, the office or offices of such Lender described as such in such Lender’s Administrative Questionnaire, or such other office or offices as a Lender may from time to time notify the Borrower and the Administrative Agent.
“ Letter of Credit ” means any standby letter of credit issued hereunder providing for the payment of cash upon the honoring of a presentation thereunder.
“ Letter of Credit Application ” means an application and agreement for the issuance or amendment of a Letter of Credit in the form from time to time in use by the L/C Issuer.
“ Letter of Credit Expiration Date ” means the day that is seven days prior to the Maturity Date then in effect (or, if such day is not a Business Day, the immediately preceding Business Day).
“ Letter of Credit Fee ” has the meaning specified in Section 2.03(h) .
 
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“ Letter of Credit Sublimit ” means an amount equal to $15,000,000. The Letter of Credit Sublimit is part of, and not in addition to, the Aggregate Commitments.
“ LIBOR ” has the meaning specified in the definition of Eurodollar Rate.
“ Lien ” means any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), charge, or preference, priority or other security interest or preferential arrangement in the nature of a security interest of any kind or nature whatsoever (including any conditional sale or other title retention agreement, any easement, right of way or other encumbrance on title to real property, and any financing lease having substantially the same economic effect as any of the foregoing).
“ Loan ” has the meaning specified in Section 2.01 .
“ Loan Documents ” means this Agreement, each Note, each Issuer Document, any agreement creating or perfecting rights in Cash Collateral pursuant to the provisions of Section 2.12 of this Agreement, the Fee Letter, any Guaranties and the Security Documents.
“ Loan Notice ” means a notice of (a) a Borrowing, (b) a conversion of Loans from one Type to the other, or (c) a continuation of Eurodollar Rate Loans, pursuant to Section 2.02(a) , which, if in writing, shall be substantially in the form of Exhibit A or such other form as may be approved by the Administrative Agent (including any form on an electronic platform or electronic transmission system as shall be approved by the Administrative Agent), appropriately completed and signed by a Responsible Officer of the Borrower.
“ Loan Parties ” means, collectively, the General Partner, the Borrower and each Guarantor.
“ London Banking Day ” means any day on which dealings in Dollar deposits are conducted by and between banks in the London interbank eurodollar market.
“ Material Adverse Effect ” means a material adverse effect upon and/or material adverse developments with respect to (a) the operations, business, assets, properties, liabilities or financial condition of the Borrower and its Subsidiaries (taken as a whole), (b) the ability of the Borrower and the Guarantors (taken as a whole) to perform their obligations under the Loan Document, (c) the legality, validity or enforceability of any material provision of this Agreement or any other Loan Document, (d) the rights or remedies of the Administrative Agent or the Lenders under the Loan Documents or (e) the validity, perfection or priority of the Administrative Agent’s or Collateral Agent’s Liens on any material Collateral.
“ Maturity Date ” means December 10, 2016; provided , that upon the completion of a Qualifying IPO, the Maturity Date shall be December 10, 2019.
“ McAllen Lease ” shall mean (A) prior to the effectiveness of the McAllen Lease Amendment and Restatement, the Second Amended and Restated Master System Lease Agreement, dated as of July 1, 2012, between SDTS, as lessor, and Sharyland, as lessee, and (B) upon the effectiveness of the McAllen Lease Amendment and Restatement, the McAllen Lease Amendment and Restatement, as such lease may be amended, restated, supplemented or otherwise modified from time to time, or any new lease entered into in replacement thereof, in accordance with Section 6.10 and/or 7.14 of this Agreement, as applicable.
 
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“ McAllen Lease Amendment and Restatement ” the Third Amended and Restated Master System Lease Agreement (McAllen System), between SDTS, as lessor, and Sharyland, as lessee.
“ Minimum Collateral Amount ” means, at any time, (i) with respect to Cash Collateral consisting of cash or deposit account balances provided to reduce or eliminate Fronting Exposure during the existence of a Defaulting Lender, an amount equal to 100% of the Fronting Exposure of the L/C Issuer with respect to Letters of Credit issued and outstanding at such time, (ii) with respect to Cash Collateral consisting of cash or deposit account balances provided in accordance with the provisions of Section 2.12(a)(i), (a)(ii) or (a)(iii) , an amount equal to 100% of the Outstanding Amount of all LC Obligations, and (iii) otherwise, an amount determined by the Administrative Agent and the L/C Issuer in their sole discretion.
“ Multiemployer Plan ” means a multiemployer plan as defined in Section 4001(a)(3) of ERISA.
“ New Project ” means any transmission or distribution project, including any such project acquired or built by a Project Finance Subsidiary, any “New Project” or “Footprint Project” (each as defined in the Leases) that the Borrower, SDTS or any other Subsidiary of the Borrower funds pursuant to a Lease and any such project that the General Partner or a Subsidiary thereof acquires pursuant to the Development Agreement.
“ Non-Consenting Lender ” means any Lender that does not approve any consent, waiver or amendment that (i) requires the approval of all Lenders or all affected Lenders in accordance with the terms of Section 10.01 and (ii) has been approved by the Required Lenders.
“ Non-Defaulting Lender ” means, at any time, each Lender that is not a Defaulting Lender at such time.
“ Non-Recourse Debt ” means Indebtedness of a Project Finance Subsidiary that, if secured, is secured solely by a pledge of collateral owned by that Project Finance Subsidiary and the Equity Interests in such Project Finance Subsidiary and for which no Person other than such Project Finance Subsidiary is personally liable.
“ Note ” means a promissory note made by the Borrower in favor of a Lender evidencing Loans made by such Lender, substantially in the form of Exhibit B .
“ Noteholders ” means, with respect to any 2020 Note the Person in whose name such 2020 Note is registered in the register maintained by TDC.
“ O&M Costs ” means actual cash management and operation costs of the Borrower and its Subsidiaries, taxes payable by the Borrower, insurance premiums, consumables, fees and expenses of, and other amounts owing to, the Administrative Agent, the Collateral Agent, the SDTS Collateral Agent and Depositary, and other costs and expenses in connection with the management or operation of the Borrower and its Subsidiaries, but exclusive in all cases of (a) non-cash charges, including depreciation or obsolescence charges or reserves therefor,
 
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amortization of intangibles or other bookkeeping entries of a similar nature, (b) all other payments of Debt Service and (c) costs of repair or replacement paid with insurance proceeds; and (d) development costs related to any Project Finance Subsidiary.
“ Obligations ” means all advances to, and debts, liabilities, obligations, covenants, cash management arrangements and duties of, any Loan Party arising under any Loan Document, any Specified Swap Contracts or any Specified Cash Management Contracts or otherwise with respect to any Loan or Letter of Credit, whether direct or indirect (including those acquired by assumption), absolute or contingent, due or to become due, now existing or hereafter arising and including interest and fees that accrue after the commencement by or against any Loan Party or any Affiliate thereof of any proceeding under any Debtor Relief Laws naming such Person as the debtor in such proceeding, regardless of whether such interest and fees are allowed claims in such proceeding.
“ OFAC ” means the Office of Foreign Assets Control of the United States Department of the Treasury.
“ Organization Documents ” means, (a) with respect to any corporation, the certificate or articles of incorporation and the bylaws (or equivalent or comparable constitutive documents with respect to any non-U.S. jurisdiction); (b) with respect to any limited liability company, the certificate or articles of formation or organization and operating agreement; and (c) with respect to any partnership, joint venture, trust or other form of business entity, the partnership, joint venture or other applicable agreement of formation or organization and any agreement, instrument, filing or notice with respect thereto filed in connection with its formation or organization with the applicable Governmental Authority in the jurisdiction of its formation or organization and, if applicable, any certificate or articles of formation or organization of such entity.
“ Other Connection Taxes ” means, with respect to any Recipient or any other recipient of any payment to be made by or on account of any obligation of any Loan Party under any Loan Document (any of the foregoing, for purposes of this definition, a “recipient”), Taxes imposed as a result of a present or former connection between such recipient and the jurisdiction imposing such Tax (other than connections arising from such recipient having executed, delivered, become a party to, performed its obligations under, received payments under, received or perfected a security interest under, engaged in any other transaction pursuant to or enforced any Loan Document, or sold or assigned an interest in any Loan or Loan Document).
“ Other Taxes ” means all present or future stamp, court or documentary, intangible, recording, filing or similar Taxes that arise from any payment made under, from the execution, delivery, performance, enforcement or registration of, from the receipt or perfection of a security interest under, or otherwise with respect to, any Loan Document, except any such Taxes that are Other Connection Taxes imposed with respect to an assignment (other than an assignment made pursuant to Section 3.06 ).
“ Outstanding Amount ” means (i) with respect to Loans on any date, the aggregate outstanding principal amount thereof after giving effect to any borrowings and prepayments or repayments of Loans occurring on such date; and (ii) with respect to any L/C Obligations on any
 
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date, the amount of such L/C Obligations on such date after giving effect to any L/C Credit Extension occurring on such date and any other changes in the aggregate amount of the L/C Obligations as of such date, including as a result of any reimbursements by the Borrower of Unreimbursed Amounts.
“ Participant ” has the meaning specified in Section 10.06(d) .
“ Participant Register ” has the meaning specified in Section 10.06(d) .
“ PBGC ” means the Pension Benefit Guaranty Corporation established pursuant to Section 4002 of ERISA, or any successor thereto.
“ Permitted Investments ” means any (a) marketable direct obligation of the United States of America, (b) marketable obligation directly and fully guaranteed as to interest and principal by the United States of America, (c) demand deposit with Depositary, or time deposit, certificate of deposit and banker’s acceptance issued by any member bank of the Federal Reserve System which is organized under the laws of the United States of America or any state thereof or any United States branch of a foreign bank, in each case whose equity capital is in excess of $500,000,000 and whose long-term debt securities are rated “A” or better by S&P and “A2” or better by Moody’s, (d) commercial paper or tax exempt obligations given the highest rating by Moody’s and S&P, (e) obligations of a commercial bank described in clause (c) above, in respect of the repurchase of obligations of the type as described in clauses (a) and (b) hereof, provided that such repurchase obligation shall be fully secured by obligations of the type described in said clauses (a) and (b) and the possession of such obligation shall be transferred to, and segregated from other obligations owned by, any such bank, (f) instrument rated “AAA” by S&P and “Aaa” by Moody’s issued by investment companies and having an original maturity of 180 days or less, (g) eurodollar certificates of deposit issued by any bank described in clause (c) above, and (h) marketable security rated not less than “A-1” by S&P or not less than “Prime-1” by Moody’s. In no event shall Permitted Investments include any obligation, certificate of deposit, acceptance, commercial paper or instrument which by its terms matures (A) more than 180 days after the date of Investment, unless a bank meeting the requirements of clause (c) above shall have agreed to repurchase such obligation, certificate of deposit, acceptance, commercial paper or instrument at its purchase price plus earned interest within no more than 90 days after its purchase thereunder or (B) after the next payment date.
“ Permitted Lien ” means any Lien permitted under Section 7.05 of the Agreement.
“ Permitted Secured Indebtedness ” means all Indebtedness of the Borrower or its Subsidiaries incurred pursuant to Sections 7.06(a) and (b).
“ Person ” means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity.
“ Plan ” means any single-employer plan as defined in Section 4001 of ERISA, which is maintained or contributed to by (or to which there is an obligation to contribute of) a Loan Party, a Transaction of a Loan Party or an ERISA Affiliate, and each such plan for the five year period immediately following the latest date on which a Loan Party, a Subsidiary of a Loan Party or an ERISA Affiliate maintained, contributed to or had an obligation to contribute to such plan.
 
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“ Platform ” has the meaning specified in Section 6.01 .
“ Pledge Agreement ” means the Amended and Restated Assignment of Membership Interests and Pledge Agreement, dated as of February 21, 2014, among Energy Trans Alliance LP and the Collateral Agent.
“ Preferred Stock ” means any class of capital stock of a Person that is preferred over any other class of capital stock (or similar equity interests) of such Person as to the payment of dividends or the payments of any amount upon liquidation or dissolution of such Person.
“ Project Finance Subsidiary ” means a special purpose Subsidiary of a Person created to develop a New Project and to finance such New Project solely with Non-Recourse Debt and equity (including, for the avoidance of doubt, CV Project Entity, L.L.C. and GS Project Entity.
“ Public Lender ” has the meaning specified in Section 6.01 .
“ PUCT ” means the Public Utility Commission of Texas.
“ PUHCA ” means the Public Utility Holding Company Act of 1935.
“ Qualified Lessee ” means (a) as of the Closing Date, Sharyland and its Subsidiaries and (b) after the Closing Date, Sharyland and/or any other utility that is (x) approved or authorized by the applicable public utility commission or similar regulatory authority to operate and/or lease the transmission and/or distribution assets of Borrower or any TDC Subsidiary and (y) a party to a then-effective lease agreement with the Borrower or a TDC Subsidiary thereof pursuant to which such utility leases and operates such entity’s transmission and/or distribution assets.
“ Qualified Lessee Affiliate Loan ” means loans made by the Borrower or a Subsidiary to Qualified Lessees from time to time on terms approved in a manner consistent with Section 7.01(g) as long as the use of proceeds of such loans is limited to the acquisition or financing of equipment or other assets used in the Qualified Lessee’s operation or lease of transmission or distribution assets from the Borrower or a Subsidiary thereof pursuant to a Lease.
“ Qualifying IPO ” means a transaction or series of related transactions that include an initial public offering of the common Equity Interests of the General Partner and result in net proceeds in excess of $200,000,000 being contributed to the Borrower.
“ Recipient ” means the Administrative Agent, any Lender or the L/C Issuer.
“ Recovery Event ” means any loss of, damage to or destruction of, or any condemnation or other taking for public use of, any property of any Person.
“ Register ” has the meaning specified in Section 10.06(c) .
“ Related Parties ” means, with respect to any Person, such Person’s Affiliates and the partners, directors, officers, employees, agents, trustees, administrators, managers, advisors and representatives of such Person and of such Person’s Affiliates.
 
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“ Request for Credit Extension ” means (a) with respect to a Borrowing, conversion or continuation of Loans, a Loan Notice and (b) with respect to an L/C Credit Extension, a Letter of Credit Application.
“ Required Lenders ” means, at any time, Lenders having Total Credit Exposures representing more than 50% of the Total Credit Exposures of all Lenders. The Total Credit Exposure of any Defaulting Lender shall be disregarded in determining Required Lenders at any time; provided that, the amount of any participation in any Unreimbursed Amounts that such Defaulting Lender has failed to fund that have not been reallocated to and funded by another Lender shall be deemed to be held by the Lender that is the L/C Issuer in making such determination.
“ Responsible Officer ” means the chief executive officer, president, chief financial officer, treasurer, assistant treasurer, controller, vice president of finance or chief accounting officer of a Loan Party (or in the case of the Borrower, of the General Partner) or a Qualified Lessee, as applicable, and solely for purposes of the delivery of incumbency certificates pursuant to Section 4.01 , the secretary or any assistant secretary of a Loan Party and, solely for purposes of notices given pursuant to Article II, any other officer or employee of the applicable Loan Party so designated by any of the foregoing officers in a notice to the Administrative Agent or any other officer or employee of the applicable Loan Party designated in or pursuant to an agreement between the applicable Loan Party and the Administrative Agent. Any document delivered hereunder that is signed by a Responsible Officer of a Loan Party or a Qualified Lessee, as applicable, shall be conclusively presumed to have been authorized by all necessary corporate, partnership and/or other action on the part of such Loan Party or such Qualified Lessee, as applicable, and such Responsible Officer shall be conclusively presumed to have acted on behalf of such Loan Party or such Qualified Lessee, as applicable.
“ Revolving Credit Exposure ” means, as to any Lender at any time, the aggregate principal amount at such time of its outstanding Loans and such Lender’s participation in L/C Obligations at such time.
“ ROFO Transfer ” means the sale and transfer to Persons Controlled by one or more Hunt Family Members of any assets located in the Texas Panhandle related to the CREZ Project that are categorized as ROFO projects under the Leases and the Development Agreement with an aggregate fair market value not to exceed $5,000,000.
“ Sanction(s) ” means any international economic sanction administered or enforced by the United States Government (including without limitation, OFAC), the United Nations Security Council, the European Union, Her Majesty’s Treasury or other relevant sanctions authority.
“ SDTS ” means Sharyland Distribution & Transmission Services, L.L.C.
“ SDTS 2009 Note Purchase Agreement ” means the Amended and Restated Note Purchase Agreement, dated as of September 14, 2010, among SDTS and purchasers listed therein, as the same may be amended, restated, supplemented or otherwise modified from time to time.
 
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“ SDTS 2010 Note Purchase Agreement ” means the Amended and Restated Note Purchase Agreement, dated as of July 13, 2010, among SDTS and purchasers listed therein, as the same may be amended, restated, supplemented or otherwise modified from time to time.
“ SDTS 2013 Credit Agreement ” means the Third Amended and Restated Credit Agreement, dated as of December 10, 2014, among SDTS, the several lenders from time to time party thereto and Royal Bank of Canada, as administrative agent, as the same may be amended, restated, supplemented or otherwise modified from time to time.
“ SDTS Collateral Agent ” means the “Collateral Agent” as defined in the Second Amended and Restated Collateral Agency Agreement dated as of December 10, 2014, by and among The Bank of New York Mellon Trust Company, N.A., SDTS, the holders of the 2020 Notes and the other holders of Permitted Secured Indebtedness (as defined therein) from time to time party thereto (as may be amended, restated, amend and restated or otherwise modified from time to time).
“ SEC ” means the Securities and Exchange Commission, or any Governmental Authority succeeding to any of its principal functions.
“ Secured Parties ” means, from time to time, the Lenders, the Administrative Agent, the L/C Issuer, all other persons party to the Collateral Agency Agreement (other than the Borrower but including the holders of Permitted Secured Indebtedness from time to time) and the Collateral Agent.
“ Security Document Joinder Conditions ” means, collectively, the following requirements: (a) the Administrative Agent’s receipt of an executed copy (which shall be originals or telecopies (followed promptly by originals)) of the 2014 Joinder Agreement and (b) the Borrower shall have delivered to the Administrative Agent (i) an opinion of counsel to Borrower in form and substance reasonably satisfactory to the Administrative Agent that upon the valid execution and delivery by the Collateral Agent, the Borrower, each Secured Party (as such term is used and defined in the Collateral Agency Agreement) and the Administrative Agent, on behalf of itself and the Lenders, of the 2014 Joinder Agreement in accordance with the Collateral Agency Agreement, the Administrative Agent, on behalf of itself and on behalf of the Lenders, will be a Secured Party (as such term is used and defined in the Collateral Agency Agreement) and (ii) evidence that all other actions reasonably necessary or, in the reasonable opinion of the Administrative Agent, desirable to perfect and protect the first priority security interests purported to be created by any Security Document on the Collateral described therein (which shall be prior and superior in right to any other Person, other than with respect to Permitted Liens) have been, or are in the process of being, taken.
“ Security Documents ” means, collectively, the Borrower Security Agreement, the Amended and Restated Security Agreement, dated as of February 21, 2014, by and between TDC and The Bank of New York Mellon Trust Company, N.A.; the Collateral Agency Agreement; the 2014 Joinder Agreement; the Pledge Agreement and any other security documents, financing statements and the like filed or recorded in connection with the foregoing.
“ Sharyland ” means Sharyland Utilities, L.P.
 
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“ Sharyland Projects ” means Sharyland Projects, L.L.C., a Project Finance Subsidiary of SDTS.
“ Specified Cash Management Contracts ” means any cash management service agreements entered into by the Borrower and any Person that is a Lender or an affiliate of a Lender at the time such agreement is entered into.
“ Specified Event of Default ” means any Event of Default set forth in Section 8.01(a), (b), (h)(iii)(x), (i)  (other than such Events of Default relating to Qualified Lessees) or (j) (other than such Events of Default relating to Qualified Lessees).
“ Specified Swap Contracts ” means any Swap Contracts entered into by the Borrower and any Person that is a Lender or an affiliate of a Lender at the time such Swap Contract is entered into.
“ Stanton/Brady/Celeste Lease ” shall mean (A) prior to the effectiveness of the Stanton/Brady/Celeste Lease Amendment and Restatement, the Amended and Restated Lease Agreement (Stanton/Brady/Celeste Assets), dated as of July 1, 2012, between the Borrower, as lessor, and Sharyland, as lessee, and (B) upon the effectiveness of the Stanton/Brady/Celeste Lease Amendment and Restatement, the Stanton/Brady/Celeste Lease Amendment and Restatement, as such lease may be amended, restated, supplemented or otherwise modified from time to time, or any new lease entered into in replacement thereof, in accordance with Section 6.10 and/or 7.14 of this Agreement, as applicable.
“ Stanton/Brady/Celeste Lease Amendment and Restatement ” shall mean the Second Amended and Restated Lease Agreement (Stanton/Brady/Celeste Assets), between the Borrower, as lessor, and Sharyland, as lessee.
“ Subsidiary ” of a Person means a corporation, partnership, joint venture, limited liability company or other business entity of which a majority of the shares of securities or other interests having ordinary voting power for the election of directors or other governing body (other than securities or interests having such power only by reason of the happening of a contingency) are at the time beneficially owned, or the management of which is otherwise Controlled, directly, or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise specified, all references herein to a “Subsidiary” or to “Subsidiaries” shall refer to a Subsidiary or Subsidiaries of the Borrower and, prior to the completion of the FERC Merger, shall include the FERC Owner. Prior to the completion of the FERC Merger, all references herein to a Subsidiary of Sharyland shall include the FERC Operator.
“ Subsidiary Guarantor ” means any Guarantor that is a Subsidiary of the Borrower.
“ Swap Contract ” means (a) any and all rate swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward bond or forward bond price or forward bond index transactions, interest rate options, forward foreign exchange transactions, cap transactions, floor transactions, collar transactions, currency swap transactions, cross-currency rate swap transactions, currency options, spot contracts, or any other similar transactions or any
 
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combination of any of the foregoing (including any options to enter into any of the foregoing), whether or not any such transaction is governed by or subject to any master agreement, and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement (any such master agreement, together with any related schedules, a “ Master Agreement ”), including any such obligations or liabilities under any Master Agreement.
“ Swap Termination Value ” means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a) , the amount(s) determined as the mark-to-market value(s) for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts (which may include a Lender or any Affiliate of a Lender).
“ Synthetic Lease ” means, at any time, any lease (including leases that may be terminated by the lessee at any time) of any property (a) that is accounted for as an operating lease under GAAP and (b) in respect of which the lessee retains or obtains ownership of the property so leased for U.S. federal income tax purposes, other than any such lease under which such Person is the lessor.
“ Synthetic Lease Obligation ” means the monetary obligation of a Person under a Synthetic Lease.
“ System ” means the Borrower’s and/or any TDC Subsidiary’s (other than a Project Finance Subsidiary’s) integrated electrical transmission and distribution facilities located primarily in the State of Texas and the systems and other property necessary to operate the transmission and distribution facilities, and all improvements to and expansions of such facilities, and each New Project (upon its completion) owned by the Borrower or such TDC Subsidiary; provided that, for purposes hereof, “System” shall not be deemed to include any easements held by the Borrower or any Subsidiary.
“ Taxes ” means all present or future taxes, levies, imposts, duties, deductions, withholdings (including backup withholding), assessments, fees or other charges imposed by any Governmental Authority, including any interest, additions to tax or penalties applicable thereto.
“ TDC ” means Transmission & Distribution Company, L.L.C., a Texas limited liability company.
“ TDC Subsidiaries ” means, collectively, TDC and any direct or indirect Subsidiary of TDC.
“ Total Credit Exposure ” means, as to any Lender at any time, the unused Commitments and Revolving Credit Exposure of such Lender at such time.
 
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“ Total Outstandings ” means the aggregate Outstanding Amount of all Loans and all L/C Obligations.
“ Transaction Parties ” means the Borrower, the TDC Subsidiaries and any Qualified Lessee.
“ Type ” means, with respect to a Loan, its character as a Base Rate Loan or a Eurodollar Rate Loan.
“ UCC ” means, with respect to any jurisdiction, the Uniform Commercial Code as in effect in such jurisdiction.
“ UCC Collateral ” means the Collateral that is of a type in which a valid security interest can be created under Article 9 of the New York UCC.
“ UCP ” means, with respect to any Letter of Credit, the Uniform Customs and Practice for Documentary Credits, International Chamber of Commerce (“ ICC ”) Publication No. 600 (or such later version thereof as may be in effect at the time of issuance).
“ United States ” and “ U.S. ” mean the United States of America.
“ Unreimbursed Amount ” has the meaning specified in Section 2.03(c)(i) .
“ U.S. Person ” means any Person that is a “United States person” as defined in Section 7701(a)(30) of the Code.
“ U.S. Tax Compliance Certificate ” has the meaning specified in Section 3.01(e)(ii)(B)(III) .
“ USA PATRIOT ACT ” means USA PATRIOT Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)), as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.
“ Wholly-Owned Subsidiary ” means, at any time, any Subsidiary at least 90% of all of the equity and voting interests of which are owned by any one or more of the Borrower and the Borrower’s other Wholly-Owned Subsidiaries and the remaining equity and voting interests of such Subsidiary, if any, are owned by a Qualified Lessee at such time.
“ Withdrawal Liability ” means a liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA.
“ Withholding Agent ” means any Loan Party and the Administrative Agent.
 
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1.02 Other Interpretive Provisions . With reference to this Agreement and each other Loan Document, unless otherwise specified herein or in such other Loan Document:
(a) The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words “ include ,” “ includes ” and “ including ” shall be deemed to be followed by the phrase “without limitation.” The word “ will ” shall be construed to have the same meaning and effect as the word “ shall .” Unless the context requires otherwise, (i) any definition of or reference to any agreement, instrument or other document (including any Organization Document) shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein or in any other Loan Document), (ii) any reference herein to any Person shall be construed to include such Person’s successors and assigns, (iii) the words “ hereto ,” “ herein ,” “ hereof ” and “ hereunder ,” and words of similar import when used in any Loan Document, shall be construed to refer to such Loan Document in its entirety and not to any particular provision thereof, (iv) all references in a Loan Document to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, the Loan Document in which such references appear, (v) any reference to any law shall include all statutory and regulatory provisions consolidating, amending, replacing or interpreting such law and any reference to any law or regulation shall, unless otherwise specified, refer to such law or regulation as amended, modified or supplemented from time to time, and (vi) the words “ asset ” and “ property ” shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights.
(b) In the computation of periods of time from a specified date to a later specified date, the word “ from ” means “ from and including ;” the words “ to ” and “ until ” each mean “ to but excluding ;” and the word “ through ” means “ to and including .”
(c) Section headings herein and in the other Loan Documents are included for convenience of reference only and shall not affect the interpretation of this Agreement or any other Loan Document.
1.03 Accounting Terms .
(a) Generally . All accounting terms not specifically or completely defined herein shall be construed in conformity with, and all financial data (including financial ratios and other financial calculations) required to be submitted pursuant to this Agreement shall be prepared in conformity with, GAAP applied on a consistent basis, as in effect from time to time, applied in a manner consistent with that used in preparing the Audited Financial Statements, except as otherwise specifically prescribed herein. Notwithstanding the foregoing, for purposes of determining compliance with any covenant (including the computation of any financial covenant) contained herein, Indebtedness of the Borrower and its Subsidiaries shall be deemed to be carried at 100% of the outstanding principal amount thereof, and the effects of FASB ASC 825 and FASB ASC 470-20 on financial liabilities shall be disregarded.
(b) Changes in GAAP . If at any time any change in GAAP would affect the computation of any financial ratio or requirement set forth in any Loan Document, and either the Borrower or the Required Lenders shall so request, the Administrative Agent, the Lenders and
 
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the Borrower shall negotiate in good faith to amend such ratio or requirement to preserve the original intent thereof in light of such change in GAAP (subject to the approval of the Required Lenders); provided that , until so amended, (A) such ratio or requirement shall continue to be computed in accordance with GAAP prior to such change therein and (B) the Borrower shall provide to the Administrative Agent and the Lenders financial statements and other documents required under this Agreement or as reasonably requested hereunder setting forth a reconciliation between calculations of such ratio or requirement made before and after giving effect to such change in GAAP. Without limiting the foregoing, leases shall continue to be classified and accounted for on a basis consistent with that reflected in the Audited Financial Statements for all purposes of this Agreement, notwithstanding any change in GAAP relating thereto, unless the parties hereto shall enter into a mutually acceptable amendment addressing such changes, as provided for above.
1.04 Rounding . Any financial ratios required to be maintained by the Borrower pursuant to this Agreement shall be calculated by dividing the appropriate component by the other component, carrying the result to one place more than the number of places by which such ratio is expressed herein and rounding the result up or down to the nearest number (with a rounding-up if there is no nearest number).
1.05 Times of Day; Rates . Unless otherwise specified, all references herein to times of day shall be references to Eastern time (daylight or standard, as applicable).
The Administrative Agent does not warrant, nor accept responsibility, nor shall the Administrative Agent have any liability with respect to the administration, submission or any other matter related to the rates in the definition of “Eurodollar Rate” or with respect to any comparable or successor rate thereto.
1.06 Letter of Credit Amounts . Unless otherwise specified herein, the amount of a Letter of Credit at any time shall be deemed to be the stated amount of such Letter of Credit in effect at such time; provided, however, that with respect to any Letter of Credit that, by its terms or the terms of any Issuer Document related thereto, provides for one or more automatic increases in the stated amount thereof, the amount of such Letter of Credit shall be deemed to be the maximum stated amount of such Letter of Credit after giving effect to all such increases, whether or not such maximum stated amount is in effect at such time.
ARTICLE II.
THE COMMITMENTS AND CREDIT EXTENSIONS
2.01 Loans . Subject to the terms and conditions set forth herein, each Lender severally agrees to make loans in U.S. dollars (each such loan, a “ Loan ”) to the Borrower from time to time, on any Business Day during the Availability Period, in an aggregate amount not to exceed at any time outstanding the amount of such Lender’s Commitment; provided , however , that after giving effect to any Borrowing, (i) the Total Outstandings shall not exceed the Aggregate Commitments, and (ii) the Revolving Credit Exposure of any Lender shall not exceed such Lender’s Commitment. Within the limits of each Lender’s Commitment, and subject to the other terms and conditions hereof, the Borrower may borrow under this Section 2.01 , prepay under Section 2.04 , and reborrow under this Section 2.01 . Loans may be Base Rate Loans or Eurodollar Rate Loans, as further provided herein.
 
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2.02 Borrowings, Conversions and Continuations of Loans .
(a) Each Borrowing, each conversion of Loans from one Type to the other, and each continuation of Eurodollar Rate Loans shall be made upon the Borrower’s irrevocable notice to the Administrative Agent, which may be given by (A) telephone, or (B) a Loan Notice; provided that any telephonic notice must be confirmed immediately by delivery to the Administrative Agent of a Loan Notice. Each such Loan Notice must be received by the Administrative Agent not later than 11:00 a.m. (i) three Business Days prior to the requested date of any Borrowing of, conversion to or continuation of Eurodollar Rate Loans or of any conversion of Eurodollar Rate Loans to Base Rate Loans, and (ii) on the requested date of any Borrowing of Base Rate Loans; provided , however , that if the Borrower wishes to request Eurodollar Rate Loans having an Interest Period other than one, two, three or six months in duration as provided in the definition of “Interest Period,” the applicable notice must be received by the Administrative Agent not later than 11:00 a.m. four Business Days prior to the requested date of such Borrowing, conversion or continuation, whereupon the Administrative Agent shall give prompt notice to the Lenders of such request and determine whether the requested Interest Period is acceptable to all of them. Not later than 11:00 a.m., three Business Days before the requested date of such Borrowing, conversion or continuation, the Administrative Agent shall notify the Borrower (which notice may be by telephone) whether or not the requested Interest Period has been consented to by all the Lenders. Each Borrowing of, conversion to or continuation of Eurodollar Rate Loans shall be in a principal amount of $5,000,000 or a whole multiple of $1,000,000 in excess thereof. Except as provided in Sections 2.03(c) each Borrowing of or conversion to Base Rate Loans shall be in a principal amount of $500,000 or a whole multiple of $100,000 in excess thereof. Each Loan Notice shall specify (i) whether the Borrower is requesting a Borrowing, a conversion of Loans from one Type to the other, or a continuation of Eurodollar Rate Loans, (ii) the requested date of the Borrowing, conversion or continuation, as the case may be (which shall be a Business Day), (iii) the principal amount of Loans to be borrowed, converted or continued, (iv) the Type of Loans to be borrowed or to which existing Loans are to be converted, and (v) if applicable, the duration of the Interest Period with respect thereto. If the Borrower fails to specify a Type of Loan in a Loan Notice or if the Borrower fails to give a timely notice requesting a conversion or continuation, then the applicable Loans shall be made as, or converted to, Base Rate Loans. Any such automatic conversion to Base Rate Loans shall be effective as of the last day of the Interest Period then in effect with respect to the applicable Eurodollar Rate Loans. If the Borrower requests a Borrowing of, conversion to, or continuation of Eurodollar Rate Loans in any such Loan Notice, but fails to specify an Interest Period, it will be deemed to have specified an Interest Period of one month.
(b) Following receipt of a Loan Notice, the Administrative Agent shall promptly notify each Lender of the amount of its Applicable Percentage of the applicable Loans, and if no timely notice of a conversion or continuation is provided by the Borrower, the Administrative Agent shall notify each Lender of the details of any automatic conversion to Base Rate Loans described in the preceding subsection. In the case of a Borrowing, each Lender shall make the amount of its Loan available to the Administrative Agent in immediately available funds at the Administrative Agent’s Office not later than 1:00 p.m. on the Business Day specified in the
 
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applicable Loan Notice. Upon satisfaction of the applicable conditions set forth in Section 4.02 (and, if such Borrowing is the initial Credit Extension, Section 4.01 ), the Administrative Agent shall make all funds so received available to the Borrower in like funds as received by the Administrative Agent either by (i) crediting the account of the Borrower on the books of Bank of America with the amount of such funds or (ii) wire transfer of such funds, in each case in accordance with instructions provided to (and reasonably acceptable to) the Administrative Agent by the Borrower; provided , however , that if, on the date the Loan Notice with respect to such Borrowing is given by the Borrower, there are L/C Borrowings outstanding, then the proceeds of such Borrowing, first , shall be applied to the payment in full of any such L/C Borrowings, and second , shall be made available to the Borrower as provided above.
(c) Except as otherwise provided herein, a Eurodollar Rate Loan may be continued or converted only on the last day of an Interest Period for such Eurodollar Rate Loan. During the existence of a Default, no Loans may be requested as, converted to or continued as Eurodollar Rate Loans without the consent of the Required Lenders.
(d) The Administrative Agent shall promptly notify the Borrower and the Lenders of the interest rate applicable to any Interest Period for Eurodollar Rate Loans upon determination of such interest rate. At any time that Base Rate Loans are outstanding, the Administrative Agent shall notify the Borrower and the Lenders of any change in Bank of America’s prime rate used in determining the Base Rate promptly following the public announcement of such change.
(e) After giving effect to all Borrowings, all conversions of Loans from one Type to the other, and all continuations of Loans as the same Type, there shall not be more than 10 Interest Periods in effect with respect to Loans.
2.03 Letters of Credit .
(a) The Letter of Credit Commitment .
(i) Subject to the terms and conditions set forth herein, (A) the L/C Issuer agrees, in reliance upon the agreements of the Lenders set forth in this Section 2.03 , (1) from time to time on any Business Day during the period from the Closing Date until the Letter of Credit Expiration Date, to issue Letters of Credit for the account of the Borrower, and to amend Letters of Credit previously issued by it, in accordance with subsection (b)  below, and (2) to honor drawings under the Letters of Credit; and (B) the Lenders severally agree to participate in Letters of Credit issued for the account of the Borrower and any drawings thereunder; provided that after giving effect to any L/C Credit Extension with respect to any Letter of Credit, (x) the Total Outstandings shall not exceed the Aggregate Commitments, (y) the Revolving Credit Exposure of any Lender shall not exceed such Lender’s Commitment, and (z) the Outstanding Amount of the L/C Obligations shall not exceed the Letter of Credit Sublimit. Each request by the Borrower for the issuance or amendment of a Letter of Credit shall be deemed to be a representation by the Borrower that the L/C Credit Extension so requested complies with the conditions set forth in the proviso to the preceding sentence. Within the foregoing limits, and subject to the terms and conditions hereof, the Borrower’s ability to obtain Letters of Credit shall be fully revolving, and accordingly the Borrower may, during the foregoing period, obtain Letters of Credit to replace Letters of Credit that have expired or that have been drawn upon and reimbursed.
 
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(ii) The L/C Issuer shall not issue any Letter of Credit, if the expiry date of the requested Letter of Credit would occur after the Letter of Credit Expiration Date, unless all the Lenders have approved such expiry date.
(iii) The L/C Issuer shall not be under any obligation to issue any Letter of Credit if:
(A) any order, judgment or decree of any Governmental Authority or arbitrator shall by its terms purport to enjoin or restrain the L/C Issuer from issuing the Letter of Credit, or any Law applicable to the L/C Issuer or any request or directive (whether or not having the force of law) from any Governmental Authority with jurisdiction over the L/C Issuer shall prohibit, or request that the L/C Issuer refrain from, the issuance of letters of credit generally or the Letter of Credit in particular or shall impose upon the L/C Issuer with respect to the Letter of Credit any restriction, reserve or capital requirement (for which the L/C Issuer is not otherwise compensated hereunder) not in effect on the Closing Date, or shall impose upon the L/C Issuer any unreimbursed loss, cost or expense which was not applicable on the Closing Date and which the L/C Issuer in good faith deems material to it;
(B) the issuance of the Letter of Credit would violate one or more policies of the L/C Issuer applicable to letters of credit generally;
(C) except as otherwise agreed by the Administrative Agent and the L/C Issuer, the Letter of Credit is in an initial stated amount less than $500,000;
(D) the Letter of Credit is to be denominated in a currency other than Dollars;
(E) any Lender is at that time a Defaulting Lender, unless the L/C Issuer has entered into arrangements, including the delivery of Cash Collateral, satisfactory to the L/C Issuer (in its sole discretion) with the Borrower or such Lender to eliminate the L/C Issuer’s actual or potential Fronting Exposure (after giving effect to Section 2.13(a)(iv )) with respect to the Defaulting Lender arising from either the Letter of Credit then proposed to be issued or that Letter of Credit and all other L/C Obligations as to which the L/C Issuer has actual or potential Fronting Exposure, as it may elect in its sole discretion ; or
(F) the Letter of Credit contains any provisions for automatic reinstatement of the stated amount after any drawing thereunder.
(iv) The L/C Issuer shall not amend any Letter of Credit if the L/C Issuer would not be permitted at such time to issue the Letter of Credit in its amended form under the terms hereof.
 
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(v) The L/C Issuer shall be under no obligation to amend any Letter of Credit if (A) the L/C Issuer would have no obligation at such time to issue the Letter of Credit in its amended form under the terms hereof, or (B) the beneficiary of the Letter of Credit does not accept the proposed amendment to the Letter of Credit.
(vi) The L/C Issuer shall act on behalf of the Lenders with respect to any Letters of Credit issued by it and the documents associated therewith, and the L/C Issuer shall have all of the benefits and immunities (A) provided to the Administrative Agent in Article IX with respect to any acts taken or omissions suffered by the L/C Issuer in connection with Letters of Credit issued by it or proposed to be issued by it and Issuer Documents pertaining to such Letters of Credit as fully as if the term “Administrative Agent” as used in Article IX included the L/C Issuer with respect to such acts or omissions, and (B) as additionally provided herein with respect to the L/C Issuer.
(b) Procedures for Issuance and Amendment of Letters of Credit .
(i) Each Letter of Credit shall be issued or amended, as the case may be, upon the request of the Borrower delivered to the L/C Issuer (with a copy to the Administrative Agent) in the form of a Letter of Credit Application, appropriately completed and signed by a Responsible Officer of the Borrower. Such Letter of Credit Application may be sent by facsimile, by United States mail, by overnight courier, by electronic transmission using the system provided by the L/C Issuer, by personal delivery or by any other means acceptable to the L/C Issuer. Such Letter of Credit Application must be received by the L/C Issuer and the Administrative Agent not later than 11:00 a.m. at least two Business Days (or such later date and time as the Administrative Agent and the L/C Issuer may agree in a particular instance in their sole discretion) prior to the proposed issuance date or date of amendment, as the case may be. In the case of a request for an initial issuance of a Letter of Credit, such Letter of Credit Application shall specify in form and detail satisfactory to the L/C Issuer: (A) the proposed issuance date of the requested Letter of Credit (which shall be a Business Day); (B) the amount thereof; (C) the expiry date thereof; (D) the name and address of the beneficiary thereof; (E) the documents to be presented by such beneficiary in case of any drawing thereunder; (F) the full text of any certificate to be presented by such beneficiary in case of any drawing thereunder; (G) the purpose and nature of the requested Letter of Credit; and (H) such other matters as the L/C Issuer may require. In the case of a request for an amendment of any outstanding Letter of Credit, such Letter of Credit Application shall specify in form and detail satisfactory to the L/C Issuer (A) the Letter of Credit to be amended; (B) the proposed date of amendment thereof (which shall be a Business Day); (C) the nature of the proposed amendment; and (D) such other matters as the L/C Issuer may require. Additionally, the Borrower shall furnish to the L/C Issuer and the Administrative Agent such other documents and information pertaining to such requested Letter of Credit issuance or amendment, including any Issuer Documents, as the L/C Issuer or the Administrative Agent may require.
(ii) Promptly after receipt of any Letter of Credit Application, the L/C Issuer will confirm with the Administrative Agent (by telephone or in writing) that the Administrative Agent has received a copy of such Letter of Credit Application from the
 
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Borrower and, if not, the L/C Issuer will provide the Administrative Agent with a copy thereof. Unless the L/C Issuer has received written notice from any Lender, the Administrative Agent or any Loan Party, at least one Business Day prior to the requested date of issuance or amendment of the applicable Letter of Credit, that one or more applicable conditions contained in Article IV shall not then be satisfied, then, subject to the terms and conditions hereof, the L/C Issuer shall, on the requested date, issue a Letter of Credit for the account of the Borrower or enter into the applicable amendment, as the case may be, in each case in accordance with the L/C Issuer’s usual and customary business practices. Immediately upon the issuance of each Letter of Credit, each Lender shall be deemed to, and hereby irrevocably and unconditionally agrees to, purchase from the L/C Issuer a risk participation in such Letter of Credit in an amount equal to the product of such Lender’s Applicable Percentage times the amount of such Letter of Credit.
(iii) Promptly after its delivery of any Letter of Credit or any amendment to a Letter of Credit to an advising bank with respect thereto or to the beneficiary thereof, the L/C Issuer will also deliver to the Borrower and the Administrative Agent a true and complete copy of such Letter of Credit or amendment.
(c) Drawings and Reimbursements; Funding of Participations .
(i) Upon receipt from the beneficiary of any Letter of Credit of any notice of a drawing under such Letter of Credit, the L/C Issuer shall notify the Borrower and the Administrative Agent thereof. Not later than 11:00 a.m. on the date of any payment by the L/C Issuer under a Letter of Credit (each such date, an “ Honor Date ”), the Borrower shall reimburse the L/C Issuer through the Administrative Agent in an amount equal to the amount of such drawing. If the Borrower fails to so reimburse the L/C Issuer by such time, the Administrative Agent shall promptly notify each Lender of the Honor Date, the amount of the unreimbursed drawing (the “ Unreimbursed Amount ”), and the amount of such Lender’s Applicable Percentage thereof. In such event, the Borrower shall be deemed to have requested a Borrowing of Base Rate Loans to be disbursed on the Honor Date in an amount equal to the Unreimbursed Amount, without regard to the minimum and multiples specified in Section 2.02 for the principal amount of Base Rate Loans, but subject to the amount of the unutilized portion of the Aggregate Commitments and the conditions set forth in Section 4.02 (other than the delivery of a Loan Notice). Any notice given by the L/C Issuer or the Administrative Agent pursuant to this Section 2.03(c)(i) may be given by telephone if immediately confirmed in writing; provided that the lack of such an immediate confirmation shall not affect the conclusiveness or binding effect of such notice.
(ii) Each Lender shall upon any notice pursuant to Section 2.03(c)(i) make funds available (and the Administrative Agent may apply Cash Collateral provided for this purpose) for the account of the L/C Issuer at the Administrative Agent’s Office in an amount equal to its Applicable Percentage of the Unreimbursed Amount not later than 1:00 p.m. on the Business Day specified in such notice by the Administrative Agent, whereupon, subject to the provisions of Section 2.03(c)(iii) , each Lender that so makes funds available shall be deemed to have made a Base Rate Loan to the Borrower in such amount. The Administrative Agent shall remit the funds so received to the L/C Issuer.
 
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(iii) With respect to any Unreimbursed Amount that is not fully refinanced by a Borrowing of Base Rate Loans because the conditions set forth in Section 4.02 cannot be satisfied or for any other reason, the Borrower shall be deemed to have incurred from the L/C Issuer an L/C Borrowing in the amount of the Unreimbursed Amount that is not so refinanced, which L/C Borrowing shall be due and payable on demand (together with interest) and shall bear interest at the Default Rate. In such event, each Lender’s payment to the Administrative Agent for the account of the L/C Issuer pursuant to Section 2.03(c)(ii) shall be deemed payment in respect of its participation in such L/C Borrowing and shall constitute an L/C Advance from such Lender in satisfaction of its participation obligation under this Section 2.03 .
(iv) Until each Lender funds its Loan or L/C Advance pursuant to this Section 2.03(c) to reimburse the L/C Issuer for any amount drawn under any Letter of Credit, interest in respect of such Lender’s Applicable Percentage of such amount shall be solely for the account of the L/C Issuer.
(v) Each Lender’s obligation to make Loans or L/C Advances to reimburse the L/C Issuer for amounts drawn under Letters of Credit, as contemplated by this Section 2.03(c) , shall be absolute and unconditional and shall not be affected by any circumstance, including (A) any setoff, counterclaim, recoupment, defense or other right which such Lender may have against the L/C Issuer, the Borrower or any other Person for any reason whatsoever; (B) the occurrence or continuance of a Default, or (C) any other occurrence, event or condition, whether or not similar to any of the foregoing; provided , however , that each Lender’s obligation to make Loans pursuant to this Section 2.03(c) is subject to the conditions set forth in Section 4.02 (other than delivery by the Borrower of a Loan Notice). No such making of an L/C Advance shall relieve or otherwise impair the obligation of the Borrower to reimburse the L/C Issuer for the amount of any payment made by the L/C Issuer under any Letter of Credit, together with interest as provided herein.
(vi) If any Lender fails to make available to the Administrative Agent for the account of the L/C Issuer any amount required to be paid by such Lender pursuant to the foregoing provisions of this Section 2.03(c) by the time specified in Section 2.03(c)(ii) , then, without limiting the other provisions of this Agreement, the L/C Issuer shall be entitled to recover from such Lender (acting through the Administrative Agent), on demand, such amount with interest thereon for the period from the date such payment is required to the date on which such payment is immediately available to the L/C Issuer at a rate per annum equal to the greater of the Federal Funds Rate and a rate determined by the L/C Issuer in accordance with banking industry rules on interbank compensation, plus any administrative, processing or similar fees customarily charged by the L/C Issuer in connection with the foregoing. If such Lender pays such amount (with interest and fees as aforesaid), the amount so paid shall constitute such Lender’s Loan included in the relevant Borrowing or L/C Advance in respect of the relevant L/C Borrowing, as the case may be. A certificate of the L/C Issuer submitted to any Lender (through the Administrative Agent) with respect to any amounts owing under this clause (vi)  shall be conclusive absent manifest error.
 
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(d) Repayment of Participations .
(i) At any time after the L/C Issuer has made a payment under any Letter of Credit and has received from any Lender such Lender’s L/C Advance in respect of such payment in accordance with Section 2.03(c) , if the Administrative Agent receives for the account of the L/C Issuer any payment in respect of the related Unreimbursed Amount or interest thereon (whether directly from the Borrower or otherwise, including proceeds of Cash Collateral applied thereto by the Administrative Agent), the Administrative Agent will distribute to such Lender its Applicable Percentage thereof in the same funds as those received by the Administrative Agent.
(ii) If any payment received by the Administrative Agent for the account of the L/C Issuer pursuant to Section 2.03(c)(i) is required to be returned under any of the circumstances described in Section 10.05 (including pursuant to any settlement entered into by the L/C Issuer in its discretion), each Lender shall pay to the Administrative Agent for the account of the L/C Issuer its Applicable Percentage thereof on demand of the Administrative Agent, plus interest thereon from the date of such demand to the date such amount is returned by such Lender, at a rate per annum equal to the Federal Funds Rate from time to time in effect. The obligations of the Lenders under this clause shall survive the payment in full of the Obligations under the Loan Documents and the termination of this Agreement.
(e) Obligations Absolute . The obligation of the Borrower to reimburse the L/C Issuer for each drawing under each Letter of Credit and to repay each L/C Borrowing shall be absolute, unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including the following:
(i) any lack of validity or enforceability of such Letter of Credit, this Agreement, or any other Loan Document;
(ii) the existence of any claim, counterclaim, setoff, defense or other right that the Borrower or any Subsidiary may have at any time against any beneficiary or any transferee of such Letter of Credit (or any Person for whom any such beneficiary or any such transferee may be acting), the L/C Issuer or any other Person, whether in connection with this Agreement, the transactions contemplated hereby or by such Letter of Credit or any agreement or instrument relating thereto, or any unrelated transaction;
(iii) any draft, demand, certificate or other document presented under such Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; or any loss or delay in the transmission or otherwise of any document required in order to make a drawing under such Letter of Credit;
 
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(iv) waiver by the L/C Issuer of any requirement that exists for the L/C Issuer’s protection and not the protection of the Borrower or any waiver by the L/C Issuer which does not in fact materially prejudice the Borrower;
(v) honor of a demand for payment presented electronically even if such Letter of Credit requires that demand be in the form of a draft;
(vi) any payment made by the L/C Issuer in respect of an otherwise complying item presented after the date specified as the expiration date of, or the date by which documents must be received under such Letter of Credit if presentation after such date is authorized by the UCC, the ISP or the UCP, as applicable;
(vii) any payment by the L/C Issuer under such Letter of Credit against presentation of a draft or certificate that does not strictly comply with the terms of such Letter of Credit; or any payment made by the L/C Issuer under such Letter of Credit to any Person purporting to be a trustee in bankruptcy, debtor-in-possession, assignee for the benefit of creditors, liquidator, receiver or other representative of or successor to any beneficiary or any transferee of such Letter of Credit, including any arising in connection with any proceeding under any Debtor Relief Law; or
(viii) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing, including any other circumstance that might otherwise constitute a defense available to, or a discharge of, the Borrower or any Subsidiary.
The Borrower shall promptly examine a copy of each Letter of Credit and each amendment thereto that is delivered to it and, in the event of any claim of noncompliance with the Borrower’s instructions or other irregularity, the Borrower will immediately notify the L/C Issuer. The Borrower shall be conclusively deemed to have waived any such claim against the L/C Issuer and its correspondents unless such notice is given as aforesaid.
(f) Role of L/C Issuer . Each Lender and the Borrower agree that, in paying any drawing under a Letter of Credit, the L/C Issuer shall not have any responsibility to obtain any document (other than any sight draft, certificates and documents expressly required by the Letter of Credit) or to ascertain or inquire as to the validity or accuracy of any such document or the authority of the Person executing or delivering any such document. None of the L/C Issuer, the Administrative Agent, any of their respective Related Parties nor any correspondent, participant or assignee of the L/C Issuer shall be liable to any Lender for (i) any action taken or omitted in connection herewith at the request or with the approval of the Lenders or the Required Lenders, as applicable; (ii) any action taken or omitted in the absence of gross negligence or willful misconduct; or (iii) the due execution, effectiveness, validity or enforceability of any document or instrument related to any Letter of Credit or Issuer Document. The Borrower hereby assumes all risks of the acts or omissions of any beneficiary or transferee with respect to its use of any Letter of Credit; provided , however , that this assumption is not intended to, and shall not, preclude the Borrower’s pursuing such rights and remedies as it may have against the beneficiary or transferee at law or under any other agreement. None of the L/C Issuer, the Administrative Agent, any of their respective Related Parties nor any correspondent, participant or assignee of the L/C Issuer shall be liable or responsible for any of the matters described in clauses (i)
 
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through (viii)  of Section 2.03(e) ; provided , however , that anything in such clauses to the contrary notwithstanding, the Borrower may have a claim against the L/C Issuer, and the L/C Issuer may be liable to the Borrower, to the extent, but only to the extent, of any direct, as opposed to consequential or exemplary, damages suffered by the Borrower which the Borrower proves were caused by the L/C Issuer’s willful misconduct or gross negligence or the L/C Issuer’s willful failure to pay under any Letter of Credit after the presentation to it by the beneficiary of a sight draft and certificate(s) strictly complying with the terms and conditions of a Letter of Credit. In furtherance and not in limitation of the foregoing, the L/C Issuer may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary, and the L/C Issuer shall not be responsible for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign a Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason. The L/C Issuer may send a Letter of Credit or conduct any communication to or from the beneficiary via the Society for Worldwide Interbank Financial Telecommunication (“ SWIFT ”) message or overnight courier, or any other commercially reasonable means of communicating with a beneficiary.
(g) Applicability of ISP and UCP; Limitation of Liability . Unless otherwise expressly agreed by the L/C Issuer and the Borrower when a Letter of Credit is issued, the rules of the ISP shall apply to each Letter of Credit. Notwithstanding the foregoing, the L/C Issuer shall not be responsible to the Borrower for, and the L/C Issuer’s rights and remedies against the Borrower shall not be impaired by, any action or inaction of the L/C Issuer required or permitted under any law, order, or practice that is required or permitted to be applied to any Letter of Credit or this Agreement, including the Law or any order of a jurisdiction where the L/C Issuer or the beneficiary is located, the practice stated in the ISP or UCP, as applicable, or in the decisions, opinions, practice statements, or official commentary of the ICC Banking Commission, the Bankers Association for Finance and Trade - International Financial Services Association (BAFT-IFSA), or the Institute of International Banking Law & Practice, whether or not any Letter of Credit chooses such law or practice.
(h) Letter of Credit Fees . The Borrower shall pay to the Administrative Agent for the account of each Lender in accordance, subject to Section 2.13 , with its Applicable Percentage a Letter of Credit fee (the “ Letter of Credit Fee ”) for each Letter of Credit equal to the Applicable Rate times the daily amount available to be drawn under such Letter of Credit. For purposes of computing the daily amount available to be drawn under any Letter of Credit, the amount of such Letter of Credit shall be determined in accordance with Section 1.06 . Letter of Credit Fees shall be (i) due and payable on the first Business Day after the end of each March, June, September and December, commencing with the first such date to occur after the issuance of such Letter of Credit, on the Letter of Credit Expiration Date and thereafter on demand and (ii) computed on a quarterly basis in arrears. If there is any change in the Applicable Rate during any quarter, the daily amount available to be drawn under each Letter of Credit shall be computed and multiplied by the Applicable Rate separately for each period during such quarter that such Applicable Rate was in effect. Notwithstanding anything to the contrary contained herein, upon the request of the Required Lenders, if any Event of Default has occurred and is continuing, all Letter of Credit Fees shall accrue at the Default Rate.
 
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(i) Fronting Fee and Documentary and Processing Charges Payable to L/C Issuer . The Borrower shall pay directly to the L/C Issuer for its own account a fronting fee with respect to each Letter of Credit, at the rate per annum specified in the Fee Letter, computed on the daily amount available to be drawn under such Letter of Credit on a quarterly basis in arrears Such fronting fee shall be due and payable on the tenth Business Day after the end of each March, June, September and December in respect of the most recently-ended quarterly period (or portion thereof, in the case of the first payment), commencing with the first such date to occur after the issuance of such Letter of Credit, on the Letter of Credit Expiration Date and thereafter on demand. For purposes of computing the daily amount available to be drawn under any Letter of Credit, the amount of such Letter of Credit shall be determined in accordance with Section 1.06 . In addition, the Borrower shall pay directly to the L/C Issuer for its own account the customary issuance, presentation, amendment and other processing fees, and other standard costs and charges, of the L/C Issuer relating to letters of credit as from time to time in effect. Such customary fees and standard costs and charges are due and payable on demand and are nonrefundable.
(j) Conflict with Issuer Documents . In the event of any conflict between the terms hereof and the terms of any Issuer Document, the terms hereof shall control.
2.04 Prepayments .
(a) The Borrower may, upon notice to the Administrative Agent, at any time or from time to time voluntarily prepay Loans in whole or in part without premium or penalty; provided that (i) such notice must be in a form acceptable to the Administrative Agent and be received by the Administrative Agent not later than 11:00 a.m. (A) three Business Days prior to any date of prepayment of Eurodollar Rate Loans and (B) on the date of prepayment of Base Rate Loans; (ii) any prepayment of Eurodollar Rate Loans shall be in a principal amount of $5,000,000 or a whole multiple of $1,000,000 in excess thereof; and (iii) any prepayment of Base Rate Loans shall be in a principal amount of $500,000 or a whole multiple of $100,000 in excess thereof or, in each case, if less, the entire principal amount thereof then outstanding. Each such notice shall specify the date and amount of such prepayment and the Type(s) of Loans to be prepaid and, if Eurodollar Rate Loans are to be prepaid, the Interest Period(s) of such Loans. The Administrative Agent will promptly notify each Lender of its receipt of each such notice, and of the amount of such Lender’s Applicable Percentage of such prepayment. If such notice is given by the Borrower, the Borrower shall make such prepayment and the payment amount specified in such notice shall be due and payable on the date specified therein. Any prepayment of a Eurodollar Rate Loan shall be accompanied by all accrued interest on the amount prepaid, together with any additional amounts required pursuant to Section 3.05 . Subject to Section 2.13 , each such prepayment shall be applied to the Loans of the Lenders in accordance with their respective Applicable Percentages.
(b) [Reserved].
(c) If for any reason the Total Outstandings at any time exceed the Aggregate Commitments then in effect, the Borrower shall immediately prepay Loans and/or Cash Collateralize the L/C Obligations in an aggregate amount equal to such excess; provided , however , that the Borrower shall not be required to Cash Collateralize the L/C Obligations pursuant to this Section 2.05(c) unless after the prepayment in full of the Loans the Total Outstandings exceed the Aggregate Commitments then in effect.
 
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(d) The Borrower may, upon notice to the Administrative Agent, terminate the Aggregate Commitments, or from time to time permanently reduce the Aggregate Commitments; provided that (i) any such notice shall be received by the Administrative Agent not later than 11:00 a.m. five Business Days prior to the date of termination or reduction, (ii) any such partial reduction shall be in an aggregate amount of $10,000,000 or any whole multiple of $1,000,000 in excess thereof, (iii) the Borrower shall not terminate or reduce the Aggregate Commitments if, after giving effect thereto and to any concurrent prepayments hereunder, the Total Outstandings would exceed the Aggregate Commitments, and (iv) if, after giving effect to any reduction of the Aggregate Commitments, the Letter of Credit Sublimit exceeds the amount of the Aggregate Commitments, such Sublimit shall be automatically reduced by the amount of such excess. The Administrative Agent will promptly notify the Lenders of any such notice of termination or reduction of the Aggregate Commitments. Any reduction of the Aggregate Commitments shall be applied to the Commitment of each Lender according to its Applicable Percentage. All fees accrued until the effective date of any termination of the Aggregate Commitments shall be paid on the effective date of such termination.
2.05 Repayment of Loans . The Borrower shall repay to the Lenders on the Maturity Date the aggregate principal amount of Loans outstanding on such date.
2.06 Interest .
(a) Subject to the provisions of subsection (b)  below, (i) each Eurodollar Rate Loan shall bear interest on the outstanding principal amount thereof for each Interest Period at a rate per annum equal to the Eurodollar Rate for such Interest Period plus the Applicable Rate; and (ii) each Base Rate Loan shall bear interest on the outstanding principal amount thereof from the applicable borrowing date at a rate per annum equal to the Base Rate plus the Applicable Rate.
(b) (i) If any amount of principal of any Loan is not paid when due (without regard to any applicable grace periods), whether at stated maturity, by acceleration or otherwise, such amount shall thereafter bear interest at a fluctuating interest rate per annum at all times equal to the Default Rate to the fullest extent permitted by applicable Laws.
(ii) If any amount (other than principal of any Loan) payable by the Borrower under any Loan Document is not paid when due (without regard to any applicable grace periods), whether at stated maturity, by acceleration or otherwise, then upon the request of the Required Lenders, such amount shall thereafter bear interest at a fluctuating interest rate per annum at all times equal to the Default Rate to the fullest extent permitted by applicable Laws.
(iii) Upon the request of the Required Lenders, if any Event of Default has occurred and is continuing (other than as set forth in clauses (b)(i) and (b)(ii) above), the Borrower shall pay interest on the principal amount of all outstanding Obligations under the Loan Documents at a fluctuating interest rate per annum at all times equal to the Default Rate to the fullest extent permitted by applicable Laws.
(iv) Accrued and unpaid interest on past due amounts (including interest on past due interest) shall be due and payable upon demand.
(c) Interest on each Loan shall be due and payable in arrears on each Interest Payment Date applicable thereto and at such other times as may be specified herein. Interest hereunder shall be due and payable in accordance with the terms hereof before and after judgment, and before and after the commencement of any proceeding under any Debtor Relief Law.
 
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2.07 Fees . In addition to certain fees described in subsections (h)  and (i)  of Section 2.03 :
(a) Commitment Fee . The Borrower shall pay to the Administrative Agent for the account of each Lender in accordance with its Applicable Percentage, a commitment fee equal to the Applicable Rate times the actual daily amount by which the Aggregate Commitments exceed the sum of (i) the Outstanding Amount of Loans and (ii) the Outstanding Amount of L/C Obligations, subject to adjustment as provided in Section 2.13 . The commitment fee shall accrue at all times during the Availability Period, including at any time during which one or more of the conditions in Article IV is not met, and shall be due and payable quarterly in arrears on the last Business Day of each March, June, September and December, commencing with the first such date to occur after the Closing Date, and on the last day of the Availability Period. The commitment fee shall be calculated quarterly in arrears, and if there is any change in the Applicable Rate during any quarter, the actual daily amount shall be computed and multiplied by the Applicable Rate separately for each period during such quarter that such Applicable Rate was in effect.
(b) Other Fees . (i) The Borrower shall pay to the Arranger and the Administrative Agent for their own respective accounts fees in the amounts and at the times specified in the Fee Letter. Such fees shall be fully earned when paid and shall not be refundable for any reason whatsoever.
(ii) The Borrower shall pay to the Lenders such fees as shall have been separately agreed upon in writing in the amounts and at the times so specified. Such fees shall be fully earned when paid and shall not be refundable for any reason whatsoever.
2.08 Computation of Interest and Fees .
All computations of interest for Base Rate Loans (including Base Rate Loans determined by reference to the Eurodollar Rate) shall be made on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed. All other computations of fees and interest shall be made on the basis of a 360-day year and actual days elapsed (which results in more fees or interest, as applicable, being paid than if computed on the basis of a 365-day year). Interest shall accrue on each Loan for the day on which the Loan is made, and shall not accrue on a Loan, or any portion thereof, for the day on which the Loan or such portion is paid, provided that any Loan that is repaid on the same day on which it is made shall, subject to Section 2.10(a) , bear interest for one day. Each determination by the Administrative Agent of an interest rate or fee hereunder shall be conclusive and binding for all purposes, absent manifest error.
 
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2.09 Evidence of Debt .
(a) The Credit Extensions made by each Lender shall be evidenced by one or more accounts or records maintained by such Lender and by the Administrative Agent in the ordinary course of business. The accounts or records maintained by the Administrative Agent and each Lender shall be conclusive absent manifest error of the amount of the Credit Extensions made by the Lenders to the Borrower and the interest and payments thereon. Any failure to so record or any error in doing so shall not, however, limit or otherwise affect the obligation of the Borrower hereunder to pay any amount owing with respect to the Obligations. In the event of any conflict between the accounts and records maintained by any Lender and the accounts and records of the Administrative Agent in respect of such matters, the accounts and records of the Administrative Agent shall control in the absence of manifest error. Upon the request of any Lender made through the Administrative Agent, the Borrower shall execute and deliver to such Lender (through the Administrative Agent) a Note, which shall evidence such Lender’s Loans in addition to such accounts or records. Each Lender may attach schedules to its Note and endorse thereon the date, Type (if applicable), amount and maturity of its Loans and payments with respect thereto.
(b) In addition to the accounts and records referred to in subsection (a)  above, each Lender and the Administrative Agent shall maintain in accordance with its usual practice accounts or records evidencing the purchases and sales by such Lender of participations in Letters of Credit. In the event of any conflict between the accounts and records maintained by the Administrative Agent and the accounts and records of any Lender in respect of such matters, the accounts and records of the Administrative Agent shall control in the absence of manifest error.
2.10 Payments Generally; Administrative Agent’s Clawback .
(a) General . All payments to be made by the Borrower shall be made free and clear of and without condition or deduction for any counterclaim, defense, recoupment or setoff. Except as otherwise expressly provided herein, all payments by the Borrower hereunder shall be made to the Administrative Agent, for the account of the respective Lenders to which such payment is owed, at the Administrative Agent’s Office in Dollars and in immediately available funds not later than 2:00 p.m. on the date specified herein. The Administrative Agent will promptly distribute to each Lender its Applicable Percentage (or other applicable share as provided herein) of such payment in like funds as received by wire transfer to such Lender’s Lending Office. All payments received by the Administrative Agent after 2:00 p.m. shall be deemed received on the next succeeding Business Day and any applicable interest or fee shall continue to accrue. If any payment to be made by the Borrower shall come due on a day other than a Business Day, payment shall be made on the next following Business Day, and such extension of time shall be reflected in computing interest or fees, as the case may be.
(b) (i) Funding by Lenders; Presumption by Administrative Agent . Unless the Administrative Agent shall have received notice from a Lender prior to the proposed date of any Borrowing of Eurodollar Rate Loans (or, in the case of any Borrowing of Base Rate Loans, prior to 12:00 noon on the date of such Borrowing) that such Lender will not make available to the Administrative Agent such Lender’s share of such Borrowing, the Administrative Agent may
 
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assume that such Lender has made such share available on such date in accordance with Section 2.02 (or, in the case of a Borrowing of Base Rate Loans, that such Lender has made such share available in accordance with and at the time required by Section 2.02 ) and may, in reliance upon such assumption, make available to the Borrower a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Borrowing available to the Administrative Agent, then the applicable Lender and the Borrower severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount in immediately available funds with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date of payment to the Administrative Agent, at (A) in the case of a payment to be made by such Lender, the greater of the Federal Funds Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation, plus any administrative, processing or similar fees customarily charged by the Administrative Agent in connection with the foregoing, and (B) in the case of a payment to be made by the Borrower, the interest rate applicable to Base Rate Loans. If the Borrower and such Lender shall pay such interest to the Administrative Agent for the same or an overlapping period, the Administrative Agent shall promptly remit to the Borrower the amount of such interest paid by the Borrower for such period. If such Lender pays its share of the applicable Borrowing to the Administrative Agent, then the amount so paid shall constitute such Lender’s Loan included in such Borrowing. Any payment by the Borrower shall be without prejudice to any claim the Borrower may have against a Lender that shall have failed to make such payment to the Administrative Agent.
(ii) Payments by Borrower; Presumptions by Administrative Agent . Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Administrative Agent for the account of the Lenders or the L/C Issuer hereunder that the Borrower will not make such payment, the Administrative Agent may assume that the Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Lenders or the L/C Issuer, as the case may be, the amount due. In such event, if the Borrower has not in fact made such payment, then each of the Lenders or the L/C Issuer, as the case may be, severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender or the L/C Issuer, in immediately available funds with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the greater of the Federal Funds Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation.
A notice of the Administrative Agent to any Lender or the Borrower with respect to any amount owing under this subsection (b)  shall be conclusive, absent manifest error.
(c) Failure to Satisfy Conditions Precedent . If any Lender makes available to the Administrative Agent funds for any Loan to be made by such Lender as provided in the foregoing provisions of this Article II , and such funds are not made available to the Borrower by the Administrative Agent because the conditions to the applicable Credit Extension set forth in Article IV are not satisfied or waived in accordance with the terms hereof, the Administrative Agent shall return such funds (in like funds as received from such Lender) to such Lender, without interest.
 
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(d) Obligations of Lenders Several . The obligations of the Lenders hereunder to make Loans, to fund participations in Letters of Credit and to make payments pursuant to Section 10.04(c) are several and not joint. The failure of any Lender to make any Loan, to fund any such participation or to make any payment under Section 10.04(c) on any date required hereunder shall not relieve any other Lender of its corresponding obligation to do so on such date, and no Lender shall be responsible for the failure of any other Lender to so make its Loan, to purchase its participation or to make its payment under Section 10.04(c) .
(e) Funding Source . Nothing herein shall be deemed to obligate any Lender to obtain the funds for any Loan in any particular place or manner or to constitute a representation by any Lender that it has obtained or will obtain the funds for any Loan in any particular place or manner.
2.11 Sharing of Payments by Lenders . If any Lender shall, by exercising any right of setoff or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of the Loans made by it, or the participations in L/C Obligations held by it resulting in such Lender’s receiving payment of a proportion of the aggregate amount of such Loans or participations and accrued interest thereon greater than its pro rata share thereof as provided herein, then the Lender receiving such greater proportion shall (a) notify the Administrative Agent of such fact, and (b) purchase (for cash at face value) participations in the Loans and subparticipations in L/C Obligations of the other Lenders, or make such other adjustments as shall be equitable, so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Loans and other amounts owing them, provided that:
(i) if any such participations or subparticipations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations or subparticipations shall be rescinded and the purchase price restored to the extent of such recovery, without interest; and
(ii) the provisions of this Section shall not be construed to apply to (x) any payment made by or on behalf of the Borrower pursuant to and in accordance with the express terms of this Agreement (including the application of funds arising from the existence of a Defaulting Lender), (y) the application of Cash Collateral provided for in Section 2.12 , or (z) any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans or subparticipations in L/C Obligations to any assignee or participant, other than an assignment to the Borrower or any Subsidiary thereof (as to which the provisions of this Section shall apply).
The Borrower consents to the foregoing and agrees, to the extent it may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against the Borrower rights of setoff and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of the Borrower in the amount of such participation.
 
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2.12 Cash Collateral .
(a) Certain Credit Support Events . If (i) the L/C Issuer has honored any full or partial drawing request under any Letter of Credit and such drawing has resulted in an L/C Borrowing, (ii) as of the Letter of Credit Expiration Date, any L/C Obligation for any reason remains outstanding, (iii) the Borrower shall be required to provide Cash Collateral pursuant to Section 8.02(iii) , or (iv) there shall exist a Defaulting Lender, the Borrower shall immediately (in the case of clause (iii)  above) or within one Business Day (in all other cases) following any request by the Administrative Agent or the L/C Issuer, provide Cash Collateral in an amount not less than the applicable Minimum Collateral Amount (determined in the case of Cash Collateral provided pursuant to clause (iv)  above, after giving effect to Section 2.13(a)(iv) and any Cash Collateral provided by the Defaulting Lender).
(b) Grant of Security Interest . The Borrower, and to the extent provided by any Defaulting Lender, such Defaulting Lender, hereby grants to (and subjects to the control of) the Administrative Agent, for the benefit of the Administrative Agent, the L/C Issuer and the Lenders, and agrees to maintain, a first priority security interest in all such cash, deposit accounts and all balances therein, and all other property so provided as collateral pursuant hereto, and in all proceeds of the foregoing, all as security for the obligations to which such Cash Collateral may be applied pursuant to Section 2.12(c) . If at any time the Administrative Agent determines that Cash Collateral is subject to any right or claim of any Person other than the Administrative Agent or the L/C Issuer as herein provided, or that the total amount of such Cash Collateral is less than the Minimum Collateral Amount, the Borrower will, promptly upon demand by the Administrative Agent, pay or provide to the Administrative Agent additional Cash Collateral in an amount sufficient to eliminate such deficiency. All Cash Collateral (other than credit support not constituting funds subject to deposit) shall be maintained in one or more Controlled Accounts at Bank of America. The Borrower shall pay on demand therefor from time to time all customary account opening, activity and other administrative fees and charges in connection with the maintenance and disbursement of Cash Collateral.
(c) Application . Notwithstanding anything to the contrary contained in this Agreement, Cash Collateral provided under any of this Section 2.12 or Sections 2.03 , 2.05 , 2.13 or 8.02 in respect of Letters of Credit shall be held and applied to the satisfaction of the specific L/C Obligations, obligations to fund participations therein (including, as to Cash Collateral provided by a Defaulting Lender, any interest accrued on such obligation) and other obligations for which the Cash Collateral was so provided, prior to any other application of such property as may otherwise be provided for herein.
(d) Release . Cash Collateral (or the appropriate portion thereof) provided to reduce Fronting Exposure or to secure other obligations shall be released promptly following (i) the elimination of the applicable Fronting Exposure or other obligations giving rise thereto (including by the termination of Defaulting Lender status of the applicable Lender (or, as appropriate, its assignee following compliance with Section 10.06(b)(vi) )) or (ii) the determination by the Administrative Agent and the L/C Issuer that there exists excess Cash Collateral; provided , however, (x) any such release shall be without prejudice to, and any disbursement or other transfer of Cash Collateral shall be and remain subject to, any other Lien conferred under the Loan Documents and the other applicable provisions of the Loan
 
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Documents, and (y) the Person providing Cash Collateral and the L/C Issuer may agree that Cash Collateral shall not be released but instead held to support future anticipated Fronting Exposure or other obligations.
2.13 Defaulting Lenders .
(a) Adjustments . Notwithstanding anything to the contrary contained in this Agreement, if any Lender becomes a Defaulting Lender, then, until such time as that Lender is no longer a Defaulting Lender, to the extent permitted by applicable Law:
(i) Waivers and Amendments . Such Defaulting Lender’s right to approve or disapprove any amendment, waiver or consent with respect to this Agreement shall be restricted as set forth in the definition of “Required Lenders” and Section 10.01 .
(ii) Defaulting Lender Waterfall . Any payment of principal, interest, fees or other amounts received by the Administrative Agent for the account of such Defaulting Lender (whether voluntary or mandatory, at maturity, pursuant to Article VIII or otherwise) or received by the Administrative Agent from a Defaulting Lender pursuant to Section 10.08 shall be applied at such time or times as may be determined by the Administrative Agent as follows: first , to the payment of any amounts owing by such Defaulting Lender to the Administrative Agent hereunder; second , to the payment on a pro rata basis of any amounts owing by such Defaulting Lender to the L/C Issuer hereunder; third , to Cash Collateralize the L/C Issuer’s Fronting Exposure with respect to such Defaulting Lender in accordance with Section 2.12 ; fourth , as the Borrower may request (so long as no Default or Event of Default has occurred and is continuing), to the funding of any Loan in respect of which such Defaulting Lender has failed to fund its portion thereof as required by this Agreement, as determined by the Administrative Agent; fifth , if so determined by the Administrative Agent and the Borrower, to be held in a deposit account and released pro rata in order to (x) satisfy such Defaulting Lender’s potential future funding obligations with respect to Loans under this Agreement and (y) Cash Collateralize the L/C Issuer’s future Fronting Exposure with respect to such Defaulting Lender with respect to future Letters of Credit issued under this Agreement, in accordance with Section 2.12 ; sixth , to the payment of any amounts owing to the Lenders or the L/C Issuer as a result of any judgment of a court of competent jurisdiction obtained by any Lender or the L/C Issuer against such Defaulting Lender as a result of such Defaulting Lender’s breach of its obligations under this Agreement; seventh , so long as no Default or Event of Default has occurred and is continuing, to the payment of any amounts owing to the Borrower as a result of any judgment of a court of competent jurisdiction obtained by the Borrower against such Defaulting Lender as a result of such Defaulting Lender’s breach of its obligations under this Agreement; and eighth , to such Defaulting Lender or as otherwise directed by a court of competent jurisdiction; provided that if (x) such payment is a payment of the principal amount of any Loans or L/C Borrowings in respect of which such Defaulting Lender has not fully funded its appropriate share, and (y) such Loans were made or the related Letters of Credit were issued at a time when the conditions set forth in Section 4.02 were satisfied or waived, such payment shall be applied solely to pay the Loans of, and L/C Obligations owed to, all Non-Defaulting Lenders on a pro rata basis prior to being applied to the payment of
 
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any Loans of, or L/C Obligations owed to, such Defaulting Lender until such time as all Loans and funded and unfunded participations in L/C Obligations are held by the Lenders pro rata in accordance with the Commitments hereunder without giving effect to Section 2.13(a)(iv) . Any payments, prepayments or other amounts paid or payable to a Defaulting Lender that are applied (or held) to pay amounts owed by a Defaulting Lender or to post Cash Collateral pursuant to this Section 2.13(a)(ii) shall be deemed paid to and redirected by such Defaulting Lender, and each Lender irrevocably consents hereto.
(iii) Certain Fees .
(A) No Defaulting Lender shall be entitled to receive any fee payable under Section 2.07(a) for any period during which that Lender is a Defaulting Lender (and the Borrower shall not be required to pay any such fee that otherwise would have been required to have been paid to that Defaulting Lender).
(B) Each Defaulting Lender shall be entitled to receive Letter of Credit Fees for any period during which that Lender is a Defaulting Lender only to the extent allocable to its Applicable Percentage of the stated amount of Letters of Credit for which it has provided Cash Collateral pursuant to Section 2.12 .
(C) With respect to any Letter of Credit Fee not required to be paid to any Defaulting Lender pursuant to clause (A)  or (B)  above, the Borrower shall (x) pay to each Non-Defaulting Lender that portion of any such fee otherwise payable to such Defaulting Lender with respect to such Defaulting Lender’s participation in L/C Obligations that has been reallocated to such Non-Defaulting Lender pursuant to clause (iv)  below, (y) pay to the L/C Issuer the amount of any such fee otherwise payable to such Defaulting Lender to the extent allocable to such L/C Issuer’s Fronting Exposure to such Defaulting Lender, and (z) not be required to pay the remaining amount of any such fee.
(iv) Reallocation of Applicable Percentages to Reduce Fronting Exposure . All or any part of such Defaulting Lender’s participation in L/C Obligations shall be reallocated among the Non-Defaulting Lenders in accordance with their respective Applicable Percentages (calculated without regard to such Defaulting Lender’s Commitment) but only to the extent that (x) the conditions set forth in Section 4.02 are satisfied at the time of such reallocation (and, unless the Borrower shall have otherwise notified the Administrative Agent at such time, the Borrower shall be deemed to have represented and warranted that such conditions are satisfied at such time), and (y) such reallocation does not cause the aggregate Revolving Credit Exposure of any Non-Defaulting Lender to exceed such Non-Defaulting Lender’s Commitment. No reallocation hereunder shall constitute a waiver or release of any claim of any party hereunder against a Defaulting Lender arising from that Lender having become a Defaulting Lender, including any claim of a Non-Defaulting Lender as a result of such Non-Defaulting Lender’s increased exposure following such reallocation.
(v) Cash Collateral . If the reallocation described in clause (a)(iv) above cannot, or can only partially, be effected, the Borrower shall, without prejudice to any
 
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right or remedy available to it hereunder or under applicable Law, Cash Collateralize the L/C Issuers’ Fronting Exposure in accordance with the procedures set forth in Section 2.12.
(b) Defaulting Lender Cure . If the Borrower, the Administrative Agent and the L/C Issuer agree in writing that a Lender is no longer a Defaulting Lender, the Administrative Agent will so notify the parties hereto, whereupon as of the effective date specified in such notice and subject to any conditions set forth therein (which may include arrangements with respect to any Cash Collateral), that Lender will, to the extent applicable, purchase at par that portion of outstanding Loans of the other Lenders or take such other actions as the Administrative Agent may determine to be necessary to cause the Loans and funded and unfunded participations in Letters of Credit to be held on a pro rata basis by the Lenders in accordance with their Applicable Percentages (without giving effect to Section 2.13(a)(iv) ), whereupon such Lender will cease to be a Defaulting Lender; provided that no adjustments will be made retroactively with respect to fees accrued or payments made by or on behalf of the Borrower while that Lender was a Defaulting Lender; and provided , further , that except to the extent otherwise expressly agreed by the affected parties, no change hereunder from Defaulting Lender to Lender will constitute a waiver or release of any claim of any party hereunder arising from that Lender’s having been a Defaulting Lender.
2.14 Increase in Commitments .
(a) Request for Increase . Provided no Event of Default has occurred and is continuing, upon notice to the Administrative Agent (which shall promptly notify the Lenders), the Borrower may from time to time request an increase in the Aggregate Commitments by an amount (for all such requests) not exceeding $50,000,000 in the aggregate; provided that (i) any such request for an increase shall be in a minimum amount of $10,000,000, (ii) the Borrower may make a maximum of three such requests, and (iii) the new or increased Commitment of each new or increasing Lender shall be on terms and conditions identical to those of the existing Lenders immediately prior to such increase (other than with respect to fees). At the time of sending such notice, the Borrower (in consultation with the Administrative Agent) shall specify the time period within which each Lender is requested to respond (which shall in no event be less than ten Business Days from the date of delivery of such notice to the Lenders).
(b) Lender Elections to Increase . Each Lender shall notify the Administrative Agent within such time period whether or not it agrees to increase its Commitment and, if so, whether by an amount equal to, greater than, or less than its Applicable Percentage of such requested increase. Any Lender not responding within such time period shall be deemed to have declined to increase its Commitment.
(c) Notification by Administrative Agent; Additional Lenders . The Administrative Agent shall notify the Borrower and each Lender of the Lenders’ responses to each request made hereunder. To achieve the full amount of a requested increase and subject to the approval of the Administrative Agent and the L/C Issuer, such approval not to be unreasonably withheld or delayed, the Borrower may also invite additional Eligible Assignees to become Lenders pursuant to a joinder agreement in form and substance reasonably satisfactory to the Administrative Agent and its counsel.
 
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(d) Effective Date and Allocations . If the Aggregate Commitments are increased in accordance with this Section, the Administrative Agent and the Borrower shall determine the effective date (the “ Increase Effective Date ”) and the final allocation of such increase. The Administrative Agent shall promptly notify the Borrower and the Lenders of the final allocation of such increase and the Increase Effective Date.
(e) Conditions to Effectiveness of Increase . As a condition precedent to such increase, the Borrower shall deliver to the Administrative Agent a certificate of each Loan Party dated as of the Increase Effective Date (in sufficient copies for each Lender) signed by a Responsible Officer of such Loan Party (i) certifying and attaching the resolutions adopted by such Loan Party approving or consenting to such increase, and (ii) in the case of the Borrower, certifying that, before and after giving effect to such increase, (A) the representations and warranties contained in Article V and the other Loan Documents are true and correct on and as of the Increase Effective Date, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they are true and correct as of such earlier date, and except that for purposes of this Section 2.14 , the representations and warranties contained in subsections (a)  and (b)  of Section 5.05 shall be deemed to refer to the most recent statements furnished pursuant to subsections (a)  and (b) , respectively, of Section 6.01 , and (B) no Default or Event of Default has occurred and is continuing or would result therefrom. On the Increase Effective Date, each Lender (including any new Lender) participating in such Commitment increase shall purchase and assume from each existing Lender having Loans outstanding on such Increase Effective Date, without recourse or warranty, an undivided interest and participation, to the extent of such Lender’s ratable portion of the Aggregate Commitments (after giving effect to such Commitment increase), in the aggregate Loans then outstanding, so as to ensure that, on the Increase Effective Date after giving effect to such Commitment increase, each Lender is owed only its ratable portion of the Loans outstanding on such Increase Effective Date.
(f) Conflicting Provisions . This Section shall supersede any provisions in Section 2.11 or 10.01 to the contrary.
ARTICLE III.
TAXES, YIELD PROTECTION AND ILLEGALITY
3.01 Taxes .
(a) Payments Free of Taxes; Obligation to Withhold; Payments on Account of Taxes .
Any and all payments by or on account of any obligation of any Loan Party under any Loan Document shall be made without deduction or withholding for any Taxes, except as required by applicable law. If any applicable law (as determined in the good faith discretion of an applicable Withholding Agent) requires the deduction or withholding of any Tax from any such payment by a Withholding Agent, then the applicable Withholding Agent shall be entitled to make such deduction or withholding and shall timely pay the full amount deducted or withheld to the relevant Governmental Authority in accordance with applicable law and, if such Tax is an Indemnified Tax, then the sum payable by the applicable Loan Party shall be increased as necessary so that after such deduction or withholding has been made (including such deductions
 
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and withholdings for Indemnified Taxes applicable to additional sums payable under this Section 3.01(a) ) the applicable Recipient receives an amount equal to the sum it would have received had no such deduction or withholding been made.
(b) Payment of Other Taxes by the Borrower . Without limiting the provisions of subsection (a)  above, the Loan Parties shall timely pay to the relevant Governmental Authority in accordance with applicable law, or at the option of the Administrative Agent timely reimburse it for the payment of, any Other Taxes.
(c) Tax Indemnifications . (i) Each of the Loan Parties shall jointly and severally indemnify each Recipient, and shall make payment in respect thereof within 10 days after demand therefor, for the full amount of any Indemnified Taxes (including Indemnified Taxes imposed or asserted on or attributable to amounts payable under this Section 3.01 ) payable or paid by such Recipient or required to be withheld or deducted from a payment to such Recipient, and any reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability (setting forth in reasonable detail the basis of such Indemnified Tax) delivered to the Borrower by a Lender or the L/C Issuer (with a copy to the Administrative Agent), or by the Administrative Agent on its own behalf or on behalf of a Lender or the L/C Issuer, shall be conclusive absent manifest error. Each of the Loan Parties shall, and does hereby, jointly and severally indemnify the Administrative Agent, and shall make payment in respect thereof within 10 days after demand therefor, for any amount which a Lender or the L/C Issuer for any reason fails to pay indefeasibly to the Administrative Agent as required pursuant to Section 3.01(c)(ii) below; provided that such indemnity shall not, as to the Administrative Agent, be available to the extent that such amount is determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of the Administrative Agent.
(ii) Each Lender and the L/C Issuer shall, and does hereby, severally indemnify, and shall make payment in respect thereof within 10 days after demand therefor, ( x ) the Administrative Agent against any Indemnified Taxes attributable to such Lender or the L/C Issuer (but only to the extent that any Loan Party has not already indemnified the Administrative Agent for such Indemnified Taxes and without limiting the obligation of the Loan Parties to do so), ( y ) the Administrative Agent and the Loan Parties, as applicable, against any Taxes attributable to such Lender’s failure to comply with the provisions of Section 10.06(d) relating to the maintenance of a Participant Register and ( z ) the Administrative Agent and the Loan Parties, as applicable, against any Excluded Taxes attributable to such Lender or the L/C Issuer, in each case, that are payable or paid by the Administrative Agent or a Loan Party in connection with any Loan Document, and any reasonable expenses arising therefrom or with respect thereto, whether or not such Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to any Lender by the Administrative Agent shall be conclusive absent manifest error. Each Lender and the L/C Issuer hereby authorizes the Administrative Agent to set off and apply any and all amounts at any time owing to such Lender or the L/C Issuer, as the case may be, under this Agreement or any other Loan Document against any amount due to the Administrative Agent under this clause (ii) .
 
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(d) Evidence of Payments . Upon request by the Borrower or the Administrative Agent, as the case may be, after any payment of Taxes by the Borrower or by the Administrative Agent to a Governmental Authority as provided in this Section 3.01 , the Borrower shall deliver to the Administrative Agent or the Administrative Agent shall deliver to the Borrower, as the case may be, the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of any return required by Laws to report such payment or other evidence of such payment reasonably satisfactory to the Borrower or the Administrative Agent, as the case may be.
(e) Status of Lenders; Tax Documentation .
(i) Any Lender (which, for purposes of this Section 3.01(e) , shall include the L/C Issuer and the Administrative Agent) that is entitled to an exemption from or reduction of withholding Tax with respect to payments made under any Loan Document shall deliver to the Borrower and the Administrative Agent, at the time or times reasonably requested by the Borrower or the Administrative Agent, such properly completed and executed documentation reasonably requested by the Borrower or the Administrative Agent as will permit such payments to be made without withholding or at a reduced rate of withholding. In addition, any Lender, if reasonably requested by the Borrower or the Administrative Agent, shall deliver such other documentation prescribed by applicable law or reasonably requested by the Borrower or the Administrative Agent as will enable the Borrower or the Administrative Agent to determine whether or not such Lender is subject to backup withholding or information reporting requirements. Notwithstanding anything to the contrary in the preceding two sentences, the completion, execution and submission of such documentation (other than such documentation set forth in Section 3.01(e)(ii)(A) , (ii)(B) and (ii)(D) below) shall not be required if in the Lender’s reasonable judgment such completion, execution or submission would subject such Lender to any material unreimbursed cost or expense or would materially prejudice the legal or commercial position of such Lender.
(ii) Without limiting the generality of the foregoing,
(A) any Lender that is a U.S. Person shall deliver to the Borrower and the Administrative Agent on or prior to the date on which such Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of the Borrower or the Administrative Agent), properly completed and executed originals of IRS Form W-9 certifying that such Lender is exempt from U.S. federal backup withholding tax;
(B) any Foreign Lender shall, to the extent it is legally entitled to do so, deliver to the Borrower and the Administrative Agent (in such number of copies as shall be requested by the recipient) on or prior to the date on which such Foreign Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of the Borrower or the Administrative Agent), whichever of the following is applicable:
(I) in the case of a Foreign Lender claiming the benefits of an income tax treaty to which the United States is a party (x) with respect to payments of interest under any Loan Document, properly completed and executed originals of IRS Form W-8BEN or IRS Form W-8BEN-E (or the applicable successor form) establishing an exemption from, or reduction of, U.S. federal withholding Tax pursuant to the “interest” article of such tax treaty and (y) with respect to any other applicable payments under any Loan Document, properly completed and executed originals of IRS Form W-8BEN or IRS Form W-8BEN-E (or the applicable successor form) establishing an exemption from, or reduction of, U.S. federal withholding Tax pursuant to the “business profits” or “other income” article of such tax treaty;
 
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(II) properly completed and executed originals of IRS Form W-8ECI;
(III) in the case of a Foreign Lender claiming the benefits of the exemption for portfolio interest under Section 881(c) of the Code, (x) a certificate substantially in the form of Exhibit G-1 to the effect that such Foreign Lender is not a “bank” within the meaning of Section 881(c)(3)(A) of the Code, a “10 percent shareholder” of the Borrower within the meaning of Section 881(c)(3)(B) of the Code, or a “controlled foreign corporation” described in Section 881(c)(3)(C) of the Code (a “ U.S. Tax Compliance Certificate ”) and (y) properly completed and executed originals of IRS Form W-8BEN or IRS Form W-8BEN-E (or the applicable successor form); or
(IV) to the extent a Foreign Lender is not the beneficial owner, properly completed and executed originals of IRS Form W-8IMY, accompanied by IRS Form W-8ECI, IRS Form W-8BEN, IRS Form W-8BEN-E (or the applicable successor form), a U.S. Tax Compliance Certificate substantially in the form of Exhibit G-2 or Exhibit G-3 , IRS Form W-9, and/or other certification documents from each beneficial owner, as applicable; provided that if the Foreign Lender is a partnership and one or more direct or indirect partners of such Foreign Lender are claiming the portfolio interest exemption, such Foreign Lender may provide a U.S. Tax Compliance Certificate substantially in the form of Exhibit G-4 on behalf of each such direct and indirect partner;
(C) any Foreign Lender shall, to the extent it is legally entitled to do so, deliver to the Borrower and the Administrative Agent (in such number of copies as shall be requested by the recipient) on or prior to the date on which such Foreign Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of the Borrower or the Administrative Agent), executed originals of any other form prescribed by applicable law as a basis for claiming exemption from or a reduction in U.S. federal withholding Tax, duly completed, together with such supplementary documentation as may be prescribed by applicable law to permit the Borrower or the Administrative Agent to determine the withholding or deduction required to be made; and
 
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(D) if a payment made to a Lender under any Loan Document would be subject to U.S. federal withholding Tax imposed by FATCA if such Lender were to fail to comply with the applicable reporting requirements of FATCA (including those contained in Section 1471(b) or 1472(b) of the Code, as applicable), such Lender shall deliver to the Borrower and the Administrative Agent at the time or times prescribed by law and at such time or times reasonably requested by the Borrower or the Administrative Agent such documentation prescribed by applicable law (including as prescribed by Section 1471(b)(3)(C)(i) of the Code) and such additional documentation reasonably requested by the Borrower or the Administrative Agent as may be necessary for the Borrower and the Administrative Agent to comply with their obligations under FATCA and to determine that such Lender has complied with such Lender’s obligations under FATCA or to determine the amount to deduct and withhold from such payment. Solely for purposes of this clause (D), “FATCA” shall include any amendments made to FATCA after the date of this Agreement.
(iii) Each Lender agrees that if any form or certification it previously delivered pursuant to this Section 3.01 expires or becomes obsolete or inaccurate in any respect, it shall update such form or certification or promptly notify the Borrower and the Administrative Agent in writing of its legal inability to do so.
(f) Treatment of Certain Refunds . If any Recipient determines, in its sole discretion exercised in good faith, that it has received a refund of any Taxes as to which it has been indemnified by any Loan Party or with respect to which any Loan Party has paid additional amounts pursuant to this Section 3.01 , it shall pay to the Loan Party an amount equal to such refund (but only to the extent of indemnity payments made, or additional amounts paid, by a Loan Party under this Section 3.01 with respect to the Taxes giving rise to such refund), net of all out-of-pocket expenses (including Taxes) incurred by such Recipient, and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund), provided that the Loan Party, upon the request of such Recipient, agrees to repay the amount paid over to the Loan Party pursuant to this subsection (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) to such Recipient in the event such Recipient is required to repay such refund to such Governmental Authority. Notwithstanding anything to the contrary in this subsection, in no event will the applicable Recipient be required to pay any amount to the Loan Party pursuant to this subsection the payment of which would place the Recipient in a less favorable net after-Tax position than such Recipient would have been in if the Tax subject to indemnification and giving rise to such refund had not been deducted, withheld or otherwise imposed and the indemnification payments or additional amounts with respect to such Tax had never been paid. This subsection shall not be construed to require any Recipient to make available its tax returns (or any other information relating to its Taxes that it deems confidential) to any Loan Party or any other Person.
(g) Survival . Each party’s obligations under this Section 3.01 shall survive the resignation or replacement of the Administrative Agent or any assignment of rights by, or the replacement of, a Lender or the L/C Issuer, the termination of the Commitments and the repayment, satisfaction or discharge of all other Obligations under the Loan Documents.
(h) Defined Term . For purposes of this Section 3.01 , the term “applicable law” includes FATCA.
 
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3.02 Illegality . If any Lender determines that any Law has made it unlawful, or that any Governmental Authority has asserted that it is unlawful, for any Lender or its Lending Office to make, maintain or fund Loans whose interest is determined by reference to the Eurodollar Rate, or to determine or charge interest rates based upon the Eurodollar Rate, or any Governmental Authority has imposed material restrictions on the authority of such Lender to purchase or sell, or to take deposits of, Dollars in the London interbank market, then, on notice thereof by such Lender to the Borrower through the Administrative Agent, (i) any obligation of such Lender to make or continue Eurodollar Rate Loans or to convert Base Rate Loans to Eurodollar Rate Loans shall be suspended, and (ii) if such notice asserts the illegality of such Lender making or maintaining Base Rate Loans the interest rate on which is determined by reference to the Eurodollar Rate component of the Base Rate, the interest rate on which Base Rate Loans of such Lender shall, if necessary to avoid such illegality, be determined by the Administrative Agent without reference to the Eurodollar Rate component of the Base Rate, in each case until such Lender notifies the Administrative Agent and the Borrower that the circumstances giving rise to such determination no longer exist. Upon receipt of such notice, (x) the Borrower shall, upon demand from such Lender (with a copy to the Administrative Agent), prepay or, if applicable, convert all Eurodollar Rate Loans of such Lender to Base Rate Loans (the interest rate on which Base Rate Loans of such Lender shall, if necessary to avoid such illegality, be determined by the Administrative Agent without reference to the Eurodollar Rate component of the Base Rate), either on the last day of the Interest Period therefor, if such Lender may lawfully continue to maintain such Eurodollar Rate Loans to such day, or immediately, if such Lender may not lawfully continue to maintain such Eurodollar Rate Loans and (y) if such notice asserts the illegality of such Lender determining or charging interest rates based upon the Eurodollar Rate, the Administrative Agent shall during the period of such suspension compute the Base Rate applicable to such Lender without reference to the Eurodollar Rate component thereof until the Administrative Agent is advised in writing by such Lender that it is no longer illegal for such Lender to determine or charge interest rates based upon the Eurodollar Rate. Upon any such prepayment or conversion, the Borrower shall also pay accrued interest on the amount so prepaid or converted.
3.03 Inability to Determine Rates . If in connection with any request for a Eurodollar Rate Loan or a conversion to or continuation thereof, (a) the Administrative Agent determines that (i) Dollar deposits are not being offered to banks in the London interbank Eurodollar market for the applicable amount and Interest Period of such Eurodollar Rate Loan, or (ii) adequate and reasonable means do not exist for determining the Eurodollar Rate for any requested Interest Period with respect to a proposed Eurodollar Rate Loan or in connection with an existing or proposed Base Rate Loan (in each case with respect to clause (a) (i) above, “ Impacted Loans ”), or (b) the Administrative Agent or the Required Lenders determine that for any reason the Eurodollar Rate for any requested Interest Period with respect to a proposed Eurodollar Rate Loan does not adequately and fairly reflect the cost to such Lenders of funding such Eurodollar Rate Loan, the Administrative Agent will promptly so notify the Borrower and each Lender.
 
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Thereafter, (x) the obligation of the Lenders to make or maintain Eurodollar Rate Loans shall be suspended, (to the extent of the affected Eurodollar Rate Loans or Interest Periods), and (y) in the event of a determination described in the preceding sentence with respect to the Eurodollar Rate component of the Base Rate, the utilization of the Eurodollar Rate component in determining the Base Rate shall be suspended, in each case until the Administrative Agent upon the instruction of the Required Lenders revokes such notice. Upon receipt of such notice, the Borrower may revoke any pending request for a Borrowing of, conversion to or continuation of Eurodollar Rate Loans (to the extent of the affected Eurodollar Rate Loans or Interest Periods) or, failing that, will be deemed to have converted such request into a request for a Borrowing of Base Rate Loans in the amount specified therein.
Notwithstanding the foregoing, if the Administrative Agent has made the determination described in clause (a) (i) of this section, the Administrative Agent, in consultation with the Borrower and the affected Lenders, may establish an alternative interest rate for the Impacted Loans , in which case, such alternative rate of interest shall apply with respect to the Impacted Loans until (1) the Administrative Agent revokes the notice delivered with respect to the Impacted Loans under clause (a) of the first sentence of this section, (2) the Administrative Agent or the Required Lenders notify the Administrative Agent and the Borrower that such alternative interest rate does not adequately and fairly reflect the cost to such Lenders of funding the Impacted Loans, or (3) any Lender determines that any Law has made it unlawful, or that any Governmental Authority has asserted that it is unlawful, for such Lender or its applicable Lending Office to make, maintain or fund Loans whose interest is determined by reference to such alternative rate of interest or to determine or charge interest rates based upon such rate or any Governmental Authority has imposed material restrictions on the authority of such Lender to do any of the foregoing and provides the Administrative Agent and the Borrower written notice thereof.
3.04 Increased Costs; Reserves on Eurodollar Rate Loans .
(a) Increased Costs Generally . If any Change in Law shall:
(i) impose, modify or deem applicable any reserve, special deposit, compulsory loan, insurance charge or similar requirement against assets of, deposits with or for the account of, or credit extended or participated in by, any Lender (except any reserve requirement contemplated by Section 3.04(e) ) or the L/C Issuer;
(ii) subject any Recipient to any Taxes (other than (A) Indemnified Taxes, (B) Taxes described in clauses (b) through (d) of the definition of Excluded Taxes and (C) Connection Income Taxes) on its loans, loan principal, letters of credit, commitments, or other obligations, or its deposits, reserves, other liabilities or capital attributable thereto; or
(iii) impose on any Lender or the L/C Issuer or the London interbank market any other condition, cost or expense (other than Taxes) affecting this Agreement or Eurodollar Rate Loans made by such Lender or any Letter of Credit or participation therein;
 
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and the result of any of the foregoing shall be to increase the cost to such Lender of making, converting to, continuing or maintaining any Loan the interest on which is determined by reference to the Eurodollar Rate (or of maintaining its obligation to make any such Loan), or to increase the cost to such Lender or the L/C Issuer of participating in, issuing or maintaining any Letter of Credit (or of maintaining its obligation to participate in or to issue any Letter of Credit), or to reduce the amount of any sum received or receivable by such Lender or the L/C Issuer hereunder (whether of principal, interest or any other amount) then, upon request of such Lender or the L/C Issuer, the Borrower will pay to such Lender or the L/C Issuer, as the case may be, such additional amount or amounts as will compensate such Lender or the L/C Issuer, as the case may be, for such additional costs incurred or reduction suffered.
(b) Capital Requirements . If any Lender or the L/C Issuer determines that any Change in Law affecting such Lender or the L/C Issuer or any Lending Office of such Lender or such Lender’s or the L/C Issuer’s holding company, if any, regarding capital or liquidity requirements has or would have the effect of reducing the rate of return on such Lender’s or the L/C Issuer’s capital or on the capital of such Lender’s or the L/C Issuer’s holding company, if any, as a consequence of this Agreement, the Commitments of such Lender or the Loans made by, or participations in Letters of Credit held by, such Lender, or the Letters of Credit issued by the L/C Issuer, to a level below that which such Lender or the L/C Issuer or such Lender’s or the L/C Issuer’s holding company could have achieved but for such Change in Law (taking into consideration such Lender’s or the L/C Issuer’s policies and the policies of such Lender’s or the L/C Issuer’s holding company with respect to capital adequacy), then from time to time the Borrower will pay to such Lender or the L/C Issuer, as the case may be, such additional amount or amounts as will compensate such Lender or the L/C Issuer or such Lender’s or the L/C Issuer’s holding company for any such reduction suffered.
(c) Certificates for Reimbursement . A certificate of a Lender or the L/C Issuer setting forth the amount or amounts necessary to compensate such Lender or the L/C Issuer or its holding company, as the case may be, as specified in subsection (a)  or (b)  of this Section and delivered to the Borrower shall be conclusive absent manifest error. The Borrower shall pay such Lender or the L/C Issuer, as the case may be, the amount shown as due on any such certificate within 10 days after receipt thereof.
(d) Delay in Requests . Failure or delay on the part of any Lender or the L/C Issuer to demand compensation pursuant to the foregoing provisions of this Section 3.04 shall not constitute a waiver of such Lender’s or the L/C Issuer’s right to demand such compensation, provided that the Borrower shall not be required to compensate a Lender or the L/C Issuer pursuant to the foregoing provisions of this Section for any increased costs incurred or reductions suffered more than nine months prior to the date that such Lender or the L/C Issuer, as the case may be, notifies the Borrower of the Change in Law giving rise to such increased costs or reductions and of such Lender’s or the L/C Issuer’s intention to claim compensation therefor (except that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the nine-month period referred to above shall be extended to include the period of retroactive effect thereof).
(e) Reserves on Eurodollar Rate Loans . The Borrower shall pay to each Lender, as long as such Lender shall be required by Law to maintain reserves with respect to liabilities or
 
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assets consisting of or including Eurocurrency funds or deposits (currently known as “Eurocurrency liabilities”), additional interest on the unpaid principal amount of each Eurodollar Rate Loan equal to the actual costs of such reserves allocated to such Loan by such Lender (as determined by such Lender in good faith, which determination shall be conclusive), which shall be due and payable on each date on which interest is payable on such Loan, provided the Borrower shall have received at least 10 days’ prior notice (with a copy to the Administrative Agent) of such additional interest from such Lender. If a Lender fails to give notice 10 days prior to the relevant Interest Payment Date, such additional interest shall be due and payable 10 days from receipt of such notice.
3.05 Compensation for Losses . Upon demand of any Lender (with a copy to the Administrative Agent) from time to time, the Borrower shall promptly compensate such Lender for and hold such Lender harmless from any loss, cost or expense incurred by it as a result of:
(a) any continuation, conversion, payment or prepayment of any Loan other than a Base Rate Loan on a day other than the last day of the Interest Period for such Loan (whether voluntary, mandatory, automatic, by reason of acceleration, or otherwise);
(b) any failure by the Borrower (for a reason other than the failure of such Lender to make a Loan) to prepay, borrow, continue or convert any Loan other than a Base Rate Loan on the date or in the amount notified by the Borrower; or
(c) any assignment of a Eurodollar Rate Loan on a day other than the last day of the Interest Period therefor as a result of a request by the Borrower pursuant to Section 10.13 ;
including any loss of anticipated profits and any loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain such Loan or from fees payable to terminate the deposits from which such funds were obtained. The Borrower shall also pay any customary administrative fees charged by such Lender in connection with the foregoing.
For purposes of calculating amounts payable by the Borrower to the Lenders under this Section 3.05 , each Lender shall be deemed to have funded each Eurodollar Rate Loan made by it at the Eurodollar Rate for such Loan by a matching deposit or other borrowing in the London interbank eurodollar market for a comparable amount and for a comparable period, whether or not such Eurodollar Rate Loan was in fact so funded.
3.06 Mitigation Obligations; Replacement of Lenders .
(a) Designation of a Different Lending Office . If any Lender requests compensation under Section 3.04 , or the Borrower is required to pay any Indemnified Taxes or additional amounts to any Lender or the L/C Issuer, or any Governmental Authority for the account of any Lender or the L/C Issuer pursuant to Section 3.01 , or if any Lender gives a notice pursuant to Section 3.02 , then at the request of the Borrower such Lender or the L/C Issuer shall, as applicable, use reasonable efforts to designate a different Lending Office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the judgment of such Lender or the L/C Issuer, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 3.01 or 3.04 , as the case may be, in the future, or eliminate the need for the notice pursuant to Section 3.02 , as
 
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applicable, and (ii) in each case, would not subject such Lender or the L/C Issuer, as the case may be, to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender or the L/C Issuer, as the case may be. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender or the L/C Issuer in connection with any such designation or assignment.
(b) Replacement of Lenders . If any Lender requests compensation under Section 3.04 , or if the Borrower is required to pay any Indemnified Taxes or additional amounts to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 3.01 , the Borrower may replace such Lender in accordance with Section 10.13 .
3.07 Survival . All of the Borrower’s obligations under this Article III shall survive termination of the Aggregate Commitments, repayment of all other Obligations under the Loan Documents, and resignation of the Administrative Agent.
ARTICLE IV.
CONDITIONS PRECEDENT TO CREDIT EXTENSIONS
4.01 Conditions of Initial Credit Extension . The obligation of the L/C Issuer and each Lender to make its initial Credit Extension hereunder is subject to satisfaction of the following conditions precedent:
(a) The Administrative Agent’s receipt of the following, each of which shall be originals or telecopies (followed promptly by originals) unless otherwise specified, each properly executed by a Responsible Officer of the signing Loan Party, each dated the Closing Date (or, in the case of certificates of governmental officials, a recent date before the Closing Date) and each in form and substance satisfactory to the Administrative Agent and each of the Lenders:
(i) executed counterparts of (A) this Agreement, (B) the Guaranty and (C) the Borrower Security Agreement;
(ii) a Note executed by the Borrower in favor of each Lender requesting a Note;
(iii) such certificates of resolutions or other action, incumbency certificates and/or other certificates of Responsible Officers of each Loan Party as the Administrative Agent may require evidencing the identity, authority and capacity of each Responsible Officer thereof authorized to act as a Responsible Officer in connection with this Agreement and the other Loan Documents to which such Loan Party is a party;
(iv) such documents and certifications as the Administrative Agent may reasonably require to evidence that each Loan Party is duly organized or formed, and that the Borrower and each Loan Party is validly existing, in good standing and qualified to engage in business in each jurisdiction where its ownership, lease or operation of properties or the conduct of its business requires such qualification, except to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect;
 
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(v) a favorable opinion of Baker Botts L.L.P., counsel to the Loan Parties, addressed to the Administrative Agent and each Lender, as to the matters set forth in Exhibit F and such other matters concerning the Loan Parties and the Loan Documents as the Required Lenders may reasonably request;
(vi) a certificate of a Responsible Officer of each Loan Party either (A) attaching copies of all consents, licenses and approvals required in connection with the execution, delivery and performance by such Loan Party and the validity against such Loan Party of the Loan Documents to which it is a party, and such consents, licenses and approvals shall be in full force and effect, or (B) stating that no such consents, licenses or approvals are so required;
(vii) a certificate signed by a Responsible Officer of the Borrower certifying (A) that the conditions specified in Sections 4.02(a) and (b)  have been satisfied, (B) that there has been no event or circumstance since the date of the Audited Financial Statements that has had or could be reasonably expected to have, either individually or in the aggregate, a Material Adverse Effect; and (C) a calculation of the Consolidated Cash Flow Available for Debt Service and Consolidated Debt Service Coverage Ratio as of the last day of the fiscal quarter of the Borrower ended September 30, 2014;
(viii) a customary solvency certificate from the chief financial officer, treasurer or another senior financial or accounting officer of the Borrower certifying as to the solvency of the Borrower and its Subsidiaries on a consolidated basis after giving effect to the transactions contemplated hereby in form and substance reasonably satisfactory to the Administrative Agent; and
(ix) such other assurances, certificates, documents, consents or opinions as the Administrative Agent, the L/C Issuer or the Required Lenders reasonably may require.
(b) Any fees required to be paid on or before the Closing Date shall have been paid.
(c) Unless waived by the Administrative Agent, the Borrower shall have paid all fees, charges and disbursements of counsel to the Administrative Agent (directly to such counsel if requested by the Administrative Agent) to the extent invoiced prior to or on the Closing Date, plus such additional amounts of such fees, charges and disbursements as shall constitute its reasonable estimate of such fees, charges and disbursements incurred or to be incurred by it through the closing proceedings ( provided that such estimate shall not thereafter preclude a final settling of accounts between the Borrower and the Administrative Agent).
(d) The Administrative Agent and the Arranger shall have received copies of:
(i) the Audited Financial Statements;
(ii) (A) the unaudited consolidated balance sheets of the Borrower and its Subsidiaries for each fiscal quarter ended after the calendar year ended December 31, 2013, ended at least 45 days prior to the Closing Date and the related consolidated statements of operations, the related consolidated statement of partners’ capital and the related consolidated statement of cash flows for the corresponding period certified by a
 
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Responsible Officer as (i) being prepared in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein, and (ii) fairly presenting the financial condition of the Borrower and its Subsidiaries as of the date thereof and their results of operations for the period covered thereby, subject, in the case of clauses (i) and (ii), to the absence of footnotes and to normal year-end audit adjustments and (B) the unaudited consolidated balance sheets of Sharyland and its Subsidiaries for each fiscal quarter ended after the calendar year ended December 31, 2013, ended at least 45 days prior to the Closing Date and the related consolidated statement of operations, the related consolidated statement of partners’ capital and the related consolidated statement of cash flows for the corresponding period certified by a Responsible Officer of Sharyland as (i) being prepared in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein, and (ii) fairly presenting the financial condition of Sharyland and its Subsidiaries as of the date thereof and their results of operations for the period covered thereby, subject, in the case of clauses (i) and (ii), to the absence of footnotes and to normal year-end audit adjustments; and
(iii) projections of the Borrower through 2018 that are not, in the reasonable determination of the Administrative Agent, materially inconsistent in an adverse manner with any comparable projections delivered to the Administrative Agent prior to the Closing Date.
(e) During the period from December 31, 2013 to the Closing Date, there shall have been no development or event that has had or could reasonably be expected to have a Material Adverse Effect.
(f) The Administrative Agent shall have received, at least 5 days prior to the Closing Date, all documentation and other information required by regulatory authorities under applicable “know your customer” and anti-money laundering rules and regulations, including the USA PATRIOT ACT.
(g) The Administrative Agent shall have received satisfactory evidence that all existing Indebtedness other than Indebtedness permitted pursuant to Section 7.06 , of the Borrower and its Subsidiaries, shall have been repaid or cancelled and all documentation representing such indebtedness shall have been terminated.
(h) The Borrower shall have delivered to the Administrative Agent certified copies of Requests for Information or Copies (Form UCC-11), or equivalent reports, each of recent date listing all effective financing statements that name the Borrower or TDC as a debtor and that are filed in the jurisdictions in which filing of a financing statement is necessary to perfect the security interests purported to be created by the Security Documents, together with copies of such financing statements (none of which shall cover the Collateral except (x) those with respect to which appropriate termination statements executed by the secured lender thereunder have been delivered to the Administrative Agent and (y) to the extent evidencing Permitted Liens).
(i) The Security Document Joinder Conditions shall have been satisfied.
 
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Without limiting the generality of the provisions of the last paragraph of Section 9.03 , for purposes of determining compliance with the conditions specified in this Section 4.01 , each Lender that has signed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to a Lender unless the Administrative Agent shall have received notice from such Lender prior to the proposed Closing Date specifying its objection thereto.
4.02 Conditions to all Credit Extensions . The obligation of each Lender to honor any Request for Credit Extension (other than a Loan Notice requesting only a conversion of Loans to the other Type, or a continuation of Eurodollar Rate Loans) is subject to the following conditions precedent:
(a) The representations and warranties of the Borrower contained in Article V or any other Loan Document, or which are contained in any document furnished at any time under or in connection herewith or therewith, shall be true and correct on and as of the date of such Credit Extension, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they shall be true and correct as of such earlier date, and except that for purposes of this Section 4.02 , the representations and warranties contained in subsections (a)  and (b)  of Section 5.05 shall be deemed to refer to the most recent statements furnished pursuant to subsections (a)  and (b) , respectively, of Section 6.01 .
(b) No Default or Event of Default shall have occurred and is continuing, or will occur and be continuing immediately after giving effect to such proposed Credit Extension and the application of the proceeds thereof.
(c) The Administrative Agent and, if applicable, the L/C Issuer shall have received a Request for Credit Extension in accordance with the requirements hereof.
Each Request for Credit Extension (other than a Loan Notice requesting only a conversion of Loans to the other Type or a continuation of Eurodollar Rate Loans) submitted by the Borrower shall be deemed to be a representation and warranty that the conditions specified in Sections 4.02(a) and (b)  have been satisfied on and as of the date of the applicable Credit Extension (other than the required satisfaction of the Administrative Agent or any Lender as specified therein or as waived).
ARTICLE V.
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Administrative Agent and the Lenders that:
5.01 Existence, Qualification and Power . The General Partner and each other Loan Party (a) is duly organized or formed, validly existing and, as applicable, in good standing under the Laws of the jurisdiction of its incorporation or organization, (b) has all requisite power and authority to (i) own or lease its assets and carry on its business and (ii) execute and deliver the Loan Documents to which it is a party (or in the case of the Borrower, the General Partner, on
 
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behalf of the Borrower) and (iii) perform its obligations under the Loan Documents to which it is a party, and (c) is duly qualified and is licensed and, as applicable, in good standing under the Laws of each jurisdiction where its ownership, lease or operation of properties or the conduct of its business requires such qualification or license; except in each case referred to in clause (b)(i) or (c) , to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect. The General Partner and each other Loan Party has all requisite governmental licenses, authorizations, consents and approvals that are material to its business.
5.02 Authorization; No Contravention . The execution and delivery by each Loan Party (or, in the case of the Borrower, by the General Partner on behalf of the Borrower), and the performance by each Loan Party, of each Loan Document to which such Person is party, have been duly authorized by all necessary corporate or other organizational action, and do not and will not (a) contravene the terms of any of such Person’s Organization Documents; (b) conflict with or result in any breach or contravention of, or the creation of any Lien under, or require any payment to be made under (i) any material Contractual Obligation to which such Person is a party or affecting such Person or the properties of such Person or (ii) any order, injunction, writ or decree of any Governmental Authority or any arbitral award to which such Person or its property is subject; or (c) violate any Law applicable to such Person, in each case with respect to clauses (b) and (c), that could reasonably be expected to result in a Material Adverse Effect.
5.03 Governmental Authorization; Other Consents . No approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority or any other Person is necessary or required in connection with the execution or delivery by any Loan Party (or, in the case of the Borrower, by the General Partner on behalf of the Borrower), or the performance by or enforcement against any Loan Party, of this Agreement or any other Loan Document.
5.04 Binding Effect . This Agreement has been, and each other Loan Document, when delivered hereunder, will have been, duly executed and delivered by each Loan Party (or, in the case of the Borrower, by the General Partner on behalf of the Borrower) that is party thereto. This Agreement constitutes, and each other Loan Document when so delivered will constitute, a legal, valid and binding obligation of such Loan Party, enforceable against each Loan Party that is party thereto in accordance with its terms, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors’ rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).
5.05 Financial Statements; No Material Adverse Effect .
(a) The Audited Financial Statements (i) were prepared in accordance with GAAP consistently applied throughout the period covered thereby, except for changes required by GAAP or as otherwise expressly noted therein; (ii) fairly present the financial condition of the Borrower and its Subsidiaries as of the date thereof and their results of operations for the period covered thereby in accordance with GAAP consistently applied throughout the period covered thereby, except for changes required by GAAP or as otherwise expressly noted therein; and (iii) show all material indebtedness and other liabilities, direct or contingent, of the Borrower and its Subsidiaries and the Qualified Lessee and its Subsidiaries as of the date thereof, including liabilities for Taxes, material commitments and Indebtedness.
 
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(b) The unaudited consolidated balance sheets of (i) the Borrower and its Subsidiaries and (ii) Sharyland and its Subsidiaries, each for each calendar quarter ended after the calendar year ended December 31, 2013, ended at least 45 days prior to the Closing Date, and the related consolidated statement of operations, the related consolidated statement of partners’ capital and the related consolidated statement of cash flows for the fiscal quarter ended on that date (i) were prepared in accordance with GAAP consistently applied throughout the period covered thereby, except for changes required by GAAP or as otherwise expressly noted therein, and (ii) fairly present the financial condition of the Borrower and its Subsidiaries and Sharyland and its Subsidiaries as of the date thereof and their results of operations for the period covered thereby, subject, in the case of clauses (i)  and (ii) , to the absence of footnotes and to normal year-end audit adjustments.
(c) Since the date of the Audited Financial Statements, there has been no event or circumstance, either individually or in the aggregate, that has had or could reasonably be expected to have a Material Adverse Effect.
5.06 Litigation . There are no actions, suits, proceedings, claims or disputes pending or, to the knowledge of any Responsible Officer of the Borrower after due and diligent investigation, threatened or contemplated, at law, in equity, in arbitration or before any Governmental Authority, by or against any Loan Party, the TDC Subsidiaries or, to the knowledge of any Responsible Officer of the Borrower, any Qualified Lessee or against any of its properties or revenues that either individually or in the aggregate could reasonably be expected to have a Material Adverse Effect.
5.07 No Default . No Loan Party is in default under or with respect to any Contractual Obligation that could, either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. No Default has occurred and is continuing or will occur and be continuing immediately after giving effect to the consummation of the transactions contemplated by this Agreement.
5.08 Ownership of Property . Each of the General Partner, the Borrower and each Subsidiary has good record and marketable title in fee simple to, or valid leasehold interests in, all real property necessary or used in the ordinary conduct of its business, except for such defects in title or interest as could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The property of the Borrower and the Subsidiary Guarantors is subject to no Liens other than Permitted Liens. The Equity Interests in the Borrower owned by the General Partner are subject to no Liens.
5.09 Environmental Compliance . The Borrower has no knowledge of any claims nor has it received any notice of any claim, and no proceeding has been instituted raising any claim against any Loan Party or any of their real properties now or formerly owned, leased or operated by any of them or other assets, alleging any damage to the environment or violation of any Environmental Laws, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect.
 
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5.10 Insurance . The properties of the General Partner, the Borrower and its Subsidiaries are insured pursuant to policies and other bonds which are valid and in full force and effect and which provide adequate coverage from reputable and financially sound insurers in amounts sufficient to insure the assets and risks of the General Partner, the Borrower and each such Subsidiary in accordance with prudent business practice in the industry of the General Partner, the Borrower and its Subsidiaries, except where the failure to do so could not reasonably be expected to result in a Material Adverse Effect.
5.11 Taxes . The General Partner, the Borrower and its Subsidiaries have filed all federal, state and other material tax returns and reports required to be filed by them, and have paid all federal, state and other material Taxes, assessments, fees and other governmental charges levied or imposed upon them or their properties or assets due and payable by them, (other than (i) an amount of which is not individually or in the aggregate material or (ii) those which are being contested in good faith by appropriate proceedings diligently conducted and for which adequate reserves have been provided in accordance with GAAP), except to the extent the failure to do so could not reasonably be expected to have a Material Adverse Effect. The General Partner or the Borrower knows of no proposed tax assessment against the General Partner, the Borrower or any of its Subsidiaries that would, if made, have a Material Adverse Effect.
5.12 ERISA Compliance .
(a) Each Loan Party and each ERISA Affiliate has operated and administered each Plan in compliance with the terms of the Plan and with all applicable laws except for such instances of noncompliance as have not resulted in and could not reasonably be expected to result in a Material Adverse Effect. Neither any Loan Party nor any ERISA Affiliate has incurred any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code applicable to employee benefit plans (as defined in Section 3 of ERISA) and there has been no “prohibited transaction” (as such term is defined in Section 406 of ERISA and Section 4975(c) of the Code) or violation of the fiduciary responsibility rules with respect to any Plan or that has resulted or could reasonably be expected to result in a Material Adverse Effect, and no event, transaction or condition has occurred or exists that could reasonably be expected to result in the incurrence of any such liability by any Loan Party or any ERISA Affiliate, or in the imposition of any Lien on any of the rights, properties or assets of any Loan Party or any ERISA Affiliate, in either case pursuant to Title I or IV of ERISA or to such penalty or excise tax provisions of the Code or to Sections 401(a)(29), 412 or 430(k) of the Code or Section 4068 of ERISA, and no liability to the PBGC (other than required premium payments), the IRS, any Plan or any trust established under Title IV of ERISA has been or is expected to be incurred by any Loan Party or any of their ERISA Affiliates, other than such liabilities or Liens as would not be individually or in the aggregate reasonably be expected to result in a Material Adverse Effect.
(b) The present value of the aggregate benefit liabilities under each Plan (other than a Multiemployer Plan) (determined in accordance with Section 430 of the Code and the Treasury Regulations promulgated thereunder as determined as of the end of such Plan’s most recently ended plan year on the basis of the actuarial assumptions specified for funding purposes in such Plan’s most recent actuarial valuation report) did not exceed the aggregate actuarial value of assets as determined in accordance with Section 430(g)(3) of the Code (and the Treasury Regulations promulgated thereunder) under each such Plan by an amount that could reasonably be expected to result in a Material Adverse Effect.
 
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(c) No Loan Party or any ERISA Affiliate has incurred Withdrawal Liabilities (and is not subject to contingent Withdrawal Liabilities) of ERISA in respect of Multiemployer Plans that individually or in the aggregate could reasonably be expected to result in a Material Adverse Effect. Neither any Loan Party nor any of its ERISA Affiliates has failed to make by its due date any required contribution to a Multiemployer Plan or received notice that any Multiemployer Plan is, or is expected to be, insolvent (within the meaning of Section 4245 of ERISA), in reorganization (within the meaning of Section 4241 of ERISA), or in endangered or critical status (within the meaning of Section 432 of the Code or Section 305 of ERISA).
(d) The expected postretirement benefit obligation (determined as of the last day of the Borrower’s most recently ended calendar year in accordance with ASC Topic 715-60, without regard to liabilities attributable to continuation coverage mandated by Section 4980B of the Code) of the Borrower is not material to it.
5.13 Subsidiaries; Equity Interests . As of the Closing Date, the Borrower has no Subsidiaries other than those specifically disclosed in Part (a) of Schedule 5.13 , and all of the outstanding Equity Interests in such Subsidiaries have been validly issued, are fully paid and nonassessable and are owned by a Loan Party or a Subsidiary thereof in the amounts specified on Part (a) of Schedule 5.13 free and clear of all Liens (other than Permitted Liens). As of the Closing Date, the Borrower has no equity investments in any other corporation or entity other than those specifically disclosed in Part (b) of Schedule 5.13 . As of the Closing Date, all of the outstanding Equity Interests in the Borrower have been validly issued, are fully paid and nonassessable and are owned by the Persons listed on Part (c) of Schedule 5.13 .
5.14 Margin Regulations; Investment Company Act .
(a) The Borrower is not engaged, principally or as one of its important activities, in the business of purchasing or carrying margin stock (within the meaning of Regulation U issued by the FRB), or extending credit for the purpose of purchasing or carrying margin stock. Following the application of the proceeds of each Borrowing or drawing under each Letter of Credit, not more than 25% of the value of the assets of the Borrower and its Subsidiaries on a consolidated basis subject to the provisions of Section 7.05 or Section 7.10 or subject to any restriction contained in any agreement or instrument between the Borrower and any Lender or any Affiliate of any Lender relating to Indebtedness and within the scope of Section 8.01(h) will be margin stock.
(b) No Loan Party is or is required to be registered as an “investment company” under the Investment Company Act of 1940.
5.15 Disclosure . No report, financial statement, certificate or other information furnished in writing by the General Partner, the Borrower or its Subsidiaries or their respective counsel to the Administrative Agent or any Lender in connection with the transactions contemplated hereby and the negotiation of this Agreement (in each case, as modified or supplemented by other information so furnished) contains any material misstatement of fact or
 
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omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that, with respect to projected financial information, the Borrower represents only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time.
5.16 Compliance with Laws . Each Loan Party is in compliance in all material respects with the requirements of all Laws and all orders, writs, injunctions and decrees applicable to it or to its properties, except in such instances in which (a) such requirement of Law or order, writ, injunction or decree is being contested in good faith by appropriate proceedings diligently conducted or (b) the failure to comply therewith, either individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect.
5.17 Taxpayer Identification Number . The General Partner and the Borrower’s true and correct U.S. taxpayer identification number is set forth on Schedule 10.02 .
5.18 Intellectual Property; Licenses, Etc . The Borrower and its Subsidiaries own, or possess the right to use, all of the material trademarks, service marks, trade names, copyrights, patents, patent rights, franchises, licenses and other intellectual property rights (collectively, “ IP Rights ”) that are necessary for the operation of their respective businesses, without any conflict, to the knowledge of the Borrower, with the rights of any other Person, except for any IP Rights or any conflicts that, either individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect.
5.19 OFAC . None of the General Partner, the Borrower, or any of its Subsidiaries, or, to the knowledge of any Responsible Officer of the Borrower, any other Transaction Party or any director, officer, employee, agent, affiliate or representative thereof, is an individual or entity currently the subject of any Sanctions, nor is any Transaction Party or the General Partner located, organized or resident in a Designated Jurisdiction.
5.20 Foreign Assets Control Regulations .
(a) The use of the proceeds from the Loans hereunder will not violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto.
(b) Neither the General Partner nor any Transaction Party (i) is a Person described or designated in the Specially Designated Nationals and Blocked Persons List of the OFAC or in Section 1 of the Anti-Terrorism Order or (ii) engages in any dealings or transactions with any such Person. The Borrower, the General Partner and each Transaction Party are in compliance, in all material respects, with the USA PATRIOT Act applicable to them.
(c) No part of the proceeds from the Loans hereunder will be used, directly or indirectly, for any payments to any governmental official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977, as amended, assuming in all cases that such Act applies to the Borrower and each other Loan Party.
 
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5.21 Status under Certain Statutes .
(a) No Loan Party is a “public utility” under the FPA and the regulations of FERC thereunder. The execution, delivery and performance of the Borrower’s obligations under the Loan Documents requires no authorization of approval by, or notice to, and is not subject to the jurisdiction of, FERC under the FPA.
(b) The Borrower is not subject to regulation as an “electric utility” by the PUCT. The execution, delivery and performance of the Borrower’s obligations under the Loan Documents requires no authorization or approval by, or notice to, the PUCT or under the Public Utility Regulatory Act of Texas other than those that have been obtained.
(c) Solely by virtue of the execution, delivery and performance of the Loan Documents to which it is a party, the Administrative Agent or any Lender will not become subject to any of the provisions of the FPA, PUHCA (based on FERC’s currently effective definitions under PUHCA) or the Public Utility Regulatory Act of Texas, or to regulation under any such statute.
5.22 Collateral . Upon the execution and delivery by all parties thereto of the 2014 Joinder Agreement and the Borrower Security Agreement, (i) the security interests in the UCC Collateral granted to the Collateral Agent (for the benefit of the Secured Parties) or the Administrative Agent (for the benefit of the Lenders, the Administrative Agent and the L/C Issuer): (a) constitute, as to such Collateral, a valid security interest and Lien under the New York UCC, and (b) constitute first-priority Liens on such Collateral described in the Security Documents, subject to no Liens other than Permitted Liens and the rights of holders of Permitted Secured Indebtedness in compliance with the Collateral Agency Agreement, and (ii) all action as is required pursuant to the Security Documents has been taken to establish and perfect the Collateral Agent’s or Administrative Agent’s rights, as applicable, in and to, and the first priority of its Lien (subject to Permitted Liens) on, the Collateral as set forth in the immediately preceding clause (i), including any recording, filing, registration, delivery to the Collateral Agent or the Administrative Agent, as applicable, giving of notice or other similar action.
5.23 Collateral Agency Agreement . Upon the execution and delivery by all parties thereto of the 2014 Joinder Agreement, this Agreement will be a “Financing Agreement”, as such term is defined in the Collateral Agency Agreement and all of the obligations of the Borrower hereunder and under the other Loan Documents will be “Obligations”, as such term is defined in the Collateral Agency Agreement, and “Permitted Secured Indebtedness”, as such term is defined in the Collateral Agency Agreement.
 
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ARTICLE VI.
AFFIRMATIVE COVENANTS
The Borrower covenants and agrees that until the Commitments have terminated, no Letters of Credit or Notes are outstanding and the Loans and Borrowings, together with interest, fees and all other Obligations under the Loan Documents (other than contingent obligations (including indemnification obligations) for which no claims have been made) incurred hereunder, are paid in full:
6.01 Information Covenants . The Borrower will furnish to the Administrative Agent (on behalf of each Lender):
(a) Annual Financial Statements . Within 90 days after the close of each fiscal year of the Borrower and each Qualified Lessee (other than a Consolidated Qualified Lessee), as applicable, the consolidated balance sheet of the Borrower and its Subsidiaries and each such Qualified Lessee, as the case may be, as at the end of such fiscal year, the related consolidated statement of operations, the related consolidated statement of partners’ capital and the related consolidated statement of cash flows for such fiscal year, in each case setting forth comparative consolidated figures for the preceding fiscal year, and examined by independent certified public accountants of recognized national standing or other independent certified public accountants reasonably acceptable to the Administrative Agent whose opinion shall not be qualified as to the scope of audit and as to the status of the Borrower or any of its Subsidiaries or such Qualified Lessees, as applicable, as a going concern, together with a certificate of such accounting firm stating that in the course of its regular audit of the business of the Borrower or such Qualified Lessees, which audit was conducted in accordance with generally accepted auditing standards, such accounting firm has obtained no knowledge of any Default or Event of Default which has occurred and is continuing or, if in the opinion of such accounting firm such a Default or Event of Default has occurred and is continuing, a statement as to the nature thereof (which certificate may be limited to the extent required by accounting rules or guidelines).
(b) Quarterly Financial Statements . As soon as available and in any event within 45 days after the close of each of the first three quarterly accounting periods in each fiscal year, the consolidated balance sheet of the Borrower and its Subsidiaries and each Qualified Lessee (other than a Consolidated Qualified Lessee), as the case may be, as at the end of such quarterly period, the related consolidated statement of operations, the related consolidated statement of partners’ capital and the related consolidated statement of cash flows for such quarterly period, and for the elapsed portion of the fiscal year ended with the last day of such quarterly period, and in each case setting forth comparative consolidated figures for the related periods in the prior fiscal year, all of which shall be certified by a Responsible Officer of the Borrower or such Qualified Lessee, as applicable, except for the absence of footnotes and subject to changes resulting from audit and normal year-end audit adjustments.
(c) Annual Budgets . As soon as available and in any event within 30 days after the close of each fiscal year of the Borrower and each Qualified Lessee (other than a Consolidated Qualified Lessee), as the case may be, the annual budget of the Borrower and its Subsidiaries and each such Qualified Lessee, as applicable, which shall include details on capital expenditures to be made by the Borrower and its Subsidiaries and each such Qualified Lessee, as applicable, in the next twelve months.
(d) Management Discussion and Analysis . Within 45 days after the close of each of the first three fiscal quarters in each fiscal year, a management discussion and analysis of each of each Qualified Lessee’s (other than a Consolidated Qualified Lessee) and the Borrower’s consolidated performance for that fiscal quarter and a comparison of performance for that
 
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financial quarter to the corresponding fiscal quarter of the previous fiscal year (in form and substance reasonably acceptable to the Administrative Agent, which shall not be unacceptable solely because it does not contain all of the information required to be included in unaudited interim financial statements by Item 303 of Regulation S-K of the Securities Act of 1933, as amended). Within 90 days after the close of each fiscal year, a management discussion and analysis of each of each such Qualified Lessee’s and the Borrower’s consolidated performance for that fiscal year and a comparison of performance for that fiscal year to the prior year.
All such financial statements delivered pursuant to paragraphs (a) and (b) above shall present fairly in all material respects in accordance with GAAP the consolidated financial condition of such Qualified Lessees or the Borrower and their respective consolidated Subsidiaries, as applicable, as at the applicable dates, and the consolidated results of their operations, their changes in equity (deficit) and their Consolidated Cash Flows for the periods reflected therein, and shall be prepared in accordance with GAAP applied consistently throughout the periods reflected therein and with prior periods (except as approved by such accountants or officer, as the case may be, and disclosed therein).
(e) Officer’s Certificates . At the time of the delivery of the financial statements provided for in Section 6.01(a) and (b) , a certificate of a Responsible Officer of each Qualified Lessee (other than a Consolidated Qualified Lessee) or of the Borrower, as applicable, substantially in the form of Exhibit C-1 or C-2, as applicable, to the effect that no Default or Event of Default has occurred and is continuing (or, in the case of each such Qualified Lessee, no default or event of default has occurred and is continuing under any Leases to which it is a party, which default or event of default constitutes an Event of Default pursuant to Section 8.01(f) ) or, if any Default or Event of Default has occurred and is continuing (or in the case of such Qualified Lessees, any default or event of default has occurred and is continuing under the Leases which default or event of default constitutes an Event of Default pursuant to Section 8.01(f) ), specifying the nature and extent thereof, which certificate shall set forth the calculations required to establish whether the Borrower and its Subsidiaries were in compliance with the provisions of Section 6.11 as at the end of such fiscal period or year, as the case may be.
(f) Notices . Promptly, and in any event within five Business Days after a Responsible Officer of the Borrower obtains knowledge thereof, notice of (v) the occurrence of any event which constitutes a Default or Event of Default, which notice shall specify the nature thereof, the period of existence thereof and what action the Borrower or an applicable Subsidiary proposes to take with respect thereto, (x)(i) the commencement of or any material development in any litigation or governmental proceeding pending against the General Partner, the Borrower or any of its Subsidiaries, in which the amount involved is $25,000,000 or more (other than proceedings under the PUCT or similar regulatory authority or condemnation proceedings in which a Qualified Lessee, the Borrower or any of its Subsidiaries is the condemning party) or is reasonably likely to have a Material Adverse Effect; (y) the commencement of any proceeding under PUCT involving the Borrower (other than proceedings that are in the ordinary course of business or that are not material) and the issuance of any final order of the PUCT with respect to such proceeding; and (z) any development or event that has had or could reasonably be expected to have a Material Adverse Effect.
 
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(g) Other Information . (i) Promptly upon transmission thereof, copies of any reportings or filings by the Borrower or any of its Subsidiaries with regulatory agencies (including the SEC but excluding the PUCT and FERC, if applicable); provided that the Borrower shall furnish such reports or filings as the Administrative Agent may reasonably request from time to time and (ii) such other information or documents (financial or otherwise) as the Administrative Agent on its own behalf or on behalf of the Required Lenders may reasonably request from time to time.
Documents required to be delivered pursuant to Section 6.01(a) or (b)  or Section 6.01(g) may be delivered electronically and if so delivered, shall be deemed to have been delivered on the date (i) on which the Borrower posts such documents, or provides a link thereto on the Borrower’s website on the Internet at the website address listed on Schedule 10.02 ; or (ii) on which such documents are posted on the Borrower’s behalf on an Internet or intranet website, if any, to which each Lender and the Administrative Agent have access (whether a commercial, third-party website or whether sponsored by the Administrative Agent); provided that: (i) the Borrower shall deliver paper copies of such documents to the Administrative Agent or any Lender upon its request to the Borrower to deliver such paper copies until a written request to cease delivering paper copies is given by the Administrative Agent or such Lender and (ii) the Borrower shall notify the Administrative Agent and each Lender (by facsimile or electronic mail) of the posting of any such documents and provide to the Administrative Agent by electronic mail electronic versions (i.e., soft copies) of such documents. The Administrative Agent shall have no obligation to request the delivery of or to maintain paper copies of the documents referred to above, and in any event shall have no responsibility to monitor compliance by the Borrower with any such request by a Lender for delivery, and each Lender shall be solely responsible for requesting delivery to it or maintaining its copies of such documents.
The Borrower hereby acknowledges that (a) the Administrative Agent and/or the Arranger may, but shall not be obligated to, make available to the Lenders and the L/C Issuer materials and/or information provided by or on behalf of the Borrower hereunder (collectively, “ Borrower Materials ”) by posting the Borrower Materials on Debt Domain, IntraLinks, Syndtrak or another similar electronic system (the “ Platform ”) and (b) certain of the Lenders (each, a “ Public Lender ”) may have personnel who do not wish to receive material non-public information with respect to the Borrower or its Affiliates, or the respective securities of any of the foregoing, and who may be engaged in investment and other market-related activities with respect to such Persons’ securities. The Borrower hereby agrees that so long as the Borrower is the issuer of any outstanding debt or equity securities that are registered or issued pursuant to a private offering or is actively contemplating issuing any such securities (w) all Borrower Materials that are to be made available to Public Lenders shall be clearly and conspicuously marked “PUBLIC” which, at a minimum, shall mean that the word “PUBLIC” shall appear prominently on the first page thereof; (x) by marking Borrower Materials “PUBLIC,” the Borrower shall be deemed to have authorized the Administrative Agent, the Arranger, the L/C Issuer and the Lenders to treat such Borrower Materials as not containing any material non-public information with respect to the Borrower or its securities for purposes of United States federal and state securities laws ( provided , however , that to the extent such Borrower Materials constitute Information, they shall be treated as set forth in Section 10.07); (y) all Borrower Materials marked “PUBLIC” are permitted to be made available through a portion of the Platform designated “Public Side Information;” and (z) the Administrative Agent and the
 
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Arranger shall be entitled to treat any Borrower Materials that are not marked “PUBLIC” as being suitable only for posting on a portion of the Platform not designated “Public Side Information.”
6.02 Use of Proceeds . The proceeds of Loans shall be used to refinance the indebtedness outstanding, and to replace the commitments under the Existing Facility Agreement, and to finance the working capital needs, capital expenditures, dividends and distributions and for the general corporate purposes of the Borrower and its Subsidiaries including future acquisitions not prohibited under this Agreement, but not to fund, directly or indirectly, (i) any Project Finance Subsidiary or (ii) any other Subsidiary unless such Subsidiary is (x) a Guarantor, (y) SDTS or any of its Domestic Subsidiaries or (z) a Domestic Subsidiary of the Borrower that is regulated as a public utility in an applicable jurisdiction and Subsidiaries of such regulated utilities.
6.03 Compliance with Law . Without limiting Section 7.04 , the Borrower will, and the Borrower will cause the General Partner and each of the Subsidiaries of the Borrower to, comply with all Laws to which it is subject, including, without limitation, ERISA, the USA PATRIOT Act and Environmental Laws, and will obtain and maintain in effect all licenses, certificates, permits, franchises and other governmental authorizations necessary to the ownership of its properties or to the conduct of its businesses to the extent necessary to ensure that non-compliance with such Laws or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
6.04 Insurance . The Borrower will maintain or cause to be maintained and will cause its Subsidiaries to, maintain, with financially sound and reputable insurers, insurance with respect to their respective properties and businesses against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) in accordance with prudent business practice in the industry of the Borrower and its Subsidiaries.
6.05 Maintenance of Properties . The Borrower will, and will cause its Subsidiaries, and will use commercially reasonable efforts to cause the Qualified Lessee to (a) maintain, preserve and protect all of its respective properties (including the System) and equipment necessary in the operation of its respective business in good working order and condition, ordinary wear and tear excepted; and (b) make all necessary repairs thereto and renewals and replacements thereof, except in the case of clauses (a) and (b) where the failure to do so could not reasonably be expected to have a Material Adverse Effect.
6.06 Payment of Taxes and Claims . The Borrower will, and the Borrower will cause the General Partner and each of the Subsidiaries of the Borrower to, (i) file all material Tax returns required to be filed by it in any jurisdiction, and (ii) to pay and discharge (A) all Taxes shown to be due and payable by them on such returns and all Other Taxes imposed on them or any of their properties, income or franchises, to the extent the same have become due and payable by them and before they have become delinquent, and (B) all claims for which sums have become due and payable by them that have or might become a Lien on properties or assets of the Borrower or any Subsidiary; provided that none of the General Partner, the Borrower or
 
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any Subsidiary need pay any such Tax or claim if (x) the amount, applicability or validity thereof is contested on a timely basis in good faith and in appropriate proceedings, and such Person has established adequate reserves therefor in accordance with GAAP on its books or (y) the nonpayment of all such Taxes and claims in the aggregate could not reasonably be expected to have a Material Adverse Effect.
6.07 Existence, Etc. Except as permitted under Section 7.02 , the Borrower will and will cause each of its Subsidiaries to at all times preserve and keep in full force and effect its respective limited liability company, corporate or limited partnership existence and all rights and franchises of the Borrower unless, (other than with respect to the Borrower’s existence) in the good faith judgment of the Borrower, the termination of or failure to preserve and keep in full force and effect such limited liability company, corporate or limited partnership existence, right or franchise could not, individually or in the aggregate, have a Material Adverse Effect. The Borrower shall cause the General Partner at all times to preserve and keep in full force and effect its corporate existence.
6.08 Books and Records; Inspection Rights . The Borrower will, and will cause each of its Subsidiaries to, and will use commercially reasonable efforts to cause any Qualified Lessee to, maintain proper books of record and account in conformity with GAAP and all applicable requirements of any Governmental Authority having legal or regulatory jurisdiction over such Person. The Borrower will permit representatives and independent contractors of the Administrative Agent and each Lender to visit and inspect any of its properties, to examine its corporate, financial and operating records, and make copies thereof or abstracts therefrom, and to discuss its affairs, finances and accounts with its directors, officers, and independent public accountants, all at the expense of the Borrower and at such reasonable times during normal business hours no more than once per each calendar year, upon reasonable advance notice to the Borrower; provided , however , that when an Event of Default has occurred and is continuing the Administrative Agent or any Lender (or any of their respective representatives or independent contractors) may do any of the foregoing at the expense of the Borrower at any time during normal business hours and as often as may be reasonably desired.
6.09 Collateral; Further Assurances .
(a) The Borrower shall take all actions necessary to insure that the Collateral Agent, on behalf of the Administrative Agent, the L/C Issuer, and the Lenders or the Administrative Agent on behalf of the L/C Issuer and the Lenders, as applicable, has and continues to have in all relevant jurisdictions duly and validly created, attached, perfected and enforceable first-priority Liens on the Collateral constituting UCC Collateral or real property, in each case to the extent required under the Security Documents, subject to no Liens other than Permitted Liens and rights of holders of Permitted Secured Indebtedness in compliance with the Collateral Agency Agreement. The Borrower shall cause the Obligations to constitute direct senior secured obligations of the Borrower and to rank senior in right of security with respect to Collateral granted in the Security Documents to all other Indebtedness of the Borrower (other than Permitted Secured Indebtedness with which it shall rank pari passu in right of security).
(b) If, after the Closing Date, the Borrower acquires or creates any new TDC Subsidiary that is a Wholly-Owned Subsidiary (other than an Excluded Subsidiary), the
 
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Borrower shall forthwith (and in any event, within 30 days of such creation or acquisition (or such longer time as the Administrative Agent may agree), (i) cause such Wholly-Owned Subsidiary to execute and deliver to the Administrative Agent a Guaranty, (ii) deliver to the Administrative Agent certificates of such Subsidiary, substantially consistent with those delivered on the Closing Date pursuant to Sections 4.01(a)(iii), (a)(iv) and (a)(vi) , with appropriate insertions and attachments, (iii) take such actions reasonably necessary or advisable to grant to the Administrative Agent or the Collateral Agent, as applicable for the benefit of the Lenders or the Secured Parties, as applicable, a perfected and enforceable first-priority Lien in all or substantially all assets of such new Subsidiary (other than any Equity Interests of an Excluded Subsidiary), subject to no Liens other than Permitted Liens, including the execution and delivery of one or more security documents in form and substance reasonably satisfactory to the Administrative Agent and the filing of UCC financing statements in such jurisdictions as may be required by such security documents and delivery to the Administrative Agent or the Collateral Agent, as applicable, the stock certificates (if any) representing Equity Interests issued by such Subsidiary, together with undated stock (or other transfer) powers, in blank, executed and delivered by a Responsible Officer of the Borrower or such TDC Subsidiary, as applicable, in each case as may be required by such security documents and (iv) if reasonably requested by the Administrative Agent, deliver to the Administrative Agent legal opinions relating to the matters described above, which opinions shall be in form and substance reasonably satisfactory to the Administrative Agent.
(c) Notwithstanding the foregoing, if, after the Closing Date, the Borrower acquires or creates any new Subsidiary that is not required to become a Guarantor pursuant to Section 6.09(b) , the Borrower may elect to designate such Subsidiary as a Guarantor by satisfying the requirements set forth in Section 6.09(b) with respect to such Subsidiary.
(d) The Borrower shall cause the General Partner to execute and deliver to the Administrative Agent a Guaranty upon the earlier of (1) the completion of the Qualifying IPO and (2) the Guarantee by the General Partner of any other Indebtedness.
6.10 Leases . (a) Except as otherwise permitted herein, the Borrower shall cause the TDC Subsidiaries at all times to (i) perform and observe all of the covenants under the Lease to which they are a party, (ii) take reasonable actions to enforce all of its material rights and obligations thereunder, and (iii) maintain such Leases in full force and effect, except, in each case, to the extent the same could not reasonably be expected to have a Material Adverse Effect.
(b) If the term of a Lease with a TDC Subsidiary expires and the Qualified Lessee under such Lease has either ceased operating the related assets or has ceased paying rent as required under the applicable Lease, the Borrower shall cause a TDC Subsidiary to enter into a supplement or a new Lease with respect to the related leasehold assets with a Qualified Lessee that provides for rent that, when combined with all other expected revenue, will, in the reasonable judgment of the Borrower, as of the commencement date of such supplement or new Lease, generate sufficient revenue to satisfy the requirements of Section 6.11(b) . Notwithstanding the foregoing, if (i) such expired Lease relates to transmission and/or distribution assets that are not generating significant revenue, (ii) the failure to renew such Lease would not constitute a Material Adverse Effect and (iii) the Borrower reasonably believes it will generate sufficient revenue and hold sufficient assets (without giving effect to the leasehold assets with respect to such Lease) to satisfy the requirements of Section 6.11 , then this Section 6.10(b) will not require a supplement or new lease with respect to such leasehold assets.
 
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6.11 Financial Ratios .
(a) The Borrower shall at all times maintain, on a consolidated basis, a Consolidated Total Debt to Capitalization Ratio of not more than 0.75 to 1.00.
(b) The Borrower shall maintain a Consolidated Debt Service Coverage Ratio of at least 1.20 to 1.00.
ARTICLE VII.
NEGATIVE COVENANTS.
Until the Commitments have terminated, no Letters of Credit or Notes are outstanding and the Loans and Borrowings, together with interest, fees and all other Obligations under the Loan Documents (other than contingent obligations (including indemnification obligations) for which no claims have been made) incurred hereunder, are paid in full:
7.01 Transactions with Affiliates . The Borrower will not and will not permit any Subsidiary of the Borrower to enter into directly or indirectly any transaction or group of related transactions (including without limitation the purchase, lease, sale or exchange of properties of any kind or the rendering of any service) with any Affiliate, other than:
(a) Project Finance Subsidiaries and other transactions between or among the General Partner, other owners of Equity Interests in the Borrower, Borrower and one or more Subsidiaries, or a subset thereof, to the extent permitted under Sections 7.02, 7.06, 7.07, 7.09, 7.10 and 7.14, including, for the avoidance of doubt, the contribution of the GP Note to the Borrower in exchange for an equity ownership interest in the Borrower and immediately thereafter the cancellation of Equity Interests in the Borrower held by the General Partner in connection with the repayment or cancellation of the GP Note;
(b) in the case of a Qualified Lessee, pursuant to a Lease or other lease of transmission and distribution assets that satisfies clause (g) of this Section 7.01 ;
(c) payment of customary fees and reasonable out of pocket costs to, and indemnities for the benefit of, directors, officers and employees of the General Partner or the Borrower and its Subsidiaries in the ordinary course of business;
(d) any Qualified Lessee Affiliate Loan and any Indebtedness permitted under Section 7.14(b)(ii) ;
(e) Transactions entered into in connection with the Cross Valley Project on or prior to the Cross Valley Project Transfer and the Golden Spread Project on or prior to the Golden Spread Project Transfer;
(f) ROFO Transfers; or
 
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(g) upon fair and reasonable terms no less favorable to the Borrower or such Subsidiary than would be obtained in a comparable arms-length transaction with a Person not an Affiliate; provided that transactions will be deemed to meet the requirements of clause (g) if (x) prior to a Qualifying IPO, such transaction are on terms approved by the holders of a majority of the Equity Interests of the General Partner held by Persons who do not have a separate material interest in such transaction other than by virtue of their ownership of such Equity Interests, or by a majority of the directors nominated by such Persons, and (y) upon the completion of a Qualifying IPO and thereafter, such transactions are on terms approved by a majority of the board of directors (or comparable governing body) of the General Partner or an Affiliate thereof who are “independent” (as such term is defined pursuant to the rules of the primary exchange on which the Equity Interests are then listed for trading), or a majority of the “Independent” members of a committee of any such board of directors (or comparable governing body).
For purposes hereof, in determining the outstanding Equity Interests of the General Partner, all outstanding convertible securities (i.e., operating partnership units in the Borrower) will be deemed to have been exchanged for Equity Interests in the General Partner on a one-for-one basis or at the then applicable exchange ratio.
7.02 Merger, Consolidation, etc . The Borrower will not and will not cause or permit any Subsidiary to consolidate with or merge with any other Person or convey, transfer or lease all or substantially all of its assets in a single transaction or series of transactions to any Person, except (a) so long as both before and immediately after giving effect to such merger or consolidation or such conveyance, transfer or lease of all or substantially all of its assets no Default or Event of Default shall exist, the Borrower or any Guarantor may merge or consolidate with another Person and the Borrower or any Guarantor may convey, transfer or lease all or substantially all of its assets to another Person, so long as, after giving effect to such merger or consolidation or such conveyance, transfer or lease of all or substantially all of its assets, (i) with respect to any merger or consolidation to which the Borrower is a party, the Borrower shall be the surviving entity, (ii) with respect to any merger or consolidation to which a Guarantor is a party, the Borrower or a Guarantor (or an entity that becomes a Guarantor) shall be the surviving entity, and (iii) with respect to any conveyance, transfer or lease of all or substantially all of its assets by the Borrower or a Guarantor, the Borrower or another Guarantor shall be the transferee or lessee of such assets, (b) a Subsidiary which is not a Guarantor may merge or consolidate with or convey, transfer or lease all or substantially all of its assets to another Person (other than the Borrower or any Guarantor, except to the extent permitted by clause (a) of this Section 7.02) , (c) in connection with transactions otherwise permitted under Section 7.10 (other than Section 7.10(h)), (d)  the FERC Merger and (e) the merger or consolidation of Sharyland Projects into SDTS and the transfer of the CREZ Project to SDTS.
7.03 Line of Business . The Borrower will not and will not permit any Subsidiary to engage in any business if, as a result, the general nature of the business in which the Borrower and its Subsidiaries, taken as a whole, would then be engaged would be substantially changed from the transmission and distribution of electric power and the provision of ancillary services.
7.04 Terrorism Sanctions Regulations . The Borrower will not, and the Borrower will not permit the General Partner or any Subsidiary of the Borrower, and will use commercially reasonable efforts to not permit any Qualified Lessee, to (a) become a Person described or
 
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designated in the Specially Designated Nationals and Blocked Persons List of the OFAC or in Section 1 of the Anti-Terrorism Order or (b) engage in any dealings or transactions with any such Person. The Borrower will not directly or indirectly, use the proceeds of any Credit Extension, or lend, contribute or otherwise make available such proceeds to the General Partner or any Subsidiary, joint venture partner or other individual or entity, to fund any activities of or business with any individual or entity, or in any Designated Jurisdiction, that, at the time of such funding, is the subject of Sanctions, or in any other manner that will result in a violation by any individual or entity (including any individual or entity participating in the transaction, whether as Lender, the Arranger, Administrative Agent, L/C Issuer, or otherwise) of Sanctions.
7.05 Liens . The Borrower will not create, incur, assume or permit to exist (upon the happening of a contingency or otherwise) any Lien on or with respect to the Collateral or any other property of the Borrower or any Subsidiary Guarantor, whether now owned or held or hereafter acquired, or any income or profits therefrom, or assign or otherwise convey any right to receive income or profits, or on any other asset now owned or hereafter acquired by the Borrower, except (each, a “ Permitted Lien ” ):
(a) Liens created or permitted by the Loan Documents or 2010 Note Purchase Documents on the assets of the Borrower and applicable Guarantors;
(b) Liens on Equity Interests in a Project Finance Subsidiary to secure Non-Recourse Debt of such Project Finance Subsidiary;
(c) [Reserved];
(d) Liens for Taxes which are not yet due and payable or the payment of which is not at the time required by Section 6.06 ;
(e) any attachment or judgment Lien, unless such attachment or judgment Lien constitutes an Event of Default under Article VIII;
(f) Liens existing on the date of this Agreement and securing the Indebtedness of the Borrower or any Guarantor referred to in Schedule 7.06 hereto and any renewals or extensions thereof; provided that (i) the property covered thereby is not changed, (ii) the amount secured or benefited thereby is not increased except as contemplated by Section 7.06(e) , (iii) the direct or any contingent obligor with respect thereto is not changed, and (iv) any renewal or extension of the obligations secured or benefited thereby is permitted by Section 7.06(e) ;
(g) Liens of a lessor of equipment to the Borrower or any Guarantor on such lessor’s leased equipment (but excluding equipment leased pursuant to a Capital Lease), including any of the foregoing which is evidenced by a protective UCC filing;
(h) Mechanics’, warehousemen’s, carriers’, workers’, repairers’, landlords’, and other similar liens arising or incurred in the ordinary course of business and (i) which do not in the aggregate materially detract from the value of property or assets subject to such Liens or materially impair the continued use thereof in the operation of the business or (ii) which are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property or asset subject to such Liens, or other Liens
 
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incurred or deposits made in the ordinary course of business in connection with workers’ compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, trade contracts, leases, government contracts, performance and return-of-money bonds and other similar obligations incurred in the ordinary course of business (exclusive of obligations in respect of the payment for borrowed money);
(i) zoning, entitlement, restriction, and other land use and environmental regulations by Governmental Authorities and encroachments, easements, rights of way, covenants, restrictions or agreements which do not materially interfere with the continued use of any asset as currently used in the conduct of the business;
(j) any encumbrances set forth in any franchise or governing ordinance under which any portion of the business is conducted which could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect;
(k) all rights of condemnation, eminent domain, or other similar right of any Person; and
(l) Liens securing Permitted Secured Indebtedness.
7.06 Indebtedness . The Borrower will not, and will not cause or permit any Subsidiary of the Borrower to, incur or in any manner become or be liable in respect of any Indebtedness, except the following Indebtedness, which may be incurred subject to the requirements of the last paragraph of this section:
(a) Indebtedness evidenced by the Loan Documents, the 2010 Note Purchase Documents, the SDTS Note Purchase Agreement, the SDTS 2010 Note Purchase Agreement and the SDTS 2013 Credit Agreement;
(b) Indebtedness of the Borrower or any Subsidiary that (i) that is not related to, and does not support, Non-Recourse Debt of a Project Finance Subsidiary and (ii) if incurred, would not result in a breach of Section 6.11 ; provided that, (1) if the Indebtedness is Indebtedness of the Borrower or TDC and is proposed to be secured by any of the Collateral, at least five Business Days (or such shorter period reasonably agreed by the Administrative Agent) prior to the incurrence of such Indebtedness, the Borrower shall (x) notify the Administrative Agent of the intent of Borrower or TDC to incur such Indebtedness, which notice shall set forth in reasonable detail (A) the amount of such Indebtedness and (B) the proposed collateral for such Indebtedness (which proposed collateral may include any or all of the Collateral), and (y) cause to be delivered to the Collateral Agent and the other Secured Parties an executed joinder agreement substantially in the form attached to the Collateral Agency Agreement pursuant to which all the proposed holders of such Indebtedness of Borrower or TDC have become party to the Collateral Agency Agreement and (2) any Indebtedness incurred by the Borrower under this Section 7.06(b) that (A) is not Guaranteed by TDC and (B) is Guaranteed by a Subsidiary that (x) is not a TDC Subsidiary and (y) that is not a Guarantor shall not exceed $100,000,000 at any time outstanding;
(c) (i) Non-Recourse Debt incurred by a Project Finance Subsidiary of the Borrower or any of its Subsidiaries (including Non-Recourse Debt incurred by such Project Finance
 
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Subsidiary prior to being transferred to or otherwise acquired by the Borrower or a Subsidiary) to fund a New Project, (ii) any Indebtedness in the form of a pledge of Equity Interests in a Project Finance Subsidiary as security for Non-Recourse Debt of such Project Finance Subsidiary and (iii) Indebtedness of a Subsidiary (other than a Project Finance Subsidiary of Borrower or any of its Subsidiaries) owed to the Borrower or any Guarantor;
(d) Indebtedness of the Borrower to any of its Subsidiaries (other than a Project Finance Subsidiary), which by its terms is expressly subordinated to the Obligations; and
(e) Indebtedness existing on the date of this Agreement set forth in Schedule 7.06 hereto and any refinancings, refundings, renewals or extensions thereof; provided that (i) the principal amount of such Indebtedness is not increased at the time of such refinancing, refunding, renewal or extension except by increases in principal amount which do not exceed the sum of (A) an amount equal to a reasonable premium or other reasonable amount paid, and fees and expenses reasonably incurred, in connection with such refinancing, (B) by an amount equal to any existing commitments unutilized thereunder and (C) an amount that, if incurred, would not result in a breach of Section 6.11 and (ii) the terms relating to principal amortization, maturity, collateral (if any) and subordination (if any), and other material terms taken as a whole, of any such refinancing, refunding, renewing or extending Indebtedness, and of any agreement entered into and of any instrument issued in connection therewith, are no less favorable in any material respect to the Loan Parties or the Lenders than the terms of any agreement or instrument governing the Indebtedness being refinanced, refunded, renewed or extended and the interest rate applicable to any such refinancing, refunding, renewing or extending Indebtedness does not exceed the then applicable market interest rate.
Indebtedness may be incurred under this Section 7.06 only if no Default or Event of Default is, or as a result of such incurrence would, occur and be continuing.
7.07 Loans, Advances, Investments and Contingent Liabilities . The Borrower will not, and will not cause or permit any TDC Subsidiary to, make or permit to remain outstanding any loan or advance to, or extend credit other than credit extended in the ordinary course of business to, any Person, or own, purchase or acquire any stock, obligations or securities of, or any other interest in, or make any capital contribution to, any Person (collectively, “ Investments ”), except (a) Permitted Investments, (b) ownership, purchase and acquisition of Equity Interests in and capital contributions to Project Finance Subsidiaries that are TDC Subsidiaries and Wholly-Owned Subsidiaries, (c) Investments in Subsidiaries that are TDC Subsidiaries, Guarantors or Excluded Subsidiaries of Guarantors (other than Project Finance Subsidiaries), (d) Borrower may make Investments in Subsidiaries (including Project Finance Subsidiaries) that are not TDC Subsidiaries, Guarantors or Excluded Subsidiaries of Guarantors provided that no proceeds of Loans are used to fund any such Investments, (e) Qualified Lessee Affiliate Loans, (f) Investments made in connection with the Cross Valley Project prior to the Cross Valley Project Transfer and the Golden Spread Project prior to the Golden Spread Project Transfer, (g) ROFO Transfers and (h) the GP Note.
7.08 [Reserved] .
 
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7.09 Distributions . The Borrower will not, directly or indirectly, make or declare any Distribution unless both before and immediately after giving effect to the proposed Distribution, there will not exist, a Default or an Event of Default; provided that the Borrower may, in any case so long as both before and immediately after giving effect to the proposed Distribution, there will not exist a Specified Event of Default (i) make Distributions to the General Partner (or its successor) in the minimum amounts needed so as to enable the General Partner (or its successor) to make distributions in any applicable period sufficient to satisfy the requirements of Section 857(a)(1) of the Code, (ii) make Distributions to provide any of its partners (or any other person holding a direct or indirect ownership interest in the Borrower) with funds to pay any Taxes (including any Tax imposed under Section 4981 of the Code) attributable to such partner’s (or such other person’s) direct or indirect interest in the Borrower and (iii) to the extent constituting a Distribution, immediately after the consummation of the Qualifying IPO and the contribution of the GP Note to the Borrower in exchange for an equity ownership interest in the Borrower, the cancellation of Equity Interests in the Borrower held by the General Partner in connection with the repayment or cancellation of the GP Note.
The Borrower shall deliver to the Administrative Agent and the Collateral Agent before a Distribution is made a certificate of a Responsible Officer of the Borrower stating that the foregoing condition has been satisfied (or that such Distribution is permitted under the foregoing proviso) and, if requested, providing supporting data and calculations.
7.10 Sale of Assets, etc . The Borrower will not and will not cause or permit any TDC Subsidiary to sell, exchange, convey, lease, transfer or otherwise dispose of any of its assets with a fair market value of greater than $15,000,000, in the aggregate on or prior to the Maturity Date (an “ Asset Sale ”) except:
(a) leases of Systems or other transmission and distribution assets and related assets to Qualified Lessees;
(b) the transfer of such Person’s ownership interests in any Project Finance Subsidiary in connection with and pursuant to the exercise of remedies under the documentation governing Non-Recourse Debt incurred by such Project Finance Subsidiary;
(c) Asset Sales among the Borrower, the Guarantors and any Excluded Subsidiary of a Guarantor (or a subset thereof);
(d) in connection with an acquisition that is not prohibited under this Agreement, (i) Asset Sales of operating assets and related assets to a Qualified Lessee and (ii) Asset Sales that are not electric transmission or distribution assets, in each case (x) which are, in the aggregate, not material in relation to the assets acquired and (y) upon fair and reasonable terms no less favorable to the Borrower or such TDC Subsidiary than would be obtained in a comparable arms-length transaction with a Person not an Affiliate;
(e) any disposition of assets that are obsolete or no longer used or useful in the Borrower’s or any Subsidiary’s business;
(f) Permitted Liens;
 
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(g) any Recovery Event and any disposition of assets that are the subject of such Recovery Event;
(h) Asset Sales made in connection with the Cross Valley Project Transfer and the Golden Spread Project Transfer;
(i) ROFO Transfers; and
(j) Investments permitted by Section 7.07 , transactions permitted by Section 7.02 and Distributions permitted by Section 7.09 .
7.11 Amendments to Organizational Documents . No Loan Party will amend, supplement, terminate, replace or waive any provision of its operating agreement or other Organization Documents in a manner that would have a Material Adverse Effect.
7.12 ERISA Compliance .
(a) Relationship of Vested Benefits to Plan Assets . No Loan Party or ERISA Affiliate will permit any Plan to be “at risk” within the meaning of Section 303 of ERISA to the extent such action could reasonably be expected to result in a Material Adverse Effect. The Loan Parties and their ERISA Affiliates will not incur Withdrawal Liabilities (and will not become subject to contingent Withdrawal Liabilities) in respect of Multiemployer Plans that individually or in the aggregate could reasonably be expected to result in a Material Adverse Effect.
(b) Valuations . For the purposes of clause (a) above, all assumptions and methods used to determine the actuarial valuation of vested and unvested employee benefits under any Plan at any time maintained by a Loan Party or any ERISA Affiliate and the present value of assets of any such Plan shall be reasonably consistent with those determinations made for purposes of Section 5.12 and shall comply with all requirements of law.
(c) Prohibited Actions . Neither the Loan Parties nor any ERISA Affiliate, nor any Plan at any time maintained by any Loan Party or ERISA Affiliate, will:
(i) engage in any action that could reasonably be expected to cause any transaction contemplated hereunder to result in a non-exempt “prohibited transaction” (as such term is defined in Section 406 of ERISA and Section 4975(c) of the Code);
(ii) fail to meet the minimum funding standards of Section 302 of ERISA or Sections 412 and 430 of the Code, or seek or obtain a waiver thereof, or fail to make any required contribution to a Multiemployer Plan; or
(iii) terminate any such Plan in a manner which could result in the imposition of a Lien on the Property of the Borrower or any other Loan Party or ERISA Affiliate pursuant to Section 4068 of ERISA that could reasonably be expected to result in a Material Adverse Effect;
 
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that individually or in the aggregate could reasonably be expected to result in a Material Adverse Effect.
7.13 No Margin Stock . Anything herein contained to the contrary notwithstanding, the Borrower will not, nor will it permit any Subsidiary to, make or authorize any investment in, or otherwise purchase or carry, any margin stock (within the meaning of Regulation U issued by the FRB) that violates the provisions, or for any purpose that violates the provisions, of Regulation U of the FRB.
7.14 Leases . (a) Other than the Approved Lease Amendments, the Borrower will not and will not permit any TDC Subsidiary, after the Closing Date, to amend, modify, supplement, replace, terminate or waive any provision of any Lease to which the Borrower or a TDC Subsidiary is party, or consent to any amendment, modification, supplement, replacement, termination or waiver of any Lease, that, in each case, could individually or in the aggregate reasonably be expected to have a Material Adverse Effect.
(b) Notwithstanding Section 7.14(a) , the Borrower shall use commercially reasonable efforts to ensure that no Qualified Lessee of a TDC Subsidiary (other than (1) Qualified Lessees that have an Investment Grade Credit Rating or (2) whose obligations under the applicable Leases have been Guaranteed by an entity with an Investment Grade Credit Rating) incurs Indebtedness for borrowed money other than Indebtedness (i) in an aggregate principal amount of up to the greater of (A) $5,000,000 and (B) an amount equal to 1% of the sum of, without duplication, (x) the total amount of the Consolidated Net Plant of such Qualified Lessee, plus (y) the total amount of the Consolidated Net Plant of any guarantor(s) of such Qualified Lessee’s obligations under the applicable Leases, plus (z) the total amount of Leased Consolidated Net Plant, in each case, on a senior secured basis; and (ii) in an aggregate principal amount of up to the greater of (A) $10,000,000 and (B) an amount equal to 1.5% of the sum of, without duplication, (x) the total amount of the Consolidated Net Plant of such Qualified Lessee, plus (y) the total amount of the Consolidated Net Plant of any guarantor(s) of such Qualified Lessee’s obligations under the applicable Leases, plus (z) the total amount of Leased Consolidated Net Plant, in each case, on an unsecured and subordinated basis. Without limiting the amount of Indebtedness permitted by clause (i) and clause (ii), Qualified Lessees may also incur Indebtedness (x) associated with Qualified Lessee Affiliate Loans, (y) in the form of a pledge of Equity Interests in a Project Finance Subsidiary as security for Non-Recourse Debt of such Project Finance Subsidiary and (z) in amounts otherwise acceptable to Administrative Agent. For purposes of measuring the amount of Indebtedness of a Qualified Lessee under this Section 7.14(b) , all Consolidated Qualified Lessees will be treated as one Qualified Lessee.
7.15 Regulation .
(a) The Borrower shall not be or become, subject to FERC jurisdiction as a public utility under the FPA; provided , however , that the Borrower shall not be in default of the foregoing negative covenant if the Borrower becomes subject to FERC jurisdiction under the FPA solely as a result of a change to the FPA or in FERC’s interpretation thereof or regulations thereunder, if the Borrower takes all necessary actions to comply with applicable FERC requirements and the operation of the System is uninterrupted; and
(b) The Borrower shall not violate in any material respect any regulation or order of the PUCT applicable to it.
 
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7.16 Swaps . The Borrower will not, nor will it permit any Subsidiary (other than Project Finance Subsidiaries of a TDC Subsidiary) to, enter into any Swap Contracts, except that the Borrower and its Subsidiaries may enter into Swap Contracts solely to hedge interest rate risk and not for speculative purposes.
7.17 Burdensome Agreements . The Borrower will not enter into or permit any Subsidiary Guarantor or Subsidiary of a Subsidiary Guarantor to enter into any Contractual Obligation that limits the right (a) of such Subsidiary to make Distributions to the Borrower or any Subsidiary Guarantor or to otherwise transfer property to the Borrower or any Subsidiary Guarantor, (b) of any TDC Subsidiary to Guarantee the Indebtedness of the Borrower or (c) of the Borrower or any Subsidiary Guarantor to create, incur, assume or suffer to exist Liens on property of such Person, in each case except for (i) restrictions arising under applicable Laws, (ii) customary restrictions and conditions contained in any agreement relating to the sale or other disposition of assets not prohibited under this Agreement pending the consummation of such sale or other disposition, (iii) this Agreement, the other Loan Documents, Permitted Liens (other than Liens permitted under Section 7.05(k) ), any document or instrument evidencing or granting any such Permitted Liens and the agreements listed on Schedule 7.17 ; (iv) any Contractual Obligation relating to Indebtedness permitted pursuant to Section 7.06 (including Liens permitted pursuant to Section 7.05 ) to the extent, in the good faith judgment of the Borrower, such limitations and requirements described in clauses (a), (b) or (c) above (x) are on customary market terms for Indebtedness of such type at the time entered into, so long as the Borrower has determined in good faith that such restrictions would not reasonably be expected to impair in any material respect the ability of the Loan Parties to meet their ongoing payment obligations under the Loan Documents, or (y) are not materially more restrictive, taken as a whole with respect to the Borrower and the Subsidiaries than the restrictions in the Loan Documents and (v) with respect to clause (c), any negative pledge incurred or provided in favor of any holder of Indebtedness permitted under Section 7.06(c) solely to the extent any such negative pledge relates to the property financed by or the subject of such Indebtedness.
ARTICLE VIII.
EVENTS OF DEFAULT.
8.01 Events of Default . Any of the following conditions or events shall constitute an Event of Default:
(a) the Borrower defaults in the payment of any principal on any Borrowing, Loan or Note when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise; or
(b) the Borrower defaults in the payment of any interest on any Borrowing, Loan or Note, fees or other amounts for more than five days after the same becomes due and payable; or
 
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(c) the Borrower defaults in the performance of or compliance with any term contained in Section 6.01(f)(v), 6.02, 6.11 or Article VII ; or
(d) any Loan Party defaults in the performance of or compliance with any term contained herein (other than those referred to in paragraphs (a), (b) and (c) of this Section 8.01 ) or in any other Loan Document (other than those referred to in another paragraph of this Section 8.01 ) and such default is not remedied within 30 days after the earlier of (i) a Responsible Officer of Borrower obtaining actual knowledge of such default and (ii) any Loan Party receiving written notice of such default from the Collateral Agent or Administrative Agent (any such written notice to be identified as a “notice of default” and to refer specifically to this Section 8.01(d )); or
(e) any representation or warranty made in writing by or on behalf of any Loan Party or by any Responsible Officer of such Loan Party (or in the case of the Borrower, the General Partner, on behalf of the Borrower) in this Agreement or any other Loan Document or in any writing furnished in connection with the Loan Documents proves to have been false or incorrect in any material respect on the date as of which made; or
(f) with respect to any Lease to which the Borrower or a TDC Subsidiary is a party (other than Immaterial Leases), (i) any such Lease is declared to be null and void or is otherwise unenforceable, or any party thereto claims that any such agreements is unenforceable (other than as permitted under Section 6.10 and 7.14 ), (ii) one or more payment defaults in an amount in excess of $10,000,000 in the aggregate occurs across all such Leases, after giving effect to any cure periods specified therefor (unless within 90 days after such declaration or claim such Lease is replaced by a Lease that complies with the provisions of Section 6.10 ), or (iii) any default or event of default (other than those referred to in clause (i) or (ii) of this Section 8.01(f) ) occurs under any such Lease that could reasonably be expected to have a Material Adverse Effect and such failure continues for more than 90 days; or
(g) any Security Document or any other security document entered into pursuant to Section 6.09(b) ceases to give the Collateral Agent or the Administrative Agent, as applicable, perfected first priority Liens (subject to Permitted Liens) purported to be created thereby in a material portion of the Collateral, or any other collateral created pursuant to Section 6.09(b) , taken as a whole, for any reason other than as expressly permitted hereunder or thereunder (including by amendment, waiver and/or consent granted in accordance with the terms hereunder or thereunder) or satisfaction in full of the Obligations under the Loan Documents; or
(h) without limiting clause (g), (i) the General Partner, the Borrower or any Subsidiary is in default (as principal or as guarantor or other surety) in the payment of any principal of or premium or make-whole amount or interest on any Indebtedness that is outstanding in an aggregate principal amount of at least $25,000,000 beyond any period of grace provided with respect thereto, or (ii) the General Partner, the Borrower or any Subsidiary is in default in the performance of or compliance with any term of any evidence of any Indebtedness in an aggregate outstanding principal amount of at least $25,000,000 or of any mortgage, indenture or other agreement relating thereto or any other condition exists, and as a consequence of such default or condition such Indebtedness has become, or has been declared (or one or more Persons are entitled to declare such Indebtedness to be), due and payable before its stated
 
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maturity or before its regularly scheduled dates of payment, or (iii) as a consequence of the occurrence or continuation of any event or condition (other than the passage of time or the right of the holder of Indebtedness to convert such Indebtedness into equity interests), (x) the General Partner, the Borrower or any Subsidiary has become obligated to purchase or repay Indebtedness before its regular maturity or before its regularly scheduled dates of payment in an aggregate outstanding principal amount of at least $25,000,000, or (y) one or more Persons have the right to require the General Partner, the Borrower or any Subsidiary to purchase or repay such Indebtedness; or
(i) the General Partner or any Transaction Party (other than a Qualified Lessee that is a lessee solely under Immaterial Leases) (i) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the filing against it or, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes corporate action for the purpose of any of the foregoing; or
(j) a court or Governmental Authority of competent jurisdiction enters an order appointing, without consent by the General Partner or any Transaction Party (other than a Qualified Lessee that is a lessee solely under Immaterial Leases) , a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of any such Person or any such petition shall be filed against any such Person and such petition shall not be dismissed within 60 days; or
(k) a final judgment or judgments for the payment of money aggregating in excess of $25,000,000 (or, in the case of (i) any Qualified Lessee which does not have an Investment Grade Rating or whose obligations under the applicable Leases has not been Guaranteed by an entity with an Investment Grade Credit Rating, $2,000,000 or (ii) any other Qualified Lessee, in an amount that could reasonably be expected to result in a Material Adverse Effect) are rendered against the General Partner, the Borrower or any Qualified Lessee (other than judgments payable by the General Partner, Borrower or any Subsidiary rendered in connection with condemnations in favor thereof), other than, in each case, judgments payable by the General Partner, the Borrower or such Qualified Lessee, if applicable, rendered in connection with condemnations in favor thereof, and which judgments are not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay; or
(l) if (i) any Plan shall fail to satisfy the minimum funding standards of ERISA or the Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under Section 412 of the Code, (ii) a notice of intent to terminate any Plan shall have been or is reasonably expected to be filed with the PBGC or the
 
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PBGC shall have instituted proceedings under Section 4042 of ERISA to terminate or appoint a trustee to administer any Plan or the PBGC shall have notified any Loan Party or any ERISA Affiliate that a Plan may become a subject of any such proceedings, (iii) any Plan shall be “at-risk” within the meaning of Section 303 of ERISA as of the last day of any calendar year, (iv) any Loan Party or any ERISA Affiliate shall have incurred or is reasonably expected to incur any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans (as defined in Section 3 of ERISA) or Sections 401(a)(29), 412 or 430(k) of the Code, (v) any Loan Party or any ERISA Affiliate receives any notice concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent (within the meaning of Section 4245 of ERISA), in reorganization (within the meaning of Section 4241 of ERISA, or in endangered or critical status (within the meaning of Section 432 of the Code or Section 305 of ERISA), or (vi) the Borrower establishes or amends any employee welfare benefit plan (as defined in Section 3 of ERISA) that provides post-employment welfare benefits (as described as postretirement benefit obligations in Section 5.12(d) and without regard to obligations under Section 4980B of the Code) in a manner that would increase the liability of the Borrower thereunder; and any such event or events described in clauses (i) through (vi) above, either individually or together with any other such event or events, could reasonably be expected to have a Material Adverse Effect; or
(m) any Loan Document, at any time after its execution and delivery and for any reason other than as expressly permitted hereunder or thereunder or satisfaction in full of all the Obligations under the Loan Documents, ceases to be in full force and effect; or any Loan Party contests in any manner the validity or enforceability of any Loan Document; or any Loan Party denies that it has any or further liability or obligation under any Loan Document, or purports to revoke, terminate or rescind any Loan Document; or
(n) a Change of Control shall occur; or
(o) the General Partner (i) fails to comply with Section 6.03 , 6.06 , 6.07 or 7.04 (in each case, as if such section applied to the General Partner and subject to applicable grace periods set forth in paragraphs (c) and (d) of this Section 8.01) or (ii) creates, incurs, assumes or permits to exist (upon the happening of a contingency or otherwise) any Lien on or with respect to any of its Equity Interest in the Borrower, whether now owned or held or hereafter acquired, or assigns or otherwise conveys any of its rights to receive income or profits, or on any Equity Interest in the Borrower now owned or hereafter acquired by the General Partner.
8.02 Remedies Upon Event of Default . If any Event of Default occurs and is continuing (a) of the type specified in paragraph (i)  or (j)  of Section 8.01 with respect to the Borrower, automatically the Commitments shall immediately terminate and the Loans (with accrued interest thereon and all other amounts owed under this Agreement and the other Loan Documents (including all amounts of L/C Obligations, whether or not the beneficiaries of the then outstanding Letters of Credit shall have presented then documents required thereunder)) shall immediately become due and payable, and (b) of any type other than as specified in clause (a) above, the Administrative Agent shall, at the request of, or may, with the consent of, the Required Lenders, take any or all of the following actions:
(i) declare the commitment of each Lender to make Loans and any obligation of the L/C Issuer to make L/C Credit Extensions to be terminated, whereupon such commitments and obligation shall be terminated;
 
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(ii) declare the unpaid principal amount of all outstanding Loans, all interest accrued and unpaid thereon, and all other amounts owing or payable hereunder or under any other Loan Document to be immediately due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Borrower;
(iii) require that the Borrower Cash Collateralize the L/C Obligations (in an amount equal to the Minimum Collateral Amount with respect thereto); and
(iv) exercise on behalf of itself, the Lenders and the L/C Issuer all rights and remedies available to it, the Lenders and the L/C Issuer under the Loan Documents;
provided , however , that upon the occurrence of an actual or deemed entry of an order for relief with respect to the Borrower under the Bankruptcy Code of the United States, the obligation of each Lender to make Loans and any obligation of the L/C Issuer to make L/C Credit Extensions shall automatically terminate, the unpaid principal amount of all outstanding Loans and all interest and other amounts as aforesaid shall automatically become due and payable, and the obligation of the Borrower to Cash Collateralize the L/C Obligations as aforesaid shall automatically become effective, in each case without further act of the Administrative Agent or any Lender.
8.03 Application of Funds . After the exercise of remedies provided for in Section 8.02 (or after the Loans have automatically become immediately due and payable and the L/C Obligations have automatically been required to be Cash Collateralized as set forth in the proviso to Section 8.02 ), any amounts received on account of the Obligations shall, subject to the provisions of Sections 2.12 and 2.13 , be applied by the Administrative Agent in the following order:
First , to payment of that portion of the Obligations constituting fees, indemnities, expenses and other amounts (including fees, charges and disbursements of counsel to the Administrative Agent and amounts payable under Article III ) payable to the Administrative Agent in its capacity as such;
Second , to payment of that portion of the Obligations constituting fees, indemnities and other amounts (other than principal, interest and Letter of Credit Fees) payable to the Lenders and the L/C Issuer (including fees, charges and disbursements of counsel to the respective Lenders and the L/C Issuer (including fees and time charges for attorneys who may be employees of any Lender or the L/C Issuer) and amounts payable under Article III ), ratably among them in proportion to the respective amounts described in this clause Second payable to them;
Third , to the Administrative Agent for the account of the L/C Issuer, to Cash Collateralize that portion of L/C Obligations comprised of the aggregate undrawn amount of Letters of Credit to the extent not otherwise Cash Collateralized by the Borrower pursuant to Sections 2.03 and 2.12 ;
 
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Fourth , to payment of that portion of the Obligations constituting accrued and unpaid Letter of Credit Fees, interest on the Loans, L/C Borrowings and other Obligations and scheduled periodic payments then due under Specified Swap Contracts, ratably among the Lenders and the L/C Issuer in proportion to the respective amounts described in this clause Fourth payable to them;
Fifth , to payment of that portion of the Obligations constituting unpaid principal of the Loans and L/C Borrowings and the termination values and other Obligations in respect of Specified Swap Contracts, ratably among the Lenders and the L/C Issuer in proportion to the respective amounts described in this clause Fifth held by them; and
Last , the balance, if any, after all of the Obligations have been indefeasibly paid in full, to the Borrower or as otherwise required by Law.
Subject to Sections 2.03(c) and 2.12 , amounts used to Cash Collateralize the aggregate undrawn amount of Letters of Credit pursuant to clause Third above shall be applied to satisfy drawings under such Letters of Credit as they occur. If any amount remains on deposit as Cash Collateral after all Letters of Credit have either been fully drawn or expired, such remaining amount shall be applied to the other Obligations, if any, in the order set forth above.
ARTICLE IX.
ADMINISTRATIVE AGENT
9.01 Appointment and Authority . Each of the Lenders and the L/C Issuer hereby irrevocably appoints Bank of America to act on its behalf as the Administrative Agent hereunder and under the other Loan Documents and authorizes the Administrative Agent to take such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent by the terms hereof or thereof, together with such actions and powers as are reasonably incidental thereto. The provisions of this Article are solely for the benefit of the Administrative Agent, the Lenders and the L/C Issuer, and the Borrower shall not have rights as a third party beneficiary of any of such provisions. It is understood and agreed that the use of the term “agent” herein or in any other Loan Documents (or any other similar term) with reference to the Administrative Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable Law. Instead such term is used as a matter of market custom, and is intended to create or reflect only an administrative relationship between contracting parties.
9.02 Rights as a Lender . The Person serving as the Administrative Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Administrative Agent and the term “Lender” or “Lenders” shall, unless otherwise expressly indicated or unless the context otherwise requires, include the Person serving as the Administrative Agent hereunder in its individual capacity. Such Person and its Affiliates may accept deposits from, lend money to, own securities of, act as
 
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the financial advisor or in any other advisory capacity for and generally engage in any kind of business with the Borrower or any Subsidiary or other Affiliate thereof as if such Person were not the Administrative Agent hereunder and without any duty to account therefor to the Lenders.
9.03 Exculpatory Provisions . The Administrative Agent shall not have any duties or obligations except those expressly set forth herein and in the other Loan Documents, and its duties hereunder shall be administrative in nature. Without limiting the generality of the foregoing, the Administrative Agent:
(a) shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing;
(b) shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby or by the other Loan Documents that the Administrative Agent is required to exercise as directed in writing by the Required Lenders (or such other number or percentage of the Lenders as shall be expressly provided for herein or in the other Loan Documents), provided that the Administrative Agent shall not be required to take any action that, in its opinion or the opinion of its counsel, may expose the Administrative Agent to liability or that is contrary to any Loan Document or applicable law, including for the avoidance of doubt any action that may be in violation of the automatic stay under any Debtor Relief Law or that may effect a forfeiture, modification or termination of property of a Defaulting Lender in violation of any Debtor Relief Law; and
(c) shall not, except as expressly set forth herein and in the other Loan Documents, have any duty to disclose, and shall not be liable for the failure to disclose, any Information relating to the Borrower or any of its Affiliates that is communicated to or obtained by the Person serving as the Administrative Agent or any of its Affiliates in any capacity.
The Administrative Agent shall not be liable for any action taken or not taken by it (i) with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary, or as the Administrative Agent shall believe in good faith shall be necessary, under the circumstances as provided in Sections 10.01 and 8.02 ) or (ii) in the absence of its own gross negligence or willful misconduct as determined by a court of competent jurisdiction by final and nonappealable judgment. The Administrative Agent shall be deemed not to have knowledge of any Default unless and until notice describing such Default is given in writing to the Administrative Agent by the Borrower, a Lender or the L/C Issuer.
The Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement or any other Loan Document, (ii) the contents of any certificate, report or other document delivered hereunder or thereunder or in connection herewith or therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein or therein or the occurrence of any Default, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement, any other Loan Document or any other agreement, instrument or document or (v) the satisfaction of any condition set forth in Article IV or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent.
 
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9.04 Reliance by Administrative Agent . The Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing (including any electronic message, Internet or intranet website posting or other distribution) believed by it to be genuine and to have been signed, sent or otherwise authenticated by the proper Person. The Administrative Agent also may rely upon any statement made to it orally or by telephone and believed by it to have been made by the proper Person, and shall not incur any liability for relying thereon. In determining compliance with any condition hereunder to the making of a Loan, or the issuance, extension, renewal or increase of a Letter of Credit, that by its terms must be fulfilled to the satisfaction of a Lender or the L/C Issuer, the Administrative Agent may presume that such condition is satisfactory to such Lender or the L/C Issuer unless the Administrative Agent shall have received notice to the contrary from such Lender or the L/C Issuer prior to the making of such Loan or the issuance of such Letter of Credit. The Administrative Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in good faith in accordance with the advice of any such counsel, accountants or experts.
9.05 Delegation of Duties . The Administrative Agent may perform any and all of its duties and exercise its rights and powers hereunder or under any other Loan Document by or through any one or more sub-agents appointed by the Administrative Agent. The Administrative Agent and any such sub-agent may perform any and all of its duties and exercise its rights and powers by or through their respective Related Parties. The exculpatory provisions of this Article shall apply to any such sub-agent and to the Related Parties of the Administrative Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Administrative Agent. The Administrative Agent shall not be responsible for the negligence or misconduct of any sub-agents except to the extent that a court of competent jurisdiction determines in a final and nonappealable judgment that the Administrative Agent acted with gross negligence or willful misconduct in the selection of such sub-agents.
9.06 Resignation of Administrative Agent .
(a) The Administrative Agent may at any time give notice of its resignation to the Lenders, the L/C Issuer and the Borrower. Upon receipt of any such notice of resignation, the Required Lenders shall have the right, in consultation with the Borrower and, so long as no Event of Default has occurred and is continuing at such time, subject to the consent of the Borrower, to appoint a successor, which shall be a bank with an office in the United States, or an Affiliate of any such bank with an office in the United States. If no such successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation (or such earlier day as shall be agreed by the Required Lenders) (the “ Resignation Effective Date ”), then the retiring Administrative Agent may (but shall not be obligated to) on behalf of the Lenders and the L/C Issuer, appoint a successor Administrative Agent meeting the qualifications set forth above. Whether or not a successor has been appointed, such resignation shall become effective in accordance with such notice on the Resignation Effective Date.
 
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(b) If the Person serving as Administrative Agent is a Defaulting Lender pursuant to clause (d) of the definition thereof, the Required Lenders may, to the extent permitted by applicable law, by notice in writing to the Borrower and such Person remove such Person as Administrative Agent and, in consultation with the Borrower and, so long as no Event of Default has occurred and is continuing at such time, subject to the consent of the Borrower, appoint a successor. If no such successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days (or such earlier day as shall be agreed by the Required Lenders) (the “ Removal Effective Date ”), then such removal shall nonetheless become effective in accordance with such notice on the Removal Effective Date.
(c) With effect from the Resignation Effective Date or the Removal Effective Date (as applicable) (1) the retiring or removed Administrative Agent shall be discharged from its duties and obligations hereunder and under the other Loan Documents (except that in the case of any collateral security held by the Administrative Agent on behalf of the Lenders or the L/C Issuer under any of the Loan Documents, the retiring or removed Administrative Agent shall continue to hold such collateral security until such time as a successor Administrative Agent is appointed) and (2) except for any indemnity payments or other amounts then owed to the retiring or removed Administrative Agent, all payments, communications and determinations provided to be made by, to or through the Administrative Agent shall instead be made by or to each Lender and the L/C Issuer directly, until such time, if any, as the Required Lenders appoint a successor Administrative Agent as provided for above. Upon the acceptance of a successor’s appointment as Administrative Agent hereunder, such successor shall succeed to and become vested with all of the rights, powers, privileges and duties of the retiring (or removed) Administrative Agent (other than any rights to indemnity payments or other amounts owed to the retiring or removed Administrative Agent as of the Resignation Effective Date or the Removal Effective Date, as applicable), and the retiring or removed Administrative Agent shall be discharged from all of its duties and obligations hereunder or under the other Loan Documents (if not already discharged therefrom as provided above in this Section). The fees payable by the Borrower to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor. After the retiring or removed Administrative Agent’s resignation or removal hereunder and under the other Loan Documents, the provisions of this Article and Section 10.04 shall continue in effect for the benefit of such retiring or removed Administrative Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while the retiring or removed Administrative Agent was acting as Administrative Agent.
(d) Any resignation by Bank of America as Administrative Agent pursuant to this Section shall also constitute its resignation as L/C Issuer. If Bank of America resigns as an L/C Issuer, it shall retain all the rights, powers, privileges and duties of the L/C Issuer hereunder with respect to all Letters of Credit outstanding as of the effective date of its resignation as L/C Issuer and all L/C Obligations with respect thereto, including the right to require the Lenders to make Base Rate Loans or fund risk participations in Unreimbursed Amounts pursuant to Section 2.03(c) . Upon the appointment by the Borrower of a successor L/C Issuer hereunder (which successor shall in all cases be a Lender other than a Defaulting Lender), (a) such successor shall
 
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succeed to and become vested with all of the rights, powers, privileges and duties of the retiring L/C Issuer, (b) the retiring L/C Issuer be discharged from all of their respective duties and obligations hereunder or under the other Loan Documents, and (c) the successor L/C Issuer shall issue letters of credit in substitution for the Letters of Credit, if any, outstanding at the time of such succession or make other arrangements satisfactory to Bank of America to effectively assume the obligations of Bank of America with respect to such Letters of Credit.
9.07 Non-Reliance on Administrative Agent and Other Lenders . Each Lender and the L/C Issuer acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender or any of their Related Parties and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender and the L/C Issuer also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender or any of their Related Parties and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any other Loan Document or any related agreement or any document furnished hereunder or thereunder.
9.08 No Other Duties, Etc . Anything herein to the contrary notwithstanding, the Arranger listed on the cover page hereof shall not have any powers, duties or responsibilities under this Agreement or any of the other Loan Documents, except in its capacity, as applicable, as the Administrative Agent, a Lender or the L/C Issuer hereunder.
9.09 Administrative Agent May File Proofs of Claim; Credit Bidding . In case of the pendency of any proceeding under any Debtor Relief Law or any other judicial proceeding relative to any Loan Party, the Administrative Agent (irrespective of whether the principal of any Loan or L/C Obligation shall then be due and payable as herein expressed or by declaration or otherwise and irrespective of whether the Administrative Agent shall have made any demand on the Borrower) shall be entitled and empowered, by intervention in such proceeding or otherwise
(a) to file and prove a claim for the whole amount of the principal and interest owing and unpaid in respect of the Loans, L/C Obligations and all other Obligations that are owing and unpaid and to file such other documents as may be necessary or advisable in order to have the claims of the Lenders, the L/C Issuer and the Administrative Agent (including any claim for the reasonable compensation, expenses, disbursements and advances of the Lenders, the L/C Issuer and the Administrative Agent and their respective agents and counsel and all other amounts due the Lenders, the L/C Issuer and the Administrative Agent under Sections 2.03(h) and (i) , 2.08 and 10.04 ) allowed in such judicial proceeding; and
(b) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Lender and the L/C Issuer to make such payments to the Administrative Agent and, in the event that the Administrative Agent shall consent to the making of such payments directly to the Lenders and the L/C Issuer, to pay to the Administrative Agent any amount due for the reasonable compensation, expenses, disbursements and advances of the Administrative Agent and its agents and counsel, and any other amounts due the Administrative Agent under Sections 2.08 and 10.04 .
 
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Nothing contained herein shall be deemed to authorize the Administrative Agent to authorize or consent to or accept or adopt on behalf of any Lender or the L/C Issuer any plan of reorganization, arrangement, adjustment or composition affecting the Obligations or the rights of any Lender or the L/C Issuer to authorize the Administrative Agent to vote in respect of the claim of any Lender or the L/C Issuer in any such proceeding.
In each case, subject to the provisions of the Collateral Agency Agreement, the Lenders hereby irrevocably authorize the Administrative Agent, at the direction of the Required Lenders, to credit bid all or any portion of the Obligations (including accepting some or all of the Collateral in satisfaction of some or all of the Obligations pursuant to a deed in lieu of foreclosure or otherwise) and in such manner purchase (either directly or through one or more acquisition vehicles) all or any portion of the Collateral (a) at any sale thereof conducted under the provisions of the Bankruptcy Code of the United States, including under Sections 363, 1123 or 1129 of the Bankruptcy Code of the United States, or any similar Laws in any other jurisdictions to which a Loan Party is subject, (b) at any other sale or foreclosure or acceptance of collateral in lieu of debt conducted by (or with the consent or at the direction of) the Administrative Agent (whether by judicial action or otherwise) in accordance with any applicable Law. In connection with any such credit bid and purchase, the Obligations owed to the Secured Parties shall be entitled to be, and shall be, credit bid on a ratable basis (with Obligations with respect to contingent or unliquidated claims receiving contingent interests in the acquired assets on a ratable basis that would vest upon the liquidation of such claims in an amount proportional to the liquidated portion of the contingent claim amount used in allocating the contingent interests) in the asset or assets so purchased (or in the Equity Interests or debt instruments of the acquisition vehicle or vehicles that are used to consummate such purchase). In connection with any such bid (i) the Administrative Agent shall be authorized to form one or more acquisition vehicles to make a bid, (ii) to adopt documents providing for the governance of the acquisition vehicle or vehicles ( provided that any actions by the Administrative Agent with respect to such acquisition vehicle or vehicles, including any disposition of the assets or Equity Interests thereof shall be governed, directly or indirectly, by the vote of the Required Lenders, irrespective of the termination of this Agreement and without giving effect to the limitations on actions by the Required Lenders contained in clauses (a)  through (g)  of Section 10.01 of this Agreement, (iii) the Administrative Agent shall be authorized to assign the relevant Obligations to any such acquisition vehicle pro rata by the Lenders, as a result of which each of the Lenders shall be deemed to have received a pro rata portion of any Equity Interests and/or debt instruments issued by such an acquisition vehicle on account of the assignment of the Obligations to be credit bid, all without the need for any Secured Party or acquisition vehicle to take any further action, and (iv) to the extent that Obligations that are assigned to an acquisition vehicle are not used to acquire Collateral for any reason (as a result of another bid being higher or better, because the amount of Obligations assigned to the acquisition vehicle exceeds the amount of debt credit bid by the acquisition vehicle or otherwise), such Obligations shall automatically be reassigned to the Lenders pro rata and the Equity Interests and/or debt instruments issued by any acquisition vehicle on account of the Obligations that had been assigned to the acquisition vehicle shall automatically be cancelled, without the need for any Secured Party or any acquisition vehicle to take any further action.
 
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9.10 Collateral and Guaranty Matters. Without limiting the provisions of Section 9.09 , the Lenders and the L/C Issuer irrevocably authorize the Administrative Agent, at its option and in its discretion,
(a) to release any Lien on any property granted to or held by the Administrative Agent under any Loan Document (i) upon termination of the Aggregate Commitments and payment in full of all Obligations under the Loan Documents (other than contingent obligations) and the expiration or termination of all Letters of Credit (other than Letters of Credit as to which other arrangements satisfactory to the Administrative Agent and the L/C Issuer shall have been made), (ii) that is sold or otherwise Disposed of or to be sold or otherwise Disposed of as part of or in connection with any sale or other Disposition permitted hereunder or under any other Loan Document, or (iii) subject to Section 10.01 , if approved, authorized or ratified in writing by the Required Lenders;
(b) to release any Guarantor from its obligations under the Guaranty if such Person ceases to be a Subsidiary as a result of a transaction permitted under the Loan Documents.
Upon request by the Administrative Agent at any time, the Required Lenders will confirm in writing the Administrative Agent’s authority to release or subordinate its interest in particular types or items of property, or to release any Guarantor from its obligations under the Guaranty pursuant to this Section 9.10 .
The Administrative Agent shall not be responsible for or have a duty to ascertain or inquire into any representation or warranty regarding the existence, value or collectability of the Collateral, the existence, priority or perfection of the Administrative Agent’s Lien thereon, or any certificate prepared by any Loan Party in connection therewith, nor shall the Administrative Agent be responsible or liable to the Lenders for any failure to monitor or maintain any portion of the Collateral.
Each of the Loan Parties, the Administrative Agent and the Lenders (i) consents to and ratifies the execution by the Administrative Agent of the Collateral Agency Agreement and any amendments or supplements expressly contemplated thereby and to the appointment of the Collateral Agent as provided therein, (ii) hereby agrees that it will be bound by and will take no actions contrary to the provisions of the Collateral Agency Agreement and (iii) acknowledges that it has received a copy of the Collateral Agency Agreement and that the exercise of certain of the Administrative Agent’s and the Lenders’ rights and remedies hereunder may be subject to, and restricted by, the provisions of the Collateral Agency Agreement.
ARTICLE X.
MISCELLANEOUS
10.01 Amendments, Etc . No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent to any departure by the Borrower or any other Loan Party therefrom, shall be effective unless in writing signed by the Required Lenders (or by the Administrative Agent, on behalf of the Required Lenders) and the Borrower or the applicable Loan Party, as the case may be, and acknowledged by the Administrative Agent, and each such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided , however , that no such amendment, waiver or consent shall:
(a) waive any condition set forth in Section 4.01(a) without the written consent of each Lender;
 
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(b) extend or increase the Commitment of any Lender (or reinstate any Commitment terminated pursuant to Section 8.02 ) without the written consent of such Lender;
(c) postpone any date fixed by this Agreement or any other Loan Document for any payment of principal, interest, fees or other amounts due to the Lenders (or any of them) hereunder or under any other Loan Document without the written consent of each Lender directly affected thereby;
(d) reduce the principal of, or the rate of interest specified herein on, any Loan or L/C Borrowing, or (subject to clause (iv)  of the second proviso to this Section 10.01 ) any fees or other amounts payable hereunder or under any other Loan Document, or change the manner of computation of any financial ratio (including any change in any applicable defined term) used in determining the Applicable Rate that would result in a reduction of any interest rate on any Loan or any fee payable hereunder without the written consent of each Lender directly affected thereby; provided , however , that only the consent of the Required Lenders shall be necessary (i) to amend the definition of “Default Rate” or to waive any obligation of the Borrower to pay interest or Letter of Credit Fees at the Default Rate or (ii) to amend any financial covenant hereunder (or any defined term used therein) even if the effect of such amendment would be to reduce the rate of interest on any Loan or L/C Borrowing or to reduce any fee payable hereunder;
(e) change Section 8.03 or Section 2.11 in a manner that would alter the pro rata sharing of payments required thereby without the written consent of each Lender;
(f) change any provision of this Section or the definition of “Required Lenders” or any other provision hereof specifying the number or percentage of Lenders required to amend, waive or otherwise modify any rights hereunder or make any determination or grant any consent hereunder, without the written consent of each Lender; or
(g) release all or substantially all of the value of the Guaranties or release all or substantially all of the Collateral in any transaction or series of related transactions without the written consent of each Lender, except to the extent the release of any Guarantor is permitted pursuant to Section 9.10 or, solely with respect to the Collateral, the Collateral Agency Agreement (in which case such release may be made by the Administrative Agent acting alone);
and, provided further , that (i) no amendment, waiver or consent shall, unless in writing and signed by the L/C Issuer in addition to the Lenders required above, affect the rights or duties of the L/C Issuer under this Agreement or any Issuer Document relating to any Letter of Credit issued or to be issued by it; (ii) no amendment, waiver or consent shall, unless in writing and signed by the Administrative Agent in addition to the Lenders required above, affect the rights or duties of the Administrative Agent under this Agreement or any other Loan Document; (iii) the Fee Letter may be amended, or rights or privileges thereunder waived, in a writing executed only by the parties thereto and (iv) the Administrative Agent and the Borrower shall be permitted to
 
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amend any provision of the Loan Documents (and such amendment shall be effective without any further action or consent of any other party to any Loan Document) if the Administrative Agent and the Borrower shall have jointly identified an obvious error or any error or omission of a technical or immaterial nature in any such provision. Notwithstanding anything to the contrary herein, no Defaulting Lender shall have any right to approve or disapprove any amendment, waiver or consent hereunder (and any amendment, waiver or consent which by its terms requires the consent of all Lenders or each affected Lender may be effected with the consent of the applicable Lenders other than Defaulting Lenders), except that (x) the Commitment of any Defaulting Lender may not be increased or extended without the consent of such Lender and (y) any waiver, amendment or modification requiring the consent of all Lenders or each affected Lender that by its terms affects any Defaulting Lender disproportionately adversely relative to other affected Lenders shall require the consent of such Defaulting Lender.
Notwithstanding any provision herein to the contrary, this Agreement may be amended with the written consent of the Required Lenders, the Administrative Agent and the Borrower (i) to add one or more additional revolving credit facilities to this Agreement and to permit the extensions of credit and all related obligations and liabilities arising in connection therewith from time to time outstanding to share ratably (or on a basis subordinated to the existing facilities hereunder) in the benefits of this Agreement and the other Loan Documents with the obligations and liabilities from time to time outstanding in respect of the existing facilities hereunder, and (ii) in connection with the foregoing, to permit, as deemed appropriate by the Administrative Agent and approved by the Required Lenders, the Lenders providing such additional credit facilities to participate in any required vote or action required to be approved by the Required Lenders or by any other number, percentage or class of Lenders hereunder.
10.02 Notices; Effectiveness; Electronic Communication .
(a) Notices Generally . Except in the case of notices and other communications expressly permitted to be given by telephone (and except as provided in subsection (b)  below), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by facsimile as follows, and all notices and other communications expressly permitted hereunder to be given by telephone shall be made to the applicable telephone number, as follows:
(i) if to the Borrower, the Administrative Agent, or the L/C Issuer to the address, facsimile number, electronic mail address or telephone number specified for such Person on Schedule 10.02 ; and
(ii) if to any other Lender, to the address, facsimile number, electronic mail address or telephone number specified in its Administrative Questionnaire (including, as appropriate, notices delivered solely to the Person designated by a Lender on its Administrative Questionnaire then in effect for the delivery of notices that may contain material non-public information relating to the Borrower).
Notices and other communications sent by hand or overnight courier service, or mailed by certified or registered mail, shall be deemed to have been given when received; notices and other communications sent by facsimile shall be deemed to have been given when sent (except that, if
 
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not given during normal business hours for the recipient, shall be deemed to have been given at the opening of business on the next Business Day for the recipient). Notices and other communications delivered through electronic communications to the extent provided in subsection (b)  below shall be effective as provided in such subsection (b) .
(b) Electronic Communications . Notices and other communications to the Lenders and the L/C Issuer hereunder may be delivered or furnished by electronic communication (including e-mail and Internet or intranet websites) pursuant to procedures approved by the Administrative Agent, provided that the foregoing shall not apply to notices to any Lender or the L/C Issuer pursuant to Article II if such Lender or the L/C Issuer, as applicable, has notified the Administrative Agent that it is incapable of receiving notices under such Article by electronic communication. The Administrative Agent, the L/C Issuer or the Borrower may each, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it, provided that approval of such procedures may be limited to particular notices or communications.
Unless the Administrative Agent otherwise prescribes, (i) notices and other communications sent to an e-mail address shall be deemed received upon the sender’s receipt of an acknowledgement from the intended recipient (such as by the “return receipt requested” function, as available, return e-mail or other written acknowledgement), and (ii) notices or communications posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its e-mail address as described in the foregoing clause (i) of notification that such notice or communication is available and identifying the website address therefor; provided that, for both clauses (i)  and (ii) , if such notice, email or other communication is not sent during the normal business hours of the recipient, such notice, email or communication shall be deemed to have been sent at the opening of business on the next business day for the recipient.
(c) The Platform . THE PLATFORM IS PROVIDED “AS IS” AND “AS AVAILABLE.” THE AGENT PARTIES (AS DEFINED BELOW) DO NOT WARRANT THE ACCURACY OR COMPLETENESS OF THE BORROWER MATERIALS OR THE ADEQUACY OF THE PLATFORM, AND EXPRESSLY DISCLAIM LIABILITY FOR ERRORS IN OR OMISSIONS FROM THE BORROWER MATERIALS. NO WARRANTY OF ANY KIND, EXPRESS, IMPLIED OR STATUTORY, INCLUDING ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT OF THIRD PARTY RIGHTS OR FREEDOM FROM VIRUSES OR OTHER CODE DEFECTS, IS MADE BY ANY AGENT PARTY IN CONNECTION WITH THE BORROWER MATERIALS OR THE PLATFORM. In no event shall the Administrative Agent or any of its Related Parties (collectively, the “ Agent Parties ”) have any liability to the Borrower, any Lender, the L/C Issuer or any other Person for losses, claims, damages, liabilities or expenses of any kind (whether in tort, contract or otherwise) arising out of the Borrower’s, any Loan Party’s or the Administrative Agent’s transmission of Borrower Materials or notices through the Platform, any other electronic platform or electronic messaging service, or through the Internet.
(d) Change of Address, Etc . Each of the Borrower, the Administrative Agent, and the L/C Issuer may change its address, facsimile or telephone number for notices and other
 
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communications hereunder by notice to the other parties hereto. Each other Lender may change its address, facsimile or telephone number for notices and other communications hereunder by notice to the Borrower, the Administrative Agent, and the L/C Issuer. In addition, each Lender agrees to notify the Administrative Agent from time to time to ensure that the Administrative Agent has on record (i) an effective address, contact name, telephone number, facsimile number and electronic mail address to which notices and other communications may be sent and (ii) accurate wire instructions for such Lender. Furthermore, each Public Lender agrees to cause at least one individual at or on behalf of such Public Lender to at all times have selected the “Private Side Information” or similar designation on the content declaration screen of the Platform in order to enable such Public Lender or its delegate, in accordance with such Public Lender’s compliance procedures and applicable Law, including United States federal and state securities Laws, to make reference to Borrower Materials that are not made available through the “Public Side Information” portion of the Platform and that may contain material non-public information with respect to the Borrower or its securities for purposes of United States federal or state securities laws.
(e) Reliance by Administrative Agent, L/C Issuer and Lenders . The Administrative Agent, the L/C Issuer and the Lenders shall be entitled to rely and act upon any notices (including telephonic notices or electronic Loan Notices and Letter of Credit Applications) purportedly given by or on behalf of the Borrower even if (i) such notices were not made in a manner specified herein, were incomplete or were not preceded or followed by any other form of notice specified herein, or (ii) the terms thereof, as understood by the recipient, varied from any confirmation thereof. The Borrower shall indemnify the Administrative Agent, the L/C Issuer, each Lender and the Related Parties of each of them from all losses, costs, expenses and liabilities resulting from the reliance by such Person on each notice purportedly given by or on behalf of the Borrower. All telephonic notices to and other telephonic communications with the Administrative Agent may be recorded by the Administrative Agent, and each of the parties hereto hereby consents to such recording.
10.03 No Waiver; Cumulative Remedies; Enforcement . No failure by any Lender, the L/C Issuer or the Administrative Agent to exercise, and no delay by any such Person in exercising, any right, remedy, power or privilege hereunder or under any other Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided, and provided under each other Loan Document, are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law.
Notwithstanding anything to the contrary contained herein or in any other Loan Document, the authority to enforce rights and remedies hereunder and under the other Loan Documents against the Loan Parties or any of them shall be vested exclusively in, and all actions and proceedings at law in connection with such enforcement shall be instituted and maintained exclusively by, the Administrative Agent in accordance with Section 8.02 for the benefit of all the Lenders and the L/C Issuer; provided , however , that the foregoing shall not prohibit (a) the Administrative Agent from exercising on its own behalf the rights and remedies that inure to its benefit (solely in its capacity as Administrative Agent) hereunder and under the other Loan Documents, (b) the L/C Issuer from exercising the rights and remedies that inure to its benefit
 
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(solely in its capacity as L/C Issuer) hereunder and under the other Loan Documents, (c) any Lender from exercising setoff rights in accordance with Section 10.08 (subject to the terms of Section 2.11 ), or (d) any Lender from filing proofs of claim or appearing and filing pleadings on its own behalf during the pendency of a proceeding relative to any Loan Party under any Debtor Relief Law; and provided , further , that if at any time there is no Person acting as Administrative Agent hereunder and under the other Loan Documents, then (i) the Required Lenders shall have the rights otherwise ascribed to the Administrative Agent pursuant to Section 8.02 and (ii) in addition to the matters set forth in clauses (b) , (c)  and (d)  of the preceding proviso and subject to Section 2.11 , any Lender may, with the consent of the Required Lenders, enforce any rights and remedies available to it and as authorized by the Required Lenders.
10.04 Expenses; Indemnity; Damage Waiver .
(a) Costs and Expenses . The Borrower shall pay (i) all reasonable out-of-pocket expenses incurred by the Administrative Agent and its Affiliates (including the reasonable fees, charges and disbursements of counsel for the Administrative Agent), in connection with the syndication of the credit facilities provided for herein, the preparation, negotiation, execution, delivery and administration of this Agreement and the other Loan Documents or any amendments, modifications or waivers of the provisions hereof or thereof (whether or not the transactions contemplated hereby or thereby shall be consummated), (ii) all reasonable out-of-pocket expenses incurred by the L/C Issuer in connection with the issuance, amendment, renewal or extension of any Letter of Credit or any demand for payment thereunder and (iii) all out-of-pocket expenses incurred by the Administrative Agent, any Lender or the L/C Issuer (including the fees, charges and disbursements of any counsel for the Administrative Agent, any Lender or the L/C Issuer), and shall pay all fees and time charges for attorneys who may be employees of the Administrative Agent, any Lender or the L/C Issuer, in connection with the enforcement or protection of its rights (A) in connection with this Agreement and the other Loan Documents, including its rights under this Section, or (B) in connection with the Loans made or Letters of Credit issued hereunder, including all such out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect of such Loans or Letters of Credit.
(b) Indemnification by the Borrower . The Borrower shall indemnify the Administrative Agent (and any sub-agent thereof), each Lender and the L/C Issuer, and each Related Party of any of the foregoing Persons (each such Person being called an “ Indemnitee ”) against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses (including the fees, charges and disbursements of any counsel for any Indemnitee), and shall indemnify and hold harmless each Indemnitee from all fees and time charges and disbursements for attorneys who may be employees of any Indemnitee, incurred by any Indemnitee or asserted against any Indemnitee by any Person (including the Borrower or any other Loan Party) other than such Indemnitee and its Related Parties arising out of, in connection with, or as a result of (i) the execution or delivery of this Agreement, any other Loan Document or any agreement or instrument contemplated hereby or thereby, the performance by the parties hereto of their respective obligations hereunder or thereunder, the consummation of the transactions contemplated hereby or thereby, or, in the case of the Administrative Agent (and any sub-agent thereof) and its Related Parties only, the administration of this Agreement and the other Loan Documents, (ii) any Loan or Letter of Credit or the use or proposed use of the proceeds therefrom (including any refusal by the L/C Issuer to honor a demand for payment
 
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under a Letter of Credit if the documents presented in connection with such demand do not strictly comply with the terms of such Letter of Credit), (iii) any actual or alleged presence or release of Hazardous Materials on or from any property owned or operated by the Borrower or any of its Subsidiaries, or any Environmental Liability related in any way to the Borrower or any of its Subsidiaries, or (iv) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory, whether brought by a third party or by the Borrower or any other Loan Party, and regardless of whether any Indemnitee is a party thereto , IN ALL CASES, WHETHER OR NOT CAUSED BY OR ARISING, IN WHOLE OR IN PART, OUT OF THE COMPARATIVE, CONTRIBUTORY OR SOLE NEGLIGENCE OF THE INDEMNITEE ; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses (x) are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee or (y) result from a claim brought by the Borrower or any other Loan Party against an Indemnitee for breach in bad faith of such Indemnitee’s obligations hereunder or under any other Loan Document, if the Borrower or such Loan Party has obtained a final and nonappealable judgment in its favor on such claim as determined by a court of competent jurisdiction. Without limiting the provisions of Section 3.01(c) , this Section 10.04(b) shall not apply with respect to Taxes other than any Taxes that represent losses, claims, damages, etc. arising from any non-Tax claim.
(c) Reimbursement by Lenders . To the extent that the Borrower for any reason fails to indefeasibly pay any amount required under subsection (a) or  (b) of this Section to be paid by it to the Administrative Agent (or any sub-agent thereof), the L/C Issuer or any Related Party of any of the foregoing, each Lender severally agrees to pay to the Administrative Agent (or any such sub-agent), the L/C Issuer or such Related Party, as the case may be, such Lender’s pro rata share (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought based on each Lender’s share of the Total Credit Exposure at such time) of such unpaid amount (including any such unpaid amount in respect of a claim asserted by such Lender), such payment to be made severally among them based on such Lenders’ Applicable Percentage (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought), provided, further that, the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent (or any such sub-agent), or the L/C Issuer in its capacity as such, or against any Related Party of any of the foregoing acting for the Administrative Agent (or any such sub-agent), or the L/C Issuer in connection with such capacity. The obligations of the Lenders under this subsection (c) are subject to the provisions of Section 2.10(d) .
(d) Waiver of Consequential Damages, Etc. To the fullest extent permitted by applicable Law, the Borrower shall not assert, and hereby waives, and acknowledges that no other Person shall have, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement, any other Loan Document or any agreement or instrument contemplated hereby, the transactions contemplated hereby or thereby, any Loan or Letter of Credit or the use of the proceeds thereof. No Indemnitee referred to in subsection (b)  above shall be liable for any damages arising from the use by unintended recipients of any information or other materials distributed to such unintended recipients by such
 
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Indemnitee through telecommunications, electronic or other information transmission systems in connection with this Agreement or the other Loan Documents or the transactions contemplated hereby or thereby other than for direct or actual damages resulting from the gross negligence or willful misconduct of such Indemnitee as determined by a final and nonappealable judgment of a court of competent jurisdiction.
(e) Payments . All amounts due under this Section shall be payable not later than ten Business Days after demand therefor.
(f) Survival . The agreements in this Section and the indemnity provisions of Section 10.02(e) shall survive the resignation of the Administrative Agent, the L/C Issuer, the replacement of any Lender, the termination of the Aggregate Commitments and the repayment, satisfaction or discharge of all the other Obligations under the Loan Documents.
10.05 Payments Set Aside . To the extent that any payment by or on behalf of the Borrower is made to the Administrative Agent, the L/C Issuer or any Lender, or the Administrative Agent, the L/C Issuer or any Lender exercises its right of setoff, and such payment or the proceeds of such setoff or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by the Administrative Agent, the L/C Issuer or such Lender in its discretion) to be repaid to a trustee, receiver or any other party, in connection with any proceeding under any Debtor Relief Law or otherwise, then (a) to the extent of such recovery, the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such setoff had not occurred, and (b) each Lender and the L/C Issuer severally agrees to pay to the Administrative Agent upon demand its applicable share (without duplication) of any amount so recovered from or repaid by the Administrative Agent, plus interest thereon from the date of such demand to the date such payment is made at a rate per annum equal to the Federal Funds Rate from time to time in effect. The obligations of the Lenders and the L/C Issuer under clause (b)  of the preceding sentence shall survive the payment in full of the Obligations under the Loan Documents and the termination of this Agreement.
10.06 Successors and Assigns .
(a) Successors and Assigns Generally . The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of the Administrative Agent and each Lender and no Lender may assign or otherwise transfer any of its rights or obligations hereunder except (i) to an assignee in accordance with the provisions of subsection (b)  of this Section, (ii) by way of participation in accordance with the provisions of subsection (d)  of this Section, or (iii) by way of pledge or assignment of a security interest subject to the restrictions of subsection (f)  of this Section (and any other attempted assignment or transfer by any party hereto shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby, Participants to the extent provided in subsection (d)  of this Section and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent, the L/C Issuer and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement.
 
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(b) Assignments by Lenders . Any Lender may at any time assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans (including for purposes of this subsection (b) , participations in L/C Obligations) at the time owing to it); provided that any such assignment shall be subject to the following conditions:
(i) Minimum Amounts .
(A) in the case of an assignment of the entire remaining amount of the assigning Lender’s Commitment and/or the Loans at the time owing to it or contemporaneous assignments to related Approved Funds that equal at least the amount specified in paragraph (b)(i)(B) of this Section in the aggregate or in the case of an assignment to a Lender, an Affiliate of a Lender or an Approved Fund, no minimum amount need be assigned; and
(B) in any case not described in subsection (b)(i)(A) of this Section, the aggregate amount of the Commitment (which for this purpose includes Loans outstanding thereunder) or, if the Commitment is not then in effect, the principal outstanding balance of the Loans of the assigning Lender subject to each such assignment, determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent or, if “Trade Date” is specified in the Assignment and Assumption, as of the Trade Date, shall not be less than $5,000,000 unless each of the Administrative Agent and, so long as no Event of Default has occurred and is continuing, the Borrower otherwise consents (each such consent not to be unreasonably withheld or delayed).
(ii) Proportionate Amounts . Each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender’s rights and obligations under this Agreement with respect to the Loans or the Commitment assigned,
(iii) Required Consents . No consent shall be required for any assignment except to the extent required by subsection (b)(i)(B) of this Section and, in addition:
(A) the consent of the Borrower (such consent not to be unreasonably withheld or delayed) shall be required unless (1) an Event of Default has occurred and is continuing at the time of such assignment or (2) such assignment is to a Lender, an Affiliate of a Lender or an Approved Fund; provided that the Borrower shall be deemed to have consented to any such assignment unless it shall object thereto by written notice to the Administrative Agent within five (5) Business Days after having received notice thereof;;
(B) the consent of the Administrative Agent (such consent not to be unreasonably withheld or delayed) shall be required if such assignment is to a Person that is not a Lender, an Affiliate of such Lender or an Approved Fund with respect to such Lender ; and
(C) the consent of the L/C Issuer (such consent not to be unreasonably withheld or delayed) shall be required for any assignment.
 
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(iv) Assignment and Assumption . The parties to each assignment (other than pursuant to Section 9.09 ) shall execute and deliver to the Administrative Agent an Assignment and Assumption, together with a processing and recordation fee in the amount of $3,500; provided , however , that the Administrative Agent may, in its sole discretion, elect to waive such processing and recordation fee in the case of any assignment. The assignee, if it is not a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire.
(v) No Assignment to Certain Persons . No such assignment shall be made (A) to the Borrower or any of the Borrower’s Affiliates or Subsidiaries (including, without limitation, any Hunt Family Members), (B) to any Defaulting Lender or any of its Subsidiaries, or any Person who, upon becoming a Lender hereunder, would constitute any of the foregoing Persons described in this clause (B) , or (C) to a natural Person.
(vi) Certain Additional Payments . In connection with any assignment of rights and obligations of any Defaulting Lender hereunder, no such assignment shall be effective unless and until, in addition to the other conditions thereto set forth herein, the parties to the assignment shall make such additional payments to the Administrative Agent in an aggregate amount sufficient, upon distribution thereof as appropriate (which may be outright payment, purchases by the assignee of participations or subparticipations, or other compensating actions, including funding, with the consent of the Borrower and the Administrative Agent, the applicable pro rata share of Loans previously requested but not funded by the Defaulting Lender, to each of which the applicable assignee and assignor hereby irrevocably consent), to (x) pay and satisfy in full all payment liabilities then owed by such Defaulting Lender to the Administrative Agent, the L/C Issuer or any Lender hereunder (and interest accrued thereon) and (y) acquire (and fund as appropriate) its full pro rata share of all Loans and participations in Letters of Credit in accordance with its Applicable Percentage. Notwithstanding the foregoing, in the event that any assignment of rights and obligations of any Defaulting Lender hereunder shall become effective under applicable Law without compliance with the provisions of this paragraph, then the assignee of such interest shall be deemed to be a Defaulting Lender for all purposes of this Agreement until such compliance occurs.
Subject to acceptance and recording thereof by the Administrative Agent pursuant to subsection (c)  of this Section, from and after the effective date specified in each Assignment and Assumption, the assignee thereunder shall be a party to this Agreement and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender’s rights and obligations under this Agreement, such Lender shall cease to be a party hereto) but shall continue to be entitled to the benefits of Sections 3.01 , 3.04 , 3.05 , and 10.04 with respect to facts and circumstances occurring prior to the effective date of such assignment; provided , that except to the extent otherwise expressly agreed by the affected parties, no
 
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assignment by a Defaulting Lender will constitute a waiver or release of any claim of any party hereunder arising from that Lender’s having been a Defaulting Lender. Upon request, the Borrower (at its expense) shall execute and deliver a Note to the assignee Lender. Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this subsection shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with subsection (d)  of this Section.
(c) Register . The Administrative Agent, acting solely for this purpose as an agent of the Borrower (and such agency being solely for tax purposes), shall maintain at the Administrative Agent’s Office a copy of each Assignment and Assumption delivered to it (or the equivalent thereof in electronic form) and a register for the recordation of the names and addresses of the Lenders, and the Commitments of, and principal amounts (and stated interest) of the Loans and L/C Obligations owing to, each Lender pursuant to the terms hereof from time to time (the “ Register ”). The entries in the Register shall be conclusive absent manifest error, and the Borrower, the Administrative Agent and the Lenders shall treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower and any Lender, at any reasonable time and from time to time upon reasonable prior notice.
(d) Participations . Any Lender may at any time, without the consent of, or notice to, the Borrower or the Administrative Agent, sell participations to any Person (other than a natural Person, a Defaulting Lender or the Borrower or any of the Borrower’s Affiliates or Subsidiaries) (each, a “ Participant ”) in all or a portion of such Lender’s rights and/or obligations under this Agreement (including all or a portion of its Commitment and/or the Loans (including such Lender’s participations in L/C Obligations) owing to it); provided that (i) such Lender’s obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Borrower, the Administrative Agent, the Lenders and the L/C Issuer shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement. For the avoidance of doubt, each Lender shall be responsible for the indemnity under Section 10.04(c) without regard to the existence of any participation.
Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, waiver or other modification described in the first proviso to Section 10.01 that affects such Participant. The Borrower agrees that each Participant shall be entitled to the benefits of Sections 3.01 , 3.04 and 3.05 (subject to the requirements and limitations therein, including the requirements under Section 3.01(e) (it being understood that the documentation required under Section 3.01(e) shall be delivered to the Lender who sells the participation)) to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b) of this Section; provided that such Participant (A) agrees to be subject to the provisions of Sections 3.06 and 10.13 as if it were an assignee under paragraph (b) of this Section and (B) shall not be entitled to receive any greater payment under Sections 3.01 or 3.04 , with respect to any participation, than the Lender from whom it acquired the
 
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applicable participation would have been entitled to receive, except to the extent such entitlement to receive a greater payment results from a Change in Law that occurs after the Participant acquired the applicable participation. Each Lender that sells a participation agrees, at the Borrower’s request and expense, to use reasonable efforts to cooperate with the Borrower to effectuate the provisions of Sections 3.06 and 10.13 with respect to any Participant. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 10.08 as though it were a Lender; provided that such Participant agrees to be subject to Section 2.10 as though it were a Lender. Each Lender that sells a participation shall, acting solely for this purpose as a nonfiduciary agent of the Borrower, maintain a register on which it enters the name and address of each Participant and the principal amounts (and stated interest) of each Participant’s interest in the Loans or other obligations under the Loan Documents (the “ Participant Register ”); provided that no Lender shall have any obligation to disclose all or any portion of the Participant Register (including the identity of any Participant or any information relating to a Participant’s interest in any commitments, loans, letters of credit or its other obligations under any Loan Document) to any Person except to the extent that such disclosure is necessary to establish that such commitment, loan, letter of credit or other obligation is in registered form under Section 5f.103-1(c) of the United States Treasury Regulations. The entries in the Participant Register shall be conclusive absent manifest error, and such Lender shall treat each Person whose name is recorded in the Participant Register as the owner of such participation for all purposes of this Agreement notwithstanding any notice to the contrary. For the avoidance of doubt, the Administrative Agent (in its capacity as Administrative Agent) shall have no responsibility for maintaining a Participant Register.
(e) Certain Pledges . Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement (including under its Note, if any) to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank; provided that no such pledge or assignment shall release such Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.
(f) Resignation as L/C Issuer after Assignment . Notwithstanding anything to the contrary contained herein, if at any time Bank of America assigns all of its Commitment and Loans pursuant to subsection (b)  above, Bank of America may, upon 30 days’ notice to the Borrower and the Lenders, resign as L/C Issuer. In the event of any such resignation as L/C Issuer, the Borrower shall be entitled to appoint from among the Lenders a successor L/C Issuer hereunder; provided , however , that no failure by the Borrower to appoint any such successor shall affect the resignation of Bank of America as L/C Issuer. If Bank of America resigns as L/C Issuer, it shall retain all the rights, powers, privileges and duties of the L/C Issuer hereunder with respect to all Letters of Credit outstanding as of the effective date of its resignation as L/C Issuer and all L/C Obligations with respect thereto (including the right to require the Lenders to make Base Rate Loans or fund risk participations in Unreimbursed Amounts pursuant to Section 2.03(c) ). Upon the appointment of a successor L/C Issuer, (a) such successor shall succeed to and become vested with all of the rights, powers, privileges and duties of the retiring L/C Issuer, and (b) the successor L/C Issuer shall issue letters of credit in substitution for the Letters of Credit, if any, outstanding at the time of such succession or make other arrangements satisfactory to Bank of America to effectively assume the obligations of Bank of America with respect to such Letters of Credit.
 
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10.07 Treatment of Certain Information; Confidentiality . Each of the Administrative Agent, the Lenders and the L/C Issuer agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its Affiliates and to its Related Parties (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent required or requested by any regulatory authority purporting to have jurisdiction over such Person or its Related Parties (including any self-regulatory authority, such as the National Association of Insurance Commissioners), (c) to the extent required by applicable Laws or regulations or by any subpoena or similar legal process, (d) to any other party hereto, (e) in connection with the exercise of any remedies hereunder or under any other Loan Document or any action or proceeding relating to this Agreement or any other Loan Document or the enforcement of rights hereunder or thereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to (i) any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights and obligations under this Agreement or any Eligible Assignee invited to be a Lender pursuant to Section 2.14(c) or (ii) any actual or prospective party (or its Related Parties) to any swap, derivative or other transaction under which payments are to be made by reference to the Borrower and its obligations, this Agreement or payments hereunder, (g) on a confidential basis to (i) any rating agency in connection with rating the Borrower or its Subsidiaries or the credit facilities provided hereunder or (ii) the CUSIP Service Bureau or any similar agency in connection with the issuance and monitoring of CUSIP numbers or other market identifiers with respect to the credit facilities provided hereunder, (h) with the consent of the Borrower or (i) to the extent such Information (x) becomes publicly available other than as a result of a breach of this Section or (y) becomes available to the Administrative Agent, any Lender, the L/C Issuer or any of their respective Affiliates on a nonconfidential basis from a source other than the Borrower. For purposes of this Section, “Information” means all information received from the Borrower or any Subsidiary relating to the Borrower or any Subsidiary or any of their respective businesses, other than any such information that is available to the Administrative Agent, any Lender or the L/C Issuer on a nonconfidential basis prior to disclosure by the Borrower or any Subsidiary, provided that, in the case of information received from the General Partner, the Borrower or any Subsidiary after the date hereof, such information is not designated as “Public Side Information” or is clearly identified at the time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information.
Each of the Administrative Agent, the Lenders and the L/C Issuer acknowledges that (a) the Information may include material non-public information concerning the Borrower or a Subsidiary, as the case may be, (b) it has developed compliance procedures regarding the use of material non-public information and (c) it will handle such material non-public information in accordance with applicable Law, including United States federal and state securities Laws.
10.08 Right of Setoff . If an Event of Default shall have occurred and be continuing, each Lender, the L/C Issuer and each of their respective Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by applicable Law, to set off and apply any and all deposits (general or special, time or demand, provisional or final, in whatever
 
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currency) at any time held and other obligations (in whatever currency) at any time owing by such Lender, the L/C Issuer or any such Affiliate to or for the credit or the account of the Borrower against any and all of the obligations of the Borrower now or hereafter existing under this Agreement or any other Loan Document to such Lender or the L/C Issuer or their respective Affiliates, irrespective of whether or not such Lender, L/C Issuer or Affiliate shall have made any demand under this Agreement or any other Loan Document and although such obligations of the Borrower may be contingent or unmatured or are owed to a branch, office or Affiliate of such Lender or the L/C Issuer different from the branch, office or Affiliate holding such deposit or obligated on such indebtedness; provided, that in the event that any Defaulting Lender shall exercise any such right of setoff, (x) all amounts so set off shall be paid over immediately to the Administrative Agent for further application in accordance with the provisions of Section 2.13 and, pending such payment, shall be segregated by such Defaulting Lender from its other funds and deemed held in trust for the benefit of the Administrative Agent, the L/C Issuer and the Lenders, and (y) the Defaulting Lender shall provide promptly to the Administrative Agent a statement describing in reasonable detail the Obligations owing to such Defaulting Lender as to which it exercised such right of setoff. The rights of each Lender, the L/C Issuer and their respective Affiliates under this Section are in addition to other rights and remedies (including other rights of setoff) that such Lender, the L/C Issuer or their respective Affiliates may have. Each Lender and the L/C Issuer agrees to notify the Borrower and the Administrative Agent promptly after any such setoff and application, provided that the failure to give such notice shall not affect the validity of such setoff and application .
10.09 Interest Rate Limitation . Notwithstanding anything to the contrary contained in any Loan Document, the interest paid or agreed to be paid under the Loan Documents shall not exceed the maximum rate of non-usurious interest permitted by applicable Law (the “ Maximum Rate ”). If the Administrative Agent or any Lender shall receive interest in an amount that exceeds the Maximum Rate, the excess interest shall be applied to the principal of the Loans or, if it exceeds such unpaid principal, refunded to the Borrower. In determining whether the interest contracted for, charged, or received by the Administrative Agent or a Lender exceeds the Maximum Rate, such Person may, to the extent permitted by applicable Law, (a) characterize any payment that is not principal as an expense, fee, or premium rather than interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the contemplated term of the Obligations under the Loan Documents.
10.10 Counterparts; Integration; Effectiveness. This Agreement may be executed in counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement, the other Loan Documents, and any separate letter agreements with respect to fees payable to the Administrative Agent or the L/C Issuer, constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Except as provided in Section 4.01 , this Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof that, when taken together, bear the signatures of each of the other parties hereto. Delivery of an executed counterpart of a signature page of this Agreement by facsimile or other electronic imaging means (e.g. “pdf” or “tif”) shall be effective as delivery of a manually executed counterpart of this Agreement.
 
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10.11 Survival of Representations and Warranties. All representations and warranties made hereunder and in any other Loan Document or other document delivered pursuant hereto or thereto or in connection herewith or therewith shall survive the execution and delivery hereof and thereof. Such representations and warranties have been or will be relied upon by the Administrative Agent and each Lender, regardless of any investigation made by the Administrative Agent or any Lender or on their behalf and notwithstanding that the Administrative Agent or any Lender may have had notice or knowledge of any Default at the time of any Credit Extension, and shall continue in full force and effect as long as any Loan or any other Obligation under the Loan Documents shall remain unpaid or unsatisfied or any Letter of Credit shall remain outstanding.
10.12 Severability . If any provision of this Agreement or the other Loan Documents is held to be illegal, invalid or unenforceable, (a) the legality, validity and enforceability of the remaining provisions of this Agreement and the other Loan Documents shall not be affected or impaired thereby and (b) the parties shall endeavor in good faith negotiations to replace the illegal, invalid or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the illegal, invalid or unenforceable provisions. The invalidity of a provision in a particular jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Without limiting the foregoing provisions of this Section 10.12 , if and to the extent that the enforceability of any provisions in this Agreement relating to Defaulting Lenders shall be limited by Debtor Relief Laws, as determined in good faith by the Administrative Agent or the L/C Issuer, then such provisions shall be deemed to be in effect only to the extent not so limited.
10.13 Replacement of Lenders. If the Borrower is entitled to replace a Lender pursuant to the provisions of Section 3.06 , or if any Lender is a Defaulting Lender or a Non-Consenting Lender, then the Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in, and consents required by, Section 10.06 ), all of its interests, rights (other than its existing rights to payments pursuant to Sections 3.01 and 3.04 ) and obligations under this Agreement and the related Loan Documents to an Eligible Assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment), provided that:
(a) the Borrower shall have paid to the Administrative Agent the assignment fee (if any) specified in Section 10.06(b) ;
(b) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans and L/C Advances, accrued interest thereon, accrued fees and all other amounts payable to it hereunder and under the other Loan Documents (including any amounts under Section 3.05 ) from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts);
 
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(c) in the case of any such assignment resulting from a claim for compensation under Section 3.04 or payments required to be made pursuant to Section 3.01 , such assignment will result in a reduction in such compensation or payments thereafter;
(d) such assignment does not conflict with applicable Laws; and
(e) in the case of an assignment resulting from a Lender becoming a Non-Consenting Lender, the applicable assignee shall have consented to the applicable amendment, waiver or consent.
(f) A Lender shall not be required to make any such assignment or delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrower to require such assignment and delegation cease to apply.
10.14 Governing Law; Jurisdiction; Etc .
(a) GOVERNING LAW . This Agreement and the other Loan Documents and any claims, controversy, dispute or cause of action (whether in contract or tort or otherwise) based upon, arising out of or relating to this Agreement or any other Loan Document (except, as to any other Loan Document, as expressly set forth therein) and the transactions contemplated hereby and thereby shall be governed by, and construed in accordance with, the law of the State of New York.
(b) SUBMISSION TO JURISDICTION . THE BORROWER IRREVOCABLY AND UNCONDITIONALLY agrees that it will not commence any action, litigation or proceeding of any kind or description, whether in law or equity, whether in contract or in tort or otherwise, against the Administrative Agent, any Lender, the L/C Issuer, or any Related Party of the foregoing in any way relating to this Agreement or any other Loan Document or the transactions relating hereto or thereto, in any forum other than THE COURTS OF THE STATE OF NEW YORK SITTING IN NEW YORK COUNTY AND OF THE UNITED STATES DISTRICT COURT OF THE SOUTHERN DISTRICT OF NEW YORK, AND ANY APPELLATE COURT FROM ANY THEREOF, AND EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY SUBMITS TO THE JURISDICTION OF SUCH COURTS AND AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION, LITIGATION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH NEW YORK STATE COURT OR, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, IN SUCH FEDERAL COURT. EACH OF THE PARTIES HERETO AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION, LITIGATION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS AGREEMENT OR IN ANY OTHER LOAN DOCUMENT SHALL AFFECT ANY RIGHT THAT THE ADMINISTRATIVE AGENT, ANY LENDER OR THE L/C ISSUER MAY OTHERWISE HAVE TO BRING ANY ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AGAINST THE BORROWER OR ITS PROPERTIES IN THE COURTS OF ANY JURISDICTION.
 
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(c) WAIVER OF VENUE . THE BORROWER IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT IN ANY COURT REFERRED TO IN PARAGRAPH (B) OF THIS SECTION. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING IN ANY SUCH COURT.
(d) SERVICE OF PROCESS . EACH PARTY HERETO IRREVOCABLY CONSENTS TO SERVICE OF PROCESS IN THE MANNER PROVIDED FOR NOTICES IN SECTION 10.02 . NOTHING IN THIS AGREEMENT WILL AFFECT THE RIGHT OF ANY PARTY HERETO TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY APPLICABLE LAW.
10.15 Waiver of Jury Trial . EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.
10.16 No Advisory or Fiduciary Responsibility . In connection with all aspects of each transaction contemplated hereby (including in connection with any amendment, waiver or other modification hereof or of any other Loan Document), the Borrower acknowledges and agrees, and acknowledges its Affiliates’ understanding, that: (i) (A) the arranging and other services regarding this Agreement provided by the Administrative Agent , the Arranger, and the Lenders are arm’s-length commercial transactions between the Borrower and its Affiliates, on the one hand, and the Administrative Agent , the Arranger, and the Lenders, on the other hand, (B) the Borrower has consulted its own legal, accounting, regulatory and tax advisors to the extent it has deemed appropriate, and (C) the Borrower is capable of evaluating, and understands and accepts, the terms, risks and conditions of the transactions contemplated hereby and by the other Loan Documents; (ii) (A) the Administrative Agent , the Arranger and each Lender is and has been acting solely as a principal and, except as expressly agreed in writing by the relevant parties, has not been, is not, and will not be acting as an advisor, agent or fiduciary for the Borrower or any of its Affiliates, or any other Person and (B) neither the Administrative Agent , the Arranger nor any Lender has any obligation to the Borrower or any of its Affiliates with respect to the transactions contemplated hereby except those obligations expressly set forth
 
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herein and in the other Loan Documents; and (iii) the Administrative Agent , the Arranger and the Lenders and their respective Affiliates may be engaged in a broad range of transactions that involve interests that differ from those of the Borrower and its Affiliates, and neither the Administrative Agent , the Arranger, nor any Lender has any obligation to disclose any of such interests to the Borrower or its Affiliates. To the fullest extent permitted by Law, the Borrower hereby waives and releases any claims that it may have against the Administrative Agent, the Arranger or any Lender with respect to any breach or alleged breach of agency or fiduciary duty in connection with any aspect of any transaction contemplated hereby.
10.17 Electronic Execution of Assignments and Certain Other Documents . The words “execute,” “execution,” “signed,” “signature,” and words of like import in or related to any document to be signed in connection with this Agreement and the transactions contemplated hereby (including without limitation Assignment and Assumptions, amendments or other modifications, Loan Notices, waivers and consents) shall be deemed to include electronic signatures, the electronic matching of assignment terms and contract formations on electronic platforms approved by the Administrative Agent, or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any applicable law, including the Federal Electronic Signatures in Global and National Commerce Act, the New York State Electronic Signatures and Records Act, or any other similar state laws based on the Uniform Electronic Transactions Act; provided that notwithstanding anything contained herein to the contrary the Administrative Agent is under no obligation to agree to accept electronic signatures in any form or in any format unless expressly agreed to by the Administrative Agent pursuant to procedures approved by it.
10.18 USA PATRIOT Act. Each Lender that is subject to the Act (as hereinafter defined) and the Administrative Agent (for itself and not on behalf of any Lender) hereby notifies the Borrower that pursuant to the requirements of the USA PATRIOT Act it is required to obtain, verify and record information that identifies the Borrower, which information includes the name and address of the Borrower and other information that will allow such Lender or the Administrative Agent, as applicable, to identify the Borrower in accordance with the Act. The Borrower shall, promptly following a request by the Administrative Agent or any Lender, provide all documentation and other information that the Administrative Agent or such Lender requests in order to comply with its ongoing obligations under applicable “know your customer” and anti-money laundering rules and regulations, including the Act.
10.19 ENTIRE AGREEMENT . THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.
 
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written.

InfraREIT Partners, LP	
		
By:	 	InfraREIT, L.L.C., general partner	
			
	 	By:	 	/s/ Brant Meleski	
	 	Name:	 	Brant Meleski	
	 	Title:	 	Senior Vice President and Chief	
	 		 	Financial Officer	

			
BANK OF AMERICA, N.A., as	
Administrative Agent	
		
By:	 	/s/ Angela Lau	
		
Name:	 	Angela Lau	
		
Title:	 	Vice President	

			
BANK OF AMERICA, N.A., as a Lender and L/C Issuer	
		
By:	 	/s/ Jerry Wells	
		
Name:	 	Jerry Wells	
		
Title:	 	Vice President	

					
CITIBANK, N.A.	
	
as a Lender	
		
By:	 	/s/ Sandip Sen	
	 	Name:	 	Sandip Sen	
	 	Title:	 	Vice President	

					
MORGAN STANLEY BANK, N.A.,	
as a Lender	
		
By:	 	/s/ Michael King	
	 	Name:	 	Michael King	
	 	Title:	 	Authorized Signatory	

					
UBS AG, STAMFORD BRANCH,	
as a Lender	
		
By:	 	/s/ Lana Gifas	
	 	Name:	 	Lana Gifas	
	 	Title:	 	Director	
		
By:	 	/s/ Jennifer Anderson	
	 	Name:	 	Jennifer Anderson	
	 	Title:	 	Associate Director	

					
ROYAL BANK OF CANADA,	
as a Lender	
		
By:	 	/s/ Frank Lambrinos	
	 	Name:	 	Frank Lambrinos	
	 	Title:	 	Authorized Signatory	

					
CANADIAN IMPERIAL BANK OF COMMERCE, NEW YORK BRANCH,
as a Lender	
		
By:	 	/s/ Anju Abraham	
	 	Name:	 	Anju Abraham	
	 	Title:	 	Authorized Signatory	
		
By:	 	/s/ Robert Casey	
	 	Name:	 	Robert Casey	
	 	Title:	 	Authorized Signatory	

					
MIZUHO BANK, LTD	
as a Lender	
		
By:	 	/s/ Leon Mo	
	 	Name:	 	Leon Mo	
	 	Title:	 	Authorized Signatory	

					
SOCIETE GENERALE,	
as a Lender	
		
By:	 	/s/ Yao Wang	
	 	Name:	 	Yao Wang	
	 	Title:	 	Director	

					
WELLS FARGO BANK, NATIONAL ASSOCIATION	
as a Lender	
		
By:	 	/s/ Yann Blindert	
	 	Name:	 	Yann Blindert	
	 	Title:	 	Director	

SCHEDULE 2.01
COMMITMENTS
AND APPLICABLE PERCENTAGES

Lender	  	Commitment	 	  	Applicable
Percentage	 	
			
BANK OF AMERICA, N.A	  	$	15,000,000.00	  	  	 	20.000000000	% 	
			
CITIBANK, N.A	  	$	15,000,000.00	  	  	 	20.000000000	% 	
			
MORGAN STANLEY BANK, N.A.	  	$	10,000,000.00	  	  	 	13.333333333	% 	
			
UBS AG, STAMFORD BRANCH	  	$	8,000,000.00	  	  	 	10.666666667	% 	
			
ROYAL BANK OF CANADA	  	$	7,000,000.00	  	  	 	9.333333333	% 	
			
CANADIAN IMPERIAL BANK OF COMMERCE, NEW YORK BRANCH	  	$	5,000,000.00	  	  	 	6.666666667	% 	
			
MIZUHO BANK, LTD	  	$	5,000,000.00	  	  	 	6.666666667	% 	
			
SOCIETE GENERALE	  	$	5,000,000.00	  	  	 	6.666666667	% 	
			
WELLS FARGO BANK, NATIONAL ASSOCIATION	  	$	5,000,000.00	  	  	 	6.666666667	% 	
			
Total	  	$	75,000,000.00	  	  	 	100.000000000	% 	

Exhibit 10.24
 
EXECUTION COPY

S HARYLAND D ISTRIBUTION  & T RANSMISSION S ERVICES , L.L.C.
$110,000,000
6.47% Senior Notes due September 30, 2030

A MENDED AND R ESTATED N OTE P URCHASE A GREEMENT

Dated July 13, 2010

TABLE OF CONTENTS

 	  	Page	 	
SECTION 1. AUTHORIZATION OF NOTES	  	 	2	  	
		
SECTION 2. SALE AND PURCHASE OF NOTES	  	 	2	  	
		
SECTION 3. CLOSING	  	 	2	  	
		
SECTION 4. CONDITIONS TO CLOSING	  	 	3	  	
			
Section 4.1.	  	Representations and Warranties	  	 	3	  	
Section 4.2.	  	Performance; No Default	  	 	3	  	
Section 4.3.	  	Compliance Certificates	  	 	3	  	
Section 4.4.	  	Opinions of Counsel	  	 	3	  	
Section 4.5.	  	Purchase Permitted By Applicable Law, Etc.	  	 	3	  	
Section 4.6.	  	Sale of Other Notes	  	 	4	  	
Section 4.7.	  	Payment of Special Counsel and Other Fees and Expenses	  	 	4	  	
Section 4.8.	  	Private Placement Number	  	 	4	  	
Section 4.9.	  	Changes in Structure	  	 	4	  	
Section 4.10.	  	Funding Instructions	  	 	4	  	
Section 4.11.	  	Proceedings and Documents	  	 	5	  	
Section 4.12.	  	Joinder Agreement, Etc.	  	 	6	  	
Section 4.13.	  	UCC Searches; and Litigation Searches	  	 	6	  	
Section 4.14.	  	Insurance	  	 	6	  	
Section 4.15.	  	Financial Statements	  	 	6	  	
Section 4.16.	  	Consents and Approvals	  	 	7	  	
		
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY	  	 	7	  	
			
Section 5.1.	  	Organization; Power and Authority	  	 	7	  	
Section 5.2.	  	Authorization, Etc.	  	 	7	  	
Section 5.3.	  	Disclosure	  	 	7	  	
Section 5.4.	  	Organization and Ownership of Interests	  	 	8	  	
Section 5.5.	  	Financial Statements; Material Liabilities	  	 	8	  	
Section 5.6.	  	Compliance with Laws, Other Instruments, Etc.	  	 	8	  	
Section 5.7.	  	Governmental Authorizations, Etc.	  	 	9	  	
Section 5.8.	  	Litigation; Observance of Agreements, Statutes and Orders	  	 	9	  	
Section 5.9.	  	Taxes	  	 	9	  	
Section 5.10.	  	Title to Property; Leases	  	 	10	  	
Section 5.11.	  	Insurance	  	 	10	  	
Section 5.12.	  	Licenses, Permits, Etc.; Material Project Documents	  	 	10	  	
Section 5.13.	  	Compliance with ERISA	  	 	10	  	
Section 5.14.	  	Private Offering by the Company	  	 	11	  	
Section 5.15.	  	Use of Proceeds; Margin Regulations	  	 	11	  	
Section 5.16.	  	Existing Indebtedness; Future Liens	  	 	11	  	
Section 5.17.	  	Foreign Assets Control Regulations, Etc.	  	 	12	  	
Section 5.18.	  	Status under Certain Statutes	  	 	12	  	
 
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TABLE OF CONTENTS
(continued)

 	  	Page	 	
Section 5.19.	  	Environmental Matters	  	 	13	  	
Section 5.20.	  	Force Majeure Events; Employees	  	 	14	  	
Section 5.21.	  	Collateral	  	 	14	  	
		
SECTION 6. REPRESENTATIONS OF THE PURCHASERS	  	 	14	  	
			
Section 6.1.	  	Purchase for Investment	  	 	14	  	
Section 6.2.	  	Source of Funds	  	 	14	  	
		
SECTION 7. INFORMATION	  	 	16	  	
			
Section 7.1.	  	Financial and Business Information	  	 	16	  	
Section 7.2.	  	Officer’s Certificate	  	 	19	  	
Section 7.3.	  	Visitation	  	 	20	  	
		
SECTION 8. PAYMENT AND PREPAYMENT OF THE NOTES	  	 	20	  	
			
Section 8.1.	  	Amortization; Maturity	  	 	20	  	
Section 8.2.	  	Optional Prepayments with Yield-Maintenance Amount	  	 	20	  	
Section 8.3.	  	Allocation of Partial Prepayments	  	 	21	  	
Section 8.4.	  	Maturity; Surrender, Etc.	  	 	21	  	
Section 8.5.	  	Purchase of Notes	  	 	21	  	
Section 8.6.	  	Yield-Maintenance Amount	  	 	21	  	
		
SECTION 9. AFFIRMATIVE COVENANTS	  	 	23	  	
			
Section 9.1.	  	Compliance with Law	  	 	23	  	
Section 9.2.	  	Insurance	  	 	23	  	
Section 9.3.	  	Maintenance of Properties	  	 	24	  	
Section 9.4.	  	Payment of Taxes and Claims	  	 	24	  	
Section 9.5.	  	Existence, Etc.	  	 	25	  	
Section 9.6.	  	Books and Records	  	 	25	  	
Section 9.7.	  	Collateral; Further Assurances	  	 	25	  	
Section 9.8.	  	Material Project Documents	  	 	26	  	
Section 9.9.	  	Financial Ratios	  	 	26	  	
		
SECTION 10. NEGATIVE COVENANTS	  	 	27	  	
			
Section 10.1.	  	Transactions with Affiliates	  	 	27	  	
Section 10.2.	  	Merger, Consolidation, Etc.	  	 	27	  	
Section 10.3.	  	Line of Business	  	 	27	  	
Section 10.4.	  	Terrorism Sanctions Regulations	  	 	27	  	
Section 10.5.	  	Liens	  	 	27	  	
Section 10.6.	  	Indebtedness	  	 	28	  	
Section 10.7.	  	Loans, Advances, Investments and Contingent Liabilities	  	 	29	  	
Section 10.8.	  	No Subsidiaries	  	 	29	  	
 
ii

TABLE OF CONTENTS
(continued)

 	  	Page	 	
Section 10.9.	  	Restricted Payments	  	 	29	  	
Section 10.10.	  	Sale of Assets, Etc.	  	 	30	  	
Section 10.11.	  	Sale or Discount of Receivables	  	 	30	  	
Section 10.12.	  	Amendments to Organizational Documents	  	 	30	  	
Section 10.13.	  	Sale and Lease-Back	  	 	31	  	
Section 10.14.	  	ERISA Compliance	  	 	31	  	
Section 10.15.	  	No Margin Stock	  	 	31	  	
Section 10.16.	  	Project Documents	  	 	31	  	
Section 10.17.	  	Regulation	  	 	32	  	
Section 10.18.	  	Swaps	  	 	32	  	
Section 10.19.	  	Most Favored Lender	  	 	33	  	
		
SECTION 11. EVENTS OF DEFAULT	  	 	33	  	
		
SECTION 12. REMEDIES ON DEFAULT, ETC.	  	 	36	  	
			
Section 12.1.	  	Acceleration	  	 	36	  	
Section 12.2.	  	Other Remedies	  	 	36	  	
Section 12.3.	  	Rescission	  	 	37	  	
Section 12.4.	  	No Waivers or Election of Remedies, Expenses, Etc.	  	 	37	  	
		
SECTION 13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES	  	 	37	  	
			
Section 13.1.	  	Registration of Notes	  	 	37	  	
Section 13.2.	  	Transfer and Exchange of Notes	  	 	38	  	
Section 13.3.	  	Replacement of Notes	  	 	39	  	
		
SECTION 14. PAYMENTS ON NOTES	  	 	39	  	
			
Section 14.1.	  	Place of Payment	  	 	39	  	
Section 14.2.	  	Home Office Payment	  	 	39	  	
		
SECTION 15. EXPENSES, ETC.	  	 	40	  	
			
Section 15.1.	  	Transaction Expenses	  	 	40	  	
Section 15.2.	  	Survival	  	 	40	  	
		
SECTION 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT	  	 	40	  	
		
SECTION 17. AMENDMENT AND WAIVER	  	 	41	  	
			
Section 17.1.	  	Requirements	  	 	41	  	
Section 17.2.	  	Solicitation of Holders of Notes	  	 	41	  	
Section 17.3.	  	Binding Effect, etc.	  	 	41	  	
Section 17.4.	  	Notes Held by Company, etc.	  	 	42	  	
 
iii

TABLE OF CONTENTS
(continued)

 	  	Page	 	
		
SECTION 18. NOTICES	  	 	42	  	
		
SECTION 19. REPRODUCTION OF DOCUMENTS	  	 	42	  	
		
SECTION 20. CONFIDENTIAL INFORMATION	  	 	43	  	
		
SECTION 21. SUBSTITUTION OF PURCHASER	  	 	44	  	
		
SECTION 22. MISCELLANEOUS	  	 	44	  	
			
Section 22.1.	  	Successors and Assigns	  	 	44	  	
Section 22.2.	  	Payments Due on Non-Business Days	  	 	44	  	
Section 22.3.	  	Accounting Terms	  	 	44	  	
Section 22.4.	  	Severability	  	 	44	  	
Section 22.5.	  	Construction, etc.	  	 	45	  	
Section 22.6.	  	Counterparts	  	 	45	  	
Section 22.7.	  	Governing Law	  	 	45	  	
Section 22.8.	  	Jurisdiction and Process; Waiver of Jury Trial	  	 	45	  	
Section 22.9.	  	Transaction References	  	 	46	  	
 
iv

							
S CHEDULE  A	 	—	 		  	I NFORMATION R ELATING TO P URCHASERS	
				
S CHEDULE  B	 	—	 		  	D EFINED T ERMS	
				
Schedule 4.12(a)	 	—	 		  	Deeds of Trust	
				
Schedule 5.3	 	—	 		  	Disclosure Materials	
				
Schedule 5.4	 	—	 		  	Ownership of the Company, etc.; Officers	
				
Schedule 5.5	 	—	 		  	Financial Statements	
				
Schedule 5.7	 	—	 		  	Government Authorizations	
				
Schedule 5.12(a)	 	—	 		  	Required Permits	
				
Schedule 5.12(b)	 	—	 		  	Material Project Documents	
				
Schedule 5.13	 	—	 		  	ERISA	
				
Schedule 5.16	 	—	 		  	Indebtedness	
				
Schedule 8.1	 	—	 		  	Principal Amortization Schedule	
				
Schedule 9.2	 	—	 		  	Insurance	
				
Schedule 10.1	 	—	 		  	Cap Rock Transaction	
				
Schedule 10.16	 	—	 		  	Certain Existing Leases	
				
Exhibit 1	 	—	 		  	Form of 6.47% Senior Secured Note due September 30, 2030	
			
Security Documents	 		  		
				
Exhibit S-1	 	—	 		  	Form of Amended and Restated Collateral Agency Agreement	
				
Exhibit S-2	 	—	 		  	Form of Deed of Trust	
				
Exhibit S-3A	 	—	 		  	Form of Company Pledge Agreement	
				
Exhibit S-3B	 	—	 		  	Form of TDC Pledge Agreement	
				
Exhibit S-4	 	—	 		  	Form of Negative Pledge Agreement	
 
v

6.47% Senior Notes due September 30, 2030
July 13, 2010
T O E ACH OF THE P URCHASERS L ISTED IN
Schedule A Hereto:
Ladies and Gentlemen:
Sharyland Distribution & Transmission Services, L.L.C., a Texas limited liability company (the “ Company ”), agrees with each of the purchasers whose names appear at the end hereof (each, a “ Purchaser ” and, collectively, the “ Purchasers ”):
RECITALS
WHEREAS, Hunt Transmission Services, L.L.C. (“ Hunt ”) entered into an Agreement and Plan of Merger, dated as of December 17, 2009 (the “ Acquisition Agreement ”), pursuant to which HTS Acquisition Sub., Inc, a Delaware corporation and a wholly owned indirect subsidiary of Hunt (“ Merger Sub ”) merged with and into Cap Rock Holding Corporation (“ Holding ”), a Delaware corporation, which owns directly or indirectly all of the capital stock of Cap Rock Energy Corporation, a Texas corporation (the acquisition and the transactions related therein, the “ Merger ”);
WHEREAS, in connection with the Merger, Merger Sub entered into that certain Note Purchase Agreement, dated as of July 13, 2010 (the “ Acquisition Date ”), among Merger Sub, as issuer, and the Purchasers, as purchasers thereunder, with respect to the issuance of 6.47% Senior Notes due September 30, 2030, in the aggregate principal amount of $110,000,000 (the “ Initial NPA ”);
WHEREAS, Holding as the survivor of the merger with Merger Sub, succeeded to and assumed by operation of law all of the rights, duties, obligations and liabilities of Merger Sub under the Initial NPA, and Holding has confirmed its obligations under the Initial NPA pursuant to that certain Ratification Agreement, dated the Acquisition Date, executed by Holding in favor of the Purchasers;
WHEREAS, Cap Rock Energy Corporation, pursuant to and in accordance with the Plan of Conversion, dated as of the Acquisition Date, was converted from a Texas corporation to a Texas limited liability company, as so converted Cap Rock Energy LLC (“ CR Energy ”);
WHEREAS, pursuant to the Assumption Agreement, dated as of the Acquisition Date, between Holding and CR Energy, CR Energy, with the consent of the Collateral Agent and the Purchasers, assumed all of the rights, duties, obligations and liabilities of Holding under the Initial NPA;

WHEREAS, pursuant to the Agreement and Plan of Merger, dated as of the Acquisition Date, between CR Energy and the Company, CR Energy was merged into the Company with the Company being the surviving corporation and succeeding by operation of law to the Initial NPA; and
WHEREAS, subject to and on the terms and conditions set forth herein, the parties hereto wish to amend and restate the Initial NPA in its entirety as set forth herein, with the Initial NPA as so amended and restated being hereinafter referred to as the “ Agreement ”;
NOW, THEREFORE, in consideration of the premises and agreements hereinafter set forth, the parties hereto agree as follows:
SECTION 1. AUTHORIZATION OF NOTES.
The Company will authorize the issue and sale of $110,000,000 aggregate principal amount of its 6.47% Senior Notes due September 30, 2030 (the “ Notes ”, such term to include any such notes issued in substitution therefor pursuant to Section 13 ). The Notes shall be substantially in the form set out in Exhibit 1 . Certain capitalized and other terms used in this Agreement are defined in Schedule B ; and references to a “Schedule” or an “Exhibit” are, unless otherwise specified, to a Schedule or an Exhibit attached to this Agreement.
SECTION 2. SALE AND PURCHASE OF NOTES.
Subject to the terms and conditions of this Agreement, the Company will issue and sell to each Purchaser and each Purchaser will purchase from the Company, at the Closing provided for in Section 3 , Notes in the principal amount specified opposite such Purchaser’s name in Schedule A at the purchase price of 100% of the principal amount thereof. The Purchasers’ obligations hereunder are several and not joint obligations and no Purchaser shall have any liability to any Person for the performance or non-performance of any obligation by any other Purchaser hereunder.
SECTION 3. CLOSING.
The sale and purchase of the Notes to be purchased by each Purchaser shall occur at the offices of Bingham McCutchen, 399 Park Avenue, New York, NY, at 11:00 a.m., New York time, at a closing (the “ Closing ”) on July 13, 2010, or on such other Business Day thereafter on or prior to July 16, 2010 as may be agreed upon by the Company and the Purchasers. At the Closing the Company will deliver to each Purchaser the Notes to be purchased by such Purchaser in the form of a single Note (or such greater number of Notes in denominations of at least $1,000,000 as such Purchaser may request) dated the Closing Date and registered in such Purchaser’s name (or in the name of its nominee), against delivery by such Purchaser to the Company or its order of immediately available funds in the amount of the purchase price therefor by wire transfer of immediately available funds for the account of the Company to account number 4426868026 at Bank of America, 901 Main Street, Dallas, TX 75202 ABA: 026009593 or to such other account as established in a flow of funds memorandum that is agreed upon between the Company and the Purchasers. If at the Closing the Company shall fail to tender such Notes to any Purchaser as provided above in this Section 3 , or any of the conditions specified in Section 4 shall not have been fulfilled to such Purchaser’s satisfaction, such Purchaser shall, at its election, be relieved of all further obligations under this Agreement, without thereby waiving any rights such Purchaser may have by reason of such failure or such nonfulfillment.
 
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SECTION 4. CONDITIONS TO CLOSING
Each Purchaser’s obligation to purchase and pay for the Notes to be sold to such Purchaser at the Closing is subject to the fulfillment to the satisfaction of each Purchaser, prior to or at the Closing, of the following conditions:
Section 4.1. Representations and Warranties . The representations and warranties of the Company in this Agreement shall be correct when made and at the time of the Closing.
Section 4.2. Performance; No Default. The Company shall have performed and complied with all agreements and conditions contained in this Agreement required to be performed or complied with by it prior to or at the Closing and after giving effect to the issue and sale of the Notes (and the application of the proceeds thereof as contemplated by Section 5.14 ) no Default or Event of Default shall have occurred and be continuing and no “Default” or “Event of Default” under the 2009 Note Agreement or the RBC Agreement shall have occurred and be continuing.
Section 4.3. Compliance Certificates.
(a) Company’s Closing Certificates. The Company shall have delivered to each Purchaser an officer’s certificate, dated the Closing Date, certifying that (i) the conditions specified in Sections 4.1 and 4.2 have been fulfilled, and (ii) that each of the other conditions precedent to the occurrence of the Closing has been satisfied.
(b) Company’s’ Authority Certificate. The Company shall have delivered to each Purchaser a certificate of its secretary, dated the Closing Date, certifying as to the resolutions attached thereto and other corporate proceedings by the Company relating to the authorization, execution and delivery of the Notes and this Agreement and the other Transaction Documents to which it is a party.
Section 4.4. Opinions of Counsel. Such Purchaser shall have received opinions in form and substance satisfactory to such Purchaser, dated the date of the Closing (a)(i) from Mayer Brown LLP, counsel for the Company, Sharyland, New Owner and New Operator, covering such matters incident to the transactions contemplated hereby as such Purchaser or its counsel may reasonably request, and (ii) from Sutherland, Asbill & Brennan LLP, special counsel for the Company, Sharyland, New Owner and New Operator, covering Federal and Texas regulatory matters (and the Company hereby instructs its counsel to deliver such opinion to the Purchasers and the Secured Parties), and (b) from Bingham McCutchen LLP, in connection with such transactions, in form and substance satisfactory to the Purchasers and covering such other matters incident to such transactions as the Purchasers may reasonably request.
Section 4.5. Purchase Permitted By Applicable Law, Etc. On the date of the Closing such Purchaser’s purchase of Notes shall (a) be permitted by the laws and regulations of each jurisdiction to which such Purchaser is subject, without recourse to provisions (such as section
 
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1405(a)(8) of the New York Insurance Law) permitting limited investments by insurance companies without restriction as to the character of the particular investment, (b) not violate any applicable law or regulation (including, without limitation, Regulation T, U or X of the Board of Governors of the Federal Reserve System) and (c) not subject such Purchaser to any tax, penalty or liability under or pursuant to any applicable law or regulation, which law or regulation was not in effect on the date hereof. If requested by such Purchaser, such Purchaser shall have received an Officer’s Certificate certifying as to such matters of fact as such Purchaser may reasonably specify to enable such Purchaser to determine whether such purchase is so permitted.
Section 4.6. Sale of Other Notes . Contemporaneously with the Closing, (a) the Company shall sell to each Purchaser and each Purchaser shall purchase the Notes to be purchased by it at the Closing as specified in Schedule A ; (b) the transactions contemplated by the RBC Agreement shall be consummated and (c) the transactions contemplated by the TDC Note Agreement shall be consummated.
Section 4.7. Payment of Special Counsel and Other Fees and Expenses. Without limiting the provisions of Section 15.1 , the Company shall have paid on or before the Closing: (a) the fees, charges and disbursements of the Purchasers’ special counsel, Bingham McCutchen LLP and the Purchasers’ Texas counsel to the extent reflected in a statement of such counsel rendered to the Company at least one Business Day prior to the Closing and (b) all other fees, including to the extent not paid pursuant to the Initial NPA a structuring fee in the amount of $550,000 to Prudential (the “ Structuring Fee ”), and out-of-pocket costs and expenses (including legal fees and expenses and consultant fees and expenses) and other compensation contemplated hereby or by the other Financing Documents, or pursuant to separate letter agreements, payable to the Purchasers.
Section 4.8. Private Placement Number. A Private Placement Number issued by Standard & Poor’s CUSIP Service Bureau (in cooperation with the SVO) shall have been obtained for the Notes.
Section 4.9. Changes in Structure. The Cap Rock Transaction shall be consummated prior to or contemporaneously with the Closing. The Company shall not have changed its jurisdiction of formation or been a party to any merger or consolidation or succeeded to all or any substantial part of the liabilities of any other entity, at any time following the date of the most recent financial statements referred to in Schedule 5.5 , except in connection with the Cap Rock Transaction.
Section 4.10. Funding Instructions. At least one Business Day prior to the date of the Closing, each Purchaser shall have received written instructions signed by a Responsible Officer on letterhead of the Company confirming the information specified in Section 3 including (i) the name and address of the transferee bank, (ii) such transferee bank’s ABA number and (iii) the account name and number into which the purchase price for the Notes is to be deposited.
 
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Section 4.11. Proceedings and Documents. Each Purchaser shall have received the following, each to be (i) dated the Closing Date unless otherwise indicated, and (ii) in form and substance satisfactory to the Purchasers:
(a) The Notes to be purchased by the Purchasers;
(b) This Agreement and each other Financing Document, duly executed, authorized and delivered by each party thereto;
(c) The certificates of formation of the Company, each Member, New Owner and New Operator each certified as of a recent date by the Secretary of State of Texas and by such Person’s secretary or other authorized officer;
(d) The organizational documents of each the Company, each Member, New Owner and New Operator certified by such Person’s secretary or other authorized officer;
(e) With respect to each of the Company, Sharyland, New Owner and New Operator, an incumbency certificate signed by the secretary and one other officer of such Person, certifying as to the names, titles and true signatures of the officers of such Person authorized to sign this Agreement, the Notes, the other Financing Documents to which such Person is a party and other documents to be delivered hereunder or thereunder;
(f) A certificate of the secretary of the Company, Sharyland, New Owner and New Operator attaching resolutions of its management committee or other governing body evidencing approval of the transactions contemplated by this Agreement and the other Financing Documents to which such Person is a party and, with respect to the Company, the issuance of the Notes, and in each case, the execution, delivery and performance thereof, and authorizing certain officers to execute and deliver the same, and certifying that such resolutions were duly and validly adopted and have not since been amended, revoked or rescinded;
(g) Good standing certificates as to each of the Company, each Member, New Owner and New Operator from all relevant jurisdictions;
(h) Evidence of the filing and acceptance of financing statements which name the Company, as debtor, and the Collateral Agent, as secured party, in all applicable offices, together with copies of such financing statements;
(i) A schedule of all Required Permits, together with copies thereof certified by officers of the Company as being true, correct and complete, in full force and effect and not subject to any appeal or further proceeding;
(j) Certified copies of the documents delivered in connection with the consummation of the Cap Rock Transaction, including without limitation the Public Utility Commission of Texas and FERC approvals issued in connection with the Cap Rock Transaction;
(k) Copies of the documents delivered in connection with the consummation of the transactions contemplated by the RBC Agreement and of the documents delivered in connection with the consummation of the transactions contemplated by the TDC Note Agreement; and
(l) Such additional documents or certificates with respect to such legal matters or limited liability company, general partnership or other proceedings related to the transactions contemplated hereby as may be reasonably requested by the Purchasers.
 
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Section 4.12. Joinder Agreement, Etc. The Obligations shall be secured by a perfected first priority security interest (subject to Permitted Liens) in the Collateral in favor of the Collateral Agent, for the benefit of the Secured Parties, and the Company will deliver or cause to be delivered to the Purchasers and the Collateral Agent on the Closing Date a joinder agreement, substantially in the form of Exhibit A attached to the Collateral Agency Agreement, duly executed by the Company, the Collateral Agent and each Purchaser as a “Joining Party” (the “ 2010 NPA Joinder Agreement”), and the following, each of which shall be in full force and effect:
(a) The First Lien Deed of Trust, Security Agreement, Assignment of Rents and Leases and Fixture Filings (Texas) by and from the Company, as grantor, to Peter M. Oxman, as trustee, for the benefit of the Collateral Agent and the Secured Parties, dated as of July 13, 2010, covering the real property listed on Schedule 4.12(a) hereto (the “ Deed of Trust ”);
(b) An Assignment of Membership Interests and Pledge Agreement in the form attached hereto as Exhibit S-3A, duly executed by the Company, with respect to its membership interests in New Owner, to the Collateral Agent for the benefit of the Secured Parties (the “ Pledge Agreement (Company) ”), and an Assignment of Membership Interests and Pledge Agreement in the form attached hereto as Exhibit S-3B, duly executed by TDC, with respect to its membership interests in the Company, to the Collateral Agent for the benefit of the Secured Parties (the “ Pledge Agreement (TDC) ”, and together with the Pledge Agreement (Company), the “ Pledge Agreements ”);
(c) A Negative Pledge Agreement in the form attached hereto as Exhibit S-4, duly executed by New Owner to the Collateral Agent for the benefit of the Secured Parties (the “ Negative Pledge Agreement ”);
(d) A joinder agreement, substantially in the form of Exhibit A attached to the Collateral Agency Agreement, duly executed by RBC (the “ RBC Joinder Agreement”); and
(e) Such other documents, instruments and agreements any Purchaser may reasonably request to grant to the Collateral Agent first priority (subject only to Permitted Liens) perfected Liens on the Collateral.
Section 4.13 . UCC Searches; and Litigation Searches . The Collateral Agent and the Purchasers shall have received UCC and litigation searches of the Company, each Member, New Owner and New Operator which searches shall (i) confirm that no Liens other than Permitted Liens exist on the Collateral and that such Persons are not subject to any litigation, and (ii) be otherwise in substance satisfactory to the Collateral Agent and the Purchasers.
Section 4.14. Insurance. The Company shall have delivered to the Purchasers evidence of insurance in effect that meets the requirements of Section 9.2 , and the Purchasers shall have received an insurance consultant’s report, which shall be addressed to the Purchasers and shall be in form and substance satisfactory to the Purchasers.
Section 4.15. Financial Statements . The Purchasers shall have received unaudited financial statements of the Company and each Member for the calendar quarter ended March 31, 2010.
 
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Section 4.16. Consents and Approvals. All Required Permits and all governmental and third party permits and regulatory and other approvals required to be in effect in connection with the issuance of the Notes hereunder have been obtained and are in effect, all applicable waiting periods have expired without any materially adverse action being taken by any applicable authority, and copies of the documentation thereof shall have been delivered to each Purchaser.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each Purchaser that:
Section5.1. Organization; Power and Authority. Each of the Company, each Member, New Owner and New Operator is a limited liability company or limited partnership, as applicable, duly organized, validly existing and in good standing under the laws of its jurisdiction of formation, and is duly qualified and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Each of the Company, each Member, New Owner and New Operator has the limited liability company or limited partnership, as applicable, power and authority to own or hold under lease the properties it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver this Agreement and the other Transaction Documents to which it is a party and to perform the provisions hereof and thereof.
Section 5.2. Authorization, Etc. This Agreement and the other Transaction Documents have been duly authorized by all necessary limited liability company or limited partnership, as applicable, action on the part of the Company, each Member, New Owner and New Operator, and this Agreement and the other Transaction Documents constitute, and upon execution and delivery thereof each Note will constitute, a legal, valid and binding obligation of the Company, such Member, New Owner or New Operator, as applicable, enforceable against such Person in accordance with its terms, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors’ rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).
Section 5.3. Disclosure. This Agreement, the other Transaction Documents and the documents, certificates or other writings delivered to the Purchasers by or on behalf of the Company, a Member, New Owner or New Operator in connection with the transactions contemplated hereby, and the financial statements listed in Schedule 5.5 (this Agreement, and such documents, certificates or other writings listed on Schedule 5.3 and such financial statements delivered to each Purchaser and listed on Schedule 5.5 being referred to, collectively, as the “ Disclosure Documents ”), taken as a whole, do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading in light of the circumstances under which they were made. The projections and pro forma financial information contained in the materials referenced above are based upon good faith estimates and assumptions believed by management of the Company and Sharyland to be reasonable at the time made and on the Closing Date, it being recognized by each Purchaser that such financial information as it relates to future events is not to be viewed as fact and that actual
 
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results during the period or periods covered by such financial information may differ from the projected results set forth therein by a material amount. Except as disclosed in the Disclosure Documents, since December 31, 2009, there has been no change in the financial condition, operations, business, properties or prospects of the Company, a Member, New Owner or New Operator except changes that individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. There is no fact known to the Company that could reasonably be expected to have a Material Adverse Effect that has not been set forth herein or in the Disclosure Documents.
Section 5.4. Organization and Ownership of Interests. Schedule 5.4 contains a complete and correct list and description of (i) each of the Company’s, each Member’s, New Owner’s and New Operator’s jurisdiction of its organization and its ownership structure, (ii) the Company’s and each Member’s Subsidiaries, and (iii) the Company’s, each Member’s, New Owner’s and New Operator’s senior officers. None of the Company, Sharyland, New Owner or New Operator has any Subsidiaries as of the Closing Date except as shown on Schedule 5.4 .
Section 5.5. Financial Statements; Material Liabilities . The Company and Sharyland have delivered to each Purchaser copies of the financial statements listed on Schedule 5.5 .
(a) With respect to the consolidated financial statements of the Company and Sharyland, all of such financial statements (including in each case the related schedules and notes) fairly present in all material respects the consolidated financial positions of the Company and Sharyland, each as of the respective dates specified in such Schedule and the results of their operations and cash flows for the respective periods so specified and have been prepared in accordance with GAAP consistently applied throughout the periods involved except as set forth in the notes thereto (subject, in the case of any interim financial statements, to normal year-end adjustments). Neither the Company nor Sharyland has any material liabilities that are not disclosed on such financial statements or otherwise disclosed in the Disclosure Documents.
(b) With respect to the consolidated financial statements of Cap Rock Energy Corporation, to the knowledge of the Company and Sharyland, all of such financial statements (including in each case the related schedules and notes) fairly present in all material respects the consolidated financial positions of Cap Rock Energy Corporation as of the date specified in Schedule 5.5 and the results of its operations and cash flows, on a consolidated basis, for the period so specified and have been prepared in accordance with GAAP consistently applied throughout the periods involved except as set forth in the notes thereto (subject, in the case of any interim financial statements, to normal year-end adjustments). To the knowledge of the Company and Sharyland, Cap Rock Energy Corporation does not have any material liabilities that are not disclosed on such financial statements or otherwise disclosed in the Disclosure Documents.
Section 5.6. Compliance with Laws, Other Instruments, Etc . The execution, delivery and performance by the Company, the Members, New Owner and New Operator of this Agreement and the Notes and the other Transaction Documents to which such Person is a party, do not and will not (i) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of such Person under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter or limited
 
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partnership or limited liability company agreement, or any other agreement or instrument to which such Person is bound or by which such Person or any of its properties may be bound or affected, (ii) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to such Person or (iii) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to such Person, which in the case of any of the foregoing clauses (i) through (iii), with respect to Material Project Documents, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.
Section 5.7. Governmental Authorizations, Etc. Except as set forth on Schedule 5.7 , no consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority is required in connection with the execution, delivery or performance by the Company, either Member, New Owner or New Operator of this Agreement or the Notes or any of the other Transaction Documents to which it is a party.
Section 5.8. Litigation; Observance of Agreements, Statutes and Orders. (a) There are no actions, suits, investigations or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company, either Member, New Owner or New Operator or any of their property in any court or before any arbitrator of any kind or before or by any Governmental Authority that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.
(b) None of the Company, either Member, New Operator or New Owner is in default under any term of any Material Project Document or any other agreement or any order, judgment, decree or ruling of any court, arbitrator or Governmental Authority or is in violation of any applicable law, ordinance, rule or regulation (including without limitation Environmental Laws or the USA Patriot Act) of any Governmental Authority, which default or violation, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.
(c) To the knowledge of the Company, after due inquiry, no breach or default under any of the Material Project Documents has occurred and is continuing.
Section 5.9. Taxes. Each of the Company, each Member, New Owner and New Operator has filed all material tax returns that are required to have been filed (or timely requests for extensions have been filed, have been granted and are not expired) in any jurisdiction, and has paid all taxes shown to be due and payable on such returns and all other taxes and assessments levied upon them or their properties, assets, income or franchises, to the extent such taxes and assessments have become due and payable and before they have become delinquent, except for any taxes and assessments (i) the amount of which is not individually or in the aggregate material or (ii) the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which such Person has established adequate reserves in accordance with GAAP. The Company knows of no basis for any other tax or assessment that could reasonably be expected to have a Material Adverse Effect. The charges, accruals and reserves on the books of the Company in respect of Federal, state or other taxes for all fiscal periods are adequate.
 
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Section 5.10. Title to Property; Leases. The Company has good and sufficient title to the System and the Acquired System, New Owner has good and sufficient title to the FERC Assets and the Company, Sharyland, New Owner and New Operator have good and sufficient title to their properties that individually or in the aggregate are material to them, free and clear of Liens (other than Permitted Liens). All leases that individually or in the aggregate are material to the Company, Sharyland, New Owner or New Operator are valid and subsisting and are in full force and effect in all material respects.
Section 5.11. Insurance. Sharyland and New Operator have all insurance coverage required by Section 9.2.
Section 5.12. Licenses, Permits, Etc.; Material Project Documents . The Company, Sharyland, New Owner and New Operator own or possess all governmental and third party licenses, permits, franchises, authorizations, patents, copyrights, proprietary software, service marks, trademarks and trade names, or rights thereto, that are material to the ownership, leasing, operating and maintenance of the System, including the Acquired System, and the FERC Assets, including the Certificates of Convenience and Necessity (#30192, #30026, #30114 and #30191) issued or transferred by the Public Utility Commission of Texas to Sharyland and the New Operator (collectively, the “Required Permits”), without known conflict with the rights of others. All Required Permits are listed in Schedule 5.12(a) . The Material Project Documents listed on Schedule 5.12(b) constitute and include all material contracts and agreements to which the Company, Sharyland, New Owner or New Operator is a party. Each Material Project Document is in full force and effect, and constitutes the legal, valid and binding obligation of each party thereto as of the date hereof.
Section 5.13. Compliance with ERISA . Except as set forth on Schedule 5.13 , (a) The Company and each ERISA Affiliate have operated and administered each Plan in compliance with all applicable laws except for such instances of noncompliance as have not resulted in and could not reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any ERISA Affiliate has incurred any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans (as defined in section 3 of ERISA), and no event, transaction or condition has occurred or exists that could reasonably be expected to result in the incurrence of any such liability by the Company or any ERISA Affiliate, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate, in either case pursuant to Title I or IV of ERISA or to such penalty or excise tax provisions or to Section 401(a)(29), 412 or 430(k) of the Code or section 4068 of ERISA, other than such liabilities or Liens as would not be individually or in the aggregate material.
(b) The ratio of (x) the aggregate actuarial value of assets as defined in and determined in accordance with Code section 430(g)(3)(B) and adopted by Sharyland under each Plan (other than a Multiemployer Plan) to (y) the present value of the aggregate benefit liabilities under each such Plan, exceeds 80%, as determined as of the end of such Plan’s most recently ended plan year on the basis of the actuarial assumptions specified for funding purposes in such Plan’s most recent actuarial valuation report. The terms “current value” and “present value” have the meanings specified in section 3 of ERISA.
 
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(c) The Company and its ERISA Affiliates have not incurred withdrawal liabilities (and are not subject to contingent withdrawal liabilities) under section 4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate are material.
(d) The expected postretirement benefit obligation (determined as of the last day of the Company’s most recently ended calendar year in accordance with Financial Accounting Standards Board Statement No. 106, without regard to liabilities attributable to continuation coverage mandated by section 4980B of the Code) of the Company is not material to it.
(e) The execution and delivery of this Agreement and the issuance and sale of the Notes hereunder will not involve any non-exempt prohibited transaction under section 406 of ERISA or in connection with which a tax could be imposed pursuant to section 4975(c)(1)(A)-(D) of the Code. The representation by the Company to each Purchaser in the first sentence of this Section 5.13(e) is made in reliance upon and subject to the accuracy of such Purchaser’s representation in Section 6.2 as to the sources of the funds used to pay the purchase price of the Notes to be purchased by such Purchaser.
Section 5.14. Private Offering by the Company . Neither the Company nor anyone acting on its behalf has offered the Notes or any similar securities for sale to, or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof with, any person other than the Purchasers and not more than five other Institutional Investors, each of which has been offered the Notes at a private sale for investment. Neither the Company nor anyone acting on its behalf has taken, or will take, any action that would subject the issuance or sale of the Notes to the registration requirements of Section 5 of the Securities Act or to the registration requirements of any securities or blue sky laws of any applicable jurisdiction.
S ection 5.15. Use of Proceeds; Margin Regulations . The Company has applied the proceeds of the sale of the Notes to (i) pay the purchase price for the Cap Rock Transaction and (ii) pay all fees, expenses and costs related to Closing, including legal fees and the Structuring Fee. No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for the purpose of buying or carrying any margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System (12 CFR 221), or for the purpose of buying or carrying or trading in any securities under such circumstances as to involve the Company in a violation of Regulation X of said Board (12 CFR 224) or to involve any broker or dealer in a violation of Regulation T of said Board (12 CFR 220). As used in this Section, the terms “margin stock” and “purpose of buying or carrying” shall have the meanings assigned to them in Regulation U.
Section 5.16. Existing Indebtedness; Future Liens . (a)  Schedule 5.16 sets forth a complete and correct list of all outstanding Indebtedness of the Company, each Member, New Owner and New Operator as of March 31, 2010 (including a description of the obligors and obligees, principal amount outstanding and collateral therefor, if any, and Guaranty thereof, if any). Since March 31, 2010, there has been no material change in the amounts, interest rates, sinking funds, installment payments or maturities of the Indebtedness of the Company, a Member, New Owner or New Operator. None of the Company, a Member, New Owner or New Operator is in default and no waiver of default is currently in effect, in the payment of any principal or interest on any of its Indebtedness and no event or condition exists with respect to any of its Indebtedness that would permit (or that with notice or the lapse of time, or both, would permit) one or more Persons to cause such Indebtedness to become due and payable before its stated maturity or before its regularly scheduled dates of payment.
 
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(b) The Company has not agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its property, whether now owned or hereafter acquired, to be subject to a Lien not otherwise permitted by Section 10.5 .
(c) The Company is not a party to, nor otherwise subject to any provision contained in, any instrument evidencing Indebtedness of the Company, any agreement relating thereto or any other agreement (including, but not limited to, its charter or other organizational document) which limits the amount of, or otherwise imposes restrictions on the incurring of, Indebtedness of the Company, other than the 2009 Note Agreement and the RBC Agreement.
Section 5.17. Foreign Assets Control Regulations, Etc . (a) Neither the sale of the Notes by the Company hereunder nor the use of the proceeds thereof will violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto.
(b) None of the Company, the Members, New Owner or New Operator: (i) is a Person described or designated in the Specially Designated Nationals and Blocked Persons List of the Office of Foreign Assets Control or in Section 1 of the Anti-Terrorism Order or (ii) engages in any dealings or transactions with any such Person. The Company, each Member, New Owner and New Operator is in compliance, in all material respects, with the USA Patriot Act.
(c) No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for any payments to any governmental official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977, as amended, assuming in all cases that such Act applies to the Company and the Members.
Section 5.18. Status under Certain Statutes. Prior to, and after consummation of, the Cap Rock Transaction:
(a) Neither Member nor the Company is an “investment company” or a company “controlled” by an “investment company” within the meaning of the Investment Company Act of 1940, as amended, or an “investment adviser” within the meaning of the Investment Advisers Act of 1940, as amended.
(b) Neither the Company nor either Member is a “public utility” under the FPA and the regulations of FERC thereunder. The execution, delivery and performance of the Company’s and Sharyland’s obligations under the Transaction Documents requires no authorization of approval by, or notice to, and is not subject to the jurisdiction of, FERC under the FPA.
 
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(c) Sharyland and the holding company system of which it is a part have obtained a waiver of the requirements of 18 C.F.R. 366.21, 366.22 and 366.23 (FERC Docket No. PH06-59-000), but are subject to the FERC regulations relating to regulatory access to books and records. Sharyland and the holding company system of which it is a part have filed a notice of holding company status under FERC Docket No. HC06-1-000 and may be required to submit a revised notice of holding company status and/or a revised request for the waiver described in the preceding sentence as a result of the transactions contemplated in the Transaction Documents or in Schedule 10.1 . Under FERC’s currently effective regulations, the Company will be deemed not to be a “public-utility company” and as a result TDC is not a “holding company” under PUHCA; as a result of the Cap Rock Transactions, Sharyland will become a “holding company” under PUHCA.
(d) The Company is subject to regulation as an “electric utility” by the Public Utility Commission of Texas. The execution, delivery and performance of the Company’s and Sharyland’s obligations under the Transaction Documents requires no authorization or approval by, or notice to, the Public Utility Commission of Texas or under the Public Utility Regulatory Act of Texas other than those that have been obtained.
(e) Solely by virtue of the execution, delivery and performance of the Transaction Documents, no Purchaser will become subject to any of the provisions of the FPA, PUHCA (based on FERC’s currently effective definitions under PUHCA) or the Public Utility Regulatory Act of Texas, or to regulation under any such statute.
Section 5.19. Environmental Matters . (a) The Company has no knowledge of any claims nor has it received any notice of any claim, and no proceeding has been instituted raising any claim against the Company, a Member, New Owner or New Operator or any of their real properties now or formerly owned, leased or operated by any of them or other assets, alleging any damage to the environment or violation of any Environmental Laws, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect.
(b) The Company has no knowledge of any facts which would give rise to any claim, public or private, of violation of Environmental Laws or damage to the environment emanating from, occurring on or in any way related to real properties now or formerly owned, leased or operated by the Company, either Member, New Owner or New Operator or to other assets or its use, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect.
(c) None of the Company, a Member, New Owner or New Operator has stored any Hazardous Materials on real properties now or formerly owned, leased or operated by any of them and has not disposed of any Hazardous Materials in a manner contrary to any Environmental Laws in each case in any manner that could reasonably be expected to result in a Material Adverse Effect; and
(d) All buildings on all real properties now owned, leased or operated by the Company, a Member, New Owner or New Operator are in compliance with applicable Environmental Laws, except where failure to comply could not reasonably be expected to result in a Material Adverse Effect.
 
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Section 5.20. Force Majeure Events; Employees. None of the System, the Acquired System, the FERC Assets nor any of the other assets of the Company, a Member, New Owner and New Operator has suffered any Force Majeure Event that is continuing. Neither the Company nor New Owner has any employees.
Section 5.21. Collateral. The Collateral, as described in the Security Documents, constitutes all of the Company’s rights in the System Lease and the System and all of its membership interests in New Owner and all of TDC’s membership interests in the Company. The security interests in the Collateral granted to the Collateral Agent (for the benefit of the Secured Parties) pursuant to the Financing Documents: (a) constitute as to personal property included in the Collateral and, with respect to subsequently acquired personal property included in the Collateral, will constitute, a perfected security interest and Lien under each applicable Uniform Commercial Code, and (b) are, and, with respect to such subsequently acquired property, will be, as to Collateral perfected under each applicable Uniform Commercial Code, superior and prior to the rights of all third Persons now existing or hereafter arising whether by way of mortgage, lien, security interests, encumbrance, assignment or otherwise, except for Permitted Liens. All action as is necessary has been taken to establish and perfect the Collateral Agent’s rights in and to, and the first lien priority of its Lien on, the Collateral, including any recording, filing, registration, delivery to the Collateral Agent, giving of notice or other similar action. The Security Documents and financing statements relating thereto have been duly filed or recorded in each office and in each jurisdiction where required in order to create and perfect the Lien and security interest described above and the priority thereof.
SECTION 6. REPRESENTATIONS OF THE PURCHASERS.
Section 6.1. Purchase for Investment . Each Purchaser severally represents that it is an “Accredited Investor” as defined in Rule 501 of Regulation D under the Securities Act. Each Purchaser severally represents that it is purchasing the Notes for its own account or for one or more separate accounts maintained by such Purchaser or for the account of one or more pension or trust funds and not with a view to the distribution thereof, provided that the disposition of such Purchaser’s property shall at all times be within such Purchaser’s control. Each Purchaser understands that the Notes have not been registered under the Securities Act and may be resold only if registered pursuant to the provisions of the Securities Act or if an exemption from registration is available, except under circumstances where neither such registration nor such an exemption is required by law, and that the Company is not required to register the Notes.
Section 6.2. Source of Funds. Each Purchaser severally represents that at least one of the following statements is an accurate representation as to each source of funds (a “ Source ”) to be used by such Purchaser to pay the purchase price of the Notes to be purchased by such Purchaser hereunder:
(a) the Source is an “insurance company general account” (as the term is defined in the United States Department of Labor’s Prohibited Transaction Exemption (“ PTE ”) 95-60) in respect of which the reserves and liabilities (as defined by the annual statement for life insurance companies approved by the National Association of Insurance Commissioners (the “NAIC Annual Statement”)) for the general account contract(s) held by or on behalf of any employee benefit plan together with the amount of the reserves and liabilities for the general account
 
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contract(s) held by or on behalf of any other employee benefit plans maintained by the same employer (or affiliate thereof as defined in PTE 95-60) or by the same employee organization in the general account do not exceed 10% of the total reserves and liabilities of the general account (exclusive of separate account liabilities) plus surplus as set forth in the NAIC Annual Statement filed with such Purchaser’s state of domicile; or
(b) the Source is a separate account that is maintained solely in connection with such Purchaser’s fixed contractual obligations under which the amounts payable, or credited, to any employee benefit plan (or its related trust) that has any interest in such separate account (or to any participant or beneficiary of such plan (including any annuitant)) are not affected in any manner by the investment performance of the separate account; or
(c) the Source is either (i) an insurance company pooled separate account, within the meaning of PTE 90-1 or (ii) a bank collective investment fund, within the meaning of the PTE 91-38 and, except as disclosed by such Purchaser to the Company in writing pursuant to this clause (c), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; or
(d) the Source constitutes assets of an “investment fund” (within the meaning of Part V of PTE 84-14 (the “ QPAM Exemption ”)) managed by a “qualified professional asset manager” or “QPAM” (within the meaning of Part V of the QPAM Exemption), no employee benefit plan’s assets that are included in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Section V(c)(1) of the QPAM Exemption) of such employer or by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, the conditions of Part I(c) and (g) of the QPAM Exemption are satisfied as of the last day of the most recent calendar quarter, the QPAM does not own a 10% or more interest in the Company and no Person controlling or controlled by the QPAM (applying the definition of “control” in Section V(e) of the QPAM Exemption) owns a 20% or more interest in the Company (or less than 20% but greater than 10% if such Person exercises control over the management or policies of the Company by reason of its ownership interest) and (i) the identity of such QPAM and (ii) the names of all employee benefit plans whose assets are included in such investment fund have been disclosed to the Company in writing pursuant to this clause (d); or
(e) the Source constitutes assets of a “plan(s)” (within the meaning of Section IV of PTE 96-23 (the “ INHAM Exemption ”)) managed by an “in-house asset manager” or “INHAM” (within the meaning of Part IV of the INHAM Exemption), the conditions of Part I(a), (g) and (h) of the INHAM Exemption are satisfied, neither the INHAM nor a person controlling or controlled by the INHAM (applying the definition of “control” in Section IV(d) of the INHAM Exemption) owns a 5% or more interest in the Company and (i) the identity of such INHAM and (ii) the name(s) of the employee benefit plan(s) whose assets constitute the Source have been disclosed to the Company in writing pursuant to this clause (e); or
(f) the Source is a governmental plan; or
 
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(g) the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this clause (g); or
(h) the Source does not include assets of any employee benefit plan, other than a plan exempt from the coverage of ERISA.
As used in this Section 6.2, the terms “employee benefit plan,” “governmental plan,” and “separate account” shall have the respective meanings assigned to such terms in section 3 of ERISA.
SECTION 7. INFORMATION.
Section 7.1. Financial and Business Information. The Company shall deliver, and shall cause Sharyland to deliver, to each Holder of Notes:
(a) Quarterly Statements — within 45 days after the end of each quarterly fiscal period in each calendar year of such Person and its Subsidiaries (excluding the last quarterly fiscal period of each such calendar year), duplicate copies of
(i) balance sheets of such Person and its Subsidiaries on a consolidated basis as at the end of such quarter, and
(ii) profit and loss statements and cash flows statements for such Person and its Subsidiaries on a consolidated basis for such quarter and (in the case of the second and third quarters) for the portion of the calendar year ending with such quarter,
setting forth in each case in comparative form the figures for the corresponding periods in the previous calendar year, all in reasonable detail, prepared in accordance with GAAP applicable to quarterly financial statements generally, and certified by a Senior Financial Officer of such Person as fairly presenting, in all material respects, the financial position of the companies being reported on and their results of operations and cash flows, subject to changes resulting from year-end adjustments;
(b) Annual Statements — within 105 days after the end of each calendar year of the Company and Sharyland, duplicate copies of
(i) balance sheets of such Person on a consolidated basis as at the end of such year, and
(ii) statements of income, profit and loss statements and cash flows statements for such Person on a consolidated basis for such year,
setting forth in each case in comparative form the figures for the previous calendar year, all in reasonable detail, prepared in accordance with GAAP, and accompanied by
 
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(A) an opinion thereon of Ernst & Young LLP or another independent public accounting firm of nationally recognized standing selected by the Company (herein, the “ Approved Accountant ”), which opinion shall state that such financial statements present fairly, in all material respects, the financial position of the companies being reported upon and their results of operations and cash flows and have been prepared in conformity with GAAP, and that the examination of the Approved Accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and that such audit provides a reasonable basis for such opinion in the circumstances, and
(B) a certificate of the Approved Accountants stating that they have reviewed this Agreement and stating further whether, in making their audit, they have become aware of any condition or event that then constitutes a Default or an Event of Default, and, if they are aware that any such condition or event then exists, specifying the nature and period of the existence thereof (it being understood that the Approved Accountants shall not be liable, directly or indirectly, for any failure to obtain knowledge of any Default or Event of Default unless the Approved Accountants should have obtained knowledge thereof in making an audit in accordance with generally accepted auditing standards or did not make such an audit);
(c) Other Reports — promptly upon their becoming available, and to the extent not otherwise required to be delivered pursuant to another provision of this Agreement, one copy of (i) each financial statement and budget and such other reports and notices as a Holder may reasonably request sent by the Company or Sharyland to its members or partners, (ii) each report or filing (without exhibits except as expressly requested by such Holder) other than regular and periodic reports and filings made by the Company, Sharyland, New Owner or New Operator to any state or Federal regulatory body;
(d) Notice of Default or Event of Default — promptly, and in any event within 5 Business Days after a Responsible Officer becoming aware of the existence of any Default or Event of Default or that any Person has given any notice or taken any action with respect to a claimed default hereunder or that any Person has given any notice or taken any action with respect to a claimed default of the type referred to in Section 11(f), a written notice specifying the nature and period of existence thereof and what action the Company or New Owner is taking or proposes to take with respect thereto;
(e) Audit Reports — promptly, and in any event within 5 Business Days after receipt the results of any non-routine audit reports relating to the Company, Sharyland, New Owner or New Operator;
(f) ERISA Matters — promptly, and in any event within 5 Business Days after a Responsible Officer becoming aware of any of the following, a written notice setting forth the nature thereof and the action, if any, that the Company or an ERISA Affiliate proposes to take with respect thereto:
 
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(i) with respect to any Plan, any reportable event, as defined in section 4043(c) of ERISA and the regulations thereunder, for which notice thereof has not been waived pursuant to such regulations as in effect on the date hereof; or
(ii) the taking by the PBGC of steps to institute, or the threatening by the PBGC of the institution of, proceedings under section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Company or any ERISA Affiliate of a notice from a Multi-employer Plan that such action has been taken by the PBGC with respect to such Multi-employer Plan; or
(iii) any event, transaction or condition that could result in the incurrence of any liability by the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or such penalty or excise tax provisions, if such liability or Lien, taken together with any other such liabilities or Liens then existing, could reasonably be expected to have a Material Adverse Effect;
(g) Notices from Governmental Authority — promptly, and in any event within 5 Business Days of receipt (or knowledge) thereof copies of any notice to the Company, any Subsidiary, Sharyland or New Operator from any Federal or state Governmental Authority relating to any order, ruling, statute or other law or regulation that could reasonably be expected to have a Material Adverse Effect;
(h) Other Notices — promptly, and in any event within 5 Business Days of receipt (or knowledge by a Responsible Officer of the Company) thereof:
(i) any press releases and other statements made available generally by any of the Company, any Subsidiary, Sharyland or New Operator to the public concerning developments that are material to the Company, Sharyland or any of their Subsidiaries;
(ii) notice of the occurrence of any condition or event that could reasonably be expected to result in a Material Adverse Effect;
(iii) copies of any notice of a violation or an event of default under any Material Project Document;
(iv) any actual termination or rescission or any written threat of termination or rescission of any Material Project Document, any amendment of or waiver under any Material Project Document;
(v) any material pending or threatened adversarial or contested proceeding of or before a Governmental Authority relating to the System or the System Lease, the Acquired System or the New Lease, or the FERC Assets;
 
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(vi) any termination, suspension or other loss of any Required Permit, other than a termination of a Required Permit in accordance with its terms so long as the permit, if it is a Required Permit, is replaced on a timely basis so as not to interrupt operation of the System, the Acquired System or the FERC Assets;
(vii) any litigation or proceeding taken or threatened in writing against the Company, Sharyland or any of their Subsidiaries, that, if successful, could reasonably be expected to result in a Material Adverse Effect;
(viii) any Force Majeure Event or other claim of force majeure under any Material Project Document; and
(ix) copies of any notices delivered by the lessee under the System Lease or the New Lease;
(i) Annual Operating Budgets — As soon as available and in any event within 30 days after the close of each fiscal year of each of Sharyland and the Company, the annual budget of each of Sharyland and the Company.
(j) Information Required by Rule 144A — upon the request of such Holder (and shall deliver to any qualified institutional buyer designated by such Holder), such financial and other information as such Holder may reasonably determine to be necessary in order to permit compliance with the information requirements of Rule 144A under the Securities Act in connection with the resale of Notes, except at such times as the Company is subject to the reporting requirements of section 13 or 15(d) of the Exchange Act (for the purpose of this Section  7.1(j) , the term “qualified institutional buyer” shall have the meaning specified in Rule 144A under the Securities Act); and
(k) Requested Information — with reasonable promptness, such other data and information relating to the business, operations, affairs, financial condition, assets or properties of the Company or relating to the ability of the Company to perform its obligations hereunder and under the Notes as from time to time may be reasonably requested by any such Holder of Notes.
Section 7.2. Officer’s Certificate . Each set of financial statements delivered pursuant to Section 7.1(a) or Section 7.1(b) shall be accompanied by a certificate of a Senior Financial Officer setting forth:
(a) Covenant Compliance — the information (including detailed calculations) required in order to establish whether the Company was in compliance with the requirements of Sections 9.9, 10.6 and 10.9 of this Agreement, during the quarterly or annual period covered by the statements then being furnished (including with respect to each such Section, where applicable, the calculations of the maximum or minimum amount, ratio or percentage, as the case may be, permissible under the terms of such Sections, and the calculation of the amount, ratio or percentage then in existence); and
 
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(b) Event of Default — a statement that such Senior Financial Officer has reviewed the relevant terms hereof and has made, or caused to be made, under his or her supervision, a review of the transactions and conditions of the Company from the beginning of the quarterly or annual period covered by the statements then being furnished to the date of the certificate and that such review shall not have disclosed the existence during such period of any condition or event that constitutes a Default or an Event of Default or, if any such condition or event existed or exists (including, without limitation, any such event or condition resulting from the failure of the Company to comply with any Environmental Law), specifying the nature and period of existence thereof and what action the Company shall have taken or proposes to take with respect thereto.
Section 7.3. Visitation. The Company shall permit, and shall cause Sharyland, New Owner and New Operator to permit, the representatives of each Holder of Notes that is an Institutional Investor:
(a) No Default — if no Default or Event of Default then exists, at the expense of such Holder (or in the case of the Collateral Agent, the Holders) and upon reasonable prior notice, to visit the principal executive office of such Person, to discuss the affairs, finances and accounts of such Person with such Person’s officers, and (with the consent of such Person, which consent will not be unreasonably withheld) its independent public accountants, and (with the consent of such Person, which consent will not be unreasonably withheld) to visit the other offices and properties of such Person, all at such reasonable times and as often as may be reasonably requested in writing; and
(b) Default — if a Default or Event of Default then exists, at the expense of the Company to visit and inspect any of the offices or properties of such Person, to examine all their respective books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers and independent public accountants (and by this provision the Company authorizes said accountants to discuss the affairs, finances and accounts of the Company), all at such times and as often as may be reasonably requested.
SECTION 8. PAYMENT AND PREPAYMENT OF THE NOTES.
Section 8.1. Amortization; Maturity. On each Payment Date, the Company will prepay the principal amounts set forth in the amortization schedule attached hereto as Schedule 8.1 (the “Amortization Schedule”) (or such lesser principal amount as shall then be outstanding) of the Notes at par and without payment of the Yield-Maintenance Amount or any premium, provided that upon any partial prepayment of the Notes pursuant to Section 8.2 , the principal amount of each required prepayment of the Notes becoming due under this Section 8.1 on and after the date of such prepayment shall be reduced in the same proportion as the aggregate unpaid principal amount of the Notes is reduced as a result of the prepayment. The entire unpaid principal balance of the Notes shall be due and payable on the Maturity Date.
Section 8.2. Optional Prepayments with Yield-Maintenance Amount. The Company may, at its option, upon notice as provided below, prepay at any time all, or from time to time any part of, the Notes, in an amount not less than $1,000,000 in the case of a partial prepayment, at 100% of the principal amount so prepaid, and the Yield-Maintenance Amount determined for the prepayment date with respect to such principal amount. The Company will give each Holder
 
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of Notes written notice of each optional prepayment under this Section 8.2 not less than 30 days and not more than 60 days prior to the date fixed for such prepayment. Each such notice shall specify such date (which shall be a Business Day), the aggregate principal amount of the Notes to be prepaid on such date, the principal amount of each Note held by such Holder to be prepaid (determined in accordance with Section 8.3 ), and the interest to be paid on the prepayment date with respect to such principal amount being prepaid, and shall be accompanied by a certificate of a Senior Financial Officer as to the estimated Yield-Maintenance Amount due in connection with such prepayment (calculated as if the date of such notice were the date of the prepayment), setting forth the details of such computation. Two Business Days prior to such prepayment, the Company shall deliver to each Holder of Notes a certificate of a Senior Financial Officer specifying the calculation of such Yield-Maintenance Amount as of the specified prepayment date.
Section 8.3. Allocation of Partial Prepayments . In the case of each partial prepayment of the Notes, the principal amount of the Notes to be prepaid shall be allocated among all of the Notes at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof not theretofore called for prepayment.
Section 8.4. Maturity; Surrender, Etc. In the case of each prepayment of Notes pursuant to this Section 8 , the principal amount of each Note to be prepaid shall mature and become due and payable on the date fixed for such prepayment (which shall be a Business Day), together with interest on such principal amount accrued to such date and the applicable Yield-Maintenance Amount, if any. From and after such date, unless the Company shall fail to pay such principal amount when so due and payable, together with the interest and Yield-Maintenance Amount, if any, as aforesaid, interest on such principal amount shall cease to accrue. Any Note paid or prepaid in full shall be surrendered to the Company and cancelled and shall not be reissued, and no Note shall be issued in lieu of any prepaid principal amount of any Note.
Section 8.5. Purchase of Notes. The Company will not and will not permit any Affiliate to purchase, redeem, prepay or otherwise acquire, directly or indirectly, any of the outstanding Notes except (a) upon the payment or prepayment of the Notes in accordance with the terms of this Agreement and the Notes or (b) pursuant to Section 13.2(b) ; provided that if an Affiliate which does not Control and is not Controlled by the Company has so acquired any of the outstanding Notes, such acquisition shall not constitute an Event of Default. The Company will promptly cancel all Notes acquired by it or any Affiliate pursuant to any payment or prepayment of Notes pursuant to any provision of this Agreement and no Notes may be issued in substitution or exchange for any such Notes.
Section 8.6. Yield-Maintenance Amount.
“Yield-Maintenance Amount ” means, with respect to any Note, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Note over the amount of such Called Principal, provided that the Yield-Maintenance Amount may in no event be less than zero. For the purposes of determining the Yield-Maintenance Amount, the following terms have the following meanings:
 
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“Called Principal” means, with respect to any Note, the principal of such Note that is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1 , as the context requires.
“Discounted Value” means, with respect to the Called Principal of any Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Notes is payable) equal to the Reinvestment Yield with respect to such Called Principal.
“Reinvestment Yield” means, with respect to the Called Principal of any Note, 0.50% over the yield to maturity implied by (i) the yields reported as of 10:00 a.m. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the display designated as “Page PXI” (or such other display as may replace Page PX1) on Bloomberg Financial Markets for the most recently issued actively traded on the run U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or (ii) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable (including by way of interpolation), the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H. 15 (or any comparable successor publication) for U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date.
In the case of each determination under clause (i) or clause (ii), as the case may be, of the preceding paragraph, such implied yield will be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between (1) the applicable U.S. Treasury security with the maturity closest to and greater than such Remaining Average Life and (2) the applicable U.S. Treasury security with the maturity closest to and less than such Remaining Average Life. The Reinvestment Yield shall be rounded to the number of decimal places as appears in the interest rate of the applicable Note.
“Remaining Average Life” means, with respect to any Called Principal, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (a) the principal component of each Remaining Scheduled Payment with respect to such Called Principal by (b) the number of years (calculated to the nearest one-twelfth year) that will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment.
“Remaining Scheduled Payments” means, with respect to the Called Principal of any Note, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, provided that if such Settlement Date is not a date on which interest payments are due to be made under the terms of the Notes, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to Section 8.2 or 12.1.
 
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“Settlement Date” means, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1 , as the context requires.
SECTION 9. AFFIRMATIVE COVENANTS.
The Company covenants that so long as any of the Notes are outstanding:
Section 9.1. Compliance with Law. Without limiting Section 10.4, the Company will, and will cause its Subsidiaries, including New Owner, to comply with all laws, ordinances or governmental rules or regulations to which it is subject, including, without limitation, ERISA, the USA Patriot Act and Environmental Laws, and will obtain and maintain in effect all licenses, certificates, permits, franchises and other governmental authorizations necessary to the ownership of its properties or to the conduct of its businesses to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
Section 9.2. Insurance. The Company will maintain or cause to be maintained and will cause its Subsidiaries, including New Owner, to maintain, with financially sound and reputable insurers, insurance with respect to their respective properties and businesses against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated, but in no event less than the insurance set forth in this Section  9.2 and Schedule 9.2.
(a) Insurance by the Company : The Company shall procure at its own expense and maintain in full force and effect at all times throughout the term of this Note Purchase Agreement insurance policies with insurance companies rated A-, 9 or higher by A.M. Best, or acceptable to the Required Holders if not so rated, and authorized to do business in the State of Texas.
(b) Amendment of Requirements : The Required Holders may at any time amend the requirements and approved insurance companies described in this Section 9.2 or Schedule 9.2 due to (i) new information not previously known by the Purchasers prior to the Closing Date or (ii) changed circumstances after Closing Date, in which in the reasonable judgment of the Required Holders either renders a required coverage to be materially inadequate or materially reduces the financial ability of the approved insurance companies to pay claims.
(c) Evidence of Insurance : On the Closing Date and on any anniversary thereafter, if so requested by a Holder or the Collateral Agent, the Company shall furnish the Holders and the Collateral Agent with approved certification of all required insurance. Such certification shall be
 
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executed by each insurer or by an authorized representative of each insurer where it is not practical for such insurer to execute the certificate itself. Such certification shall identify underwriters, the type of insurance, the insurance limits, and the policy term, and shall specifically list the special provisions enumerated for such insurance required by this Section   9.2 . Upon request, the Company will promptly furnish the Holders and the Collateral Agent with copies of all insurance certificates, binders, and cover notes or other evidence of such insurance relating to the Collateral.
(d) Insurance Report : Concurrently with the furnishing of the certification referred to in Section 9.2(c) and on an annual basis thereafter, the Company shall furnish the Holders with a certificate, signed by a Responsible Officer of the Company, stating that all premiums then due have been paid and that the insurance then carried or to be renewed is in accordance with the terms of this Section 9.2. and Schedule 9.2.
(e) Failure to Maintain Insurance : In the event the Company fails to take out or maintain the full insurance coverage required by this Section 9.2 and Schedule 9.2, the Required Holders, upon thirty (30) days’ prior notice (unless the aforementioned insurance would lapse within such period, in which event notice should be given as soon as reasonably possible) to the Company of any such failure, may (but shall not be obligated to) take out (or cause the Collateral Agent to take out) the required policies of insurance and pay the premiums on the same. All amounts so advanced thereof by the Holders (or the Collateral Agent) shall become an additional obligation of the Company to the Holders (or the Collateral Agent), and the Company shall forthwith pay such amounts to the Holders (or the Collateral Agent).
(f) No Duty of Purchaser to Verify : No provision of this Section 9.2 or Schedule 9.2 or any other provision of this Agreement, any other Financing Document or any Project Document shall impose on the Holders or the Collateral Agent any duty or obligation to verify the existence or adequacy of the insurance coverage maintained by the Company, nor shall the Holders or the Collateral Agent be responsible for any representations or warranties made by or on behalf of the Company to any insurance company or underwriter.
Section 9.3. Maintenance of Properties. The Company will, and will cause its Subsidiaries, including New Owner, to, maintain and keep, or cause to be maintained and kept, their respective properties in good repair, working order and condition (other than ordinary wear and tear), so that the business carried on in connection therewith may be properly conducted at all times. The Company shall, and shall cause Sharyland, New Owner and New Operator, as applicable, to operate and maintain the System, including the Acquired System, and the FERC Assets in accordance with, and make all repairs, alterations, additions and replacements which are necessary for the System, including the Acquired System, and the FERC Assets to meet, all Requirements of Law, including all Required Permits, all requirements of the Transaction Documents and Good Utility Practices.
Section 9.4. Payment of Taxes and Claims. The Company will, and will cause each of its Subsidiaries, including New Owner, to, file all tax returns required to be filed in any jurisdiction and to pay and discharge all taxes shown to be due and payable on such returns and all other taxes, assessments, governmental charges, or levies imposed on them or any of their properties, assets, income or franchises, to the extent the same have become due and payable and
 
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before they have become delinquent and all claims for which sums have become due and payable that have or might become a Lien on properties or assets of the Company or any Subsidiary, including New Owner, provided that none of the Company or any Subsidiary, including New Owner, need pay any such tax, assessment, charge, levy or claim if (i) the amount, applicability or validity thereof is contested by such Person on a timely basis in good faith and in appropriate proceedings, and such Person has established adequate reserves therefor in accordance with GAAP on its books or (ii) the nonpayment of all such taxes, assessments, charges, levies and claims in the aggregate could not reasonably be expected to have a Material Adverse Effect.
Section 9.5. Existence, Etc. The Company will at all times preserve and keep in full force and effect its limited liability company existence and all rights and franchises of the Company unless, in the good faith judgment of the Company, the termination of or failure to preserve and keep in full force and effect such corporate existence, right or franchise could not, individually or in the aggregate, have a Material Adverse Effect. The Company will cause each of its Subsidiaries, including New Owner, to at all times preserve and keep in full force and effect its limited liability company, corporate or limited partnership existence, except as permitted pursuant to Section 10.2 .
Section  9.6. Books and Records. The Company will, and will cause each of its Subsidiaries, Sharyland and New Operator to, maintain proper books of record and account in conformity with GAAP and all applicable requirements of any Governmental Authority having legal or regulatory jurisdiction over such Person.
Section 9.7. Collateral; Further Assurances. (a)  The Company shall take all actions necessary to insure that the Collateral Agent, on behalf of the Secured Parties, has and continues to have in all relevant jurisdictions duly and validly created, attached, perfected and enforceable first-priority Liens on the Collateral described in the Security Documents (including after-acquired Collateral), subject to no Liens other than Permitted Liens and rights of holders of Permitted Secured Indebtedness in compliance with the Collateral Agency Agreement. The Company shall cause the Obligations to constitute direct senior secured obligations of the Company and to rank senior in priority of payment, in right of security and in all other respects to all other Indebtedness of the Company (other than Permitted Secured Indebtedness, with which it shall be pari passu in accordance with the terms of the Collateral Agency Agreement).
(b) Upon completion of each New Project, the Company may cause its Project Finance Subsidiary to Transfer the New Project to the Company and shall take all actions necessary to insure that (i) the New Project becomes a part of the Collateral, subject to the first priority Lien of the Security Documents, (ii) no Default or Event of Default occurs as a result of such Transfer, (iii) the Indebtedness of the Project Finance Subsidiary is either repaid in full at the time of the Transfer or becomes Permitted Secured Indebtedness, and (iv) the Project Finance Subsidiary is terminated or merged with and into the Company.
(c) If, after the Closing Date, the Company acquires or leases any real property, the value (or aggregate rental costs) of which exceeds $1,000,000, the Company shall forthwith (and in any event, within five Business Days of such acquisition or lease) deliver to the Collateral Agent a fully executed mortgage or deed of trust over such real property, in form and substance satisfactory to the Required Holders and the Collateral Agent, together with such surveys,
 
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environmental reports and other documents and certificates with respect to such real estate as may be reasonably required by the Required Holders. The Company further agrees to take all other actions necessary to create in favor of the Collateral Agent for the benefit of the Secured Parties a valid and enforceable first priority Lien on such real estate, free and clear of all Liens except for Permitted Liens and rights of holders of Permitted Secured Indebtedness in compliance with the Collateral Agency Agreement.
Section 9.8. Material Project Documents. (a) The Company shall at all times (i) perform and observe all of the covenants under the Material Project Documents to which it is a party, (ii) take reasonable actions to enforce all of its rights and obligations thereunder, and (iii) maintain the Material Project Documents in full force and effect.
(b) Upon expiration or termination of the initial or any renewal term of the Lease Supplement or the New Lease (or any supplement or new lease entered into in replacement thereof in accordance with this Section 9.8(b)) , the Company shall, or shall cause New Owner to, enter into a supplement or new lease with respect to the Acquired System or the FERC Assets, as applicable: (i) having an initial term of at least five years, (ii) providing for renewal terms, (iii) requiring payment of a base rent that is sufficient during the initial and all renewal terms of such supplement or new lease to enable the Company to pay Debt Service with respect to the Notes when due, and (iv) (x) substantially in the form of the existing System Lease with respect to all non-economic provisions; provided that notwithstanding the foregoing, provisions that are administrative or ministerial in nature and provisions that are of an inconsequential nature and which do not adversely affect any Holder or which satisfy any requirements, conditions or guidelines contained in any order, directive, opinion, ruling or regulation of a Federal or state agency or contained in Federal or state law shall be deemed to be substantially in the form of the existing System Lease, or (y) otherwise in form and substance satisfactory to the Required Holders, which consent shall not be unreasonably withheld. If the Required Holders have a consent right pursuant to clause (iv)(y) hereof, the Holders shall make commercially reasonable efforts to respond to the Company’s request for such review within ten business days, provided that failure to so respond shall not be deemed a consent to such supplement or new lease.
Section 9.9. Financial Ratios. (a) The Company shall at all times maintain, on a consolidated basis, a Total Debt to Capitalization Ratio of not more than 0.65 to 1.00.
(b) The Company shall maintain, for each period of four consecutive fiscal quarters, a Debt Service Coverage Ratio of at least 1.40 to 1.00; provided that for purposes of this Section 9.9(b), the Debt Service Coverage Ratio shall be deemed to be 1.40 to 1.00 for the three calendar quarters ending December 31, 2009, March 31, 2010 and June 30, 2010.
 
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SECTION 10. NEGATIVE COVENANTS.
The Company covenants that so long as any of the Notes are outstanding:
Section 10.1. Transactions with Affiliates. The Company will not and will not permit any Subsidiary (including New Owner), Sharyland or New Operator to enter into directly or indirectly any transaction or group of related transactions (including without limitation the purchase, lease, sale or exchange of properties of any kind or the rendering of any service) with any Affiliate (other than, in the case of (i) the Company, a Project Finance Subsidiary, as permitted by Section 9.7(b) , (ii) Sharyland, pursuant to the System Lease, (iii) New Owner and New Operator, pursuant to the New Lease, or (iv) as part of the Cap Rock Transaction), except in the ordinary course and upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would be obtained in a comparable arms-length transaction with a Person not an Affiliate.
Section  10.2. Merger, Consolidation, Etc. The Company will not nor will it cause or permit any of its Subsidiaries to consolidate with or merge with any other Person or convey, transfer or lease all or substantially all of its assets in a single transaction or series of transactions to any Person, except (i) pursuant to the System Lease or the New Lease, (ii) as permitted pursuant to Section 9.7(b) , (iii) as part of the Cap Rock Transaction or (iv) that so long as after giving effect to such merger or consolidation no Default or Event of Default shall have occurred or will result therefrom, the Company or any Subsidiary may merge or consolidate with another Person, so long as, after giving effect to such merger or consolidation, with respect to any merger or consolidation to which the Company is a party, the Company shall be the surviving entity, and with respect to any merger or consolidation to which a Subsidiary is a party but the Company is not, a Subsidiary shall be the surviving entity.
Section 10.3. Line of Business. The Company will not and will not permit any Subsidiary, including New Owner, to engage in any business if, as a result, the general nature of the business in which the Company and its Subsidiaries, including New Owner, taken as a whole, would then be engaged would be substantially changed from the transmission and distribution of electric power and the provision of ancillary services.
Section 10.4. Terrorism Sanctions Regulations. The Company will not and will not permit any Member or Subsidiary to (a) become a Person described or designated in the Specially Designated Nationals and Blocked Persons List of the Office of Foreign Assets Control or in Section 1 of the Anti-Terrorism Order or (b) engage in any dealings or transactions with any such Person.
Section 10.5. Liens. The Company will not, nor will it cause or permit any Subsidiary, including New Owner, to, directly or indirectly create, incur, assume or permit to exist (upon the happening of a contingency or otherwise) any Lien on or with respect to the Collateral or any other property of the Company or such Subsidiary, including New Owner, whether now owned or held or hereafter acquired, or any income or profits therefrom, or assign or otherwise convey any right to receive income or profits, or on any other asset now owned or hereafter acquired by the Company or such Subsidiary, except (each, a “Permitted Lien” ):
(a) solely in the case of the Company, Liens created by the Financing Documents or the 2009 Financing Documents on assets of the Company; and
(b) solely in the case of a Project Finance Subsidiary, Liens on assets owned by that Project Finance Subsidiary and on the ownership interests in that Project Finance Subsidiary to secure its Non-Recourse Debt;
 
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(c) Liens permitted pursuant to the terms of the Security Documents;
(d) Liens for taxes, assessments or other governmental charges which are not yet due and payable or the payment of which is not at the time required by Section 9.4;
(e) any attachment or judgment Lien, unless such attachment or judgment Lien constitutes an Event of Default under
Section 11(1) hereof;
(f) Liens existing on the date of this Agreement and securing the Indebtedness of the Company referred to in Schedule 5.16 hereto;
(g) Liens of a lessor of equipment to the Company or any Subsidiary, including New Owner, on such lessor’s leased equipment (but excluding equipment leased pursuant to a Capital Lease), including any of the foregoing which is evidenced by a protective Uniform Commercial Code filing;
(h) Mechanics’, warehousemen’s, carriers’, workers’, repairers’, landlords’, and other similar liens arising or incurred in the ordinary course of business and (i) which do not in the aggregate materially detract from the value of property or assets subject to such Liens or materially impair the continued use thereof in the operation of the business or (ii) which are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property or asset subject to such Liens, or other Liens incurred or deposits made in the ordinary course of business in connection with workers’ compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, trade contracts, leases, government contracts, performance and return-of-money bonds and other similar obligations incurred in the ordinary course of business (exclusive of obligations in respect of the payment for borrowed money);
(i) zoning, entitlement, restriction, and other land use and environmental regulations by Governmental Authorities and encroachments, easements, rights of way, covenants, restrictions or agreements which do not materially interfere with the continued use of any asset as currently used in the conduct of the business;
(j) any encumbrances set forth in any franchise or governing ordinance under which any portion of the business is conducted which could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; and
(k) all rights of condemnation, eminent domain, or other similar right of any Person.
Section 10.6. Indebtedness. The Company will not, and will not cause or permit a Subsidiary or Sharyland or New Operator to, incur or in any manner become or be liable in respect of any Indebtedness, except the following Indebtedness, which may be incurred subject to the requirements of the last paragraph of this section:
(a) Indebtedness evidenced by the Financing Documents, the RBC Agreement and the 2009 Financing Documents;
 
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(b) Indebtedness of the Company that (i) that is not related to, and does not support, Non-Recourse Debt of a Project Finance Subsidiary and (ii) if incurred, would not result in a breach of Section 9.9;
(c) (i) Non-Recourse Debt incurred by a Project Finance Subsidiary to fund a New Project and (ii) Indebtedness of a Wholly-Owned Subsidiary (other than a Project Finance Subsidiary) owed to the Company;
(d) Indebtedness of Sharyland allowed under the System Lease in an aggregate amount of up to $4,000,000;
(e) Indebtedness of the New Owner allowed under the New Lease in an aggregate amount up to $1,000,000 at any one time outstanding; or
(f) Indebtedness of the Company to any of its Wholly Owned Subsidiaries (other than a Project Finance Subsidiary), which by its terms is expressly subordinated to the Notes, and Indebtedness of any Wholly Owned Subsidiary (other than a Project Finance Subsidiary) to the Company or any other Wholly Owned Subsidiary of the Company (other than a Project Finance Subsidiary) not to exceed $5,000,000 at any one time outstanding and in each case to have a maturity date of less than one year later.
Indebtedness may be incurred under this Section 10.6 only if no Default or Event of Default is, or as a result of such incurrence would be, existing.
Section 10.7. Loans, Advances, Investments and Contingent Liabilities. The Company will not make or permit to remain outstanding any loan or advance to, or extend credit other than credit extended in the ordinary course of business to any Person, or own, purchase or acquire any stock, obligations or securities of, or any other interest in, or make any capital contribution to, any Person, or commit to do any of the foregoing, except (a) Permitted Investments, (b) equity interests in Project Finance Subsidiaries, or (c) loans to or equity interests in Wholly-Owned Subsidiaries (other than Project Finance Subsidiaries).
Section 10.8. No Subsidiaries. The Company shall have no subsidiaries other than Project Finance Subsidiaries and other Wholly-Owned Subsidiaries. The Company shall give the Holders notice 5 Business Days prior to creating any new Subsidiaries.
Section 10.9. Restricted Payments . The Company will not, directly or indirectly, make or declare any Distribution unless the following conditions are met (the “Restricted Payment Conditions” ):
(a) there does not exist and, after giving effect to the proposed Distribution, there will not exist, a Default or an Event of Default; and
(b) the Distribution is to be made no sooner than 15 days following a Payment Date.
The Company shall deliver to the Holders and the Collateral Agent before a Distribution is made a certificate of a Responsible Officer of the Company stating that each of the foregoing conditions has been satisfied and, if requested, providing supporting data and calculations.
 
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Section 10.10. Sale of Assets, Etc. The Company will not nor will it cause or permit New Operator, Sharyland or any Subsidiary of the Company to transfer, or agree or otherwise commit to Transfer, any of its assets except :
(a) the Company shall lease the System to Sharyland pursuant to the System Lease; the Company shall lease the Acquired System to Sharyland pursuant to the Lease Supplement; and the New Owner shall lease the FERC Assets to New Operator pursuant to the New Lease;
(b) each Project Finance Subsidiary may Transfer the New Project developed and constructed by such Project Finance Subsidiary to the Company upon completion of the New Project in accordance with Section 9.7(b);
(c) the Company, New Operator, Sharyland and any Subsidiary of any of them may sell assets that are obsolete or no longer used or useful in such Person’s business; and
(d) Transfers contemplated by the Cap Rock Transaction.
Section 10.11. Sale or Discount of Receivables. The Company will not nor will it cause or permit any Subsidiary or New Operator to sell with recourse, or discount or otherwise sell for less than the face value thereof, any of its notes or accounts receivable.
Section 10.12. Amendments to Organizational Documents. The Company will not nor will it cause or permit any of its Subsidiaries, Sharyland or any of Sharyland’s Subsidiaries to amend, supplement, terminate, replace or waive any provision of its operating agreement or other organization documents. Notwithstanding the preceding sentence, each of the Company, its Subsidiaries, Sharyland and Sharyland’s Subsidiaries may, without the consent of the Holders, amend its operating agreement as may be required to facilitate or implement any of the following:
(a) to reflect the contribution of additional capital by its members;
(b) to reflect a change that is of an inconsequential nature and does not adversely affect any Holders in any material respect, or to cure any ambiguity, or correct or supplement any provision, not inconsistent with law or with the provisions of this Agreement;
(c) to satisfy any requirements, conditions, or guidelines contained in any order, directive, opinion, ruling or regulation of a Federal or state agency or contained in Federal or state law; and
(d) to take actions to avoid any material adverse consequences to such Person as a result of any change in law or interpretation of law applicable to Persons subject to regulation by the PUCT and FERC.
The Company will provide notice to the Holders at least 5 Business Days prior to taking any such action under the foregoing sentence of this Section 10.12.
 
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Section 10.13. Sale and Lease-Back. Except for the System Lease and the New Lease, the Company will not, nor will it cause or permit any Subsidiary to, enter into any arrangement providing for the leasing by the Company or any Subsidiary of real or personal property which has been or is to be Transferred by the Company or Subsidiary to a lender or investor or to any Person to whom funds have been or are to be advanced by such lender or investor on the security of such property or rental obligations of the Company or any Subsidiary.
Section 10.14. ERISA Compliance.
(a) Relationship of Vested Benefits to Plan Assets. The Company will not as of the last day of any calendar year permit the aggregate funding ratio (as described in Section 5.13 ) under all Plans, determined in accordance with Title IV of ERISA, to be less than 80%. The Company and its ERISA Affiliates will not incur withdrawal liabilities (and will not become subject to contingent withdrawal liabilities) under section 4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate are material.
(b) Valuations. For the purposes of clause (a) above, all assumptions and methods used to determine the actuarial valuation of vested and unvested employee benefits under any Plan at any time maintained by the Company and the present value of assets of any such Plan shall be reasonably consistent with those determinations made for purposes of Section 5.13.
(c) Prohibited Actions. The Company will not, nor, as applicable, will any Plan at any time maintained by the Company
(i) engage in any non-exempt “prohibited transaction” (as such term is defined in Section 406 or Section 2003(a) of ERISA;
(ii) fail to meet the minimum funding standards of Section 302 of ERISA or Sections 412 and 430 of the Code, or seek or obtain a waiver thereof or fail to make any required contribution to a Multiemployer Plan; or
(iii) terminate any such Plan in a manner which could result in the imposition of a Lien on the Property of the Company pursuant to Section 4068 of ERISA.
Section 10.15. No Margin Stock. Anything herein contained to the contrary notwithstanding, the Company will not, nor will it permit any Subsidiary to, make or authorize any investment in, or otherwise purchase or carry, any margin stock.
Section 10.16. Project Documents.
(a) The Company will not amend, modify, supplement, replace, terminate or waive any provision of any Material Project Document to which it is party, or consent to any amendment, modification, supplement, replacement, termination or waiver of any Material Project Document, except that (i) the Company, Sharyland, New Owner and New Operator may enter into “Lease Supplements” as contemplated by the System Lease and the New Lease in accordance with Section 9.8(b), and (ii) the Company may enter into modifications of Material Project Documents that are merely ministerial or corrective in nature.
 
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(b) The Company shall not enter into any Additional Project Document, except (i) leases and lease supplements in accordance with Section 9.8(b), and (ii) limited liability company agreements or other organizational documents of Project Finance Subsidiaries or other Wholly-Owned Subsidiaries. The Company shall ensure that Sharyland does not enter into any new lease of transmission or distribution facilities other than the System Lease at any time prior to the Maturity Date; provided that for the avoidance of doubt, the foregoing provisions of this sentence shall not prohibit Sharyland from maintaining or entering into replacement leases for, or from amending or modifying the leases described in Schedule 10.16.
Section 10.17. Regulation.
(a) Except as permitted in connection with the transactions described in Schedule 10.1 or in subsection (d) below, the Company shall not be or become, nor shall it permit Sharyland to be or become, subject to FERC jurisdiction under the FPA; provided, however, that the Company shall not be in default of the forgoing negative covenant if the Company or Sharyland becomes subject to FERC jurisdiction under the FPA solely as a result of a change to the FPA or in FERC’s interpretation thereof or regulations thereunder, if the Company or Sharyland takes all necessary actions to comply with applicable FERC requirements and the operation of the System is uninterrupted;
(b) The Company shall not become subject to regulation under PUHCA except to the extent and in the fashion it is subject to regulation on the Closing Date; provided, however, that the Company shall not be in default of the foregoing negative covenant if the Company becomes subject to additional such regulation solely as a result of a change to the PUHCA or in FERC’s interpretation thereof or the regulations thereunder if the Company takes all necessary actions to comply with PUHCA requirements and the operation of the System is uninterrupted. As a result of the Cap Rock Transactions, Sharyland will become a “holding company” under PUHCA and, together with the holding company system of which it is a part, may be required to submit to FERC a revised notice of holding company status and/or a revised request for waiver of the requirements of 18 C.F.R. §§ 366.21, 366.22, and 366.23;
(c) None of the Company nor Sharyland shall violate in any material respect any regulation or order of the Public Utility Commission of Texas applicable to it; and
(d) None of the Company nor Sharyland shall own, operate or control any electrical generating, transmitting or distribution facility, nor effect or control any sale of electricity, outside of the ERCOT balancing authority area except (i) as permitted by FERC, as set forth in its declaratory order issued in Docket no. EL07-93-000 or (ii) interconnected transmission or distribution assets or systems located substantially in the State of Texas or deriving a majority of their revenue from customers within the State of Texas.
Section 10.18. Swaps. The Company will not, nor will it permit any Subsidiary, including New Owner, to, enter into any Swap Contracts, except that the Company may enter into Swap Contracts solely to hedge interest rate risk and not for speculative purposes.
 
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Section 10.19. Most Favored Lender. The Company will not enter into, assume or otherwise become bound or obligated under any agreement creating or evidencing Indebtedness containing one or more Additional Covenants or Additional Defaults unless the Required Holders shall have given prior written consent to such agreement (the Required Holders hereby being deemed to have consented to the 2009 Note Agreement and the RBC Agreement as in effect on the Closing Date); provided, however, in the event the Company shall enter into, assume or otherwise become bound by or obligated under any such agreement without the prior written consent of the Required Holders, the terms of this Agreement shall, without any further action on the party of the Company or any of the Holders of the Notes, be deemed to be amended automatically to include each Additional Covenant and each Additional Default contained in such agreement. The Company further covenants to promptly execute and deliver at its expense (including the fees and expenses of counsel for the Holders of the Notes) an amendment to this Agreement in form and substance satisfactory to the Required Holders evidencing the amendment of this Agreement to include such Additional Covenants and Additional Defaults, but that the execution and delivery of such amendment shall not be a precondition to the effectiveness of such amendment as provided for in this Section 10.19 , but shall merely be for the convenience of the parties hereto; provided that if the Company promptly executes and delivers at its expense such amendment of this Agreement to include such Additional Covenants and Additional Defaults, the Company shall not be in breach or default of the covenant in this Section 10.19.
SECTION 11. EVENTS OF DEFAULT.
An “ Event of Default ” shall exist if any of the following conditions or events shall occur and be continuing:
(a) the Company defaults in the payment of any principal or Yield-Maintenance Amount, if any, on any Note when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise; or
(b) the Company defaults in the payment of any interest on any Note for more than five days after the same becomes due and payable; or
(c) the Company defaults in the performance of or compliance with any term contained in Section 7.1(d), Section 9.2, 9.9 or Section 10; or
(d) the Company defaults in the performance of or compliance with any term contained herein (other than those referred to in Sections 11(a) , (b)  and (c) ) or in any other Financing Document (other than those referred to in another paragraph of this Section 11 ) and such default is not remedied within 30 days after the earlier of (i) a Responsible Officer obtaining actual knowledge of such default and (ii) the Company receiving written notice of such default from the Collateral Agent or Holder of a Note (any such written notice to be identified as a “notice of default” and to refer specifically to this Section 11(d) ); or
(e) any representation or warranty made in writing by or on behalf of the Company or by any officer of the Company in this Agreement or any other Transaction Document or in any writing furnished in connection with the transactions contemplated hereby proves to have been false or incorrect in any material respect on the date as of which made; or
 
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(f) (i) A default or event of default occurs under the System Lease or the New Lease or any other Material Project Document, and such failure continues for more than any cure period specified therefor; or (ii) the System Lease, the New Lease or any other Transaction Document is declared to be null and void or is otherwise unenforceable, or any party thereto claims that any such agreement is unenforceable; or
(g) any Required Permit is lost, terminated without being timely replaced (if the terminated Permit continues to be a Required Permit), revoked or otherwise is not in effect; provided, however, that the termination without immediate renewal of any franchise agreement pursuant to which the Company, a Member, New Owner or New Operator is authorized to operate the System, the Acquired System or the FERC Assets and collect fees for services shall not constitute an Event of Default if the parties to the franchise agreement continue to perform in accordance with the terms of such agreement notwithstanding the termination; or
(h) any Lien granted to the Collateral Agent pursuant to any of the Security Documents is invalid, void, unenforceable or unperfected or ceases to have first priority (subject to Permitted Liens), or any Person commences any proceeding or takes any other action to render any such Lien invalid, or to avoid any such Lien or to render any such Lien unenforceable or unperfected or to challenge the priority of such Lien, or an event of default occurs under any Indebtedness that is secured in whole or in part by the Collateral Agency Agreement, or any Person party to the Collateral Agency Agreement fails to comply with the terms thereof or commences any proceeding or takes any other action to render any part of the Collateral Agency Agreement unenforceable; or
(i) without limiting clause (h), (i) the Company, Sharyland, New Owner or New Operator is in default (as principal or as guarantor or other surety) in the payment of any principal of or premium or make-whole amount or interest on any Indebtedness that is outstanding in an aggregate principal amount of at least $10,000,000 ($2,000,000 in the case of Sharyland, New Owner or New Operator) beyond any period of grace provided with respect thereto, or (ii) the Company, Sharyland, New Owner or New Operator is in default in the performance of or compliance with any term of any evidence of any Indebtedness in an aggregate outstanding principal amount of at least $10,000,000 ($2,000,000 in the case of Sharyland, New Owner or New Operator) or of any mortgage, indenture or other agreement relating thereto or any other condition exists, and as a consequence of such default or condition such Indebtedness has become, or has been declared (or one or more Persons are entitled to declare such Indebtedness to be), due and payable before its stated maturity or before its regularly scheduled dates of payment, or (iii) as a consequence of the occurrence or continuation of any event or condition (other than the passage of time or the right of the holder of Indebtedness to convert such Indebtedness into equity interests), (x) the Company, Sharyland, New Owner or New Operator has become obligated to purchase or repay Indebtedness before its regular maturity or before its regularly scheduled dates of payment in an aggregate outstanding principal amount of at least $10,000,000 (or $2,000,000 in the case of Sharyland, New Owner or New Operator), or (y) one or more Persons have the right to require the Company, Sharyland, New Owner or New Operator to purchase or repay such Indebtedness, or (iv) a default or an event of default occurs under the 2009 Note Agreement or the RBC Agreement and such failure continues for more than any cure period specified therefor; or
 
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(j) the Company, Sharyland, New Owner or New Operator (i) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes corporate action for the purpose of any of the foregoing; or
(k) a court or Governmental Authority of competent jurisdiction enters an order appointing, without consent by the Company, Sharyland, New Owner or New Operator, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of any such Person or any such petition shall be filed against any such Person and such petition shall not be dismissed within 90 days; or
(l) a final judgment or judgments for the payment of money aggregating in excess of $10,000,000 ($2,000,000 in the case of Sharyland, New Owner or New Operator) are rendered against such Person and which judgments are not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay; or
(m) if (i) any Plan shall fail to satisfy the minimum funding standards of ERISA or the Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under Section 412 of the Code, (ii) a notice of intent to terminate any Plan shall have been or is reasonably expected to be filed with the PBGC or the PBGC shall have instituted proceedings under ERISA section 4042 to terminate or appoint a trustee to administer any Plan or the PBGC shall have notified the Company or any ERISA Affiliate that a Plan may become a subject of any such proceedings, (iii) the aggregate funding ratio (as described in Section 5.11 ) under all Plans, determined in accordance with Title IV of ERISA as of the last day of any fiscal year, to be less than 80%, (iv) the Company or any ERISA Affiliate shall have incurred or is reasonably expected to incur any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, (v) the Company or any ERISA Affiliate withdraws from any Multiemployer Plan, or (vi) the Company establishes or amends any employee welfare benefit plan that provides post-employment welfare benefits in a manner that would increase the liability of the Company thereunder; and any such event or events described in clauses (i) through (vi) above, either individually or together with any other such event or events, could reasonably be expected to have a Material Adverse Effect; or
(n) (i) Members of the Ray L. Hunt family or trusts for the benefit of the Ray L. Hunt family cease to own, directly or indirectly, and control all of the outstanding equity interests of Sharyland and New Operator, (ii) Sharyland ceases to be the lessee under the System Lease within the initial term of such System Lease (without giving effect to any amendments,
 
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supplements or replacements thereof), (iii) Energy Trans Alliance, L.P. ceases to own, directly or indirectly, and control 90% of the outstanding equity interest of the Company, or (iv) members of the Ray L. Hunt family or trusts for the benefit of the Ray L. Hunt family cease to own, directly or indirectly, and control at least 5% of the outstanding equity interests of Energy Trans Alliance, L.P., unless (x) the general partner of Energy Trans Alliance, L.P. has become a publicly held company, or (y) the Company has total assets on its balance sheet valued at $1,000,000,000 or greater; or
(o) the Company defaults in the performance of or compliance with Section 9.8(b) .
As used in Section 11(m), the terms “employee benefit plan” and “employee welfare benefit plan” shall have the respective meanings assigned to such terms in section 3 of ERISA.
SECTION 12. REMEDIES ON DEFAULT, ETC.
Section 12.1. Acceleration. (a) If an Event of Default with respect to the Company described in Section 11(j) or (k)  (other than an Event of Default described in clause (i) of Section 11(j) or described in clause (vi) of Section 11(j) by virtue of the fact that such clause encompasses clause (i) of Section 11(j)) has occurred, all the Notes then outstanding shall automatically become immediately due and payable.
(b) If any other Event of Default has occurred and is continuing, any Holder or Holders of more than 51% in principal amount of the Notes at the time outstanding may at any time at its or their option, by notice or notices to the Company, declare all the Notes then outstanding to be immediately due and payable.
(c) If any Event of Default described in Section 11(a) or (b)  has occurred and is continuing, any Holder or Holders of Notes at the time outstanding affected by such Event of Default may at any time, at its or their option, by notice or notices to the Company, declare all the Notes held by it or them to be immediately due and payable.
Upon any Notes becoming due and payable under this Section 12.1 , whether automatically or by declaration, such Notes will forthwith mature and the entire unpaid principal amount of such Notes, plus (x) all accrued and unpaid interest thereon (including, but not limited to, interest accrued thereon at the Default Rate) and (y) the Yield-Maintenance Amount determined in respect of such principal amount (to the full extent permitted by applicable law), shall all be immediately due and payable, in each and every case without presentment, demand, protest or further notice, all of which are hereby waived. The Company acknowledges, and the parties hereto agree, that each Holder of a Note has the right to maintain its investment in the Notes free from repayment by the Company (except as herein specifically provided for) and that the provision for payment of a Yield-Maintenance Amount by the Company in the event that the Notes are prepaid or are accelerated as a result of an Event of Default, is intended to provide compensation for the deprivation of such right under such circumstances.
Section 12.2. Other Remedies. If any Default or Event of Default has occurred and is continuing, and irrespective of whether any Notes have become or have been declared immediately due and payable trader Section 12.1, the Holder of any Note at the time outstanding may proceed to protect and enforce the rights of such Holder by an action at law, suit in equity or
 
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other appropriate proceeding, whether for the specific performance of any agreement contained herein or in any Note, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise.
Section 12.3. Rescission. At any time after any Notes have been declared due and payable pursuant to Section 12.1(b) or (c) , the Holders of not less than 51% in principal amount of the Notes then outstanding, by written notice to the Company, may rescind and annul any such declaration and its consequences if (a) the Company has paid all overdue interest on the Notes, all principal of and Yield-Maintenance Amount, if any, on any Notes that are due and payable and are unpaid other than by reason of such declaration, and all interest on such overdue principal and Yield-Maintenance Amount, if any, and (to the extent permitted by applicable law) any overdue interest in respect of the Notes, at the Default Rate, (b) neither the Company nor any other Person shall have paid any amounts which have become due solely by reason of such declaration, (c) all Events of Default and Defaults, other than non-payment of amounts that have become due solely by reason of such declaration, have been cured or have been waived pursuant to Section 17 , and (d) no judgment or decree has been entered for the payment of any monies due pursuant hereto or to the Notes. No rescission and annulment under this Section 12.3 will extend to or affect any subsequent Event of Default or Default or impair any right consequent thereon.
Section 12.4. No Waivers or Election of Remedies, Expenses, Etc. No course of dealing and no delay on the part of any Holder of any Note in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice such Holder’s rights, powers or remedies. No right, power or remedy conferred by this Agreement or by any Note upon any Holder thereof shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. Without limiting the obligations of the Company under Section 15 , the Company will pay to the Holder of each Note on demand such further amount as shall be sufficient to cover all costs and expenses of such Holder incurred in any enforcement or collection under this Section 12 , including, without limitation, reasonable attorneys’ fees, expenses and disbursements.
SECTION 13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES.
Section 13.1. Registration of Notes. The Company shall keep at its principal executive office a register for the registration and registration of transfers of Notes. The name and address of each Holder of one or more Notes, each transfer thereof and the name and address of each transferee of one or more Notes shall be registered in such register. Prior to due presentment for registration of transfer, the Person in whose name any Note shall be registered shall be deemed and treated as the owner and Holder thereof for all purposes hereof, and the Company shall not be affected by any notice or knowledge to the contrary. The Company shall give to any Holder of a Note that is an Institutional Investor, promptly upon request therefor, a complete and correct copy of the names and addresses of all registered Holders of Notes. In addition to and not in limitation of any representations contained herein, each Holder acknowledges and agrees that the Notes have not been registered under the Securities Act and may not be transferred except pursuant to registration or an exemption therefrom and in compliance with Section 13.2(b) hereof.
 
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Section 13.2. Transfer and Exchange of Notes. (a) Subject to compliance with Section 13.2(b) , upon surrender of any Note to the Company at the address and to the attention of the designated officer (all as specified in Section 18(iii)), for registration of transfer or exchange (and in the case of a surrender for registration of transfer accompanied by a written instrument of transfer duly executed by the registered Holder of such Note or such Holder’s attorney duly authorized in writing and accompanied by the relevant name, address and other information for notices of each transferee of such Note or part thereof), within ten Business Days thereafter, the Company shall execute and deliver, at the Company’s expense (except as provided below), one or more new Notes (as requested by the Holder thereof) in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Note. Each such new Note shall be payable to such Person as such Holder may request and shall be substantially in the form of Exhibit 1 . Each such new Note shall be dated and bear interest from the date to which interest shall have been paid on the surrendered Note or dated the date of the surrendered Note if no interest shall have been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of Notes. Notes shall not be transferred in denominations of less than $1,000,000, provided that if necessary to enable the registration of transfer by a Holder of its entire holding of Notes, one Note may be in a denomination of less than $1,000,000. Any transferee, by its acceptance of a Note registered in its name (or the name of its nominee), shall be deemed to have made the representations set forth in Section 6.1 and Section 6.2 .
(b) Each Holder hereby agrees that it will not offer for sale or sell any of its Notes or disclose any Confidential Information to any prospective transferee of the Notes, other than to an Affiliate, or to another Holder without first delivering written notice to the Company ( a “Right of First Offer Notice”) of its intent to sell such Notes and disclose such Confidential Information. Such Right of First Offer Notice shall contain a reasonably detailed description of the proposed terms of such sale, including, without limitation, the proposed purchase price (the “Proposed Purchase Price” ) for such Notes and the names of up to ten prospective purchasers. If the Company so desires it may, within 5 Business Days of the receipt of such Right of First Offer Notice, inform such Holder in writing of its intent to purchase, or have an Affiliate or Institutional Investor designated by the Company purchase, such Notes ( a “Purchase Notice”) from the Holder delivering such Right of First Offer Notice at the Proposed Purchase Price, provided, however, that if at such time a Default or Event of Default shall have occurred and be continuing, the Company shall not purchase, and shall not allow any Affiliate or Institutional Investor designated by the Company to purchase, the Notes of the Holder delivering such Right of First Offer Notice. The aggregate principal amount of the Notes specified in such Purchase Notice shall be purchased by the Company, or such Affiliate or Institutional Investor, for the Proposed Purchase Price, together with accrued interest on such Notes to the purchase date, on the date specified by the Company in such Purchase Notice, which shall be not more than 30 days following delivery of such Purchase Notice. If a Holder does not receive a Purchase Notice from the Company within 5 Business Days after the delivery of a Right of First Offer Notice to the Company, such Holder shall have the right to sell its Notes identified in such Right of First Offer Notice to one or more of the prospective purchasers identified in such Right of First Offer Notice for a price which is not less than the Proposed Purchase Price identified in such Right of First Offer Notice for a period of 120 days from the date of such Right of First Offer Notice. In the event that the prospective purchasers identified by a Holder in a Right of First Offer Notice shall decline to purchase the Notes within such 120 day period, then the Holder may identify up to 10 additional Institutional Investors through a new Right of First Offer Notice.
 
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Section 13.3. Replacement of Notes. Upon receipt by the Company at the address and to the attention of the designated officer (all as specified in Section 18(iii)) of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Note (which evidence shall be, in the case of an Institutional Investor, notice from such Institutional Investor of such ownership and such loss, theft, destruction or mutilation), and
(a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (provided that if the Holder of such Note is, or is a nominee for, an original Purchaser or another Holder of a Note with a minimum net worth of at least $100,000,000 or a Qualified Institutional Buyer, such Person’s own unsecured agreement of indemnity shall be deemed to be satisfactory), or
(b) in the case of mutilation, upon surrender and cancellation thereof,
within ten Business Days thereafter, the Company at its own expense shall execute and deliver, in lieu thereof, a new Note, dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Note or dated the date of such lost, stolen, destroyed or mutilated Note if no interest shall have been paid thereon.
SECTION 14. PAYMENTS ON NOTES.
Section 14.1. Place of Payment. Subject to Section 14.2, payments of principal, Yield-Maintenance Amount, if any, and interest becoming due and payable on the Notes shall be made in New York City, New York at the principal office of JPMorgan Chase Bank National Association in such jurisdiction. The Company may at any time, by notice to each Holder of a Note, change the place of payment of the Notes so long as such place of payment shall be either the principal office of the Company in such jurisdiction or the principal office of a bank or trust company in such jurisdiction.
Section 14.2. Home Office Payment. So long as any Purchaser or its nominee shall be the Holder of any Note, and notwithstanding anything contained in Section 14.1 or in such Note to the contrary, the Company will pay all sums becoming due on such Note for principal, Yield-Maintenance Amount, if any, and interest by the method and at the address specified for such purpose below such Purchaser’s name in Schedule A, or by such other method or at such other address as such Purchaser shall have from time to time specified to the Company in writing for such purpose, without the presentation or surrender of such Note or the making of any notation thereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment or prepayment in full of any Note, such Purchaser shall surrender such Note for cancellation, reasonably promptly after any such request, to the Company at its principal executive office or at the place of payment most recently designated by the Company pursuant to Section 14.1. Prior to any sale or other disposition of any Note held by a Purchaser or its nominee, such Purchaser will, at its election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender such Note to the Company in exchange for a new Note or Notes pursuant to Section 13.2 . The Company will afford the benefits of this Section 14.2 to any Institutional Investor that is the direct or indirect transferee of any Note purchased by a Purchaser under this Agreement and that has made the same agreement relating to such Note as the Purchasers have made in this Section 14.2 .
 
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SECTION 15. EXPENSES, ETC.
Section 15.1. Transaction Expenses. Whether or not the transactions contemplated hereby are consummated, the Company will pay all costs and expenses (including reasonable attorneys’ fees of one firm of special counsel and, if reasonably required by the Required Holders, local or other counsel) incurred by the Purchasers and each other Holder of a Note in connection with such transactions and in connection with any amendments, waivers or consents under or in respect of this Agreement or the Notes (whether or not such amendment, waiver or consent becomes effective), including, without limitation: (a) the costs and expenses incurred in enforcing or defending (or determining whether or how to enforce or defend) any rights under this Agreement or the Notes or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement or the Notes, or by reason of being a Holder of any Note, but only to the extent such subpoena or legal proceeding arises out of matters related to the Company, (b) the costs and expenses, including financial advisors’ fees, incurred in connection with the insolvency or bankruptcy of the Company or in connection with any work-out or restructuring of the transactions contemplated hereby and by the Notes and (c) the costs and expenses incurred in connection with the initial filing of this Agreement and all related documents and financial information with the SVO provided. The Company will pay, and will save each Purchaser and each other Holder of a Note harmless from, all claims in respect of any fees, costs or expenses, if any, of brokers and finders (other than those, if any, retained by a Purchaser or other Holder in connection with its purchase of the Notes).
Section 15.2. Survival. The obligations of the Company under this Section 15 will survive the payment or transfer of any Note, the enforcement, amendment or waiver of any provision of this Agreement or the Notes, and the termination of this Agreement.
SECTION 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT.
All representations and warranties contained herein shall survive the execution and delivery of this Agreement and the Notes, the purchase or transfer by any Purchaser of any Note or portion thereof or interest therein and the payment of any Note, and may be relied upon by any subsequent Holder of a Note, regardless of any investigation made at any time by or on behalf of such Purchaser or any other Holder of a Note; provided that no representation or warranty shall be deemed to be made as of any time other than the date of execution and delivery of this Agreement or such other document, certificate, instrument or agreement containing such representation or warranty. All statements contained in any certificate or other instrument delivered by or on behalf of the Company pursuant to this Agreement shall be deemed representations and warranties of the Company under this Agreement. Subject to the preceding sentence, this Agreement and the Notes embody the entire agreement and understanding between each Purchaser and the Company and supersede all prior agreements and understandings relating to the subject matter hereof.
 
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SECTION 17. AMENDMENT AND WAIVER.
Section 17.1. Requirements. This Agreement and the Notes may be amended, and the observance of any term hereof or of the Notes may be waived (either retroactively or prospectively), with (and only with) the written consent of the Company and the Required Holders, except that (a) no amendment or waiver of any of the provisions of Section 1, 2, 3, 4, 5, 6 or 21 hereof, or any defined term (as it is used therein), will be effective as to any Purchaser unless consented to by such Purchaser in writing, and (b) no such amendment or waiver may, without the written consent of the Holder of each Note at the time outstanding affected thereby, (i) subject to the provisions of Section 12 relating to acceleration or rescission, change the amount or time of any prepayment or payment of principal of, or reduce the rate or change the time of payment or method of computation of interest or of the Yield-Maintenance Amount on, the Notes, (ii) change the percentage of the principal amount of the Notes the Holders of which are required to consent to any such amendment or waiver, or (iii) amend any of Section 8, ll(a), ll(b), 12, 17 or 20.
Section 17.2. Solicitation of Holders of Notes.
(a) Solicitation. The Company will provide each Holder of the Notes (irrespective of the amount of Notes then owned by it) with sufficient information, sufficiently far in advance of the date a decision is required, to enable such Holder to make an informed and considered decision with respect to any proposed amendment, waiver or consent in respect of any of the provisions hereof or of the Notes. The Company will deliver executed or true and correct copies of each amendment, waiver or consent effected pursuant to the provisions of this Section 17 to each Holder of outstanding Notes promptly following the date on which it is executed and delivered by, or receives the consent or approval of, the requisite Holders of Notes.
(b) Payment. The Company will not directly or indirectly pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, or grant any security or provide other credit support, to any Holder of Notes as consideration for or as an inducement to the entering into by any Holder of Notes of any waiver or amendment of any of the terms and provisions hereof unless such remuneration is concurrently paid, or security is concurrently granted or other credit support concurrently provided, on the same terms, ratably to each Holder of Notes then outstanding even if such Holder did not consent to such waiver or amendment.
Section 17.3. Binding Effect, etc. Any amendment or waiver consented to as provided in this Section 17 applies equally to all Holders of Notes and is binding upon them and upon each future Holder of any Note and upon the Company without regard to whether such Note has been marked to indicate such amendment or waiver. No such amendment or waiver will extend to or affect any obligation, covenant, agreement, Default or Event of Default not expressly amended or waived or impair any right consequent thereon. No course of dealing between the Company and the Holder of any Note nor any delay in exercising any rights hereunder or under any Note shall operate as a waiver of any rights of any Holder of such Note. As used herein, the term “this Agreement” and references thereto shall mean this Agreement as it may from time to time be amended or supplemented.
 
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Section 17.4. Notes Held by Company, etc. Solely for the purpose of determining whether the Holders of the requisite percentage of the aggregate principal amount of Notes then outstanding approved or consented to any amendment, waiver or consent to be given under this Agreement or the Notes, or have directed the taking of any action provided herein or in the Notes to be taken upon the direction of the Holders of a specified percentage of the aggregate principal amount of Notes then outstanding, Notes directly or indirectly owned by the Company or any of its Affiliates shall be deemed not to be outstanding.
SECTION 18. NOTICES.
All notices and communications provided for hereunder shall be in writing and sent (a) by telecopy if the sender on the same day sends a confirming copy of such notice by a recognized overnight delivery service (charges prepaid), or (b) by registered or certified mail with return receipt requested (postage prepaid), or (c) by a recognized overnight delivery service (with charges prepaid). Any such notice must be sent:
(i) if to any Purchaser or its nominee, to such Purchaser or nominee at the address specified for such communications in Schedule A , or at such other address as such Purchaser or nominee shall have specified to the Company in writing,
(ii) if to any other Holder of any Note, to such Holder at such address as such other Holder shall have specified to the Company in writing, and
(iii) if to the Company, to the Company at 1900 N. Akard Street, Dallas, TX 75201-2300, facsimile: (214) 855-6965 to the attention of W. Kirk Baker, or at such other address as the Company shall have specified to the Holder of each Note in writing.
Notices under this Section 18 will be deemed given only when actually received.
SECTION 19. REPRODUCTION OF DOCUMENTS.
This Agreement and all documents relating thereto, including, without limitation, (a) consents, waivers and modifications that may hereafter be executed, (b) documents received by any Purchaser at the Closing (except the Notes themselves), and (c) financial statements, certificates and other information previously or hereafter furnished to any Purchaser, may be reproduced by such Purchaser by any photographic, photostatic, electronic, digital, or other similar process and such Purchaser may destroy any original document so reproduced. The Company agrees and stipulates that, to the extent permitted by applicable law, any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by such Purchaser in the regular course of business) and any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. This Section  19 shall not prohibit the Company or any other Holder of Notes from contesting any such reproduction to the same extent that it could contest the original, or from introducing evidence to demonstrate the inaccuracy of any such reproduction.
 
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SECTION 20. CONFIDENTIAL INFORMATION.
For the purposes of this Section 20, “Confidential Information” means Information delivered to any Purchaser by or on behalf of the Company in connection with the transactions contemplated by or otherwise pursuant to this Agreement, provided that such term does not include information that (a) other than as a result of disclosure by any Purchaser or its employees or agents in violation of this Section 20 was publicly known or otherwise known to such Purchaser prior to the time of such disclosure, (b) other than as a result of disclosure by any Purchaser or its employees or agents in violation of this Section 20 subsequently becomes publicly known through no act or omission by such Purchaser or any Person acting on such Purchaser’s behalf, (c) other than as a result of disclosure by any Purchaser or its employees or agents in violation of this Section 20 otherwise becomes known to such Purchaser other than through disclosure by the Company or (d) constitutes financial statements delivered to such Purchaser under Section 7.1 that are otherwise publicly available. “Information” means information concerning the Company or its Subsidiaries, irrespective of its source or form of communication, furnished by or on behalf of the Company or any of its Subsidiaries, including without limitation notes, analyses, compilations, studies or other documents or records prepared by any Purchaser, which contain or reflect or were generated from information supplied by or on behalf of the Company or its Subsidiaries. Each Purchaser will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by such Purchaser in good faith to protect confidential information of third parties delivered to such Purchaser, provided that such Purchaser may deliver or disclose Confidential Information to (i) its directors, officers, employees, agents, attorneys, trustees and affiliates (to the extent such disclosure reasonably relates to the administration of the investment represented by its Notes), (ii) its financial advisors and other professional advisors who agree to hold confidential the Confidential Information substantially in accordance with the terms of this Section 20 , (iii) any other Holder of any Note, (iv) any Institutional Investor to which it sells or offers to sell such Note or any part thereof or any participation therein (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section  20), (v) any Person from which it offers to purchase any security of the Company (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section  20 ), (vi) any Federal or state regulatory authority having jurisdiction over such Purchaser, (vii) the NAIC or the SVO or, in each case, any similar organization, or any nationally recognized rating agency that requires access to information about such Purchaser’s investment portfolio, or (viii) any other Person to which such delivery or disclosure may be necessary or appropriate (w) to effect compliance with any law, rule, regulation or order applicable to such Purchaser, (x) in response to any subpoena or other legal process, (y) in connection with any litigation to which such Purchaser is a party or (z) if an Event of Default has occurred and is continuing, to the extent such Purchaser may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement or for the protection of the rights and remedies under such Purchaser’s Notes and this Agreement. Each Holder of a Note, by its acceptance of a Note, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Section 20 as though it were a party to this Agreement. On reasonable request by the Company in connection with the delivery to any Holder of a Note of information required to be delivered to such Holder under this Agreement or requested by such Holder (other than a Holder that is a party to this Agreement or its nominee), such Holder will enter into an agreement with the Company embodying the provisions of this Section 20.
 
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SECTION 21. SUBSTITUTION OF PURCHASER.
Each Purchaser shall have the right to substitute any one of its Affiliates as the purchaser of the Notes that it has agreed to purchase hereunder, by written notice to the Company, which notice shall be signed by both such Purchaser and such Affiliate, shall contain such Affiliate’s agreement to be bound by this Agreement and shall contain a confirmation by such Affiliate of the accuracy with respect to it of the representations set forth in Section 6. Upon receipt of such notice, any reference to such Purchaser in this Agreement (other than in this Section 21 ), shall be deemed to refer to such Affiliate in lieu of such original Purchaser. In the event that such Affiliate is so substituted as a Purchaser hereunder and such Affiliate thereafter transfers to such original Purchaser all of the Notes then held by such Affiliate, upon receipt by the Company of notice of such transfer, any reference to such Affiliate as a “Purchaser” in this Agreement (other than in this Section 21 ), shall no longer be deemed to refer to such Affiliate, but shall refer to such original Purchaser, and such original Purchaser shall again have all the rights of an original Holder of the Notes under this Agreement.
SECTION 22. MISCELLANEOUS.
Section 22.1. Successors and Assigns. All covenants and other agreements contained in this Agreement by or on behalf of any of the parties hereto bind and inure to the benefit of their respective successors and assigns (including, without limitation, any subsequent Holder of a Note) whether so expressed or not.
Section 22.2. Payments Due on Non-Business Days. Anything in this Agreement or the Notes to the contrary notwithstanding (but without limiting the requirement in Section 8.4 that the notice of any optional prepayment specify a Business Day as the date fixed for such prepayment), any payment of principal of or Yield-Maintenance Amount or interest on any Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day without including the additional days elapsed in the computation of the interest payable on such next succeeding Business Day; provided that if the maturity date of any Note is a date other than a Business Day, the payment otherwise due on such maturity date shall be made on the next succeeding Business Day and shall include the additional days elapsed in the computation of interest payable on such next succeeding Business Day.
Section 22.3. Accounting Terms. All accounting terms used herein which are not expressly defined in this Agreement have the meanings respectively given to them in accordance with GAAP. Except as otherwise specifically provided herein, (i) all computations made pursuant to this Agreement shall be made in accordance with GAAP, and (ii) all financial statements shall be prepared in accordance with GAAP. For purposes of determining compliance with any financial covenants contained in this Agreement, any election by the Company to measure an item of Indebtedness using fair value (as permitted by Statement of Financial Accounting Standards No. 159 or any similar accounting standard) shall be disregarded and such determination shall be made as if such election had not been made.
Section 22.4. Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction.
 
-44-

Section 22.5. Construction, etc. Each covenant contained herein shall be construed (absent express provision to the contrary) as being independent of each other covenant contained herein, so that compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with any other covenant. Where any provision herein refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person.
For the avoidance of doubt, all Schedules and Exhibits attached to this Agreement shall be deemed to be a part hereof.
Section 22.6. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the parties hereto.
Section 22.7. Governing Law. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York excluding choice-of-law principles of the law of such State that would permit the application of the laws of a jurisdiction other than such State.
Section 22.8. Jurisdiction and Process; Waiver of Jury Trial. (a) The Company irrevocably submits to the non-exclusive jurisdiction of any New York State or Federal court sitting in the Borough of Manhattan, The City of New York, over any suit, action or proceeding arising out of or relating to this Agreement or the Notes. To the fullest extent permitted by applicable law, the Company irrevocably waives and agrees not to assert, by way of motion, as a defense or otherwise, any claim that it is not subject to the jurisdiction of any such court, any objection that it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum.
(b) The Company consents to process being served by or on behalf of any Holder of Notes in any suit, action or proceeding of the nature referred to in Section 22.8(a) by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, return receipt requested, to it at its address specified in Section 18 or at such other address of which such Holder shall then have been notified pursuant to said Section. The Company agrees that such service upon receipt (i) shall be deemed in every respect effective service of process upon it in any such suit, action or proceeding and (ii) shall, to the fullest extent permitted by applicable law, be taken and held to be valid personal service upon and personal delivery to it. Notices hereunder shall be conclusively presumed received as evidenced by a delivery receipt furnished by the United States Postal Service or any reputable commercial delivery service.
 
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(c) In addition to and notwithstanding the provisions of Section 22.8(b) above, the Company hereby irrevocably appoints CT Corporation System as its agent to receive on its behalf and its property service of copies of the summons and complaint and any other process which may be served in any action or proceeding. Such service may be made by mailing or delivering a copy of such process to the Company, in care of the process agent at 111 Eighth Avenue, 13 th Floor, New York, New York 10011, and the Company hereby irrevocably authorizes and directs the process agent to accept such service on its behalf. If for any reason the process agent ceases to be available to act as process agent, the Company agrees immediately to appoint a replacement process agent satisfactory to the Required Holders.
(d) Nothing in this Section 22.8 shall affect the right of any Holder of a Note to serve process in any manner permitted by law, or limit any right that the Holders of any of the Notes may have to bring proceedings against the Company in the courts of any appropriate jurisdiction or to enforce in any lawful manner a judgment obtained in one jurisdiction in any other jurisdiction.
(e) The parties hereto hereby waive trial by jury in any action brought on or with respect to this Agreement, the Notes or any other document executed in connection herewith or therewith.
Section 22.9. Transaction References. The Company and the Holders shall not refer to the other on an internet site or in marketing materials, press releases, published “tombstone” announcements or any other print or electronic medium, except with the referenced party’s prior written consent, which may be withheld at its sole discretion.
* * * * *
 
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If you are in agreement with the foregoing, please sign the form of agreement on a counterpart of this Agreement and return it to the Company, whereupon this Agreement shall become a binding agreement between you and the Company.

Very truly yours,
 
SHARYLAND DISTRIBUTION &
TRANSMISSION SERVICES, L.L.C.	
		
By:	 	/s/ W. Kirk Baker	
	 	Name: W. Kirk Baker
Title: Senior Vice President	
[Signature Page to SDTS Amended and Restated Note Purchase Agreement]

This Agreement is hereby
accepted and agreed to as
of the date thereof.

Purchaser:	
	
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA	
	 		
By:	 	/s/ Richard Carrell	
	 	Vice President	
[Signature Page to SDTS Amended and Restated Note Purchase Agreement]

DEFINED TERMS
As used herein, the following terms have the respective meanings set forth below or set forth in the Section hereof following such term:
“2009 Financing Documents” means the “Financing Documents” as defined in the 2009 Note Agreement.
“2009 Note Agreement” means the Note Purchase Agreement, dated December 31, 2009, among the Company and the holders of the Company’s 7.25% Senior Notes due December 30, 2029, issued thereunder.
“2010 NPA Joinder Agreement” is defined in Section 4.12 .
“Acquired System” means transmission and distribution facilities acquired by the Company as a result of its merger with Cap Rock Energy Corporation; provided, however, that the term “Acquired System” shall not include any FERC Assets.
“Additional Covenant” shall mean any affirmative or negative covenant or similar restriction applicable to the Company (regardless of whether such provision is labeled or otherwise characterized as a covenant) the subject matter of which either (i) is similar to that of any covenant in this Agreement, or related definitions in this Agreement, but contains one or more percentages, amounts or formulas that is more restrictive than those set forth herein or more beneficial to the holder or holders of the Indebtedness created or evidenced by the document in which such covenant or similar restriction is contained (and such covenant or similar restriction shall be deemed an Additional Covenant only to the extent that it is more restrictive or more beneficial) or (ii) is different from the subject matter of any covenant of this Agreement, or related definitions in this Agreement.
“Additional Default” shall mean any provision contained in any document or instrument creating or evidencing Indebtedness of the Company which permits the holder or holders of Indebtedness to accelerate (with the passage of time or giving of notice or both) the maturity thereof or otherwise requires the Company to purchase such Indebtedness prior to the stated maturity thereof and which either (i) is similar to any Default or Event of Default contained in this Agreement, or related definitions in this Agreement, but contains one or more percentages, amounts or formulas that is more restrictive or has a shorter grace period than those set forth herein or is more beneficial to the holders of such other Indebtedness (and such provision shall be deemed an Additional Default only to the extent that it is more restrictive, has a shorter grace period or is more beneficial) or (ii) is different from the subject matter of any Default or Event of Default contained in this Agreement, or related definitions in this Agreement.
“Additional Project Document” means any contract or agreement related to the ownership, operation, maintenance, repair or use of the System or the Acquired System or the FERC Assets entered into by the Company or New Owner subsequent to the Closing Date that involves full payments or obligations in excess of $1,000,000.
 
S CHEDULE B-1
(To Note Purchase Agreement)

“Affiliate” means, at any time, and with respect to any Person, any other Person that at such time directly or indirectly through one or more intermediaries Controls, or is Controlled by, or is under common Control with, such first Person and, with respect to the Company, shall include any Person beneficially owning or holding, directly or indirectly, 10% or more of any class of voting or equity interest of the Company or any corporation of which the Company beneficially owns or holds, in the aggregate, directly or indirectly, 10% or more of any class of voting or equity interests; provided, however, that this definition shall at all times exclude owners or investors in Energy Trans Alliance L.P., except for members of the Ray L. Hunt family, trusts for the benefit of the Ray L. Hunt family or entities controlled by members of the Ray L. Hunt family or such trusts. As used in this definition, “Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. Unless the context otherwise clearly requires, any reference to an “Affiliate” is a reference to an Affiliate of the Company.
“Agreement” is defined in the introductory paragraph of this Agreement.
“Amortization Schedule” is defined in Section 8.1(a) .
“Anti-Terrorism Order” means Executive Order No. 13,224 of September 24, 2001, Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit or Support Terrorism, 66 U.S. Fed. Reg. 49, 079 (2001), as amended.
“ Approved Accountant ” is defined in Section 7.1(b)(A) .
“Business Day” means any day other than a Saturday, a Sunday or a day on which commercial banks in New York City are required or authorized to be closed.
“ Cap Rock Transaction ” is described in Schedule 10.1 .
“Capital Lease” means, at any time, a lease with respect to which the lessee is required concurrently to recognize the acquisition of an asset and the incurrence of a liability in accordance with GAAP.
“Cash Flow” means, for any period, the sum of the following (without duplication): (i) all cash paid to the Company during such period under the System Lease, (ii) all cash distributions received by the Company from New Owner during such period, (iii) all interest and investment earnings, if any, paid to the Company during such period on amounts on deposit in the account created under the Deposit Agreement, (iv) revenues, if any, received by or on behalf of the Company during such period under any insurance policy as business interruption insurance proceeds, (v) direct cash equity investments made by TDC in the Company during such period (excluding equity contributed to a Project Finance Subsidiary) in an amount not greater than the amount necessary to cause the Company to be in compliance with the financial covenants set forth in Section 9.9 (each such investment, an “Equity Cure” ); provided, however, that during any period of four consecutive fiscal quarters, “Cash Flow” shall include an Equity Cure in no more than two of such quarters, and (vi) proceeds of any borrowing made after the date hereof to the extent used to finance the payment of bullet or balloon installments of Indebtedness for borrowed money.
 
S CHEDULE B-2
(To Note Purchase Agreement)

“Cash Flow Available for Debt Service” for any period, means (i) Cash Flow received during such period minus (ii) (A) all O&M Costs paid during such period and (B) if an Equity Cure has been made in any fiscal quarter during the period for which Cash Flow Available for Debt Service is calculated, the lesser of the aggregate amount of (x) such Equity Cure during such period and (y) the aggregate amount of cash distributions paid by the Company during such period.
“Closing” is defined in Section 3 .
“Closing Date” means the date upon which the Closing occurs.
“Code” means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder from time to time.
“Collateral” means, collectively, the “Collateral” as defined in each of the Security Documents.
“Collateral Agency Agreement” means the Amended and Restated Collateral Agency Agreement, dated as of the date hereof, among the Collateral Agent, the Company and the Holders and other lenders party thereto from time to time.
“Collateral Agent” means The Bank of New York Mellon Trust Company, N.A., a national association, acting in its capacity as Collateral Agent for itself and the other Secured Parties, or its successors in such capacity appointed pursuant to the terms of the Collateral Agency Agreement.
“Company” means Sharyland Distribution & Transmission Services, L.L.C., a Texas limited liability company, or any successor that becomes such in the manner prescribed in Section 10.2.
“Confidential Information” is defined in Section 20 .
“CREZ” means the Competitive Renewable Energy Zones electric transmission project overseen by ERCOT and the Public Utility Commission of Texas.
“CREZ Project” means the development and construction by a Project Finance Subsidiary of line segments and sub-stations in CREZ to connect to the System.
“Debt Service” for any period, the aggregate (without duplication) of (i) all amounts of interest on the Notes and in respect of other Indebtedness of the Company required to be paid during such period, plus (ii) all amounts of principal on the Notes and in respect of other Indebtedness of the Company or required to be paid during such period, excluding any optional prepayments of principal during such period, plus (iii) all other premiums, fees, costs, charges, expenses and indemnities due and payable to the Holders or the other Secured Parties and holders of other Indebtedness of the Company or and agents acting on their behalf during such period.
 
S CHEDULE B-3
(To Note Purchase Agreement)

“Debt Service Coverage Ratio” means, for each period of four consecutive fiscal quarters, the quotient of (i) Cash Flow Available for Debt Service for such period to (ii) Debt Service for such period.
“Deeds of Trust” is defined in Section 4.12(a) .
“Default” means an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default.
“Default Rate” means that rate of interest per annum from time to time equal to the greater of (i) 8.47% per annum, and (ii) 2% over the rate of interest publicly announced by The Bank of New York Mellon from time to time in New York as its “base” or “prime” rate.
“Disclosure Documents” is defined in Section 5.3 .
“Distributions” means any (i) distribution of any nature or kind, either directly or indirectly, to any Affiliate or equityholder of the Company, including any dividend or distribution in cash or property of any kind; a purchase, redemption, reduction, return or any other payment of capital; or any repayment or reduction of Indebtedness owing to an Affiliate or equityholder of Company; (ii) loans or other payments to an Affiliate or equityholder of the Company; and (iii) payment for or on behalf of an Affiliate equityholder of the Company by way of guaranty, indemnity or otherwise including in connection with any Affiliate Indebtedness; but shall not include any payments made to any equityholder or Affiliate of the Company under any services, advisory, tax sharing or agency agreement disclosed to the Holders and entered into on commercially reasonable terms and conditions.
“Environmental Laws” means any and all Federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including but not limited to those related to Hazardous Materials.
“ERCOT” means the Electric Reliability Council of Texas or any successor thereto.
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.
“ERISA Affiliate” means any trade or business (whether or not incorporated) that is treated as a single employer together with the Company under section 414 of the Code.
“Event of Default” is defined in Section 11 .
“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended from time to time.
“FERC” means the Federal Energy Regulatory Commission, or any successor agency to its duties and responsibilities.
 
S CHEDULE B-4
(To Note Purchase Agreement)

“FERC Assets” is defined in the New Lease.
“Financing Documents” means, collectively, this Agreement, the Notes, the Security Documents, the 2009 Financing Documents and any other documents, agreements or instruments entered into in connection with any of the foregoing.
“Force Majeure Event” means any claim of force majeure by any Person under any Material Project Document, which would allow such Person to avoid all or any material part of its obligations thereunder and any other fire, explosion, accident, strike, slowdown or stoppage, lockout or other labor dispute (whether pending or, to the Company’s knowledge threatened), drought, storm, hail, earthquake, embargo, act of God or of the public enemy, or other casualty (whether or not covered by insurance), that could reasonably be expected to result in a Material Adverse Effect.
“FPA” means the Federal Power Act, 16 U.S.C. §§791 et seq., as amended, and the regulations of the FERC thereunder.
“GAAP” means generally accepted accounting principles as in effect in the United States of America. In the event that any “Accounting Change” (as defined below) shall occur and such change results in a change in the method of calculation of financial covenants, ratios, standards or terms in this Agreement, then the Company and the holders agree to enter into negotiations in order to amend such provisions of this Agreement so as to reflect equitably such Accounting Changes with the desired result that the criteria for evaluating the financial condition of the Company and Sharyland shall be the same after such Accounting Changes as if such Accounting Changes had not been made. Until such time as such an amendment shall have been executed and delivered by the Company and the holders, all financial covenants, ratios, standards and terms in this Agreement shall continue to be calculated or construed as if such Accounting Changes had not occurred. “Accounting Changes” refers to changes in accounting principles required by the promulgation of any rule, regulation, pronouncement or opinion by the Financial Accounting Standards Board of the American Institute of Certified Public Accountants or, if applicable, the SEC.
“Good Utility Practices” means “Good Utility Practice” as defined from time to time by the Public Utility Commission of Texas.
“Governmental Authority” means
(a) the government of:
(i) the United States of America or any State or other political subdivision thereof, or
(ii) any other jurisdiction in which the Company conducts all or any part of its business, or which asserts jurisdiction over any properties of the Company, or
(b) any entity exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, any such government, or
 
S CHEDULE B-5
(To Note Purchase Agreement)

(c) ERCOT, or
(d) SPP, or
(e) the Texas Regional Entity.
“Guaranty” means, with respect to any Person, any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing any Indebtedness of any other Person in any manner, whether directly or indirectly, including (without limitation) obligations incurred through an agreement, contingent or otherwise, by such Person:
(a) to purchase such Indebtedness or any property constituting security therefor;
(b) to advance or supply funds (i) for the purchase or payment of such indebtedness or obligation, or (ii) to maintain any working capital or other balance sheet condition or any income statement condition of any other Person or otherwise to advance or make available funds for the purchase or payment of such Indebtedness;
(c) to lease properties or to purchase properties or services primarily for the purpose of assuring the owner of such Indebtedness of the ability of any other Person to make payment of the Indebtedness; or
(d) otherwise to assure the owner of such Indebtedness against loss in respect thereof.
In any computation of the indebtedness or other liabilities of the obligor under any Guaranty, the indebtedness or other obligations that are the subject of such Guaranty shall be assumed to be direct obligations of such obligor.
“Hazardous Material” means any and all pollutants, toxic or hazardous wastes or other substances that might pose a hazard to health and safety, the removal of which may be required or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage or filtration of which is or shall be restricted, prohibited or penalized by any applicable law including, but not limited to, asbestos, urea formaldehyde foam insulation, polychlorinated biphenyls, petroleum, petroleum products, lead based paint, radon gas or similar restricted, prohibited or penalized substances.
“Holder” means, with respect to any Note the Person in whose name such Note is registered in the register maintained by the Company pursuant to Section 13.1.
“Indebtedness” with respect to any Person means, at any time, without duplication,
(a) its liabilities for borrowed money and its redemption obligations in respect of mandatorily redeemable Preferred Stock;
(b) its liabilities for the deferred purchase price of property acquired by such Person (excluding accounts payable arising in the ordinary course of business but including all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property);
 
S CHEDULE B-6
(To Note Purchase Agreement)

(c) (i) all liabilities appearing on its balance sheet in accordance with GAAP in respect of Capital Leases and (ii) all liabilities which would appear on its balance sheet in accordance with GAAP in respect of Synthetic Leases assuming such Synthetic Leases were accounted for as Capital Leases;
(d) all liabilities for borrowed money secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities);
(e) all its liabilities in respect of letters of credit or instruments serving a similar function issued or accepted for its account by banks and other financial institutions (whether or not representing obligations for borrowed money);
(f) the aggregate Swap Termination Value of all Swap Contracts of such Person; and
(g) any Guaranty of such Person with respect to liabilities of a type described in any of clauses (a) through (f) hereof.
Indebtedness of any Person shall include all obligations of such Person of the character described in clauses (a) through (g) to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is deemed to be extinguished under GAAP.
“Initial NPA” is defined in the recitals hereto.
“Institutional Investor” means (a) any Purchaser of a Note, (b) any Holder of a Note holding (together with one or more of its Affiliates) more than 5% of the aggregate principal amount of the Notes then outstanding, (c) any bank, trust company, savings and loan association or other financial institution, any pension plan, any investment company, any insurance company, any broker or dealer, or any other similar financial institution or entity, regardless of legal form, and (d) any Related Fund of any Holder of any Note.
“Lease Supplement” means the Lease Supplement (Cap Rock Assets), dated as of July 13, 2010 between the Company, as lessor, and Sharyland, as lessee.
“Lien” means, with respect to any Person, any mortgage, lien, pledge, charge, security interest or other encumbrance, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or Capital Lease, upon or with respect to any property or asset of such Person (including in the case of stock, stockholder agreements, voting trust agreements and all similar arrangements).
“Material Adverse Effect” means a material adverse effect on: (i) the business, operations, affairs or financial condition of the Company, New Owner, Sharyland or New Operator (taken as a whole), or the System, the Acquired System or the FERC Assets (taken as a whole); (ii) the ability of the Company to perform its obligations under this Agreement, the Notes or any Transaction Document to which it is a party; (iii) the ability of Sharyland, New Owner or New Operator to perform under any of the Transaction Documents to which it is a party; or (iv) the validity or enforceability of the Notes, this Agreement or any Transaction Document.
 
S CHEDULE B-7
(To Note Purchase Agreement)

“Material Project Document” means each of the agreements listed on Schedule 5.12(b), any Additional Project Document that replaces any of the foregoing, the System Lease and the New Lease.
“Maturity Date” means September 30, 2030.
“Members” means Sharyland and TDC.
“Membership Collateral” is defined and described in the respective Pledge Agreements.
“Moody’s” means Moody’s Investors Service, Inc.
“Multiemployer Plan” means any Plan that is a “multiemployer plan” (as such term is defined in section 4001(a)(3) of ERISA).
“NAIC” means the National Association of Insurance Commissioners or any successor thereto.
“Negative Pledge Agreement” is defined in Section 4.12(c) .
“New Lease” means the Lease Agreement, dated as of July 13, 2010, between New Owner and New Operator or any new lease entered into in replacement thereof in accordance with Section 9.8(b) of this Agreement.
“New Operator” means SU FERC, L.L.C., a Texas limited liability company and a wholly-owned subsidiary of Sharyland.
“New Owner” means SDTS FERC, L.L.C., a Texas limited liability company and wholly-owned subsidiary of the Company.
“New Project” means a “New Project” (as defined in the System Lease) that the Company agrees to fund pursuant to Article 10 of the System Lease.
“Non-Recourse Debt” means Indebtedness of a Project Finance Subsidiary that, if secured, is secured solely by a pledge of collateral owned by that Project Finance Subsidiary and the ownership interests in such Project Finance Subsidiary and for which no Person other than such Project Finance Subsidiary is personally liable.
“Notes” is defined in Section 1 .
“O&M Costs” means actual cash management and operation costs of the Company, property taxes, insurance premiums, consumables, fees and expenses of, and other amounts owing to, the Collateral Agent, and other costs and expenses in connection with the management or operation of the Company, but exclusive in all cases of (a) non-cash charges, including
 
S CHEDULE B-8
(To Note Purchase Agreement)

depreciation or obsolescence charges or reserves therefor, amortization of intangibles or other bookkeeping entries of a similar nature, (b) all other payments of Debt Service and Yield- Maintenance Amounts, if any, (c) costs of repair or replacement paid with insurance proceeds and (d) costs of due diligence and transition expenses related to the Cap Rock Transaction.
“Obligation” means any loan, advance, debt, liability, and obligation of performance, howsoever arising, owed by the Company to the Collateral Agent or the Holders of any kind or description (whether or not evidenced by any note or instrument and whether or not for the payment of money), direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, pursuant to the terms of this Agreement, any Note or any of the other Financing Documents, including all principal, interest, Yield-Maintenance Amounts, fees, charges, expenses, attorneys’ fees and accountants fees payable or reimbursable by the Company under this Agreement or any of the other Financing Documents.
“Officer’s Certificate” means a certificate of a Senior Financial Officer or of any other officer of the Company whose responsibilities extend to the subject matter of such certificate.
“Payment Date” means September 30, 2010 and the 30th day of December, March, June and September thereafter up to the Maturity Date, and the Maturity Date.
“PBGC” means the Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto.
“Permit” means any action, approval, consent, waiver, exemption, variance, franchise, order, permit, authorization, right or license of or from a Governmental Authority, provided that interests or estates in real property, shall not be considered Permits.
“Permitted Investment” means any (a) marketable direct obligation of the United States of America, (b) marketable obligation directly and fully guaranteed as to interest and principal by the United States of America, (c) demand deposit with Bank of America N.A., or time deposit, certificate of deposit and banker’s acceptance issued by any member bank of the Federal Reserve System which is organized under the laws of the United States of America or any state thereof or any United States branch of a foreign bank, in each case whose equity capital is in excess of $500,000,000 and whose long-term debt securities are rated “A” or better by S&P and “A2” or better by Moody’s, (d) commercial paper or tax exempt obligations given the highest rating by Moody’s and S&P, (e) obligations of a commercial bank described in clause (c) above, in respect of the repurchase of obligations of the type as described in clauses (a) and (b) hereof, provided that such repurchase obligation shall be fully secured by obligations of the type described in said clauses (a) and (b) and the possession of such obligation shall be transferred to, and segregated from other obligations owned by, any such bank, (f) instrument rated “AAA” by S&P and “Aaa” by Moody’s issued by investment companies and having an original maturity of 180 days or less, (g) eurodollar certificates of deposit issued by any bank described in clause (c) above, and (h) marketable security rated not less than “A-l” by S&P or not less than “Prime-1” by Moody’s. In no event shall Permitted Investments include any obligation, certificate of deposit, acceptance, commercial paper or instrument which by its terms matures (A) more than 180 days after the date of investment, unless a bank meeting the requirements of clause (c) above shall have agreed to repurchase such obligation, certificate of deposit, acceptance, commercial paper or instrument at its purchase price plus earned interest within no more than 90 days after its purchase thereunder or (B) after the next Payment Date.
 
S CHEDULE B-9
(To Note Purchase Agreement)

“Permitted Lien” is defined in Section 10.5 .
“Permitted Secured Indebtedness” means Indebtedness of the Company incurred pursuant to Section 10.6(b), provided that at least 5 Business Days prior to the incurrence of such Indebtedness, the Company shall (a) notify the Holders of its intent to incur such Indebtedness, which notice shall set forth in reasonable detail (i) the amount and proposed economic terms of such Indebtedness, (ii) the type of lender or purchaser and (iii) the proposed collateral for such Indebtedness (which proposed collateral may include any or all of the Collateral), and (b) if the Indebtedness is proposed to be secured by any property of the Company or any of its Subsidiaries or any other collateral, deliver to the Collateral Agent and the other Secured Parties an executed joinder agreement, substantially in the form of Exhibit A attached to the Collateral Agency Agreement, pursuant to which all the proposed holders of such Indebtedness have become party to the Collateral Agency Agreement.
“Person” means an individual, partnership, corporation, cooperative corporation, limited liability company, association, trust, unincorporated organization, business entity or Governmental Authority.
“Plan” means an “employee benefit plan” (as defined in section 3(3) of ERISA) subject to Title I of ERISA that is or, within the preceding five years, has been established or maintained, or to which contributions are or, within the preceding five years, have been made or required to be made, by the Company or any ERISA Affiliate or with respect to which the Company or any ERISA Affiliate may have any liability.
“Pledge Agreement (Company)” is defined in Section 4.12(b) .
“Pledge Agreement (TDC)” is defined in Section 4.12(b) .
“Pledge Agreements” is defined in Section 4.12(b) .
“Preferred Stock” means any class of capital stock of a Person that is preferred over any other class of capital stock (or similar equity interests) of such Person as to the payment of dividends or the payment of any amount upon liquidation or dissolution of such Person.
“Project Finance Subsidiary” means a special purpose Wholly-Owned Subsidiary of the Company created to develop the CREZ Project or another New Project and to finance the project solely with Non-Recourse Debt and equity.
“property” or “properties” means, unless otherwise specifically limited, real or personal property of any kind, tangible or intangible, choate or inchoate.
“PTE” is defined in Section 6.2(a) .
“Purchaser” is defined in the first paragraph of this Agreement.
 
S CHEDULE B-10
(To Note Purchase Agreement)

“Qualified Institutional Buyer” means any Person who is a “qualified institutional buyer” within the meaning of such term as set forth in Rule 144A(a)(l) under the Securities Act.
“RBC” means Royal Bank of Canada, a Canadian banking institution.
“RBC Agreement” means that certain $20,000,000 Credit Agreement, dated the date hereof, among SDTS, as Borrower and RBC, as lender and letter of credit provider.
“RBC Joinder Agreement” is defined in Section 4.12(d) .
“Related Fund” means, with respect to any Holder of any Note, any fund or entity that (i) invests in Securities or bank loans, and (ii) is advised or managed by such Holder, the same investment advisor as such Holder or by an Affiliate of such Holder or such investment advisor.
“Required Holders” means, at any time, the Holders of at least 51% in principal amount of the Notes at the time outstanding (exclusive of Notes then owned by the Company or any of its Affiliates).
“Required Permit” is defined in Section 5.12(a) .
“Requirements of Law” means as to any Person, the certificate of incorporation or formation and by-laws or partnership or operating agreement or other organizational or governing documents of such Person, and any local, state or Federal law, regulation, rule, ordinances or determination, interpretation or order of an arbitrator or a court or other Governmental Authority, and any Required Permit, in each case applicable to or binding upon such Person or any of its properties or its business or to which such Person or any of its properties or its business is subject.
“Responsible Officer” means any Senior Financial Officer and any other officer of the Company with responsibility for the administration of the relevant portion of this Agreement.
“Restricted Payment Conditions” is defined in Section 10.9 .
“SEC” shall mean the Securities and Exchange Commission of the United States, or any successor thereto.
“Secured Parties” means, from time to time, the Holders, all other Persons party to the Collateral Agency Agreement (other than the Company) and the Collateral Agent.
“Securities” or “Security” shall have the meaning specified in Section 2(1) of the Securities Act.
“Securities Act” means the Securities Act of 1933, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.
“Security Documents” means the “Security Documents” as defined in the 2009 Note Agreement, the Deeds of Trust, the 2010 NPA Joinder Agreement, the Pledge Agreement, the Negative Pledge Agreement, the RBC Joinder Agreement, and any other security documents, financing statements and the like filed or recorded in connection with the foregoing.
 
S CHEDULE B-11
(To Note Purchase Agreement)

“Senior Financial Officer” means the chief financial officer, principal accounting officer, treasurer or comptroller of the Company or Sharyland, as applicable.
“Sharyland” means Sharyland Utilities, L.P., a Texas limited partnership.
“SPP” means the Southwest Power Pool or any successor thereto.
“Structuring Fee” is defined in Section 4.7 .
“Subsidiary” means, as to any Person, any other Person in which such first Person or one or more of its Subsidiaries or such first Person and one or more of its Subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar functions) of such second Person and any partnership or joint venture if more than a 50% interest in the profits or capital thereof is owned by such first Person or one or more of its Subsidiaries or such first Person and one or more of its Subsidiaries (unless such partnership or joint venture can and does ordinarily take major business actions without the prior approval of such Person or one or more of its Subsidiaries). Unless the context otherwise clearly requires, any reference to a “Subsidiary” is a reference to a Subsidiary of the Company.
“SVO” means the Securities Valuation Office of the NAIC or any successor to such Office.
“Swap Contract” means (a) any and all interest rate swap transactions, basis swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward foreign exchange transactions, cap transactions, floor transactions, currency options, spot contracts or any other similar transactions or any of the foregoing (including, but without limitation, any options to enter into any of the foregoing), and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., or any International Foreign Exchange Master Agreement.
“Swap Termination Value” means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a), the amounts(s) determined as the mark-to-market values(s) for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts.
“Synthetic Lease” means, at any time, any lease (including leases that may be terminated by the lessee at any time) of any property (a) that is accounted for as an operating lease under GAAP and (b) in respect of which the lessee retains or obtains ownership of the property so leased for U.S. Federal income tax purposes, other than any such lease under which such Person is the lessor.
 
S CHEDULE B-12
(To Note Purchase Agreement)

“System” means the Company’s integrated electrical transmission and distribution facilities located in the State of Texas and the systems and other property necessary to operate the transmission and distribution facilities, and all improvements to and expansions of such facilities, each New Project (upon its completion) and the Acquired System.
“System Lease” means the Master System Lease Agreement, dated as of December 31, 2009, between the Company, as lessor, and Sharyland, as lessee, as supplemented by the Lease Supplement or any lease supplement entered into in replacement of such Lease Supplement and as further supplemented by additional lease supplements entered into by the Company and Sharyland, each in accordance with Section 9.8(b) of the Agreement.
“TDC” means Transmission and Distribution Company, L.L.C., a Texas limited liability company.
“TDC Note Agreement” means the Note Purchase Agreement, dated the date hereof, among TDC and the purchasers named herein.
“Total Debt” means, with respect to the Company, all Indebtedness of the Company on a consolidated basis; provided, however, that for purposes of calculating the Company’s Total Debt to Capitalization Ratio, the Company’s Total Debt (i) shall exclude Non-Recourse Debt of a Project Finance Subsidiary and that portion of the Swap Termination Value defined in clause (b) of the definition of “Swap Termination Value” and (ii) shall include Indebtedness of Sharyland on a consolidated basis.
“Total Debt to Capitalization Ratio” means the Company’s Total Debt, divided by the sum of Total Debt plus the Company’s capitalization, as shown on the Company’s balance sheet.
“Transaction Documents” means, collectively, the Financing Documents and the Material Project Documents.
“Transfer” means, with respect to any item, the sale, exchange, conveyance, lease, transfer or other disposition of such item.
“USA Patriot Act” means United States Public Law 107-56, Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 2001, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.
“Wholly-Owned Subsidiary” means, at any time, any Subsidiary one hundred percent of all of the equity interests and voting interests of which are owned by any one or more of the Company and the Company’s other Wholly-Owned Subsidiaries at such time.
“Yield-Maintenance Amount” is defined in Section 8.6 .
 
S CHEDULE B-13
(To Note Purchase Agreement)

RULES OF INTERPRETATION
 
1.	The singular includes the plural and the plural includes the singular; and words in the masculine, neuter or feminine gender shall be read and construed as though in either of the other genders where the context so requires.	
 
2.	The word “or” is not exclusive.	
 
3.	A reference to any law includes any amendment or modification to such law, and all regulations, rulings and other laws and regulations promulgated under such law.	
 
4.	A reference to a Person includes its successors and permitted assigns.	
 
5.	Accounting terms have the meanings assigned to them by GAAP, as applied by the accounting entity to which they refer.	
 
6.	The words “include,” “includes” and “including” are not limiting.	
 
7.	A reference in a document to an Article, Section, Exhibit, Schedule, Annex or Appendix is to the Article, Section, Exhibit, Schedule, Annex or Appendix of such document unless otherwise indicated. Exhibits, Schedules, Annexes or Appendices to any document shall be deemed incorporated by reference in such document.	
 
8.	References to “knowledge” or words of similar import refer to the actual knowledge of the current officers of the relevant Person, without any duty of investigation unless otherwise indicated.	
 
9.	References to any document, instrument or agreement (a) shall include all exhibits, schedules and other attachments thereto, (b) shall include all documents, instruments or agreements issued or executed in replacement thereof, and (c) shall mean such document, instrument or agreement, or replacement or predecessor thereto, as amended, modified and supplemented from time to time and in effect at any given time.	
 
10.	The words “hereof,” “herein” and “hereunder” and words of similar import when used in any document shall refer to such document as a whole and not to any particular provision of such document.	
 
11.	References to “days” shall mean calendar days, unless the term “Banking Days” shall be used. References to a time of day shall mean such time in New York City, unless otherwise specified.	
 
12.	The section and subsection headings in a document are for convenience of reference only and shall neither be deemed to be a part of such document nor modify, define, expand or limit any of the terms or provisions thereof.	
 
S CHEDULE B-14
(To Note Purchase Agreement)

Exhibit 10.25
EXECUTION COPY
FIRST AMENDMENT, dated as of June 9, 2011 (this “ First Amendment ”) to the AMENDED AND RESTATED NOTE PURCHASE AGREEMENT, dated as of July 13, 2010 (the “ Agreement ”), between SHARYLAND DISTRIBUTION & TRANSMISSION SERVICES, L.L.C. (the “ Company ”), a Texas limited liability company and a wholly-owned Subsidiary of Transmission and Distribution Company L.L.C. (“ TDC ”), and the holders of the notes party thereto (“ Holders ”). Capitalized terms used but not otherwise defined in this First Amendment shall have the meanings set forth in the Agreement and the rules of interpretation set forth therein shall apply to this First Amendment.
W I T N E S S E T H :
WHEREAS, the Company and the Holders are parties to the Agreement;
WHEREAS, the Company has requested that the Holders amend the Agreement, as more fully described herein; and
WHEREAS, each Holder is willing to agree to such amendment, but only upon the terms and subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual agreements herein contained and other good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Amendments to Section 10.1 (Transactions with Affiliates) of the Agreement . Clause (ii) of Section 10.1 of the Agreement is hereby amended in its entirety as follows:
“(ii) Sharyland, pursuant to (x) the System Lease and (y) the SP Lease”
2. Amendments to Section 10.2 (Merger, Consolidation, etc.) of the Agreement . Clause (i) of Section 10.2 of the Agreement is hereby amended in its entirety as follows:
“(i) pursuant to the System Lease, the SP Lease or the New Lease”
3. Amendment to Section 10.6(d) (Indebtedness) of the Agreement . Section 10.6(d) of the Agreement is hereby amended by replacing the amount “$4,000,000” with “$5,000,000.”
4. Amendments to Section 10.10 (Sale of Assets, etc.) of the Agreement . Section 10.10(b) of the Agreement is hereby amended in its entirety as follows:
“(b) (i) each Project Finance Subsidiary may Transfer the New Project developed and constructed by such Project Finance Subsidiary to the Company upon completion of the New Project in accordance with Section 9.7(b) ; (ii) the Company may Transfer, or suffer the Transfer, of its ownership interests in a Project Finance Subsidiary and such Project Finance Subsidiary may Transfer, or suffer the Transfer, of the New Project developed by it and its other assets, in each case in connection with and pursuant to the exercise of remedies under the documentation governing Non-Recourse Debt incurred by such Project Finance Subsidiary to finance such New Project; and (iii) SP may lease the CREZ Project pursuant to the SP Lease;”
 
STDS First Amendment - 1

5. Amendments to Section 10.13 (Sale and Leaseback) of the Agreement . Section 10.13 of the Agreement is hereby amended in its entirety as follows:
“10.13 Sale and Lease-Back . Except for the System Lease, the SP Lease and the New Lease, the Company will not, nor will it cause or permit any Subsidiary to, enter into any arrangement providing for the leasing by the Company or any Subsidiary of real or personal property which has been or is to be Transferred by the Company or Subsidiary to a lender or investor or to any Person to whom funds have been or are to be advanced by such lender or investor on the security of such property or rental obligations of the Company or any Subsidiary.”
6. Amendments to Section 10.16 (Project Documents) of the Agreement . The second sentence of Section 10.16(b) of the Agreement is hereby amended in its entirety as follows:
“The Company shall ensure that Sharyland does not enter into any new lease of transmission or distribution facilities at any time prior to the Maturity Date other than the System Lease, the SP Lease or a lease with a Project Finance Subsidiary of a New Project; provided that for the avoidance of doubt, the foregoing provisions of this sentence shall not prohibit Sharyland from maintaining or entering into replacement leases for, or from amending or modifying, the leases described in Schedule 10.16 . ”
7. Amendments to Schedule B (Defined Terms) of the Agreement . Schedule B of the Agreement is hereby amended:
(a) by adding the following new definitions :
“ CREZ Project ” shall mean the five transmission lines, four substations and other facilities in Texas identified and awarded to Sharyland by the Public Utility Commission of Texas (the “PUCT”) in Docket Number 37902.
“ First Amendment ” shall mean the First Amendment to this Agreement, dated June 9, 2011.
“ First Amendment Effective Date ” shall have the meaning ascribed to such term in Section 8 of the First Amendment.
“ SP ” shall mean Sharyland Projects, L.L.C., a Project Finance Subsidiary.
“ SP Lease ” shall mean the CREZ Master System Lease Agreement and Supplements proposed to be entered between SP, as lessor, and Sharyland, as lessee, with respect to the CREZ Project.
 
STDS First Amendment - 2

(b) by replacing the following existing definition in its entirety :
“ New Project ” shall mean the CREZ Project, any other transmission or distribution project acquired or built by a Project Finance Subsidiary and any “New Project” (as defined in the System Lease) that the Company agrees to fund pursuant to Article 10 of the System Lease.
8. Conditions to First Amendment Effective Date . This First Amendment shall become effective upon the date (the “ First Amendment Effective Date ”) the Holders shall have received counterparts of this First Amendment, duly executed and delivered by the Company and the other Holders.
9. Representations and Warranties . In order to induce the Holders to enter into this First Amendment, the Company hereby represents and warrants that (i) each of the representations and warranties made by the Company in the Financing Documents is true and correct in all material respects on and as of the date hereof, before and after giving effect to the effectiveness of this First Amendment, as if made on and as of the date hereof, except to the extent such representations and warranties expressly relate to a specific earlier date, in which case such representations and warranties were true and correct in all material respects as of such earlier date and (ii) no Default or Event of Default has occurred and is continuing on the date hereof or after giving effect to the transactions contemplated herein.
10. Continuing Effect of Financing Documents . Except as expressly set forth herein, this First Amendment shall not constitute an amendment or waiver of any provision of the Agreement and shall not be construed as an amendment, waiver or consent to any further or future action on the part of the Company that would require an amendment, waiver or consent of the Holders. Except as expressly amended hereby, the provisions of the Agreement are and shall remain in full force and effect. This First Amendment shall be deemed a Financing Document for purposes of the Agreement.
11. Fees . In accordance with Section 15.1 of the Agreement, the Company shall have paid the fees, charges and disbursements of the Purchaser’s special counsel in connection with this Amendment.
12. Counterparts . This First Amendment may be executed by one or more of the parties hereto on any number of separate counterparts (including by facsimile), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed signature page to this First Amendment by facsimile or electronic transmission shall be as effective as the delivery of a manually executed counterpart of this First Amendment.
13. Severability . Any provision of this First Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
14. Integration . This First Amendment and the other Financing Documents represent the agreement of the Company and the Holders with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by any Holder relative to the subject matter hereof not expressly set forth or referred to herein or in the other Financing Documents.
 
STDS First Amendment - 3

15. GOVERNING LAW . THIS FIRST AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS FIRST AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
[ Signatures on Following Page ]
 
STDS First Amendment - 4

IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written.

SHARYLAND DISTRIBUTION &
TRANSMISSION SERVICES, L.L.C.	
		
By:	 	/s/ W. Kirk Baker
 	
Name:	 	W. Kirk Baker	
Title:	 	President	
 
[Signature Page - STDS First Amendment]

			
THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA	
		
By:	 	/s/ Richard Carrell	
Name:	 	Richard Carrell	
Title:	 	Vice President	
 
[Signature Page - STDS First Amendment]

Exhibit 10.26
Execution Version
SECOND AMENDMENT, dated as of October 15, 2013 (this “ Second Amendment ”) to the AMENDED AND RESTATED NOTE PURCHASE AGREEMENT, dated as of July 13, 2010 (as heretofore amended, restated, supplemented and otherwise modified, the “ Agreement ”), between SHARYLAND DISTRIBUTION & TRANSMISSION SERVICES, L.L.C. (the “ Company ”), a Texas limited liability company and a wholly-owned Subsidiary of Transmission and Distribution Company L.L.C. (“ TDC ”), and the holders of the notes party thereto (“ Holders ”). Capitalized terms used but not otherwise defined in this Second Amendment shall have the meanings set forth in the Agreement and the rules of interpretation set forth therein shall apply to this Second Amendment.
W I T N E S S E T H :
WHEREAS, the Company and the Holders are parties to the Agreement;
WHEREAS, the Company has requested that the Holders amend the Agreement, as more fully described herein; and
WHEREAS, each Holder party hereto (such Holders constituting the Required Holders) is willing to agree to such amendment, but only upon the terms and subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual agreements herein contained and other good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Amendments to the Agreement . The Agreement is amended to read in its entirety as set forth on Annex A hereto.
2. Amendments to Schedules . Schedule B of the Agreement is hereby amended and restated in its entirety as Schedule B attached hereto.
3. Amendments to Exhibits . The exhibits attached hereto as Exhibit 2 and Exhibit 3 shall be added as Exhibit 2 and Exhibit 3, respectively, to the Agreement.
4. Conditions to Second Amendment Effective Date . This Second Amendment shall become effective upon the date the Holders shall have received counterparts of this Second Amendment, duly executed and delivered by the Company and the other Holders.
5. Representations and Warranties . In order to induce the Holders to enter into this Second Amendment, the Company hereby represents and warrants as follows:
 
 	(a)	The Company has the limited liability power and authority to execute and deliver this Second Amendment and to carry out the terms and provisions of this Second Amendment and the Agreement, as amended hereby, and has taken all necessary limited liability company action to authorize the execution and delivery by the Company of this Second Amendment and	

 	the performance under this Second Amendment and the Agreement, as amended hereby. The Company has duly executed and delivered this Second Amendment, and this Second Amendment constitutes the legal, valid and binding obligation of the Company, enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law).	
 
 	(b)	The execution and delivery by the Company of this Second Amendment and the performance under this Second Amendment and the Agreement, as amended hereby, do not (i) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of the Company under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter or limited partnership or limited liability company agreement, or any other agreement or instrument to which the Company is bound or by which the Company or any of its properties may be bound or affected, (ii) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to the Company or (iii) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to the Company, which in the case of any of the foregoing clauses (i) through (iii), with respect to Material Project Documents, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.	
 
 	(c)	No consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority is required in connection with the execution or delivery by the Company of this Second Amendment or the performance under this Second Amendment and the Agreement, as amended hereby.	
 
 	(d)	No Default or Event of Default has occurred and is continuing on the date hereof or after giving effect to the transactions contemplated herein.	
6. Continuing Effect of Financing Documents . Except as expressly set forth herein, this Second Amendment shall not constitute an amendment or waiver of any provision of the Agreement and shall not be construed as an amendment, waiver or consent to any further or future action on the part of the Company that would require an amendment, waiver or consent of the Holders. Except as expressly amended hereby, the provisions of the Agreement are and shall remain in full force and effect. This Second Amendment shall be deemed a Financing Document for purposes of the Agreement.
 
2

7. Fees . In accordance with Section 15.1 of the Agreement, the Company shall have paid the fees, charges and disbursements of the Purchaser’s special counsel in connection with this Second Amendment.
8. Counterparts . This Second Amendment may be executed by one or more of the parties hereto on any number of separate counterparts (including by facsimile), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed signature page to this Second Amendment by facsimile or electronic transmission shall be as effective as the delivery of a manually executed counterpart of this Second Amendment.
9. Severability . Any provision of this Second Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
10. Integration . This Second Amendment and the other Financing Documents represent the agreement of the Company and the Holders with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by any Holder relative to the subject matter hereof not expressly set forth or referred to herein or in the other Financing Documents.
11. GOVERNING LAW . THIS SECOND AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS FIRST AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
[ Signatures of Following Page ]
 
3

IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be duly executed and delivered by their property and duly authorized officers as of the day and year first above written

SHARYLAND DISTRIBUTION &	
TRANSMISSION SERVICES, L.L.C.	
		
By	 	/s/ W. Kirk Baker	
Name:	 	W. Kirk Baker	
Title:	 	Senior Vice President	
[Signature Page - SDTS Second Amendment]

			
THE PRUDENTIAL INSURANCE COMPANY
   OF AMERICA	
		
By:	 	/s/ Richard Carrell	
	 	Vice President	
[Signature Page - SDTS Second Amendment]

Annex A
Amended and Restated Credit Agreement, as amended by the Second Amendment
[See attached.]
[Annex A - SDTS Second Amendment]

 
 
S HARYLAND D ISTRIBUTION  & T RANSMISSION S ERVICES , L.L.C.
$110,000,000
6.47% Senior Notes due September 30, 2030

A MENDED AND R ESTATED N OTE P URCHASE A GREEMENT

Dated July 13, 2010,
AS AMENDED BY :
F IRST A MENDMENT DATED AS OF J UNE 9, 2011
AND
S ECOND A MENDMENT DATED AS OF O CTOBER  15, 2013

 

TABLE OF CONTENTS

 	  	 	  	Page	 	
			
SECTION 1.	  	AUTHORIZATION OF NOTES	  	 	2	  	
			
SECTION 2.	  	SALE AND PURCHASE OF NOTES	  	 	2	  	
			
SECTION 3.	  	CLOSING	  	 	2	  	
			
SECTION 4.	  	CONDITIONS TO CLOSING	  	 	3	  	
			
Section 4.1	  	Representations and Warranties	  	 	3	  	
Section 4.2	  	Performance; No Default	  	 	3	  	
Section 4.3	  	Compliance Certificates	  	 	3	  	
Section 4.4	  	Opinions of Counsel	  	 	3	  	
Section 4.5	  	Purchase Permitted By Applicable Law, Etc.	  	 	3	  	
Section 4.6	  	Sale of Other Notes	  	 	4	  	
Section 4.7	  	Payment of Special Counsel and Other Fees and Expenses	  	 	4	  	
Section 4.8	  	Private Placement Number	  	 	4	  	
Section 4.9	  	Changes in Structure	  	 	4	  	
Section 4.10	  	Funding Instructions	  	 	4	  	
Section 4.11	  	Proceedings and Documents	  	 	5	  	
Section 4.12	  	Joinder Agreement, Etc.	  	 	6	  	
Section 4.13	  	UCC Searches; and Litigation Searches	  	 	6	  	
Section 4.14	  	Insurance	  	 	6	  	
Section 4.15	  	Financial Statements	  	 	7	  	
Section 4.16	  	Consents and Approvals	  	 	7	  	
			
SECTION 5.	  	REPRESENTATIONS AND WARRANTIES OF THE COMPANY	  	 	7	  	
			
Section 5.1	  	Organization; Power and Authority	  	 	7	  	
Section 5.2	  	Authorization, Etc.	  	 	7	  	
Section 5.3	  	Disclosure	  	 	7	  	
Section 5.4	  	Organization and Ownership of Interests	  	 	8	  	
Section 5.5	  	Financial Statements; Material Liabilities	  	 	8	  	
Section 5.6	  	Compliance with Laws, Other Instruments, Etc.	  	 	9	  	
Section 5.7	  	Governmental Authorizations, Etc.	  	 	9	  	
Section 5.8	  	Litigation; Observance of Agreements, Statutes and Orders	  	 	9	  	
Section 5.9	  	Taxes	  	 	9	  	
Section 5.10	  	Title to Property; Leases	  	 	10	  	
Section 5.11	  	Insurance	  	 	10	  	
Section 5.12	  	Licenses, Permits, Etc.; Material Project Documents	  	 	10	  	
Section 5.13	  	Compliance with ERISA	  	 	10	  	
Section 5.14	  	Private Offering by the Company	  	 	11	  	
Section 5.15	  	Use of Proceeds; Margin Regulations	  	 	11	  	
Section 5.16	  	Existing Indebtedness; Future Liens	  	 	11	  	
Section 5.17	  	Foreign Assets Control Regulations, Etc.	  	 	12	  	
Section 5.18	  	Status under Certain Statutes	  	 	12	  	
 
i

TABLE OF CONTENTS
(continued)

 	  	 	  	Page	 	
			
Section 5.19	  	Environmental Matters	  	 	13	  	
Section 5.20	  	Force Majeure Events; Employees	  	 	14	  	
Section 5.21	  	Collateral	  	 	14	  	
			
SECTION 6.	  	REPRESENTATIONS OF THE PURCHASERS	  	 	14	  	
			
Section 6.1	  	Purchase for Investment	  	 	14	  	
Section 6.2	  	Source of Funds	  	 	14	  	
			
SECTION 7.	  	INFORMATION	  	 	16	  	
			
Section 7.1	  	Financial and Business Information	  	 	16	  	
Section 7.2	  	Officer’s Certificate	  	 	19	  	
Section 7.3	  	Visitation	  	 	20	  	
			
SECTION 8.	  	PAYMENT AND PREPAYMENT OF THE NOTES	  	 	20	  	
			
Section 8.1	  	Amortization; Maturity	  	 	20	  	
Section 8.2	  	Optional Prepayments with Yield-Maintenance Amount	  	 	21	  	
Section 8.3	  	Allocation of Partial Prepayments	  	 	21	  	
Section 8.4	  	Maturity; Surrender, Etc.	  	 	21	  	
Section 8.5	  	Purchase of Notes	  	 	21	  	
Section 8.6	  	Yield-Maintenance Amount	  	 	22	  	
			
SECTION 9.	  	AFFIRMATIVE COVENANTS	  	 	23	  	
			
Section 9.1	  	Compliance with Law	  	 	23	  	
Section 9.2	  	Insurance	  	 	23	  	
Section 9.3	  	Maintenance of Properties	  	 	24	  	
Section 9.4	  	Payment of Taxes and Claims	  	 	25	  	
Section 9.5	  	Existence, Etc.	  	 	25	  	
Section 9.6	  	Books and Records	  	 	25	  	
Section 9.7	  	Collateral; Further Assurances	  	 	25	  	
Section 9.8	  	Material Project Documents	  	 	26	  	
Section 9.9	  	Financial Ratios	  	 	27	  	
			
SECTION 10.	  	NEGATIVE COVENANTS	  	 	27	  	
			
Section 10.1	  	Transactions with Affiliates	  	 	27	  	
Section 10.2	  	Merger, Consolidation, Etc.	  	 	27	  	
Section 10.3	  	Line of Business	  	 	28	  	
Section 10.4	  	Terrorism Sanctions Regulations	  	 	28	  	
Section 10.5	  	Liens	  	 	28	  	
Section 10.6	  	Indebtedness	  	 	29	  	
Section 10.7	  	Loans, Advances, Investments and Contingent Liabilities	  	 	30	  	
Section 10.8	  	No Subsidiaries	  	 	30	  	
Section 10.9	  	Restricted Payments	  	 	30	  	
 
ii

TABLE OF CONTENTS
(continued)

 	  	 	  	Page	 	
			
Section 10.10	  	Sale of Assets, Etc.	  	 	30	  	
Section 10.11	  	Sale or Discount of Receivables	  	 	31	  	
Section 10.12	  	Amendments to Organizational Documents	  	 	31	  	
Section 10.13	  	Sale and Lease-Back	  	 	31	  	
Section 10.14	  	ERISA Compliance	  	 	32	  	
Section 10.15	  	No Margin Stock	  	 	32	  	
Section 10.16	  	Project Documents	  	 	32	  	
Section 10.17	  	Regulation	  	 	33	  	
Section 10.18	  	Swaps	  	 	33	  	
Section 10.19	  	Most Favored Lender	  	 	33	  	
			
SECTION 11.	  	EVENTS OF DEFAULT	  	 	34	  	
			
SECTION 12.	  	REMEDIES ON DEFAULT, ETC.	  	 	37	  	
			
Section 12.1	  	Acceleration	  	 	37	  	
Section 12.2	  	Other Remedies	  	 	37	  	
Section 12.3	  	Rescission	  	 	37	  	
Section 12.4	  	No Waivers or Election of Remedies, Expenses, Etc.	  	 	38	  	
			
SECTION 13.	  	REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES	  	 	38	  	
			
Section 13.1	  	Registration of Notes	  	 	38	  	
Section 13.2	  	Transfer and Exchange of Notes	  	 	38	  	
Section 13.3	  	Replacement of Notes	  	 	39	  	
			
SECTION 14.	  	PAYMENTS ON NOTES	  	 	40	  	
			
Section 14.1	  	Place of Payment	  	 	40	  	
Section 14.2	  	Home Office Payment	  	 	40	  	
			
SECTION 15.	  	EXPENSES, ETC.	  	 	40	  	
			
Section 15.1	  	Transaction Expenses	  	 	40	  	
Section 15.2	  	Survival	  	 	41	  	
			
SECTION 16.	  	SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT	  	 	41	  	
			
SECTION 17.	  	AMENDMENT AND WAIVER	  	 	41	  	
			
Section 17.1	  	Requirements	  	 	41	  	
Section 17.2	  	Solicitation of Holders of Notes	  	 	42	  	
Section 17.3	  	Binding Effect, etc.	  	 	42	  	
Section 17.4	  	Notes Held by Company, etc.	  	 	42	  	
			
SECTION 18.	  	NOTICES	  	 	42	  	
 
iii

TABLE OF CONTENTS
(continued)

 	  	 	  	Page	 	
			
SECTION 19.	  	REPRODUCTION OF DOCUMENTS	  	 	43	  	
			
SECTION 20.	  	CONFIDENTIAL INFORMATION	  	 	43	  	
			
SECTION 21.	  	SUBSTITUTION OF PURCHASER	  	 	44	  	
			
SECTION 22.	  	MISCELLANEOUS	  	 	45	  	
			
Section 22.1	  	Successors and Assigns	  	 	45	  	
Section 22.2	  	Payments Due on Non-Business Days	  	 	45	  	
Section 22.3	  	Accounting Terms	  	 	45	  	
Section 22.4	  	Severability	  	 	45	  	
Section 22.5	  	Construction, etc.	  	 	45	  	
Section 22.6	  	Counterparts	  	 	46	  	
Section 22.7	  	Governing Law	  	 	46	  	
Section 22.8	  	Jurisdiction and Process; Waiver of Jury Trial	  	 	46	  	
Section 22.9	  	Transaction References	  	 	47	  	
 
iv

							
S CHEDULE A	  	 	—	  	  	I NFORMATION R ELATING TO P URCHASERS	
S CHEDULE B	  	 	—	  	  	D EFINED T ERMS	
Schedule 4.12(a)	  	 	—	  	  	Deeds of Trust	
Schedule 5.3	  	 	—	  	  	Disclosure Materials	
Schedule 5.4	  	 	—	  	  	Ownership of the Company, etc.; Officers	
Schedule 5.5	  	 	—	  	  	Financial Statements	
Schedule 5.7	  	 	—	  	  	Government Authorizations	
Schedule 5.12(a)	  	 	—	  	  	Required Permits	
Schedule 5.12(b)	  	 	—	  	  	Material Project Documents	
Schedule 5.13	  	 	—	  	  	ERISA	
Schedule 5.16	  	 	—	  	  	Indebtedness	
Schedule 8.1	  	 	—	  	  	Principal Amortization Schedule	
Schedule 9.2	  	 	—	  	  	Insurance	
Schedule 10.1	  	 	—	  	  	Cap Rock Transaction	
Schedule 10.16	  	 	—	  	  	Certain Existing Leases	
Exhibit 1	  	 	—	  	  	Form of 6.47% Senior Secured Note due September 30, 2030	
Exhibit 2	  	 	—	  	  	Form of Subordination Terms	
Exhibit 3	  	 	—	  	  	Form of Subsidiary Guaranty	

Security Documents	
			
Exhibit S-1	  	 	—	  	  	Form of Amended and Restated Collateral Agency Agreement	
Exhibit S-2	  	 	—	  	  	Form of Deed of Trust	
Exhibit S-3A	  	 	—	  	  	Form of Company Pledge Agreement	
Exhibit S-3B	  	 	—	  	  	Form of TDC Pledge Agreement	
Exhibit S-4	  	 	—	  	  	Form of Negative Pledge Agreement	

6.47% Senior Notes due September 30, 2030
July 13, 2010
T O E ACH OF THE P URCHASERS L ISTED IN
Schedule A Hereto:
Ladies and Gentlemen:
Sharyland Distribution & Transmission Services, L.L.C., a Texas limited liability company (the “ Company ”), agrees with each of the purchasers whose names appear at the end hereof (each, a “ Purchaser ” and, collectively, the “ Purchasers ”):
RECITALS
WHEREAS, Hunt Transmission Services, L.L.C. (“ Hunt ”) entered into an Agreement and Plan of Merger, dated as of December 17, 2009 (the “ Acquisition Agreement ”), pursuant to which HTS Acquisition Sub., Inc, a Delaware corporation and a wholly owned indirect subsidiary of Hunt (“ Merger Sub ”) merged with and into Cap Rock Holding Corporation (“ Holding ”), a Delaware corporation, which owns directly or indirectly all of the capital stock of Cap Rock Energy Corporation, a Texas corporation (the acquisition and the transactions related therein, the “ Merger ”);
WHEREAS, in connection with the Merger, Merger Sub entered into that certain Note Purchase Agreement, dated as of July 13, 2010 (the “ Acquisition Date ”), among Merger Sub, as issuer, and the Purchasers, as purchasers thereunder, with respect to the issuance of 6.47% Senior Notes due September 30, 2030, in the aggregate principal amount of $110,000,000 (the “ Initial NPA ”);
WHEREAS, Holding as the survivor of the merger with Merger Sub, succeeded to and assumed by operation of law all of the rights, duties, obligations and liabilities of Merger Sub under the Initial NPA, and Holding has confirmed its obligations under the Initial NPA pursuant to that certain Ratification Agreement, dated the Acquisition Date, executed by Holding in favor of the Purchasers;
WHEREAS, Cap Rock Energy Corporation, pursuant to and in accordance with the Plan of Conversion, dated as of the Acquisition Date, was converted from a Texas corporation to a Texas limited liability company, as so converted Cap Rock Energy LLC (“ CR Energy ”);
WHEREAS, pursuant to the Assumption Agreement, dated as of the Acquisition Date, between Holding and CR Energy, CR Energy, with the consent of the Collateral Agent and the Purchasers, assumed all of the rights, duties, obligations and liabilities of Holding under the Initial NPA;

WHEREAS, pursuant to the Agreement and Plan of Merger, dated as of the Acquisition Date, between CR Energy and the Company, CR Energy was merged into the Company with the Company being the surviving corporation and succeeding by operation of law to the Initial NPA; and
WHEREAS, subject to and on the terms and conditions set forth herein, the parties hereto wish to amend and restate the Initial NPA in its entirety as set forth herein, with the Initial NPA as so amended and restated being hereinafter referred to as the “ Agreement ”;
NOW, THEREFORE, in consideration of the premises and agreements hereinafter set forth, the parties hereto agree as follows:
SECTION 1. AUTHORIZATION OF NOTES.
The Company will authorize the issue and sale of $110,000,000 aggregate principal amount of its 6.47% Senior Notes due September 30, 2030 (the “ Notes ”, such term to include any such notes issued in substitution therefor pursuant to Section 13) . The Notes shall be substantially in the form set out in Exhibit 1 . Certain capitalized and other terms used in this Agreement are defined in Schedule B ; and references to a “Schedule” or an “Exhibit” are, unless otherwise specified, to a Schedule or an Exhibit attached to this Agreement.
SECTION 2. SALE AND PURCHASE OF NOTES.
Subject to the terms and conditions of this Agreement, the Company will issue and sell to each Purchaser and each Purchaser will purchase from the Company, at the Closing provided for in Section 3 , Notes in the principal amount specified opposite such Purchaser’s name in Schedule A at the purchase price of 100% of the principal amount thereof. The Purchasers’ obligations hereunder are several and not joint obligations and no Purchaser shall have any liability to any Person for the performance or non-performance of any obligation by any other Purchaser hereunder.
SECTION 3. CLOSING.
The sale and purchase of the Notes to be purchased by each Purchaser shall occur at the offices of Bingham McCutchen, 399 Park Avenue, New York, NY, at 11:00 a.m., New York time, at a closing (the “ Closing ”) on July 13, 2010, or on such other Business Day thereafter on or prior to July 16, 2010 as may be agreed upon by the Company and the Purchasers. At the Closing the Company will deliver to each Purchaser the Notes to be purchased by such Purchaser in the form of a single Note (or such greater number of Notes in denominations of at least $1,000,000 as such Purchaser may request) dated the Closing Date and registered in such Purchaser’s name (or in the name of its nominee), against delivery by such Purchaser to the Company or its order of immediately available funds in the amount of the purchase price therefor by wire transfer of immediately available funds for the account of the Company to account number 4426868026 at Bank of America, 901 Main Street, Dallas, TX 75202 ABA: 026009593 or to such other account as established in a flow of funds memorandum that is agreed upon between the Company and the Purchasers. If at the Closing the Company shall fail to tender such Notes to any Purchaser as provided above in this Section 3 , or any of the conditions specified in Section 4 shall not have been fulfilled to such Purchaser’s satisfaction, such
 
S CHEDULE A-2
(To Note Purchase Agreement)

Purchaser shall, at its election, be relieved of all further obligations under this Agreement, without thereby waiving any rights such Purchaser may have by reason of such failure or such nonfulfillment.
SECTION 4. CONDITIONS TO CLOSING
Each Purchaser’s obligation to purchase and pay for the Notes to be sold to such Purchaser at the Closing is subject to the fulfillment to the satisfaction of each Purchaser, prior to or at the Closing, of the following conditions:
Section 4.1 Representations and Warranties . The representations and warranties of the Company in this Agreement shall be correct when made and at the time of the Closing.
Section 4.2 Performance; No Default . The Company shall have performed and complied with all agreements and conditions contained in this Agreement required to be performed or complied with by it prior to or at the Closing and after giving effect to the issue and sale of the Notes (and the application of the proceeds thereof as contemplated by Section 5.14) no Default or Event of Default shall have occurred and be continuing and no “Default” or “Event of Default” under the 2009 Note Agreement or the RBC Agreement shall have occurred and be continuing.
Section 4.3 Compliance Certificates .
(a) Company’s Closing Certificates. The Company shall have delivered to each Purchaser an officer’s certificate, dated the Closing Date, certifying that (i) the conditions specified in Sections 4.1 and 4.2 have been fulfilled, and (ii) that each of the other conditions precedent to the occurrence of the Closing has been satisfied.
(b) Company’s Authority Certificate. The Company shall have delivered to each Purchaser a certificate of its secretary, dated the Closing Date, certifying as to the resolutions attached thereto and other corporate proceedings by the Company relating to the authorization, execution and delivery of the Notes and this Agreement and the other Transaction Documents to which it is a party.
Section 4.4 Opinions of Counsel . Such Purchaser shall have received opinions in form and substance satisfactory to such Purchaser, dated the date of the Closing (a)(i) from Mayer Brown LLP, counsel for the Company, Sharyland, New Owner and New Operator, covering such matters incident to the transactions contemplated hereby as such Purchaser or its counsel may reasonably request, and (ii) from Sutherland, Asbill & Brennan LLP, special counsel for the Company, Sharyland, New Owner and New Operator, covering Federal and Texas regulatory matters (and the Company hereby instructs its counsel to deliver such opinion to the Purchasers and the Secured Parties), and (b) from Bingham McCutchen LLP, in connection with such transactions, in form and substance satisfactory to the Purchasers and covering such other matters incident to such transactions as the Purchasers may reasonably request.
Section 4.5 Purchase Permitted By Applicable Law, Etc . On the date of the Closing such Purchaser’s purchase of Notes shall (a) be permitted by the laws and regulations of
 
S CHEDULE A-3
(To Note Purchase Agreement)

each jurisdiction to which such Purchaser is subject, without recourse to provisions (such as section 1405(a)(8) of the New York Insurance Law) permitting limited investments by insurance companies without restriction as to the character of the particular investment, (b) not violate any applicable law or regulation (including, without limitation, Regulation T, U or X of the Board of Governors of the Federal Reserve System) and (c) not subject such Purchaser to any tax, penalty or liability under or pursuant to any applicable law or regulation, which law or regulation was not in effect on the date hereof. If requested by such Purchaser, such Purchaser shall have received an Officer’s Certificate certifying as to such matters of fact as such Purchaser may reasonably specify to enable such Purchaser to determine whether such purchase is so permitted.
Section 4.6 Sale of Other Notes . Contemporaneously with the Closing, (a) the Company shall sell to each Purchaser and each Purchaser shall purchase the Notes to be purchased by it at the Closing as specified in Schedule A; (b) the transactions contemplated by the RBC Agreement shall be consummated and (c) the transactions contemplated by the TDC Note Agreement shall be consummated.
Section 4.7 Payment of Special Counsel and Other Fees and Expenses . Without limiting the provisions of Section 15.1 , the Company shall have paid on or before the Closing: (a) the fees, charges and disbursements of the Purchasers’ special counsel, Bingham McCutchen LLP and the Purchasers’ Texas counsel to the extent reflected in a statement of such counsel rendered to the Company at least one Business Day prior to the Closing and (b) all other fees, including to the extent not paid pursuant to the Initial NPA a structuring fee in the amount of $550,000 to Prudential (the “Structuring Fee”), and out-of-pocket costs and expenses (including legal fees and expenses and consultant fees and expenses) and other compensation contemplated hereby or by the other Financing Documents, or pursuant to separate letter agreements, payable to the Purchasers.
Section 4.8 Private Placement Number . A Private Placement Number issued by Standard & Poor’s CUSIP Service Bureau (in cooperation with the SVO) shall have been obtained for the Notes.
Section 4.9 Changes in Structure . The Cap Rock Transaction shall be consummated prior to or contemporaneously with the Closing. The Company shall not have changed its jurisdiction of formation or been a party to any merger or consolidation or succeeded to all or any substantial part of the liabilities of any other entity, at any time following the date of the most recent financial statements referred to in Schedule 5.5 , except in connection with the Cap Rock Transaction.
Section 4.10 Funding Instructions . At least one Business Day prior to the date of the Closing, each Purchaser shall have received written instructions signed by a Responsible Officer on letterhead of the Company confirming the information specified in Section 3 including (i) the name and address of the transferee bank, (ii) such transferee bank’s ABA number and (iii) the account name and number into which the purchase price for the Notes is to be deposited.
 
S CHEDULE A-4
(To Note Purchase Agreement)

Section 4.11 Proceedings and Documents . Each Purchaser shall have received the following, each to be (i) dated the Closing Date unless otherwise indicated, and (ii) in form and substance satisfactory to the Purchasers:
(a) The Notes to be purchased by the Purchasers;
(b) This Agreement and each other Financing Document, duly executed, authorized and delivered by each party thereto;
(c) The certificates of formation of the Company, each Member, New Owner and New Operator each certified as of a recent date by the Secretary of State of Texas and by such Person’s secretary or other authorized officer;
(d) The organizational documents of each the Company, each Member, New Owner and New Operator certified by such Person’s secretary or other authorized officer;
(e) With respect to each of the Company, Sharyland, New Owner and New Operator, an incumbency certificate signed by the secretary and one other officer of such Person, certifying as to the names, titles and true signatures of the officers of such Person authorized to sign this Agreement, the Notes, the other Financing Documents to which such Person is a party and other documents to be delivered hereunder or thereunder;
(f) A certificate of the secretary of the Company, Sharyland, New Owner and New Operator attaching resolutions of its management committee or other governing body evidencing approval of the transactions contemplated by this Agreement and the other Financing Documents to which such Person is a party and, with respect to the Company, the issuance of the Notes, and in each case, the execution, delivery and performance thereof, and authorizing certain officers to execute and deliver the same, and certifying that such resolutions were duly and validly adopted and have not since been amended, revoked or rescinded;
(g) Good standing certificates as to each of the Company, each Member, New Owner and New Operator from all relevant jurisdictions;
(h) Evidence of the filing and acceptance of financing statements which name the Company, as debtor, and the Collateral Agent, as secured party, in all applicable offices, together with copies of such financing statements;
(i) A schedule of all Required Permits, together with copies thereof certified by officers of the Company as being true, correct and complete, in full force and effect and not subject to any appeal or further proceeding;
(j) Certified copies of the documents delivered in connection with the consummation of the Cap Rock Transaction, including without limitation the Public Utility Commission of Texas and FERC approvals issued in connection with the Cap Rock Transaction;
(k) Copies of the documents delivered in connection with the consummation of the transactions contemplated by the RBC Agreement and of the documents delivered in connection with the consummation of the transactions contemplated by the TDC Note Agreement; and
 
S CHEDULE A-5
(To Note Purchase Agreement)

(l) Such additional documents or certificates with respect to such legal matters or limited liability company, general partnership or other proceedings related to the transactions contemplated hereby as may be reasonably requested by the Purchasers.
Section 4.12 Joinder Agreement, Etc . The Obligations shall be secured by a perfected first priority security interest (subject to Permitted Liens) in the Collateral in favor of the Collateral Agent, for the benefit of the Secured Parties, and the Company will deliver or cause to be delivered to the Purchasers and the Collateral Agent on the Closing Date a joinder agreement, substantially in the form of Exhibit A attached to the Collateral Agency Agreement, duly executed by the Company, the Collateral Agent and each Purchaser as a “ Joining Party ” (the “ 2010 NPA Joinder Agreement ”), and the following, each of which shall be in full force and effect:
(a) The First Lien Deed of Trust, Security Agreement, Assignment of Rents and Leases and Fixture Filings (Texas) by and from the Company, as grantor, to Peter M. Oxman, as trustee, for the benefit of the Collateral Agent and the Secured Parties, dated as of July 13, 2010, covering the real property listed on Schedule 4.12(a) hereto;
(b) An Assignment of Membership Interests and Pledge Agreement in the form attached hereto as Exhibit S-3A , duly executed by the Company, with respect to its membership interests in New Owner, to the Collateral Agent for the benefit of the Secured Parties (the “ Pledge Agreement (Company) ”), and an Assignment of Membership Interests and Pledge Agreement in the form attached hereto as Exhibit S-3B , duly executed by TDC, with respect to its membership interests in the Company, to the Collateral Agent for the benefit of the Secured Parties (the “ Pledge Agreement (TDC) ”, and together with the Pledge Agreement (Company), the “ Pledge Agreements ”);
(c) A Negative Pledge Agreement in the form attached hereto as Exhibit S-4 , duly executed by New Owner to the Collateral Agent for the benefit of the Secured Parties (the “ Negative Pledge Agreement ”);
(d) A joinder agreement, substantially in the form of Exhibit A attached to the Collateral Agency Agreement, duly executed by RBC (the “ RBC Joinder Agreement ”); and
(e) Such other documents, instruments and agreements any Purchaser may reasonably request to grant to the Collateral Agent first priority (subject only to Permitted Liens) perfected Liens on the Collateral.
Section 4.13 UCC Searches; and Litigation Searches . The Collateral Agent and the Purchasers shall have received UCC and litigation searches of the Company, each Member, New Owner and New Operator which searches shall (i) confirm that no Liens other than Permitted Liens exist on the Collateral and that such Persons are not subject to any litigation, and (ii) be otherwise in substance satisfactory to the Collateral Agent and the Purchasers.
Section 4.14 Insurance . The Company shall have delivered to the Purchasers evidence of insurance in effect that meets the requirements of Section 9.2 , and the Purchasers shall have received an insurance consultant’s report, which shall be addressed to the Purchasers and shall be in form and substance satisfactory to the Purchasers.
 
S CHEDULE A-6
(To Note Purchase Agreement)

Section 4.15 Financial Statements . The Purchasers shall have received unaudited financial statements of the Company and each Member for the calendar quarter ended March 31, 2010.
Section 4.16 Consents and Approvals . All Required Permits and all governmental and third party permits and regulatory and other approvals required to be in effect in connection with the issuance of the Notes hereunder have been obtained and are in effect, all applicable waiting periods have expired without any materially adverse action being taken by any applicable authority, and copies of the documentation thereof shall have been delivered to each Purchaser.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each Purchaser that:
Section 5.1 Organization; Power and Authority . Each of the Company, each Member, New Owner and New Operator is a limited liability company or limited partnership, as applicable, duly organized, validly existing and in good standing under the laws of its jurisdiction of formation, and is duly qualified and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Each of the Company, each Member, New Owner and New Operator has the limited liability company or limited partnership, as applicable, power and authority to own or hold under lease the properties it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver this Agreement and the other Transaction Documents to which it is a party and to perform the provisions hereof and thereof.
Section 5.2 Authorization, Etc . This Agreement and the other Transaction Documents have been duly authorized by all necessary limited liability company or limited partnership, as applicable, action on the part of the Company, each Member, New Owner and New Operator, and this Agreement and the other Transaction Documents constitute, and upon execution and delivery thereof each Note will constitute, a legal, valid and binding obligation of the Company, such Member, New Owner or New Operator, as applicable, enforceable against such Person in accordance with its terms, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors’ rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).
Section 5.3 Disclosure . This Agreement, the other Transaction Documents and the documents, certificates or other writings delivered to the Purchasers by or on behalf of the Company, a Member, New Owner or New Operator in connection with the transactions contemplated hereby, and the financial statements listed in Schedule 5.5 (this Agreement, and such documents, certificates or other writings listed on Schedule 5.3 and such financial statements delivered to each Purchaser and listed on Schedule 5.5 being referred to, collectively, as the “ Disclosure Documents ”) , taken as a whole, do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not
 
S CHEDULE A-7
(To Note Purchase Agreement)

misleading in light of the circumstances under which they were made. The projections and pro forma financial information contained in the materials referenced above are based upon good faith estimates and assumptions believed by management of the Company and Sharyland to be reasonable at the time made and on the Closing Date, it being recognized by each Purchaser that such financial information as it relates to future events is not to be viewed as fact and that actual results during the period or periods covered by such financial information may differ from the projected results set forth therein by a material amount. Except as disclosed in the Disclosure Documents, since December 31, 2009, there has been no change in the financial condition, operations, business, properties or prospects of the Company, a Member, New Owner or New Operator except changes that individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. There is no fact known to the Company that could reasonably be expected to have a Material Adverse Effect that has not been set forth herein or in the Disclosure Documents.
Section 5.4 Organization and Ownership of Interests . Schedule 5.4 contains a complete and correct list and description of (i) each of the Company’s, each Member’s, New Owner’s and New Operator’s jurisdiction of its organization and its ownership structure, (ii) the Company’s and each Member’s Subsidiaries, and (iii) the Company’s, each Member’s, New Owner’s and New Operator’s senior officers. None of the Company, Sharyland, New Owner or New Operator has any Subsidiaries as of the Closing Date except as shown on Schedule 5.4 .
Section 5.5 Financial Statements; Material Liabilities . The Company and Sharyland have delivered to each Purchaser copies of the financial statements listed on Schedule 5.5 .
(a) With respect to the consolidated financial statements of the Company and Sharyland, all of such financial statements (including in each case the related schedules and notes) fairly present in all material respects the consolidated financial positions of the Company and Sharyland, each as of the respective dates specified in such Schedule and the results of their operations and cash flows for the respective periods so specified and have been prepared in accordance with GAAP consistently applied throughout the periods involved except as set forth in the notes thereto (subject, in the case of any interim financial statements, to normal year-end adjustments). Neither the Company nor Sharyland has any material liabilities that are not disclosed on such financial statements or otherwise disclosed in the Disclosure Documents.
(b) With respect to the consolidated financial statements of Cap Rock Energy Corporation, to the knowledge of the Company and Sharyland, all of such financial statements (including in each case the related schedules and notes) fairly present in all material respects the consolidated financial positions of Cap Rock Energy Corporation as of the date specified in Schedule 5.5 and the results of its operations and cash flows, on a consolidated basis, for the period so specified and have been prepared in accordance with GAAP consistently applied throughout the periods involved except as set forth in the notes thereto (subject, in the case of any interim financial statements, to normal year-end adjustments). To the knowledge of the Company and Sharyland, Cap Rock Energy Corporation does not have any material liabilities that are not disclosed on such financial statements or otherwise disclosed in the Disclosure Documents.
 
S CHEDULE A-8
(To Note Purchase Agreement)

Section 5.6 Compliance with Laws, Other Instruments, Etc . The execution, delivery and performance by the Company, the Members, New Owner and New Operator of this Agreement and the Notes and the other Transaction Documents to which such Person is a party, do not and will not (i) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of such Person under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter or limited partnership or limited liability company agreement, or any other agreement or instrument to which such Person is bound or by which such Person or any of its properties may be bound or affected, (ii) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to such Person or (iii) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to such Person, which in the case of any of the foregoing clauses (i) through (iii), with respect to Material Project Documents, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.
Section 5.7 Governmental Authorizations, Etc . Except as set forth on Schedule 5.7 , no consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority is required in connection with the execution, delivery or performance by the Company, either Member, New Owner or New Operator of this Agreement or the Notes or any of the other Transaction Documents to which it is a party.
Section 5.8 Litigation; Observance of Agreements, Statutes and Orders . (a) There are no actions, suits, investigations or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company, either Member, New Owner or New Operator or any of their property in any court or before any arbitrator of any kind or before or by any Governmental Authority that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.
(b) None of the Company, either Member, New Operator or New Owner is in default under any term of any Material Project Document or any other agreement or any order, judgment, decree or ruling of any court, arbitrator or Governmental Authority or is in violation of any applicable law, ordinance, rule or regulation (including without limitation Environmental Laws or the USA Patriot Act) of any Governmental Authority, which default or violation, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.
(c) To the knowledge of the Company, after due inquiry, no breach or default under any of the Material Project Documents has occurred and is continuing.
Section 5.9 Taxes . Each of the Company, each Member, New Owner and New Operator has filed all material tax returns that are required to have been filed (or timely requests for extensions have been filed, have been granted and are not expired) in any jurisdiction, and has paid all taxes shown to be due and payable on such returns and all other taxes and assessments levied upon them or their properties, assets, income or franchises, to the extent such taxes and assessments have become due and payable and before they have become delinquent, except for any taxes and assessments (i) the amount of which is not individually or in the aggregate material or (ii) the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which such Person has
 
S CHEDULE A-9
(To Note Purchase Agreement)

established adequate reserves in accordance with GAAP. The Company knows of no basis for any other tax or assessment that could reasonably be expected to have a Material Adverse Effect. The charges, accruals and reserves on the books of the Company in respect of Federal, state or other taxes for all fiscal periods are adequate.
Section 5.10 Title to Property; Leases . The Company has good and sufficient title to the System and the Acquired System, New Owner has good and sufficient title to the FERC Assets and the Company, Sharyland, New Owner and New Operator have good and sufficient title to their properties that individually or in the aggregate are material to them, free and clear of Liens (other than Permitted Liens). All leases that individually or in the aggregate are material to the Company, Sharyland, New Owner or New Operator are valid and subsisting and are in full force and effect in all material respects.
Section 5.11 Insurance . Sharyland and New Operator have all insurance coverage required by Section 9.2 .
Section 5.12 Licenses, Permits, Etc.; Material Project Documents . The Company, Sharyland, New Owner and New Operator own or possess all governmental and third party licenses, permits, franchises, authorizations, patents, copyrights, proprietary software, service marks, trademarks and trade names, or rights thereto, that are material to the ownership, leasing, operating and maintenance of the System, including the Acquired System, and the FERC Assets, including the Certificates of Convenience and Necessity (#30192, #30026, #30114 and #30191) issued or transferred by the Public Utility Commission of Texas to Sharyland and the New Operator (collectively, the “ Required Permits ”), without known conflict with the rights of others. All Required Permits are listed in Schedule 5.12(a) . The Material Project Documents listed on Schedule 5.12(b) constitute and include all material contracts and agreements to which the Company, Sharyland, New Owner or New Operator is a party. Each Material Project Document is in full force and effect, and constitutes the legal, valid and binding obligation of each party thereto as of the date hereof.
Section 5.13 Compliance with ERISA . Except as set forth on Schedule 5.13 , (a) The Company and each ERISA Affiliate have operated and administered each Plan in compliance with all applicable laws except for such instances of noncompliance as have not resulted in and could not reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any ERISA Affiliate has incurred any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans (as defined in section 3 of ERISA), and no event, transaction or condition has occurred or exists that could reasonably be expected to result in the incurrence of any such liability by the Company or any ERISA Affiliate, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate, in either case pursuant to Title I or IV of ERISA or to such penalty or excise tax provisions or to Section 401(a)(29), 412 or 430(k) of the Code or section 4068 of ERISA, other than such liabilities or Liens as would not be individually or in the aggregate material.
(b) The ratio of (x) the aggregate actuarial value of assets as defined in and determined in accordance with Code section 430(g)(3)(B) and adopted by Sharyland under each Plan (other than a Multiemployer Plan) to (y) the present value of the aggregate benefit liabilities
 
S CHEDULE A-10
(To Note Purchase Agreement)

under each such Plan, exceeds 80%, as determined as of the end of such Plan’s most recently ended plan year on the basis of the actuarial assumptions specified for funding purposes in such Plan’s most recent actuarial valuation report. The terms “current value” and “present value” have the meanings specified in section 3 of ERISA.
(c) The Company and its ERISA Affiliates have not incurred withdrawal liabilities (and are not subject to contingent withdrawal liabilities) under section 4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate are material.
(d) The expected postretirement benefit obligation (determined as of the last day of the Company’s most recently ended calendar year in accordance with Financial Accounting Standards Board Statement No. 106, without regard to liabilities attributable to continuation coverage mandated by section 4980B of the Code) of the Company is not material to it.
(e) The execution and delivery of this Agreement and the issuance and sale of the Notes hereunder will not involve any non-exempt prohibited transaction under section 406 of ERISA or in connection with which a tax could be imposed pursuant to section 4975(c)(1)(A)-(D) of the Code. The representation by the Company to each Purchaser in the first sentence of this Section 5.13(e) is made in reliance upon and subject to the accuracy of such Purchaser’s representation in Section 6.2 as to the sources of the funds used to pay the purchase price of the Notes to be purchased by such Purchaser.
Section 5.14 Private Offering by the Company . Neither the Company nor anyone acting on its behalf has offered the Notes or any similar securities for sale to, or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof with, any person other than the Purchasers and not more than five other Institutional Investors, each of which has been offered the Notes at a private sale for investment. Neither the Company nor anyone acting on its behalf has taken, or will take, any action that would subject the issuance or sale of the Notes to the registration requirements of Section 5 of the Securities Act or to the registration requirements of any securities or blue sky laws of any applicable jurisdiction.
Section 5.15 Use of Proceeds; Margin Regulations . The Company has applied the proceeds of the sale of the Notes to (i) pay the purchase price for the Cap Rock Transaction and (ii) pay all fees, expenses and costs related to Closing, including legal fees and the Structuring Fee. No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for the purpose of buying or carrying any margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System (12 CFR 221), or for the purpose of buying or carrying or trading in any securities under such circumstances as to involve the Company in a violation of Regulation X of said Board (12 CFR 224) or to involve any broker or dealer in a violation of Regulation T of said Board (12 CFR 220). As used in this Section, the terms “margin stock” and “purpose of buying or carrying” shall have the meanings assigned to them in Regulation U.
Section 5.16 Existing Indebtedness; Future Liens . (a)  Schedule 5.16 sets forth a complete and correct list of all outstanding Indebtedness of the Company, each Member, New Owner and New Operator as of March 31, 2010 (including a description of the obligors and
 
S CHEDULE A-11
(To Note Purchase Agreement)

obligees, principal amount outstanding and collateral therefor, if any, and Guaranty thereof, if any). Since March 31, 2010, there has been no material change in the amounts, interest rates, sinking funds, installment payments or maturities of the Indebtedness of the Company, a Member, New Owner or New Operator. None of the Company, a Member, New Owner or New Operator is in default and no waiver of default is currently in effect, in the payment of any principal or interest on any of its Indebtedness and no event or condition exists with respect to any of its Indebtedness that would permit (or that with notice or the lapse of time, or both, would permit) one or more Persons to cause such Indebtedness to become due and payable before its stated maturity or before its regularly scheduled dates of payment.
(b) The Company has not agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its property, whether now owned or hereafter acquired, to be subject to a Lien not otherwise permitted by Section 10.5 .
(c) The Company is not a party to, nor otherwise subject to any provision contained in, any instrument evidencing Indebtedness of the Company, any agreement relating thereto or any other agreement (including, but not limited to, its charter or other organizational document) which limits the amount of, or otherwise imposes restrictions on the incurring of, Indebtedness of the Company, other than the 2009 Note Agreement and the RBC Agreement.
Section 5.17 Foreign Assets Control Regulations, Etc . (a) Neither the sale of the Notes by the Company hereunder nor the use of the proceeds thereof will violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto.
(b) None of the Company, the Members, New Owner or New Operator: (i) is a Person described or designated in the Specially Designated Nationals and Blocked Persons List of the Office of Foreign Assets Control or in Section 1 of the Anti-Terrorism Order or (ii) engages in any dealings or transactions with any such Person. The Company, each Member, New Owner and New Operator is in compliance, in all material respects, with the USA Patriot Act.
(c) No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for any payments to any governmental official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977, as amended, assuming in all cases that such Act applies to the Company and the Members.
Section 5.18 Status under Certain Statutes . Prior to, and after consummation of, the Cap Rock Transaction:
(a) Neither Member nor the Company is an “investment company” or a company “controlled” by an “investment company” within the meaning of the Investment Company Act of 1940, as amended, or an “investment adviser” within the meaning of the Investment Advisers Act of 1940, as amended.
 
S CHEDULE A-12
(To Note Purchase Agreement)

(b) Neither the Company nor either Member is a “public utility” under the FPA and the regulations of FERC thereunder. The execution, delivery and performance of the Company’s and Sharyland’s obligations under the Transaction Documents requires no authorization of approval by, or notice to, and is not subject to the jurisdiction of, FERC under the FPA.
(c) Sharyland and the holding company system of which it is a part have obtained a waiver of the requirements of 18 C.F.R. 366.21, 366.22 and 366.23 (FERC Docket No. PH06-59-000), but are subject to the FERC regulations relating to regulatory access to books and records. Sharyland and the holding company system of which it is a part have filed a notice of holding company status under FERC Docket No. HC06-1-000 and may be required to submit a revised notice of holding company status and/or a revised request for the waiver described in the preceding sentence as a result of the transactions contemplated in the Transaction Documents or in Schedule 10.1 . Under FERC’s currently effective regulations, the Company will be deemed not to be a “public-utility company” and as a result TDC is not a “holding company” under PUHCA; as a result of the Cap Rock Transactions, Sharyland will become a “holding company” under PUHCA.
(d) The Company is subject to regulation as an “electric utility” by the Public Utility Commission of Texas. The execution, delivery and performance of the Company’s and Sharyland’s obligations under the Transaction Documents requires no authorization or approval by, or notice to, the Public Utility Commission of Texas or under the Public Utility Regulatory Act of Texas other than those that have been obtained.
(e) Solely by virtue of the execution, delivery and performance of the Transaction Documents, no Purchaser will become subject to any of the provisions of the FPA, PUHCA (based on FERC’s currently effective definitions under PUHCA) or the Public Utility Regulatory Act of Texas, or to regulation under any such statute.
Section 5.19 Environmental Matters . (a) The Company has no knowledge of any claims nor has it received any notice of any claim, and no proceeding has been instituted raising any claim against the Company, a Member, New Owner or New Operator or any of their real properties now or formerly owned, leased or operated by any of them or other assets, alleging any damage to the environment or violation of any Environmental Laws, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect.
(b) The Company has no knowledge of any facts which would give rise to any claim, public or private, of violation of Environmental Laws or damage to the environment emanating from, occurring on or in any way related to real properties now or formerly owned, leased or operated by the Company, either Member, New Owner or New Operator or to other assets or its use, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect.
(c) None of the Company, a Member, New Owner or New Operator has stored any Hazardous Materials on real properties now or formerly owned, leased or operated by any of them and has not disposed of any Hazardous Materials in a manner contrary to any Environmental Laws in each case in any manner that could reasonably be expected to result in a Material Adverse Effect; and
 
S CHEDULE A-13
(To Note Purchase Agreement)

(d) All buildings on all real properties now owned, leased or operated by the Company, a Member, New Owner or New Operator are in compliance with applicable Environmental Laws, except where failure to comply could not reasonably be expected to result in a Material Adverse Effect.
Section 5.20 Force Majeure Events; Employees . None of the System, the Acquired System, the FERC Assets nor any of the other assets of the Company, a Member, New Owner and New Operator has suffered any Force Majeure Event that is continuing. Neither the Company nor New Owner has any employees.
Section 5.21 Collateral . The Collateral, as described in the Security Documents, constitutes all of the Company’s rights in the System Lease and the System and all of its membership interests in New Owner and all of TDC’s membership interests in the Company. The security interests in the Collateral granted to the Collateral Agent (for the benefit of the Secured Parties) pursuant to the Financing Documents: (a) constitute as to personal property included in the Collateral and, with respect to subsequently acquired personal property included in the Collateral, will constitute, a perfected security interest and Lien under each applicable Uniform Commercial Code, and (b) are, and, with respect to such subsequently acquired property, will be, as to Collateral perfected under each applicable Uniform Commercial Code, superior and prior to the rights of all third Persons now existing or hereafter arising whether by way of mortgage, lien, security interests, encumbrance, assignment or otherwise, except for Permitted Liens. All action as is necessary has been taken to establish and perfect the Collateral Agent’s rights in and to, and the first lien priority of its Lien on, the Collateral, including any recording, filing, registration, delivery to the Collateral Agent, giving of notice or other similar action. The Security Documents and financing statements relating thereto have been duly filed or recorded in each office and in each jurisdiction where required in order to create and perfect the Lien and security interest described above and the priority thereof.
SECTION 6. REPRESENTATIONS OF THE PURCHASERS.
Section 6.1 Purchase for Investment . Each Purchaser severally represents that it is an “ Accredited Investor ” as defined in Rule 501 of Regulation D under the Securities Act. Each Purchaser severally represents that it is purchasing the Notes for its own account or for one or more separate accounts maintained by such Purchaser or for the account of one or more pension or trust funds and not with a view to the distribution thereof, provided that the disposition of such Purchaser’s property shall at all times be within such Purchaser’s control. Each Purchaser understands that the Notes have not been registered under the Securities Act and may be resold only if registered pursuant to the provisions of the Securities Act or if an exemption from registration is available, except under circumstances where neither such registration nor such an exemption is required by law, and that the Company is not required to register the Notes.
 
S CHEDULE A-14
(To Note Purchase Agreement)

Section 6.2 Source of Funds . Each Purchaser severally represents that at least one of the following statements is an accurate representation as to each source of funds (a “ Source ”) to be used by such Purchaser to pay the purchase price of the Notes to be purchased by such Purchaser hereunder:
(a) the Source is an “ insurance company general account ” (as the term is defined in the United States Department of Labor’s Prohibited Transaction Exemption (“ PTE ”) 95-60) in respect of which the reserves and liabilities (as defined by the annual statement for life insurance companies approved by the National Association of Insurance Commissioners (the “ NAIC Annual Statement ”)) for the general account contract(s) held by or on behalf of any employee benefit plan together with the amount of the reserves and liabilities for the general account contract(s) held by or on behalf of any other employee benefit plans maintained by the same employer (or affiliate thereof as defined in PTE 95-60) or by the same employee organization in the general account do not exceed 10% of the total reserves and liabilities of the general account (exclusive of separate account liabilities) plus surplus as set forth in the NAIC Annual Statement filed with such Purchaser’s state of domicile; or
(b) the Source is a separate account that is maintained solely in connection with such Purchaser’s fixed contractual obligations under which the amounts payable, or credited, to any employee benefit plan (or its related trust) that has any interest in such separate account (or to any participant or beneficiary of such plan (including any annuitant)) are not affected in any manner by the investment performance of the separate account; or
(c) the Source is either (i) an insurance company pooled separate account, within the meaning of PTE 90-1 or (ii) a bank collective investment fund, within the meaning of the PTE 91-38 and, except as disclosed by such Purchaser to the Company in writing pursuant to this clause (c), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; or
(d) the Source constitutes assets of an “investment fund” (within the meaning of Part V of PTE 84-14 (the “ QPAM Exemption ”)) managed by a “qualified professional asset manager” or “QPAM” (within the meaning of Part V of the QPAM Exemption), no employee benefit plan’s assets that are included in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Section V(c)(1) of the QPAM Exemption) of such employer or by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, the conditions of Part I(c) and (g) of the QPAM Exemption are satisfied as of the last day of the most recent calendar quarter, the QPAM does not own a 10% or more interest in the Company and no Person controlling or controlled by the QPAM (applying the definition of “control” in Section V(e) of the QPAM Exemption) owns a 20% or more interest in the Company (or less than 20% but greater than 10% if such Person exercises control over the management or policies of the Company by reason of its ownership interest) and (i) the identity of such QPAM and (ii) the names of all employee benefit plans whose assets are included in such investment fund have been disclosed to the Company in writing pursuant to this clause (d); or
 
S CHEDULE A-15
(To Note Purchase Agreement)

(e) the Source constitutes assets of a “plan(s)” (within the meaning of Section IV of PTE 96-23 (the “ INHAM Exemption ”)) managed by an “in-house asset manager” or “INHAM” (within the meaning of Part IV of the INHAM Exemption), the conditions of Part I(a), (g) and (h) of the INHAM Exemption are satisfied, neither the INHAM nor a person controlling or controlled by the INHAM (applying the definition of “control” in Section IV(d) of the INHAM Exemption) owns a 5% or more interest in the Company and (i) the identity of such INHAM and (ii) the name(s) of the employee benefit plan(s) whose assets constitute the Source have been disclosed to the Company in writing pursuant to this clause (e); or
(f) the Source is a governmental plan; or
(g) the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this clause (g); or
(h) the Source does not include assets of any employee benefit plan, other than a plan exempt from the coverage of ERISA.
As used in this Section 6.2 , the terms “ employee benefit plan , ” “ governmental plan, ” and “ separate account ” shall have the respective meanings assigned to such terms in section 3 of ERISA.
SECTION 7. INFORMATION.
Section 7.1 Financial and Business Information . The Company shall deliver, and shall cause Sharyland to deliver, to each Holder of Notes:
(a) Quarterly Statements — within 45 days after the end of each quarterly fiscal period in each calendar year of such Person and its Subsidiaries (excluding the last quarterly fiscal period of each such calendar year), duplicate copies of
(i) balance sheets of such Person and its Subsidiaries on a consolidated basis as at the end of such quarter, and
(ii) profit and loss statements and cash flows statements for such Person and its Subsidiaries on a consolidated basis for such quarter and (in the case of the second and third quarters) for the portion of the calendar year ending with such quarter,
setting forth in each case in comparative form the figures for the corresponding periods in the previous calendar year, all in reasonable detail, prepared in accordance with GAAP applicable to quarterly financial statements generally, and certified by a Senior Financial Officer of such Person as fairly presenting, in all material respects, the financial position of the companies being reported on and their results of operations and cash flows, subject to changes resulting from year-end adjustments;
(b) Annual Statements — within 105 days after the end of each calendar year of the Company and Sharyland, duplicate copies of
 
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(i) balance sheets of such Person on a consolidated basis as at the end of such year, and
(ii) statements of income, profit and loss statements and cash flows statements for such Person on a consolidated basis for such year,
setting forth in each case in comparative form the figures for the previous calendar year, all in reasonable detail, prepared in accordance with GAAP, and accompanied by
(A) an opinion thereon of Ernst & Young LLP or another independent public accounting firm of nationally recognized standing selected by the Company (herein, the “ Approved Accountant ”), which opinion shall state that such financial statements present fairly, in all material respects, the financial position of the companies being reported upon and their results of operations and cash flows and have been prepared in conformity with GAAP, and that the examination of the Approved Accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and that such audit provides a reasonable basis for such opinion in the circumstances, and
(B) a certificate of the Approved Accountants stating that they have reviewed this Agreement and stating further whether, in making their audit, they have become aware of any condition or event that then constitutes a Default or an Event of Default, and, if they are aware that any such condition or event then exists, specifying the nature and period of the existence thereof (it being understood that the Approved Accountants shall not be liable, directly or indirectly, for any failure to obtain knowledge of any Default or Event of Default unless the Approved Accountants should have obtained knowledge thereof in making an audit in accordance with generally accepted auditing standards or did not make such an audit);
(c) Other Reports — promptly upon their becoming available, and to the extent not otherwise required to be delivered pursuant to another provision of this Agreement, one copy of (i) each financial statement and budget and such other reports and notices as a Holder may reasonably request sent by the Company or Sharyland to its members or partners, (ii) each report or filing (without exhibits except as expressly requested by such Holder) other than regular and periodic reports and filings made by the Company, Sharyland, New Owner or New Operator to any state or Federal regulatory body;
(d) Notice of Default or Event of Default — promptly, and in any event within 5 Business Days after a Responsible Officer becoming aware of the existence of any Default or Event of Default or that any Person has given any notice or taken any action with respect to a claimed default hereunder or that any Person has given any notice or taken any action with respect to a claimed default of the type referred to in Section 11(f) , a written notice specifying the nature and period of existence thereof and what action the Company or New Owner is taking or proposes to take with respect thereto;
 
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(e) Audit Reports — promptly, and in any event within 5 Business Days after receipt the results of any non-routine audit reports relating to the Company, Sharyland, New Owner or New Operator;
(f) ERISA Matters — promptly, and in any event within 5 Business Days after a Responsible Officer becoming aware of any of the following, a written notice setting forth the nature thereof and the action, if any, that the Company or an ERISA Affiliate proposes to take with respect thereto:
(i) with respect to any Plan, any reportable event, as defined in section 4043(c) of ERISA and the regulations thereunder, for which notice thereof has not been waived pursuant to such regulations as in effect on the date hereof; or
(ii) the taking by the PBGC of steps to institute, or the threatening by the PBGC of the institution of, proceedings under section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Company or any ERISA Affiliate of a notice from a Multi-employer Plan that such action has been taken by the PBGC with respect to such Multi-employer Plan; or
(iii) any event, transaction or condition that could result in the incurrence of any liability by the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or such penalty or excise tax provisions, if such liability or Lien, taken together with any other such liabilities or Liens then existing, could reasonably be expected to have a Material Adverse Effect;
(g) Notices from Governmental Authority — promptly, and in any event within 5 Business Days of receipt (or knowledge) thereof copies of any notice to the Company, any Subsidiary, Sharyland or New Operator from any Federal or state Governmental Authority relating to any order, ruling, statute or other law or regulation that could reasonably be expected to have a Material Adverse Effect;
(h) Other Notices — promptly, and in any event within 5 Business Days of receipt (or knowledge by a Responsible Officer of the Company) thereof:
(i) any press releases and other statements made available generally by any of the Company, any Subsidiary, Sharyland or New Operator to the public concerning developments that are material to the Company, Sharyland or any of their Subsidiaries;
(ii) notice of the occurrence of any condition or event that could reasonably be expected to result in a Material Adverse Effect;
(iii) copies of any notice of a violation or an event of default under any Material Project Document;
 
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(iv) any actual termination or rescission or any written threat of termination or rescission of any Material Project Document, any amendment of or waiver under any Material Project Document;
(v) any material pending or threatened adversarial or contested proceeding of or before a Governmental Authority relating to the System or the System Lease, the Acquired System or the New Lease, or the FERC Assets;
(vi) any termination, suspension or other loss of any Required Permit, other than a termination of a Required Permit in accordance with its terms so long as the permit, if it is a Required Permit, is replaced on a timely basis so as not to interrupt operation of the System, the Acquired System or the FERC Assets;
(vii) any litigation or proceeding taken or threatened in writing against the Company, Sharyland or any of their Subsidiaries, that, if successful, could reasonably be expected to result in a Material Adverse Effect;
(viii) any Force Majeure Event or other claim of force majeure under any Material Project Document; and
(ix) copies of any notices delivered by the lessee under the System Lease or the New Lease;
(i) Annual Operating Budgets — As soon as available and in any event within 30 days after the close of each fiscal year of each of Sharyland and the Company, the annual budget of each of Sharyland and the Company.
(j) Information Required by Rule 144A — upon the request of such Holder (and shall deliver to any qualified institutional buyer designated by such Holder), such financial and other information as such Holder may reasonably determine to be necessary in order to permit compliance with the information requirements of Rule 144A under the Securities Act in connection with the resale of Notes, except at such times as the Company is subject to the reporting requirements of section 13 or 15(d) of the Exchange Act (for the purpose of this Section 7.1(j) , the term “qualified institutional buyer” shall have the meaning specified in Rule 144A under the Securities Act); and (k)  Requested Information — with reasonable promptness, such other data and information relating to the business, operations, affairs, financial condition, assets or properties of the Company or relating to the ability of the Company to perform its obligations hereunder and under the Notes as from time to time may be reasonably requested by any such Holder of Notes.
Section 7.2 Officer’s Certificate . Each set of financial statements delivered pursuant to Section 7.1(a) or Section 7.1(b) shall be accompanied by a certificate of a Senior Financial Officer setting forth:
(a) Covenant Compliance — the information (including detailed calculations) required in order to establish whether the Company was in compliance with the requirements of
 
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Sections 9.9 , 10.6 and 10.9 of this Agreement, during the quarterly or annual period covered by the statements then being furnished (including with respect to each such Section, where applicable, the calculations of the maximum or minimum amount, ratio or percentage, as the case may be, permissible under the terms of such Sections, and the calculation of the amount, ratio or percentage then in existence); and
(b) Event of Default — a statement that such Senior Financial Officer has reviewed the relevant terms hereof and has made, or caused to be made, under his or her supervision, a review of the transactions and conditions of the Company from the beginning of the quarterly or annual period covered by the statements then being furnished to the date of the certificate and that such review shall not have disclosed the existence during such period of any condition or event that constitutes a Default or an Event of Default or, if any such condition or event existed or exists (including, without limitation, any such event or condition resulting from the failure of the Company to comply with any Environmental Law), specifying the nature and period of existence thereof and what action the Company shall have taken or proposes to take with respect thereto.
Section 7.3 Visitation . The Company shall permit, and shall cause Sharyland, New Owner and New Operator to permit, the representatives of each Holder of Notes that is an Institutional Investor:
(a) No Default — if no Default or Event of Default then exists, at the expense of such Holder (or in the case of the Collateral Agent, the Holders) and upon reasonable prior notice, to visit the principal executive office of such Person, to discuss the affairs, finances and accounts of such Person with such Person’s officers, and (with the consent of such Person, which consent will not be unreasonably withheld) its independent public accountants, and (with the consent of such Person, which consent will not be unreasonably withheld) to visit the other offices and properties of such Person, all at such reasonable times and as often as may be reasonably requested in writing; and
(b) Default — if a Default or Event of Default then exists, at the expense of the Company to visit and inspect any of the offices or properties of such Person, to examine all their respective books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers and independent public accountants (and by this provision the Company authorizes said accountants to discuss the affairs, finances and accounts of the Company), all at such times and as often as may be reasonably requested.
SECTION 8. PAYMENT AND PREPAYMENT OF THE NOTES.
Section 8.1 Amortization; Maturity . On each Payment Date, the Company will prepay the principal amounts set forth in the amortization schedule attached hereto as Schedule 8.1 (the “Amortization Schedule”) (or such lesser principal amount as shall then be outstanding) of the Notes at par and without payment of the Yield-Maintenance Amount or any premium, provided that upon any partial prepayment of the Notes pursuant to Section 8.2 , the principal amount of each required prepayment of the Notes becoming due under this Section 8.1 on and after the date of such prepayment shall be reduced in the same proportion as the aggregate unpaid principal amount of the Notes is reduced as a result of the prepayment. The entire unpaid principal balance of the Notes shall be due and payable on the Maturity Date.
 
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Section 8.2 Optional Prepayments with Yield-Maintenance Amount . The Company may, at its option, upon notice as provided below, prepay at any time all, or from time to time any part of, the Notes, in an amount not less than $1,000,000 in the case of a partial prepayment, at 100% of the principal amount so prepaid, and the Yield-Maintenance Amount determined for the prepayment date with respect to such principal amount. The Company will give each Holder of Notes written notice of each optional prepayment under this Section 8.2 not less than 30 days and not more than 60 days prior to the date fixed for such prepayment. Each such notice shall specify such date (which shall be a Business Day), the aggregate principal amount of the Notes to be prepaid on such date, the principal amount of each Note held by such Holder to be prepaid (determined in accordance with Section 8.3) , and the interest to be paid on the prepayment date with respect to such principal amount being prepaid, and shall be accompanied by a certificate of a Senior Financial Officer as to the estimated Yield-Maintenance Amount due in connection with such prepayment (calculated as if the date of such notice were the date of the prepayment), setting forth the details of such computation. Two Business Days prior to such prepayment, the Company shall deliver to each Holder of Notes a certificate of a Senior Financial Officer specifying the calculation of such Yield-Maintenance Amount as of the specified prepayment date.
Section 8.3 Allocation of Partial Prepayments . In the case of each partial prepayment of the Notes, the principal amount of the Notes to be prepaid shall be allocated among all of the Notes at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof not theretofore called for prepayment.
Section 8.4 Maturity; Surrender, Etc . In the case of each prepayment of Notes pursuant to this Section 8, the principal amount of each Note to be prepaid shall mature and become due and payable on the date fixed for such prepayment (which shall be a Business Day), together with interest on such principal amount accrued to such date and the applicable Yield-Maintenance Amount, if any. From and after such date, unless the Company shall fail to pay such principal amount when so due and payable, together with the interest and Yield-Maintenance Amount, if any, as aforesaid, interest on such principal amount shall cease to accrue. Any Note paid or prepaid in full shall be surrendered to the Company and cancelled and shall not be reissued, and no Note shall be issued in lieu of any prepaid principal amount of any Note.
Section 8.5 Purchase of Notes . The Company will not and will not permit any Affiliate to purchase, redeem, prepay or otherwise acquire, directly or indirectly, any of the outstanding Notes except (a) upon the payment or prepayment of the Notes in accordance with the terms of this Agreement and the Notes or (b) pursuant to Section 13.2(b) ; provided that if an Affiliate which does not Control and is not Controlled by the Company has so acquired any of the outstanding Notes, such acquisition shall not constitute an Event of Default. The Company will promptly cancel all Notes acquired by it or any Affiliate pursuant to any payment or prepayment of Notes pursuant to any provision of this Agreement and no Notes may be issued in substitution or exchange for any such Notes.
 
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Section 8.6 Yield-Maintenance Amount .
“ Yield-Maintenance Amount ” means, with respect to any Note, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Note over the amount of such Called Principal, provided that the Yield-Maintenance Amount may in no event be less than zero. For the purposes of determining the Yield-Maintenance Amount, the following terms have the following meanings:
“ Called Principal ” means, with respect to any Note, the principal of such Note that is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1 , as the context requires.
“ Discounted Value ” means, with respect to the Called Principal of any Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Notes is payable) equal to the Reinvestment Yield with respect to such Called Principal.
“ Reinvestment Yield ” means, with respect to the Called Principal of any Note, 0.50% over the yield to maturity implied by (i) the yields reported as of 10:00 a.m. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the display designated as “Page PX1” (or such other display as may replace Page PX1) on Bloomberg Financial Markets for the most recently issued actively traded on the run U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or (ii) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable (including by way of interpolation), the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (or any comparable successor publication) for U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date.
In the case of each determination under clause (i) or clause (ii), as the case may be, of the preceding paragraph, such implied yield will be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between (1) the applicable U.S. Treasury security with the maturity closest to and greater than such Remaining Average Life and (2) the applicable U.S. Treasury security with the maturity closest to and less than such Remaining Average Life. The Reinvestment Yield shall be rounded to the number of decimal places as appears in the interest rate of the applicable Note.
“ Remaining Average Life ” means, with respect to any Called Principal, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (a) the principal component of each Remaining Scheduled Payment with respect to such Called Principal by (b) the number of years (calculated to the nearest one-twelfth year) that will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment.
 
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“ Remaining Scheduled Payments ” means, with respect to the Called Principal of any Note, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, provided that if such Settlement Date is not a date on which interest payments are due to be made under the terms of the Notes, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to Section 8.2 or 12.1 .
“ Settlement Date ” means, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1 , as the context requires.
SECTION 9. AFFIRMATIVE COVENANTS.
The Company covenants that so long as any of the Notes are outstanding:
Section 9.1 Compliance with Law . Without limiting Section 10.4 , the Company will, and will cause its Subsidiaries, including New Owner, to comply with all laws, ordinances or governmental rules or regulations to which it is subject, including, without limitation, ERISA, the USA Patriot Act and Environmental Laws, and will obtain and maintain in effect all licenses, certificates, permits, franchises and other governmental authorizations necessary to the ownership of its properties or to the conduct of its businesses to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
Section 9.2 Insurance . The Company will maintain or cause to be maintained and will cause its Subsidiaries, including New Owner, to maintain, with financially sound and reputable insurers, insurance with respect to their respective properties and businesses against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated, but in no event less than the insurance set forth in this Section 9.2 and Schedule 9.2 .
(a) Insurance by the Company : The Company shall procure at its own expense and maintain in full force and effect at all times throughout the term of this Note Purchase Agreement insurance policies with insurance companies rated A-, 9 or higher by A.M. Best, or acceptable to the Required Holders if not so rated, and authorized to do business in the State of Texas.
 
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(b) Amendment of Requirements : The Required Holders may at any time amend the requirements and approved insurance companies described in this Section 9.2 or Schedule 9.2 due to (i) new information not previously known by the Purchasers prior to the Closing Date or (ii) changed circumstances after Closing Date, in which in the reasonable judgment of the Required Holders either renders a required coverage to be materially inadequate or materially reduces the financial ability of the approved insurance companies to pay claims.
(c) Evidence of Insurance : On the Closing Date and on any anniversary thereafter, if so requested by a Holder or the Collateral Agent, the Company shall furnish the Holders and the Collateral Agent with approved certification of all required insurance. Such certification shall be executed by each insurer or by an authorized representative of each insurer where it is not practical for such insurer to execute the certificate itself. Such certification shall identify underwriters, the type of insurance, the insurance limits, and the policy term, and shall specifically list the special provisions enumerated for such insurance required by this Section 9.2 . Upon request, the Company will promptly furnish the Holders and the Collateral Agent with copies of all insurance certificates, binders, and cover notes or other evidence of such insurance relating to the Collateral.
(d) Insurance Report : Concurrently with the furnishing of the certification referred to in Section 9.2(c) and on an annual basis thereafter, the Company shall furnish the Holders with a certificate, signed by a Responsible Officer of the Company, stating that all premiums then due have been paid and that the insurance then carried or to be renewed is in accordance with the terms of this Section 9.2 . and Schedule 9.2 .
(e) Failure to Maintain Insurance : In the event the Company fails to take out or maintain the full insurance coverage required by this Section 9.2 and Schedule 9.2 , the Required Holders, upon thirty (30) days’ prior notice (unless the aforementioned insurance would lapse within such period, in which event notice should be given as soon as reasonably possible) to the Company of any such failure, may (but shall not be obligated to) take out (or cause the Collateral Agent to take out) the required policies of insurance and pay the premiums on the same. All amounts so advanced thereof by the Holders (or the Collateral Agent) shall become an additional obligation of the Company to the Holders (or the Collateral Agent), and the Company shall forthwith pay such amounts to the Holders (or the Collateral Agent).
(f) No Duty of Purchaser to Verify : No provision of this Section 9.2 or Schedule 9.2 or any other provision of this Agreement, any other Financing Document or any Material Project Document shall impose on the Holders or the Collateral Agent any duty or obligation to verify the existence or adequacy of the insurance coverage maintained by the Company, nor shall the Holders or the Collateral Agent be responsible for any representations or warranties made by or on behalf of the Company to any insurance company or underwriter.
Section 9.3 Maintenance of Properties . The Company will, and will cause its Subsidiaries, including New Owner, to, maintain and keep, or cause to be maintained and kept, their respective properties in good repair, working order and condition (other than ordinary wear and tear), so that the business carried on in connection therewith may be properly conducted at all times. The Company shall, and shall cause Sharyland, New Owner and New Operator, as applicable, to operate and maintain the System, including the Acquired System, and the FERC Assets in accordance with, and make all repairs, alterations, additions and replacements which are necessary for the System, including the Acquired System, and the FERC Assets to meet, all Requirements of Law, including all Required Permits, all requirements of the Transaction Documents and Good Utility Practices.
 
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Section 9.4 Payment of Taxes and Claims . The Company will, and will cause each of its Subsidiaries, including New Owner, to, file all tax returns required to be filed in any jurisdiction and to pay and discharge all taxes shown to be due and payable on such returns and all other taxes, assessments, governmental charges, or levies imposed on them or any of their properties, assets, income or franchises, to the extent the same have become due and payable and before they have become delinquent and all claims for which sums have become due and payable that have or might become a Lien on properties or assets of the Company or any Subsidiary, including New Owner, provided that none of the Company or any Subsidiary, including New Owner, need pay any such tax, assessment, charge, levy or claim if (i) the amount, applicability or validity thereof is contested by such Person on a timely basis in good faith and in appropriate proceedings, and such Person has established adequate reserves therefor in accordance with GAAP on its books or (ii) the nonpayment of all such taxes, assessments, charges, levies and claims in the aggregate could not reasonably be expected to have a Material Adverse Effect.
Section 9.5 Existence, Etc . The Company will at all times preserve and keep in full force and effect its limited liability company existence and all rights and franchises of the Company unless, in the good faith judgment of the Company, the termination of or failure to preserve and keep in full force and effect such corporate existence, right or franchise could not, individually or in the aggregate, have a Material Adverse Effect. The Company will cause each of its Subsidiaries, including New Owner, to at all times preserve and keep in full force and effect its limited liability company, corporate or limited partnership existence, except as permitted pursuant to Section 10.2 .
Section 9.6 Books and Records . The Company will, and will cause each of its Subsidiaries, Sharyland and New Operator to, maintain proper books of record and account in conformity with GAAP and all applicable requirements of any Governmental Authority having legal or regulatory jurisdiction over such Person.
Section 9.7 Collateral; Further Assurances . (a) The Company shall take all actions necessary to insure that the Collateral Agent, on behalf of the Secured Parties, has and continues to have in all relevant jurisdictions duly and validly created, attached, perfected and enforceable first-priority Liens on the Collateral described in the Security Documents (including, in accordance with clauses (c) and (d) of this Section 9.7 , after-acquired Collateral), subject to no Liens other than Permitted Liens and rights of holders of Permitted Secured Indebtedness in compliance with the Collateral Agency Agreement. The Company shall cause the Obligations to constitute direct senior secured obligations of the Company and to rank senior in priority of payment, in right of security and in all other respects to all other Indebtedness of the Company (other than Permitted Secured Indebtedness, with which it shall be pari passu in accordance with the terms of the Collateral Agency Agreement).
(b) Upon completion of each New Project, the Company may cause its Project Finance Subsidiary to Transfer the New Project to the Company and shall take all actions necessary to insure that (i) the New Project becomes a part of the Collateral, subject to the first priority Lien of the Security Documents (subject to no Liens other than Permitted Liens), (ii) no
 
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Default or Event of Default occurs as a result of such Transfer, (iii) the Indebtedness of the Project Finance Subsidiary is either repaid in full at the time of the Transfer or becomes Permitted Secured Indebtedness, and (iv) the Project Finance Subsidiary is terminated or merged with and into the Company.
(c) If, after the Closing Date, the Company acquires or leases any real property (other than an easement), the value (or aggregate rental costs) of which exceeds $1,000,000, the Company shall forthwith (and in any event, within five Business Days of such acquisition or lease) deliver to the Collateral Agent a fully executed mortgage or deed of trust over such real property, in form and substance satisfactory to the Required Holders and the Collateral Agent, together with such surveys, environmental reports and other documents and certificates with respect to such real estate as may be reasonably required by the Required Holders. The Company further agrees to take all other actions necessary to create in favor of the Collateral Agent for the benefit of the Secured Parties a valid and enforceable first priority Lien on such real estate, free and clear of all Liens except for Permitted Liens and rights of holders of Permitted Secured Indebtedness in compliance with the Collateral Agency Agreement.
(d) If, after the Second Amendment Date, the Company acquires or creates any new Subsidiary that is a Wholly-Owned Subsidiary (other than New Owner, any Subsidiary of the Company that is not organized under the laws of the United States, any state thereof or the District of Columbia, any Project Finance Subsidiary or any other Subsidiary that is prohibited from providing a Guaranty of the Obligations by any Requirement of Law), the Company shall forthwith (and in any event, within 30 days of such creation or acquisition (or such longer time as the Required Purchasers may agree), (i) execute and deliver to the Collateral Agent a Subsidiary Guaranty, (ii) deliver to the Collateral Agent a certificate of such Subsidiary, substantially consistent with those delivered on the Closing Date pursuant to Section 4.3(b) , with appropriate insertions and attachments, (iii) take such actions reasonably necessary or advisable to grant to the Collateral Agent for the benefit of the Secured Parties a perfected and enforceable first-priority Lien in the Collateral described in the Security Documents with respect to such new Subsidiary, subject to no Liens other than Permitted Liens and rights of holders of Permitted Secured Indebtedness in compliance with the Collateral Agency Agreement, and including the filing of UCC financing statements in such jurisdictions as may be required by such Subsidiary Guaranty or by law or as may be reasonably requested by the Collateral Agent, (iv) deliver to the Collateral Agent the stock certificates (if any) representing equity interests issued by such Subsidiary, together with undated stock (or other transfer) powers, in blank, executed and delivered by a duly authorized officer of the Company, and (v) if reasonably requested by the Collateral Agent, deliver to the Collateral Agent legal opinions relating to the matters described above, which opinions shall be in form and substance reasonably satisfactory to the Collateral Agent.
Section 9.8 Material Project Documents . (a) The Company shall at all times (i) perform and observe all of the covenants under the Material Project Documents to which it is a party, (ii) take reasonable actions to enforce all of its rights and obligations thereunder, and (iii) maintain the Material Project Documents in full force and effect.
 
S CHEDULE A-26
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(b) Upon expiration or termination of the initial or any renewal term of the System Lease or the New Lease (or any supplement or new lease entered into in replacement thereof in accordance with this Section 9.8(b) ), the Company shall, or shall cause New Owner to, enter into a supplement or new lease with respect to the Acquired System or the FERC Assets, as applicable: (i) having an initial term of at least five years, (ii) providing for renewal terms, (iii) requiring payment of a base rent that is sufficient during the initial and all renewal terms of such supplement or new lease to enable the Company to pay Debt Service with respect to the Notes when due, and (iv) (x) substantially in the form of the existing System Lease with respect to all non-economic provisions; provided that notwithstanding the foregoing, provisions that are administrative or ministerial in nature and provisions that are of an inconsequential nature and which do not adversely affect any Holder or which satisfy any requirements, conditions or guidelines contained in any order, directive, opinion, ruling or regulation of a Federal or state agency or contained in Federal or state law shall be deemed to be substantially in the form of the existing System Lease, or (y) otherwise in form and substance satisfactory to the Required Holders, which consent shall not be unreasonably withheld. If the Required Holders have a consent right pursuant to clause (iv)(y) hereof, the Holders shall make commercially reasonable efforts to respond to the Company’s request for such review within ten business days, provided that failure to so respond shall not be deemed a consent to such supplement or new lease.
Section 9.9 Financial Ratios . (a) The Company shall at all times maintain, on a consolidated basis, a Total Debt to Capitalization Ratio of not more than 0.65 to 1.00.
(b) The Company shall maintain, for each period of four consecutive fiscal quarters, a Debt Service Coverage Ratio of at least 1.40 to 1.00; provided that for purposes of this Section 9.9(b) , the Debt Service Coverage Ratio shall be deemed to be 1.40 to 1.00 for the three calendar quarters ending December 31, 2009, March 31, 2010 and June 30, 2010.
SECTION 10. NEGATIVE COVENANTS.
The Company covenants that so long as any of the Notes are outstanding:
Section 10.1 Transactions with Affiliates . The Company will not and will not permit any Subsidiary (including New Owner), Sharyland or New Operator to enter into directly or indirectly any transaction or group of related transactions (including without limitation the purchase, lease, sale or exchange of properties of any kind or the rendering of any service) with any Affiliate (other than (i) in the case of the Company, a Project Finance Subsidiary, as permitted by Section 9.7(b) , (ii) in the case of Sharyland, pursuant to (x) the System Lease and (y) the SP Lease, (iii)in the case of New Owner and New Operator, pursuant to the New Lease or (iv) the Sharyland Affiliate Loan), except in the ordinary course and upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would be obtained in a comparable arms-length transaction with a Person not an Affiliate.
Section 10.2 Merger, Consolidation, Etc . The Company will not nor will it cause or permit any of its Subsidiaries to consolidate with or merge with any other Person or convey, transfer or lease all or substantially all of its assets in a single transaction or series of transactions to any Person, except (i) pursuant to the System Lease, the SP Lease or the New Lease, (ii) as permitted pursuant to Section 9.7(b) , (iii) as part of the Cap Rock Transaction or (iv) that so long as after giving effect to such merger or consolidation no Default or Event of Default shall have
 
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occurred or will result therefrom, the Company or any Subsidiary may merge or consolidate with another Person, so long as, after giving effect to such merger or consolidation, with respect to any merger or consolidation to which the Company is a party, the Company shall be the surviving entity, and with respect to any merger or consolidation to which a Subsidiary is a party but the Company is not, a Subsidiary shall be the surviving entity.
Section 10.3 Line of Business . The Company will not and will not permit any Subsidiary, including New Owner, to engage in any business if, as a result, the general nature of the business in which the Company and its Subsidiaries, including New Owner, taken as a whole, would then be engaged would be substantially changed from the transmission and distribution of electric power and the provision of ancillary services.
Section 10.4 Terrorism Sanctions Regulations . The Company will not and will not permit any Member or Subsidiary to (a) become a Person described or designated in the Specially Designated Nationals and Blocked Persons List of the Office of Foreign Assets Control or in Section 1 of the Anti-Terrorism Order or (b) engage in any dealings or transactions with any such Person.
Section 10.5 Liens . The Company will not, nor will it cause or permit any Subsidiary, including New Owner, to, directly or indirectly create, incur, assume or permit to exist (upon the happening of a contingency or otherwise) any Lien on or with respect to the Collateral or any other property of the Company or such Subsidiary, including New Owner, whether now owned or held or hereafter acquired, or any income or profits therefrom, or assign or otherwise convey any right to receive income or profits, or on any other asset now owned or hereafter acquired by the Company or such Subsidiary, except (each, a “Permitted Lien”):
(a) solely in the case of the Company, Liens created by the Financing Documents on assets of the Company; and
(b) solely in the case of a Project Finance Subsidiary, Liens on assets owned by that Project Finance Subsidiary and on the ownership interests in that Project Finance Subsidiary to secure its Non-Recourse Debt;
(c) Liens permitted pursuant to the terms of the Security Documents;
(d) Liens for taxes, assessments or other governmental charges which are not yet due and payable or the payment of which is not at the time required by Section 9.4 ;
(e) any attachment or judgment Lien, unless such attachment or judgment Lien constitutes an Event of Default under Section 11(l) hereof;
(f) Liens existing on the date of this Agreement and securing the Indebtedness of the Company referred to in Schedule 5.16 hereto;
(g) Liens of a lessor of equipment to the Company or any Subsidiary, including New Owner, on such lessor’s leased equipment (but excluding equipment leased pursuant to a Capital Lease), including any of the foregoing which is evidenced by a protective Uniform Commercial Code filing;
 
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(h) Mechanics’, warehousemen’s, carriers’, workers’, repairers’, landlords’, and other similar liens arising or incurred in the ordinary course of business and (i) which do not in the aggregate materially detract from the value of property or assets subject to such Liens or materially impair the continued use thereof in the operation of the business or (ii) which are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property or asset subject to such Liens, or other Liens incurred or deposits made in the ordinary course of business in connection with workers’ compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, trade contracts, leases, government contracts, performance and return-of-money bonds and other similar obligations incurred in the ordinary course of business (exclusive of obligations in respect of the payment for borrowed money);
(i) zoning, entitlement, restriction, and other land use and environmental regulations by Governmental Authorities and encroachments, easements, rights of way, covenants, restrictions or agreements which do not materially interfere with the continued use of any asset as currently used in the conduct of the business;
(j) any encumbrances set forth in any franchise or governing ordinance under which any portion of the business is conducted which could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect;
(k) all rights of condemnation, eminent domain, or other similar right of any Person; and
(l) Liens securing Permitted Secured Indebtedness.
Section 10.6 Indebtedness . The Company will not, and will not cause or permit any Subsidiary or Sharyland or New Operator to, incur or in any manner become or be liable in respect of any Indebtedness, except the following Indebtedness, which may be incurred subject to the requirements of the last paragraph of this section:
(a) Indebtedness evidenced by the Financing Documents;
(b) Indebtedness of the Company that (i) that is not related to, and does not support, Non-Recourse Debt of a Project Finance Subsidiary and (ii) if incurred, would not result in a breach of Section 9.9 ;
(c) (i) Non-Recourse Debt incurred by a Project Finance Subsidiary to fund a New Project and (ii) Indebtedness of a Wholly-Owned Subsidiary (other than a Project Finance Subsidiary) owed to the Company;
(d) Indebtedness of Sharyland in an aggregate principal amount of up to (i) $5,000,000 on a senior secured basis and (ii) $10,000,000 on an unsecured subordinated basis on terms substantially similar to the terms set forth on Exhibit 2 hereto, in each case to the extent allowed under the System Lease;
 
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(e) Indebtedness of the New Owner allowed under the New Lease in an aggregate amount up to $1,000,000 at any one time outstanding; or
(f) Indebtedness of the Company to any of its Wholly-Owned Subsidiaries (other than a Project Finance Subsidiary), which by its terms is expressly subordinated to the Notes, and Indebtedness of any Wholly-Owned Subsidiary (other than a Project Finance Subsidiary) to the Company or any other Wholly-Owned Subsidiary of the Company (other than a Project Finance Subsidiary) not to exceed $5,000,000 at any one time outstanding and in each case to have a maturity date of less than one year later; and
(g) the Sharyland Affiliate Loan.
Indebtedness may be incurred under this Section 10.6 only if no Default or Event of Default is, or as a result of such incurrence would be, existing.
Section 10.7 Loans, Advances, Investments and Contingent Liabilities . The Company will not make or permit to remain outstanding any loan or advance to, or extend credit other than credit extended in the ordinary course of business to any Person, or own, purchase or acquire any stock, obligations or securities of, or any other interest in, or make any capital contribution to, any Person, or commit to do any of the foregoing, except (a) Permitted Investments, (b) equity interests in Project Finance Subsidiaries, or (c) loans to or equity interests in Wholly-Owned Subsidiaries (other than Project Finance Subsidiaries).
Section 10.8 No Subsidiaries . The Company shall have no subsidiaries other than Project Finance Subsidiaries and other Wholly-Owned Subsidiaries. The Company shall give the Holders notice 5 Business Days prior to creating any new Subsidiaries.
Section 10.9 Restricted Payments . The Company will not, directly or indirectly, make or declare any Distribution unless there does not exist and, after giving effect to the proposed Distribution, there will not exist, a Default or an Event of Default. The Company shall deliver to the Holders and the Collateral Agent before a Distribution is made a certificate of a Responsible Officer of the Company stating that the foregoing condition has been satisfied and, if requested, providing supporting data and calculations.
Section 10.10 Sale of Assets, Etc . The Company will not nor will it cause or permit New Operator, Sharyland or any Subsidiary of the Company to transfer, or agree or otherwise commit to Transfer, any of its assets except:
(a) the Company shall lease the System to Sharyland pursuant to the System Lease; the Company shall lease the Acquired System to Sharyland pursuant to the Lease Supplement; and the New Owner shall lease the FERC Assets to New Operator pursuant to the New Lease;
(b) (i) each Project Finance Subsidiary may Transfer the New Project developed and constructed by such Project Finance Subsidiary to the Company upon completion of the New Project in accordance with Section 9.7(b) ; (ii) the Company may Transfer, or suffer the Transfer of, its ownership interests in a Project Finance Subsidiary and such Project Finance Subsidiary may Transfer, or suffer the Transfer of, the New Project developed by it and its other
 
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assets, in each case in connection with and pursuant to the exercise of remedies under the documentation governing Non-Recourse Debt incurred by such Project Finance Subsidiary to finance such New Project; and (iii) SP may lease the CREZ Project pursuant to the SP Lease;
(c) the Company, New Operator, Sharyland and any Subsidiary of any of them may sell assets that are obsolete or no longer used or useful in such Person’s business; and
(d) Transfers contemplated by the Cap Rock Transaction.
Section 10.11 Sale or Discount of Receivables . The Company will not nor will it cause or permit any Subsidiary or New Operator to sell with recourse, or discount or otherwise sell for less than the face value thereof, any of its notes or accounts receivable.
Section 10.12 Amendments to Organizational Documents . The Company will not nor will it cause or permit any of its Subsidiaries, Sharyland or any of Sharyland’s Subsidiaries to amend, supplement, terminate, replace or waive any provision of its operating agreement or other organization documents. Notwithstanding the preceding sentence, each of the Company, its Subsidiaries, Sharyland and Sharyland’s Subsidiaries may, without the consent of the Holders, amend its operating agreement as may be required to facilitate or implement any of the following:
(a) to reflect the contribution of additional capital by its members;
(b) to reflect a change that is of an inconsequential nature and does not adversely affect any Holders in any material respect, or to cure any ambiguity, or correct or supplement any provision, not inconsistent with law or with the provisions of this Agreement;
(c) to satisfy any requirements, conditions, or guidelines contained in any order, directive, opinion, ruling or regulation of a Federal or state agency or contained in Federal or state law; and
(d) to take actions to avoid any material adverse consequences to such Person as a result of any change in law or interpretation of law applicable to Persons subject to regulation by the PUCT and FERC.
The Company will provide notice to the Holders at least 5 Business Days prior to taking any such action under the foregoing sentence of this Section 10.12 .
Section 10.13 Sale and Lease-Back . Except for the System Lease, the SP Lease and the New Lease, the Company will not, nor will it cause or permit any Subsidiary to, enter into any arrangement providing for the leasing by the Company or any Subsidiary of real or personal property which has been or is to be Transferred by the Company or Subsidiary to a lender or investor or to any Person to whom funds have been or are to be advanced by such lender or investor on the security of such property or rental obligations of the Company or any Subsidiary.
 
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Section 10.14 ERISA Compliance .
(a) Relationship of Vested Benefits to Plan Assets. The Company will not as of the last day of any calendar year permit the aggregate funding ratio (as described in Section 5.13) under all Plans, determined in accordance with Title IV of ERISA, to be less than 80%. The Company and its ERISA Affiliates will not incur withdrawal liabilities (and will not become subject to contingent withdrawal liabilities) under section 4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate are material.
(b) Valuations. For the purposes of clause (a) above, all assumptions and methods used to determine the actuarial valuation of vested and unvested employee benefits under any Plan at any time maintained by the Company and the present value of assets of any such Plan shall be reasonably consistent with those determinations made for purposes of Section 5.13 .
(c) Prohibited Actions. The Company will not, nor, as applicable, will any Plan at any time maintained by the Company
(i) engage in any non-exempt “ prohibited transaction ” (as such term is defined in Section 406 or Section 2003(a) of ERISA;
(ii) fail to meet the minimum funding standards of Section 302 of ERISA or Sections 412 and 430 of the Code, or seek or obtain a waiver thereof or fail to make any required contribution to a Multiemployer Plan; or
(iii) terminate any such Plan in a manner which could result in the imposition of a Lien on the Property of the Company pursuant to Section 4068 of ERISA.
Section 10.15 No Margin Stock . Anything herein contained to the contrary notwithstanding, the Company will not, nor will it permit any Subsidiary to, make or authorize any investment in, or otherwise purchase or carry, any margin stock.
Section 10.16 Project Documents .
(a) The Company will not amend, modify, supplement, replace, terminate or waive any provision of any Material Project Document to which it is party, or consent to any amendment, modification, supplement, replacement, termination or waiver of any Material Project Document, except that (i) the Company, Sharyland, New Owner and New Operator may enter into “Lease Supplements” as contemplated by the System Lease and the New Lease in accordance with Section 9.8(b) , and (ii) the Company may enter into modifications of Material Project Documents that are merely ministerial or corrective in nature and, with respect to any covenant contained in any Material Project Document which corresponds to a covenant contained in this Agreement, may amend or modify such covenant so long as such covenant, as so amended or modified, is no more restrictive than the corresponding covenant contained in this Agreement.
(b) The Company shall ensure that Sharyland does not enter into any new lease of transmission or distribution facilities at any time prior to the Maturity Date other than the System Lease, the SP Lease or a lease with a Project Finance Subsidiary of a New Project;
 
S CHEDULE A-32
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provided that for the avoidance of doubt, the foregoing provisions of this sentence shall not prohibit Sharyland from maintaining or entering into replacement leases for, or from amending or modifying, the leases described in Schedule 10.16 .
Section 10.17 Regulation .
(a) Except as permitted in connection with the transactions described in Schedule 10.1 or in subsection (d) below, the Company shall not be or become, nor shall it permit Sharyland to be or become, subject to FERC jurisdiction as a public utility under the FPA; provided, however, that the Company shall not be in default of the forgoing negative covenant if the Company or Sharyland becomes subject to FERC jurisdiction under the FPA solely as a result of a change to the FPA or in FERC’s interpretation thereof or regulations thereunder, if the Company or Sharyland takes all necessary actions to comply with applicable FERC requirements and the operation of the System is uninterrupted;
(b) The Company shall not become subject to regulation under PUHCA except to the extent and in the fashion it is subject to regulation on the Closing Date; provided, however, that the Company shall not be in default of the foregoing negative covenant if the Company becomes subject to additional such regulation solely as a result of a change to the PUHCA or in FERC’s interpretation thereof or the regulations thereunder if the Company takes all necessary actions to comply with PUHCA requirements and the operation of the System is uninterrupted. As a result of the Cap Rock Transaction, Sharyland will become a “holding company” under PUHCA and, together with the holding company system of which it is a part, may be required to submit to FERC a revised notice of holding company status and/or a revised request for waiver of the requirements of 18 C.F.R §§ 366.21, 366.22, and 366.23;
(c) None of the Company nor Sharyland shall violate in any material respect any regulation or order of the Public Utility Commission of Texas applicable to it; and;
(d) None of the Company nor Sharyland shall own, operate or control any electrical generating, transmitting or distribution facility, nor effect or control any sale of electricity, outside of the ERCOT balancing authority area except (i) as permitted by FERC, as set forth in its declaratory order issued in Docket no. EL07-93-000 or (ii) interconnected transmission or distribution assets or systems located substantially in the State of Texas or deriving a majority of their revenue from customers within the State of Texas.
Section 10.18 Swaps . The Company will not, nor will it permit any Subsidiary, including New Owner, to, enter into any Swap Contracts, except that the Company may enter into Swap Contracts solely to hedge interest rate risk and not for speculative purposes.
Section 10.19 Most Favored Lender . If the Company shall, after the date hereof, enter into, assume or otherwise become bound or obligated under any agreement creating or evidencing Indebtedness containing one or more Additional Covenants or Additional Defaults, the terms of this Agreement shall, without any further action on the party of the Company or any of the Holders of the Notes, be deemed to be amended automatically to include each Additional Covenant and each Additional Default contained in such agreement. The Company shall promptly execute and deliver at its expense (including the fees and expenses of counsel for the
 
S CHEDULE A-33
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Holders of the Notes) an amendment to this Agreement in form and substance satisfactory to the Required Holders evidencing the amendment of this Agreement to include such Additional Covenants and Additional Defaults, it being understood that the execution and delivery of such amendment shall not be a precondition to the effectiveness of such amendment as provided for in this Section 10.19, but shall merely be for the convenience of the parties hereto.
SECTION 11. EVENTS OF DEFAULT .
An “Event of Default” shall exist if any of the following conditions or events shall occur and be continuing:
(a) the Company defaults in the payment of any principal or Yield-Maintenance Amount, if any, on any Note when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise; or
(b) the Company defaults in the payment of any interest on any Note for more than five days after the same becomes due and payable; or
(c) the Company defaults in the performance of or compliance with any term contained in Section 7.1(d) , Section 9.2 , 9.9 or Section 10 ; or
(d) the Company defaults in the performance of or compliance with any term contained herein (other than those referred to in Sections 11(a) , (b)  and (c) ) or in any other Financing Document (other than those referred to in another paragraph of this Section 11) and such default is not remedied within 30 days after the earlier of (i) a Responsible Officer obtaining actual knowledge of such default and (ii) the Company receiving written notice of such default from the Collateral Agent or Holder of a Note (any such written notice to be identified as a “notice of default” and to refer specifically to this Section 11(d) ); or
(e) any representation or warranty made in writing by or on behalf of the Company or by any officer of the Company in this Agreement or any other Transaction Document or in any writing furnished in connection with the transactions contemplated hereby proves to have been false or incorrect in any material respect on the date as of which made; or
(f) (i) A default or event of default occurs under the System Lease or the New Lease or any other Material Project Document, and such failure continues for more than any cure period specified therefor; or (ii) the System Lease, the New Lease or any other Transaction Document is declared to be null and void or is otherwise unenforceable, or any party thereto claims that any such agreement is unenforceable; or
(g) any Required Permit is lost, terminated without being timely replaced (if the terminated Permit continues to be a Required Permit), revoked or otherwise is not in effect; provided, however, that the termination without immediate renewal of any franchise agreement pursuant to which the Company, a Member, New Owner or New Operator is authorized to operate the System, the Acquired System or the FERC Assets and collect fees for services shall not constitute an Event of Default if the parties to the franchise agreement continue to perform in accordance with the terms of such agreement notwithstanding the termination; or
 
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(h) any Lien granted to the Collateral Agent pursuant to any of the Security Documents is invalid, void, unenforceable or unperfected or ceases to have first priority (subject to Permitted Liens), or any Person commences any proceeding or takes any other action to render any such Lien invalid, or to avoid any such Lien or to render any such Lien unenforceable or unperfected or to challenge the priority of such Lien, or an event of default occurs under any Indebtedness that is secured in whole or in part by the Collateral Agency Agreement, or any Person party to the Collateral Agency Agreement fails to comply with the terms thereof or commences any proceeding or takes any other action to render any part of the Collateral Agency Agreement unenforceable; or
(i) without limiting clause (h), (i) the Company, Sharyland, New Owner or New Operator is in default (as principal or as guarantor or other surety) in the payment of any principal of or premium or make-whole amount or interest on any Indebtedness that is outstanding in an aggregate principal amount of at least $10,000,000 ($2,000,000 in the case of Sharyland, New Owner or New Operator) beyond any period of grace provided with respect thereto, or (ii) the Company, Sharyland, New Owner or New Operator is in default in the performance of or compliance with any term of any evidence of any Indebtedness in an aggregate outstanding principal amount of at least $10,000,000 ($2,000,000 in the case of Sharyland, New Owner or New Operator) or of any mortgage, indenture or other agreement relating thereto or any other condition exists, and as a consequence of such default or condition such Indebtedness has become, or has been declared (or one or more Persons are entitled to declare such Indebtedness to be), due and payable before its stated maturity or before its regularly scheduled dates of payment, or (iii) as a consequence of the occurrence or continuation of any event or condition (other than the passage of time or the right of the holder of Indebtedness to convert such Indebtedness into equity interests), (x) the Company, Sharyland, New Owner or New Operator has become obligated to purchase or repay Indebtedness before its regular maturity or before its regularly scheduled dates of payment in an aggregate outstanding principal amount of at least $10,000,000 (or $2,000,000 in the case of Sharyland, New Owner or New Operator), or (y) one or more Persons have the right to require the Company, Sharyland, New Owner or New Operator to purchase or repay such Indebtedness, or (iv) a default or an event of default occurs under the 2009 Note Agreement or the RBC Agreement and such failure continues for more than any cure period specified therefor; or
(j) the Company, Sharyland, New Owner or New Operator (i) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes corporate action for the purpose of any of the foregoing; or
(k) a court or Governmental Authority of competent jurisdiction enters an order appointing, without consent by the Company, Sharyland, New Owner or New Operator, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition
 
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for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of any such Person or any such petition shall be filed against any such Person and such petition shall not be dismissed within 90 days; or
(l) a final judgment or judgments for the payment of money aggregating in excess of $10,000,000 ($2,000,000 in the case of Sharyland, New Owner or New Operator) are rendered against such Person (other than judgments payable by the Company, Sharyland, New Owner or New Operator rendered in connection with the condemnations in favor thereof) and which judgments are not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay; or
(m) if (i) any Plan shall fail to satisfy the minimum funding standards of ERISA or the Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under Section 412 of the Code, (ii) a notice of intent to terminate any Plan shall have been or is reasonably expected to be filed with the PBGC or the PBGC shall have instituted proceedings under ERISA section 4042 to terminate or appoint a trustee to administer any Plan or the PBGC shall have notified the Company or any ERISA Affiliate that a Plan may become a subject of any such proceedings, (iii) the aggregate funding ratio (as described in Section 5.11) under all Plans, determined in accordance with Title IV of ERISA as of the last day of any fiscal year, to be less than 80%, (iv) the Company or any ERISA Affiliate shall have incurred or is reasonably expected to incur any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, (v) the Company or any ERISA Affiliate withdraws from any Multiemployer Plan, or (vi) the Company establishes or amends any employee welfare benefit plan that provides post-employment welfare benefits in a manner that would increase the liability of the Company thereunder; and any such event or events described in clauses (i) through (vi) above, either individually or together with any other such event or events, could reasonably be expected to have a Material Adverse Effect; or
(n) (i) Members of the Ray L. Hunt family or trusts for the benefit of the Ray L. Hunt family cease to own and control, directly or indirectly, all of the outstanding equity interests of Sharyland and New Operator, (ii) Sharyland ceases to be the lessee under the System Lease within the initial term of such System Lease (without giving effect to any amendments, supplements or replacements thereof), (iii) Electric Infrastructure Alliance of America, LP shall cease to own or control, directly or indirectly, 90% of the outstanding equity interest of the Company; or members of the Ray L. Hunt family or trusts for the benefit of the Ray L. Hunt family cease to own and control, directly or indirectly, at least 5% of the outstanding equity interests of Electric Infrastructure Alliance of America, LP, unless (x) the general partner of Electric Infrastructure Alliance of America, LP has become a publicly held company, or (y) the Company has total assets on its balance sheet valued at $1,000,000,000 or greater; or
(o) the Company defaults in the performance of or compliance with Section 9.8(b) .
As used in Section 11(m) , the terms “ employee benefit plan ” and “ employee welfare benefit plan ” shall have the respective meanings assigned to such terms in section 3 of ERISA.
 
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SECTION 12. REMEDIES ON DEFAULT, ETC.
Section 12.1 Acceleration . (a) If an Event of Default with respect to the Company described in Section 11(j) or (k)  (other than an Event of Default described in clause (i) of Section 11(j) or described in clause (vi) of Section 11(j) by virtue of the fact that such clause encompasses clause (i) of Section 11(j) ) has occurred, all the Notes then outstanding shall automatically become immediately due and payable.
(b) If any other Event of Default has occurred and is continuing, any Holder or Holders of more than 51% in principal amount of the Notes at the time outstanding may at any time at its or their option, by notice or notices to the Company, declare all the Notes then outstanding to be immediately due and payable.
(c) If any Event of Default described in Section 11(a) or (b)  has occurred and is continuing, any Holder or Holders of Notes at the time outstanding affected by such Event of Default may at any time, at its or their option, by notice or notices to the Company, declare all the Notes held by it or them to be immediately due and payable.
Upon any Notes becoming due and payable under this Section 12.1 , whether automatically or by declaration, such Notes will forthwith mature and the entire unpaid principal amount of such Notes, plus (x) all accrued and unpaid interest thereon (including, but not limited to, interest accrued thereon at the Default Rate) and (y) the Yield-Maintenance Amount determined in respect of such principal amount (to the full extent permitted by applicable law), shall all be immediately due and payable, in each and every case without presentment, demand, protest or further notice, all of which are hereby waived. The Company acknowledges, and the parties hereto agree, that each Holder of a Note has the right to maintain its investment in the Notes free from repayment by the Company (except as herein specifically provided for) and that the provision for payment of a Yield-Maintenance Amount by the Company in the event that the Notes are prepaid or are accelerated as a result of an Event of Default, is intended to provide compensation for the deprivation of such right under such circumstances.
Section 12.2 Other Remedies . If any Default or Event of Default has occurred and is continuing, and irrespective of whether any Notes have become or have been declared immediately due and payable under Section 12.1 , the Holder of any Note at the time outstanding may proceed to protect and enforce the rights of such Holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in any Note, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise.
Section 12.3 Rescission . At any time after any Notes have been declared due and payable pursuant to Section 12.1(b) or (c), the Holders of not less than 51% in principal amount of the Notes then outstanding, by written notice to the Company, may rescind and annul any such declaration and its consequences if (a) the Company has paid all overdue interest on the Notes, all principal of and Yield-Maintenance Amount, if any, on any Notes that are due and payable and are unpaid other than by reason of such declaration, and all interest on such overdue principal and Yield-Maintenance Amount, if any, and (to the extent permitted by applicable law) any overdue interest in respect of the Notes, at the Default Rate, (b) neither the Company nor any
 
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other Person shall have paid any amounts which have become due solely by reason of such declaration, (c) all Events of Default and Defaults, other than non-payment of amounts that have become due solely by reason of such declaration, have been cured or have been waived pursuant to Section 17 , and (d) no judgment or decree has been entered for the payment of any monies due pursuant hereto or to the Notes. No rescission and annulment under this Section 12.3 will extend to or affect any subsequent Event of Default or Default or impair any right consequent thereon.
Section 12.4 No Waivers or Election of Remedies, Expenses, Etc . No course of dealing and no delay on the part of any Holder of any Note in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice such Holder’s rights, powers or remedies. No right, power or remedy conferred by this Agreement or by any Note upon any Holder thereof shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. Without limiting the obligations of the Company under Section 15 , the Company will pay to the Holder of each Note on demand such further amount as shall be sufficient to cover all costs and expenses of such Holder incurred in any enforcement or collection under this Section 12 , including, without limitation, reasonable attorneys’ fees, expenses and disbursements.
SECTION 13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES.
Section 13.1 Registration of Notes . The Company shall keep at its principal executive office a register for the registration and registration of transfers of Notes. The name and address of each Holder of one or more Notes, each transfer thereof and the name and address of each transferee of one or more Notes shall be registered in such register. Prior to due presentment for registration of transfer, the Person in whose name any Note shall be registered shall be deemed and treated as the owner and Holder thereof for all purposes hereof, and the Company shall not be affected by any notice or knowledge to the contrary. The Company shall give to any Holder of a Note that is an Institutional Investor, promptly upon request therefor, a complete and correct copy of the names and addresses of all registered Holders of Notes. In addition to and not in limitation of any representations contained herein, each Holder acknowledges and agrees that the Notes have not been registered under the Securities Act and may not be transferred except pursuant to registration or an exemption therefrom and in compliance with Section  13.2(b) hereof.
Section 13.2 Transfer and Exchange of Notes . (a) Subject to compliance with Section 13.2(b) , upon surrender of any Note to the Company at the address and to the attention of the designated officer (all as specified in Section 18(iii)), for registration of transfer or exchange (and in the case of a surrender for registration of transfer accompanied by a written instrument of transfer duly executed by the registered Holder of such Note or such Holder’s attorney duly authorized in writing and accompanied by the relevant name, address and other information for notices of each transferee of such Note or part thereof), within ten Business Days thereafter, the Company shall execute and deliver, at the Company’s expense (except as provided below), one or more new Notes (as requested by the Holder thereof) in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Note. Each such new Note shall be payable to such Person as such Holder may request and shall be substantially in the form of Exhibit 1 . Each such new Note shall be dated and bear interest from
 
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the date to which interest shall have been paid on the surrendered Note or dated the date of the surrendered Note if no interest shall have been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of Notes. Notes shall not be transferred in denominations of less than $1,000,000, provided that if necessary to enable the registration of transfer by a Holder of its entire holding of Notes, one Note may be in a denomination of less than $1,000,000. Any transferee, by its acceptance of a Note registered in its name (or the name of its nominee), shall be deemed to have made the representations set forth in Section 6.1 and Section 6.2 .
(b) Each Holder hereby agrees that it will not offer for sale or sell any of its Notes or disclose any Confidential Information to any prospective transferee of the Notes, other than to an Affiliate, or to another Holder without first delivering written notice to the Company (a “ Right of First Offer Notice ”) of its intent to sell such Notes and disclose such Confidential Information. Such Right of First Offer Notice shall contain a reasonably detailed description of the proposed terms of such sale, including, without limitation, the proposed purchase price (the “ Proposed Purchase Price ”) for such Notes and the names of up to ten prospective purchasers. If the Company so desires it may, within 5 Business Days of the receipt of such Right of First Offer Notice, inform such Holder in writing of its intent to purchase, or have an Affiliate or Institutional Investor designated by the Company purchase, such Notes (a “ Purchase Notice ”) from the Holder delivering such Right of First Offer Notice at the Proposed Purchase Price, provided, however, that if at such time a Default or Event of Default shall have occurred and be continuing, the Company shall not purchase, and shall not allow any Affiliate or Institutional Investor designated by the Company to purchase, the Notes of the Holder delivering such Right of First Offer Notice. The aggregate principal amount of the Notes specified in such Purchase Notice shall be purchased by the Company, or such Affiliate or Institutional Investor, for the Proposed Purchase Price, together with accrued interest on such Notes to the purchase date, on the date specified by the Company in such Purchase Notice, which shall be not more than 30 days following delivery of such Purchase Notice. If a Holder does not receive a Purchase Notice from the Company within 5 Business Days after the delivery of a Right of First Offer Notice to the Company, such Holder shall have the right to sell its Notes identified in such Right of First Offer Notice to one or more of the prospective purchasers identified in such Right of First Offer Notice for a price which is not less than the Proposed Purchase Price identified in such Right of First Offer Notice for a period of 120 days from the date of such Right of First Offer Notice. In the event that the prospective purchasers identified by a Holder in a Right of First Offer Notice shall decline to purchase the Notes within such 120 day period, then the Holder may identify up to 10 additional Institutional Investors through a new Right of First Offer Notice.
Section 13.3 Replacement of Notes . Upon receipt by the Company at the address and to the attention of the designated officer (all as specified in Section 18(iii) ) of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Note (which evidence shall be, in the case of an Institutional Investor, notice from such Institutional Investor of such ownership and such loss, theft, destruction or mutilation), and
(a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (provided that if the Holder of such Note is, or is a nominee for, an original Purchaser or another Holder of a Note with a minimum net worth of at least $100,000,000 or a Qualified Institutional Buyer, such Person’s own unsecured agreement of indemnity shall be deemed to be satisfactory), or
 
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(b) in the case of mutilation, upon surrender and cancellation thereof,
within ten Business Days thereafter, the Company at its own expense shall execute and deliver, in lieu thereof, a new Note, dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Note or dated the date of such lost, stolen, destroyed or mutilated Note if no interest shall have been paid thereon.
SECTION 14. PAYMENTS ON NOTES.
Section 14.1 Place of Payment . Subject to Section 14.2 , payments of principal, Yield-Maintenance Amount, if any, and interest becoming due and payable on the Notes shall be made in New York City, New York at the principal office of JPMorgan Chase Bank National Association in such jurisdiction. The Company may at any time, by notice to each Holder of a Note, change the place of payment of the Notes so long as such place of payment shall be either the principal office of the Company in such jurisdiction or the principal office of a bank or trust company in such jurisdiction.
Section 14.2 Home Office Payment . So long as any Purchaser or its nominee shall be the Holder of any Note, and notwithstanding anything contained in Section 14.1 or in such Note to the contrary, the Company will pay all sums becoming due on such Note for principal, Yield-Maintenance Amount, if any, and interest by the method and at the address specified for such purpose below such Purchaser’s name in Schedule A , or by such other method or at such other address as such Purchaser shall have from time to time specified to the Company in writing for such purpose, without the presentation or surrender of such Note or the making of any notation thereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment or prepayment in full of any Note, such Purchaser shall surrender such Note for cancellation, reasonably promptly after any such request, to the Company at its principal executive office or at the place of payment most recently designated by the Company pursuant to Section 14.1 . Prior to any sale or other disposition of any Note held by a Purchaser or its nominee, such Purchaser will, at its election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender such Note to the Company in exchange for a new Note or Notes pursuant to Section 13.2 . The Company will afford the benefits of this Section 14.2 to any Institutional Investor that is the direct or indirect transferee of any Note purchased by a Purchaser under this Agreement and that has made the same agreement relating to such Note as the Purchasers have made in this Section 14.2 .
SECTION 15. EXPENSES, ETC.
Section 15.1 Transaction Expenses . Whether or not the transactions contemplated hereby are consummated, the Company will pay all costs and expenses (including reasonable attorneys’ fees of one firm of special counsel and, if reasonably required by the Required Holders, local or other counsel) incurred by the Purchasers and each other Holder of a Note in connection with such transactions and in connection with any amendments, waivers or consents under or in respect of this Agreement or the Notes (whether or not such amendment, waiver or
 
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consent becomes effective), including, without limitation: (a) the costs and expenses incurred in enforcing or defending (or determining whether or how to enforce or defend) any rights under this Agreement or the Notes or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement or the Notes, or by reason of being a Holder of any Note, but only to the extent such subpoena or legal proceeding arises out of matters related to the Company, (b) the costs and expenses, including financial advisors’ fees, incurred in connection with the insolvency or bankruptcy of the Company or in connection with any work-out or restructuring of the transactions contemplated hereby and by the Notes and (c) the costs and expenses incurred in connection with the initial filing of this Agreement and all related documents and financial information with the SVO provided. The Company will pay, and will save each Purchaser and each other Holder of a Note harmless from, all claims in respect of any fees, costs or expenses, if any, of brokers and finders (other than those, if any, retained by a Purchaser or other Holder in connection with its purchase of the Notes).
Section 15.2 Survival . The obligations of the Company under this Section 15 will survive the payment or transfer of any Note, the enforcement, amendment or waiver of any provision of this Agreement or the Notes, and the termination of this Agreement.
SECTION 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT.
All representations and warranties contained herein shall survive the execution and delivery of this Agreement and the Notes, the purchase or transfer by any Purchaser of any Note or portion thereof or interest therein and the payment of any Note, and may be relied upon by any subsequent Holder of a Note, regardless of any investigation made at any time by or on behalf of such Purchaser or any other Holder of a Note; provided that no representation or warranty shall be deemed to be made as of any time other than the date of execution and delivery of this Agreement or such other document, certificate, instrument or agreement containing such representation or warranty. All statements contained in any certificate or other instrument delivered by or on behalf of the Company pursuant to this Agreement shall be deemed representations and warranties of the Company under this Agreement. Subject to the preceding sentence, this Agreement and the Notes embody the entire agreement and understanding between each Purchaser and the Company and supersede all prior agreements and understandings relating to the subject matter hereof.
SECTION 17. AMENDMENT AND WAIVER.
Section 17.1 Requirements . This Agreement and the Notes may be amended, and the observance of any term hereof or of the Notes may be waived (either retroactively or prospectively), with (and only with) the written consent of the Company and the Required Holders, except that (a) no amendment or waiver of any of the provisions of Section 1, 2, 3, 4, 5, 6 or 21 hereof, or any defined term (as it is used therein), will be effective as to any Purchaser unless consented to by such Purchaser in writing, and (b) no such amendment or waiver may, without the written consent of the Holder of each Note at the time outstanding affected thereby, (i) subject to the provisions of Section 12 relating to acceleration or rescission, change the amount or time of any prepayment or payment of principal of, or reduce the rate or change the time of payment or method of computation of interest or of the Yield-Maintenance Amount on,
 
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the Notes, (ii) change the percentage of the principal amount of the Notes the Holders of which are required to consent to any such amendment or waiver, or (iii) amend any of Section 8, 11(a), 11(b), 12, 17 or 20 .
Section 17.2 Solicitation of Holders of Notes.
(a) Solicitation. The Company will provide each Holder of the Notes (irrespective of the amount of Notes then owned by it) with sufficient information, sufficiently far in advance of the date a decision is required, to enable such Holder to make an informed and considered decision with respect to any proposed amendment, waiver or consent in respect of any of the provisions hereof or of the Notes. The Company will deliver executed or true and correct copies of each amendment, waiver or consent effected pursuant to the provisions of this Section 17 to each Holder of outstanding Notes promptly following the date on which it is executed and delivered by, or receives the consent or approval of, the requisite Holders of Notes.
(b) Payment. The Company will not directly or indirectly pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, or grant any security or provide other credit support, to any Holder of Notes as consideration for or as an inducement to the entering into by any Holder of Notes of any waiver or amendment of any of the terms and provisions hereof unless such remuneration is concurrently paid, or security is concurrently granted or other credit support concurrently provided, on the same terms, ratably to each Holder of Notes then outstanding even if such Holder did not consent to such waiver or amendment.
Section 17.3 Binding Effect, etc . Any amendment or waiver consented to as provided in this Section 17 applies equally to all Holders of Notes and is binding upon them and upon each future Holder of any Note and upon the Company without regard to whether such Note has been marked to indicate such amendment or waiver. No such amendment or waiver will extend to or affect any obligation, covenant, agreement, Default or Event of Default not expressly amended or waived or impair any right consequent thereon. No course of dealing between the Company and the Holder of any Note nor any delay in exercising any rights hereunder or under any Note shall operate as a waiver of any rights of any Holder of such Note. As used herein, the term “this Agreement” and references thereto shall mean this Agreement as it may from time to time be amended or supplemented.
Section 17.4 Notes Held by Company, etc . Solely for the purpose of determining whether the Holders of the requisite percentage of the aggregate principal amount of Notes then outstanding approved or consented to any amendment, waiver or consent to be given under this Agreement or the Notes, or have directed the taking of any action provided herein or in the Notes to be taken upon the direction of the Holders of a specified percentage of the aggregate principal amount of Notes then outstanding, Notes directly or indirectly owned by the Company or any of its Affiliates shall be deemed not to be outstanding.
SECTION 18. NOTICES.
All notices and communications provided for hereunder shall be in writing and sent (a) by telecopy if the sender on the same day sends a confirming copy of such notice by a
 
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recognized overnight delivery service (charges prepaid), or (b) by registered or certified mail with return receipt requested (postage prepaid), or (c) by a recognized overnight delivery service (with charges prepaid). Any such notice must be sent:
(i) if to any Purchaser or its nominee, to such Purchaser or nominee at the address specified for such communications in Schedule A , or at such other address as such Purchaser or nominee shall have specified to the Company in writing,
(ii) if to any other Holder of any Note, to such Holder at such address as such other Holder shall have specified to the Company in writing, and
(iii) if to the Company, to the Company at 1900 N. Akard Street, Dallas, TX 75201-2300, facsimile: (214) 855-6965 to the attention of W. Kirk Baker, or at such other address as the Company shall have specified to the Holder of each Note in writing.
Notices under this Section 18 will be deemed given only when actually received.
SECTION 19. REPRODUCTION OF DOCUMENTS.
This Agreement and all documents relating thereto, including, without limitation, (a) consents, waivers and modifications that may hereafter be executed, (b) documents received by any Purchaser at the Closing (except the Notes themselves), and (c) financial statements, certificates and other information previously or hereafter furnished to any Purchaser, may be reproduced by such Purchaser by any photographic, photostatic, electronic, digital, or other similar process and such Purchaser may destroy any original document so reproduced. The Company agrees and stipulates that, to the extent permitted by applicable law, any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by such Purchaser in the regular course of business) and any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. This Section 19 shall not prohibit the Company or any other Holder of Notes from contesting any such reproduction to the same extent that it could contest the original, or from introducing evidence to demonstrate the inaccuracy of any such reproduction.
SECTION 20. CONFIDENTIAL INFORMATION.
For the purposes of this Section 20 , “Confidential Information” means Information delivered to any Purchaser by or on behalf of the Company in connection with the transactions contemplated by or otherwise pursuant to this Agreement, provided that such term does not include information that (a) other than as a result of disclosure by any Purchaser or its employees or agents in violation of this Section 20 was publicly known or otherwise known to such Purchaser prior to the time of such disclosure, (b) other than as a result of disclosure by any Purchaser or its employees or agents in violation of this Section 20 subsequently becomes publicly known through no act or omission by such Purchaser or any Person acting on such Purchaser’s behalf, (c) other than as a result of disclosure by any Purchaser or its employees or agents in violation of this Section 20 otherwise becomes known to such Purchaser other than
 
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through disclosure by the Company or (d) constitutes financial statements delivered to such Purchaser under Section 7.1 that are otherwise publicly available. “Information” means information concerning the Company or its Subsidiaries, irrespective of its source or form of communication, furnished by or on behalf of the Company or any of its Subsidiaries, including without limitation notes, analyses, compilations, studies or other documents or records prepared by any Purchaser, which contain or reflect or were generated from information supplied by or on behalf of the Company or its Subsidiaries. Each Purchaser will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by such Purchaser in good faith to protect confidential information of third parties delivered to such Purchaser, provided that such Purchaser may deliver or disclose Confidential Information to (i) its directors, officers, employees, agents, attorneys, trustees and affiliates (to the extent such disclosure reasonably relates to the administration of the investment represented by its Notes), (ii) its financial advisors and other professional advisors who agree to hold confidential the Confidential Information substantially in accordance with the terms of this Section 20 , (iii) any other Holder of any Note, (iv) any Institutional Investor to which it sells or offers to sell such Note or any part thereof or any participation therein (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20 ), (v) any Person from which it offers to purchase any security of the Company (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20 ), (vi) any Federal or state regulatory authority having jurisdiction over such Purchaser, (vii) the NAIC or the SVO or, in each case, any similar organization, or any nationally recognized rating agency that requires access to information about such Purchaser’s investment portfolio, or (viii) any other Person to which such delivery or disclosure may be necessary or appropriate (w) to effect compliance with any law, rule, regulation or order applicable to such Purchaser, (x) in response to any subpoena or other legal process, (y) in connection with any litigation to which such Purchaser is a party or (z) if an Event of Default has occurred and is continuing, to the extent such Purchaser may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement or for the protection of the rights and remedies under such Purchaser’s Notes and this Agreement. Each Holder of a Note, by its acceptance of a Note, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Section 20 as though it were a party to this Agreement. On reasonable request by the Company in connection with the delivery to any Holder of a Note of information required to be delivered to such Holder under this Agreement or requested by such Holder (other than a Holder that is a party to this Agreement or its nominee), such Holder will enter into an agreement with the Company embodying the provisions of this Section 20.
SECTION 21. SUBSTITUTION OF PURCHASER.
Each Purchaser shall have the right to substitute any one of its Affiliates as the purchaser of the Notes that it has agreed to purchase hereunder, by written notice to the Company, which notice shall be signed by both such Purchaser and such Affiliate, shall contain such Affiliate’s agreement to be bound by this Agreement and shall contain a confirmation by such Affiliate of the accuracy with respect to it of the representations set forth in Section 6 . Upon receipt of such notice, any reference to such Purchaser in this Agreement (other than in this Section 21 ), shall be deemed to refer to such Affiliate in lieu of such original Purchaser. In the event that such Affiliate is so substituted as a Purchaser hereunder and such Affiliate thereafter transfers to such original Purchaser all of the Notes then held by such Affiliate, upon receipt by the Company of
 
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notice of such transfer, any reference to such Affiliate as a “Purchaser” in this Agreement (other than in this Section 21 ), shall no longer be deemed to refer to such Affiliate, but shall refer to such original Purchaser, and such original Purchaser shall again have all the rights of an original Holder of the Notes under this Agreement.
SECTION 22. MISCELLANEOUS.
Section 22.1 Successors and Assigns . All covenants and other agreements contained in this Agreement by or on behalf of any of the parties hereto bind and inure to the benefit of their respective successors and assigns (including, without limitation, any subsequent Holder of a Note) whether so expressed or not.
Section 22.2 Payments Due on Non-Business Days . Anything in this Agreement or the Notes to the contrary notwithstanding (but without limiting the requirement in Section 8.4 that the notice of any optional prepayment specify a Business Day as the date fixed for such prepayment), any payment of principal of or Yield-Maintenance Amount or interest on any Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day without including the additional days elapsed in the computation of the interest payable on such next succeeding Business Day; provided that if the maturity date of any Note is a date other than a Business Day, the payment otherwise due on such maturity date shall be made on the next succeeding Business Day and shall include the additional days elapsed in the computation of interest payable on such next succeeding Business Day.
Section 22.3 Accounting Terms . All accounting terms used herein which are not expressly defined in this Agreement have the meanings respectively given to them in accordance with GAAP. Except as otherwise specifically provided herein, (i) all computations made pursuant to this Agreement shall be made in accordance with GAAP, and (ii) all financial statements shall be prepared in accordance with GAAP. For purposes of determining compliance with any financial covenants contained in this Agreement, any election by the Company to measure an item of Indebtedness using fair value (as permitted by Statement of Financial Accounting Standards No. 159 or any similar accounting standard) shall be disregarded and such determination shall be made as if such election had not been made.
Section 22.4 Severability . Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction.
Section 22.5 Construction, etc . Each covenant contained herein shall be construed (absent express provision to the contrary) as being independent of each other covenant contained herein, so that compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with any other covenant. Where any provision herein refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person. For the avoidance of doubt, all Schedules and Exhibits attached to this Agreement shall be deemed to be a part hereof.
 
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Section 22.6 Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the parties hereto.
Section 22.7 Governing Law . This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York excluding choice-of-law principles of the law of such State that would permit the application of the laws of a jurisdiction other than such State.
Section 22.8 Jurisdiction and Process; Waiver of Jury Trial . (a) The Company irrevocably submits to the non-exclusive jurisdiction of any New York State or Federal court sitting in the Borough of Manhattan, The City of New York, over any suit, action or proceeding arising out of or relating to this Agreement or the Notes. To the fullest extent permitted by applicable law, the Company irrevocably waives and agrees not to assert, by way of motion, as a defense or otherwise, any claim that it is not subject to the jurisdiction of any such court, any objection that it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum.
(b) The Company consents to process being served by or on behalf of any Holder of Notes in any suit, action or proceeding of the nature referred to in Section 22.8(a) by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, return receipt requested, to it at its address specified in Section 18 or at such other address of which such Holder shall then have been notified pursuant to said Section. The Company agrees that such service upon receipt (i) shall be deemed in every respect effective service of process upon it in any such suit, action or proceeding and (ii) shall, to the fullest extent permitted by applicable law, be taken and held to be valid personal service upon and personal delivery to it. Notices hereunder shall be conclusively presumed received as evidenced by a delivery receipt furnished by the United States Postal Service or any reputable commercial delivery service.
(c) In addition to and notwithstanding the provisions of Section 22.8(b) above, the Company hereby irrevocably appoints CT Corporation System as its agent to receive on its behalf and its property service of copies of the summons and complaint and any other process which may be served in any action or proceeding. Such service may be made by mailing or delivering a copy of such process to the Company, in care of the process agent at 111 Eighth Avenue, 13 th Floor, New York, New York 10011, and the Company hereby irrevocably authorizes and directs the process agent to accept such service on its behalf. If for any reason the process agent ceases to be available to act as process agent, the Company agrees immediately to appoint a replacement process agent satisfactory to the Required Holders.
(d) Nothing in this Section 22.8 shall affect the right of any Holder of a Note to serve process in any manner permitted by law, or limit any right that the Holders of any of the Notes may have to bring proceedings against the Company in the courts of any appropriate jurisdiction or to enforce in any lawful manner a judgment obtained in one jurisdiction in any other jurisdiction.
 
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(e) The parties hereto hereby waive trial by jury in any action brought on or with respect to this Agreement, the Notes or any other document executed in connection herewith or therewith.
Section 22.9 Transaction References . The Company and the Holders shall not refer to the other on an internet site or in marketing materials, press releases, published “tombstone” announcements or any other print or electronic medium, except with the referenced party’s prior written consent, which may be withheld at its sole discretion.
* * * * *
 
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If you are in agreement with the foregoing, please sign the form of agreement on a counterpart of this Agreement and return it to the Company, whereupon this Agreement shall become a binding agreement between you and the Company.

Very truly yours,	
	
SHARYLAND DISTRIBUTION & TRANSMISSION SERVICES, L.L.C.	
		
 By	 		
Name:	 	W. Kirk Baker	
Title:	 	Senior Vice President	
[S IGNATURE P AGE TO SDTS 2010 N OTE P URCHASE A GREEMENT ]

This Agreement is hereby
accepted and agreed to as
of the date thereof.

Purchaser :	
	
THE PRUDENTIAL INSURANCE COMPANY	
OF AMERICA	
		
By:	 	 	
	 	Vice President	
[S IGNATURE P AGE TO SDTS 2010 N OTE P URCHASE A GREEMENT ]

Schedule B
Definitions
[See attached.]
[Schedule B- SDTS Second Amendment]

DEFINED TERMS
As used herein, the following terms have the respective meanings set forth below or set forth in the Section hereof following such term:
“ 2009 Note Agreement ” means the Note Purchase Agreement, dated December 31, 2009, among the Company and the holders of 2029 Notes, issued thereunder, as the same may be amended, restated, supplemented or otherwise modified from time to time.
“ 2010 NPA Joinder Agreement ” means the Joinder Agreement to the Collateral Agency Agreement, executed by the Company, the Collateral Agent and each purchaser of the 2029 Notes as a “Joining Party,” dated July 13, 2010.
“ 2029 Notes ” means the Company’s 7.25% Senior Notes due December 30, 2029, issued under the 2009 Note Agreement.
“ Acquired System ” means transmission and distribution facilities acquired by the Company as a result of its merger with Cap Rock Energy Corporation; provided, however, that the term “Acquired System” shall not include any FERC Assets.
“ Additional Covenant ” shall mean any affirmative or negative covenant or similar restriction applicable to the Company (regardless of whether such provision is labeled or otherwise characterized as a covenant) the subject matter of which either (i) is similar to that of any covenant in this Agreement, or related definitions in this Agreement, but contains one or more percentages, amounts or formulas that is more restrictive than those set forth herein or more beneficial to the holder or holders of the Indebtedness created or evidenced by the document in which such covenant or similar restriction is contained (and such covenant or similar restriction shall be deemed an Additional Covenant only to the extent that it is more restrictive or more beneficial) or (ii) is different from the subject matter of any covenant of this Agreement, or related definitions in this Agreement.
“ Additional Default ” shall mean any provision contained in any document or instrument creating or evidencing Indebtedness of the Company which permits the holder or holders of Indebtedness to accelerate (with the passage of time or giving of notice or both) the maturity thereof or otherwise requires the Company to purchase such Indebtedness prior to the stated maturity thereof and which either (i) is similar to any Default or Event of Default contained in this Agreement, or related definitions in this Agreement, but contains one or more percentages, amounts or formulas that is more restrictive or has a shorter grace period than those set forth herein or is more beneficial to the holders of such other Indebtedness (and such provision shall be deemed an Additional Default only to the extent that it is more restrictive, has a shorter grace period or is more beneficial) or (ii) is different from the subject matter of any Default or Event of Default contained in this Agreement, or related definitions in this Agreement.
“ Additional Project Document ” means any contract or agreement related to the ownership, operation, maintenance, repair or use of the System or the Acquired System or the FERC Assets entered into by the Company or New Owner subsequent to the Closing Date that involves full payments or obligations in excess of $1,000,000.
 
S CHEDULE B-1
(To Note Purchase Agreement)

“ Affiliate ” means, at any time, and with respect to any Person, any other Person that at such time directly or indirectly through one or more intermediaries Controls, or is Controlled by, or is under common Control with, such first Person and, with respect to the Company, shall include any Person beneficially owning or holding, directly or indirectly, 10% or more of any class of voting or equity interest of the Company or any corporation of which the Company beneficially owns or holds, in the aggregate, directly or indirectly, 10% or more of any class of voting or equity interests; provided, however, that this definition shall at all times exclude owners or investors in Electric Infrastructure Alliance of America, L.P., except for members of the Ray L. Hunt family, trusts for the benefit of the Ray L. Hunt family or entities controlled by members of the Ray L. Hunt family or such trusts. As used in this definition, “ Control ” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. Unless the context otherwise clearly requires, any reference to an “Affiliate” is a reference to an Affiliate of the Company.
“ Agreement ” is defined in the introductory paragraph of this Agreement.
“ Amortization Schedule ” is defined in Section 8.1(a) .
“ Anti-Terrorism Order ” means Executive Order No. 13,224 of September 24, 2001, Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit or Support Terrorism, 66 U.S. Fed. Reg. 49, 079 (2001), as amended.
“ Approved Accountant ” is defined in Section 7.1(b)(A).
“ Business Day ” means any day other than a Saturday, a Sunday or a day on which commercial banks in New York City are required or authorized to be closed.
“ Cap Rock Transaction ” is described in Schedule 10.1.
“ Capital Lease ” means, at any time, a lease with respect to which the lessee is required concurrently to recognize the acquisition of an asset and the incurrence of a liability in accordance with GAAP.
“ Cash Flow ” means, for any period, the sum of the following (without duplication): (i) all cash paid to the Company during such period under the System Lease, (ii) all cash distributions received by the Company from New Owner during such period, (iii) all interest and investment earnings, if any, paid to the Company during such period on amounts on deposit in the account created under the Deposit Agreement, (iv) revenues, if any, received by or on behalf of the Company during such period under any insurance policy as business interruption insurance proceeds, (v) direct cash equity investments made by TDC in the Company during such period (excluding equity contributed to a Project Finance Subsidiary) in an amount not greater than the amount necessary to cause the Company to be in compliance with the financial covenants set forth in Section 9.9 (each such investment, an “ Equity Cure ”); provided, however, that during any period of four consecutive fiscal quarters, “Cash Flow” shall include an
 
S CHEDULE B-2
(To Note Purchase Agreement)

Equity Cure in no more than two of such quarters, and (vi) proceeds of any borrowing made after the date hereof to the extent used to finance the payment of bullet or balloon installments of Indebtedness for borrowed money.
“ Cash Flow Available for Debt Service ” for any period, means (i) Cash Flow received during such period minus (ii) (A) all O&M Costs paid during such period and (B) if an Equity Cure has been made in any fiscal quarter during the period for which Cash Flow Available for Debt Service is calculated, the lesser of the aggregate amount of (x) such Equity Cure during such period and (y) the aggregate amount of cash distributions paid by the Company during such period.
“ Closing ” is defined in Section 3 .
“ Closing Date ” means July 13, 2010.
“ Code ” means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder from time to time.
“ Collateral ” means, collectively, the “Collateral” as defined in each of the Security Documents.
“ Collateral Agency Agreement ” means the Amended and Restated Collateral Agency Agreement, dated as of July 13, 2010, by and among the Collateral Agent, the Company and the holders of the 2029 Notes and the other secured parties from time to time party thereto, as the same may be amended, restated, supplemented or otherwise modified from time to time.
“ Collateral Agent ” means The Bank of New York Mellon Trust Company, N.A., a national association, acting in its capacity as collateral agent for itself and the other Secured Parties under the Financing Documents, or its successors in such capacity appointed pursuant to the terms of the Collateral Agency Agreement.
“ Company ” means Sharyland Distribution & Transmission Services, L.L.C., a Texas limited liability company, or any successor that becomes such in the manner prescribed in Section 10.2 .
“ Confidential Information ” is defined in Section 20 .
“ CREZ ” means the Competitive Renewable Energy Zones electric transmission project overseen by ERCOT and the Public Utility Commission of Texas.
“ CREZ Project ” shall mean the five transmission lines, four substations and other facilities in Texas identified and awarded to Sharyland by the Public Utility Commission of Texas (the “PUCT”) in Docket Number 37902.
“ Debt Service ” for any period, the aggregate (without duplication) of (i) all amounts of interest on the Notes and in respect of other Indebtedness of the Company required to be paid during such period, plus (ii) all amounts of principal on the Notes and in respect of other Indebtedness of the Company or required to be paid during such period, excluding any optional
 
S CHEDULE B-3
(To Note Purchase Agreement)

prepayments of principal during such period, plus (iii) all other premiums, fees, costs, charges, expenses and indemnities due and payable to the Holders or the other Secured Parties and holders of other Indebtedness of the Company or and agents acting on their behalf during such period.
“ Debt Service Coverage Ratio ” means, for each period of four consecutive fiscal quarters, the quotient of (i) Cash Flow Available for Debt Service for such period to (ii) Debt Service for such period.
“ Deeds of Trust ” means each of the Amended and Restated First Lien Deed of Trust, Security Agreement and Fixture Filing (Texas) and each First Lien Deed of Trust, Security Agreement, Assignment of Rents and Leases (Texas) by and from the Company, as grantor, to Peter M. Oxman, as trustee, for the benefit of the Collateral Agent and the Secured Parties, dated as of July 13, 2010, in each case as the same may be amended, restated, supplemented or otherwise modified from time to time.
“ Default ” means an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default.
“ Default Rate ” means that rate of interest per annum from time to time equal to the greater of (i) 8.47% per annum, and (ii) 2% over the rate of interest publicly announced by The Bank of New York Mellon from time to time in New York as its “base” or “prime” rate.
“ Disclosure Documents ” is defined in Section 5.3 .
“ Distributions ” means any (i) distribution of any nature or kind, either directly or indirectly, to any Affiliate or equityholder of the Company, including any dividend or distribution in cash or property of any kind; a purchase, redemption, reduction, return or any other payment of capital; or any repayment or reduction of Indebtedness owing to an Affiliate or equityholder of Company; (ii) loans or other payments to an Affiliate or equityholder of the Company; and (iii) payment for or on behalf of an Affiliate equityholder of the Company by way of guaranty, indemnity or otherwise including in connection with any Affiliate Indebtedness; but shall not include any payments made to any equityholder or Affiliate of the Company under any services, advisory, tax sharing or agency agreement disclosed to the Holders and entered into on commercially reasonable terms and conditions.
“ Environmental Laws ” means any and all Federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including but not limited to those related to Hazardous Materials.
“ ERCOT ” means the Electric Reliability Council of Texas or any successor thereto.
“ ERISA ” means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.
 
S CHEDULE B-4
(To Note Purchase Agreement)

“ ERISA Affiliate ” means any trade or business (whether or not incorporated) that is treated as a single employer together with the Company under section 414 of the Code.
“ Event of Default ” is defined in Section 11.
“ Exchange Act ” shall mean the Securities Exchange Act of 1934, as amended from time to time.
“ FERC ” means the Federal Energy Regulatory Commission, or any successor agency to its duties and responsibilities.
“ FERC Assets ” is defined in the New Lease.
“ Financing Documents ” means, collectively, this Agreement, the 2009 Note Agreement, the Notes, the 2029 Notes, the RBC Agreement, the Security Documents, any other documents, agreements or instruments entered into in connection with any of the foregoing and any other documents, agreements or instruments from time to time constituting “Financing Documents” under the Collateral Agency Agreement.
“ First Amendment ” shall mean the First Amendment to this Agreement, dated June 9, 2011.
“ First Amendment Effective Date ” shall have the meaning ascribed to such term in Section 8 of the First Amendment.
“ Force Majeure Event ” means any claim of force majeure by any Person under any Material Project Document, which would allow such Person to avoid all or any material part of its obligations thereunder and any other fire, explosion, accident, strike, slowdown or stoppage, lockout or other labor dispute (whether pending or, to the Company’s knowledge threatened), drought, storm, hail, earthquake, embargo, act of God or of the public enemy, or other casualty (whether or not covered by insurance), that could reasonably be expected to result in a Material Adverse Effect.
“ FPA ” means the Federal Power Act, 16 U.S.C. §§791 et seq., as amended, and the regulations of the FERC thereunder.
“ GAAP ” means generally accepted accounting principles as in effect in the United States of America. In the event that any “Accounting Change” (as defined below) shall occur and such change results in a change in the method of calculation of financial covenants, ratios, standards or terms in this Agreement, then the Company and the holders agree to enter into negotiations in order to amend such provisions of this Agreement so as to reflect equitably such Accounting Changes with the desired result that the criteria for evaluating the financial condition of the Company and Sharyland shall be the same after such Accounting Changes as if such Accounting Changes had not been made. Until such time as such an amendment shall have been executed and delivered by the Company and the holders, all financial covenants, ratios, standards and terms in this Agreement shall continue to be calculated or construed as if such Accounting Changes had not occurred. “ Accounting Changes” refers to changes in accounting principles required by the promulgation of any rule, regulation, pronouncement or opinion by the Financial Accounting Standards Board of the American Institute of Certified Public Accountants or, if applicable, the SEC.
 
S CHEDULE B-5
(To Note Purchase Agreement)

“ Good Utility Practices ” means “Good Utility Practice” as defined from time to time by the Public Utility Commission of Texas.
“ Governmental Authority ” means
the government of:
the United States of America or any State or other political subdivision thereof, or
any other jurisdiction in which the Company conducts all or any part of its business, or which asserts jurisdiction over any properties of the Company, or
any entity exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, any such government, or
ERCOT, or
SPP, or
the Texas Regional Entity.
“ Guaranty ” means, with respect to any Person, any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing any Indebtedness of any other Person in any manner, whether directly or indirectly, including (without limitation) obligations incurred through an agreement, contingent or otherwise, by such Person:
to purchase such Indebtedness or any property constituting security therefor;
to advance or supply funds (i) for the purchase or payment of such indebtedness or obligation, or (ii) to maintain any working capital or other balance sheet condition or any income statement condition of any other Person or otherwise to advance or make available funds for the purchase or payment of such Indebtedness;
to lease properties or to purchase properties or services primarily for the purpose of assuring the owner of such Indebtedness of the ability of any other Person to make payment of the Indebtedness; or
otherwise to assure the owner of such Indebtedness against loss in respect thereof.
In any computation of the indebtedness or other liabilities of the obligor under any Guaranty, the indebtedness or other obligations that are the subject of such Guaranty shall be assumed to be direct obligations of such obligor.
 
S CHEDULE B-6
(To Note Purchase Agreement)

“ Hazardous Material ” means any and all pollutants, toxic or hazardous wastes or other substances that might pose a hazard to health and safety, the removal of which may be required or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage or filtration of which is or shall be restricted, prohibited or penalized by any applicable law including, but not limited to, asbestos, urea formaldehyde foam insulation, polychlorinated biphenyls, petroleum, petroleum products, lead based paint, radon gas or similar restricted, prohibited or penalized substances.
“ Holder ” means, with respect to any Note the Person in whose name such Note is registered in the register maintained by the Company pursuant to Section 13.1 .
“ Indebtedness ” with respect to any Person means, at any time, without duplication,
its liabilities for borrowed money and its redemption obligations in respect of mandatorily redeemable Preferred Stock;
its liabilities for the deferred purchase price of property acquired by such Person (excluding accounts payable arising in the ordinary course of business but including all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property);
(i) all liabilities appearing on its balance sheet in accordance with GAAP in respect of Capital Leases and (ii) all liabilities which would appear on its balance sheet in accordance with GAAP in respect of Synthetic Leases assuming such Synthetic Leases were accounted for as Capital Leases; provided , however , that for purposes of this definition (including with respect to clauses (i) and (ii) hereof), the System Lease, the New Lease and any similar lease shall not be treated as a capital lease;
all liabilities for borrowed money secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities);
all its liabilities in respect of letters of credit or instruments serving a similar function issued or accepted for its account by banks and other financial institutions (whether or not representing obligations for borrowed money); provided , however , that for purposes of this definition, any surety bonds or indemnification agreements entered into by Sharyland (with respect to which the Company or a subsidiary thereof has a reimbursement or backstop obligation) in connection with condemnation proceedings shall be excluded;
the aggregate Swap Termination Value of all Swap Contracts of such Person; and
any Guaranty of such Person with respect to liabilities of a type described in any of clauses (a) through (f) hereof.
Indebtedness of any Person shall include all obligations of such Person of the character described in clauses (a) through (g) to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is deemed to be extinguished under GAAP.
 
S CHEDULE B-7
(To Note Purchase Agreement)

“ Initial NPA ” is defined in the recitals hereto.
“ Institutional Investor ” means (a) any Purchaser of a Note, (b) any Holder of a Note holding (together with one or more of its Affiliates) more than 5% of the aggregate principal amount of the Notes then outstanding, (c) any bank, trust company, savings and loan association or other financial institution, any pension plan, any investment company, any insurance company, any broker or dealer, or any other similar financial institution or entity, regardless of legal form, and (d) any Related Fund of any Holder of any Note.
“ Lease Supplement ” means the Lease Supplement (Cap Rock Assets), dated as of July 13, 2010 between the Company, as lessor, and Sharyland, as lessee.
“ Lien ” means, with respect to any Person, any mortgage, lien, pledge, charge, security interest or other encumbrance, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or Capital Lease, upon or with respect to any property or asset of such Person (including in the case of stock, stockholder agreements, voting trust agreements and all similar arrangements).
“ Material Adverse Effect ” means a material adverse effect on: (i) the business, operations, affairs or financial condition of the Company, New Owner, Sharyland or New Operator (taken as a whole), or the System, the Acquired System or the FERC Assets (taken as a whole); (ii) the ability of the Company to perform its obligations under this Agreement, the Notes or any Transaction Document to which it is a party; (iii) the ability of Sharyland, New Owner or New Operator to perform under any of the Transaction Documents to which it is a party; or (iv) the validity or enforceability of the Notes, this Agreement or any Transaction Document.
“ Material Project Document ” means each of the agreements listed on Schedule 5.12(b), any Additional Project Document that replaces any of the foregoing, the System Lease and the New Lease.
“ Maturity Date ” means September 30, 2030. “Members” means Sharyland and TDC.
“ Membership Collateral ” is defined and described in the respective Pledge Agreements.
“ Moody’s ” means Moody’s Investors Service, Inc.
“ Multiemployer Plan ” means any Plan that is a “multiemployer plan” (as such term is defined in section 4001(a)(3) of ERISA).
“ NAIC ” means the National Association of Insurance Commissioners or any successor thereto.
“ Negative Pledge Agreement ” is defined in Section 4.12(c).
 
S CHEDULE B-8
(To Note Purchase Agreement)

“ New Lease ” means the Lease Agreement, dated as of July 13, 2010, between New Owner and New Operator or any new lease entered into in replacement thereof in accordance with Section 9.8(b) of this Agreement.
“ New Operator ” means SU FERC, L.L.C., a Texas limited liability company and a wholly-owned subsidiary of Sharyland.
“ New Owner ” means SDTS FERC, L.L.C., a Texas limited liability company and wholly-owned subsidiary of the Company.
“ New Project ” shall mean the CREZ Project, any other transmission or distribution project acquired or built by a Project Finance Subsidiary and any “New Project” (as defined in the System Lease) that the Company agrees to fund pursuant to Article 10 of the System Lease.
“ Non-Recourse Debt ” means Indebtedness of a Project Finance Subsidiary that, if secured, is secured solely by a pledge of collateral owned by that Project Finance Subsidiary and the ownership interests in such Project Finance Subsidiary and for which no Person other than such Project Finance Subsidiary is personally liable.
“ Notes ” is defined in Section 1.
“ O&M Costs ” means actual cash management and operation costs of the Company, property taxes, insurance premiums, consumables, fees and expenses of, and other amounts owing to, the Collateral Agent, and other costs and expenses in connection with the management or operation of the Company, but exclusive in all cases of (a) non-cash charges, including depreciation or obsolescence charges or reserves therefor, amortization of intangibles or other bookkeeping entries of a similar nature, (b) all other payments of Debt Service and Yield-Maintenance Amounts, if any, (c) costs of repair or replacement paid with insurance proceeds and (d) costs of due diligence and transition expenses related to the Cap Rock Transaction.
“ Obligation ” means any loan, advance, debt, liability, and obligation of performance, howsoever arising, owed by the Company to the Collateral Agent or the Holders of any kind or description (whether or not evidenced by any note or instrument and whether or not for the payment of money), direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, pursuant to the terms of this Agreement, any Note or any of the other Financing Documents, including all principal, interest, Yield-Maintenance Amounts, fees, charges, expenses, attorneys’ fees and accountants fees payable or reimbursable by the Company under this Agreement or any of the other Financing Documents.
“ Officer’s Certificate ” means a certificate of a Senior Financial Officer or of any other officer of the Company whose responsibilities extend to the subject matter of such certificate.
“ Payment Date ” means September 30, 2010 and the 30th day of December, March, June and September thereafter up to the Maturity Date, and the Maturity Date.
 
S CHEDULE B-9
(To Note Purchase Agreement)

“ PBGC ” means the Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto.
“ Permit ” means any action, approval, consent, waiver, exemption, variance, franchise, order, permit, authorization, right or license of or from a Governmental Authority, provided that interests or estates in real property, shall not be considered Permits.
“ Permitted Investment ” means any (a) marketable direct obligation of the United States of America, (b) marketable obligation directly and fully guaranteed as to interest and principal by the United States of America, (c) demand deposit with Bank of America N.A., or time deposit, certificate of deposit and banker’s acceptance issued by any member bank of the Federal Reserve System which is organized under the laws of the United States of America or any state thereof or any United States branch of a foreign bank, in each case whose equity capital is in excess of $500,000,000 and whose long-term debt securities are rated “A” or better by S&P and “A2” or better by Moody’s, (d) commercial paper or tax exempt obligations given the highest rating by Moody’s and S&P, (e) obligations of a commercial bank described in clause (c) above, in respect of the repurchase of obligations of the type as described in clauses (a) and (b) hereof, provided that such repurchase obligation shall be fully secured by obligations of the type described in said clauses (a) and (b) and the possession of such obligation shall be transferred to, and segregated from other obligations owned by, any such bank, (f) instrument rated “AAA” by S&P and “Aaa” by Moody’s issued by investment companies and having an original maturity of 180 days or less, (g) eurodollar certificates of deposit issued by any bank described in clause (c) above, and (h) marketable security rated not less than “A-1” by S&P or not less than “Prime-1” by Moody’s. In no event shall Permitted Investments include any obligation, certificate of deposit, acceptance, commercial paper or instrument which by its terms matures (A) more than 180 days after the date of investment, unless a bank meeting the requirements of clause (c) above shall have agreed to repurchase such obligation, certificate of deposit, acceptance, commercial paper or instrument at its purchase price plus earned interest within no more than 90 days after its purchase thereunder or (B) after the next Payment Date.
“ Permitted Lien ” is defined in Section 10.5.
“ Permitted Secured Indebtedness ” means Indebtedness of the Company incurred pursuant to Section 10.6(b), provided that at least 5 Business Days prior to the incurrence of such Indebtedness, the Company shall (a) notify the Holders of its intent to incur such Indebtedness, which notice shall set forth in reasonable detail (i) the amount and proposed economic terms of such Indebtedness, (ii) the type of lender or purchaser and (iii) the proposed collateral for such Indebtedness (which proposed collateral may include any or all of the Collateral), and (b) if the Indebtedness is proposed to be secured by any property of the Company or any of its Subsidiaries or any other collateral, deliver to the Collateral Agent and the other Secured Parties an executed joinder agreement, substantially in the form of Exhibit A attached to the Collateral Agency Agreement, pursuant to which all the proposed holders of such Indebtedness have become party to the Collateral Agency Agreement.
“ Person ” means an individual, partnership, corporation, cooperative corporation, limited liability company, association, trust, unincorporated organization, business entity or Governmental Authority.
 
S CHEDULE B-10
(To Note Purchase Agreement)

“ Plan ” means an “employee benefit plan” (as defined in section 3(3) of ERISA) subject to Title I of ERISA that is or, within the preceding five years, has been established or maintained, or to which contributions are or, within the preceding five years, have been made or required to be made, by the Company or any ERISA Affiliate or with respect to which the Company or any ERISA Affiliate may have any liability.
“ Pledge Agreement (Company) ” is defined in Section 4.12(b).
“ Pledge Agreement (TDC) ” is defined in Section 4.12(b).
“ Pledge Agreements ” is defined in Section 4.12(b).
“ Preferred Stock ” means any class of capital stock of a Person that is preferred over any other class of capital stock (or similar equity interests) of such Person as to the payment of dividends or the payment of any amount upon liquidation or dissolution of such Person.
“ Project Finance Subsidiary ” means a special purpose Wholly-Owned Subsidiary of the Company created to develop the CREZ Project or another New Project and to finance the project solely with Non-Recourse Debt and equity.
“ property ” or “properties” means, unless otherwise specifically limited, real or personal property of any kind, tangible or intangible, choate or inchoate.
“ PTE ” is defined in Section 6.2(a) .
“ Purchaser ” is defined in the first paragraph of this Agreement.
“ Qualified Institutional Buyer ” means any Person who is a “qualified institutional buyer” within the meaning of such term as set forth in Rule 144A(a)(1) under the Securities Act.
“ RBC ” means Royal Bank of Canada, a Canadian banking institution.
“ RBC Agreement ” means that certain Second Amended and Restated Credit Agreement, dated as of June 28, 2013, among the Company, as borrower, the lenders from time to time party thereto and RBC, administrative agent, as the same may be amended, restated, supplemented and otherwise modified from time to time.
“ RBC Joinder Agreement ” means the Joinder Agreement to Amended and Restated Collateral Agency Agreement dated as of June 28, 2013 by and among the Collateral Agent, the Company, the Secured Parties then parties to the Collateral Agency Agreement and RBC, pursuant to which RBC was joined as a Secured Party under the Collateral Agency Agreement.
“ Related Fund ” means, with respect to any Holder of any Note, any fund or entity that (i) invests in Securities or bank loans, and (ii) is advised or managed by such Holder, the same investment advisor as such Holder or by an Affiliate of such Holder or such investment advisor.
 
S CHEDULE B-11
(To Note Purchase Agreement)

“ Required Holders ” means, at any time, the Holders of at least 51% in principal amount of the Notes at the time outstanding (exclusive of Notes then owned by the Company or any of its Affiliates).
“ Required Permit ” is defined in Section 5.12(a).
“ Requirements of Law ” means as to any Person, the certificate of incorporation or formation and by-laws or partnership or operating agreement or other organizational or governing documents of such Person, and any local, state or Federal law, regulation, rule, ordinances or determination, interpretation or order of an arbitrator or a court or other Governmental Authority, and any Required Permit, in each case applicable to or binding upon such Person or any of its properties or its business or to which such Person or any of its properties or its business is subject.
“ Responsible Officer ” means any Senior Financial Officer and any other officer of the Company with responsibility for the administration of the relevant portion of this Agreement.
“ Restricted Payment Conditions ” is defined in Section 10.9.
“ SEC ” shall mean the Securities and Exchange Commission of the United States, or any successor thereto.
“ Second Amendment Date ” shall mean October [    ], 2013.
“ Secured Parties ” means, from time to time, the Holders, all other persons party to the Collateral Agency Agreement (other than the Company) and the Collateral Agent.
“ Securities ” or “ Security ” shall have the meaning specified in Section 2(1) of the Securities Act.
“ Securities Act ” means the Securities Act of 1933, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.
“ Security Documents ” means the “Security Documents” as defined in the 2009 Note Agreement, the Deeds of Trust, the 2010 NPA Joinder Agreement, the Pledge Agreement, the Negative Pledge Agreement, the RBC Joinder Agreement, and any other security documents, financing statements and the like filed or recorded in connection with the foregoing.
“ Senior Financial Officer ” means the chief financial officer, principal accounting officer, treasurer or comptroller of the Company or Sharyland, as applicable.
“ Sharyland ” means Sharyland Utilities, L.P., a Texas limited partnership.
“ Sharyland Affiliate Loan ” means collectively, intercompany loans, in an aggregate principal amount not to exceed $5,000,000 at any time outstanding, made by the Company to Sharyland from time to time for the purpose of financing capital expenditures.
 
S CHEDULE B-12
(To Note Purchase Agreement)

“ SP ” shall mean Sharyland Projects, L.L.C., a Project Finance Subsidiary.
“ SP Lease ” shall mean the CREZ Master System Lease Agreement and Supplements proposed to be entered between SP, as lessor, and Sharyland, as lessee, with respect to the CREZ Project.
“ SPP ” means the Southwest Power Pool or any successor thereto.
“ Structuring Fee ” is defined in Section 4.7.
“ Subsidiary ” means, as to any Person, any other Person in which such first Person or one or more of its Subsidiaries or such first Person and one or more of its Subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar functions) of such second Person and any partnership or joint venture if more than a 50% interest in the profits or capital thereof is owned by such first Person or one or more of its Subsidiaries or such first Person and one or more of its Subsidiaries (unless such partnership or joint venture can and does ordinarily take major business actions without the prior approval of such Person or one or more of its Subsidiaries). Unless the context otherwise clearly requires, any reference to a “Subsidiary” is a reference to a Subsidiary of the Company.
“ Subsidiary Guaranty ” means each Guaranty provided by the Subsidiary Guarantors pursuant to Section 9.7(d) , if any, substantially in the form of Exhibit 3 to the Agreement.
“ Subsidiary Guarantor ” means any Subsidiary of the Company that is a guarantor under a Guaranty pursuant to Section 9.7(d) .
“ SVO ” means the Securities Valuation Office of the NAIC or any successor to such Office.
“ Swap Contract ” means (a) any and all interest rate swap transactions, basis swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward foreign exchange transactions, cap transactions, floor transactions, currency options, spot contracts or any other similar transactions or any of the foregoing (including, but without limitation, any options to enter into any of the foregoing), and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., or any International Foreign Exchange Master Agreement.
“ Swap Termination Value ” means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a), the amounts(s) determined as the mark-to-market values(s) for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts.

S CHEDULE B-13
(To Note Purchase Agreement)

“ Synthetic Lease ” means, at any time, any lease (including leases that may be terminated by the lessee at any time) of any property (a) that is accounted for as an operating lease under GAAP and (b) in respect of which the lessee retains or obtains ownership of the property so leased for U.S. Federal income tax purposes, other than any such lease under which such Person is the lessor.
“ System ” means the Company’s integrated electrical transmission and distribution facilities located primarily in the State of Texas and the systems and other property necessary to operate the transmission and distribution facilities, and all improvements to and expansions of such facilities, each New Project (upon its completion) and the Acquired System; provided that, for the purposes hereof, “System” shall not be deemed to include any easements held by the Company.
“ System Lease ” means (i) the Second Amended and Restated Master System Lease Agreement, dated as of July 1, 2012, between the Company, as lessor, and Sharyland, as lessee as supplemented by any lease supplement in accordance with Section 9.8(b) of this Agreement and as further supplemented by any other lease supplement entered into by the Company and Sharyland permitted under Section 10.16 , (ii) the Amended and Restated Lease Agreement (Stanton/Brady/Celeste Assets), dated as of July 1, 2012, between the Company, as lessor, and Sharyland, as lessee as supplemented by any other lease supplement in accordance with Section 9.8(b) of this Agreement and as further supplemented by any other lease supplement entered into by the Company and Sharyland permitted under Section 10.16 and (iii) any and all other leases in connection with the System and the transmission and distribution facilities ancillary thereto.
“ TDC ” means Transmission and Distribution Company, L.L.C., a Texas limited liability company.
“ TDC Note Agreement ” means the Note Purchase Agreement, dated the Closing Date, among TDC and the purchasers named therein.
“ Total Debt ” means, with respect to the Company, all Indebtedness of the Company on a consolidated basis; provided, however, that for purposes of calculating the Company’s Total Debt to Capitalization Ratio, the Company’s Total Debt (i) shall exclude Non-Recourse Debt of a Project Finance Subsidiary and that portion of the Swap Termination Value defined in clause (b) of the definition of “Swap Termination Value” and (ii) shall include Indebtedness of Sharyland on a consolidated basis.
“ Total Debt to Capitalization Ratio ” means the Company’s Total Debt, divided by the sum of Total Debt plus the Company’s capitalization, as shown on the Company’s balance sheet.
“ Transaction Documents ” means, collectively, the Financing Documents and the Material Project Documents.

S CHEDULE B-14
(To Note Purchase Agreement)

“ Transfer ” means, with respect to any item, the sale, exchange, conveyance, lease, transfer or other disposition of such item.
“ USA Patriot Act ” means United States Public Law 107-56, Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 2001, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.
“ Wholly-Owned Subsidiary ” means, at any time, any Subsidiary one hundred percent of all of the equity interests and voting interests of which are owned by any one or more of the Company and the Company’s other Wholly-Owned Subsidiaries at such time.
“ Yield-Maintenance Amount ” is defined in Section 8.6.

S CHEDULE B-15
(To Note Purchase Agreement)

Exhibit 2
Form of Subordination Terms
[See attached.]
[Exhibit 2 - SDTS Second Amendment]

EXHIBIT G
SUBORDINATED DEBT TERMS
Reference is made to that certain Amended and Restated Collateral Agency Agreement (as amended, restated, supplemented or otherwise modified, the “ Collateral Agency Agreement ”), dated as of July 13, 2010, by and among The Bank of New York Mellon Trust Company, N.A., as collateral agent (together with its successors and assigns, the “ Collateral Agent ”), Sharyland Distribution & Transmission Services, L.L.C., a Texas limited liability company (the “ Company ”), the holders of the notes issued pursuant to the Note Purchase Agreement (as defined below) and the other parties from time to time party thereto.
Section 1. Definitions and Rules of Interpretation . Capitalized terms used herein without definition shall have the meanings assigned to such terms in the Collateral Agency Agreement. The rules of construction set forth in Section 1.1 of the Collateral Agency Agreement shall apply to this document as if fully set forth herein. In addition, the following terms shall have the following meanings:
 
1.1	“ Credit Agreement ” shall mean the Second Amended and Restated Credit Agreement, dated as of June 28, 2013 among the Company, as the borrower, the lenders from time to time party thereto and Royal Bank of Canada, as the Administrative Agent, Issuing Bank and Swingline Lender, as amended, restated, supplemented or otherwise modified in writing from time to time.	
 
1.2	“ Entitled Party ” shall mean the Company unless the Collateral Agent or the Company has given notice to the Subordinated Lender that the Collateral Agent has, on behalf of the Secured Parties and pursuant to the Collateral Agency Agreement or related documents, exercised its remedies to foreclose on the Company’s interest in the System Lease and receive payments pursuant to the System Lease directly from Sharyland, in which case the Entitled Party shall mean the Collateral Agent, acting for the benefit of the Secured Parties.	
 
1.3	“ Insolvency Event ” has the meaning set forth in Section 3.1 herein below.	
 
1.4	“ Note Purchase Agreement ” shall mean the Amended and Restated Note Purchase Agreement, dated as of July 13, 2010, by and among the Company, a wholly owned subsidiary thereof, and the holders of the notes party thereunder, as amended, restated, supplemented and otherwise modified.	
 
1.5	“ Reorganization Securities ” shall mean any debt or equity securities issued on account of all or any portion of the Subordinated Indebtedness in connection with an Insolvency Event that are in each case subordinated in liquidation to the Obligations (or any debt or equity securities issued on account of any Obligations) to at least the same extent that the Subordinated Indebtedness are subordinated to the Obligations hereunder.	
 
1.6	“ Sharyland ” shall mean Sharyland Utilities, L.P.	
Exhibit 2

Page 2
 
1.7	“ Subordinated Indebtedness ” shall mean, with respect to Sharyland, Indebtedness (as such term is defined in the Note Purchase Agreement) that is incurred pursuant to (i) Section 8.6(d)(ii) of the Credit Agreement, (ii) Section 10.6(d)(ii) of the Note Purchase Agreement or (iii) any such comparable provision in the debt documents governing any other Permitted Secured Indebtedness.	
 
1.8	“ Subordinated Lenders ” shall mean each and every Person to whom any of the Subordinated Indebtedness are owed.	
 
1.9	“ Subordinated Loan Documents ” shall mean all documentation evidencing the Subordinated Indebtedness.	
 
1.10	“ System Lease ” shall have the meaning specified in the Note Purchase Agreement.	
 
1.11	“ System Lease Obligations ” shall mean any and all Rent (as such term is defined in the System Lease) and other amounts then due and payable under the System Lease.	
Section 2. Subordination of Subordinated Indebtedness . Until the indefeasible payment in full in cash of all the Obligations and the termination of any commitments to lend under any Permitted Secured Indebtedness, the Subordinated Lenders and Sharyland hereby agree that (i) all Subordinated Indebtedness is and shall be subordinated in right of liquidation in relation to all System Lease Obligations to the extent and in the manner hereinafter set forth, (ii) upon the occurrence and during the continuance of any default or event of default under the System Lease (or if after giving effect to a proposed distribution in respect of any part of the Subordinated Indebtedness, a default or event of default under the System Lease will exist), no payments or other distributions whatsoever in respect of any part of the Subordinated Indebtedness shall be made, (iii) upon the occurrence and during the continuance of an Insolvency Event, no payments or other distributions whatsoever in respect of any part of the Subordinated Indebtedness shall be made nor shall any property or assets of Sharyland be applied to the purchase or other acquisition or retirement of any part of the Subordinated Indebtedness, and (iv) upon the occurrence and during the continuance of an Insolvency Event, the Subordinated Lenders shall not accept any payment by or on behalf of Sharyland on account of the Subordinated Indebtedness, other than the payment of reasonable out of pocket costs and expenses (including reasonable attorney’s fees) when due and payable in accordance with the terms of the Subordinated Debt Documents.
Section 3. Liquidation, Dissolution, Bankruptcy . Until the indefeasible payment in full in cash of all the Obligations and the termination of any commitments to lend under any Permitted Secured Indebtedness, and without limitation to the rights of the Secured Parties under the terms of the Financing Documents or the rights of Company under the System Lease:
 
3.1	upon the occurrence and during the continuance of any event with respect to Sharyland that is described in Sections 11(j) or (k) of the Note Purchase Agreement (herein, an “ Insolvency Event ”):	
 
Exhibit 2

Page 3
 
 	3.1.1	the System Lease Obligations shall first be irrevocably and indefeasibly paid in full to the Entitled Party before any of the Subordinated Lenders shall be entitled to receive any payment (other than Reorganization Securities) on account of the Subordinated Indebtedness whether in cash, securities or other assets (other than Reorganization Securities); and	
 
 	3.1.2	any payment or distribution of assets of Sharyland of any kind or character in respect of the Subordinated Indebtedness to which any of the Subordinated Lenders would be entitled if the Subordinated Indebtedness were not subordinated pursuant to the terms hereof shall be made by the trustee, liquidator or agent or other Person making such payment or distribution, directly to the Entitled Party until the System Lease Obligations are paid in full and each of the Subordinated Lenders and, unless the Company is the Entitled Party, the Company irrevocably authorizes and empowers the Entitled Party to receive and collect on its behalf any and all such payments or distributions.	
 
3.2	The Subordinated Lenders agree not to, directly or indirectly, initiate, prosecute or participate in any claim, action or other proceeding (a) challenging the enforceability, validity or priority of the System Lease Obligations or (b) to enforce payment of the Subordinated Indebtedness in violation of these subordination provisions.	
 
Exhibit 2

Page 4
 
Section 4. Incorrect Payments . If, for any reason whatsoever and whether pursuant to an Insolvency Proceeding or otherwise, Sharyland shall make or any of the Subordinated Lenders shall receive any payment or distribution of any kind or character, whether in cash, securities or other property (other than Reorganization Securities), on account or in respect of the Subordinated Indebtedness in contravention of any of the terms set forth herein, such Subordinated Lender shall hold any such payment or distribution in trust for the benefit of the Secured Parties, promptly notify the Entitled Party of the receipt of such payment or distribution and promptly pay over or deliver such distribution or payment to the Entitled Party or to any other Person nominated by the Entitled Party, to hold for the account of the Secured Parties.
Section 5. Non-Impairment . To the fullest extent permitted by applicable Law, no change of law or circumstances shall release or diminish any of the Subordinated Lender’s obligations, liabilities, agreements or duties hereunder, or affect the provisions set forth herein in any way.
Section 6. Benefit of Subordination Provisions . These subordination provisions are intended solely to define the relative rights of the Secured Parties, the Collateral Agent, the Company, the Subordinated Lenders, and their respective successors and permitted assigns.
Section 7. Termination and Reinstatement . Notwithstanding anything to the contrary contained herein, the Subordinated Indebtedness shall no longer be subordinated in right of liquidation pursuant to the terms contained herein otherwise at such time as the Obligations (other than contingent obligations for which no claim has been made) shall have been indefeasibly paid in full in cash and any commitments to lend under any Permitted Secured Indebtedness shall have terminated. If any payment to any of the Entitled Party, the Company, the Collateral Agent or the Secured Parties by Sharyland or any other Person in respect of any of the System Lease Obligations is held to constitute a preference or a voidable transfer under applicable Law, or if for any other reason any such party is required to refund such payment to Sharyland or to such Person or to pay the amount thereof to any other Person, each Subordinated Lender agrees and acknowledges that the provisions set forth herein shall continue to be effective or shall be reinstated, as the case may be, to the extent of any such payment or payments.
Section 8. Restrictions on Transfers . None of the Subordinated Lenders may transfer (by sale, novation or otherwise) any of its rights or obligations under the Subordinated Indebtedness unless the transferee of such interest first agrees in writing to be bound by the terms of this Exhibit G applicable to the transferor of such interest and executes an instrument to that effect.
Section 9. Exercise of Powers .
 
9.1	The Entitled Party shall be entitled to exercise their rights and powers under these subordination provisions in such a manner and at such times as the Entitled Party in its absolute discretion may determine.	
 
9.2	The Subordinated Lenders alone shall be responsible for their contracts, engagements, acts, omissions, defaults and losses and for liabilities incurred by them.	
 
Exhibit 2

Exhibit 10.27
Execution Version
THIRD AMENDMENT, DIRECTION AND WAIVER, dated as of December 10, 2014 (this “ Third Amendment, Direction and Waiver ”) to the AMENDED AND RESTATED NOTE PURCHASE AGREEMENT, dated as of July 13, 2010 (as heretofore amended, restated, supplemented and otherwise modified, the “ Agreement ”), between SHARYLAND DISTRIBUTION & TRANSMISSION SERVICES, L.L.C. (the “ Company ”), a Texas limited liability company and a wholly-owned Subsidiary of Transmission and Distribution Company L.L.C., and the holders of the notes party thereto (“ Holders ”). Capitalized terms used but not otherwise defined in this Third Amendment, Direction and Waiver shall have the meanings set forth in the Agreement (as amended hereby) and the rules of interpretation set forth therein (as amended hereby) shall apply to this Third Amendment, Direction and Waiver.
W I T N E S S E T H :
WHEREAS, the Company and the Holders are parties to the Agreement;
WHEREAS, the Company has requested that the Holders amend the Agreement, as more fully described herein; and
WHEREAS, each Holder party hereto (such Holders constituting the Required Holders) is willing to agree to such amendment, but only upon the terms and subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual agreements herein contained and other good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Amendments to the Agreement . The Agreement is amended to read in its entirety as set forth on Annex A hereto.
2. Amendments to Schedules . Schedule B of the Agreement is hereby amended and restated in its entirety as Schedule B attached to Annex A.
3. Amendments to Exhibits . Exhibit 2 and Exhibit 3 of the Agreement are hereby amended and restated in their entirety as Exhibit 2 and Exhibit 3, respectively, attached to Annex A.
4. Conditions to Third Amendment, Direction and Waiver Effective Date . This Third Amendment, Direction and Waiver shall become effective upon the date the Collateral Agent and the Holders shall have received counterparts of this Third Amendment, Direction and Waiver, duly executed and delivered by the Company and the other Holders.
5. Representations and Warranties to the Holders . In order to induce the Holders to enter into this Third Amendment, Direction and Waiver, the Company hereby represents and warrants as follows:
 
 	(a)	The Company has the limited liability power and authority to execute and deliver this Third Amendment, Direction and Waiver and to carry out the terms and provisions of this Third Amendment, Direction and Waiver and the Agreement, as amended hereby, and has taken all necessary limited liability company action to authorize the execution and delivery by the Company of this Third Amendment, Direction and Waiver and the performance under this Third Amendment, Direction and Waiver and the Agreement, as amended hereby. The Company has duly executed and delivered this Third Amendment, Direction and Waiver, and this Third Amendment, Direction and Waiver constitutes the legal, valid and binding obligation of the Company, enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law).	

 	(b)	The execution and delivery by the Company of this Third Amendment, Direction and Waiver and the performance under this Third Amendment, Direction and Waiver and the Agreement, as amended hereby, do not (i) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of the Company under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter or limited partnership or limited liability company agreement, or any other agreement or instrument to which the Company is bound or by which the Company or any of its properties may be bound or affected, (ii) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to the Company or (iii) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to the Company, which in the case of any of the foregoing clauses (i) through (iii), with respect to Material Project Documents, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.	
 
 	(c)	No consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority is required in connection with the execution or delivery by the Company of this Third Amendment, Direction and Waiver or the performance under this Third Amendment, Direction and Waiver and the Agreement, as amended hereby.	
 
 	(d)	No Default or Event of Default has occurred and is continuing on the date hereof after giving effect to the transactions contemplated herein.	
6. Direction to Collateral Agent . The Holders party hereto, in accordance with Sections 2.1 and 5.2 of the Amended and Restated Collateral Agency Agreement dated as of July 13,

2010 (the “ Collateral Agency Agreement ”), among The Bank of New York Mellon Trust Company, N.A., as collateral agent for the benefit of the Secured Parties (as defined therein) (in such capacity, the “ Collateral Agent ”), the Company and the other Secured Parties, hereby authorize and direct the Collateral Agent, at the sole cost and expense of the Company, as follows:
 
 	(a)	Upon the effectiveness of this Third Amendment, Direction and Waiver (together with the effectiveness of directions from the other holders and lenders referred to in Section 7(b)(ii) below), to execute and deliver to the Company an amendment and restatement of the Collateral Agency Agreement and of the other Collateral Documents in the forms attached hereto as Annex B .	
 
 	(b)	Upon the completion of the FERC Merger, to execute and deliver to the Company a termination of each of the FERC Negative Pledge Agreement and the FERC Pledge Agreement in the form attached hereto as Annex C , such other releases, assignments, terminations and similar documents as the Company shall reasonably request and to authorize the filing of any UCC-3 amendment or termination statements, in each case as may be necessary or reasonably requested by the Company, in order to evidence such termination and release.	
The parties hereto acknowledge and agree that the Collateral Agent shall be a third party beneficiary of Sections 6 and 7 of this Third Amendment, Direction and Waiver.
7. Representations and Warranties to the Collateral Agent .
 
 	(a)	Pursuant to Section 5.2 of the Collateral Agency Agreement The Prudential Insurance Company of America, as a Holder, hereby certifies that the outstanding principal amount of its Notes is [$106,900,125.00].	
 
 	(b)	In order to induce the Collateral Agent to take the actions requested in Section 6 hereof, the Company hereby represents and warrants to the Collateral Agent that (i) no Default or Event of Default has occurred and is continuing on the date hereof and (ii) consents and waivers from lenders and holders constituting the Required Secured Parties (as defined in the Collateral Agency Agreement) will be obtained in connection with the request for the Collateral Agent to take the actions requested in Section 6 hereof.	
8. Waiver . The Holders party hereto hereby waive non-compliance by the Company with Section 2 of that certain Deposit Account Control Agreement, dated as of December 31, 2009, among the Company, the Collateral Agent and Bank of America, N.A in so far as the Company’s opening and maintenance of that certain money market account with Bank of America, N.A. which was closed as of September 25, 2014 violates or has violated the provisions set forth therein.

9. Continuing Effect of Financing Documents . Except as expressly set forth herein, this Third Amendment, Direction and Waiver shall not constitute an amendment or waiver of any provision of the Agreement and shall not be construed as an amendment, waiver or consent to any further or future action on the part of the Company that would require an amendment, waiver or consent of the Holders. Except as expressly amended hereby, the provisions of the Agreement are and shall remain in full force and effect. This Third Amendment, Direction and Waiver shall be deemed a Financing Document for purposes of the Agreement.
10. Fees . In accordance with Section 15.1 of the Agreement, the Company shall have paid the fees, charges and disbursements of the Holders’ special counsel in connection with this Third Amendment, Direction and Waiver.
11. Counterparts . This Third Amendment, Direction and Waiver may be executed by one or more of the parties hereto on any number of separate counterparts (including by facsimile), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed signature page to this Third Amendment, Direction and Waiver by facsimile or electronic transmission shall be as effective as the delivery of a manually executed counterpart of this Third Amendment, Direction and Waiver.
12. Severability . Any provision of this Third Amendment, Direction and Waiver which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
13. Integration . This Third Amendment, Direction and Waiver and the other Financing Documents represent the agreement of the Company and the Holders with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by any Holder relative to the subject matter hereof not expressly set forth or referred to herein or in the other Financing Documents.
14. GOVERNING LAW . THIS THIRD AMENDMENT AND DIRECTION AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS FIRST AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
[ Signatures of Following Page ]

IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment, Direction and Waiver to be duly executed and delivered by their properly and duly authorized officers as of the day and year first above written.

SHARYLAND DISTRIBUTION & TRANSMISSION SERVICES, L.L.C.	
		
By:	 	/s/ Brant Meleski	
Name:	 	Brant Meleski	
Title:	 	Senior Vice President and Chief Financial Officer	
 
[Signature Page to 2010 NPA Third Amendment, Direction and Waiver]

			
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA	
		
By:	 	/s/ Richard Carrell	
	 	Vice President	
 
[Signature Page to 2010 NPA Third Amendment, Direction and Waiver]

Annex A
Amended and Restated Note Purchase Agreement, as amended by the Third Amendment, Direction and Waiver
[See attached.]

Execution Version

 
S HARYLAND D ISTRIBUTION  & T RANSMISSION S ERVICES , L.L.C.
$110,000,000
6.47% Senior Notes due September 30, 2030

A MENDED AND R ESTATED N OTE P URCHASE A GREEMENT

Dated July 13, 2010,
AS AMENDED BY :
F IRST A MENDMENT DATED AS OF J UNE  9, 2011
S ECOND A MENDMENT DATED AS OF O CTOBER  15, 2013
AND
Third Amendment dated as of December 10, 2014

 

TABLE OF CONTENTS

 	 	 	  	Page	 	
		
SECTION 1.        AUTHORIZATION OF NOTES	  	 	2	  	
		
SECTION 2.        SALE AND PURCHASE OF NOTES	  	 	2	  	
		
SECTION 3.        CLOSING	  	 	2	  	
		
SECTION 4.        CONDITIONS TO CLOSING	  	 	3	  	
			
Section 4.1	 	Representations and Warranties	  	 	3	  	
Section 4.2	 	Performance; No Default	  	 	3	  	
Section 4.3	 	Compliance Certificates	  	 	3	  	
Section 4.4	 	Opinions of Counsel	  	 	3	  	
Section 4.5	 	Purchase Permitted By Applicable Law, Etc.	  	 	3	  	
Section 4.6	 	Sale of Other Notes	  	 	4	  	
Section 4.7	 	Payment of Special Counsel and Other Fees and Expenses	  	 	4	  	
Section 4.8	 	Private Placement Number	  	 	4	  	
Section 4.9	 	Changes in Structure	  	 	4	  	
Section 4.10	 	Funding Instructions	  	 	4	  	
Section 4.11	 	Proceedings and Documents	  	 	5	  	
Section 4.12	 	Joinder Agreement, Etc.	  	 	6	  	
Section 4.13	 	UCC Searches; and Litigation Searches	  	 	6	  	
Section 4.14	 	Insurance	  	 	6	  	
Section 4.15	 	Financial Statements	  	 	7	  	
Section 4.16	 	Consents and Approvals	  	 	7	  	
		
SECTION 5.        REPRESENTATIONS AND WARRANTIES OF THE COMPANY	  	 	7	  	
			
Section 5.1	 	Organization; Power and Authority	  	 	7	  	
Section 5.2	 	Authorization, Etc.	  	 	7	  	
Section 5.3	 	Disclosure	  	 	7	  	
Section 5.4	 	Organization and Ownership of Interests	  	 	8	  	
Section 5.5	 	Financial Statements; Material Liabilities	  	 	8	  	
Section 5.6	 	Compliance with Laws, Other Instruments, Etc.	  	 	9	  	
Section 5.7	 	Governmental Authorizations, Etc.	  	 	9	  	
Section 5.8	 	Litigation; Observance of Agreements, Statutes and Orders	  	 	9	  	
Section 5.9	 	Taxes	  	 	9	  	
Section 5.10	 	Title to Property; Leases	  	 	10	  	
Section 5.11	 	Insurance	  	 	10	  	
Section 5.12	 	Licenses, Permits, Etc.; Material Project Documents	  	 	10	  	
Section 5.13	 	Compliance with ERISA	  	 	10	  	
Section 5.14	 	Private Offering by the Company	  	 	11	  	
Section 5.15	 	Use of Proceeds; Margin Regulations	  	 	11	  	
Section 5.16	 	Existing Indebtedness; Future Liens	  	 	11	  	
Section 5.17	 	Foreign Assets Control Regulations, Etc.	  	 	12	  	
Section 5.18	 	Status under Certain Statutes	  	 	12	  	
 
i

TABLE OF CONTENTS
(continued)

 	 	 	  	Page	 	
			
Section 5.19	 	Environmental Matters	  	 	13	  	
Section 5.20	 	Force Majeure Events; Employees	  	 	14	  	
Section 5.21	 	Collateral	  	 	14	  	
		
SECTION 6.        REPRESENTATIONS OF THE PURCHASERS	  	 	14	  	
			
Section 6.1	 	Purchase for Investment	  	 	14	  	
Section 6.2	 	Source of Funds	  	 	15	  	
		
SECTION 7.        INFORMATION	  	 	16	  	
			
Section 7.1	 	Financial and Business Information	  	 	16	  	
Section 7.2	 	Officer’s Certificate	  	 	19	  	
Section 7.3	 	[ Intentionally Omitted ]	  	 	19	  	
		
SECTION 8.        PAYMENT AND PREPAYMENT OF THE NOTES	  	 	19	  	
			
Section 8.1	 	Amortization; Maturity	  	 	19	  	
Section 8.2	 	Optional Prepayments with Yield-Maintenance Amount	  	 	20	  	
Section 8.3	 	Allocation of Partial Prepayments	  	 	20	  	
Section 8.4	 	Maturity; Surrender, Etc.	  	 	20	  	
Section 8.5	 	Purchase of Notes	  	 	20	  	
Section 8.6	 	Yield-Maintenance Amount	  	 	21	  	
		
SECTION 9.        AFFIRMATIVE COVENANTS	  	 	22	  	
			
Section 9.1	 	Compliance with Law	  	 	22	  	
Section 9.2	 	Insurance	  	 	22	  	
Section 9.3	 	Maintenance of Properties	  	 	23	  	
Section 9.4	 	Payment of Taxes and Claims	  	 	23	  	
Section 9.5	 	Existence, Etc.	  	 	23	  	
Section 9.6	 	Books and Records; Inspection Rights	  	 	24	  	
Section 9.7	 	Collateral; Further Assurances	  	 	24	  	
Section 9.8	 	Material Project Documents	  	 	25	  	
Section 9.9	 	Financial Ratios	  	 	26	  	
		
SECTION 10.      NEGATIVE COVENANTS	  	 	26	  	
			
Section 10.1	 	Transactions with Affiliates	  	 	26	  	
Section 10.2	 	Merger, Consolidation, Etc.	  	 	27	  	
Section 10.3	 	Line of Business	  	 	27	  	
Section 10.4	 	Terrorism Sanctions Regulations	  	 	27	  	
Section 10.5	 	Liens	  	 	28	  	
Section 10.6	 	Indebtedness	  	 	29	  	
Section 10.7	 	Loans, Advances, Investments and Contingent Liabilities	  	 	30	  	
Section 10.8	 	No Subsidiaries	  	 	31	  	
Section 10.9	 	Restricted Payments	  	 	31	  	
 
A NNEX A-ii
(Amended and Restated Note Purchase Agreement)

TABLE OF CONTENTS
(continued)

 	 	 	  	Page	 	
			
Section 10.10	 	Sale of Assets, Etc.	  	 	31	  	
Section 10.11	 	Sale or Discount of Receivables	  	 	32	  	
Section 10.12	 	Amendments to Organizational Documents	  	 	32	  	
Section 10.13	 	Sale and Lease-Back	  	 	32	  	
Section 10.14	 	ERISA Compliance	  	 	33	  	
Section 10.15	 	No Margin Stock	  	 	33	  	
Section 10.16	 	Project Documents	  	 	33	  	
Section 10.17	 	Regulation	  	 	34	  	
Section 10.18	 	Swaps	  	 	34	  	
Section 10.19	 	Additional Financial Covenants	  	 	34	  	
		
SECTION 11.        EVENTS OF DEFAULT	  	 	35	  	
		
SECTION 12.        REMEDIES ON DEFAULT, ETC.	  	 	39	  	
			
Section 12.1	 	Acceleration	  	 	39	  	
Section 12.2	 	Other Remedies	  	 	39	  	
Section 12.3	 	Rescission	  	 	39	  	
Section 12.4	 	No Waivers or Election of Remedies, Expenses, Etc.	  	 	40	  	
		
SECTION 13.        REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES	  	 	40	  	
			
Section 13.1	 	Registration of Notes	  	 	40	  	
Section 13.2	 	Transfer and Exchange of Notes	  	 	40	  	
Section 13.3	 	Replacement of Notes	  	 	41	  	
		
SECTION 14.        PAYMENTS ON NOTES	  	 	42	  	
			
Section 14.1	 	Place of Payment	  	 	42	  	
Section 14.2	 	Home Office Payment	  	 	42	  	
		
SECTION 15.        EXPENSES, ETC.	  	 	42	  	
			
Section 15.1	 	Transaction Expenses	  	 	42	  	
Section 15.2	 	Survival	  	 	43	  	
		
SECTION 16.        SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT	  	 	43	  	
		
SECTION 17.        AMENDMENT AND WAIVER	  	 	43	  	
			
Section 17.1	 	Requirements	  	 	43	  	
Section 17.2	 	Solicitation of Holders of Notes	  	 	44	  	
Section 17.3	 	Binding Effect, etc.	  	 	44	  	
Section 17.4	 	Notes Held by Company, etc.	  	 	44	  	
		
SECTION 18.        NOTICES	  	 	45	  	
 
A NNEX A-iii
(Amended and Restated Note Purchase Agreement)

TABLE OF CONTENTS
(continued)

 	 	 	  	Page	 	
		
SECTION 19.        REPRODUCTION OF DOCUMENTS	  	 	45	  	
		
SECTION 20.        CONFIDENTIAL INFORMATION	  	 	45	  	
		
SECTION 21.        SUBSTITUTION OF PURCHASER	  	 	46	  	
		
SECTION 22.        MISCELLANEOUS	  	 	47	  	
			
Section 22.1	 	Successors and Assigns	  	 	47	  	
Section 22.2	 	Payments Due on Non-Business Days	  	 	47	  	
Section 22.3	 	Accounting Terms	  	 	47	  	
Section 22.4	 	Severability	  	 	47	  	
Section 22.5	 	Construction, etc.	  	 	47	  	
Section 22.6	 	Counterparts	  	 	48	  	
Section 22.7	 	Governing Law	  	 	48	  	
Section 22.8	 	Jurisdiction and Process; Waiver of Jury Trial	  	 	48	  	
Section 22.9	 	Transaction References	  	 	49	  	
 
A NNEX A-iv
(Amended and Restated Note Purchase Agreement)

					
S CHEDULE A	 	—	    	I NFORMATION R ELATING TO P URCHASERS	
S CHEDULE B	 	—	    	D EFINED T ERMS	
Schedule 4.12(a)	 	—	    	Deeds of Trust	
Schedule 5.3	 	—	    	Disclosure Materials	
Schedule 5.4	 	—	    	Ownership of the Company, etc.; Officers	
Schedule 5.5	 	—	    	Financial Statements	
Schedule 5.7	 	—	    	Government Authorizations	
Schedule 5.12(a)	 	—	    	Required Permits	
Schedule 5.12(b)	 	—	    	Material Project Documents	
Schedule 5.13	 	—	    	ERISA	
Schedule 5.16	 	—	    	Indebtedness	
Schedule 8.1	 	—	    	Principal Amortization Schedule	
Schedule 9.2	 	—	    	Insurance	
Schedule 10.1	 	—	    	Cap Rock Transaction	
Schedule 10.20	 	—	    	Burdensome Agreements	
Exhibit 1	 	—	    	Form of 6.47% Senior Secured Note due September 30, 2030	
Exhibit 2	 	—	    	Form of Subordination Terms	
Exhibit 3	 	—	    	Form of Subsidiary Guaranty	
	
Security Documents
 	
Exhibit S-1	 	—	    	Form of Amended and Restated Collateral Agency Agreement	
Exhibit S-2	 	—	    	Form of Deed of Trust	
Exhibit S-3A	 	—	    	Form of Company Pledge Agreement	
Exhibit S-3B	 	—	    	Form of TDC Pledge Agreement	
Exhibit S-4	 	—	    	Form of Negative Pledge Agreement	
 
Annex A-v
(Amended and Restated Note Purchase Agreement)

6.47% Senior Notes due September 30, 2030
July 13, 2010
T O E ACH OF THE P URCHASERS L ISTED IN
Schedule A Hereto:
Ladies and Gentlemen:
Sharyland Distribution & Transmission Services, L.L.C., a Texas limited liability company (the “ Company ”), agrees with each of the purchasers whose names appear at the end hereof (each, a “ Purchaser ” and, collectively, the “ Purchasers ”):
RECITALS
WHEREAS, Hunt Transmission Services, L.L.C. (“ Hunt ”) entered into an Agreement and Plan of Merger, dated as of December 17, 2009 (the “ Acquisition Agreement ”), pursuant to which HTS Acquisition Sub., Inc, a Delaware corporation and a wholly owned indirect subsidiary of Hunt (“ Merger Sub ”) merged with and into Cap Rock Holding Corporation (“ Holding ”), a Delaware corporation, which owns directly or indirectly all of the capital stock of Cap Rock Energy Corporation, a Texas corporation (the acquisition and the transactions related therein, the “ Merger ”);
WHEREAS, in connection with the Merger, Merger Sub entered into that certain Note Purchase Agreement, dated as of July 13, 2010 (the “ Acquisition Date ”), among Merger Sub, as issuer, and the Purchasers, as purchasers thereunder, with respect to the issuance of 6.47% Senior Notes due September 30, 2030, in the aggregate principal amount of $110,000,000 (the “ Initial NPA ”);
WHEREAS, Holding as the survivor of the merger with Merger Sub, succeeded to and assumed by operation of law all of the rights, duties, obligations and liabilities of Merger Sub under the Initial NPA, and Holding has confirmed its obligations under the Initial NPA pursuant to that certain Ratification Agreement, dated the Acquisition Date, executed by Holding in favor of the Purchasers;
WHEREAS, Cap Rock Energy Corporation, pursuant to and in accordance with the Plan of Conversion, dated as of the Acquisition Date, was converted from a Texas corporation to a Texas limited liability company, as so converted Cap Rock Energy LLC (“ CR Energy ”);
WHEREAS, pursuant to the Assumption Agreement, dated as of the Acquisition Date, between Holding and CR Energy, CR Energy, with the consent of the Collateral Agent and the Purchasers, assumed all of the rights, duties, obligations and liabilities of Holding under the Initial NPA;
 
A NNEX A-1
(Amended and Restated Note Purchase Agreement)

WHEREAS, pursuant to the Agreement and Plan of Merger, dated as of the Acquisition Date, between CR Energy and the Company, CR Energy was merged into the Company with the Company being the surviving corporation and succeeding by operation of law to the Initial NPA; and
WHEREAS, subject to and on the terms and conditions set forth herein, the parties hereto wish to amend and restate the Initial NPA in its entirety as set forth herein, with the Initial NPA as so amended and restated being hereinafter referred to as the “ Agreement ”;
NOW, THEREFORE, in consideration of the premises and agreements hereinafter set forth, the parties hereto agree as follows:
SECTION 1. AUTHORIZATION OF NOTES.
The Company will authorize the issue and sale of $110,000,000 aggregate principal amount of its 6.47% Senior Notes due September 30, 2030 (the “ Notes ”, such term to include any such notes issued in substitution therefor pursuant to Section 13 ). The Notes shall be substantially in the form set out in Exhibit 1 . Certain capitalized and other terms used in this Agreement are defined in Schedule B ; and references to a “Schedule” or an “Exhibit” are, unless otherwise specified, to a Schedule or an Exhibit attached to this Agreement.
SECTION 2. SALE AND PURCHASE OF NOTES.
Subject to the terms and conditions of this Agreement, the Company will issue and sell to each Purchaser and each Purchaser will purchase from the Company, at the Closing provided for in Section 3 , Notes in the principal amount specified opposite such Purchaser’s name in Schedule A at the purchase price of 100% of the principal amount thereof. The Purchasers’ obligations hereunder are several and not joint obligations and no Purchaser shall have any liability to any Person for the performance or non-performance of any obligation by any other Purchaser hereunder.
SECTION 3. CLOSING.
The sale and purchase of the Notes to be purchased by each Purchaser shall occur at the offices of Bingham McCutchen, 399 Park Avenue, New York, NY, at 11:00 a.m., New York time, at a closing (the “ Closing ”) on July 13, 2010, or on such other Business Day thereafter on or prior to July 16, 2010 as may be agreed upon by the Company and the Purchasers. At the Closing the Company will deliver to each Purchaser the Notes to be purchased by such Purchaser in the form of a single Note (or such greater number of Notes in denominations of at least $1,000,000 as such Purchaser may request) dated the Closing Date and registered in such Purchaser’s name (or in the name of its nominee), against delivery by such Purchaser to the Company or its order of immediately available funds in the amount of the purchase price therefor by wire transfer of immediately available funds for the account of the Company to account number 4426868026 at Bank of America, 901 Main Street, Dallas, TX 75202 ABA: 026009593 or to such other account as established in a flow of funds memorandum that is agreed upon between the Company and the Purchasers. If at the Closing the Company shall fail to tender such Notes to any Purchaser as provided above in this Section 3 , or any of the conditions specified in Section 4 shall not have been fulfilled to such Purchaser’s satisfaction, such
 
A NNEX A-2
(Amended and Restated Note Purchase Agreement)

Purchaser shall, at its election, be relieved of all further obligations under this Agreement, without thereby waiving any rights such Purchaser may have by reason of such failure or such nonfulfillment.
SECTION 4. CONDITIONS TO CLOSING
Each Purchaser’s obligation to purchase and pay for the Notes to be sold to such Purchaser at the Closing is subject to the fulfillment to the satisfaction of each Purchaser, prior to or at the Closing, of the following conditions:
Section 4.1 Representations and Warranties . The representations and warranties of the Company in this Agreement shall be correct when made and at the time of the Closing.
Section 4.2 Performance; No Default . The Company shall have performed and complied with all agreements and conditions contained in this Agreement required to be performed or complied with by it prior to or at the Closing and after giving effect to the issue and sale of the Notes (and the application of the proceeds thereof as contemplated by Section 5.14 ) no Default or Event of Default shall have occurred and be continuing and no “Default” or “Event of Default” under the 2009 Note Agreement or the RBC Agreement shall have occurred and be continuing.
Section 4.3 Compliance Certificates .
(a) Company’s Closing Certificates . The Company shall have delivered to each Purchaser an officer’s certificate, dated the Closing Date, certifying that (i) the conditions specified in Sections 4.1 and 4.2 have been fulfilled, and (ii) that each of the other conditions precedent to the occurrence of the Closing has been satisfied.
(b) Company’s Authority Certificate . The Company shall have delivered to each Purchaser a certificate of its secretary, dated the Closing Date, certifying as to the resolutions attached thereto and other corporate proceedings by the Company relating to the authorization, execution and delivery of the Notes and this Agreement and the other Transaction Documents to which it is a party.
Section 4.4 Opinions of Counsel . Such Purchaser shall have received opinions in form and substance satisfactory to such Purchaser, dated the date of the Closing (a)(i) from Mayer Brown LLP, counsel for the Company, Sharyland, New Owner and New Operator, covering such matters incident to the transactions contemplated hereby as such Purchaser or its counsel may reasonably request, and (ii) from Sutherland, Asbill & Brennan LLP, special counsel for the Company, Sharyland, New Owner and New Operator, covering Federal and Texas regulatory matters (and the Company hereby instructs its counsel to deliver such opinion to the Purchasers and the Secured Parties), and (b) from Bingham McCutchen LLP, in connection with such transactions, in form and substance satisfactory to the Purchasers and covering such other matters incident to such transactions as the Purchasers may reasonably request.
Section 4.5 Purchase Permitted By Applicable Law, Etc . On the date of the Closing such Purchaser’s purchase of Notes shall (a) be permitted by the laws and regulations of
 
A NNEX A-3
(Amended and Restated Note Purchase Agreement)

each jurisdiction to which such Purchaser is subject, without recourse to provisions (such as section 1405(a)(8) of the New York Insurance Law) permitting limited investments by insurance companies without restriction as to the character of the particular investment, (b) not violate any applicable law or regulation (including, without limitation, Regulation T, U or X of the Board of Governors of the Federal Reserve System) and (c) not subject such Purchaser to any tax, penalty or liability under or pursuant to any applicable law or regulation, which law or regulation was not in effect on the date hereof. If requested by such Purchaser, such Purchaser shall have received an Officer’s Certificate certifying as to such matters of fact as such Purchaser may reasonably specify to enable such Purchaser to determine whether such purchase is so permitted.
Section 4.6 Sale of Other Notes . Contemporaneously with the Closing, (a) the Company shall sell to each Purchaser and each Purchaser shall purchase the Notes to be purchased by it at the Closing as specified in Schedule A; (b) the transactions contemplated by the RBC Agreement shall be consummated and (c) the transactions contemplated by the TDC Note Agreement shall be consummated.
Section 4.7 Payment of Special Counsel and Other Fees and Expenses . Without limiting the provisions of Section 15.1 , the Company shall have paid on or before the Closing: (a) the fees, charges and disbursements of the Purchasers’ special counsel, Bingham McCutchen LLP and the Purchasers’ Texas counsel to the extent reflected in a statement of such counsel rendered to the Company at least one Business Day prior to the Closing and (b) all other fees, including to the extent not paid pursuant to the Initial NPA a structuring fee in the amount of $550,000 to Prudential (the “Structuring Fee”), and out-of-pocket costs and expenses (including legal fees and expenses and consultant fees and expenses) and other compensation contemplated hereby or by the other Financing Documents, or pursuant to separate letter agreements, payable to the Purchasers.
Section 4.8 Private Placement Number . A Private Placement Number issued by Standard & Poor’s CUSIP Service Bureau (in cooperation with the SVO) shall have been obtained for the Notes.
Section 4.9 Changes in Structure . The Cap Rock Transaction shall be consummated prior to or contemporaneously with the Closing. The Company shall not have changed its jurisdiction of formation or been a party to any merger or consolidation or succeeded to all or any substantial part of the liabilities of any other entity, at any time following the date of the most recent financial statements referred to in Schedule 5.5 , except in connection with the Cap Rock Transaction.
Section 4.10 Funding Instructions . At least one Business Day prior to the date of the Closing, each Purchaser shall have received written instructions signed by a Responsible Officer on letterhead of the Company confirming the information specified in Section 3 including (i) the name and address of the transferee bank, (ii) such transferee bank’s ABA number and (iii) the account name and number into which the purchase price for the Notes is to be deposited.
 
A NNEX A-4
(Amended and Restated Note Purchase Agreement)

Section 4.11 Proceedings and Documents . Each Purchaser shall have received the following, each to be (i) dated the Closing Date unless otherwise indicated, and (ii) in form and substance satisfactory to the Purchasers:
(a) The Notes to be purchased by the Purchasers;
(b) This Agreement and each other Financing Document, duly executed, authorized and delivered by each party thereto;
(c) The certificates of formation of the Company, each Member, New Owner and New Operator each certified as of a recent date by the Secretary of State of Texas and by such Person’s secretary or other authorized officer;
(d) The organizational documents of each the Company, each Member, New Owner and New Operator certified by such Person’s secretary or other authorized officer;
(e) With respect to each of the Company, Sharyland, New Owner and New Operator, an incumbency certificate signed by the secretary and one other officer of such Person, certifying as to the names, titles and true signatures of the officers of such Person authorized to sign this Agreement, the Notes, the other Financing Documents to which such Person is a party and other documents to be delivered hereunder or thereunder;
(f) A certificate of the secretary of the Company, Sharyland, New Owner and New Operator attaching resolutions of its management committee or other governing body evidencing approval of the transactions contemplated by this Agreement and the other Financing Documents to which such Person is a party and, with respect to the Company, the issuance of the Notes, and in each case, the execution, delivery and performance thereof, and authorizing certain officers to execute and deliver the same, and certifying that such resolutions were duly and validly adopted and have not since been amended, revoked or rescinded;
(g) Good standing certificates as to each of the Company, each Member, New Owner and New Operator from all relevant jurisdictions;
(h) Evidence of the filing and acceptance of financing statements which name the Company, as debtor, and the Collateral Agent, as secured party, in all applicable offices, together with copies of such financing statements;
(i) A schedule of all Required Permits, together with copies thereof certified by officers of the Company as being true, correct and complete, in full force and effect and not subject to any appeal or further proceeding;
(j) Certified copies of the documents delivered in connection with the consummation of the Cap Rock Transaction, including without limitation the Public Utility Commission of Texas and FERC approvals issued in connection with the Cap Rock Transaction;
(k) Copies of the documents delivered in connection with the consummation of the transactions contemplated by the RBC Agreement and of the documents delivered in connection with the consummation of the transactions contemplated by the TDC Note Agreement; and
(l) Such additional documents or certificates with respect to such legal matters or limited liability company, general partnership or other proceedings related to the transactions contemplated hereby as may be reasonably requested by the Purchasers.
 
A NNEX A-5
(Amended and Restated Note Purchase Agreement)

Section 4.12 Joinder Agreement, Etc . The Obligations shall be secured by a perfected first priority security interest (subject to Permitted Liens) in the Collateral in favor of the Collateral Agent, for the benefit of the Secured Parties, and the Company will deliver or cause to be delivered to the Purchasers and the Collateral Agent on the Closing Date a joinder agreement, substantially in the form of Exhibit A attached to the Collateral Agency Agreement, duly executed by the Company, the Collateral Agent and each Purchaser as a “ Joining Party ” (the “ 2010 NPA Joinder Agreement ”), and the following, each of which shall be in full force and effect:
(a) The First Lien Deed of Trust, Security Agreement, Assignment of Rents and Leases and Fixture Filings (Texas) by and from the Company, as grantor, to Peter M. Oxman, as trustee, for the benefit of the Collateral Agent and the Secured Parties, dated as of July 13, 2010, covering the real property listed on Schedule 4.12(a) hereto;
(b) An Assignment of Membership Interests and Pledge Agreement in the form attached hereto as Exhibit S-3A , duly executed by the Company, with respect to its membership interests in New Owner, to the Collateral Agent for the benefit of the Secured Parties (the “ Pledge Agreement (Company) ”), and an Assignment of Membership Interests and Pledge Agreement in the form attached hereto as Exhibit S-3B , duly executed by TDC, with respect to its membership interests in the Company, to the Collateral Agent for the benefit of the Secured Parties (the “ Pledge Agreement (TDC) ”, and together with the Pledge Agreement (Company), the “ Pledge Agreements ”);
(c) A Negative Pledge Agreement in the form attached hereto as Exhibit S-4, duly executed by New Owner to the Collateral Agent for the benefit of the Secured Parties (the “ Negative Pledge Agreement ”);
(d) A joinder agreement, substantially in the form of Exhibit A attached to the Collateral Agency Agreement, duly executed by RBC (the “ RBC Joinder Agreement ”); and
(e) Such other documents, instruments and agreements any Purchaser may reasonably request to grant to the Collateral Agent first priority (subject only to Permitted Liens) perfected Liens on the Collateral.
Section 4.13 UCC Searches; and Litigation Searches . The Collateral Agent and the Purchasers shall have received UCC and litigation searches of the Company, each Member, New Owner and New Operator which searches shall (i) confirm that no Liens other than Permitted Liens exist on the Collateral and that such Persons are not subject to any litigation, and (ii) be otherwise in substance satisfactory to the Collateral Agent and the Purchasers.
Section 4.14 Insurance . The Company shall have delivered to the Purchasers evidence of insurance in effect that meets the requirements of Section 9.2 , and the Purchasers shall have received an insurance consultant’s report, which shall be addressed to the Purchasers and shall be in form and substance satisfactory to the Purchasers.
 
A NNEX A-6
(Amended and Restated Note Purchase Agreement)

Section 4.15 Financial Statements . The Purchasers shall have received unaudited financial statements of the Company and each Member for the calendar quarter ended March 31, 2010.
Section 4.16 Consents and Approvals . All Required Permits and all governmental and third party permits and regulatory and other approvals required to be in effect in connection with the issuance of the Notes hereunder have been obtained and are in effect, all applicable waiting periods have expired without any materially adverse action being taken by any applicable authority, and copies of the documentation thereof shall have been delivered to each Purchaser.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each Purchaser that:
Section 5.1 Organization; Power and Authority . Each of the Company, each Member, New Owner and New Operator is a limited liability company or limited partnership, as applicable, duly organized, validly existing and in good standing under the laws of its jurisdiction of formation, and is duly qualified and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Each of the Company, each Member, New Owner and New Operator has the limited liability company or limited partnership, as applicable, power and authority to own or hold under lease the properties it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver this Agreement and the other Transaction Documents to which it is a party and to perform the provisions hereof and thereof.
Section 5.2 Authorization, Etc . This Agreement and the other Transaction Documents have been duly authorized by all necessary limited liability company or limited partnership, as applicable, action on the part of the Company, each Member, New Owner and New Operator, and this Agreement and the other Transaction Documents constitute, and upon execution and delivery thereof each Note will constitute, a legal, valid and binding obligation of the Company, such Member, New Owner or New Operator, as applicable, enforceable against such Person in accordance with its terms, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors’ rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).
Section 5.3 Disclosure . This Agreement, the other Transaction Documents and the documents, certificates or other writings delivered to the Purchasers by or on behalf of the Company, a Member, New Owner or New Operator in connection with the transactions contemplated hereby, and the financial statements listed in Schedule 5.5 (this Agreement, and such documents, certificates or other writings listed on Schedule 5.3 and such financial statements delivered to each Purchaser and listed on Schedule 5.5 being referred to, collectively, as the “ Disclosure Documents ”), taken as a whole, do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not
 
A NNEX A-7
(Amended and Restated Note Purchase Agreement)

misleading in light of the circumstances under which they were made. The projections and pro forma financial information contained in the materials referenced above are based upon good faith estimates and assumptions believed by management of the Company and Sharyland to be reasonable at the time made and on the Closing Date, it being recognized by each Purchaser that such financial information as it relates to future events is not to be viewed as fact and that actual results during the period or periods covered by such financial information may differ from the projected results set forth therein by a material amount. Except as disclosed in the Disclosure Documents, since December 31, 2009, there has been no change in the financial condition, operations, business, properties or prospects of the Company, a Member, New Owner or New Operator except changes that individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. There is no fact known to the Company that could reasonably be expected to have a Material Adverse Effect that has not been set forth herein or in the Disclosure Documents.
Section 5.4 Organization and Ownership of Interests . Schedule 5.4 contains a complete and correct list and description of (i) each of the Company’s, each Member’s, New Owner’s and New Operator’s jurisdiction of its organization and its ownership structure, (ii) the Company’s and each Member’s Subsidiaries, and (iii) the Company’s, each Member’s, New Owner’s and New Operator’s senior officers. None of the Company, Sharyland, New Owner or New Operator has any Subsidiaries as of the Closing Date except as shown on Schedule 5.4 .
Section 5.5 Financial Statements; Material Liabilities . The Company and Sharyland have delivered to each Purchaser copies of the financial statements listed on Schedule 5.5 .
(a) With respect to the consolidated financial statements of the Company and Sharyland, all of such financial statements (including in each case the related schedules and notes) fairly present in all material respects the consolidated financial positions of the Company and Sharyland, each as of the respective dates specified in such Schedule and the results of their operations and cash flows for the respective periods so specified and have been prepared in accordance with GAAP consistently applied throughout the periods involved except as set forth in the notes thereto (subject, in the case of any interim financial statements, to normal year-end adjustments). Neither the Company nor Sharyland has any material liabilities that are not disclosed on such financial statements or otherwise disclosed in the Disclosure Documents.
(b) With respect to the consolidated financial statements of Cap Rock Energy Corporation, to the knowledge of the Company and Sharyland, all of such financial statements (including in each case the related schedules and notes) fairly present in all material respects the consolidated financial positions of Cap Rock Energy Corporation as of the date specified in Schedule 5.5 and the results of its operations and cash flows, on a consolidated basis, for the period so specified and have been prepared in accordance with GAAP consistently applied throughout the periods involved except as set forth in the notes thereto (subject, in the case of any interim financial statements, to normal year-end adjustments). To the knowledge of the Company and Sharyland, Cap Rock Energy Corporation does not have any material liabilities that are not disclosed on such financial statements or otherwise disclosed in the Disclosure Documents.
 
A NNEX A-8
(Amended and Restated Note Purchase Agreement)

Section 5.6 Compliance with Laws, Other Instruments, Etc . The execution, delivery and performance by the Company, the Members, New Owner and New Operator of this Agreement and the Notes and the other Transaction Documents to which such Person is a party, do not and will not (i) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of such Person under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter or limited partnership or limited liability company agreement, or any other agreement or instrument to which such Person is bound or by which such Person or any of its properties may be bound or affected, (ii) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to such Person or (iii) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to such Person, which in the case of any of the foregoing clauses (i) through (iii), with respect to Material Project Documents, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.
Section 5.7 Governmental Authorizations, Etc . Except as set forth on Schedule 5.7 , no consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority is required in connection with the execution, delivery or performance by the Company, either Member, New Owner or New Operator of this Agreement or the Notes or any of the other Transaction Documents to which it is a party.
Section 5.8 Litigation; Observance of Agreements, Statutes and Orders . (a) There are no actions, suits, investigations or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company, either Member, New Owner or New Operator or any of their property in any court or before any arbitrator of any kind or before or by any Governmental Authority that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.
(b) None of the Company, either Member, New Operator or New Owner is in default under any term of any Material Project Document or any other agreement or any order, judgment, decree or ruling of any court, arbitrator or Governmental Authority or is in violation of any applicable law, ordinance, rule or regulation (including without limitation Environmental Laws or the USA Patriot Act) of any Governmental Authority, which default or violation, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.
(c) To the knowledge of the Company, after due inquiry, no breach or default under any of the Material Project Documents has occurred and is continuing.
Section 5.9 Taxes . Each of the Company, each Member, New Owner and New Operator has filed all material tax returns that are required to have been filed (or timely requests for extensions have been filed, have been granted and are not expired) in any jurisdiction, and has paid all taxes shown to be due and payable on such returns and all other taxes and assessments levied upon them or their properties, assets, income or franchises, to the extent such taxes and assessments have become due and payable and before they have become delinquent, except for any taxes and assessments (i) the amount of which is not individually or in the aggregate material or (ii) the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which such Person has
 
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established adequate reserves in accordance with GAAP. The Company knows of no basis for any other tax or assessment that could reasonably be expected to have a Material Adverse Effect. The charges, accruals and reserves on the books of the Company in respect of Federal, state or other taxes for all fiscal periods are adequate.
Section 5.10 Title to Property; Leases . The Company has good and sufficient title to the System and the Acquired System, New Owner has good and sufficient title to the FERC Assets and the Company, Sharyland, New Owner and New Operator have good and sufficient title to their properties that individually or in the aggregate are material to them, free and clear of Liens (other than Permitted Liens). All leases that individually or in the aggregate are material to the Company, Sharyland, New Owner or New Operator are valid and subsisting and are in full force and effect in all material respects.
Section 5.11 Insurance . Sharyland and New Operator have all insurance coverage required by Section 9.2 .
Section 5.12 Licenses, Permits, Etc.; Material Project Documents . The Company, Sharyland, New Owner and New Operator own or possess all governmental and third party licenses, permits, franchises, authorizations, patents, copyrights, proprietary software, service marks, trademarks and trade names, or rights thereto, that are material to the ownership, leasing, operating and maintenance of the System, including the Acquired System, and the FERC Assets, including the Certificates of Convenience and Necessity (#30192, #30026, #30114 and #30191) issued or transferred by the Public Utility Commission of Texas to Sharyland and the New Operator (collectively, the “ Required Permits ”), without known conflict with the rights of others. All Required Permits are listed in Schedule 5.12(a). The Material Project Documents listed on Schedule 5.12(b) constitute and include all material contracts and agreements to which the Company, Sharyland, New Owner or New Operator is a party. Each Material Project Document is in full force and effect, and constitutes the legal, valid and binding obligation of each party thereto as of the date hereof.
Section 5.13 Compliance with ERISA . The Company and each ERISA Affiliate have operated and administered each Plan in compliance with all applicable laws except for such instances of noncompliance as have not resulted in and could not reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any ERISA Affiliate has incurred any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans (as defined in section 3 of ERISA), and no event, transaction or condition has occurred or exists that could reasonably be expected to result in the incurrence of any such liability by the Company or any ERISA Affiliate, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate, in either case pursuant to Title I or IV of ERISA or to such penalty or excise tax provisions or to section 401(a)(29) or 412 of the Code or section 4068 of ERISA, other than such liabilities or Liens as would not be individually or in the aggregate material.
(b) The present value of the aggregate benefit liabilities under each of the Plans (other than Multiemployer Plans), determined as of the end of such Plan’s most recently ended plan year on the basis of the actuarial assumptions specified for funding purposes in such Plan’s most recent actuarial valuation report did not exceed the aggregate current value of the
 
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assets of such Plan allocable to such benefit liabilities by an amount that could reasonably be expected to result in a Material Adverse Effect. The term “benefit liabilities” has the meaning specified in section 4001 of ERISA and the terms “current value” and “present value” have the meanings specified in section 3 of ERISA.
(c) The Company and its ERISA Affiliates have not incurred withdrawal liabilities (and are not subject to contingent withdrawal liabilities) under section 4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate are material.
(d) The expected postretirement benefit obligation (determined as of the last day of the Company’s most recently ended fiscal year in accordance with Financial Accounting Standards Board Statement No. 106, without regard to liabilities attributable to continuation coverage mandated by section 4980B of the Code) of the Company is not material to it.
(e) The execution and delivery of this Agreement and the issuance and sale of the Notes hereunder will not involve any non-exempt prohibited transaction under section 406 of ERISA or in connection with which a tax could be imposed pursuant to section 4975(c)(1)(A)-(D) of the Code. The representation by the Company to each Purchaser in the first sentence of this Section 5.13(e) is made in reliance upon and subject to the accuracy of such Purchaser’s representation in Section 6.2 as to the sources of the funds used to pay the purchase price of the Notes to be purchased by such Purchaser.
Section 5.14 Private Offering by the Company . Neither the Company nor anyone acting on its behalf has offered the Notes or any similar securities for sale to, or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof with, any person other than the Purchasers and not more than five other Institutional Investors, each of which has been offered the Notes at a private sale for investment. Neither the Company nor anyone acting on its behalf has taken, or will take, any action that would subject the issuance or sale of the Notes to the registration requirements of Section 5 of the Securities Act or to the registration requirements of any securities or blue sky laws of any applicable jurisdiction.
Section 5.15 Use of Proceeds; Margin Regulations . The Company has applied the proceeds of the sale of the Notes to (i) pay the purchase price for the Cap Rock Transaction and (ii) pay all fees, expenses and costs related to Closing, including legal fees and the Structuring Fee. No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for the purpose of buying or carrying any margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System (12 CFR 221), or for the purpose of buying or carrying or trading in any securities under such circumstances as to involve the Company in a violation of Regulation X of said Board (12 CFR 224) or to involve any broker or dealer in a violation of Regulation T of said Board (12 CFR 220). As used in this Section, the terms “margin stock” and “purpose of buying or carrying” shall have the meanings assigned to them in Regulation U.
Section 5.16 Existing Indebtedness; Future Liens . (a)  Schedule 5.16 sets forth a complete and correct list of all outstanding Indebtedness of the Company, each Member, New Owner and New Operator as of March 31, 2010 (including a description of the obligors and obligees, principal amount outstanding and collateral therefor, if any, and Guaranty thereof, if
 
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any). Since March 31, 2010, there has been no material change in the amounts, interest rates, sinking funds, installment payments or maturities of the Indebtedness of the Company, a Member, New Owner or New Operator. None of the Company, a Member, New Owner or New Operator is in default and no waiver of default is currently in effect, in the payment of any principal or interest on any of its Indebtedness and no event or condition exists with respect to any of its Indebtedness that would permit (or that with notice or the lapse of time, or both, would permit) one or more Persons to cause such Indebtedness to become due and payable before its stated maturity or before its regularly scheduled dates of payment.
(b) The Company has not agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its property, whether now owned or hereafter acquired, to be subject to a Lien not otherwise permitted by Section 10.5 .
(c) The Company is not a party to, nor otherwise subject to any provision contained in, any instrument evidencing Indebtedness of the Company, any agreement relating thereto or any other agreement (including, but not limited to, its charter or other organizational document) which limits the amount of, or otherwise imposes restrictions on the incurring of, Indebtedness of the Company, other than the 2009 Note Agreement and the RBC Agreement.
Section 5.17 Foreign Assets Control Regulations, Etc . (a) Neither the sale of the Notes by the Company hereunder nor the use of the proceeds thereof will violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto.
(b) None of the Company, the Members, New Owner or New Operator: (i) is a Person described or designated in the Specially Designated Nationals and Blocked Persons List of the Office of Foreign Assets Control or in Section 1 of the Anti-Terrorism Order or (ii) engages in any dealings or transactions with any such Person. The Company, each Member, New Owner and New Operator is in compliance, in all material respects, with the USA Patriot Act.
(c) No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for any payments to any governmental official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977, as amended, assuming in all cases that such Act applies to the Company and the Members.
Section 5.18 Status under Certain Statutes . Prior to, and after consummation of, the Cap Rock Transaction:
(a) Neither Member nor the Company is an “investment company” or a company “controlled” by an “investment company” within the meaning of the Investment Company Act of 1940, as amended, or an “investment adviser” within the meaning of the Investment Advisers Act of 1940, as amended.
 
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(b) Neither the Company nor either Member is a “public utility” under the FPA and the regulations of FERC thereunder. The execution, delivery and performance of the Company’s and Sharyland’s obligations under the Transaction Documents requires no authorization of approval by, or notice to, and is not subject to the jurisdiction of, FERC under the FPA.
(c) Sharyland and the holding company system of which it is a part have obtained a waiver of the requirements of 18 C.F.R. 366.21, 366.22 and 366.23 (FERC Docket No. PH06-59-000), but are subject to the FERC regulations relating to regulatory access to books and records. Sharyland and the holding company system of which it is a part have filed a notice of holding company status under FERC Docket No. HC06-1-000 and may be required to submit a revised notice of holding company status and/or a revised request for the waiver described in the preceding sentence as a result of the transactions contemplated in the Transaction Documents or in Schedule 10.1 . Under FERC’s currently effective regulations, the Company will be deemed not to be a “public-utility company” and as a result TDC is not a “holding company” under PUHCA; as a result of the Cap Rock Transactions, Sharyland will become a “holding company” under PUHCA.
(d) The Company is subject to regulation as an “electric utility” by the Public Utility Commission of Texas. The execution, delivery and performance of the Company’s and Sharyland’s obligations under the Transaction Documents requires no authorization or approval by, or notice to, the Public Utility Commission of Texas or under the Public Utility Regulatory Act of Texas other than those that have been obtained.
(e) Solely by virtue of the execution, delivery and performance of the Transaction Documents, no Purchaser will become subject to any of the provisions of the FPA, PUHCA (based on FERC’s currently effective definitions under PUHCA) or the Public Utility Regulatory Act of Texas, or to regulation under any such statute.
Section 5.19 Environmental Matters . (a) The Company has no knowledge of any claims nor has it received any notice of any claim, and no proceeding has been instituted raising any claim against the Company, a Member, New Owner or New Operator or any of their real properties now or formerly owned, leased or operated by any of them or other assets, alleging any damage to the environment or violation of any Environmental Laws, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect.
(b) The Company has no knowledge of any facts which would give rise to any claim, public or private, of violation of Environmental Laws or damage to the environment emanating from, occurring on or in any way related to real properties now or formerly owned, leased or operated by the Company, either Member, New Owner or New Operator or to other assets or its use, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect.
(c) None of the Company, a Member, New Owner or New Operator has stored any Hazardous Materials on real properties now or formerly owned, leased or operated by any of them and has not disposed of any Hazardous Materials in a manner contrary to any Environmental Laws in each case in any manner that could reasonably be expected to result in a Material Adverse Effect; and
(d) All buildings on all real properties now owned, leased or operated by the Company, a Member, New Owner or New Operator are in compliance with applicable Environmental Laws, except where failure to comply could not reasonably be expected to result in a Material Adverse Effect.
 
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Section 5.20 Force Majeure Events; Employees . None of the System, the Acquired System, the FERC Assets nor any of the other assets of the Company, a Member, New Owner and New Operator has suffered any Force Majeure Event that is continuing. Neither the Company nor New Owner has any employees.
Section 5.21 Collateral . The Collateral, as described in the Security Documents, constitutes all of the Company’s rights in the System Lease and the System and all of its membership interests in New Owner and all of TDC’s membership interests in the Company. The security interests in the Collateral granted to the Collateral Agent (for the benefit of the Secured Parties) pursuant to the Financing Documents: (a) constitute as to personal property included in the Collateral and, with respect to subsequently acquired personal property included in the Collateral, will constitute, a perfected security interest and Lien under each applicable Uniform Commercial Code, and (b) are, and, with respect to such subsequently acquired property, will be, as to Collateral perfected under each applicable Uniform Commercial Code, superior and prior to the rights of all third Persons now existing or hereafter arising whether by way of mortgage, lien, security interests, encumbrance, assignment or otherwise, except for Permitted Liens. All action as is necessary has been taken to establish and perfect the Collateral Agent’s rights in and to, and the first lien priority of its Lien on, the Collateral, including any recording, filing, registration, delivery to the Collateral Agent, giving of notice or other similar action. The Security Documents and financing statements relating thereto have been duly filed or recorded in each office and in each jurisdiction where required in order to create and perfect the Lien and security interest described above and the priority thereof.
SECTION 6. REPRESENTATIONS OF THE PURCHASERS.
Section 6.1 Purchase for Investment . Each Purchaser severally represents that it is an “ Accredited Investor ” as defined in Rule 501 of Regulation D under the Securities Act. Each Purchaser severally represents that it is purchasing the Notes for its own account or for one or more separate accounts maintained by such Purchaser or for the account of one or more pension or trust funds and not with a view to the distribution thereof, provided that the disposition of such Purchaser’s property shall at all times be within such Purchaser’s control. Each Purchaser understands that the Notes have not been registered under the Securities Act and may be resold only if registered pursuant to the provisions of the Securities Act or if an exemption from registration is available, except under circumstances where neither such registration nor such an exemption is required by law, and that the Company is not required to register the Notes.
 
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Section 6.2 Source of Funds . Each Purchaser severally represents that at least one of the following statements is an accurate representation as to each source of funds (a “ Source ”) to be used by such Purchaser to pay the purchase price of the Notes to be purchased by such Purchaser hereunder:
(a) the Source is an “ insurance company general account ” (as the term is defined in the United States Department of Labor’s Prohibited Transaction Exemption (“ PTE ”) 95-60) in respect of which the reserves and liabilities (as defined by the annual statement for life insurance companies approved by the National Association of Insurance Commissioners (the “ NAIC Annual Statement ”)) for the general account contract(s) held by or on behalf of any employee benefit plan together with the amount of the reserves and liabilities for the general account contract(s) held by or on behalf of any other employee benefit plans maintained by the same employer (or affiliate thereof as defined in PTE 95-60) or by the same employee organization in the general account do not exceed 10% of the total reserves and liabilities of the general account (exclusive of separate account liabilities) plus surplus as set forth in the NAIC Annual Statement filed with such Purchaser’s state of domicile; or
(b) the Source is a separate account that is maintained solely in connection with such Purchaser’s fixed contractual obligations under which the amounts payable, or credited, to any employee benefit plan (or its related trust) that has any interest in such separate account (or to any participant or beneficiary of such plan (including any annuitant)) are not affected in any manner by the investment performance of the separate account; or
(c) the Source is either (i) an insurance company pooled separate account, within the meaning of PTE 90-1 or (ii) a bank collective investment fund, within the meaning of the PTE 91-38 and, except as disclosed by such Purchaser to the Company in writing pursuant to this clause (c), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; or
(d) the Source constitutes assets of an “investment fund” (within the meaning of Part V of PTE 84-14 (the “ QPAM Exemption ”)) managed by a “qualified professional asset manager” or “QPAM” (within the meaning of Part V of the QPAM Exemption), no employee benefit plan’s assets that are included in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Section V(c)(1) of the QPAM Exemption) of such employer or by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, the conditions of Part I(c) and (g) of the QPAM Exemption are satisfied as of the last day of the most recent calendar quarter, the QPAM does not own a 10% or more interest in the Company and no Person controlling or controlled by the QPAM (applying the definition of “control” in Section V(e) of the QPAM Exemption) owns a 20% or more interest in the Company (or less than 20% but greater than 10% if such Person exercises control over the management or policies of the Company by reason of its ownership interest) and (i) the identity of such QPAM and (ii) the names of all employee benefit plans whose assets are included in such investment fund have been disclosed to the Company in writing pursuant to this clause (d); or
(e) the Source constitutes assets of a “plan(s)” (within the meaning of Section IV of PTE 96-23 (the “ INHAM Exemption ”)) managed by an “in-house asset manager” or
 
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“INHAM” (within the meaning of Part IV of the INHAM Exemption), the conditions of Part I(a), (g) and (h) of the INHAM Exemption are satisfied, neither the INHAM nor a person controlling or controlled by the INHAM (applying the definition of “control” in Section IV(d) of the INHAM Exemption) owns a 5% or more interest in the Company and (i) the identity of such INHAM and (ii) the name(s) of the employee benefit plan(s) whose assets constitute the Source have been disclosed to the Company in writing pursuant to this clause (e); or
(f) the Source is a governmental plan; or
(g) the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this clause (g); or
(h) the Source does not include assets of any employee benefit plan, other than a plan exempt from the coverage of ERISA.
As used in this Section 6.2 , the terms “ employee benefit plan, ” “ governmental plan, ” and “ separate account ” shall have the respective meanings assigned to such terms in section 3 of ERISA.
SECTION 7. INFORMATION.
Section 7.1 Financial and Business Information . The Company shall deliver, and shall cause Sharyland to deliver, and shall use commercially reasonable efforts to cause each other Qualified Lessee (other than any Consolidated Qualified Lessee) to deliver, to each Holder of Notes ( provided , that no default shall arise under this Section 7.1 as a result of the failure by a Qualified Lessee other than Sharyland to deliver financial statements and other documents in accordance with the requirements of an applicable Lease and such Lease is terminated in accordance with Section 9.14 hereunder):
(a) Quarterly Statements — within 45 days after the end of each quarterly fiscal period in each calendar year of such Person and its Subsidiaries (excluding the last quarterly fiscal period of each such calendar year), duplicate copies of
(i) balance sheets of such Person and its Subsidiaries on a consolidated basis as at the end of such quarter, and
(ii) profit and loss statements and cash flows statements for such Person and its Subsidiaries on a consolidated basis for such quarter and (in the case of the second and third quarters) for the portion of the calendar year ending with such quarter,
(iii) setting forth in each case in comparative form the figures for the corresponding periods in the previous calendar year, all in reasonable detail, prepared in accordance with GAAP applicable to quarterly financial statements generally, and certified by a Senior Financial Officer of such Person as fairly presenting, in all material respects, the financial position of the companies being reported on and their results of operations and cash flows, subject to changes resulting from year-end adjustments;
 
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(b) Annual Statements — within 90 days after the end of each calendar year of the Company and each Qualified Lessee (other than a Consolidated Qualified Lessee), as applicable, duplicate copies of
(i) balance sheets of such Person and its Subsidiaries on a consolidated basis as at the end of such year; and
(ii) statements of income, profit and loss statements and cash flow statements for such Person and its Subsidiaries on a consolidated basis for such year,
setting forth in each case in comparative form the figures for the previous calendar year, all in reasonable detail, prepared in accordance with GAAP, and accompanied by
(A) an opinion thereon of Ernst & Young LLP or another independent public accounting firm of nationally recognized standing selected by the Company or such Qualified Lessee (herein, the “ Approved Accountant ”), which opinion shall state that such financial statements present fairly, in all material respects, the financial position of the companies being reported upon and their results of operations and cash flows and have been prepared in conformity with GAAP, and that the examination of the Approved Accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and that such audit provides a reasonable basis for such opinion in the circumstances, and
(B) a certificate of the Approved Accountants stating that they have reviewed this Agreement and stating further whether, in making their audit, they have become aware of any condition or event that then constitutes a Default or an Event of Default, and, if they are aware that any such condition or event then exists, specifying the nature and period of the existence thereof (it being understood that the Approved Accountants shall not be liable, directly or indirectly, for any failure to obtain knowledge of any Default or Event of Default unless the Approved Accountants should have obtained knowledge thereof in making an audit in accordance with generally accepted auditing standards or did not make such an audit);
(c) Other Reports — promptly upon their becoming available, and to the extent not otherwise required to be delivered pursuant to another provision of this Agreement, one copy of (i) each financial statement and budget and such other reports and notices as a
 
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Holder may reasonably request sent by the Company or any Qualified Lessee to its Subsidiaries, (ii) each report or filing (without exhibits except as expressly requested by such Holder) other than regular and periodic reports and filings made by the Company, any Subsidiary, or any Qualified Lessee to any state or Federal regulatory body and (iii) each report and filing made by the Company to its lenders;
(d) Notice of Default or Event of Default — promptly, and in any event within 5 Business Days after (i) a Responsible Officer of the Company becoming aware of the existence of any Default or Event of Default or that any Person has given any notice or taken any action with respect to a claimed default hereunder or that any Person has given any notice or taken any action with respect to a claimed default of the type referred to in Section 11(i) , a written notice specifying the nature and period of existence thereof and what action the Company or any Subsidiary is taking or proposes to take with respect thereto and (ii) the Company receives a written notice of default under a System Lease from the applicable Qualified Lessee, a copy of such notice of default or a written notice specifying the nature and period of existence of such default and what action the Company is taking or proposes to take with respect thereto;
(e) [Intentionally Omitted];
(f) [Intentionally Omitted];
(g) Notices from Governmental Authority — promptly, and in any event within 5 Business Days of receipt (or knowledge thereof by a Responsible Officer of the Company) of copies of any notice to the Company, any Subsidiary, or any Qualified Lessee from any Federal or state Governmental Authority relating to any order, ruling, statute or other law or regulation that could reasonably be expected to have a Material Adverse Effect;
(h) Other Notices — promptly, and in any event within 5 Business Days of receipt (or knowledge by a Responsible Officer of the Company) thereof:
(i) any pending or threatened adversarial or contested proceeding of or before a Governmental Authority relating to the System or the System Leases that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect;
(ii) any litigation or proceeding taken or threatened in writing against the Company, any Subsidiary, or any Qualified Lessee, that, if successful, could reasonably be expected to result in a Material Adverse Effect;
(i) Annual Operating Budgets — As soon as available and in any event within 30 days after the close of each calendar year of the Company and each Qualified Lessee (other than a Consolidated Qualified Lessee), as the case may be,, the annual budget of the Company and its Subsidiaries and each Qualified Lessee, as applicable.
(j) Information Required by Rule 144A — upon the request of such Holder (and shall deliver to any qualified institutional buyer designated by such Holder), such financial
 
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and other information as such Holder may reasonably determine to be necessary in order to permit compliance with the information requirements of Rule 144A under the Securities Act in connection with the resale of Notes, except at such times as the Company is subject to the reporting requirements of section 13 or 15(d) of the Exchange Act (for the purpose of this Section 7.1(j) , the term “ qualified institutional buyer ” shall have the meaning specified in Rule 144A under the Securities Act); and
(k) Requested Information — with reasonable promptness, such other data and information relating to the business, operations, affairs, financial condition, assets or properties of the Company or relating to the ability of the Company to perform its obligations hereunder and under the Notes as from time to time may be reasonably requested by any such Holder of Notes.
Section 7.2 Officer’s Certificate . Each set of financial statements delivered pursuant to Section 7.1(a) or Section 7.1(b) shall be accompanied by a certificate of a Senior Financial Officer of each Qualified Lessee (other than a Consolidated Qualified Lessee) or the Company, as applicable, setting forth:
(a) Covenant Compliance — the information (including detailed calculations) required in order to establish whether the Company was in compliance with the requirements of Sections 9.9 , 10.6 and 10.9 of this Agreement, during the quarterly or annual period covered by the statements then being furnished (including with respect to each such Section, where applicable, the calculations of the maximum or minimum amount, ratio or percentage, as the case may be, permissible under the terms of such Sections, and the calculation of the amount, ratio or percentage then in existence); and
(b) Event of Default — a statement that such Senior Financial Officer has reviewed the relevant terms hereof and has made, or caused to be made, under his or her supervision, a review of the transactions and conditions of the Company from the beginning of the quarterly or annual period covered by the statements then being furnished to the date of the certificate and that no Default or an Event of Default has occurred and is continuing (or in the case of any Qualified Lessee, any default or event of default has occurred and is continuing under any Leases to which it is a party, which default or event of default constitutes an Event of Default pursuant to Section 11(f)) or, if any such condition or event has occurred and is continuing (including, without limitation, any such event or condition resulting from the failure of the Company to comply with any Environmental Law), (or in the case of any Qualified Lessee, any default or event of default has occurred and is continuing under any Leases to which it is a party, which default or event of default constitutes an Event of Default pursuant to Section 11(f)), specifying the nature and period of existence thereof and what action the Company shall have taken or proposes to take with respect thereto.
Section 7.3 [Intentionally Omitted ]
SECTION 8. PAYMENT AND PREPAYMENT OF THE NOTES.
Section 8.1 Amortization; Maturity . On each Payment Date, the Company will prepay the principal amounts set forth in the amortization schedule attached hereto as Schedule 8.1 (the “Amortization Schedule”) (or such lesser principal amount as shall then be
 
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outstanding) of the Notes at par and without payment of the Yield-Maintenance Amount or any premium, provided that upon any partial prepayment of the Notes pursuant to Section 8.2 , the principal amount of each required prepayment of the Notes becoming due under this Section 8.1 on and after the date of such prepayment shall be reduced in the same proportion as the aggregate unpaid principal amount of the Notes is reduced as a result of the prepayment. The entire unpaid principal balance of the Notes shall be due and payable on the Maturity Date.
Section 8.2 Optional Prepayments with Yield-Maintenance Amount . The Company may, at its option, upon notice as provided below, prepay at any time all, or from time to time any part of, the Notes, in an amount not less than $1,000,000 in the case of a partial prepayment, at 100% of the principal amount so prepaid, and the Yield-Maintenance Amount determined for the prepayment date with respect to such principal amount. The Company will give each Holder of Notes written notice of each optional prepayment under this Section 8.2 not less than 30 days and not more than 60 days prior to the date fixed for such prepayment. Each such notice shall specify such date (which shall be a Business Day), the aggregate principal amount of the Notes to be prepaid on such date, the principal amount of each Note held by such Holder to be prepaid (determined in accordance with Section 8.3 ), and the interest to be paid on the prepayment date with respect to such principal amount being prepaid, and shall be accompanied by a certificate of a Senior Financial Officer as to the estimated Yield-Maintenance Amount due in connection with such prepayment (calculated as if the date of such notice were the date of the prepayment), setting forth the details of such computation. Two Business Days prior to such prepayment, the Company shall deliver to each Holder of Notes a certificate of a Senior Financial Officer specifying the calculation of such Yield-Maintenance Amount as of the specified prepayment date.
Section 8.3 Allocation of Partial Prepayments . In the case of each partial prepayment of the Notes, the principal amount of the Notes to be prepaid shall be allocated among all of the Notes at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof not theretofore called for prepayment.
Section 8.4 Maturity; Surrender, Etc . In the case of each prepayment of Notes pursuant to this Section 8, the principal amount of each Note to be prepaid shall mature and become due and payable on the date fixed for such prepayment (which shall be a Business Day), together with interest on such principal amount accrued to such date and the applicable Yield-Maintenance Amount, if any. From and after such date, unless the Company shall fail to pay such principal amount when so due and payable, together with the interest and Yield-Maintenance Amount, if any, as aforesaid, interest on such principal amount shall cease to accrue. Any Note paid or prepaid in full shall be surrendered to the Company and cancelled and shall not be reissued, and no Note shall be issued in lieu of any prepaid principal amount of any Note.
Section 8.5 Purchase of Notes . The Company will not and will not permit any Affiliate to purchase, redeem, prepay or otherwise acquire, directly or indirectly, any of the outstanding Notes except (a) upon the payment or prepayment of the Notes in accordance with the terms of this Agreement and the Notes or (b) pursuant to Section 13.2(b) ; provided that if an Affiliate which does not Control and is not Controlled by the Company has so acquired any of the outstanding Notes, such acquisition shall not constitute an Event of Default. The Company
 
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will promptly cancel all Notes acquired by it or any Affiliate pursuant to any payment or prepayment of Notes pursuant to any provision of this Agreement and no Notes may be issued in substitution or exchange for any such Notes.
Section 8.6 Yield-Maintenance Amount .
“ Yield-Maintenance Amount ” means, with respect to any Note, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Note over the amount of such Called Principal, provided that the Yield-Maintenance Amount may in no event be less than zero. For the purposes of determining the Yield-Maintenance Amount, the following terms have the following meanings:
“ Called Principal ” means, with respect to any Note, the principal of such Note that is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1 , as the context requires.
“ Discounted Value ” means, with respect to the Called Principal of any Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Notes is payable) equal to the Reinvestment Yield with respect to such Called Principal.
“ Reinvestment Yield ” means, with respect to the Called Principal of any Note, 0.50% over the yield to maturity implied by (i) the yields reported as of 10:00 a.m. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the display designated as “Page PX1” (or such other display as may replace Page PX1) on Bloomberg Financial Markets for the most recently issued actively traded on the run U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or (ii) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable (including by way of interpolation), the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (or any comparable successor publication) for U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date.
In the case of each determination under clause (i) or clause (ii), as the case may be, of the preceding paragraph, such implied yield will be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between (1) the applicable U.S. Treasury security with the maturity closest to and greater than such Remaining Average Life and (2) the applicable U.S. Treasury security with the maturity closest to and less than such Remaining Average Life. The Reinvestment Yield shall be rounded to the number of decimal places as appears in the interest rate of the applicable Note.
 
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“ Remaining Average Life ” means, with respect to any Called Principal, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (a) the principal component of each Remaining Scheduled Payment with respect to such Called Principal by (b) the number of years (calculated to the nearest one-twelfth year) that will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment.
“ Remaining Scheduled Payments ” means, with respect to the Called Principal of any Note, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, provided that if such Settlement Date is not a date on which interest payments are due to be made under the terms of the Notes, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to Section 8.2 or 12.1 .
“ Settlement Date ” means, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1 , as the context requires.
SECTION 9. AFFIRMATIVE COVENANTS.
The Company covenants that so long as any of the Notes are outstanding:
Section 9.1 Compliance with Law . Without limiting Section 10.4 , the Company will, and will cause its Subsidiaries to comply with all laws, ordinances or governmental rules or regulations to which it is subject, including, without limitation, ERISA, the USA Patriot Act and Environmental Laws, and will obtain and maintain in effect all licenses, certificates, permits, franchises and other governmental authorizations necessary to the ownership of its properties or to the conduct of its businesses to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
Section 9.2 Insurance. (a) Maintenance of Insurance . The Company will maintain or cause to be maintained and will cause its Subsidiaries to maintain, with financially sound and reputable insurers, insurance with respect to their respective properties and businesses against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated.
(b) Evidence of Insurance : Promptly upon request by a Holder or the Collateral Agent, the Company shall furnish the Holders and the Collateral Agent with approved certification of all required insurance. Such certification shall be executed by each insurer or by an authorized representative of each insurer where it is not practical for such insurer to execute
 
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the certificate itself. Such certification shall identify underwriters, the type of insurance, the insurance limits, and the policy term, and shall specifically list the special provisions enumerated for such insurance required by this Section 9.2 . Upon request, the Company will promptly furnish the Holders and the Collateral Agent with copies of all insurance certificates, binders, and cover notes or other evidence of such insurance relating to the Collateral.
(c) No Duty of Purchaser to Verify: No provision of this Section 9.2 or any other provision of this Agreement, any other Financing Document or any Lease shall impose on the Holders or the Collateral Agent any duty or obligation to verify the existence or adequacy of the insurance coverage maintained by the Company, nor shall the Holders or the Collateral Agent be responsible for any representations or warranties made by or on behalf of the Company to any insurance company or underwriter.
Section 9.3 Maintenance of Properties . The Company will, and will cause its Subsidiaries, Sharyland and Qualified Lessees that are Affiliates of the Company to, and will use commercially reasonable efforts to cause the other Qualified Lessees to, (a) maintain, preserve and protect in all material respects all of its respective material properties (including any such properties comprising any material portion of the System) and equipment necessary in the operation of its respective business (taken as a whole) in good, working order and condition, ordinary wear and tear excepted; and (b) make all necessary repairs thereto and renewals and replacements thereof.
Section 9.4 Payment of Taxes and Claims . The Company will, and will cause each of its Subsidiaries to, file all tax returns required to be filed in any jurisdiction and to pay and discharge all taxes shown to be due and payable on such returns and all other taxes, assessments, governmental charges, or levies imposed on them or any of their properties, assets, income or franchises, to the extent the same have become due and payable and before they have become delinquent and all claims for which sums have become due and payable that have or might become a Lien on properties or assets of the Company or any Subsidiary, provided that none of the Company or any Subsidiary need pay any such tax, assessment, charge, levy or claim if (i) the amount, applicability or validity thereof is contested by such Person on a timely basis in good faith and in appropriate proceedings, and such Person has established adequate reserves therefor in accordance with GAAP on its books or (ii) the nonpayment of all such taxes, assessments, charges, levies and claims in the aggregate could not reasonably be expected to have a Material Adverse Effect.
Section 9.5 Existence, Etc. . Except as permitted under Section 10.2 , the Company will, and will cause each of its Subsidiaries, at all times preserve and keep in full force and effect its respective limited liability company, corporate or limited partnership existence and all rights and franchises of the Company unless (other than with respect to the Company’s existence), in the good faith judgment of the Company, the termination of or failure to preserve and keep in full force and effect such limited liability company, corporate or limited partnership existence, right or franchise could not, individually or in the aggregate, have a Material Adverse Effect.
 
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Section 9.6 Books and Records; Inspection Rights . The Company will, and will cause each of its Subsidiaries and Sharyland to, and will use commercially reasonable efforts to cause other Qualified Lessees to, maintain proper books of record and account in conformity with GAAP and all applicable requirements of any Governmental Authority having legal or regulatory jurisdiction over such Person. The Company will permit representatives and independent contractors of the Holders of the Notes to visit and inspect any of its properties, to examine its corporate, financial and operating records, and make copies thereof or abstracts therefrom, and to discuss its affairs, finances and accounts with its directors, officers, and independent public accountants, all at the expense of the Company and at such reasonable times during normal business hours no more than once per calendar year, upon reasonable advance notice to the Company; provided , however, that when an Event of Default has occurred and is continuing, any Holder of the Notes (or any of its respective representatives or independent contractors) may do any of the foregoing at the expense of the Company at any time during normal business hours and as often as reasonably desired.
Section 9.7 Collateral; Further Assurances (a) The Company shall take all actions necessary to insure that the Collateral Agent, on behalf of the Secured Parties (or in the case of Real Property Collateral, the Trustee named in the Deeds of Trust, for the benefit of the Collateral Agent and the other Secured Parties), has and continues to have in all relevant jurisdictions duly and validly created, attached and enforceable Liens on the Collateral, including perfected first-priority Liens on Collateral constituting UCC Collateral or Real Property Collateral, in each case, to the extent required under the Security Documents (including, in accordance with clauses (c) and (d) of this Section 9.7 , after-acquired Collateral), subject to no Liens other than Permitted Liens. The Company shall cause the Obligations to constitute direct senior secured obligations of the Company and to be senior in right of payment and to rank senior in right of security (other than Permitted Liens) with respect to Collateral granted in the Security Documents to all other Indebtedness of the Company (other than Permitted Secured Indebtedness, with which it shall be pari passu in accordance with the terms of the Collateral Agency Agreement).
(b) Upon completion of each New Project of a Project Finance Subsidiary, the Company may cause any such Project Finance Subsidiary to Transfer the New Project to the Company and upon such Transfer, the Company shall take all actions necessary to insure that (w) the New Project becomes a part of the Collateral to the extent required under the Security Documents and Section 9.7(c), subject to the first priority Lien of the Security Documents (subject to no Liens other than Permitted Liens and rights of holders of Permitted Secured Indebtedness in accordance with the Collateral Agency Agreement), (x) no Default or Event of Default occurs as a result of such Transfer, (y) the Indebtedness of the Project Finance Subsidiary is either repaid in full at the time of the Transfer or becomes Permitted Secured Indebtedness in accordance with the Collateral Agency Agreement, and (z) the Project Finance Subsidiary is liquidated or merged with and into the Company.
(c) If, after the Third Amendment Date, the Company acquires any Real Property Collateral, the Company shall forthwith (and in any event, within five Business Days of such acquisition or such longer period of time as reasonably agreed by the Required Holders) deliver to the Collateral Agent a fully executed mortgage or deed of trust over the Company’s interests in such Real Property Collateral, in form and substance satisfactory to the Required Holders and the Collateral Agent, together with such surveys, environmental reports and other
 
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(Amended and Restated Note Purchase Agreement)

documents and certificates with respect to such real estate as may be reasonably required by the Required Holders. The Company further agrees to take all other actions necessary to create in favor of the Trustee named therein for the benefit of the Collateral Agent and the other Secured Parties a valid and enforceable first priority Lien on the Company’s interests in such Real Property Collateral, free and clear of all Liens except for Permitted Liens and rights of holders of Permitted Secured Indebtedness in compliance with the Collateral Agency Agreement. The Company shall not create in favor of any Person a Lien on the Company’s interests in real property acquired or leased after the Third Amendment Date other than Permitted Liens (but excluding Permitted Liens that constitute Permitted Secured Indebtedness other than the Notes).
(d) If, after the Third Amendment Date, the Company acquires or creates any new Subsidiary (other than any Subsidiary of the Company that is not organized under the laws of the United States, any state thereof or the District of Columbia, any Project Finance Subsidiary and any other Subsidiary that is prohibited from providing a Guaranty of the Obligations by any Requirement of Law), the Company shall or cause such Subsidiary forthwith (and in any event, within 30 days of such creation or acquisition (or such longer time as the Required Holders may agree):
(i) execute and deliver to the Collateral Agent a Subsidiary Guaranty;
(ii) to deliver to the Collateral Agent a certificate of such Subsidiary, substantially consistent with those delivered on the Closing Date pursuant to Section 4.03(b) , with appropriate insertions and attachments;
(iii) to take such actions reasonably necessary or advisable to grant to the Collateral Agent for the benefit of the Secured Parties (or, in the case of Real Property Collateral, the Trustee named in the Deeds of Trust, for the benefit of the Collateral Agent and the other Secured Parties) a perfected and enforceable first-priority Lien in the Collateral described in the Security Documents with respect to such new Subsidiary, subject to no Liens other than Permitted Liens and rights of holders of Permitted Secured Indebtedness in compliance with the Collateral Agency Agreement, and including the filing of UCC financing statements in such jurisdictions as may be required by such Subsidiary Guaranty or by law or as may be reasonably requested by the Collateral Agent;
(iv) to deliver to the Collateral Agent the stock certificates (if any) representing equity interests issued by such Subsidiary, together with undated stock (or other transfer) powers, in blank, executed and delivered by a duly authorized officer of the Company; and
(v) if reasonably requested by the Collateral Agent, to deliver to the Collateral Agent legal opinions relating to the matters described above, which opinions shall be in form and substance reasonably satisfactory to the Collateral Agent.
Section 9.8 Material Project Documents. (a) The Company shall at all times (i) perform and observe all of the covenants under the Material Project Documents to which it is a
 
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party and take reasonable actions to enforce all of its rights thereunder, other than to the extent the same could not reasonably be expected to have a Material Adverse Effect, (ii) subject to the provisions of clause (b) of this Section 9.8, maintain the System Leases (other than Leases constituting System Leases only pursuant to clause (5) of the definition thereof) in full force and effect, and (iii) maintain the Leases (other than the System Leases referred to in the foregoing clause (ii) of this Section 9.8(a)) to which it or any of its Subsidiaries is a party in full force and effect, except to the extent the same could not reasonably be expected to have a Material Adverse Effect.
(b) If the term of a Lease with the Company or one of its Subsidiaries expires and the Qualified Lessee under such Lease has either ceased operating the related assets or has ceased paying rent as required under the applicable Lease, the Company shall, or shall cause a Subsidiary, as applicable, to enter into a supplement or a new Lease with respect to the related leasehold assets with a Qualified Lessee that provides for rent that, when combined with all other expected revenue, will, in the reasonable judgment of the Company, as of the commencement date of such supplement or new Lease, generate sufficient revenue to satisfy the requirements of Section 9.9 and will not otherwise result in a materially worse position for the Company as compared to the terms of the applicable expired Lease. Each such new Lease shall have a term of at least five years. Notwithstanding the foregoing, if (i) such expired Lease relates to transmission and/or distribution assets that are not generating significant revenue, (ii) the failure to renew such Lease would not constitute a Material Adverse Effect and (iii) the Company reasonably believes it will generate sufficient revenue and hold sufficient assets (without giving effect to the leasehold assets with respect to such Lease) to satisfy the requirements of Section 9.9 , then this Section 9.8(b) will not require a supplement or new lease with respect to such leasehold assets.
Section 9.9 Financial Ratios (a) The Company shall at all times maintain, on a consolidated basis, a Total Debt to Capitalization Ratio of not more than 0.65 to 1.00.
(b) The Company shall maintain, for each period of four consecutive fiscal quarters, a Debt Service Coverage Ratio of at least 1.40 to 1.00; provided that for purposes of this Section 9.9(b) , the Debt Service Coverage Ratio shall be deemed to be 1.40 to 1.00 for the three calendar quarters ending December 31, 2009, March 31, 2010 and June 30, 2010.
SECTION 10. NEGATIVE COVENANTS.
The Company covenants that so long as any of the Notes are outstanding:
Section 10.1 Transactions with Affiliates . The Company will not and will not permit any Subsidiary to enter into directly or indirectly any transaction or group of related transactions (including without limitation the purchase, lease, sale or exchange of properties of any kind or the rendering of any service) with any Affiliate other than (i) transactions with Project Finance Subsidiaries, as permitted by Section 9.7(b)(ii) and other transactions between or among the Company and one or more Subsidiaries, or any subset thereof, to the extent permitted under Sections 10.2 , 10.6 , 10.7 , 10.10 and 10.14 , (ii) Leases with Qualified Lessees and transactions relating thereto, (iii) any Qualified Lessee Affiliate Loan and any Indebtedness permitted under Section 10.6(d)(ii) , (iv) payment of customary fees and reasonable out of pocket costs to, and
 
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indemnities for the benefit of, directors, officers and employees of the Company and its Subsidiaries in the ordinary course of business, (v) Investments permitted pursuant to Section 10.7 , (vi) transactions entered into in connection with the Cross Valley Project on or prior to the Cross Valley Project Transfer and the Golden Spread Project on or prior to the Golden Spread Project Transfer, (vii) ROFO Transfers, and (viii) upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would be obtained in a comparable arms-length transaction with a Person not an Affiliate; provided that any transaction will be deemed to meet the requirements of this clause (viii) if, (x) prior to a Qualifying IPO, such transaction is on terms approved by the holders of a majority of the Capital Stock of InfraREIT held by Persons who do not have a separate material interest in such transaction other than by virtue of their ownership of such Capital Stock, or by a majority of the directors nominated by such Persons, and (y) upon the completion of a Qualifying IPO and thereafter, such transaction is on terms approved by a majority of the board of directors (or comparable governing body) of InfraREIT or an Affiliate thereof who are “independent”(as such term is defined pursuant to the rules of the primary exchange on which the Capital Stock is listed for trading), or a majority of the “independent” members of a committee of any such board of directors (or comparable governing body).
Section 10.2 Merger, Consolidation, Etc. . The Company will not nor will it cause or permit any of its Subsidiaries to consolidate with or merge with any other Person or Transfer all or substantially all of its assets in a single transaction or series of transactions to any Person, except (i) pursuant to the System Leases or any other Lease, (ii) as permitted pursuant to Section 9.7(b) , (iii) that so long as both before and after giving effect to such merger or consolidation or Transfer of all or substantially all of its assets to another Person no Default or Event of Default exists, the Company or any Subsidiary may merge or consolidate with another Person, and the Company or any Subsidiary may Transfer all or substantially all of its assets to another Person, so long as, after giving effect to such merger or consolidation, or such Transfer of all or substantially all of its assets, (A) with respect to any merger or consolidation to which the Company is a party, the Company shall be the surviving entity, (B) with respect to any merger or consolidation to which a Subsidiary is a party but the Company is not, a Subsidiary (other than a Project Finance Subsidiary) shall be the surviving entity and (C) with respect to any Transfer of all or substantially all of its assets by the Company or a Subsidiary, the Company or another Subsidiary (other than a Project Finance Subsidiary) shall be the transferee or lessee of such assets (except to the extent permitted by clauses (i) and (ii) of this Section 10.2 , or (iv) the FERC Merger.
Section 10.3 Line of Business . The Company will not and will not permit any Subsidiary to engage in any business if, as a result, the general nature of the business in which the Company and its Subsidiaries taken as a whole, would then be engaged would be substantially changed from the transmission and distribution of electric power and the provision of ancillary services.
Section 10.4 Terrorism Sanctions Regulations . The Company will not and will not permit any Controlled Entity (a) to become (including by virtue of being owned or controlled by a Blocked Person), own or control a Blocked Person or any Person that is the target of sanctions imposed by the United Nations or by the European Union, or (b) directly or indirectly to have any investment in or engage in any dealing or transaction (including, without limitation, any
 
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(Amended and Restated Note Purchase Agreement)

investment, dealing or transaction involving the proceeds of the Notes) with any Person if such investment, dealing or transaction (i) would cause any holder to be in violation of any applicable United States (federal or state) anti-terrorism law or regulation applicable to such holder, or (ii) is prohibited by or subject to sanctions under any U.S. Economic Sanctions, or (c) to engage, nor shall any Affiliate of either engage, in any activity that could subject such Person or any holder to sanctions under CISADA or any similar law or regulation with respect to Iran or any other country that is subject to U.S. Economic Sanctions.
Section 10.5 Liens . The Company will not, nor will it cause or permit any Subsidiary to, directly or indirectly create, incur, assume or permit to exist (upon the happening of a contingency or otherwise) any Lien on or with respect to the Collateral or any other property of the Company or such Subsidiary, whether now owned or held or hereafter acquired, or any income or profits therefrom, or assign or otherwise convey any right to receive income or profits, or on any other asset now owned or hereafter acquired by the Company or such Subsidiary, except (each, a “ Permitted Lien ”):
(a) solely in the case of the Note Parties, Liens created or permitted by the Financing Documents on the assets of the Note Parties; and
(b) (i) solely in the case of a Project Finance Subsidiary, Liens on assets owned by that Project Finance Subsidiary and (ii) Liens on the Capital Stock in that Project Finance Subsidiary, in each case to secure its Non-Recourse Debt;
(c) Liens created or permitted pursuant to the terms of the Security Documents, including Cash Collateral (as defined in the Collateral Agency Agreement);
(d) Liens for Taxes which are not yet due and payable or the payment of which is not at the time required by Section 9.4 ;
(e) any attachment or judgment Lien, unless such attachment or judgment Lien constitutes an Event of Default under Section 11(l) hereof;
(f) Liens of a lessor of equipment to the Company or any Subsidiary on such lessor’s leased equipment (but excluding equipment leased pursuant to a Capital Lease), including any of the foregoing which is evidenced by a protective UCC filing;
(g) Mechanics’, warehousemen’s, carriers’, workers’, repairers’, landlords’, and other similar liens arising or incurred in the ordinary course of business and (i) which do not in the aggregate materially detract from the value of property or assets subject to such Liens or materially impair the continued use thereof in the operation of the business or (ii) which are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property or asset subject to such Liens, or other Liens incurred or deposits made in the ordinary course of business in connection with workers’ compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, trade contracts, leases, government contracts, performance and return-of-money bonds and other similar obligations incurred in the ordinary course of business (exclusive of obligations in respect of the payment for borrowed money);
 
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(Amended and Restated Note Purchase Agreement)

(h) zoning, entitlement, restriction, and other land use and environmental regulations by Governmental Authorities and encroachments, easements, rights of way, covenants, restrictions or agreements which do not materially interfere with the continued use of any asset as currently used in the conduct of the business;
(i) any encumbrances set forth in any franchise or governing ordinance under which any portion of the business is conducted which could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect;
(j) all rights of condemnation, eminent domain, or other similar right of any Person;
(k) any interest of title of a lessor under leases; and
(l) Liens securing Permitted Secured Indebtedness on a pari passu basis with the Obligations in accordance with the terms of the Collateral Agency Agreement.
Section 10.6 Indebtedness . The Company will not, and will not cause or permit any Subsidiary or Sharyland to incur any Indebtedness, and will use commercially reasonable efforts not to permit any Qualified Lessee or Subsidiaries of Specified Qualified Lessees to incur Indebtedness for borrowed money, in each case except the following Indebtedness, which may be incurred subject to the requirements of the last paragraph of this section:
(a) Indebtedness evidenced by the Financing Documents;
(b) Indebtedness of the Company (i) that is not related to, and does not support, Non-Recourse Debt of a Project Finance Subsidiary and (ii) if incurred, would not result in a breach of Section 9.9 ; provided that if the Indebtedness is proposed to be secured by any of the Collateral, then at least five Business Days (or such shorter period reasonably agreed by the Required Holders) prior to the incurrence of such Indebtedness, the Company shall (x) notify the Holders of its intent to incur such Indebtedness, which notice shall set forth in reasonable detail (A) the amount and proposed economic terms of such Indebtedness, (B) by type of lender or purchaser and (C) the proposed collateral for such Indebtedness (which proposed collateral may include any or all of the Collateral) and (y) deliver to the Collateral Agent and the other Secured Parties an executed joinder agreement substantially in the form of Exhibit A to the Collateral Agency Agreement pursuant to which all the proposed holders of such Indebtedness have become party to the Collateral Agency Agreement;
(c) (i) Non-Recourse Debt incurred by a Project Finance Subsidiary of the Company (including Non-Recourse Debt incurred by such Project Finance Subsidiary prior to being acquired by the Company or a Subsidiary) to fund a New Project and (ii) any Indebtedness in the form of a pledge of Capital Stock in a Project Finance Subsidiary as security for Non-Recourse Debt of such Project Finance Subsidiary;
(d) Indebtedness of any such Qualified Lessee (i) in an aggregate principal amount for such Qualified Lessee of up to the greater of (A) $5,000,000 and (B) an amount equal to 1% of the sum of, without duplication, (x) the total amount of the Consolidated Net Plant of such Qualified Lessee, plus (y) the total amount of the Consolidated Net Plant of any
 
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(Amended and Restated Note Purchase Agreement)

guarantor(s) of such Qualified Lessee’s obligations under the applicable Leases, plus (z) the total amount of Leased Consolidated Net Plant, in each case on a senior secured basis and (ii) in an aggregate principal amount for such Qualified Lessee of up to the greater of (A) $10,000,000 and (B) an amount equal to 1.5% of the sum of, without duplication, (x) the total amount of the Consolidated Net Plant of such Qualified Lessee, plus (y) the total amount of the Consolidated Net Plant of any guarantor(s) of such Qualified Lessee’s obligations under the applicable Leases, plus (z) the total amount of Leased Consolidated Net Plant, in each case on an unsecured subordinated basis on terms substantially similar to the terms set forth on Exhibit 2, to the extent allowed under the Leases to which such Qualified Lessee is a party as a lessee or tenant thereunder; provided , that for purposes of this clause (d), all Consolidated Qualified Lessees will be treated as one Qualified Lessee;
(e) Indebtedness of the Company to any of its Subsidiaries, which by its terms is expressly subordinated to the Obligations, and Indebtedness of any Subsidiary to the Company or any other Subsidiary of the Company not to exceed $5,000,000 at any one time outstanding and in each case to have a maturity date of less than one year;
(f) any Qualified Lessee Affiliate Loan and other Indebtedness of Qualified Lessees otherwise acceptable to the Required Holders; and
(g) Indebtedness of Subsidiaries of Specified Qualified Lessees incurred in an aggregate principal amount for each such Specified Qualified Lessee of up to the product of (x) such Specified Qualified Lessee’s Consolidated Net Plant (derived from its most recently prepared consolidated balance sheet, prepared in accordance with GAAP but adjusted to reverse the effects of failed sale-leaseback accounting in a manner reasonably determined by such Specified Qualified Lessee in good faith) multiplied by (y) the lesser of (A) the sum of such Specified Qualified Lessee’s then-current PUCT-regulated debt-to-equity ratio (expressed as a percentage) and 5% or (B) 65%; provided that such Indebtedness must be Non-Recourse Debt to such Specified Qualified Lessee.
Indebtedness may be incurred under this Section 10.6 only if no Default or Event of Default is, or as a result of such incurrence would be, existing.
Section 10.7 Loans, Advances, Investments and Contingent Liabilities . The Company will not make or permit to remain outstanding any loan or advance to, or extend credit other than credit extended in the ordinary course of business to any Person, or own, purchase or acquire any stock, obligations or securities of, or any other interest in, or make any capital contribution to, any Person (collectively, “ Investments ”), or commit to do any of the foregoing, except (a) Permitted Investments, (b) ownership, purchase and acquisition of equity interests in and capital contributions to Project Finance Subsidiaries of the Company and Wholly-Owned Subsidiaries, (c) loans, advances and extensions of credit to Subsidiary Guarantors and other Wholly-Owned Subsidiaries (other than Project Finance Subsidiaries) not required to provide a Guaranty pursuant to Section 9.7(d), (d) any Qualified Lessee Affiliate Loan or (e) Investments made in connection with the Cross Valley Project and the Golden Spread Project prior to the Cross Valley Project Transfer and the Golden Spread Project Transfer and (f) the ROFO Transfers.
 
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(Amended and Restated Note Purchase Agreement)

Section 10.8 No Subsidiaries . The Company shall have no subsidiaries other than Project Finance Subsidiaries and Wholly-Owned Subsidiaries.
Section 10.9 Restricted Payments . The Company will not, directly or indirectly, make or declare any Distribution unless there does not exist and, after giving effect to the proposed Distribution, there will not exist, a Default or an Event of Default. The Company shall deliver to the Holders and the Collateral Agent before a Distribution is made a certificate of a Responsible Officer of the Company stating that the foregoing condition has been satisfied and, if requested, providing supporting data and calculations.
Section 10.10 Sale of Assets, Etc. . The Company will not, nor will it cause or permit any Subsidiary, to Transfer, or agree or otherwise commit to Transfer, any of its assets with a fair market value of greater than $15,000,000, in the aggregate during the term of this Agreement (“ Asset Sale ”) except :
(a) the Company or a Subsidiary shall lease the System or other transmission and distribution assets and related assets pursuant to a Lease to which the Company or a Subsidiary thereof is a party;
(b) (i) each Project Finance Subsidiary of the Company may Transfer its assets to the Company or its Wholly-Owned Subsidiaries in accordance with Section 9.7(b) ; and (ii) the Company may Transfer, or suffer the Transfer of, its ownership interests in a Project Finance Subsidiary and such Project Finance Subsidiary may Transfer, or suffer the Transfer of its assets, in each case in connection with and pursuant to the exercise of remedies under the documentation governing Non-Recourse Debt incurred by such Project Finance Subsidiary;
(c) Asset Sales (i) among the Company and the Subsidiary Guarantors (or a subset thereof), (ii) among Subsidiaries that are not Subsidiary Guarantors and (iii) from Subsidiaries to the Company or a Subsidiary Guarantor;
(d) in connection with an acquisition that is not prohibited under this Agreement, (i) Asset Sales of operating assets and related assets to a Qualified Lessee and (ii) Asset Sales of property acquired after the Third Amendment Date that are not electric transmission or distribution assets, in each case (x) which are, in the aggregate, not material in relation to the assets acquired and (y) upon fair and reasonable terms no less favorable to such Person than would be obtained in a comparable arms-length transaction with a Person not an Affiliate;
(e) Permitted Liens;
(f) Investments permitted by Section 10.7 , transactions permitted by Section 10.2 and Distributions permitted by Section 10.9 ;
(g) Asset Sales made in connection with the Cross Valley Project Transfer and the Golden Spread Project Transfer;
(h) ROFO Transfers; and
(i) Asset Sales of assets that are obsolete or no longer used or useful in such Person’s business.
 
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(Amended and Restated Note Purchase Agreement)

Section 10.11 Sale or Discount of Receivables . The Company will not nor will it cause or permit any Subsidiary to sell with recourse, or discount or otherwise sell for less than the face value thereof, any of its notes or accounts receivable.
Section 10.12 Amendments to Organizational Documents . The Company will not nor will it cause or permit any of its Subsidiaries to, and shall use commercially reasonable efforts not to permit, any Qualified Lessee or any of its Subsidiaries to, amend, supplement, terminate, replace or waive any provision of its operating agreement or other organization documents after the Third Amendment Date. Notwithstanding this Section 10.2 , the Company, its Subsidiaries, any Qualified Lessee and its Subsidiaries may, without the consent of the Holders, amend their respective operating agreement or similar organizational documents as may be required to facilitate or implement any of the following:
(a) to reflect (i) the contribution of any new capital or additional capital by new or existing members or partners of such Person, (ii) the addition of new members or partners of such Person, or (iii) any adjustment, termination, reduction or redemption of equity interests of its members, partners or other holders of equity interests or the issuance of additional equity interests in such Person; provided, that after giving effect to any such changes, no Event of Default would exist under Sections 10.8 , or 12(n) ;
(b) to reflect a change that does not adversely affect any Holders in any material respect, or to cure any ambiguity, or correct or supplement any provision, not inconsistent with law or with the provisions of this Agreement;
(c) to satisfy any requirements, conditions, or guidelines contained in any order, directive, opinion, ruling or regulation of a federal or state agency or contained in federal or state law;
(d) to take actions to avoid any material adverse consequences to such Person as a result of any change in law or interpretation of law applicable to Persons subject to regulation by the PUCT and FERC; and
(e) to effect the dissolution, liquidation, merger or consolidation of any Person that is not otherwise prohibited under this Agreement.
The Company will provide prompt notice to the Holders upon taking any such action under the foregoing sentence of this Section 10.12 .
Section 10.13 Sale and Lease-Back . Except for the System Leases, the CREZ Lease and any other Lease, the Company will not, nor will it cause or permit any Subsidiary to, enter into any arrangement providing for the leasing by the Company or any Subsidiary of real or personal property which has been or is to be Transferred by the Company or such Subsidiary to a lender or investor or to any Person to whom funds have been or are to be advanced by such lender or investor on the security of such property or rental obligations of the Company or any Subsidiary.
 
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(Amended and Restated Note Purchase Agreement)

Section 10.14 ERISA Compliance (a) Relationship of Vested Benefits to Plan Assets . The Company will not as of the last day of any calendar year permit any Plan to be “at risk” within the meaning of Section 303 of ERISA to the extent such action could reasonably be expected to result in a Material Adverse Effect. The Company and its ERISA Affiliates will not incur withdrawal liabilities (and will not become subject to contingent withdrawal liabilities) under section 4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate could reasonably be expected to result in a Material Adverse Effect.
(b) Valuations. For the purposes of clause (a) above, all assumptions and methods used to determine the actuarial valuation of vested and unvested employee benefits under any Plan at any time maintained by the Company and the present value of assets of any such Plan shall be reasonably consistent with those determinations made for purposes of Section 5.13 .
(c) Prohibited Actions . The Company will not, nor, as applicable, will any Plan at any time maintained by the Company:
(i) engage in any action that could reasonably be expected to cause the execution and delivery of this Agreement and the issuance and sale of the Notes to result in a non-exempt “prohibited transaction” (as such term is defined in Section 406 of ERISA and Section 4975(c) of the Code);
(ii) fail to meet the minimum funding standards of Section 302 of ERISA or Sections 412 and 430 of the Code, or seek or obtain a waiver thereof or fail to make any required contribution to a Multiemployer Plan; or
(iii) terminate any such Plan in a manner which could result in the imposition of a Lien on the Property of the Company pursuant to Section 4068 of ERISA that could reasonably be expected to result in a Material Adverse Effect.
Section 10.15 No Margin Stock . Anything herein contained to the contrary notwithstanding, the Company will not, nor will it permit any Subsidiary to, make or authorize any investment in, or otherwise purchase or carry, any margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System of the United States) that violates the provisions, or for any purpose that violates the provisions, of Regulation U of the Board of Governors of the Federal Reserve System of the United States.
Section 10.16 Project Documents. (a) The Company will not, and will not permit any Subsidiary to, amend, modify, supplement, replace, renew, extend, terminate or waive any provision of any Lease to which the Company or such Subsidiary is party, or consent to any amendment, modification, supplement, replacement, renewal, extension, termination or waiver of any such Lease except (i) the consummation of the FERC Lease Assumptions in connection with the FERC Merger, (ii) to the extent the same could not, individually or in the aggregate,
 
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(Amended and Restated Note Purchase Agreement)

reasonably be expected to have a Material Adverse Effect and (iii) if the Company reasonably believes, after giving effect thereto, the Company will generate sufficient revenue and hold sufficient assets to satisfy the requirements of Section 9.9 .
(b) The Company shall use commercially reasonable efforts to ensure that no Specified Qualified Lessee enters into any lease of transmission or distribution facilities other than (i) the Leases (including maintaining or entering into new Leases or replacement Leases and amending or modifying Leases to the extent not prohibited under this Agreement) and (ii) any other leases consented to by Required Holders.
Section 10.17 Regulation. (a) The Company shall not be or become, and shall use commercially reasonable efforts not to permit any Specified Qualified Lessee to be or become, subject to FERC jurisdiction as a public utility under the FPA; provided , however , that the Company shall not be in default of the forgoing negative covenant if the Company or any Specified Qualified Lessee becomes subject to FERC jurisdiction under the FPA solely as a result of a change to the FPA or in FERC’s interpretation thereof or regulations thereunder, if the Company or such Specified Qualified Lessee takes all necessary actions to comply with applicable FERC requirements and the operation of the System is uninterrupted; and
(b) The Company shall not, and shall use commercially reasonable efforts to cause any Specified Qualified Lessee not to violate in any material respect any regulation or order of the Public Utility Commission of Texas applicable to it.
(c) None of the Company nor any Specified Qualified Lessee shall own, operate or control any electrical generating, transmitting or distribution facility, nor effect or control any sale of electricity, outside of the ERCOT balancing area authority except (i) as permitted by FERC, as set forth in its declaratory order issued in Docket no. EL07-93-000 or (ii) interconnected transmission or distribution assets or systems located substantially in the State of Texas or deriving a majority of their revenue from customers within the State of Texas.
Section 10.18 Swaps . The Company will not, nor will it permit any Subsidiary to, enter into any Swap Contracts, except that the Company and its Project Finance Subsidiaries may enter into Swap Contracts solely to hedge interest rate risk and not for speculative purposes.
Section 10.19 Additional Financial Covenants . If the Company shall at any time enter into one or more agreements pursuant to which Indebtedness in an aggregate principal amount greater than $25,000,000 shall be outstanding and such agreement contains one or more financial covenants which are more restrictive on the Company and its Subsidiaries than the financial covenants contained in Section 9.9 of this Agreement, then such more restrictive financial covenants and any related definitions (the “ Additional Financial Covenants ”) shall automatically be deemed to be incorporated into Section 9.9 of this Agreement by reference from the time such other agreement becomes binding upon the Company until such time as such other Indebtedness is repaid in full and all commitments related thereto are terminated; provided , that if at the time of any such repayment or the termination of any such commitment a Default or Event of Default shall exist under this Agreement, then such Additional Financial Covenants shall continue in full force and effect under this Agreement so long as such Default or Event of Default continues to exist. So long as such Additional Financial Covenants shall be in effect, no
 
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(Amended and Restated Note Purchase Agreement)

modification or waiver of such Additional Financial Covenants shall be effective unless the Required Holders shall have consented thereto pursuant to Section 17.1 hereof. Promptly but in no event more than 5 Business Days following the execution of any agreement providing for Additional Financial Covenants, the Company shall furnish each Holder with a copy of such agreement. Upon written request of the Required Holders, the Company will enter into an amendment to this Agreement pursuant to which this Agreement will be formally amended to incorporate the Additional Financial Covenants on the terms set forth herein.
Section 10.20 Burdensome Agreements . The Company will not enter into or permit any Subsidiary Guarantor or Subsidiary of a Subsidiary Guarantor to enter into any Contractual Obligation that limits the right (a) of such Subsidiary to make Distributions to the Company or any Subsidiary Guarantor or to otherwise transfer property to the Company or any Subsidiary Guarantor, (b) of any Subsidiary of the Company to guarantee the Indebtedness of the Company or (c) of the Company or any Subsidiary Guarantor to create, incur, assume or suffer to exist Liens on property of such Person, in each case except for (i) restrictions arising under any Requirement of Law, (ii) customary restrictions and conditions contained in any agreement relating to the sale or other disposition of assets not prohibited under this Agreement pending the consummation of such sale or other disposition, (iii) this Agreement, the other Note Documents, Permitted Liens (other than Liens permitted under Section 10.5(k) ), any document or instrument evidencing or granting any such Permitted Liens and the agreements listed on Schedule 10.20 ; (iv) any Contractual Obligation relating to Indebtedness permitted pursuant to Section 10.6 (including Liens permitted pursuant to Section 10.5 ) to the extent, in the good faith judgment of the Company, such limitations and requirements described in clauses (a), (b) or (c) above (x) are on customary market terms for Indebtedness of such type at the time entered into, so long as the Company has determined in good faith that such restrictions would not reasonably be expected to impair in any material respect the ability of the Note Parties to meet their ongoing payment obligations under the Note Documents, or (y) are not materially more restrictive, taken as a whole with respect to the Company and the Subsidiaries than the restrictions in the Note Documents, (v) with respect to clause (c), any negative pledge incurred or provided in favor of any holder of Indebtedness permitted under Section 10.6(c) solely to the extent any such negative pledge relates to the property financed by or the subject of such Indebtedness, (vi) non-assignment provisions in franchise agreements, licenses, easements, leases, indemnities or other agreements and (vii) restrictions on any property or any Person contained in any asset or stock sale agreement or other similar agreements entered into with respect to such property or Person to the extent (x) the sale or other disposition of such property or Person is not prohibited by this Agreement and (y) such restrictions relate only to the property or Person to be sold or otherwise disposed of.
SECTION 11. EVENTS OF DEFAULT.
An “Event of Default” shall exist if any of the following conditions or events shall occur and be continuing:
(a) the Company defaults in the payment of any principal or Yield-Maintenance Amount, if any, on any Note when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise; or
 
A NNEX A-35
(Amended and Restated Note Purchase Agreement)

(b) the Company defaults in the payment of any interest on any Note, fees or other amounts for more than five days after the same becomes due and payable; or
(c) the Company defaults in the performance of or compliance with any term contained in Section 7.1(d) , Section 9.9 or Section 10 ; or
(d) the Company defaults in the performance of or compliance with any term contained herein (other than those referred to in Sections 11(a) , (b)  and (c) ) or in any other Note Document (other than those referred to in another paragraph of this Section 11 ) and such default is not remedied within 30 days after the earlier of (i) a Responsible Officer obtaining actual knowledge of such default and (ii) the Company receiving written notice of such default from the Collateral Agent or Holder of a Note (any such written notice to be identified as a “notice of default” and to refer specifically to this Section 11(d) ); or
(e) any representation or warranty made in writing by or on behalf of the Company or by any officer of the Company in this Agreement or any other Note Document or in any writing furnished in connection with the transactions contemplated hereby proves to have been false or incorrect in any material respect on the date as of which made; or
(f) with respect to any Lease to which the Company or a Subsidiary thereof is a party (other than Leases pursuant to which the Company recognized revenue, in the aggregate, that constituted 10% or less of the total consolidated revenue of the Company and its Subsidiaries (other than Project Finance Subsidiaries) as set forth on the face of the consolidated statements of operations for the four consecutive fiscal quarter period that ended on the date of the financial statements most recently delivered pursuant to Section 7.1 ), (i) any such Lease is declared to be null and void or is otherwise unenforceable, or any party thereto claims that any such agreement is unenforceable (unless, within 90 days after such declaration or claim, replaced by a Lease that complies with the provisions of Section 10.16 ), (ii) one or more payment defaults in an amount in excess of $10,000,000 in the aggregate occurs across all such Leases, after giving effect to any cure periods specified therefor or (iii) any default or event of default (other than those referred to in clause (i) or (ii) of this Section 11(f) ) occurs under any such Lease that could reasonably be expected to have a Material Adverse Effect and such failure continues for more than 90 days; or
(g) (i) the Certificate of Conveniences and Necessity (#30192, #30026, #30114 and #30191) issued or transferred by the Public Utility Commission of Texas to Sharyland and, prior to the FERC Merger, the FERC Operator, is terminated without being timely replaced, revoked or otherwise is not in effect; or (ii) except as could not reasonably be expected to result in a Material Adverse Effect, any other Required Permit is terminated without being timely replaced (if the terminated Permit continues to be a Required Permit), revoked or otherwise is not in effect; provided , however, that the termination without immediate renewal of any franchise agreement pursuant to which the Qualified Lessee operating the applicable portion of the System is authorized to operate the System and collect fees for services shall not constitute an Event of Default if the parties to the franchise agreement continue to perform in accordance with the terms of such agreement notwithstanding the termination; or
 
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(Amended and Restated Note Purchase Agreement)

(h) any Security Document or any other security document entered into pursuant to Section 9.7 ceases to give the Collateral Agent perfected first priority Liens (subject to Permitted Liens) purported to be created thereby in a material portion of the Collateral, taken as a whole, for any reason other than as expressly permitted hereunder or thereunder (including by amendment, waiver and/or consent granted in accordance with the terms hereunder or thereunder) or satisfaction in full of the Obligations; or any Note Document, at any time after its execution and delivery and for any reason other than as expressly permitted hereunder or thereunder (including by amendment, waiver and/or consent granted in accordance with the terms hereunder or thereunder) or satisfaction in full of all the Obligations, ceases to be in full force and effect; or any Note Party contests in any manner the validity or enforceability of any Note Document; or any Note Party denies that it has any further liability or obligation under any Note Document or purports to revoke, terminate or rescind any Note Document, other than, for each of the foregoing, as expressly permitted hereunder or thereunder (including by amendment, waiver and/or consent granted in accordance with the terms hereunder or thereunder) or satisfaction in full of the Obligations; or
(i) without limiting clause (h), (i) the Company or any Specified Qualified Lessee is in default (as principal or as guarantor or other surety) in the payment of any principal of or premium or make-whole amount or interest on any Indebtedness that is outstanding in an aggregate principal amount of at least, in the case of the Company or Sharyland, $10,000,000 or, in the case of any other Specified Qualified Lessee, $2,000,000, in each case beyond any period of grace provided with respect thereto, or (ii) the Company or any Specified Qualified Lessee is in default in the performance of or compliance with any term of any evidence of any Indebtedness (including any mortgage, indenture or other agreement relating thereto), which Indebtedness, in the case of the Company or Sharyland, is in an aggregate outstanding principal amount of at least $10,000,000 (for each such Person individually) or, in the case of any other Specified Qualified Lessee, is an amount that could reasonably be expected to result in a Material Adverse Effect, and as a consequence of such default or condition one or more Persons are entitled to declare such Indebtedness to be due and payable before its stated maturity or before its regularly scheduled dates of payment, (iii) as a consequence of the occurrence or continuation of any event or condition (other than the passage of time or the right of the holder of Indebtedness to convert such Indebtedness into equity interests), Indebtedness of the Company or Sharyland in an aggregate outstanding principal amount of at least $10,000,000 (for each such Person individually) has become or has been declared due and payable before its stated maturity or before its regularly scheduled dates of payment, or (iv) a default or an event of default occurs under the 2009 Note Agreement or the RBC Agreement, and such failure continues for more than any cure period specified therefor and has not otherwise been waived; or
(j) the Company or Sharyland or, to the extent the same could reasonably be expected to result in a Material Adverse Effect, any other Qualified Lessee (i) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the filing against it or, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes corporate action for the purpose of any of the foregoing; or
 
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(Amended and Restated Note Purchase Agreement)

(k) a court or Governmental Authority of competent jurisdiction enters an order appointing, without consent by the Company, any Subsidiary, Sharyland or, to the extent the same could reasonably be expected to result in a Material Adverse Effect, any other Qualified Lessee, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of any such Person or any such petition shall be filed against any such Person and such petition shall not be dismissed within 60 days; or
(l) a final judgment or judgments for the payment of money is rendered against the Company or a Qualified Lessee, in the case of the Company or Sharyland, aggregating in excess of $10,000,000 or $2,000,000, respectively, or, in the case of any other Qualified Lessee, to the extent the same could reasonably be expected to result in a Material Adverse Effect, other than, in each case, judgments payable by the Company or such Qualified Lessee, rendered in connection with the condemnations in favor thereof, and which judgments are not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay; or
(m) if (i) any Plan shall fail to satisfy the minimum funding standards of ERISA or the Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under Section 412 of the Code, (ii) a notice of intent to terminate any Plan shall have been or is reasonably expected to be filed with the PBGC or the PBGC shall have instituted proceedings under ERISA section 4042 to terminate or appoint a trustee to administer any Plan or the PBGC shall have notified the Company or any ERISA Affiliate that a Plan may become a subject of any such proceedings, (iii) any Plan shall be “at-risk” within the meaning of Section 303 of ERISA as of the last day of any calendar year, (iv) the Company or any ERISA Affiliate shall have incurred or is reasonably expected to incur any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, (v) the Company or any ERISA Affiliate withdraws from any Multiemployer Plan, or (vi) the Company establishes or amends any employee welfare benefit plan that provides post-employment welfare benefits in a manner that would increase the liability of the Company thereunder; and any such event or events described in clauses (i) through (vi) above, either individually or together with any other such event or events, could reasonably be expected to have a Material Adverse Effect; or
(n) Hunt Family Members cease to Control Sharyland, or any Person other than a Qualified Lessee shall be the lessee under any lease with respect to the System; or
(o) (i) InfraREIT Partners shall cease to own or control, directly or indirectly, 90% of the outstanding equity interest of the Company; or (ii) Hunt Family Members cease to own and control, directly or indirectly, at least 5% of the outstanding equity interests of InfraREIT Partners, unless, in the case of clause (ii), (x) the general partner of InfraREIT Partners has become a publicly held company, or (y) the Company has total assets on its balance sheet valued at $1,000,000,000 or greater.
 
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(Amended and Restated Note Purchase Agreement)

As used in Section 11(m) , the terms “ employee benefit plan ” and “ employee welfare benefit plan ” shall have the respective meanings assigned to such terms in section 3 of ERISA.
SECTION 12. REMEDIES ON DEFAULT, ETC.
Section 12.1 Acceleration . (a) If an Event of Default with respect to the Company described in Section 11(j) or (k)  (other than an Event of Default described in clause (i) of Section 11(j) or described in clause (vi) of Section 11(j) by virtue of the fact that such clause encompasses clause (i) of Section 11(j) ) has occurred, all the Notes then outstanding shall automatically become immediately due and payable.
(b) If any other Event of Default has occurred and is continuing, any Holder or Holders of more than 51% in principal amount of the Notes at the time outstanding may at any time at its or their option, by notice or notices to the Company, declare all the Notes then outstanding to be immediately due and payable.
(c) If any Event of Default described in Section 11(a) or (b)  has occurred and is continuing, any Holder or Holders of Notes at the time outstanding affected by such Event of Default may at any time, at its or their option, by notice or notices to the Company, declare all the Notes held by it or them to be immediately due and payable.
Upon any Notes becoming due and payable under this Section 12.1 , whether automatically or by declaration, such Notes will forthwith mature and the entire unpaid principal amount of such Notes, plus (x) all accrued and unpaid interest thereon (including, but not limited to, interest accrued thereon at the Default Rate) and (y) the Yield-Maintenance Amount determined in respect of such principal amount (to the full extent permitted by applicable law), shall all be immediately due and payable, in each and every case without presentment, demand, protest or further notice, all of which are hereby waived. The Company acknowledges, and the parties hereto agree, that each Holder of a Note has the right to maintain its investment in the Notes free from repayment by the Company (except as herein specifically provided for) and that the provision for payment of a Yield-Maintenance Amount by the Company in the event that the Notes are prepaid or are accelerated as a result of an Event of Default, is intended to provide compensation for the deprivation of such right under such circumstances.
Section 12.2 Other Remedies . If any Default or Event of Default has occurred and is continuing, and irrespective of whether any Notes have become or have been declared immediately due and payable under Section 12.1 , the Holder of any Note at the time outstanding may proceed to protect and enforce the rights of such Holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in any Note, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise.
Section 12.3 Rescission . At any time after any Notes have been declared due and payable pursuant to Section 12.1(b) or (c), the Holders of not less than 51% in principal amount of the Notes then outstanding, by written notice to the Company, may rescind and annul any such
 
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(Amended and Restated Note Purchase Agreement)

declaration and its consequences if (a) the Company has paid all overdue interest on the Notes, all principal of and Yield-Maintenance Amount, if any, on any Notes that are due and payable and are unpaid other than by reason of such declaration, and all interest on such overdue principal and Yield-Maintenance Amount, if any, and (to the extent permitted by applicable law) any overdue interest in respect of the Notes, at the Default Rate, (b) neither the Company nor any other Person shall have paid any amounts which have become due solely by reason of such declaration, (c) all Events of Default and Defaults, other than non-payment of amounts that have become due solely by reason of such declaration, have been cured or have been waived pursuant to Section 17 , and (d) no judgment or decree has been entered for the payment of any monies due pursuant hereto or to the Notes. No rescission and annulment under this Section 12.3 will extend to or affect any subsequent Event of Default or Default or impair any right consequent thereon.
Section 12.4 No Waivers or Election of Remedies, Expenses, Etc . No course of dealing and no delay on the part of any Holder of any Note in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice such Holder’s rights, powers or remedies. No right, power or remedy conferred by this Agreement or by any Note upon any Holder thereof shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. Without limiting the obligations of the Company under Section 15 , the Company will pay to the Holder of each Note on demand such further amount as shall be sufficient to cover all costs and expenses of such Holder incurred in any enforcement or collection under this Section 12 , including, without limitation, reasonable attorneys’ fees, expenses and disbursements.
SECTION 13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES.
Section 13.1 Registration of Notes . The Company shall keep at its principal executive office a register for the registration and registration of transfers of Notes. The name and address of each Holder of one or more Notes, each transfer thereof and the name and address of each transferee of one or more Notes shall be registered in such register. Prior to due presentment for registration of transfer, the Person in whose name any Note shall be registered shall be deemed and treated as the owner and Holder thereof for all purposes hereof, and the Company shall not be affected by any notice or knowledge to the contrary. The Company shall give to any Holder of a Note that is an Institutional Investor, promptly upon request therefor, a complete and correct copy of the names and addresses of all registered Holders of Notes. In addition to and not in limitation of any representations contained herein, each Holder acknowledges and agrees that the Notes have not been registered under the Securities Act and may not be transferred except pursuant to registration or an exemption therefrom and in compliance with Section  13.2(b) hereof.
Section 13.2 Transfer and Exchange of Notes . (a) Subject to compliance with Section 13.2(b) , upon surrender of any Note to the Company at the address and to the attention of the designated officer (all as specified in Section 18(iii)), for registration of transfer or exchange (and in the case of a surrender for registration of transfer accompanied by a written instrument of transfer duly executed by the registered Holder of such Note or such Holder’s attorney duly authorized in writing and accompanied by the relevant name, address and other information for notices of each transferee of such Note or part thereof), within ten Business Days
 
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thereafter, the Company shall execute and deliver, at the Company’s expense (except as provided below), one or more new Notes (as requested by the Holder thereof) in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Note. Each such new Note shall be payable to such Person as such Holder may request and shall be substantially in the form of Exhibit 1 . Each such new Note shall be dated and bear interest from the date to which interest shall have been paid on the surrendered Note or dated the date of the surrendered Note if no interest shall have been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of Notes. Notes shall not be transferred in denominations of less than $1,000,000, provided that if necessary to enable the registration of transfer by a Holder of its entire holding of Notes, one Note may be in a denomination of less than $1,000,000. Any transferee, by its acceptance of a Note registered in its name (or the name of its nominee), shall be deemed to have made the representations set forth in Section 6.1 and Section 6.2 .
(b) Each Holder hereby agrees that it will not offer for sale or sell any of its Notes or disclose any Confidential Information to any prospective transferee of the Notes, other than to an Affiliate, or to another Holder without first delivering written notice to the Company (a “ Right of First Offer Notice ”) of its intent to sell such Notes and disclose such Confidential Information. Such Right of First Offer Notice shall contain a reasonably detailed description of the proposed terms of such sale, including, without limitation, the proposed purchase price (the “ Proposed Purchase Price ”) for such Notes and the names of up to ten prospective purchasers. If the Company so desires it may, within 5 Business Days of the receipt of such Right of First Offer Notice, inform such Holder in writing of its intent to purchase, or have an Affiliate or Institutional Investor designated by the Company purchase, such Notes (a “ Purchase Notice ”) from the Holder delivering such Right of First Offer Notice at the Proposed Purchase Price, provided, however, that if at such time a Default or Event of Default shall have occurred and be continuing, the Company shall not purchase, and shall not allow any Affiliate or Institutional Investor designated by the Company to purchase, the Notes of the Holder delivering such Right of First Offer Notice. The aggregate principal amount of the Notes specified in such Purchase Notice shall be purchased by the Company, or such Affiliate or Institutional Investor, for the Proposed Purchase Price, together with accrued interest on such Notes to the purchase date, on the date specified by the Company in such Purchase Notice, which shall be not more than 30 days following delivery of such Purchase Notice. If a Holder does not receive a Purchase Notice from the Company within 5 Business Days after the delivery of a Right of First Offer Notice to the Company, such Holder shall have the right to sell its Notes identified in such Right of First Offer Notice to one or more of the prospective purchasers identified in such Right of First Offer Notice for a price which is not less than the Proposed Purchase Price identified in such Right of First Offer Notice for a period of 120 days from the date of such Right of First Offer Notice. In the event that the prospective purchasers identified by a Holder in a Right of First Offer Notice shall decline to purchase the Notes within such 120 day period, then the Holder may identify up to 10 additional Institutional Investors through a new Right of First Offer Notice.
Section 13.3 Replacement of Notes . Upon receipt by the Company at the address and to the attention of the designated officer (all as specified in Section 18(iii) ) of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Note (which evidence shall be, in the case of an Institutional Investor, notice from such Institutional Investor of such ownership and such loss, theft, destruction or mutilation), and
(a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (provided that if the Holder of such Note is, or is a nominee for, an original Purchaser or another Holder of a Note with a minimum net worth of at least $100,000,000 or a Qualified Institutional Buyer, such Person’s own unsecured agreement of indemnity shall be deemed to be satisfactory), or
(b) in the case of mutilation, upon surrender and cancellation thereof,
 
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within ten Business Days thereafter, the Company at its own expense shall execute and deliver, in lieu thereof, a new Note, dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Note or dated the date of such lost, stolen, destroyed or mutilated Note if no interest shall have been paid thereon.
SECTION 14. PAYMENTS ON NOTES.
Section 14.1 Place of Payment . Subject to Section 14.2 , payments of principal, Yield-Maintenance Amount, if any, and interest becoming due and payable on the Notes shall be made in New York City, New York at the principal office of JPMorgan Chase Bank National Association in such jurisdiction. The Company may at any time, by notice to each Holder of a Note, change the place of payment of the Notes so long as such place of payment shall be either the principal office of the Company in such jurisdiction or the principal office of a bank or trust company in such jurisdiction.
Section 14.2 Home Office Payment . So long as any Purchaser or its nominee shall be the Holder of any Note, and notwithstanding anything contained in Section 14.1 or in such Note to the contrary, the Company will pay all sums becoming due on such Note for principal, Yield-Maintenance Amount, if any, and interest by the method and at the address specified for such purpose below such Purchaser’s name in Schedule A , or by such other method or at such other address as such Purchaser shall have from time to time specified to the Company in writing for such purpose, without the presentation or surrender of such Note or the making of any notation thereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment or prepayment in full of any Note, such Purchaser shall surrender such Note for cancellation, reasonably promptly after any such request, to the Company at its principal executive office or at the place of payment most recently designated by the Company pursuant to Section 14.1 . Prior to any sale or other disposition of any Note held by a Purchaser or its nominee, such Purchaser will, at its election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender such Note to the Company in exchange for a new Note or Notes pursuant to Section 13.2 . The Company will afford the benefits of this Section 14.2 to any Institutional Investor that is the direct or indirect transferee of any Note purchased by a Purchaser under this Agreement and that has made the same agreement relating to such Note as the Purchasers have made in this Section 14.2 .
SECTION 15. EXPENSES, ETC.
Section 15.1 Transaction Expenses . Whether or not the transactions contemplated hereby are consummated, the Company will pay all costs and expenses (including reasonable attorneys’ fees of one firm of special counsel and, if reasonably required by the Required
 
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Holders, local or other counsel) incurred by the Purchasers and each other Holder of a Note in connection with such transactions and in connection with any amendments, waivers or consents under or in respect of this Agreement or the Notes (whether or not such amendment, waiver or consent becomes effective), including, without limitation: (a) the costs and expenses incurred in enforcing or defending (or determining whether or how to enforce or defend) any rights under this Agreement or the Notes or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement or the Notes, or by reason of being a Holder of any Note, but only to the extent such subpoena or legal proceeding arises out of matters related to the Company, (b) the costs and expenses, including financial advisors’ fees, incurred in connection with the insolvency or bankruptcy of the Company or in connection with any work-out or restructuring of the transactions contemplated hereby and by the Notes and (c) the costs and expenses incurred in connection with the initial filing of this Agreement and all related documents and financial information with the SVO provided. The Company will pay, and will save each Purchaser and each other Holder of a Note harmless from, all claims in respect of any fees, costs or expenses, if any, of brokers and finders (other than those, if any, retained by a Purchaser or other Holder in connection with its purchase of the Notes).
Section 15.2 Survival . The obligations of the Company under this Section 15 will survive the payment or transfer of any Note, the enforcement, amendment or waiver of any provision of this Agreement or the Notes, and the termination of this Agreement.
SECTION 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT.
All representations and warranties contained herein shall survive the execution and delivery of this Agreement and the Notes, the purchase or transfer by any Purchaser of any Note or portion thereof or interest therein and the payment of any Note, and may be relied upon by any subsequent Holder of a Note, regardless of any investigation made at any time by or on behalf of such Purchaser or any other Holder of a Note; provided that no representation or warranty shall be deemed to be made as of any time other than the date of execution and delivery of this Agreement or such other document, certificate, instrument or agreement containing such representation or warranty. All statements contained in any certificate or other instrument delivered by or on behalf of the Company pursuant to this Agreement shall be deemed representations and warranties of the Company under this Agreement. Subject to the preceding sentence, this Agreement and the Notes embody the entire agreement and understanding between each Purchaser and the Company and supersede all prior agreements and understandings relating to the subject matter hereof.
SECTION 17. AMENDMENT AND WAIVER.
Section 17.1 Requirements . This Agreement and the Notes may be amended, and the observance of any term hereof or of the Notes may be waived (either retroactively or prospectively), with (and only with) the written consent of the Company and the Required Holders, except that (a) no amendment or waiver of any of the provisions of Section 1, 2, 3, 4, 5, 6 or 21 hereof, or any defined term (as it is used therein), will be effective as to any Purchaser unless consented to by such Purchaser in writing, and (b) no such amendment or waiver may, without the written consent of the Holder of each Note at the time outstanding affected thereby,
 
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(Amended and Restated Note Purchase Agreement)

(i) subject to the provisions of Section 12 relating to acceleration or rescission, change the amount or time of any prepayment or payment of principal of, or reduce the rate or change the time of payment or method of computation of interest or of the Yield-Maintenance Amount on, the Notes, (ii) change the percentage of the principal amount of the Notes the Holders of which are required to consent to any such amendment or waiver, or (iii) amend any of Section 8, 11(a), 11(b), 12, 17 or 20 .
Section 17.2 Solicitation of Holders of Notes .
(a) Solicitation. The Company will provide each Holder of the Notes (irrespective of the amount of Notes then owned by it) with sufficient information, sufficiently far in advance of the date a decision is required, to enable such Holder to make an informed and considered decision with respect to any proposed amendment, waiver or consent in respect of any of the provisions hereof or of the Notes. The Company will deliver executed or true and correct copies of each amendment, waiver or consent effected pursuant to the provisions of this Section 17 to each Holder of outstanding Notes promptly following the date on which it is executed and delivered by, or receives the consent or approval of, the requisite Holders of Notes.
(b) Payment. The Company will not directly or indirectly pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, or grant any security or provide other credit support, to any Holder of Notes as consideration for or as an inducement to the entering into by any Holder of Notes of any waiver or amendment of any of the terms and provisions hereof unless such remuneration is concurrently paid, or security is concurrently granted or other credit support concurrently provided, on the same terms, ratably to each Holder of Notes then outstanding even if such Holder did not consent to such waiver or amendment.
Section 17.3 Binding Effect, etc . Any amendment or waiver consented to as provided in this Section 17 applies equally to all Holders of Notes and is binding upon them and upon each future Holder of any Note and upon the Company without regard to whether such Note has been marked to indicate such amendment or waiver. No such amendment or waiver will extend to or affect any obligation, covenant, agreement, Default or Event of Default not expressly amended or waived or impair any right consequent thereon. No course of dealing between the Company and the Holder of any Note nor any delay in exercising any rights hereunder or under any Note shall operate as a waiver of any rights of any Holder of such Note. As used herein, the term “this Agreement” and references thereto shall mean this Agreement as it may from time to time be amended or supplemented.
Section 17.4 Notes Held by Company, etc . Solely for the purpose of determining whether the Holders of the requisite percentage of the aggregate principal amount of Notes then outstanding approved or consented to any amendment, waiver or consent to be given under this Agreement or the Notes, or have directed the taking of any action provided herein or in the Notes to be taken upon the direction of the Holders of a specified percentage of the aggregate principal amount of Notes then outstanding, Notes directly or indirectly owned by the Company or any of its Affiliates shall be deemed not to be outstanding.
 
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SECTION 18. NOTICES.
All notices and communications provided for hereunder shall be in writing and sent (a) by telecopy if the sender on the same day sends a confirming copy of such notice by a recognized overnight delivery service (charges prepaid), or (b) by registered or certified mail with return receipt requested (postage prepaid), or (c) by a recognized overnight delivery service (with charges prepaid). Any such notice must be sent:
(i) if to any Purchaser or its nominee, to such Purchaser or nominee at the address specified for such communications in Schedule A , or at such other address as such Purchaser or nominee shall have specified to the Company in writing,
(ii) if to any other Holder of any Note, to such Holder at such address as such other Holder shall have specified to the Company in writing, and
(iii) if to the Company, to the Company at 1900 N. Akard Street, Dallas, TX 75201-2300, facsimile: (214) 855-6965 to the attention of W. Kirk Baker, or at such other address as the Company shall have specified to the Holder of each Note in writing.
Notices under this Section 18 will be deemed given only when actually received.
SECTION 19. REPRODUCTION OF DOCUMENTS.
This Agreement and all documents relating thereto, including, without limitation, (a) consents, waivers and modifications that may hereafter be executed, (b) documents received by any Purchaser at the Closing (except the Notes themselves), and (c) financial statements, certificates and other information previously or hereafter furnished to any Purchaser, may be reproduced by such Purchaser by any photographic, photostatic, electronic, digital, or other similar process and such Purchaser may destroy any original document so reproduced. The Company agrees and stipulates that, to the extent permitted by applicable law, any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by such Purchaser in the regular course of business) and any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. This Section 19 shall not prohibit the Company or any other Holder of Notes from contesting any such reproduction to the same extent that it could contest the original, or from introducing evidence to demonstrate the inaccuracy of any such reproduction.
SECTION 20. CONFIDENTIAL INFORMATION.
For the purposes of this Section 20 , “Confidential Information” means Information delivered to any Purchaser by or on behalf of the Company in connection with the transactions contemplated by or otherwise pursuant to this Agreement, provided that such term does not include information that: (a) other than as a result of disclosure by any Purchaser or its employees or agents in violation of this Section 20 was publicly known or otherwise known to such Purchaser prior to the time of such disclosure, (b) other than as a result of disclosure by any Purchaser or its employees or agents in violation of this Section 20 subsequently becomes publicly known through no act or omission by such Purchaser or any Person acting on such
 
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Purchaser’s behalf, (c) other than as a result of disclosure by any Purchaser or its employees or agents in violation of this Section 20 otherwise becomes known to such Purchaser other than through disclosure by the Company or (d) constitutes financial statements delivered to such Purchaser under Section 7.1 that are otherwise publicly available. “Information” means information concerning the Company or its Subsidiaries, irrespective of its source or form of communication, furnished by or on behalf of the Company or any of its Subsidiaries, including without limitation notes, analyses, compilations, studies or other documents or records prepared by any Purchaser, which contain or reflect or were generated from information supplied by or on behalf of the Company or its Subsidiaries. Each Purchaser will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by such Purchaser in good faith to protect confidential information of third parties delivered to such Purchaser, provided that such Purchaser may deliver or disclose Confidential Information to (i) its directors, officers, employees, agents, attorneys, trustees and affiliates (to the extent such disclosure reasonably relates to the administration of the investment represented by its Notes), (ii) its financial advisors and other professional advisors who agree to hold confidential the Confidential Information substantially in accordance with the terms of this Section 20 , (iii) any other Holder of any Note, (iv) any Institutional Investor to which it sells or offers to sell such Note or any part thereof or any participation therein (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20) , (v) any Person from which it offers to purchase any security of the Company (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20) , (vi) any federal or state regulatory authority having jurisdiction over such Purchaser, (vii) the NAIC or the SVO or, in each case, any similar organization, or any nationally recognized rating agency that requires access to information about such Purchaser’s investment portfolio, or (viii) any other Person to which such delivery or disclosure may be necessary or appropriate (w) to effect compliance with any law, rule, regulation or order applicable to such Purchaser, (x) in response to any subpoena or other legal process, (y) in connection with any litigation to which such Purchaser is a party or (z) if an Event of Default has occurred and is continuing, to the extent such Purchaser may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement or for the protection of the rights and remedies under such Purchaser’s Notes and this Agreement. Each Holder of a Note, by its acceptance of a Note, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Section 20 as though it were a party to this Agreement. On reasonable request by the Company in connection with the delivery to any Holder of a Note of information required to be delivered to such Holder under this Agreement or requested by such Holder (other than a Holder that is a party to this Agreement or its nominee), such Holder will enter into an agreement with the Company embodying the provisions of this Section 20.
SECTION 21. SUBSTITUTION OF PURCHASER.
Each Purchaser shall have the right to substitute any one of its Affiliates as the purchaser of the Notes that it has agreed to purchase hereunder, by written notice to the Company, which notice shall be signed by both such Purchaser and such Affiliate, shall contain such Affiliate’s agreement to be bound by this Agreement and shall contain a confirmation by such Affiliate of the accuracy with respect to it of the representations set forth in Section 6 . Upon receipt of such notice, any reference to such Purchaser in this Agreement (other than in this Section 21 ), shall be deemed to refer to such Affiliate in lieu of such original Purchaser. In the event that such
 
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Affiliate is so substituted as a Purchaser hereunder and such Affiliate thereafter transfers to such original Purchaser all of the Notes then held by such Affiliate, upon receipt by the Company of notice of such transfer, any reference to such Affiliate as a “Purchaser” in this Agreement (other than in this Section 21 ), shall no longer be deemed to refer to such Affiliate, but shall refer to such original Purchaser, and such original Purchaser shall again have all the rights of an original Holder of the Notes under this Agreement.
SECTION 22. MISCELLANEOUS.
Section 22.1 Successors and Assigns . All covenants and other agreements contained in this Agreement by or on behalf of any of the parties hereto bind and inure to the benefit of their respective successors and assigns (including, without limitation, any subsequent Holder of a Note) whether so expressed or not.
Section 22.2 Payments Due on Non-Business Days . Anything in this Agreement or the Notes to the contrary notwithstanding (but without limiting the requirement in Section 8.4 that the notice of any optional prepayment specify a Business Day as the date fixed for such prepayment), any payment of principal of or Yield-Maintenance Amount or interest on any Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day without including the additional days elapsed in the computation of the interest payable on such next succeeding Business Day; provided that if the maturity date of any Note is a date other than a Business Day, the payment otherwise due on such maturity date shall be made on the next succeeding Business Day and shall include the additional days elapsed in the computation of interest payable on such next succeeding Business Day.
Section 22.3 Accounting Terms . All accounting terms used herein which are not expressly defined in this Agreement have the meanings respectively given to them in accordance with GAAP. Except as otherwise specifically provided herein, (i) all computations made pursuant to this Agreement shall be made in accordance with GAAP, and (ii) all financial statements shall be prepared in accordance with GAAP. For purposes of determining compliance with any financial covenants contained in this Agreement, any election by the Company to measure an item of Indebtedness using fair value (as permitted by Statement of Financial Accounting Standards No. 159 or any similar accounting standard) shall be disregarded and such determination shall be made as if such election had not been made.
Section 22.4 Severability . Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction.
Section 22.5 Construction, etc . Each covenant contained herein shall be construed (absent express provision to the contrary) as being independent of each other covenant contained herein, so that compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with any other covenant. Where any provision herein refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person. For the avoidance of doubt, all Schedules and Exhibits attached to this Agreement shall be deemed to be a part hereof.
 
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Section 22.6 Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the parties hereto.
Section 22.7 Governing Law . This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York excluding choice-of-law principles of the law of such State that would permit the application of the laws of a jurisdiction other than such State.
Section 22.8 Jurisdiction and Process; Waiver of Jury Trial . (a) The Company irrevocably submits to the non-exclusive jurisdiction of any New York State or federal court sitting in the Borough of Manhattan, The City of New York, over any suit, action or proceeding arising out of or relating to this Agreement or the Notes. To the fullest extent permitted by applicable law, the Company irrevocably waives and agrees not to assert, by way of motion, as a defense or otherwise, any claim that it is not subject to the jurisdiction of any such court, any objection that it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum.
(b) The Company consents to process being served by or on behalf of any Holder of Notes in any suit, action or proceeding of the nature referred to in Section 22.8(a) by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, return receipt requested, to it at its address specified in Section 18 or at such other address of which such Holder shall then have been notified pursuant to said Section. The Company agrees that such service upon receipt (i) shall be deemed in every respect effective service of process upon it in any such suit, action or proceeding and (ii) shall, to the fullest extent permitted by applicable law, be taken and held to be valid personal service upon and personal delivery to it. Notices hereunder shall be conclusively presumed received as evidenced by a delivery receipt furnished by the United States Postal Service or any reputable commercial delivery service.
(c) In addition to and notwithstanding the provisions of Section 22.8(b) above, the Company hereby irrevocably appoints CT Corporation System as its agent to receive on its behalf and its property service of copies of the summons and complaint and any other process which may be served in any action or proceeding. Such service may be made by mailing or delivering a copy of such process to the Company, in care of the process agent at 111 Eighth Avenue, 13 th Floor, New York, New York 10011, and the Company hereby irrevocably authorizes and directs the process agent to accept such service on its behalf. If for any reason the process agent ceases to be available to act as process agent, the Company agrees immediately to appoint a replacement process agent satisfactory to the Required Holders.
(d) Nothing in this Section 22.8 shall affect the right of any Holder of a Note to serve process in any manner permitted by law, or limit any right that the Holders of any of the
 
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Notes may have to bring proceedings against the Company in the courts of any appropriate jurisdiction or to enforce in any lawful manner a judgment obtained in one jurisdiction in any other jurisdiction.
(e) The parties hereto hereby waive trial by jury in any action brought on or with respect to this Agreement, the Notes or any other document executed in connection herewith or therewith.
Section 22.9 Transaction References . The Company and the Holders shall not refer to the other on an internet site or in marketing materials, press releases, published “tombstone” announcements or any other print or electronic medium, except with the referenced party’s prior written consent, which may be withheld at its sole discretion.
*    *    *    *    *
 
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If you are in agreement with the foregoing, please sign the form of agreement on a counterpart of this Agreement and return it to the Company, whereupon this Agreement shall become a binding agreement between you and the Company.

Very truly yours,	
	
SHARYLAND DISTRIBUTION & TRANSMISSION SERVICES, L.L.C.	
		
 By	 		
	 	Name:	 	W. Kirk Baker	
	 	Title:	 	Senior Vice President	
 
[S IGNATURE P AGE TO SDTS 2010 N OTE P URCHASE A GREEMENT ]

This Agreement is hereby
accepted and agreed to as
of the date thereof.

Purchaser :	
	
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA	
		
By:	 	 	
	 	Vice President	
 
[S IGNATURE P AGE TO SDTS 2010 N OTE P URCHASE A GREEMENT ]

DEFINED TERMS
As used herein, the following terms have the respective meanings set forth below or set forth in the Section hereof following such term:
“ 2009 Note Agreement ” means the Note Purchase Agreement, dated December 31, 2009, among the Company and the holders of 2029 Notes, issued thereunder, as the same may be amended, restated, supplemented or otherwise modified from time to time.
“ 2029 Notes ” means the Company’s 7.25% Senior Notes due December 30, 2029, issued under the 2009 Note Agreement.
“ Additional Financial Covenants ” shall have the meaning given to it in Section 10.19 hereof.
“ Affiliate ” means, at any time, and with respect to any Person, any other Person that at such time directly or indirectly through one or more intermediaries Controls, or is Controlled by, or is under common Control with, such first Person and, with respect to the Company, shall include any Person beneficially owning or holding, directly or indirectly, 10% or more of any class of voting or equity interest of the Company or any corporation of which the Company beneficially owns or holds, in the aggregate, directly or indirectly, 10% or more of any class of voting or equity interests; provided, however, that this definition shall at all times exclude owners or investors in InfraREIT Partners, L.P., except for Hunt Family Members. Unless the context otherwise clearly requires, any reference to an “Affiliate” is a reference to an Affiliate of the Company.
“ Agreement ” is defined in the introductory paragraph of this Agreement.
“ Amortization Schedule ” is defined in Section 8.1(a) .
“ Anti-Terrorism Order ” means Executive Order No. 13,224 of September 24, 2001, Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit or Support Terrorism, 66 U.S. Fed. Reg. 49, 079 (2001), as amended.
“ Approved Accountant ” is defined in Section 7.1(b)(A) .
“Blocked Person” means (i) an OFAC Listed Person, (ii) an agent, department, or instrumentality of, or a Person otherwise beneficially owned by, controlled by or acting on behalf of, directly or indirectly, (x) any OFAC Listed Person or (y) any Person, entity, organization, foreign country or regime that is subject to any OFAC Sanctions Program, or (iii) a Person otherwise blocked, subject to sanctions under or engaged in any activity in violation of U.S. Economic Sanctions.
“ Business Day ” means any day other than a Saturday, a Sunday or a day on which commercial banks in New York City are required or authorized to be closed.
 
S CHEDULE B-1
(To Annex A)

“ Capital Lease ” means, at any time, a lease with respect to which the lessee is required concurrently to recognize the acquisition of an asset and the incurrence of a liability in accordance with GAAP.
“Capital Stock” of any Person shall mean any and all shares, interests, rights to purchase, warrants, options, participation, patronage capital or other equivalents of or interest in (however designated) equity of such Person, including any preferred stock, any limited or general partnership interest and any limited liability company membership interest.
“ Cash Flow ” means, for any period, the sum of the following (without duplication): (i) all cash paid to the Company during such period under the Leases, (ii) all cash distributions received by the Company from Project Finance Subsidiaries of the Company during such period, (iii) all interest and investment earnings, if any, paid to the Company during such period on amounts on deposit in the account created under the Deposit Agreement, (iv) revenues, if any, received by or on behalf of the Company during such period under any insurance policy as business interruption insurance proceeds, (v) direct cash equity investments made by TDC in the Company during such period (excluding equity contributed to a Project Finance Subsidiary) in an amount not greater than the amount necessary to cause the Company to be in compliance with the financial covenants set forth in Section 9.9 (each such investment, an “ Equity Cure ”); provided , however , that during any period of four consecutive fiscal quarters, “Cash Flow” shall include an Equity Cure in no more than two of such quarters and (vi) proceeds of any borrowing made after the date hereof to the extent used to finance the payment of bullet or balloon installments of Indebtedness for borrowed money.
“ Cash Flow Available for Debt Service ” for any period, means (i) Cash Flow received during such period minus (ii) (A) all O&M Costs paid during such period and (B) if an Equity Cure has been made in any fiscal quarter during the period for which Cash Flow Available for Debt Service is calculated, the lesser of the aggregate amount of (x) such Equity Cure during such period and (y) the aggregate amount of cash distributions paid by the Company during such period.
“CISADA” means the Comprehensive Iran Sanctions, Accountability and Divestment Act.
“ Closing ” is defined in Section 3 .
“ Closing Date ” means July 13, 2010.
“ Code ” means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder from time to time.
“ Collateral ” means, collectively, the collateral described in each of the Security Documents.
“ Collateral Agency Agreement ” means the Second Amended and Restated Collateral Agency Agreement, dated as of the Third Amendment Date, among the Collateral Agent, the Company, the Holders and the holders of the other Permitted Secured Indebtedness from time to time party thereto (as the same may be amended, restated, amended and restated, supplemented, joined or otherwise modified from time to time).
 
S CHEDULE B-2
(To Annex A)

“ Collateral Agent ” means The Bank of New York Mellon Trust Company, N.A., a national association, acting in its capacity as collateral agent for itself and the other Secured Parties, or its successors in such capacity appointed pursuant to the terms of the Collateral Agency Agreement.
“ Company ” means Sharyland Distribution & Transmission Services, L.L.C., a Texas limited liability company, or any successor that becomes such in the manner prescribed in Section 10.2 .
“ Confidential Information ” is defined in Section 20 .
“ Consolidated Net Plant ” means, with respect to any Person, as of the date of determination, the net plant set forth on the face of the consolidated balance sheet of such Person or absent such amount on the consolidated balance sheet, the total plant of such Person on a consolidated basis minus accumulated depreciation set forth in the footnotes of the consolidated financial statements, in each case for the fiscal quarter ended on the date of the last financial statements delivered pursuant to Section 7.1 .
“Consolidated Qualified Lessee” shall mean any Qualified Lessee that is consolidated into the financial statements of another Qualified Lessee.
“Contractual Obligation” shall mean as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound.
“Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise.
“ Controlled Entity ” means (i) any of the Subsidiaries of the Company and any of their or the Company’s respective Controlled Affiliates and (ii) if the Company has a parent company, such parent company and its Controlled Affiliates.
“CREZ Lease” shall mean (A) prior to the effectiveness of the CREZ Lease Amendment and Restatement, the Amended and Restated Lease Agreement (CREZ Assets) dated as of April 30, 2013, between SP, as lessor, and Sharyland, as lessee, and (B) upon the effectiveness of the CREZ Lease Amendment and Restatement, the CREZ Lease Amendment and Restatement, as such lease may be amended, restated, supplemented or otherwise modified from time to time, or any new lease entered into in replacement thereof, in accordance with Section 9.8(b) and/or 10.12 of this Agreement, as applicable.
“CREZ Lease Amendment and Restatement” shall mean the Second Amended and Restated Lease Agreement (CREZ Assets), between SP, as lessor, and Sharyland, as lessee, with respect to the CREZ Project.
 
S CHEDULE B-3
(To Annex A)

“ CREZ Project ” shall mean the five transmission lines, four substations and other facilities in Texas identified and awarded to Sharyland by the Public Utility Commission of Texas (the “PUCT”) in Docket Number 37902.
“Cross Valley Project” means the approximately 49 mile transmission line in South Texas near the Mexican border, known as the “North Edinburg to Loma Alta 345 kV single-circuit transmission line” project, subsequently, renamed as the “North Edinburg to Palmito 345 kV double-circuit transmission line” project, which is built on double-circuit capable structures and the Palmito substation located on the eastern terminus of the Cross Valley Project. The Cross Valley Project is part of a 100 mile transmission line, which is jointly developed and permitted by Sharyland and Electric Transmission Texas.
“Cross Valley Project Transfer” shall mean the sale and Transfer of all of the Capital Stock of CV Project Entity, L.L.C., a Project Finance Subsidiary of the Company, to Cross Valley Partnership, L.P., a Person Controlled by one or more Hunt Family Members, for a purchase price at least equal to the Cross Valley Project’s rate base cost at such time.
“ Debt Service ” for any period, the aggregate (without duplication) of (i) all amounts of interest on the Notes and in respect of other Indebtedness of the Company required to be paid during such period, plus (ii) all amounts of principal on the Notes and in respect of other Indebtedness of the Company or required to be paid during such period, excluding any optional prepayments of principal during such period, plus (iii) all other premiums, fees, costs, charges, expenses and indemnities due and payable to the Holders or the other Secured Parties and holders of other Indebtedness of the Company or and agents acting on their behalf during such period.
“ Debt Service Coverage Ratio ” means, for each period of four consecutive fiscal quarters, the quotient of (i) Cash Flow Available for Debt Service for such period to (ii) Debt Service for such period.
“ Deeds of Trust ” means (i) the Amended and Restated First Lien Deed of Trust, Security Agreement and Fixture Filing (Texas) and each First Lien Deed of Trust, Security Agreement, Assignment of Rents and Leases and Fixture Filing (Texas) by and from the Company, as grantor, to Peter M. Oxman, as trustee, for the benefit of the Collateral Agent and the other Secured Parties, dated as of July 13, 2010, in each case as the same may be amended, restated, supplemented or otherwise modified from time to time and (ii) each other deed of trust by and from the Company, as grantor, for the benefit of the Collateral Agent and the other Secured Parties entered into from time to time.
“ Default ” means an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default.
“ Default Rate ” means that rate of interest per annum from time to time equal to the greater of (i) 8.47% per annum, and (ii) 2% over the rate of interest publicly announced by The Bank of New York Mellon from time to time in New York as its “base” or “prime” rate.
 
S CHEDULE B-4
(To Annex A)

“Deposit Agreement” means the Amended and Restated Deposit Account Control Agreement, dated as of the Third Amendment Date, among the Company, the Collateral Agent and Bank of America, N.A.
“Designated Jurisdiction” means any country or territory to the extent that such country or territory itself is the subject of any Sanction.
“Development Agreement” means that certain Development Agreement to be entered into among Hunt Transmission Services, L.L.C., Sharyland, InfraREIT and/or InfraREIT Partners in connection with one or more New Projects, pursuant to which Hunt Transmission Services, L.L.C. has granted InfraREIT a right of first offer related to the New Projects identified therein, as amended from time to time in accordance with its terms.
“ Disclosure Documents ” is defined in Section 5.3 .
“ Distributions ” means any dividend or other distribution (whether in cash, securities or other property) with respect to any Capital Stock of any Person, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, defeasance, acquisition, cancellation or termination of any such Capital Stock or on account of any return of capital to such Person’s stockholders, partners or members (or the equivalent Person thereof), or any option, warrant or other right to acquire any such dividend or other distribution or payment.
“ Environmental Laws ” means any and all Federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including but not limited to those related to Hazardous Materials.
“ ERCOT ” means the Electric Reliability Council of Texas or any successor thereto.
“ ERISA ” means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.
“ ERISA Affiliate ” means any trade or business (whether or not incorporated) that is treated as a single employer together with the Company under section 414 of the Code.
“ Event of Default ” is defined in Section 11 .
“ Exchange Act ” shall mean the Securities Exchange Act of 1934, as amended from time to time.
“FERC” means the Federal Energy Regulatory Commission, or any successor agency to its duties and responsibilities.
“ FERC Lease ” shall mean (A) prior to the effectiveness of the FERC Lease Amendment and Restatement, the Second Amended and Restated Lease Agreement, dated as of July 1, 2012,
 
S CHEDULE B-5
(To Annex A)

between FERC Owner and FERC Operator and (B) upon the effectiveness of the FERC Lease Amendment and Restatement, the FERC Lease Amendment and Restatement, as such lease may be amended, restated, supplemented or otherwise modified from time to time, or any new lease entered into in replacement thereof, in accordance with Section 9.8(b) and/or 10.12 of this Agreement, as applicable.
“FERC Lease Amendment and Restatement” shall mean the Third Amended and Restated Lease Agreement (Stanton Transmission Loop Assets) between FERC Owner, as lessor, and FERC Operator, as lessee.
“ FERC Lease Assumptions ” shall mean the anticipated assumptions of the FERC Lease in connection with the FERC Merger (i) by the Company as the lessor thereunder, as successor in interest to FERC Owner and (ii) by Sharyland of the FERC Lease as the lessee, as successor in interest to the FERC Operator.
“ FERC Merger ” shall mean the anticipated transaction or series of transactions pursuant to which SDTS FERC L.L.C. will merge into the Company and SU FERC L.L.C. will merge into Sharyland.
“ FERC Operator ” shall mean (A) prior to the FERC Merger, SU FERC, L.L.C., a Subsidiary of Sharyland, and (B) upon the completion of the FERC Merger, Sharyland.
“ FERC Owner ” shall mean (A) prior to the FERC Merger, SDTS FERC, L.L.C., a Subsidiary of the Company, and (B) upon the completion of the FERC Merger, the Company.
“ Financing Documents ” means, collectively, this Agreement, the 2009 Note Agreement, the Notes, the 2029 Notes, the RBC Agreement, the Security Documents, any other documents, agreements or instruments entered into in connection with any of the foregoing and any other documents, agreements or instruments from time to time constituting “Financing Agreements” under the Collateral Agency Agreement.
“ Force Majeure Event ” means any claim of force majeure by any Person under any Material Project Document, which would allow such Person to avoid all or any material part of its obligations thereunder and any other fire, explosion, accident, strike, slowdown or stoppage, lockout or other labor dispute (whether pending or, to the Company’s knowledge threatened), drought, storm, hail, earthquake, embargo, act of God or of the public enemy, or other casualty (whether or not covered by insurance), that could reasonably be expected to result in a Material Adverse Effect.
“ FPA ” means the Federal Power Act, 16 U.S.C. §§791 et seq., as amended, and the regulations of the FERC thereunder.
“ GAAP ” means generally accepted accounting principles as in effect in the United States of America. In the event that any “Accounting Change” (as defined below) shall occur and such change results in a change in the method of calculation of financial covenants, ratios, standards or terms in this Agreement, then the Company and the Holders agree to enter into negotiations in order to amend such provisions of this Agreement so as to reflect equitably such Accounting Changes with the desired result that the criteria for evaluating the financial condition of the
 
S CHEDULE B-6
(To Annex A)

Company and Sharyland shall be the same after such Accounting Changes as if such Accounting Changes had not been made. Until such time as such an amendment shall have been executed and delivered by the Company and the Holders, all financial covenants, ratios, standards and terms in this Agreement shall continue to be calculated or construed as if such Accounting Changes had not occurred. “ Accounting Changes ” refers to changes in accounting principles required by the promulgation of any rule, regulation, pronouncement or opinion by the Financial Accounting Standards Board of the American Institute of Certified Public Accountants or, if applicable, the SEC.
“Golden Spread Project” shall mean a new 345 kilovolt transmission line that will be approximately 55 miles long and will connect the Golden Spread Electric Cooperative, Inc. Antelope-Elk Energy Center in Hale County, approximately 1.6 miles north of the City of Abernathy on County Road P, to the proposed White River Station that will be built by Sharyland in Floyd County, approximately 9 miles northwest of the City of Floydada and 1.1 miles east of the intersection of County Road 231 and County Road 200 and the Abernathy substation that is located in the western portion of the transmission line.
“Golden Spread Project Transfer” shall mean the sale and Transfer of all of the Capital Stock of GS Project Entity to a Person Controlled by one or more Hunt Family Members for a purchase price at least equal to the Golden Spread Project’s rate base cost at such time.
“ Good Utility Practices ” means “Good Utility Practice” as defined from time to time by the Public Utility Commission of Texas.
“ Governmental Authority ” means
(a) the government of:
(i) the United States of America or any State or other political subdivision thereof, or
(ii) any other jurisdiction in which the Company conducts all or any part of its business, or which asserts jurisdiction over any properties of the Company, or
(b) any entity exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, any such government, or
(c) ERCOT, or
(d) the Texas Regional Entity.
“GS Project Entity ” means a Project Finance Subsidiary of the Company created to finance and develop the Golden Spread Project.
“ Guaranty ” means, with respect to any Person, any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing any Indebtedness of any other Person in any manner, whether directly or indirectly, including (without limitation) obligations incurred through an agreement, contingent or otherwise, by such Person:
 
S CHEDULE B-7
(To Annex A)

to purchase such Indebtedness or any property constituting security therefor;
(a) to advance or supply funds (i) for the purchase or payment of such indebtedness or obligation, or (ii) to maintain any working capital or other balance sheet condition or any income statement condition of any other Person or otherwise to advance or make available funds for the purchase or payment of such Indebtedness;
(b) to lease properties or to purchase properties or services primarily for the purpose of assuring the owner of such Indebtedness of the ability of any other Person to make payment of the Indebtedness; or
(c) otherwise to assure the owner of such Indebtedness against loss in respect thereof.
In any computation of the indebtedness or other liabilities of the obligor under any Guaranty, the indebtedness or other obligations that are the subject of such Guaranty shall be assumed to be direct obligations of such obligor.
“ Hazardous Material ” means any and all pollutants, toxic or hazardous wastes or other substances that might pose a hazard to health and safety, the removal of which may be required or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage or filtration of which is or shall be restricted, prohibited or penalized by any applicable law including, but not limited to, asbestos, urea formaldehyde foam insulation, polychlorinated biphenyls, petroleum, petroleum products, lead based paint, radon gas or similar restricted, prohibited or penalized substances.
“ Holder ” means, with respect to any Note the Person in whose name such Note is registered in the register maintained by the Company pursuant to Section 13.1 .
“Hunt Family Members” means (i) Ray L. Hunt; (ii) the spouse of Ray L. Hunt and each of his children and siblings; (iii) the spouse and lineal descendants of any Person identified in the foregoing clause (ii); (iv) any trust or account primarily for the benefit of any Person or Persons identified in the foregoing clauses (i), (ii) or (iii); (v) any corporation, partnership or other entity in which any of the Persons identified in the foregoing clauses (i), (ii), (iii) or (iv) are the beneficial owners of substantially all of the shares of capital stock, membership interests, partnership interests or other equity interests and options or warrants to acquire, or securities convertible into, capital stock, membership interests, partnership interests, or other equity securities of an entity; and (vi) the personal representative or guardian of any of the Persons identified in the foregoing clauses (i), (ii) and (iii) upon such Person’s death for purposes of the administration of such Person’s estate or upon such Person’s disability or incompetency for purposes of protection and management of the assets of such Person.
 
S CHEDULE B-8
(To Annex A)

“ Indebtedness ” with respect to any Person means, at any time, without duplication, its liabilities for borrowed money and its redemption obligations in respect of mandatorily redeemable Preferred Stock;
(a) its liabilities for the deferred purchase price of property acquired by such Person (excluding accounts payable arising in the ordinary course of business but including all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property);
(b) (i) all liabilities appearing on its balance sheet in accordance with GAAP in respect of Capital Leases and (ii) all liabilities which would appear on its balance sheet in accordance with GAAP in respect of Synthetic Leases assuming such Synthetic Leases were accounted for as Capital Leases; provided , however , that for purposes of this definition (including with respect to clauses (i) and (ii) hereof), the System Leases, any other Lease and any similar lease shall not be treated as a capital lease;
(c) all liabilities for borrowed money secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities);
(d) all its liabilities in respect of letters of credit or instruments serving a similar function issued or accepted for its account by banks and other financial institutions (whether or not representing obligations for borrowed money); provided , however , that for purposes of this definition, any surety bonds or indemnification agreements entered into by Sharyland (with respect to which the Company or a subsidiary thereof has a reimbursement or backstop obligation) in connection with condemnation proceedings shall be excluded;
(e) the aggregate Swap Termination Value of all Swap Contracts of such Person; and
(f) any Guaranty of such Person with respect to liabilities of a type described in any of clauses (a) through (f) hereof.
Indebtedness of any Person shall include all obligations of such Person of the character described in clauses (a) through (g) to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is deemed to be extinguished under GAAP.
“InfraREIT” shall mean InfraREIT, L.L.C., a Delaware limited liability company, and its successors.
“ InfraREIT Partners ” shall mean InfraREIT Partners, LP, a Delaware limited partnership.
“ Initial NPA ” is defined in the recitals hereto.
“ Institutional Investor ” means (a) any Purchaser of a Note, (b) any Holder of a Note holding (together with one or more of its Affiliates) more than 5% of the aggregate principal amount of the Notes then outstanding, (c) any bank, trust company, savings and loan association or other financial institution, any pension plan, any investment company, any insurance company, any broker or dealer, or any other similar financial institution or entity, regardless of legal form, and (d) any Related Fund of any Holder of any Note.
 
S CHEDULE B-9
(To Annex A)

“Investments” has the meaning given to it in Section 10.7.
“Investment Grade Credit Rating” means with respect to any Person, a rating of the long-term unsecured debt securities of such Person (or if such rating is unavailable, issuer rating) equal to or higher than (1) “BBB-” (or the equivalent) with a stable or better outlook by Standard & Poor’s Financial Services LLC, or (2) “Baa3” (or the equivalent) with a stable or better outlook by Moody’s Corporation; provided, that if such Person has a rating from both Standard & Poor’s Financing Services LLC and Moody’s Corporation, then the applicable rating shall be deemed to be the lower of the two.
“Leased Consolidated Net Plant” shall mean that portion of the Consolidated Net Plant of the lessor of a Lease between such lessor and a Qualified Lessee that is the subject of such Lease.
“Leases” means (i) the System Leases, the CREZ Lease, the FERC Lease and any other leases of transmission and distribution and related assets to a Qualified Lessee under which the Company or any Subsidiary of the Company is a party as a lessor and (ii) any lease of transmission and distribution and related assets pursuant to which Sharyland is the lessee and a Subsidiary of Sharyland or another Person Controlled by one or more Hunt Family Members is the lessor; provided, no such lease will qualify as a “Lease” hereunder if each of the three following criteria apply; (x) Sharyland is the lessee, (y) cash rental payments have become due and payable pursuant thereto and (z) none of the Company, a Subsidiary of the Company or a Subsidiary of Sharyland is the lessor.
“ Lien ” means, with respect to any Person, any mortgage, lien, pledge, charge, security interest or other encumbrance, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or Capital Lease, upon or with respect to any property or asset of such Person, in each case, in the nature of a security interest of any kind or nature whatsoever.
“ Material Adverse Effect ” means a material adverse effect upon and/or material adverse developments with respect to (a) the operations, business, assets, properties, liabilities or financial condition of the Company and its Subsidiaries (taken as a whole); (b) the ability of the Note Parties (taken as a whole) to perform their obligations under the Note Documents; (c) the legality, validity or enforceability of this Agreement or any other Note Document or the rights or remedies of the Collateral Agent or the Holders hereunder or thereunder or (d) the validity, perfection or priority of the Collateral Agent’s Liens on any material Collateral.
“ Material Project Document ” means (i) any contract or agreement that is related to the ownership, operation, maintenance, management service, repair or use of the System entered into by the Company or any Subsidiary subsequent to the Third Amendment Date that involves full payments or obligations of the Company or any Subsidiary in excess of $5,000,000 in any calendar year, and (ii) System Leases, but shall exclude any documents subject to Section 10.12 herein.
 
S CHEDULE B-10
(To Annex A)

“ Maturity Date ” means September 30, 2030.
“McAllen Lease” shall mean (A) prior to the effectiveness of the McAllen Lease Amendment and Restatement, the Second Amended and Restated Master System Lease Agreement, dated as of July 1, 2012, between Company, as lessor, and Sharyland, as lessee, and (B) upon the effectiveness of the McAllen Lease Amendment and Restatement, the McAllen Lease Amendment and Restatement, as such lease may be amended, restated, supplemented or otherwise modified from time to time, or any new lease entered into in replacement thereof, in accordance with Section 9.7(b) and/or 10.12 of this Agreement, as applicable.
“McAllen Lease Amendment and Restatement” shall mean the Third Amended and Restated Master System Lease Agreement (McAllen System), between the Company, as lessor, and Sharyland, as lessee.
“ Moody’s ” means Moody’s Investors Service, Inc.
“ Multiemployer Plan ” means any Plan that is a “multiemployer plan” (as such term is defined in section 4001(a)(3) of ERISA).
“ NAIC ” means the National Association of Insurance Commissioners or any successor thereto.
“ Negative Pledge Agreement ” shall mean the Amended and Restated Negative Pledge Agreement, dated as of the Third Amendment Date among FERC Owner and the Collateral Agent .
“ New Project ” shall mean any transmission or distribution project, including any such project acquired or built by a Project Finance Subsidiary, any “Footprint Project” (as defined in the Leases) that the Company or a Subsidiary of the Company funds pursuant to a Lease and any such project that InfraREIT or a Subsidiary thereof acquires pursuant to the Development Agreement, including, for the avoidance of doubt, the Cross Valley Project and the Golden Spread Project.
“ Non-Recourse Debt ” means Indebtedness of a Project Finance Subsidiary or a Subsidiary of Sharyland, as the case may be, that, if secured, is secured solely by a pledge of collateral owned by such Project Finance Subsidiary or such Subsidiary of Sharyland, as the case may be, and the Capital Stock in such Project Finance Subsidiary or such Subsidiary of Sharyland, as the case may be, and for which no Person other than such Project Finance Subsidiary or such Subsidiary of Sharyland, as the case may be, is personally liable.
“ Notes ” is defined in Section 1 .
“ Note Documents ” means this Agreement, the Notes, the Security Documents, the Subsidiary Guaranties and any amendment, waiver, supplement or other modification to any of the foregoing.
“ Note Parties ” means the Company and each Subsidiary that is a party to a Note Document, as applicable.
 
S CHEDULE B-11
(To Annex A)

“ O&M Costs ” means actual cash management and operation costs of the Company, taxes payable by the Company, insurance premiums, consumables, fees and expenses of, and other amounts owing to, the Collateral Agent and the depositary under the Deposit Agreement, and other costs and expenses in connection with the management or operation of the Company, but exclusive in all cases of (a) non-cash charges, including depreciation or obsolescence charges or reserves therefor, amortization of intangibles or other bookkeeping entries of a similar nature, (b) all other payments of Debt Service and Yield-Maintenance Amounts, if any, (c) costs of repair or replacement paid with insurance proceeds and (d) development costs related to any Project Finance Subsidiary.
“ Obligation ” means any loan, advance, debt, liability, and obligation of performance, howsoever arising, owed by the Company to the Collateral Agent or the Holders of any kind or description (whether or not evidenced by any note or instrument and whether or not for the payment of money), direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, pursuant to the terms of this Agreement, any Note or any of the other Note Documents, including all principal, interest, Yield-Maintenance Amounts, fees, charges, expenses, attorneys’ fees and accountants fees payable or reimbursable by the Company under this Agreement or any of the other Note Documents.
“OFAC” means the Office of Foreign Assets Control, United States Department of the Treasury.
“OFAC Listed Person ” means a Person whose name appears on the list of Specially Designated Nationals and Blocked Persons published by OFAC.
“OFAC Sanctions Program” shall mean any economic or trade sanction that OFAC is responsible for administering and enforcing. A list of OFAC Sanctions Programs may be found at http://www.treasury.gov/resource-center/sanctions/Programs/Pages/Programs.aspx.
“ Officer’s Certificate ” means a certificate of a Senior Financial Officer or of any other officer of the Company whose responsibilities extend to the subject matter of such certificate.
“ Payment Date ” means September 30, 2010 and the 30th day of December, March, June and September thereafter up to the Maturity Date, and the Maturity Date.
“ PBGC ” means the Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto.
“ Permit ” means any action, approval, consent, waiver, exemption, variance, franchise, order, permit, authorization, right or license of or from a Governmental Authority, provided that interests or estates in real property, shall not be considered Permits.
“ Permitted Investment ” means any (a) marketable direct obligation of the United States of America, (b) marketable obligation directly and fully guaranteed as to interest and principal by the United States of America, (c) demand deposit with Bank of America N.A., or time deposit, certificate of deposit and banker’s acceptance issued by any member bank of the Federal Reserve System which is organized under the laws of the United States of America or any state thereof or any United States branch of a foreign bank, in each case whose equity capital is in
 
S CHEDULE B-12
(To Annex A)

excess of $500,000,000 and whose long-term debt securities are rated “A” or better by S&P and “A2” or better by Moody’s, (d) commercial paper or tax exempt obligations given the highest rating by Moody’s and S&P, (e) obligations of a commercial bank described in clause (c) above, in respect of the repurchase of obligations of the type as described in clauses (a) and (b) hereof, provided that such repurchase obligation shall be fully secured by obligations of the type described in said clauses (a) and (b) and the possession of such obligation shall be transferred to, and segregated from other obligations owned by, any such bank, (f) instrument rated “AAA” by S&P and “Aaa” by Moody’s issued by investment companies and having an original maturity of 180 days or less, (g) eurodollar certificates of deposit issued by any bank described in clause (c) above, and (h) marketable security rated not less than “A-1” by S&P or not less than “Prime-1” by Moody’s. In no event shall Permitted Investments include any obligation, certificate of deposit, acceptance, commercial paper or instrument which by its terms matures (A) more than 180 days after the date of investment, unless a bank meeting the requirements of clause (c) above shall have agreed to repurchase such obligation, certificate of deposit, acceptance, commercial paper or instrument at its purchase price plus earned interest within no more than 90 days after its purchase thereunder or (B) after the next Payment Date.
“ Permitted Lien ” is defined in Section 10.5.
“ Permitted Secured Indebtedness ” has the meaning given to it in the Collateral Agency Agreement.
“ Person ” means an individual, partnership, corporation, cooperative corporation, limited liability company, association, trust, unincorporated organization, business entity or Governmental Authority.
“ Plan ” means an “employee benefit plan” (as defined in section 3(3) of ERISA) subject to Title I of ERISA that is or, within the preceding five years, has been established or maintained, or to which contributions are or, within the preceding five years, have been made or required to be made, by the Company or any ERISA Affiliate or with respect to which the Company or any ERISA Affiliate may have any liability.
“ Pledge Agreement” means the Amended and Restated Assignment of Membership Interests and Pledge Agreement, dated as of the Third Amendment Date, by TDC, with respect to its membership interests in the Company, to the Collateral Agent.
“Pledge Agreement (FERC)” means the Amended and Restated Assignment of Membership Interests and Pledge Agreement, dated as of the Third Amendment Date, by the Company, with respect to its membership interests in the FERC Owner, to the Collateral Agent.
“ Preferred Stock ” means any class of capital stock of a Person that is preferred over any other class of capital stock (or similar equity interests) of such Person as to the payment of dividends or the payment of any amount upon liquidation or dissolution of such Person.
“ Project Finance Subsidiary ” means a special purpose Subsidiary of a Person created to develop a New Project and to finance such New Project solely with Non-Recourse Debt and equity (including, for the avoidance of doubt, CV Project Entity, L.L.C.).
 
S CHEDULE B-13
(To Annex A)

“ property ” or “ properties ” means, unless otherwise specifically limited, real or personal property of any kind, tangible or intangible, choate or inchoate.
“ PTE ” is defined in Section 6.2(a) .
“ Purchaser ” is defined in the first paragraph of this Agreement.
“ Qualified Institutional Buyer ” means any Person who is a “qualified institutional buyer” within the meaning of such term as set forth in Rule 144A(a)(1) under the Securities Act.
“Qualified Lessee” means Sharyland and/or any other utility that is (x) approved or authorized by the applicable public utility commission or similar regulatory authority to operate and/or lease the transmission and/or distribution assets of the Company or any Subsidiary and (y) a party to a then-effective lease agreement with the Company or a Subsidiary thereof pursuant to which such utility leases and operates such entity’s transmission and/or distribution assets.
“ Qualified Lessee Affiliate Loan ” means loans made by InfaREIT Partners or a Subsidiary thereof to Qualified Lessees from time to time in an aggregate principal amount not to exceed $10,000,000 at any time outstanding as long as the use of proceeds of such loans is limited to the acquisition or financing of equipment or other assets used in the Qualified Lessee’s operation or lease of transmission or distribution assets from the Company or a Subsidiary thereof pursuant to a Lease.
“Qualifying IPO” means an initial public offering of the Capital Stock of InfraREIT pursuant to a registration statement filed with the SEC.
“ RBC ” means Royal Bank of Canada, a Canadian banking institution.
“ RBC Agreement ” means that certain Third Amended and Restated Credit Agreement, dated as of the Third Amendment Date, among the Company, as borrower, the lenders from time to time party thereto and RBC, administrative agent, as the same may be amended, restated, supplemented and otherwise modified from time to time.
“Real Property Collateral ” means (i) any fee owned real property (other than easements and rights of way with a fair market value in excess of $3,000,000 and (ii) any lease of real property (other than easements and rights of way) with an annual rental value in excess of $1,000,000, which lease relates to or arises in connection with any transmission and distribution assets, excluding (x) leases otherwise prohibiting the transfer or granting of a Lien on or security interest in such leasehold interest pursuant to the terms of any agreement permitted under Section 10.20 and (y) leases with respect to which the Company is unable, after commercially reasonable efforts, to obtain such landlord consents as may be reasonably required so as to enable the Company to comply with the requirements of Section 9.7(c).
“ Related Fund ” means, with respect to any Holder of any Note, any fund or entity that (i) invests in Securities or bank loans, and (ii) is advised or managed by such Holder, the same investment advisor as such Holder or by an Affiliate of such Holder or such investment advisor.
 
S CHEDULE B-14
(To Annex A)

“ Required Holders ” means, at any time, the Holders of at least 51% in principal amount of the Notes at the time outstanding (exclusive of Notes then owned by the Company or any of its Affiliates).
“ Required Permit ” is defined in Section 5.12(a).
“ Requirements of Law ” means as to any Person, the certificate of incorporation or formation and by-laws or partnership or operating agreement or other organizational or governing documents of such Person, and any local, state or Federal law, regulation, rule, ordinances or determination, interpretation or order of an arbitrator or a court or other Governmental Authority, and any Required Permit, in each case applicable to or binding upon such Person or any of its properties or its business or to which such Person or any of its properties or its business is subject.
“ Responsible Officer ” means any Senior Financial Officer and any other officer of the Company with responsibility for the administration of the relevant portion of this Agreement.
“ Restricted Payment Conditions ” is defined in Section 10.9.
“ROFO Transfer” shall mean the sale and Transfer to Persons Controlled by one or more Hunt Family Members of any assets located in the Texas Panhandle related to the CREZ Project that are categorized as ROFO Projects under the Development Agreement with an aggregate fair market value not to exceed $5,000,000.
“Sanctions” means any international economic sanction administered or enforced by the United States Government (including without limitation, OFAC), the United Nations Security Council, the European Union, Her Majesty’s Treasury or other relevant sanctions authority.
“ SEC ” shall mean the Securities and Exchange Commission of the United States, or any successor thereto.
“ Secured Parties ” means the Collateral Agent, the Holders and the other Secured Parties (as defined in the Collateral Agency Agreement) from time to time.
“ Securities ” or “ Security ” shall have the meaning specified in Section 2(1) of the Securities Act.
“ Securities Act ” means the Securities Act of 1933, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.
“ Security Agreement ” means the Security Agreement, dated as of the Third Amendment Date, among the Company and the Collateral Agent.
“ Security Documents ” means (i) the Collateral Agency Agreement, Security Agreement, the Deeds of Trust, the Pledge Agreement and the Deposit Agreement, (ii) prior to the completion of the FERC Merger, the Pledge Agreement (FERC) and the Negative Pledge Agreement and (iii) other security documents entered into pursuant to Section 9.7 and any other security documents, financing statements and the like filed or recorded in connection with the foregoing.
 
S CHEDULE B-15
(To Annex A)

“ Senior Financial Officer ” means the chief financial officer, principal accounting officer, treasurer or comptroller of the Company or a Qualified Lessee, as applicable.
“ Sharyland ” means Sharyland Utilities, L.P., a Texas limited partnership.
“ SP ” shall mean Sharyland Projects, L.L.C., a Project Finance Subsidiary.
“Specified Qualified Lessee” shall mean Sharyland and any Qualified Lessee (a) (i) without an Investment Grade Credit Rating or (ii) whose obligations under the applicable Leases are not guaranteed by an entity with an Investment Grade Rating and (b) whose business is limited to the leasing of transmission and/or distribution assets from the Company or any of its Subsidiaries or Affiliates.
“Stanton/Brady/Celeste Lease” shall mean (A) prior to the effectiveness of the Stanton/Brady/Celeste Lease Amendment and Restatement, the Amended and Restated Lease Agreement (Stanton/Brady/Celeste Assets), dated as of July 1, 2012, between the Company, as lessor, and Sharyland, as lessee, and (B) upon the effectiveness of the Stanton/Brady/Celeste Lease Amendment and Restatement, the Stanton/Brady/Celeste Lease Amendment and Restatement, as such lease may be amended restated, supplemented or otherwise modified from time to time, or any new lease entered into in replacement thereof, in accordance with Section 9.7(b) and/or 10.12 of this Agreement, as applicable.
“Stanton/Brady/Celeste Lease Amendment and Restatement” shall mean the Second Amended and Restated Lease Agreement (Stanton/Brady/Celeste Assets), between the Company, as lessor, and Sharyland, as lessee.
“ Structuring Fee ” is defined in Section 4.7.
“ Subsidiary ” means, as to any Person, any other Person in which such first Person or one or more of its Subsidiaries or such first Person and one or more of its Subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar functions) of such second Person and any partnership or joint venture if more than a 50% interest in the profits or capital thereof is owned by such first Person or one or more of its Subsidiaries or such first Person and one or more of its Subsidiaries (unless such partnership or joint venture can and does ordinarily take major business actions without the prior approval of such Person or one or more of its Subsidiaries). Unless the context otherwise clearly requires, any reference to a “Subsidiary” is a reference to a Subsidiary of the Company and, prior to the completion of the FERC Merger, shall include the FERC Owner. Prior to the completion of the FERC Merger, all references herein to a Subsidiary of Sharyland shall include the FERC Operator.
“ Subsidiary Guaranty ” means each Guaranty provided by the Subsidiary Guarantors pursuant to Section 9.7(d) , if any, substantially in the form of Exhibit 3 to the Agreement.
 
S CHEDULE B-16
(To Annex A)

“ Subsidiary Guarantor ” means any Subsidiary of the Company that is a guarantor under a Guaranty pursuant to Section 9.7(d ).
“ SVO ” means the Securities Valuation Office of the NAIC or any successor to such Office.
“ Swap Contract ” means (a) any and all interest rate swap transactions, basis swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward foreign exchange transactions, cap transactions, floor transactions, currency options, spot contracts or any other similar transactions or any of the foregoing (including, but without limitation, any options to enter into any of the foregoing), and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., or any International Foreign Exchange Master Agreement.
“ Swap Termination Value ” means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a), the amounts(s) determined as the mark-to-market values(s) for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts.
“ Synthetic Lease ” means, at any time, any lease (including leases that may be terminated by the lessee at any time) of any property (a) that is accounted for as an operating lease under GAAP and (b) in respect of which the lessee retains or obtains ownership of the property so leased for U.S. federal income tax purposes, other than any such lease under which such Person is the lessor.
“ System ” means the Company’s and/or any Subsidiary’s (other than a Project Finance Subsidiary’s) integrated electrical transmission and distribution facilities located primarily in the State of Texas and the systems and other property necessary to operate the transmission and distribution facilities, and all improvements to and expansions of such facilities, and each New Project (upon its completion) owned by the Company or a Subsidiary thereof; provided that, for the purposes hereof, “System” shall not be deemed to include any easements held by the Company or any Subsidiary.
“ System Leases ” means (1) the McAllen Lease, (2) the Stanton/Brady/Celeste Lease, (3) upon the effectiveness thereof, the Lease Agreement (ERCOT Transmission Assets) between the Company, as lessor, and Sharyland, as lessee, (4) upon the completion of the FERC Merger, the FERC Lease and (5) any and all other Leases and supplements thereto in connection with the System and the transmission and distribution facilities ancillary thereto and any easements associated therewith, in the case of each of the foregoing clauses (1) through (5) as amended, restated, supplemented or otherwise modified from time to time, or any new lease entered into in replacement thereof, in accordance with Section 9.8 and/or 10.12 of this Agreement, as applicable.
 
S CHEDULE B-17
(To Annex A)

“ Taxes ” shall mean all present or future taxes, levies, imposts, duties, deductions, withholdings (including backup withholding), assessments, fees or other charges imposed by any Governmental Authority, including any interest, additions to tax or penalties applicable thereto.
“ TDC ” means Transmission and Distribution Company, L.L.C., a Texas limited liability company.
“ TDC Note Agreement ” means the Note Purchase Agreement, dated the Closing Date, among TDC and the purchasers named therein.
“ Third Amendment Date ” means December 10, 2014.
“ Total Debt ” means, with respect to the Company, all Indebtedness of the Company on a consolidated basis; provided , however , that for purposes of calculating the Company’s Total Debt to Capitalization Ratio, the Company’s Total Debt shall exclude Non-Recourse Debt of a Project Finance Subsidiary of the Company and that portion of the Swap Termination Value defined in clause (b) of the definition of “Swap Termination Value” and shall include Indebtedness of Sharyland on a consolidated basis (excluding Non-Recourse Debt of a Project Finance Subsidiary of Sharyland).
“ Total Debt to Capitalization Ratio ” means (a) the Company’s Total Debt, divided by (b) the sum of (i) Total Debt plus (ii) the Company’s capitalization, as shown on the Company’s balance sheet plus (iii) if positive, Sharyland’s capitalization, as shown on its balance sheet.
“ Transaction Documents ” means, collectively, the Note Documents and the Leases to which the Company or a Subsidiary thereof is a party.
“ Transfer ” means, with respect to any item, the sale, exchange, conveyance, lease, transfer or other disposition of such item.
“ UCC ” shall mean, with respect to any jurisdiction, the Uniform Commercial Code as in effect in such jurisdiction.
“ UCC Collateral ” means the Collateral that is of a type in which a valid security interest can be created under Article 8 or Article 9 of the UCC as in effect in New York.
“ U.S. Economic Sanctions ” shall mean United States economic sanctions, including but not limited to, the Trading with the Enemy Act, the International Emergency Economic Powers Act, CISADA or any similar law or regulation with respect to Iran or any other country, the Sudan Accountability and Divestment Act, any OFAC Sanctions Program, or any economic sanctions regulations administered and enforced by the United States or any enabling legislation or executive order relating to any of the foregoing.
“ USA Patriot Act ” means United States Public Law 107-56, Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 2001, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.
 
S CHEDULE B-18
(To Annex A)

“ Wholly-Owned Subsidiary ” means, at any time, any Subsidiary one hundred percent of all of the voting interests of which are owned by any one or more of the Company and the Company’s other Wholly-Owned Subsidiaries at such time.
“ Yield-Maintenance Amount ” is defined in Section 8.6 .
 
S CHEDULE B-19
(To Annex A)

RULES OF INTERPRETATION
 
1.	The singular includes the plural and the plural includes the singular; and words in the masculine, neuter or feminine gender shall be read and construed as though in either of the other genders where the context so requires.	
 
2.	The word “or” is not exclusive.	
 
3.	A reference to any law includes any amendment or modification to such law, and all regulations, rulings and other laws and regulations promulgated under such law.	
 
4.	A reference to a Person includes its successors and permitted assigns.	
 
5.	Accounting terms have the meanings assigned to them by GAAP (as defined in the applicable Financing Agreement), as applied by the accounting entity to which they refer.	
 
6.	The words “include,” “includes” and “including” are not limiting.	
 
7.	A reference in a document to an Article, Section, Exhibit, Schedule, Annex or Appendix is to the Article, Section, Exhibit, Schedule, Annex or Appendix of such document unless otherwise indicated. Exhibits, Schedules, Annexes or Appendices to any document shall be deemed incorporated by reference in such document.	
 
8.	References to “knowledge” or words of similar import refer to the actual knowledge of the current officers of the relevant Person, without any duty of investigation unless otherwise indicated.	
 
9.	References to any document, instrument or agreement (a) shall include all exhibits, schedules and other attachments thereto, (b) shall include all documents, instruments or agreements issued or executed in replacement thereof, and (c) shall mean such document, instrument or agreement, or replacement or predecessor thereto, as amended, modified and supplemented from time to time and in effect at any given time.	
 
10.	The words “hereof,” “herein” and “hereunder” and words of similar import when used in any document shall refer to such document as a whole and not to any particular provision of such document.	
 
11.	References to “days” shall mean calendar days, unless the term “Banking Days” shall be used. References to a time of day shall mean such time in New York City, unless otherwise specified.	
 
12.	The section and subsection headings in a document are for convenience of reference only and shall neither be deemed to be a part of such document nor modify, define, expand or limit any of the terms or provisions thereof.	
 
13.	References to agreements or other contractual obligations shall, unless otherwise specified, be deemed to refer to such agreements or contractual obligations as amended, supplemented, restated or otherwise modified from time to time.	
 
S CHEDULE B-20
(To Annex A)

Exhibit 10.28
EXECUTION COPY

 
T RANSMISSION AND D ISTRIBUTION C OMPANY , L.L.C.
$25,000,000
8.5% Senior Notes due December 30, 2020

A MENDED AND R ESTATED N OTE P URCHASE A GREEMENT

Dated July 13, 2010

 

TABLE OF CONTENTS

 	  	Page	 	
SECTION 1. AUTHORIZATION OF NOTES	  	 	2	  	
		
SECTION 2. SALE AND PURCHASE OF NOTES	  	 	2	  	
		
SECTION 3. CLOSING	  	 	2	  	
		
SECTION 4. CONDITIONS TO CLOSING	  	 	3	  	
		
Section 4.1. Representations and Warranties	  	 	3	  	
Section 4.2. Performance; No Default	  	 	3	  	
Section 4.3. Compliance Certificates	  	 	3	  	
Section 4.4. Opinions of Counsel	  	 	3	  	
Section 4.5. Purchase Permitted By Applicable Law, Etc.	  	 	3	  	
Section 4.6. Sale of Notes	  	 	4	  	
Section 4.7. Payment of Special Counsel and Other Fees and Expenses	  	 	4	  	
Section 4.8. Private Placement Number	  	 	4	  	
Section 4.9. Changes in Structure	  	 	4	  	
Section 4.10. Funding Instructions	  	 	4	  	
Section 4.11. Proceedings and Documents	  	 	4	  	
Section 4.12. Security Agreement, Etc.	  	 	5	  	
Section 4.13. UCC Searches; and Litigation Searches	  	 	6	  	
Section 4.14. Financial Statements	  	 	6	  	
Section 4.15. Consents and Approvals	  	 	6	  	
Section 4.16. Debt Service Reserve Account	  	 	6	  	
		
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY	  	 	6	  	
		
Section 5.1. Organization; Power and Authority	  	 	6	  	
Section 5.2. Authorization, Etc.	  	 	7	  	
Section 5.3. Disclosure	  	 	7	  	
Section 5.4. Organization and Ownership of Interests in the Company	  	 	7	  	
Section 5.5. Financial Statements; Material Liabilities	  	 	7	  	
Section 5.6. Compliance with Laws, Other Instruments, Etc.	  	 	8	  	
Section 5.7. Governmental Authorizations, Etc.	  	 	8	  	
Section 5.8. Litigation; Observance of Agreements, Statutes and Orders	  	 	8	  	
Section 5.9. Taxes	  	 	8	  	
Section 5.10. Permits; Material Agreements	  	 	9	  	
Section 5.11. Compliance with ERISA	  	 	9	  	
Section 5.12. Private Offering by the Company	  	 	10	  	
Section 5.13. Use of Proceeds; Margin Regulations	  	 	10	  	
Section 5.14. Existing Indebtedness; Future Liens	  	 	10	  	
Section 5.15. Foreign Assets Control Regulations, Etc.	  	 	10	  	
Section 5.16. Status under Certain Statutes	  	 	11	  	
Section 5.17. Collateral	  	 	11	  	
 
i

TABLE OF CONTENTS
(continued)

 	  	Page	 	
SECTION 6. REPRESENTATIONS OF THE PURCHASERS	  	 	12	  	
		
Section 6.1. Purchase for Investment	  	 	12	  	
Section 6.2. Source of Funds	  	 	12	  	
		
SECTION 7. INFORMATION	  	 	13	  	
		
Section 7.1. Financial and Business Information	  	 	13	  	
Section 7.2. Officer’s Certificate	  	 	17	  	
Section 7.3. Visitation	  	 	17	  	
		
SECTION 8. PAYMENT AND PREPAYMENT OF THE NOTES	  	 	17	  	
		
Section 8.1. Amortization; Maturity	  	 	17	  	
Section 8.2. Optional Prepayments with Yield-Maintenance Amount	  	 	18	  	
Section 8.3. Allocation of Partial Prepayments	  	 	18	  	
Section 8.4. Maturity; Surrender, Etc.	  	 	18	  	
Section 8.5. Purchase of Notes	  	 	18	  	
Section 8.6. Yield-Maintenance Amount	  	 	19	  	
		
SECTION 9. AFFIRMATIVE COVENANTS	  	 	20	  	
		
Section 9.1. Compliance with Law	  	 	20	  	
Section 9.2. Payment of Taxes and Claims	  	 	20	  	
Section 9.3. Existence, Etc.	  	 	21	  	
Section 9.4. Books and Records	  	 	21	  	
Section 9.5. Collateral; Further Assurances	  	 	21	  	
Section 9.6. Financial Ratios	  	 	21	  	
Section 9.7. Debt Service Reserve Account	  	 	21	  	
		
SECTION 10. NEGATIVE COVENANTS	  	 	21	  	
		
Section 10.1. Transactions with Affiliates	  	 	21	  	
Section 10.2. Merger, Consolidation, Etc.	  	 	22	  	
Section 10.3. Line of Business	  	 	22	  	
Section 10.4. Terrorism Sanctions Regulations	  	 	22	  	
Section 10.5. Liens	  	 	22	  	
Section 10.6. Indebtedness	  	 	23	  	
Section 10.7. Loans, Advances, Investments and Contingent Liabilities	  	 	23	  	
Section 10.8. No Subsidiaries	  	 	23	  	
Section 10.9. Restricted Payments	  	 	23	  	
Section 10.10. Amendments to Organizational Documents; Exercise of Rights	  	 	24	  	
Section 10.11. ERISA Compliance	  	 	24	  	
Section 10.12. Regulation	  	 	25	  	
Section 10.13. Most Favored Lender	  	 	25	  	
 
ii

TABLE OF CONTENTS
(continued)

 	  	Page	 	
SECTION 11. EVENTS OF DEFAULT	  	 	26	  	
		
SECTION 12. REMEDIES ON DEFAULT, ETC.	  	 	28	  	
		
Section 12.1. Acceleration	  	 	28	  	
Section 12.2. Other Remedies	  	 	29	  	
Section 12.3. Rescission	  	 	29	  	
Section 12.4. No Waivers or Election of Remedies, Expenses, Etc.	  	 	29	  	
		
SECTION 13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES	  	 	29	  	
		
Section 13.1. Registration of Notes	  	 	29	  	
Section 13.2. Transfer and Exchange of Notes	  	 	30	  	
Section 13.3. Replacement of Notes	  	 	31	  	
		
SECTION 14. PAYMENTS ON NOTES	  	 	31	  	
		
Section 14.1. Place of Payment	  	 	31	  	
Section 14.2. Home Office Payment	  	 	31	  	
		
SECTION 15. EXPENSES, ETC.	  	 	32	  	
		
Section 15.1. Transaction Expenses	  	 	32	  	
Section 15.2. Survival	  	 	32	  	
		
SECTION 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT	  	 	32	  	
		
SECTION 17. AMENDMENT AND WAIVER	  	 	33	  	
		
Section 17.1. Requirements	  	 	33	  	
Section 17.2. Solicitation of Holders of Notes	  	 	33	  	
Section 17.3. Binding Effect, etc.	  	 	34	  	
Section 17.4. Notes Held by Company, etc.	  	 	34	  	
		
SECTION 18. NOTICES	  	 	34	  	
		
SECTION 19. REPRODUCTION OF DOCUMENTS	  	 	34	  	
		
SECTION 20. CONFIDENTIAL INFORMATION	  	 	35	  	
		
SECTION 21. SUBSTITUTION OF PURCHASER	  	 	36	  	
		
SECTION 22. MISCELLANEOUS	  	 	36	  	
		
Section 22.1. Successors and Assigns	  	 	36	  	
Section 22.2. Payments Due on Non-Business Days	  	 	36	  	
Section 22.3. Accounting Terms	  	 	37	  	
 
iii

TABLE OF CONTENTS
(continued)

 	  	Page	 	
Section 22.4. Severability	  	 	37	  	
Section 22.5. Construction, etc.	  	 	37	  	
Section 22.6. Counterparts	  	 	37	  	
Section 22.7. Governing Law	  	 	37	  	
Section 22.8. Jurisdiction and Process; Waiver of Jury Trial	  	 	37	  	
Section 22.9. Transaction References	  	 	38	  	
 
iv

					
			
S CHEDULE  A	 	—	 	I NFORMATION R ELATING TO P URCHASERS	
			
S CHEDULE  B	 	—	 	D EFINED T ERMS	
			
Schedule 5.3	 	—	 	Disclosure Materials	
			
Schedule 5.4	 	—	 	Ownership of the Company and Subsidiaries; Officers	
			
Schedule 5.5	 	—	 	Financial Statements	
			
Schedule 5.7	 	—	 	Government Authorizations	
			
Schedule 5.10	 	—	 	Required Permits	
			
Schedule 5.14	 	—	 	Indebtedness	
			
Schedule 8.1	 	—	 	Principal Amortization Schedule	
			
Exhibit 1	 	—	 	Form of 8.5% Senior Secured Note due December 30, 2020	
Security Documents

Exhibit S-1	  	Form of Security Agreement	
		
Exhibit S-2	  	Form of Pledge Agreement	
		
Exhibit S-3	  	Form of Depositary Agreement	
		
Exhibit S-4	  	Form of Deposit Account Control Agreement	
		
Exhibit S-5	  	Form of Collateral Agency Agreement	
 
v

8.5% Senior Notes due December 30, 2020
July 13, 2010
T O E ACH OF THE P URCHASERS L ISTED IN
Schedule A Hereto:
Ladies and Gentlemen:
Transmission and Distribution Company, L.L.C., a Texas limited liability company (the “ Company ”), agrees with each of the purchasers whose names appear at the end hereof (each, a “ Purchaser ” and, collectively, the “ Purchasers ”) as follows (this “ Agreement ”):
RECITALS
WHEREAS, Hunt Transmission Services, L.L.C. (“ Hunt ”) entered into an Agreement and Plan of Merger, dated as of December 17, 2009 (the “ Acquisition Agreement ”), pursuant to which HTS Acquisition Sub., Inc, a Delaware corporation and a wholly owned indirect subsidiary of Hunt (“ Merger Sub ”) merged with and into Cap Rock Holding Corporation (“ Holding ”), a Delaware corporation, which owns directly or indirectly all of the capital stock of Cap Rock Intermediate, Inc., a Delaware corporation (the acquisition and the transactions related therein, the “ Merger ”);
WHEREAS, in connection with the Merger, Merger Sub entered into that certain Note Purchase Agreement, dated as of July 13, 2010 (the “ Acquisition Date ”), among Merger Sub, as issuer, and the Purchasers, as purchasers thereunder, with respect to the issuance of 8.5% Senior Notes due September 30, 2020, in the aggregate principal amount of $25,000,000 (the “ Initial NPA ”);
WHEREAS, Holding as the survivor of the merger with Merger Sub, succeeded to and assumed by operation of law all of the rights, duties, obligations and liabilities of Merger Sub under the Initial NPA, and Holding has confirmed its obligations under the Initial NPA pursuant to that certain Ratification Agreement, dated the Acquisition Date, executed by Holding in favor of the Purchasers;
WHEREAS, Cap Rock Intermediate, Inc., pursuant to and in accordance with the Plan of Conversion, dated as of the Acquisition Date, was converted from a Delaware corporation to a Delaware limited liability company, as so converted Cap Rock Intermediate LLC (“ CR Intermediate ”);
WHEREAS, pursuant to the Assumption Agreement, dated as of the Acquisition Date, between Holding and CR Intermediate, CR Intermediate, with the consent of the Administrative Agent and the Purchasers, assumed all of the rights, duties, obligations and liabilities of Holding under the Initial NPA;

WHEREAS, pursuant to the Agreement and Plan of Merger, dated as of the Acquisition Date, between CR Intermediate and the Company, CR Intermediate was merged into the Company with the Company being the surviving corporation and succeeding by operation of law to the Initial NPA; and
WHEREAS, subject to and on the terms and conditions set forth herein, the parties hereto wish to amend and restate the Initial NPA in its entirety as set forth herein, with the Initial NPA as so amended and restated being hereinafter referred to as the “ Agreement ”;
NOW, THEREFORE, in consideration of the premises and agreements hereinafter set forth, the parties hereto agree as follows:
SECTION 1. AUTHORIZATION OF NOTES.
The Company will authorize the issue and sale of $25,000,000 aggregate principal amount of its 8.5% Senior Notes due December 30, 2020 (the “ Notes ”, such term to include any such notes issued in substitution therefor pursuant to Section 13 ). The Notes shall be substantially in the form set out in Exhibit 1 . Certain capitalized and other terms used in this Agreement are defined in Schedule B ; and references to a “Schedule” or an “Exhibit” are, unless otherwise specified, to a Schedule or an Exhibit attached to this Agreement.
SECTION 2. SALE AND PURCHASE OF NOTES.
Subject to the terms and conditions of this Agreement, the Company will issue and sell to each Purchaser and each Purchaser will purchase from the Company, at the Closing provided for in Section 3 , Notes in the principal amount specified opposite such Purchaser’s name in Schedule A at the purchase price of 100% of the principal amount thereof. The Purchasers’ obligations hereunder are several and not joint obligations and no Purchaser shall have any liability to any Person for the performance or non-performance of any obligation by any other Purchaser hereunder.
SECTION 3. CLOSING.
The sale and purchase of the Notes to be purchased by each Purchaser shall occur at the offices of Bingham McCutchen, 399 Park Avenue, New York, NY, at 11:00 a.m., New York time, at a closing (the “ Closing ”) on July 13, 2010 or on such other Business Day thereafter on or prior to July 16, 2010 as may be agreed upon by the Company and the Purchasers. At the Closing the Company will deliver to each Purchaser the Notes to be purchased by such Purchaser in the form of a single Note (or such greater number of Notes in denominations of at least $1,000,000 as such Purchaser may request) dated the Closing Date and registered in such Purchaser’s name (or in the name of its nominee), against delivery by such Purchaser to the Company or its order of immediately available funds in the amount of the purchase price therefor by wire transfer of immediately available funds for the account of the Company to TDC BofA Account, account number 4426343347 at Bank of America, 915 Main Street, Dallas, TX 75202, ABA: 026009593 or to such other account as established in a flow of funds memorandum that is agreed upon between the Company and the Purchasers. If at the Closing the Company shall fail to tender such Notes to any Purchaser as provided above in this Section 3 , or any of the conditions specified in Section 4 shall not have been fulfilled to such Purchaser’s satisfaction,
 
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such Purchaser shall, at its election, be relieved of all further obligations under this Agreement, without thereby waiving any rights such Purchaser may have by reason of such failure or such nonfulfillment.
SECTION 4. CONDITIONS TO CLOSING.
Each Purchaser’s obligation to purchase and pay for the Notes to be sold to such Purchaser at the Closing is subject to the fulfillment to the satisfaction of each Purchaser, prior to or at the Closing, of the following conditions:
Section 4.1. Representations and Warranties . The representations and warranties of the Company in this Agreement shall be correct when made and at the time of the Closing.
Section 4.2. Performance; No Default . The Company shall have performed and complied with all agreements and conditions contained in this Agreement required to be performed or complied with by it prior to or at the Closing and after giving effect to the issue and sale of the Notes (and the application of the proceeds thereof as contemplated by Section 5.13 ) no Default or Event of Default shall have occurred and be continuing.
Section 4.3. Compliance Certificates .
(a) Company’s Closing Certificates. The Company shall have delivered to each Purchaser an officer’s certificate, dated the Closing Date, certifying that (i) the conditions specified in Sections 4.1 and 4.2 have been fulfilled, and (ii) that each of the other conditions precedent to the occurrence of the Closing has been satisfied.
(b) Company’s Authority Certificate. The Company shall have delivered to each Purchaser a certificate of its secretary, dated the Closing Date, certifying as to the resolutions attached thereto and other corporate proceedings by the Company relating to the authorization, execution and delivery of the Notes and this Agreement and the other Financing Documents to which it is a party.
Section 4.4. Opinions of Counsel . Such Purchaser shall have received opinions in form and substance satisfactory to such Purchaser, dated the date of the Closing (a)(i) from Mayer Brown LLP, counsel for the Company and the Member, covering such matters incident to the transactions contemplated hereby as such Purchaser or its counsel may reasonably request and (ii) from Sutherland, Asbill & Brennan LLP, special counsel for the Company and the Member, covering Federal and Texas regulatory matters (and the Company hereby instructs its counsel to deliver such opinions to the Purchasers and the Secured Parties), and (b) from Bingham McCutchen LLP, in connection with such transactions, in form and substance satisfactory to the Purchasers and covering such other matters incident to such transactions as the Purchasers may reasonably request.
Section 4.5. Purchase Permitted By Applicable Law, Etc . On the date of the Closing such Purchaser’s purchase of Notes shall (a) be permitted by the laws and regulations of each jurisdiction to which such Purchaser is subject, without recourse to provisions (such as section 1405(a)(8) of the New York Insurance Law) permitting limited investments by insurance companies without restriction as to the character of the particular investment, (b) not violate any
 
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applicable law or regulation (including, without limitation, Regulation T, U or X of the Board of Governors of the Federal Reserve System) and (c) not subject such Purchaser to any tax, penalty or liability under or pursuant to any applicable law or regulation, which law or regulation was not in effect on the date hereof. If requested by such Purchaser, such Purchaser shall have received an Officer’s Certificate certifying as to such matters of fact as such Purchaser may reasonably specify to enable such Purchaser to determine whether such purchase is so permitted.
Section 4.6. Sale of Notes . Contemporaneously with the Closing, (a) the Company shall sell to each Purchaser and each Purchaser shall purchase the Notes to be purchased by it at the Closing as specified in Schedule A, (b) the transactions contemplated by the SDTS 2010 Note Agreement shall be consummated and (c) the transactions contemplated by the RBC Agreement shall be consummated.
Section 4.7. Payment of Special Counsel and Other Fees and Expenses. Without limiting the provisions of Section 15.1 , the Company shall have paid on or before the Closing: (a) the fees, charges and disbursements of the Purchasers’ special counsel, Bingham McCutchen LLP, and the Purchasers’ Texas counsel to the extent reflected in a statement of such counsel rendered to the Company at least one Business Day prior to the Closing and (b) all other fees, including to the extent not paid pursuant to the Initial NPA a structuring fee in the amount of $250,000 to Prudential (the “ Structuring Fee ”), and out-of-pocket costs and expenses (including legal fees and expenses and consultant fees and expenses) and other compensation contemplated hereby or by the other Financing Documents, or pursuant to separate letter agreements, payable to the Purchasers.
Section 4.8. Private Placement Number . A Private Placement Number issued by Standard & Poor’s CUSIP Service Bureau (in cooperation with the SVO) shall have been obtained for the Notes.
Section 4.9. Changes in Structure . The Cap Rock Transaction shall be consummated prior to or contemporaneously with the Closing. The Company shall not have changed its jurisdiction of formation or been a party to any merger or consolidation or succeeded to all or any substantial part of the liabilities of any other entity, at any time following the date of the most recent financial statements referred to in Schedule 5.5 , except in connection with the Cap Rock Transaction.
Section 4.10. Funding Instructions . At least one Business Day prior to the date of the Closing, each Purchaser shall have received written instructions signed by a Responsible Officer on letterhead of the Company confirming the information specified in Section 3 including (i) the name and address of the transferee bank, (ii) such transferee bank’s ABA number and (iii) the account name and number into which the purchase price for the Notes is to be deposited.
Section 4.11. Proceedings and Documents . Each Purchaser shall have received the following, each to be (i) dated the Closing Date unless otherwise indicated, and (ii) in form and substance satisfactory to the Purchasers:
(a) The Notes to be purchased by the Purchasers;
 
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(b) This Agreement and each other Financing Document, duly executed, authorized and delivered by each party thereto;
(c) The certificates of formation of the Company and the Member, each certified as of a recent date by the Secretary of State of the State of Texas or the State of Delaware, as appropriate, and by such Person’s secretary or other authorized officer;
(d) The organizational documents of the Company and the Member, certified by such Person’s secretary or other authorized officer;
(e) With respect to the Company and the Member, an incumbency certificate signed by the secretary and one other officer of such Person, certifying as to the names, titles and true signatures of the officers of such Person authorized to sign this Agreement, the Notes, the other Financing Documents to which such Person is a party and other documents to be delivered hereunder or thereunder;
(f) A certificate of the secretary of the Company and the Member attaching resolutions of its management committee or other governing body evidencing approval of the transactions contemplated by this Agreement and the other Financing Documents to which such Person is a party and, with respect to the Company, the issuance of the Notes, and in each case, the execution, delivery and performance thereof, and authorizing certain officers to execute and deliver the same, and certifying that such resolutions were duly and validly adopted and have not since been amended, revoked or rescinded;
(g) Good standing certificates as to the Company and the Member from all relevant jurisdictions;
(h) Evidence of the filing and acceptance of financing statements which name the Company, as debtor, and the Collateral Agent, as secured party, in all applicable offices, together with copies of such financing statements;
(i) A schedule of all Required Permits, together with copies thereof certified by officers of the Company as being true, correct and complete, in full force and effect and not subject to any appeal or further proceeding;
(j) Copies of the documents delivered in connection with the consummation of the transactions contemplated by the SDTS 2010 Note Agreement and the RBC Agreement; and
(k) Such additional documents or certificates with respect to such legal matters or limited liability company, general partnership or other proceedings related to the transactions contemplated hereby as may be reasonably requested by the Purchasers.
Section 4.12. Security Agreement, Etc. The Obligations shall be secured by a perfected first priority security interest (subject to Permitted Liens) in the Collateral in favor of the Collateral Agent, for the benefit of the Secured Parties, and the Company will deliver or cause to be delivered to the Purchasers and the Collateral Agent on the Closing Date the following, each of which shall be in full force and effect:
(a) A Security Agreement in the form of Exhibit S-1 , duly executed by each of the Company and the Collateral Agent (the “ Security Agreement ”);
 
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(b) An Assignment of Membership Interest Pledge Agreement in the form of Exhibit S-2 , duly executed by the Member in favor of the Collateral Agent (the “ Pledge Agreement ”); and
(c) A Depositary Agreement in the form of Exhibit S-4 , duly executed by each of the Company, the Collateral Agent and the Depositary (the “ Depositary Agreement ”) and the Deposit Account Control Agreement in the form of Exhibit S-4 , duly executed by each of the Company, the Collateral Agent, and the Deposit Account Bank (the “ Deposit Account Control Agreement ”);
(d) Such other documents, instruments and agreements any Purchaser may reasonably request to grant to the Collateral Agent first priority (subject only to Permitted Liens) perfected Liens on the Collateral.
Section 4.13. UCC Searches; and Litigation Searches. The Collateral Agent and the Purchasers shall have received UCC and litigation searches of the Company and the Member, which searches shall (i) confirm that no Liens other than Permitted Liens exist on the Collateral and that such Persons are not subject to any litigation, and (ii) be otherwise in substance satisfactory to the Collateral Agent and the Purchasers.
Section 4.14. Financial Statements. The Purchasers shall have received unaudited financial statements of the Company for the calendar quarter ended March 31, 2010.
Section 4.15. Consents and Approvals. All Required Permits and all governmental and third party permits and regulatory and other approvals required to be in effect in connection with the issuance of the Notes hereunder have been obtained and are in effect, all applicable waiting periods have expired without any materially adverse action being taken by any applicable authority, and copies of the documentation thereof shall have been delivered to each Purchaser.
Section 4.16. Debt Service Reserve Account. Contemporaneously with the Closing, the Company shall deposit or cause to be deposited the Minimum Debt Service Reserve Requirement in the Debt Service Reserve Account.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each Purchaser that each of the representations and warranties made by SDTS in the SDTS 2010 Note Agreement is true and correct on the date hereof. The Company represents and warrants to each Purchaser that:
Section 5.1. Organization; Power and Authority . The Company is a limited liability company duly organized, validly existing and in good standing under the laws of its jurisdiction of formation, and is duly qualified and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The Company has the limited liability company power and
 
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authority to transact the business it transacts and proposes to transact, to execute and deliver this Agreement and the other Financing Documents to which it is a party and to perform the provisions hereof and thereof.
Section 5.2. Authorization, Etc . This Agreement and the other Financing Documents have been duly authorized by all necessary limited liability company or limited partnership action on the part of the Company and the Member, and this Agreement and the other Financing Documents constitute, and upon execution and delivery thereof each Note will constitute, a legal, valid and binding obligation of the Company and the Member, enforceable against it in accordance with its terms, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors’ rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).
Section 5.3. Disclosure . This Agreement, the other Financing Documents and the documents, certificates or other writings delivered to the Purchasers by or on behalf of the Company in connection with the transactions contemplated hereby, and the financial statements listed in Schedule 5.5 (this Agreement, and such documents, certificates or other writings listed on Schedule 5.3 , and such financial statements delivered to each Purchaser and listed on Schedule 5.5 being referred to, collectively, as the “ Disclosure Documents ”), taken as a whole, do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading in light of the circumstances under which they were made. The projections and pro forma financial information contained in the materials referenced above are based upon good faith estimates and assumptions believed by management of the Company to be reasonable at the time made and on the Closing Date, it being recognized by each Purchaser that such financial information as it relates to future events is not to be viewed as fact and that actual results during the period or periods covered by such financial information may differ from the projected results set forth therein by a material amount. Except as disclosed in the Disclosure Documents, since December 31, 2009, there has been no change in the financial condition, operations, business, properties or prospects of the Company except changes that individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. There is no fact known to the Company that could reasonably be expected to have a Material Adverse Effect that has not been set forth herein or in the Disclosure Documents.
Section 5.4. Organization and Ownership of Interests in the Company . Schedule 5.4 contains a complete and correct list and description of (i) the Company’s jurisdiction of its organization and its ownership structure, (ii) the Company’s Subsidiaries, and (iii) the Company’s senior officers. The Company has no Subsidiaries as of the Closing Date except as shown on Schedule 5.4 .
Section 5.5. Financial Statements; Material Liabilities . The Company has delivered to each Purchaser copies of the financial statements listed on Schedule 5.5 . All of such financial statements (including in each case the related schedules and notes) fairly present in all material respects the consolidated financial positions of the Company as of the respective dates specified in such Schedule and the results of operations and cash flows for the respective periods so specified and have been prepared in accordance with GAAP consistently applied throughout the periods involved except as set forth in the notes thereto (subject, in the case of any interim
 
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financial statements, to normal year-end adjustments). The Company has no material liabilities that are not disclosed on such financial statements or otherwise disclosed in the Disclosure Documents.
Section 5.6. Compliance with Laws, Other Instruments, Etc . The execution, delivery and performance by the Company of this Agreement and the Notes and the other Financing Documents to which it is a party, do not and will not (i) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of the Company under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter or limited partnership or limited liability company agreement, or any other agreement or instrument to which the Company is bound or by which the Company or any of its properties may be bound or affected, (ii) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to the Company or (iii) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to such Person.
Section 5.7. Governmental Authorizations, Etc . Except as set forth on Schedule 5.7 , no consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority is required in connection with the execution, delivery or performance by the Company of this Agreement or the Notes or any of the other Financing Documents to which it is a party.
Section 5.8. Litigation; Observance of Agreements, Statutes and Orders . (a) There are no actions, suits, investigations or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company or its property in any court or before any arbitrator of any kind or before or by any Governmental Authority that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.
(b) The Company is not in default under any agreement or any order, judgment, decree or ruling of any court, arbitrator or Governmental Authority or is in violation of any applicable law, ordinance, rule or regulation (including without limitation Environmental Laws or the USA Patriot Act) of any Governmental Authority, which default or violation, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.
Section 5.9. Taxes . The Company has filed all material tax returns that are required to have been filed (or timely requests for extensions have been filed, have been granted, and are not expired) in any jurisdiction, and has paid all taxes shown to be due and payable on such returns and all other taxes and assessments levied upon it or its properties, assets, income or franchises, to the extent such taxes and assessments have become due and payable and before they have become delinquent, except for any taxes and assessments (i) the amount of which is not individually or in the aggregate material or (ii) the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which such Person has established adequate reserves in accordance with GAAP. The Company knows of no basis for any tax or assessment that could reasonably be expected to have a Material Adverse Effect. The charges, accruals and reserves on the books of the Company in respect of Federal, state or other taxes for all fiscal periods are adequate.
 
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Section 5.10. Permits; Material Agreements . The Company owns or possesses all governmental and third party licenses, permits, franchises, authorizations, that are material to its business (collectively, the “Required Permits”), without known conflict with the rights of others. All Required Permits are listed in Schedule 5.10 . The agreements listed on Schedule 5.10 constitute and include all material contracts and agreements to which the Company is a party. Each such agreement is in full force and effect, and constitutes the legal, valid and binding obligation of each party thereto as of the date hereof.
Section 5.11. Compliance with ERISA . (a) The Company and each ERISA Affiliate have operated and administered each Plan in compliance with all applicable laws except for such instances of noncompliance as have not resulted in and could not reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any ERISA Affiliate has incurred any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans (as defined in section 3 of ERISA), and no event, transaction or condition has occurred or exists that could reasonably be expected to result in the incurrence of any such liability by the Company or any ERISA Affiliate, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate, in either case pursuant to Title I or IV of ERISA or to such penalty or excise tax provisions or to Section 401(a)(29), 412 or 430(k) of the Code or section 4068 of ERISA, other than such liabilities or Liens as would not be individually or in the aggregate material.
(b) The ratio of (x) the aggregate actuarial value of assets as defined in and determined in accordance with Code section 430(g)(3)(B) and adopted by the Company under each Plan (other than a Multiemployer Plan) to (y) the present value of the aggregate benefit liabilities under each such Plan, exceeds 80%, as determined as of the end of such Plan’s most recently ended plan year on the basis of the actuarial assumptions specified for funding purposes in such Plan’s most recent actuarial valuation report. The terms “current value” and “present value” have the meanings specified in section 3 of ERISA.
(c) The Company and its ERISA Affiliates have not incurred withdrawal liabilities (and are not subject to contingent withdrawal liabilities) under section 4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate are material.
(d) The expected postretirement benefit obligation (determined as of the last day of the Company’s most recently ended calendar year in accordance with Financial Accounting Standards Board Statement No. 106, without regard to liabilities attributable to continuation coverage mandated by section 4980B of the Code) of the Company is not material to it.
(e) The execution and delivery of this Agreement and the issuance and sale of the Notes hereunder will not involve any non-exempt prohibited transaction under section 406 of ERISA or in connection with which a tax could be imposed pursuant to section 4975(c)(1)(A)-(D) of the Code. The representation by the Company to each Purchaser in the first sentence of this Section 5.11(e) is made in reliance upon and subject to the accuracy of such Purchaser’s representation in Section 6.2 as to the sources of the funds used to pay the purchase price of the Notes to be purchased by such Purchaser.
 
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Section 5.12. Private Offering by the Company . Neither the Company nor anyone acting on its behalf has offered the Notes or any similar securities for sale to, or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof with, any person other than the Purchasers and not more than five other Institutional Investors, each of which has been offered the Notes at a private sale for investment. Neither the Company nor anyone acting on its behalf has taken, or will take, any action that would subject the issuance or sale of the Notes to the registration requirements of Section 5 of the Securities Act or to the registration requirements of any securities or blue sky laws of any applicable jurisdiction.
Section 5.13. Use of Proceeds; Margin Regulations . The Company applied the proceeds of the sale of the Notes to (i) make an equity contribution to SDTS, (ii) pay all fees, expenses and costs related to Closing, and (iii) to fund the Debt Service Reserve Account in accordance with the terms of the Depositary Agreement. No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for the purpose of buying or carrying any margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System (12 CFR 221), or for the purpose of buying or carrying or trading in any securities under such circumstances as to involve the Company in a violation of Regulation X of said Board (12 CFR 224) or to involve any broker or dealer in a violation of Regulation T of said Board (12 CFR 220). As used in this Section, the terms “margin stock” and “purpose of buying or carrying” shall have the meanings assigned to them in Regulation U.
Section 5.14. Existing Indebtedness; Future Liens . (a)  Schedule 5.14 sets forth a complete and correct list of all outstanding Indebtedness of the Company as of March 31, 2010 (including a description of the obligors and obligees, principal amount outstanding and collateral therefor, if any, and Guaranty thereof, if any). Since March 31, 2010, there has been no material change in the amounts, interest rates, sinking funds, installment payments or maturities of the Indebtedness of the Company. The Company is not in default and no waiver of default is currently in effect, in the payment of any principal or interest on any of its Indebtedness and no event or condition exists with respect to any of its Indebtedness that would permit (or that with notice or the lapse of time, or both, would permit) one or more Persons to cause such Indebtedness to become due and payable before its stated maturity or before its regularly scheduled dates of payment.
(b) The Company has not agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its property, whether now owned or hereafter acquired, to be subject to a Lien not otherwise permitted by Section 10.5 .
(c) The Company is not a party to, nor otherwise subject to any provision contained in, any instrument evidencing Indebtedness of the Company, any agreement relating thereto or any other agreement (including, but not limited to, its charter or other organizational document) which limits the amount of, or otherwise imposes restrictions on the incurring of, Indebtedness of the Company.
Section 5.15. Foreign Assets Control Regulations, Etc . (a) Neither the sale of the Notes by the Company hereunder nor the use of the proceeds thereof will violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto.
 
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(b) Neither the Company nor the Member: (i) is a Person described or designated in the Specially Designated Nationals and Blocked Persons List of the Office of Foreign Assets Control or in Section 1 of the Anti-Terrorism Order or (ii) engages in any dealings or transactions with any such Person. The Company and the Member are in compliance, in all material respects, with the USA Patriot Act.
(c) No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for any payments to any governmental official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977, as amended, assuming in all cases that such Act applies to the Company and the Member.
Section 5.16. Status under Certain Statutes . (a) The Company is not an “investment company” or a company “controlled” by an “investment company” within the meaning of the Investment Company Act of 1940, as amended, or an “investment adviser” within the meaning of the Investment Advisers Act of 1940, as amended.
(b) The Company is not a “public utility” under the FPA and the regulations of FERC thereunder. The execution, delivery and performance of the Company’s obligations under the Financing Documents requires no authorization of approval by, or notice to, and is not subject to the jurisdiction of, FERC under the FPA.
(c) The Company is not a “holding company” under PUHCA and the regulations of FERC thereunder and will not become such a “holding company” as a result of the Cap Rock Transaction.
(d) Solely by virtue of the execution, delivery and performance of the Financing Documents, no Purchaser will become subject to any of the provisions of the FPA, PUHCA (based on FERC’s currently effective definitions under PUHCA) or the Public Utility Regulatory Act of Texas, or to regulation under any such statute.
Section 5.17. Collateral . The Collateral, as described in the Security Documents, constitutes all of the property of the Company. The Company owns no real property. The security interests in the Collateral granted to the Collateral Agent (for the benefit of the Secured Parties) pursuant to the Financing Documents: (a) constitute as to personal property included in the Collateral and, with respect to subsequently acquired personal property included in the Collateral, will constitute, a perfected security interest and Lien under each applicable Uniform Commercial Code, and (b) are, and, with respect to such subsequently acquired property, will be, as to Collateral perfected under each applicable Uniform Commercial Code, superior and prior to the rights of all third Persons now existing or hereafter arising whether by way of mortgage, lien, security interests, encumbrance, assignment or otherwise, except for Permitted Liens. All action as is necessary has been taken to establish and perfect the Collateral Agent’s rights in and to, and the first lien priority of its Lien on, the Collateral, including any recording, filing, registration,
 
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delivery to the Collateral Agent, giving of notice or other similar action. The Security Documents and financing statements relating thereto have been duly filed or recorded in each office and in each jurisdiction where required in order to create and perfect the Lien and security interest described above and the priority thereof.
SECTION 6. REPRESENTATIONS OF THE PURCHASERS.
Section 6.1. Purchase for Investment . Each Purchaser severally represents that it is an “Accredited Investor” as defined in Rule 501 of Regulation D under the Securities Act. Each Purchaser severally represents that it is purchasing the Notes for its own account or for one or more separate accounts maintained by such Purchaser or for the account of one or more pension or trust funds and not with a view to the distribution thereof, provided that the disposition of such Purchaser’s property shall at all times be within such Purchaser’s control. Each Purchaser understands that the Notes have not been registered under the Securities Act and may be resold only if registered pursuant to the provisions of the Securities Act or if an exemption from registration is available, except under circumstances where neither such registration nor such an exemption is required by law, and that the Company is not required to register the Notes.
Section 6.2. Source of Funds. Each Purchaser severally represents that at least one of the following statements is an accurate representation as to each source of funds (a “ Source ”) to be used by such Purchaser to pay the purchase price of the Notes to be purchased by such Purchaser hereunder:
(a) the Source is an “insurance company general account” (as the term is defined in the United States Department of Labor’s Prohibited Transaction Exemption (“ PTE ”) 95-60) in respect of which the reserves and liabilities (as defined by the annual statement for life insurance companies approved by the National Association of Insurance Commissioners (the “ NAIC Annual Statement ”)) for the general account contract(s) held by or on behalf of any employee benefit plan together with the amount of the reserves and liabilities for the general account contract(s) held by or on behalf of any other employee benefit plans maintained by the same employer (or affiliate thereof as defined in PTE 95-60) or by the same employee organization in the general account do not exceed 10% of the total reserves and liabilities of the general account (exclusive of separate account liabilities) plus surplus as set forth in the NAIC Annual Statement filed with such Purchaser’s state of domicile; or
(b) the Source is a separate account that is maintained solely in connection with such Purchaser’s fixed contractual obligations under which the amounts payable, or credited, to any employee benefit plan (or its related trust) that has any interest in such separate account (or to any participant or beneficiary of such plan (including any annuitant)) are not affected in any manner by the investment performance of the separate account; or
(c) the Source is either (i) an insurance company pooled separate account, within the meaning of PTE 90-1 or (ii) a bank collective investment fund, within the meaning of the PTE 91-38 and, except as disclosed by such Purchaser to the Company in writing pursuant to this clause (c), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; or
 
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(d) the Source constitutes assets of an “investment fund” (within the meaning of Part V of PTE 84-14 (the “ QPAM Exemption ”)) managed by a “qualified professional asset manager” or “QPAM” (within the meaning of Part V of the QPAM Exemption), no employee benefit plan’s assets that are included in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Section V(c)(1) of the QPAM Exemption) of such employer or by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, the conditions of Part I(c) and (g) of the QPAM Exemption are satisfied as of the last day of the most recent calendar quarter, the QPAM does not own a 10% or more interest in the Company and no Person controlling or controlled by the QPAM (applying the definition of “control” in Section V(e) of the QPAM Exemption) owns a 20% or more interest in the Company (or less than 20% but greater than 10% if such Person exercises control over the management or policies of the Company by reason of its ownership interest) and (i) the identity of such QPAM and (ii) the names of all employee benefit plans whose assets are included in such investment fund have been disclosed to the Company in writing pursuant to this clause (d); or
(e) the Source constitutes assets of a “plan(s)” (within the meaning of Section IV of PTE 96-23 (the “ INHAM Exemption ”)) managed by an “in-house asset manager” or “INHAM” (within the meaning of Part IV of the INHAM Exemption), the conditions of Part I(a), (g) and (h) of the INHAM Exemption are satisfied, neither the INHAM nor a person controlling or controlled by the INHAM (applying the definition of “control” in Section IV(d) of the INHAM Exemption) owns a 5% or more interest in the Company and (i) the identity of such INHAM and (ii) the name(s) of the employee benefit plan(s) whose assets constitute the Source have been disclosed to the Company in writing pursuant to this clause (e); or
(f) the Source is a governmental plan; or
(g) the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this clause (g); or
(h) the Source does not include assets of any employee benefit plan, other than a plan exempt from the coverage of ERISA.
As used in this Section 6.2 , the terms “ employee benefit plan, ” “ governmental plan, ” and “ separate account ” shall have the respective meanings assigned to such terms in section 3 of ERISA.
SECTION 7. INFORMATION.
Section 7.1. Financial and Business Information. The Company shall deliver to each Holder of Notes:
(a) Quarterly Statements — within 45 days after the end of each quarterly fiscal period in each calendar year of the Company and its Subsidiaries (excluding the last quarterly fiscal period of each such calendar year), duplicate copies of
 
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(i) balance sheets of the Company and its Subsidiaries on a consolidated basis as at the end of such quarter, and
(ii) profit and loss statements and cash flows statements for the Company and its Subsidiaries on a consolidated basis for such quarter and (in the case of the second and third quarters) for the portion of the calendar year ending with such quarter,
setting forth in each case in comparative form the figures for the corresponding periods in the previous calendar year, all in reasonable detail, prepared in accordance with GAAP applicable to quarterly financial statements generally, and certified by a Senior Financial Officer of the Company as fairly presenting, in all material respects, the financial position of the companies being reported on and their results of operations and cash flows, subject to changes resulting from year-end adjustments;
(b) Annual Statements — within 105 days after the end of each calendar year of the Company, duplicate copies of
(i) balance sheets of the Company on a consolidated basis as at the end of such year, and
(ii) statements of income, profit and loss statements and cash flows statements for the Company on a consolidated basis for such year,
setting forth in each case in comparative form the figures for the previous calendar year, all in reasonable detail, prepared in accordance with GAAP, and accompanied by
(A) an opinion thereon of Ernst & Young LLP or another independent public accounting firm of nationally recognized standing selected by the Company (herein, the “ Approved Accountant ”), which opinion shall state that such financial statements present fairly, in all material respects, the financial position of the companies being reported upon and their results of operations and cash flows and have been prepared in conformity with GAAP, and that the examination of the Approved Accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and that such audit provides a reasonable basis for such opinion in the circumstances, and
(B) a certificate of the Approved Accountants stating that they have reviewed this Agreement and stating further whether, in making their audit, they have become aware of any condition or event that then constitutes a Default or an Event of Default, and, if they are aware that any such condition or event then exists, specifying the nature and period of the existence thereof (it being understood that the Approved Accountants shall not be liable, directly or indirectly, for any failure to obtain knowledge of any Default or Event of Default unless the Approved Accountants should have obtained knowledge thereof in making an audit in accordance with generally accepted auditing standards or did not make such an audit);
 
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(c) Other Reports — promptly upon their becoming available, and to the extent not otherwise required to be delivered pursuant to another provision of this Agreement, one copy of (i) each financial statement and such other reports and notices as a Holder may reasonably request sent by the Company to its Member, (ii) each report or filing (without exhibits except as expressly requested by such Holder) other than regular and periodic reports and filings made by the Company to any state or Federal regulatory body, and (iii) each report or notice made by SDTS to the holders of its notes issued pursuant to the SDTS 2009 Note Agreement or the SDTS 2010 Note Agreement;
(d) Notice of Default or Event of Default — promptly, and in any event within 5 Business Days after a Responsible Officer becoming aware of the existence of any Default or Event of Default or that any Person has given any notice or taken any action with respect to a claimed default hereunder or that any Person has given any notice or taken any action with respect to a claimed default of the type referred to in Section 11(f) , a written notice specifying the nature and period of existence thereof and what action the Company is taking or proposes to take with respect thereto;
(e) Audit Reports — promptly, and in any event within 5 Business Days after receipt the results of any non-routine audit reports relating to the Company;
(f) ERISA Matters — promptly, and in any event within 5 Business Days after a Responsible Officer becoming aware of any of the following, a written notice setting forth the nature thereof and the action, if any, that the Company or an ERISA Affiliate proposes to take with respect thereto:
(i) with respect to any Plan, any reportable event, as defined in section 4043(c) of ERISA and the regulations thereunder, for which notice thereof has not been waived pursuant to such regulations as in effect on the date hereof; or
(ii) the taking by the PBGC of steps to institute, or the threatening by the PBGC of the institution of, proceedings under section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Company or any ERISA Affiliate of a notice from a Multi-employer Plan that such action has been taken by the PBGC with respect to such Multi-employer Plan; or
(iii) any event, transaction or condition that could result in the incurrence of any liability by the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or such penalty or excise tax provisions, if such liability or Lien, taken together with any other such liabilities or Liens then existing, could reasonably be expected to have a Material Adverse Effect;
 
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(g) Notices from Governmental Authority — promptly, and in any event within 5 Business Days of receipt (or knowledge) thereof copies of any notice to the Company, any Subsidiary, or the Member from any Federal or state Governmental Authority relating to any order, ruling, statute or other law or regulation that could reasonably be expected to have a Material Adverse Effect;
(h) Other Notices — promptly, and in any event within 5 Business Days of receipt (or knowledge by a Responsible Officer of the Company) thereof:
(i) any press releases and other statements made available generally by any of the Company, any Subsidiary, or the Member to the public concerning developments that are material to the Company or any of its Subsidiaries;
(ii) notice of the occurrence of any condition or event that could reasonably be expected to result in a Material Adverse Effect;
(iii) any material pending or threatened adversarial or contested proceeding of or before a Governmental Authority;
(iv) any termination, suspension or other loss of any Required Permit, other than a termination of a Required Permit in accordance with its terms so long as the permit, if it is a Required Permit, is replaced on a timely basis so as not to have a Material Adverse Affect; and
(v) any litigation or proceeding taken or threatened in writing against the Company, the Member or any Subsidiary, that, if successful, could reasonably be expected to result in a Material Adverse Effect.
(i) Annual Operating Budgets — As soon as available and in any event within 30 days after the close of each fiscal year of each of Sharyland and SDTS, the annual budget of each of Sharyland and SDTS.
(j) Information Required by Rule 144A — upon the request of such Holder (and shall deliver to any qualified institutional buyer designated by such Holder), such financial and other information as such Holder may reasonably determine to be necessary in order to permit compliance with the information requirements of Rule 144A under the Securities Act in connection with the resale of Notes, except at such times as the Company is subject to the reporting requirements of section 13 or 15(d) of the Exchange Act (for the purpose of this Section 7.1(j) , the term “qualified institutional buyer” shall have the meaning specified in Rule 144A under the Securities Act); and
(k) Requested Information — with reasonable promptness, such other data and information relating to the business, operations, affairs, financial condition, assets or properties of the Company or relating to the ability of the Company to perform its obligations hereunder and under the Notes as from time to time may be reasonably requested by any such Holder of Notes.
 
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Section 7.2. Officer’s Certificate . Each set of financial statements delivered pursuant to Section 7.1(a) or Section 7.1(b) shall be accompanied by a certificate of a Senior Financial Officer setting forth:
(a) Covenant Compliance — the information (including detailed calculations) required in order to establish whether the Company was in compliance with the requirements of Sections 9.6, 10.6 and 10.9 of this Agreement, during the quarterly or annual period covered by the statements then being furnished (including with respect to each such Section, where applicable, the calculations of the maximum or minimum amount, ratio or percentage, as the case may be, permissible under the terms of such Sections, and the calculation of the amount, ratio or percentage then in existence); and
(b) Event of Default — a statement that such Senior Financial Officer has reviewed the relevant terms hereof and has made, or caused to be made, under his or her supervision, a review of the transactions and conditions of the Company from the beginning of the quarterly or annual period covered by the statements then being furnished to the date of the certificate and that such review shall not have disclosed the existence during such period of any condition or event that constitutes a Default or an Event of Default or, if any such condition or event existed or exists (including, without limitation, any such event or condition resulting from the failure of the Company to comply with any Environmental Law), specifying the nature and period of existence thereof and what action the Company shall have taken or proposes to take with respect thereto.
Section 7.3. Visitation . The Company shall permit the representatives of each Holder of Notes that is an Institutional Investor:
(a) No Default — if no Default or Event of Default then exists, at the expense of such Holder (or in the case of the Collateral Agent, the Holders) and upon reasonable prior notice, to visit the principal executive office of the Company, to discuss the affairs, finances and accounts of the Company with the Company’s officers, and (with the consent of the Company, which consent will not be unreasonably withheld) its independent public accountants, and (with the consent of the Company, which consent will not be unreasonably withheld) to visit the other offices and properties of the Company, all at such reasonable times and as often as may be reasonably requested in writing; and
(b) Default — if a Default or Event of Default then exists, at the expense of the Company to visit and inspect any of the offices or properties of the Company, to examine all its books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss its affairs, finances and accounts with its officers and independent public accountants (and by this provision the Company authorizes said accountants to discuss the affairs, finances and accounts of the Company), all at such times and as often as may be reasonably requested.
SECTION 8. PAYMENT AND PREPAYMENT OF THE NOTES.
Section 8.1. Amortization; Maturity . On each Payment Date, the Company will prepay the principal amounts set forth in the amortization schedule attached hereto as Schedule 8.1 (the “ Amortization Schedule ”) (or such lesser principal amount as shall then be
 
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outstanding) of the Notes at par and without payment of the Yield-Maintenance Amount or any premium, provided that upon any partial prepayment of the Notes pursuant to Section 8.2 , the principal amount of each required prepayment of the Notes becoming due under this Section 8.1 on and after the date of such prepayment shall be reduced in the same proportion as the aggregate unpaid principal amount of the Notes is reduced as a result of the prepayment. The entire unpaid principal balance of the Notes shall be due and payable on the Maturity Date.
Section 8.2. Optional Prepayments with Yield-Maintenance Amount. The Company may, at its option, upon notice as provided below, prepay at any time all, or from time to time any part of, the Notes, in an amount not less than $1,000,000 in the case of a partial prepayment, at 100% of the principal amount so prepaid, and the Yield-Maintenance Amount determined for the prepayment date with respect to such principal amount. The Company will give each Holder of Notes written notice of each optional prepayment under this Section 8.2 not less than 30 days and not more than 60 days prior to the date fixed for such prepayment. Each such notice shall specify such date (which shall be a Business Day), the aggregate principal amount of the Notes to be prepaid on such date, the principal amount of each Note held by such Holder to be prepaid (determined in accordance with Section 8.3 ), and the interest to be paid on the prepayment date with respect to such principal amount being prepaid, and shall be accompanied by a certificate of a Senior Financial Officer as to the estimated Yield-Maintenance Amount due in connection with such prepayment (calculated as if the date of such notice were the date of the prepayment), setting forth the details of such computation. Two Business Days prior to such prepayment, the Company shall deliver to each Holder of Notes a certificate of a Senior Financial Officer specifying the calculation of such Yield-Maintenance Amount as of the specified prepayment date.
Section 8.3. Allocation of Partial Prepayments . In the case of each partial prepayment of the Notes, the principal amount of the Notes to be prepaid shall be allocated among all of the Notes at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof not theretofore called for prepayment.
Section 8.4. Maturity; Surrender, Etc . In the case of each prepayment of Notes pursuant to this Section 8 , the principal amount of each Note to be prepaid shall mature and become due and payable on the date fixed for such prepayment (which shall be a Business Day), together with interest on such principal amount accrued to such date and the applicable Yield-Maintenance Amount, if any. From and after such date, unless the Company shall fail to pay such principal amount when so due and payable, together with the interest and Yield-Maintenance Amount, if any, as aforesaid, interest on such principal amount shall cease to accrue. Any Note paid or prepaid in full shall be surrendered to the Company and cancelled and shall not be reissued, and no Note shall be issued in lieu of any prepaid principal amount of any Note.
Section 8.5. Purchase of Notes . The Company will not and will not permit any Affiliate to purchase, redeem, prepay or otherwise acquire, directly or indirectly, any of the outstanding Notes except (a) upon the payment or prepayment of the Notes in accordance with the terms of this Agreement and the Notes or (b) pursuant to Section 13.2(b) ; provided that if an Affiliate which does not Control and is not Controlled by the Company has so acquired any of the outstanding Notes, such acquisition shall not constitute an Event of Default. The Company
 
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will promptly cancel all Notes acquired by it or any Affiliate pursuant to any payment or prepayment of Notes pursuant to any provision of this Agreement and no Notes may be issued in substitution or exchange for any such Notes.
Section 8.6. Yield-Maintenance Amount .
“ Yield-Maintenance Amount ” means, with respect to any Note, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Note over the amount of such Called Principal, provided that the Yield-Maintenance Amount may in no event be less than zero. For the purposes of determining the Yield-Maintenance Amount, the following terms have the following meanings:
“ Called Principal ” means, with respect to any Note, the principal of such Note that is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1 , as the context requires.
“ Discounted Value ” means, with respect to the Called Principal of any Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Notes is payable) equal to the Reinvestment Yield with respect to such Called Principal.
“ Reinvestment Yield ” means, with respect to the Called Principal of any Note, 0.50% over the yield to maturity implied by (i) the yields reported as of 10:00 a.m. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the display designated as “Page PXI” (or such other display as may replace Page PX1) on Bloomberg Financial Markets for the most recently issued actively traded on the run U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or (ii) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable (including by way of interpolation), the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H. 15 (or any comparable successor publication) for U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date.
In the case of each determination under clause (i) or clause (ii), as the case may be, of the preceding paragraph, such implied yield will be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between (1) the applicable U.S. Treasury security with the maturity closest to and greater than such Remaining Average Life and (2) the applicable U.S. Treasury security with the maturity closest to and less than such Remaining Average Life. The Reinvestment Yield shall be rounded to the number of decimal places as appears in the interest rate of the applicable Note.
 
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“ Remaining Average Life ” means, with respect to any Called Principal, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (a) the principal component of each Remaining Scheduled Payment with respect to such Called Principal by (b) the number of years (calculated to the nearest one-twelfth year) that will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment.
“ Remaining Scheduled Payments ” means, with respect to the Called Principal of any Note, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, provided that if such Settlement Date is not a date on which interest payments are due to be made under the terms of the Notes, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to Section 8.2 or 12.1 .
“ Settlement Date ” means, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1 , as the context requires.
SECTION 9. AFFIRMATIVE COVENANTS.
The Company covenants that so long as any of the Notes are outstanding:
Section 9.1. Compliance with Law . Without limiting Section 10.4 , the Company will, and will cause its Subsidiaries to, comply with all laws, ordinances or governmental rules or regulations to which it is subject, including, without limitation, ERISA, the USA Patriot Act and Environmental Laws, and will obtain and maintain in effect all licenses, certificates, permits, franchises and other governmental authorizations necessary to the ownership of its properties or to the conduct of its businesses to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
Section 9.2. Payment of Taxes and Claims . The Company will, and will cause each of its Subsidiaries to, file all tax returns required to be filed in any jurisdiction and to pay and discharge all taxes shown to be due and payable on such returns and all other taxes, assessments, governmental charges, or levies imposed on them or any of their properties, assets, income or franchises, to the extent the same have become due and payable and before they have become delinquent and all claims for which sums have become due and payable that have or might become a Lien on properties or assets of the Company or any Subsidiary, provided that none of the Company or any Subsidiary need pay any such tax, assessment, charge, levy or claim if (i) the amount, applicability or validity thereof is contested by such Person on a timely basis in good faith and in appropriate proceedings, and such Person has established adequate reserves therefor in accordance with GAAP on its books or (ii) the nonpayment of all such taxes, assessments, charges, levies and claims in the aggregate could not reasonably be expected to have a Material Adverse Effect.
 
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Section 9.3. Existence, Etc . The Company will at all times preserve and keep in full force and effect its limited liability company existence and all rights and franchises of the Company unless, in the good faith judgment of the Company, the termination of or failure to preserve and keep in full force and effect such corporate existence, right or franchise could not, individually or in the aggregate, have a Material Adverse Effect. The Company will cause each of its Subsidiaries to at all times preserve and keep in full force and effect its limited liability company, corporate or limited partnership existence, except as permitted pursuant to Section 10.2 .
Section 9.4. Books and Records . The Company will, and will cause each of its Subsidiaries to, maintain proper books of record and account in conformity with OAAP and all applicable requirements of any Governmental Authority having legal or regulatory jurisdiction over such Person.
Section 9.5. Collateral; Further Assurances. The Company shall take all actions necessary to insure that the Collateral Agent, on behalf of the Secured Parties, has and continues to have in all relevant jurisdictions duly and validly created, attached, perfected and enforceable first-priority Liens on the Collateral described in the Security Documents (including after-acquired Collateral), subject to no Liens other than Permitted Liens and rights of holders of Permitted Secured Indebtedness in compliance with the Collateral Agency Agreement. The Company shall cause the Obligations to constitute direct senior secured obligations of the Company and to rank senior in priority of payment, in right of security and in all other respects to all other Indebtedness of the Company (other than Permitted Secured Indebtedness, with which it shall be part passu in accordance with the terms of the Collateral Agency Agreement).
Section 9.6. Financial Ratios. (a) The Company shall at all times maintain, on a consolidated basis, a Total Debt to Capitalization Ratio of not more than 0.75 to 1.00.
(b) The Company shall maintain, for each period of four consecutive fiscal quarters, a Consolidated Debt Service Coverage Ratio of at least 1.20 to 1.00; provided that for purposes of this Section 9.6(b), the Debt Service Coverage Ratio shall be deemed to be 1.20 to 1.00 for the three fiscal quarters ending December 3 l, 2009, March 31, 2010 and June 30, 2010.
Section 9.7. Debt Service Reserve Account. The Company shall establish and maintain a Debt Service Reserve Account at the Depositary in accordance with the Depositary Agreement and shall fund the Debt Service Reserve Account as required in the Depositary Agreement. All amounts held in the Debt Service Reserve Account shall be held in cash or in Permitted Investments.
SECTION 10. NEGATIVE COVENANTS.
The Company covenants that so long as any of the Notes are outstanding:
Section 10.1. Transactions with Affiliates . The Company will not and will not cause or permit any Subsidiary to enter into directly or indirectly any transaction or group of related
 
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transactions (including without limitation the purchase, lease, sale or exchange of properties of any kind or the rendering of any service) with any Affiliate (other than, in the case of (i) SDTS, any Project Finance Subsidiary (as defined in the SDTS 2010 Note Agreement) as permitted by Section 9.7(b) of the SDTS 2010 Note Agreement, (ii) Sharyland, pursuant to the System Lease, (iii) New Owner and New Operator, pursuant to the New Lease (as defined in the SDTS 2010 Note Agreement), or (iv) as part of the Cap Rock Transaction) except in the ordinary course and upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would be obtained in a comparable arms-length transaction with a Person not an Affiliate.
Section 10.2. Merger, Consolidation, Etc . The Company will not and will not cause or permit any of its Subsidiaries to consolidate with or merge with any other Person or convey, transfer or lease all or substantially all of its assets in a single transaction or series of transactions to any Person except that (i) SDTS and its Subsidiaries may engage in transactions permitted under Section 10.1 of the SDTS 2010 Note Agreement, and (ii) so long as after giving effect to such merger or consolidation no Default or Event of Default shall have occurred or will result therefrom, the Company or any Subsidiary may merge or consolidate with another Person, so long as, after giving effect to such merger or consolidation, with respect to any merger or consolidation to which the Company is a party, the Company shall be the surviving entity, and with respect to any merger or consolidation to which a Subsidiary is a party but the Company is not, a Subsidiary shall be the surviving entity.
Section 10.3. Line of Business . The Company will not engage in any business other than owning the outstanding membership interest in SDTS and in other Subsidiaries (permitted under Section 10.8 ), the general business nature of which, when taken as a whole, is the transmission and distribution of electric power and the provision of ancillary services. The Company will not cause or permit any Subsidiary to engage in any business if, as a result, the general nature of the business in which the Company and its Subsidiaries, taken as a whole, would then be engaged would be substantially changed from the transmission and distribution of electric power and the provision of ancillary services.
Section 10.4. Terrorism Sanctions Regulations . The Company will not and will not cause or permit the Member or Subsidiary to (a) become a Person described or designated in the Specially Designated Nationals and Blocked Persons List of the Office of Foreign Assets Control or in Section 1 of the Anti-Terrorism Order or (b) engage in any dealings or transactions with any such Person.
Section 10.5. Liens . The Company will not directly or indirectly create, incur, assume or permit to exist (upon the happening of a contingency or otherwise) any Lien on or with respect to the Collateral or any other property of the Company, whether now owned or held or hereafter acquired, or any income or profits therefrom, or assign or otherwise convey any right to receive income or profits, or on any other asset now owned or hereafter acquired by the Company, except (each, a “ Permitted Lien ”):
(a) Liens created by the Financing Documents;
(b) Liens for taxes, assessments or other governmental charges which are not yet due and payable or the payment of which is not at the time required by Section 9.2 ;
 
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(c) any attachment or judgment Lien, unless such attachment or judgment Lien constitutes an Event of Default under Section 11(l) hereof; and
(d) Liens existing on the date of this Agreement and securing the Indebtedness of the Company referred to in Schedule 5.14 hereto.
Section 10.6. Indebtedness . The Company will not incur, or in any manner become or be liable in respect of any Indebtedness, except the following Indebtedness, which may be incurred subject to the requirements of the last paragraph of this section:
(a) Indebtedness evidenced by the Financing Documents; or
(b) Indebtedness of the Company that if incurred, would not result in a breach of Section 9.6(a) .
Indebtedness may be incurred under this Section 10.6 only if no Default or Event of Default exists or, as a result of such incurrence would exist.
Section 10.7. Loans, Advances, Investments and Contingent Liabilities . The Company will not make or permit to remain outstanding any loan or advance to, or extend credit other than credit extended in the ordinary course of business to any Person, or own, purchase or acquire any stock, obligations or securities of, or any other interest in, or make any capital contribution to, any Person, or commit to do any of the foregoing, except (a) Permitted Investments, (b) equity interests in Project Finance Subsidiaries of SDTS, SDTS and Wholly-Owned Subsidiaries, or (c) loans to Project Finance Subsidiaries of SDTS, SDTS and Wholly-Owned Subsidiaries.
Section 10.8. No Subsidiaries. The Company shall have no Subsidiaries other than those listed on Schedule 5.4 , and future Project Finance Subsidiaries and other Wholly Owned Subsidiaries. The Company shall give the Holders notice 5 Business Days prior to creating any new Subsidiaries.
Section 10.9. Restricted Payments . The Company will not, directly or indirectly, make or declare any Distribution unless the following conditions are met (the “ Restricted Payment Conditions ”):
(a) there does not exist and, after giving effect to the proposed Distribution, there will not exist, a Default or an Event of Default; and
(b) the balance in the Debt Service Reserve Account equals the Minimum Debt Service Reserve Requirement.
The Company shall deliver to the Holders and the Collateral Agent before a Distribution is made a certificate of a Responsible Officer of the Company stating that each of the foregoing conditions has been satisfied and, if requested by any Holder, providing supporting data and calculations.
 
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Section 10.10. Amendments to Organizational Documents; Exercise of Rights . The Company will not nor will it cause or permit the Member to amend, supplement, terminate, replace or waive any provision of the Company Agreement or other organization documents. The Company will not exercise its voting and other rights as a member of SDTS in a manner that would (i) alter or restrict the Company’s right to receive, or SDTS ability to make, distributions or (ii) cause or result in an act or omission by SDTS that constitutes or contributes to the occurrence of a “Default” or “Event of Default” under the SDTS 2009 Financing Documents or the SDTS 2010 Financing Documents or any Security Document to which SDTS is a party. Notwithstanding this Section 10.10 , the Company may, without the consent of the Purchasers, amend the Company Agreement as may be required to facilitate or implement any of the following:
(a) to reflect the contribution of additional capital by the Member;
(b) to reflect a change that is of an inconsequential nature and does not adversely affect any Holders in any material respect, or to cure any ambiguity, or correct or supplement any provision, not inconsistent with law or with the provisions of this Agreement; and
(c) to satisfy any requirements, conditions, or guidelines contained in any order, directive, opinion, ruling or regulation of a Federal or state agency or contained in Federal or state law.
The Company will provide notice to the Holders at least 5 Business Days prior to taking any such action under the foregoing sentence of this Section 10.10 .
Section 10.11. ERISA Compliance .
(a) Relationship of Vested Benefits to Plan Assets. The Company will not as of the last day of any calendar year permit the aggregate funding ratio (as described in Section 5.11 ) under all Plans, determined in accordance with Title IV of ERISA, to be less than 80%. The Company and its ERISA Affiliates will not incur withdrawal liabilities (and will not become subject to contingent withdrawal liabilities) under section 4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate are material.
(b) Valuations. For the purposes of clause (a) above, all assumptions and methods used to determine the actuarial valuation of vested and unvested employee benefits under any Plan at any time maintained by the Company and the present value of assets of any such Plan shall be reasonably consistent with those determinations made for purposes of Section 5.11 .
(c) Prohibited Actions. The Company will not, nor, as applicable, will any Plan at any time maintained by the Company
(i) engage in any non-exempt “ prohibited transaction ” (as such term is defined in Section 406 or Section 2003(a) of ERISA;
(ii) fail to meet the minimum funding standards of Section 302 of ERISA or Sections 412 and 430 of the Code, or seek or obtain a waiver thereof or fail to make any required contribution to a Multiemployer Plan; or
(iii) terminate any such Plan in a manner which could result in the imposition of a Lien on the Property of the Company pursuant to Section 4068 of ERISA.
 
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Section 10.12. Regulation .
(a) The Company shall not be or become subject to FERC jurisdiction under the FPA; provided , however , that the Company shall not be in default of the forgoing negative covenant if the Company becomes subject to FERC jurisdiction under the FPA solely as a result of a change to the FPA or in FERC’s interpretation thereof or regulations thereunder, if the Company takes all necessary actions to comply with applicable FERC requirements;
(b) The Company shall not become subject to regulation under PUHCA except to the extent and in the fashion it is subject to regulation on the Closing Date; provided, however, that the Company shall not be in default of the foregoing negative covenant if the Company becomes subject to additional such regulation solely as a result of a change to the PUHCA or in FERC’s interpretation thereof or the regulations thereunder if the Company takes all necessary actions to comply with PUHCA requirements; and
(c) The Company shall not violate in any material respect any regulation or order of the Public Utility Commission of Texas applicable to it.
Section 10.13. Most Favored Lender. The Company will not enter into, assume or otherwise become bound or obligated under any agreement creating or evidencing Indebtedness containing one or more Additional Covenants or Additional Defaults unless the Required Holders shall have given prior written consent to such agreement; provided , however , in the event the Company shall enter into, assume or otherwise become bound by or obligated under any such agreement without the prior written consent of the Required Holders, the terms of this Agreement shall, without any further action on the party of the Company or any of the Holders of the Notes, be deemed to be amended automatically to include each Additional Covenant and each Additional Default contained in such agreement. The Company further covenants to promptly execute and deliver at its expense (including the fees and expenses of counsel for the Holders of the Notes) an amendment to this Agreement in form and substance satisfactory to the Required Holders evidencing the amendment of this Agreement to include such Additional Covenants and Additional Defaults, but that the execution and delivery of such amendment shall not be a precondition to the effectiveness of such amendment as provided for in this Section 10.13 , but shall merely be for the convenience of the parties hereto; provided that if the Company promptly executes and delivers at its expense such amendment of this Agreement to include such Additional Covenants and Additional Defaults, the Company shall not be in breach or default of the covenant in this Section 10.13 .
 
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SECTION 11. EVENTS OF DEFAULT.
An “ Event of Default ” shall exist if any of the following conditions or events shall occur and be continuing:
(a) the Company defaults in the payment of any principal or Yield-Maintenance Amount, if any, on any Note when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise; or
(b) the Company defaults in the payment of any interest on any Note for more than five days after the same becomes due and payable; or
(c) the Company defaults in the performance of or compliance with any term contained in Section 7.1(d), 9.6 or Section 10 ; or
(d) the Company defaults in the performance of or compliance with any term contained herein (other than those referred to in Sections 11(a), (b)  and (c) ) or in any other Financing Document (other than those referred to in another paragraph of this Section 11 ) and such default is not remedied within 30 days after the earlier of (i) a Responsible Officer obtaining actual knowledge of such default and (ii) the Company receiving written notice of such default from the Collateral Agent or Holder of a Note (any such written notice to be identified as a “notice of default” and to refer specifically to this Section 11(d) ); or
(e) any representation or warranty made in writing by or on behalf of the Company or by any officer of the Company in this Agreement or any other Financing Document or in any writing furnished in connection with the transactions contemplated hereby proves to have been false or incorrect in any material respect on the date as of which made; or
(f) (i) A default or event of default occurs under the SDTS 2009 Note Agreement or the SDTS 2010 Note Agreement or the RBC Agreement and such failure continues for more than any cure period specified therefor; or
(g) any Required Permit is lost, terminated without being timely replaced (if the terminated Permit continues to be a Required Permit), revoked or otherwise is not in effect; or
(h) any Lien granted to the Collateral Agent pursuant to any of the Security Documents is invalid, void, unenforceable or unperfected or ceases to have first priority (subject to Permitted Liens), or any Person commences any proceeding or takes any other action to render any such Lien invalid, or to avoid any such Lien or to render any such Lien unenforceable or unperfected or to challenge the priority of such Lien, or an event of default occurs under any Indebtedness that is secured in whole or in part by the Collateral Agency Agreement, or any Person party to the Collateral Agency Agreement fails to comply with the terms thereof or commences any proceeding or takes any other action to render any part of the Collateral Agency Agreement unenforceable; or
(i) without limiting clause (h), (i) the Company is in default (as principal or as guarantor or other surety) in the payment of any principal of or premium or make-whole amount or interest on any Indebtedness that is outstanding in an aggregate principal amount of at least
 
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$2,500,000 beyond any period of grace provided with respect thereto, or (ii) the Company is in default in the performance of or compliance with any term of any evidence of any Indebtedness in an aggregate outstanding principal amount of at least $2,500,000 or of any mortgage, indenture or other agreement relating thereto or any other condition exists, and as a consequence of such default or condition such Indebtedness has become, or has been declared (or one or more Persons are entitled to declare such Indebtedness to be), due and payable before its stated maturity or before its regularly scheduled dates of payment, or (iii) as a consequence of the occurrence or continuation of any event or condition (other than the passage of time or the right of the holder of Indebtedness to convert such Indebtedness into equity interests), (x) the Company has become obligated to purchase or repay Indebtedness before its regular maturity or before its regularly scheduled dates of payment in an aggregate outstanding principal amount of at least $2,500,000, or (y) one or more Persons have the right to require the Company to purchase or repay such Indebtedness; or
(j) the Company (i) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes corporate action for the purpose of any of the foregoing; or
(k) a court or Governmental Authority of competent jurisdiction enters an order appointing, without consent by the Company, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of the Company or any such petition shall be filed against the Company and such petition shall not be dismissed within 90 days; or
(l) a final judgment or judgments for the payment of money aggregating in excess of $2,500,000 are rendered against the Company and which judgments are not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay; or
(m) (i) Members of the Ray L. Hunt family or trusts for the benefit of the Ray L. Hunt family cease to own, directly or indirectly, and control all of the outstanding equity interests of Sharyland and New Operator, (ii) Sharyland ceases to be the lessee under the System Lease within the initial term of such System Lease (without giving effect to any amendments, supplements or replacements thereof), (iii) the Member ceases to own, directly or indirectly, and control 90% of the outstanding equity interest of SDTS, or (iv) members of the Ray L. Hunt family or trusts for the benefit of the Ray L. Hunt family cease to own, directly or indirectly, and control at least 5% of the outstanding equity interests of the Member, unless (x) the general partner of the Member has become a publicly held company, or (y) SDTS has total assets on its balance sheet valued at $1,000,000,000 or greater; or
 
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(n) if (i) any Plan shall fail to satisfy the minimum funding standards of ERISA or the Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under Section 412 of the Code, (ii) a notice of intent to terminate any Plan shall have been or is reasonably expected to be filed with the PBGC or the PBGC shall have instituted proceedings under ERISA section 4042 to terminate or appoint a trustee to administer any Plan or the PBGC shall have notified the Company or any ERISA Affiliate that a Plan may become a subject of any such proceedings, (iii) the aggregate funding ratio (as described in Section 5.11 ) under all Plans, determined in accordance with Title IV of ERISA as of the last day of any fiscal year, to be less than 80%, (iv) the Company or any ERISA Affiliate shall have incurred or is reasonably expected to incur any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, (v) the Company or any ERISA Affiliate withdraws from any Multiemployer Plan, or (vi) the Company establishes or amends any employee welfare benefit plan that provides post-employment welfare benefits in a manner that would increase the liability of the Company thereunder; and any such event or events described in clauses (i) through (vi) above, either individually or together with any other such event or events, could reasonably be expected to have a Material Adverse Effect.
As used in Section 11(n) , the terms “ employee benefit plan ” and “ employee welfare benefit plan ” shall have the respective meanings assigned to such terms in section 3 of ERISA.
SECTION 12. REMEDIES ON DEFAULT, ETC.
Section 12.1. Acceleration . (a) If an Event of Default with respect to the Company described in Section 11(j) or (k)  (other than an Event of Default described in clause (i) of Section 11(j) or described in clause (vi) of Section 11(j) by virtue of the fact that such clause encompasses clause (i) of Section 11(j) ) has occurred, all the Notes then outstanding shall automatically become immediately due and payable.
(b) If any other Event of Default has occurred and is continuing, any Holder or Holders of more than 51% in principal amount of the Notes at the time outstanding may at any time at its or their option, by notice or notices to the Company, declare all the Notes then outstanding to be immediately due and payable.
(c) If any Event of Default described in Section 11(a) or (b)  has occurred and is continuing, any Holder or Holders of Notes at the time outstanding affected by such Event of Default may at any time, at its or their option, by notice or notices to the Company, declare all the Notes held by it or them to be immediately due and payable.
Upon any Notes becoming due and payable under this Section 12.1 , whether automatically or by declaration, such Notes will forthwith mature and the entire unpaid principal amount of such Notes, plus (x) all accrued and unpaid interest thereon (including, but not limited to, interest accrued thereon at the Default Rate) and (y) the Yield-Maintenance Amount determined in respect of such principal amount (to the full extent permitted by applicable law),
 
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shall all be immediately due and payable, in each and every case without presentment, demand, protest or further notice, all of which are hereby waived. The Company acknowledges, and the parties hereto agree, that each Holder of a Note has the right to maintain its investment in the Notes free from repayment by the Company (except as herein specifically provided for) and that the provision for payment of a Yield-Maintenance Amount by the Company in the event that the Notes are prepaid or are accelerated as a result of an Event of Default, is intended to provide compensation for the deprivation of such right under such circumstances.
Section 12.2. Other Remedies . If any Default or Event of Default has occurred and is continuing, and irrespective of whether any Notes have become or have been declared immediately due and payable under Section 12.1 , the Holder of any Note at the time outstanding may proceed to protect and enforce the rights of such Holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in any Note, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise.
Section 12.3. Rescission . At any time after any Notes have been declared due and payable pursuant to Section 12.1(b) or (c) , the Holders of not less than 51% in principal amount of the Notes then outstanding, by written notice to the Company, may rescind and annul any such declaration and its consequences if (a) the Company has paid all overdue interest on the Notes, all principal of and Yield-Maintenance Amount, if any, on any Notes that are due and payable and are unpaid other than by reason of such declaration, and all interest on such overdue principal and Yield-Maintenance Amount, if any, and (to the extent permitted by applicable law) any overdue interest in respect of the Notes, at the Default Rate, (b) neither the Company nor any other Person shall have paid any amounts which have become due solely by reason of such declaration, (c) all Events of Default and Defaults, other than non-payment of amounts that have become due solely by reason of such declaration, have been cured or have been waived pursuant to Section 17 , and (d) no judgment or decree has been entered for the payment of any monies due pursuant hereto or to the Notes. No rescission and annulment under this Section 12.3 will extend to or affect any subsequent Event of Default or Default or impair any right consequent thereon.
Section 12.4. No Waivers or Election of Remedies, Expenses, Etc . No course of dealing and no delay on the part of any Holder of any Note in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice such Holder’s rights, powers or remedies. No right, power or remedy conferred by this Agreement or by any Note upon any Holder thereof shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. Without limiting the obligations of the Company under Section 15 , the Company will pay to the Holder of each Note on demand such further amount as shall be sufficient to cover all costs and expenses of such Holder incurred in any enforcement or collection under this Section 12 , including, without limitation, reasonable attorneys’ fees, expenses and disbursements.
SECTION 13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES.
Section 13.1. Registration of Notes . The Company shall keep at its principal executive office a register for the registration and registration of transfers of Notes. The name and address
 
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of each Holder of one or more Notes, each transfer thereof and the name and address of each transferee of one or more Notes shall be registered in such register. Prior to due presentment for registration of transfer, the Person in whose name any Note shall be registered shall be deemed and treated as the owner and Holder thereof for all purposes hereof, and the Company shall not be affected by any notice or knowledge to the contrary. The Company shall give to any Holder of a Note that is an Institutional Investor, promptly upon request therefor, a complete and correct copy of the names and addresses of all registered Holders of Notes. In addition to and not in limitation of any representations contained herein, each Holder acknowledges and agrees that the Notes have not been registered under the Securities Act and may not be transferred except pursuant to registration or an exemption therefrom and in compliance with Section 13.2(b) hereof.
Section 13.2. Transfer and Exchange of Notes . (a) Subject to compliance with Section 13.2(b) , upon surrender of any Note to the Company at the address and to the attention of the designated officer (all as specified in Section 18(iii) ), for registration of transfer or exchange (and in the case of a surrender for registration of transfer accompanied by a written instrument of transfer duly executed by the registered Holder of such Note or such Holder’s attorney duly authorized in writing and accompanied by the relevant name, address and other information for notices of each transferee of such Note or part thereof), within ten Business Days thereafter, the Company shall execute and deliver, at the Company’s expense (except as provided below), one or more new Notes (as requested by the Holder thereof) in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Note. Each such new Note shall be payable to such Person as such Holder may request and shall be substantially in the form of Exhibit 1 . Each such new Note shall be dated and bear interest from the date to which interest shall have been paid on the surrendered Note or dated the date of the surrendered Note if no interest shall have been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of Notes. Notes shall not be transferred in denominations of less than $1,000,000, provided that if necessary to enable the registration of transfer by a Holder of its entire holding of Notes, one Note may be in a denomination of less than $1,000,000. Any transferee, by its acceptance of a Note registered in its name (or the name of its nominee), shall be deemed to have made the representations set forth in Section 6.1 and Section 6.2 .
(b) Each Holder hereby agrees that it will not offer for sale or sell any of its Notes or disclose any Confidential Information to any prospective transferee of the Notes, other than to an Affiliate, or to another Holder without first delivering written notice to the Company (a “ Right of First Offer Notice ”) of its intent to sell such Notes and disclose such Confidential Information. Such Right of First Offer Notice shall contain a reasonably detailed description of the proposed terms of such sale, including, without limitation, the proposed purchase price (the “ Proposed Purchase Price ”) for such Notes and the names of up to ten prospective purchasers. If the Company so desires it may, within 5 Business Days of the receipt of such Right of First Offer Notice, inform such Holder in writing of its intent to purchase, or have an Affiliate or Institutional Investor designated by the Company purchase, such Notes (a “ Purchase Notice ”) from the Holder delivering such Right of First Offer Notice at the Proposed Purchase Price, provided, however, that if at such time a Default or Event of Default shall have occurred and be continuing, the Company shall not purchase, and shall not allow any Affiliate or Institutional Investor designated by the Company to purchase, the Notes of the Holder delivering such Right
 
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of First Offer Notice. The aggregate principal amount of the Notes specified in such Purchase Notice shall be purchased by the Company, or such Affiliate or Institutional Investor, for the Proposed Purchase Price, together with accrued interest on such Notes to the purchase date, on the date specified by the Company in such Purchase Notice, which shall be not more than 30 days following delivery of such Purchase Notice. If a Holder does not receive a Purchase Notice from the Company within 5 Business Days after the delivery of a Right of First Offer Notice to the Company, such Holder shall have the right to sell its Notes identified in such Right of First Offer Notice to one or more of the prospective purchasers identified in such Right of First Offer Notice for a price which is not less than the Proposed Purchase Price identified in such Right of First Offer Notice for a period of 120 days from the date of such Right of First Offer Notice. In the event that the prospective purchasers identified by a Holder in a Right of First Offer Notice shall decline to purchase the Notes within such 120 day period, then the Holder may identify up to 10 additional Institutional Investors through a new Right of First Offer Notice.
Section 13.3. Replacement of Notes . Upon receipt by the Company at the address and to the attention of the designated officer (all as specified in Section 18(iii) ) of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Note (which evidence shall be, in the case of an Institutional Investor, notice from such Institutional Investor of such ownership and such loss, theft, destruction or mutilation), and
(a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (provided that if the Holder of such Note is, or is a nominee for, an original Purchaser or another Holder of a Note with a minimum net worth of at least $100,000,000 or a Qualified Institutional Buyer, such Person’s own unsecured agreement of indemnity shall be deemed to be satisfactory), or
(b) in the case of mutilation, upon surrender and cancellation thereof,
within ten Business Days thereafter, the Company at its own expense shall execute and deliver, in lieu thereof, a new Note, dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Note or dated the date of such lost, stolen, destroyed or mutilated Note if no interest shall have been paid thereon.
SECTION 14. PAYMENTS ON NOTES.
Section 14.1. Place of Payment . Subject to Section 14.2 , payments of principal, Yield-Maintenance Amount, if any, and interest becoming due and payable on the Notes shall be made in New York City, New York at the principal office of JPMorgan Chase Bank National Association in such jurisdiction. The Company may at any time, by notice to each Holder of a Note, change the place of payment of the Notes so long as such place of payment shall be either the principal office of the Company in such jurisdiction or the principal office of a bank or trust company in such jurisdiction.
Section 14.2. Home Office Payment . So long as any Purchaser or its nominee shall be the Holder of any Note, and notwithstanding anything contained in Section 14.1 or in such Note to the contrary, the Company will pay all sums becoming due on such Note for principal, Yield-Maintenance Amount, if any, and interest by the method and at the address specified for such
 
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purpose below such Purchaser’s name in Schedule A , or by such other method or at such other address as such Purchaser shall have from time to time specified to the Company in writing for such purpose, without the presentation or surrender of such Note or the making of any notation thereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment or prepayment in full of any Note, such Purchaser shall surrender such Note for cancellation, reasonably promptly after any such request, to the Company at its principal executive office or at the place of payment most recently designated by the Company pursuant to Section 14.1 . Prior to any sale or other disposition of any Note held by a Purchaser or its nominee, such Purchaser will, at its election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender such Note to the Company in exchange for a new Note or Notes pursuant to Section 13.2 . The Company will afford the benefits of this Section 14.2 to any Institutional Investor that is the direct or indirect transferee of any Note purchased by a Purchaser under this Agreement and that has made the same agreement relating to such Note as the Purchasers have made in this Section 14.2 .
SECTION 15. EXPENSES, ETC.
Section 15.1. Transaction Expenses . Whether or not the transactions contemplated hereby are consummated, the Company will pay all costs and expenses (including reasonable attorneys’ fees of one firm of special counsel and, if reasonably required by the Required Holders, local or other counsel) incurred by the Purchasers and each other Holder of a Note in connection with such transactions and in connection with any amendments, waivers or consents under or in respect of this Agreement or the Notes (whether or not such amendment, waiver or consent becomes effective), including, without limitation: (a) the costs and expenses incurred in enforcing or defending (or determining whether or how to enforce or defend) any rights under this Agreement or the Notes or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement or the Notes, or by reason of being a Holder of any Note, but only to the extent such subpoena or legal proceeding arises out of matters related to the Company, (b) the costs and expenses, including financial advisors’ fees, incurred in connection with the insolvency or bankruptcy of the Company or in connection with any work-out or restructuring of the transactions contemplated hereby and by the Notes and (c) the costs and expenses incurred in connection with the initial filing of this Agreement and all related documents and financial information with the SVO provided. The Company will pay, and will save each Purchaser and each other Holder of a Note harmless from, all claims in respect of any fees, costs or expenses, if any, of brokers and finders (other than those, if any, retained by a Purchaser or other Holder in connection with its purchase of the Notes).
Section 15.2. Survival . The obligations of the Company under this Section 15 will survive the payment or transfer of any Note, the enforcement, amendment or waiver of any provision of this Agreement or the Notes, and the termination of this Agreement.
SECTION 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT.
All representations and warranties contained herein shall survive the execution and delivery of this Agreement and the Notes, the purchase or transfer by any Purchaser of any Note or portion thereof or interest therein and the payment of any Note, and may be relied upon by
 
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any subsequent Holder of a Note, regardless of any investigation made at any time by or on behalf of such Purchaser or any other Holder of a Note; provided, that no representation or warranty shall be deemed to be made as of any time other than the date of execution and delivery of this Agreement or such other document, certificate, instrument or agreement containing such representation or warranty. All statements contained in any certificate or other instrument delivered by or on behalf of the Company pursuant to this Agreement shall be deemed representations and warranties of the Company under this Agreement. Subject to the preceding sentence, this Agreement and the Notes embody the entire agreement and understanding between each Purchaser and the Company and supersede all prior agreements and understandings relating to the subject matter hereof.
SECTION 17. AMENDMENT AND WAIVER.
Section 17.1. Requirements . This Agreement and the Notes may be amended, and the observance of any term hereof or of the Notes may be waived (either retroactively or prospectively), with (and only with) the written consent of the Company and the Required Holders, except that (a) no amendment or waiver of any of the provisions of Section 1, 2, 3, 4, 5, 6 or 21 hereof, or any defined term (as it is used therein), will be effective as to any Purchaser unless consented to by such Purchaser in writing, and (b) no such amendment or waiver may, without the written consent of the Holder of each Note at the time outstanding affected thereby, (i) subject to the provisions of Section 12 relating to acceleration or rescission, change the amount or time of any prepayment or payment of principal of, or reduce the rate or change the time of payment or method of computation of interest or of the Yield-Maintenance Amount on, the Notes, (ii) change the percentage of the principal amount of the Notes the Holders of which are required to consent to any such amendment or waiver, or (iii) amend any of Section 8, 11(a), 11(b), 12, 17 or 20 .
Section 17.2. Solicitation of Holders of Notes .
(a) Solicitation. The Company will provide each Holder of the Notes (irrespective of the amount of Notes then owned by it) with sufficient information, sufficiently far in advance of the date a decision is required, to enable such Holder to make an informed and considered decision with respect to any proposed amendment, waiver or consent in respect of any of the provisions hereof or of the Notes. The Company will deliver executed or true and correct copies of each amendment, waiver or consent effected pursuant to the provisions of this Section 17 to each Holder of outstanding Notes promptly following the date on which it is executed and delivered by, or receives the consent or approval of, the requisite Holders of Notes.
(b) Payment. The Company will not directly or indirectly pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, or grant any security or provide other credit support, to any Holder of Notes as consideration for or as an inducement to the entering into by any Holder of Notes of any waiver or amendment of any of the terms and provisions hereof unless such remuneration is concurrently paid, or security is concurrently granted or other credit support concurrently provided, on the same terms, ratably to each Holder of Notes then outstanding even if such Holder did not consent to such waiver or amendment.
 
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Section 17.3. Binding Effect, etc . Any amendment or waiver consented to as provided in this Section 17 applies equally to all Holders of Notes and is binding upon them and upon each future Holder of any Note and upon the Company without regard to whether such Note has been marked to indicate such amendment or waiver. No such amendment or waiver will extend to or affect any obligation, covenant, agreement, Default or Event of Default not expressly amended or waived or impair any right consequent thereon. No course of dealing between the Company and the Holder of any Note nor any delay in exercising any rights hereunder or under any Note shall operate as a waiver of any rights of any Holder of such Note. As used herein, the term “this Agreement” and references thereto shall mean this Agreement as it may from time to time be amended or supplemented.
Section 17.4. Notes Held by Company, etc . Solely for the purpose of determining whether the Holders of the requisite percentage of the aggregate principal amount of Notes then outstanding approved or consented to any amendment, waiver or consent to be given under this Agreement or the Notes, or have directed the taking of any action provided herein or in the Notes to be taken upon the direction of the Holders of a specified percentage of the aggregate principal amount of Notes then outstanding, Notes directly or indirectly owned by the Company or any of its Affiliates shall be deemed not to be outstanding.
SECTION 18. NOTICES.
All notices and communications provided for hereunder shall be in writing and sent (a) by telecopy if the sender on the same day sends a confirming copy of such notice by a recognized overnight delivery service (charges prepaid), or (b) by registered or certified mail with return receipt requested (postage prepaid), or (c) by a recognized overnight delivery service (with charges prepaid). Any such notice must be sent:
(i) if to any Purchaser or its nominee, to such Purchaser or nominee at the address specified for such communications in Schedule A , or at such other address as such Purchaser or nominee shall have specified to the Company in writing,
(ii) if to any other Holder of any Note, to such Holder at such address as such other Holder shall have specified to the Company in writing, and
(iii) if to the Company, to the Company at 1900 N. Akard Street, Dallas, TX 75201-2300, facsimile: (214) 855-6965 to the attention of W. Kirk Baker, or at such other address as the Company shall have specified to the Holder of each Note in writing.
Notices under this Section 18 will be deemed given only when actually received.
SECTION 19. REPRODUCTION OF DOCUMENTS.
This Agreement and all documents relating thereto, including, without limitation, (a) consents, waivers and modifications that may hereafter be executed, (b) documents received by any Purchaser at the Closing (except the Notes themselves), and (c) financial statements, certificates and other information previously or hereafter furnished to any Purchaser, may be
 
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reproduced by such Purchaser by any photographic, photostatic, electronic, digital, or other similar process and such Purchaser may destroy any original document so reproduced. The Company agrees and stipulates that, to the extent permitted by applicable law, any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by such Purchaser in the regular course of business) and any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. This Section 19 shall not prohibit the Company or any other Holder of Notes from contesting any such reproduction to the same extent that it could contest the original, or from introducing evidence to demonstrate the inaccuracy of any such reproduction.
SECTION 20. CONFIDENTIAL INFORMATION.
For the purposes of this Section 20 , “Confidential Information” means Information delivered to any Purchaser by or on behalf of the Company in connection with the transactions contemplated by or otherwise pursuant to this Agreement, provided that such term does not include information that (a) other than as a result of disclosure by any Purchaser or its employees or agents in violation of this Section 20 was publicly known or otherwise known to such Purchaser prior to the time of such disclosure, (b) other than as a result of disclosure by any Purchaser or its employees or agents in violation of this Section 20 subsequently becomes publicly known through no act or omission by such Purchaser or any Person acting on such Purchaser’s behalf, (c) other than as a result of disclosure by any Purchaser or its employees or agents in violation of this Section 20 otherwise becomes known to such Purchaser other than through disclosure by the Company or (d) constitutes financial statements delivered to such Purchaser under Section 7.1 that are otherwise publicly available. “ Information ” means information concerning the Company or its Subsidiaries, irrespective of its source or form of communication, furnished by or on behalf of the Company or any of its Subsidiaries, including without limitation notes, analyses, compilations, studies or other documents or records prepared by any Purchaser, which contain or reflect or were generated from information supplied by or on behalf of the Company or its Subsidiaries. Each Purchaser will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by such Purchaser in good faith to protect confidential information of third parties delivered to such Purchaser, provided that such Purchaser may deliver or disclose Confidential Information to (i) its directors, officers, employees, agents, attorneys, trustees and affiliates (to the extent such disclosure reasonably relates to the administration of the investment represented by its Notes), (ii) its financial advisors and other professional advisors who agree to hold confidential the Confidential Information substantially in accordance with the terms of this Section 20 , (iii) any other Holder of any Note, (iv) any Institutional Investor to which it sells or offers to sell such Note or any part thereof or any participation therein (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20 ), (v) any Person from which it offers to purchase any security of the Company (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20 ), (vi) any Federal or state regulatory authority having jurisdiction over such Purchaser, (vii) the NAIC or the SVO or, in each case, any similar organization, or any nationally recognized rating agency that requires access to information about such Purchaser’s investment portfolio, or (viii) any other Person to which such delivery or disclosure may be necessary or appropriate (w) to effect compliance with any law, rule, regulation or order applicable to such Purchaser, (x) in
 
-35-

response to any subpoena or other legal process, (y) in connection with any litigation to which such Purchaser is a party or (z) if an Event of Default has occurred and is continuing, to the extent such Purchaser may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement or for the protection of the rights and remedies under such Purchaser’s Notes and this Agreement. Each Holder of a Note, by its acceptance of a Note, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Section 20 as though it were a party to this Agreement. On reasonable request by the Company in connection with the delivery to any Holder of a Note of information required to be delivered to such Holder under this Agreement or requested by such Holder (other than a Holder that is a party to this Agreement or its nominee), such Holder will enter into an agreement with the Company embodying the provisions of this Section 20 .
SECTION 21. SUBSTITUTION OF PURCHASER.
Each Purchaser shall have the right to substitute any one of its Affiliates as the purchaser of the Notes that it has agreed to purchase hereunder, by written notice to the Company, which notice shall be signed by both such Purchaser and such Affiliate, shall contain such Affiliate’s agreement to be bound by this Agreement and shall contain a confirmation by such Affiliate of the accuracy with respect to it of the representations set forth in Section 6 . Upon receipt of such notice, any reference to such Purchaser in this Agreement (other than in this Section 21 ), shall be deemed to refer to such Affiliate in lieu of such original Purchaser. In the event that such Affiliate is so substituted as a Purchaser hereunder and such Affiliate thereafter transfers to such original Purchaser all of the Notes then held by such Affiliate, upon receipt by the Company of notice of such transfer, any reference to such Affiliate as a “Purchaser” in this Agreement (other than in this Section 21 ), shall no longer be deemed to refer to such Affiliate, but shall refer to such original Purchaser, and such original Purchaser shall again have all the rights of an original Holder of the Notes under this Agreement.
SECTION 22. MISCELLANEOUS.
Section 22.1. Successors and Assigns . All covenants and other agreements contained in this Agreement by or on behalf of any of the parties hereto bind and inure to the benefit of their respective successors and assigns (including, without limitation, any subsequent Holder of a Note) whether so expressed or not.
Section 22.2. Payments Due on Non-Business Days . Anything in this Agreement or the Notes to the contrary notwithstanding (but without limiting the requirement in Section 8.4 that the notice of any optional prepayment specify a Business Day as the date fixed for such prepayment), any payment of principal of or Yield-Maintenance Amount or interest on any Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day without including the additional days elapsed in the computation of the interest payable on such next succeeding Business Day; provided that if the maturity date of any Note is a date other than a Business Day, the payment otherwise due on such maturity date shall be made on the next succeeding Business Day and shall include the additional days elapsed in the computation of interest payable on such next succeeding Business Day.
 
-36-

Section 22.3. Accounting Terms . All accounting terms used herein which are not expressly defined in this Agreement have the meanings respectively given to them in accordance with GAAP. Except as otherwise specifically provided herein, (i) all computations made pursuant to this Agreement shall be made in accordance with GAAP, and (ii) all financial statements shall be prepared in accordance with GAAP. For purposes of determining compliance with any financial covenants contained in this Agreement, any election by the Company to measure an item of Indebtedness using fair value (as permitted by Statement of Financial Accounting Standards No. 159 or any similar accounting standard) shall be disregarded and such determination shall be made as if such election had not been made.
Section 22.4. Severability . Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction.
Section 22.5. Construction, etc . Each covenant contained herein shall be construed (absent express provision to the contrary) as being independent of each other covenant contained herein, so that compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with any other covenant. Where any provision herein refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person.
For the avoidance of doubt, all Schedules and Exhibits attached to this Agreement shall be deemed to be a part hereof.
Section 22.6. Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the parties hereto.
Section 22.7. Governing Law . This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York excluding choice-of-law principles of the law of such State that would permit the application of the laws of a jurisdiction other than such State.
Section 22.8. Jurisdiction and Process; Waiver of Jury Trial . (a) The Company irrevocably submits to the non-exclusive jurisdiction of any New York State or Federal court sitting in the Borough of Manhattan, The City of New York, over any suit, action or proceeding arising out of or relating to this Agreement or the Notes. To the fullest extent permitted by applicable law, the Company irrevocably waives and agrees not to assert, by way of motion, as a defense or otherwise, any claim that it is not subject to the jurisdiction of any such court, any objection that it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum.
 
-37-

(b) The Company consents to process being served by or on behalf of any Holder of Notes in any suit, action or proceeding of the nature referred to in Section 22.8(a) by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, return receipt requested, to it at its address specified in Section 18 or at such other address of which such Holder shall then have been notified pursuant to said Section. The Company agrees that such service upon receipt (i) shall be deemed in every respect effective service of process upon it in any such suit, action or proceeding and (ii) shall, to the fullest extent permitted by applicable law, be taken and held to be valid personal service upon and personal delivery to it. Notices hereunder shall be conclusively presumed received as evidenced by a delivery receipt furnished by the United States Postal Service or any reputable commercial delivery service.
(c) In addition to and notwithstanding the provisions of Section 22.8(b) above, the Company hereby irrevocably appoints CT Corporation System as its agent to receive on its behalf and its property service of copies of the summons and complaint and any other process which may be served in any action or proceeding. Such service may be made by mailing or delivering a copy of such process to the Company, in care of the process agent at 111 Eighth Avenue, 13 th Floor, New York, New York 10011, and the Company hereby irrevocably authorizes and directs the process agent to accept such service on its behalf. If for any reason the process agent ceases to be available to act as process agent, the Company agrees immediately to appoint a replacement process agent satisfactory to the Required Holders.
(d) Nothing in this Section 22.8 shall affect the right of any Holder of a Note to serve process in any manner permitted by law, or limit any right that the Holders of any of the Notes may have to bring proceedings against the Company in the courts of any appropriate jurisdiction or to enforce in any lawful manner a judgment obtained in one jurisdiction in any other jurisdiction.
(e) The parties hereto hereby waive trial by jury in any action brought on or with respect to this Agreement, the Notes or any other document executed in connection herewith or therewith.
Section 22.9. Transaction References . The Company and the Holders shall not refer to the other on an internet site or in marketing materials, press releases, published “tombstone” announcements or any other print or electronic medium, except with the referenced party’s prior written consent, which may be withheld at its sole discretion.
*  *  *  *  *
 
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If you are in agreement with the foregoing, please sign the form of agreement on a counterpart of this Agreement and return it to the Company, whereupon this Agreement shall become a binding agreement between you and the Company.

Very truly yours,	
	
T RANSMISSION AND D ISTRIBUTION C OMPANY , L.L.C.	
		
By:	 	/s/ W. Kirk Baker	
	 	Name:	 	W. Kirk Baker	
	 	Title:	 	Senior Vice President	
[Signature Page to TDC Amended and Restated Note Purchase Agreement]

									
This Agreement is hereby accepted and agreed to as of the date thereof.	 		 		
			
	 		 	Purchasers :	
			
	 		 	THE PRUDENTIAL INSURANCE COMPANY OF AMERICA	
				
	 		 	By:	 	/s/ Richard Carrell	
	 		 		 	Vice President	
			
	 		 	PRUCO LIFE INSURANCE COMPANY	
				
	 		 	By:	 	/s/ Richard Carrell	
	 		 		 	Vice President	
			
	 		 	PRUDENTIAL RETIREMENT INSURANCE AND ANNUITY COMPANY	
				
	 		 	By:	 	Prudential Investment Management, Inc.,	
	 		 		 	as investment manager	
					
	 		 		 	By:	 	/s/ Richard Carrell	
	 		 		 		 	Vice President	
[Signature Page to TDC Amended and Restated Note Purchase Agreement]

DEFINED TERMS
As used herein, the following terms have the respective meanings set forth below or set forth in the Section hereof following such term:
“ Additional Covenant ” shall mean any affirmative or negative covenant or similar restriction applicable to the Company (regardless of whether such provision is labeled or otherwise characterized as a covenant) the subject matter of which either (i) is similar to that of any covenant in this Agreement, or related definitions in this Agreement, but contains one or more percentages, amounts or formulas that is more restrictive than those set forth herein or more beneficial to the Holder or Holders of the Indebtedness created or evidenced by the document in which such covenant or similar restriction is contained (and such covenant or similar restriction shall be deemed an Additional Covenant only to the extent that it is more restrictive or more beneficial) or (ii) is different from the subject matter of any covenant of this Agreement, or related definitions in this Agreement.
“ Additional Default ” shall mean any provision contained in any document or instrument creating or evidencing Indebtedness of the Company which permits the Holder or Holders of Indebtedness to accelerate (with the passage of time or giving of notice or both) the maturity thereof or otherwise requires the Company to purchase such Indebtedness prior to the stated maturity thereof and which either (i) is similar to any Default or Event of Default contained in this Agreement, or related definitions in this Agreement, but contains one or more percentages, amounts or formulas that is more restrictive or has a shorter grace period than those set forth herein or is more beneficial to the Holders of such other Indebtedness (and such provision shall be deemed an Additional Default only to the extent that it is more restrictive, has a shorter grace period or is more beneficial) or (ii) is different from the subject matter of any Default or Event of Default contained in this Agreement, or related definitions in this Agreement.
“ Affiliate ” means, at any time, and with respect to any Person, any other Person that at such time directly or indirectly through one or more intermediaries Controls, or is Controlled by, or is under common Control with, such first Person and, with respect to the Company, shall include any Person beneficially owning or holding, directly or indirectly, 10% or more of any class of voting or equity interest of the Company or any corporation of which the Company beneficially owns or holds, in the aggregate, directly or indirectly, 10% or more of any class of voting or equity interests; provided, however, that this definition shall at all times exclude owners or investors in Energy Trans Alliance L.P., other than members of the Ray L. Hunt family, trusts for the benefit of the Ray L. Hunt family or entities controlled by members of the Ray L. Hunt family or such trusts. As used in this definition, “ Control ” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. Unless the context otherwise clearly requires, any reference to an “Affiliate” is a reference to an Affiliate of the Company.
“ Agreement ” is defined in the introductory paragraph of this Agreement.
“ Amortization Schedule ” is defined in Section 8.1(a) .
 
S CHEDULE B-1
(To Note Purchase Agreement)

“ Anti-Terrorism Order ” means Executive Order No. 13,224 of September 24, 2001, Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit or Support Terrorism, 66 U.S. Fed. Reg. 49, 079 (2001), as amended.
“ Approved Accountant ” is defined in Section 7.1(b)(A) .
“ Business Day ” means any day other than a Saturday, a Sunday or a day on which commercial banks in New York City are required or authorized to be closed.
“ Capital Lease ” means, at any time, a lease with respect to which the lessee is required concurrently to recognize the acquisition of an asset and the incurrence of a liability in accordance with GAAP.
“ Cap Rock Transaction ” is defined in the SDTS 2010 Note Agreement.
“ Cash Flow ” means, for any period, the sum of the following (without duplication): (i) all cash paid to SDTS during such period under the System Lease, (ii) all cash distributions received by SDTS from New Owner during such period, (iii) all interest and investment earnings, if any, paid to SDTS during such period on amounts on deposit in the account created under the Deposit Agreement (as defined in the SDTS 2010 Note Agreement), if any, (iv) revenues, if any, received by or on behalf of SDTS during such period under any insurance policy as business interruption insurance proceeds, (v) direct cash equity investments made by the Member in the Company during such period (excluding equity contributed to a Project Finance Subsidiary (as defined in the SDTS 2010 Note Agreement)) in an amount not greater than the amount necessary to cause the Company to be in compliance with the financial covenants set forth in Section 9.6 (each such investment, an “ Equity Cure ”); provided, however, that during any period of four consecutive fiscal quarters, “Cash Flow” shall include an Equity Cure in no more than two of such quarters, (vi) proceeds of any borrowing made after the date hereof to the extent used to finance the payment of bullet or balloon installments of Indebtedness for borrowed money, (vii) to the extent that a direct Wholly-Owned Subsidiary is formed in the future, (viii) all cash paid to such Subsidiary during such period under leases of such Subsidiary’s assets which is funded into the Deposit Account pursuant to the Deposit Account Control Agreement, (y) all interest and investment earnings paid to such Subsidiary during such period on amounts on deposit in an account subject to a deposit account control agreement in favor of the Collateral Agent (if any), (z) revenues, if any, received by or on behalf of such Subsidiary during such period under any insurance policy as business interruption insurance proceeds and funded into the Deposit Account pursuant to the Deposit Account Control Agreement and (ix) proceeds of any borrowing made after the date hereof to the extent used to pay bullet or balloon installments of Indebtedness for borrowed money.
“ Cash Flow Available for Debt Service ” for any period, means (i) Cash Flow received during such period minus (ii)(A) all O&M Costs paid during such period and (B) if an Equity Cure has been made in any fiscal quarter during the period for which Cash Flow Available for Debt Service is calculated, the lesser of the aggregate amount of (x) such Equity Cure during such period and (y) the aggregate amount of cash distributions paid by the Company during such period.
 
S CHEDULE B-2
(To Note Purchase Agreement)

“ Closing ” is defined in Section 3 .
“ Closing Date ” means the date upon which the Closing occurs.
“ Code ” means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder from time to time.
“ Collateral ” means all “Collateral” described in the Security Agreement and all Membership Collateral.
“ Collateral Agency Agreement ” means the Collateral Agency Agreement, dated as of the date hereof, among the Collateral Agent, the Company and the Holders and other lenders party thereto from time to time.
“ Collateral Agent ” means The Bank of New York Mellon Trust Company, N.A., a national association, acting in its capacity as Collateral Agent for itself and the other Secured Parties, or its successors in such capacity appointed pursuant to the terms of the Collateral Agency Agreement.
“ Company ” means Transmission and Distribution Company, L.L.C., a Texas limited liability company, or any successor that becomes such in the manner prescribed in Section 10.3 .
“ Company Agreement ” means that certain Amended and Restated Company Agreement of the Company, made effective as of December 2009, by the Member, as amended, supplemented or otherwise modified.
“ Confidential Information ” is defined in Section 20 .
“ Consolidated Debt Service Coverage Ratio ” means, for each period of four consecutive fiscal quarters, the quotient of (i) Cash Flow Available for Debt Service for such period to (ii) Debt Service for such period.
“ Debt Service ” for any period, the aggregate (without duplication) of (i) all amounts of interest on the Notes and in respect of other Indebtedness of the Company or of SDTS required to be paid during such period, plus (ii) all amounts of principal on the Notes and in respect of other Indebtedness of the Company or of SDTS required to be paid during such period, excluding any optional prepayments of principal during such period, plus (iii) all other premiums, fees, costs, charges, expenses and indemnities due and payable to the Holders or the other Secured Parties and holders of other Indebtedness of the Company or of SDTS and agents acting on their behalf during such period.
“ Debt Service Reserve Account ” is defined in the Depositary Agreement.
“ Default ” means an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default.
 
S CHEDULE B-3
(To Note Purchase Agreement)

“ Default Rate ” means that rate of interest per annum from time to time equal to the greater of (i) 10.5% per annum, and (ii) 2% over the rate of interest publicly announced by The Bank of New York Mellon from time to time in New York as its “base” or “prime” rate.
“ Depositary ” means The Bank of New York Mellon Trust Company, N.A., a national association, in its capacity as Depositary under the Depositary Agreement, or its successor in such capacity appointed pursuant to the terms of the Depositary Agreement.
“ Depositary Agreement ” is defined in Section 4.12(c) .
“ Deposit Account Control Agreement ” is defined in Section 4.12(c) .
“ Deposit Account Control Bank ” means Bank of America, N.A. in such capacity under the Deposit Account Control Agreement.
“ Disclosure Documents ” is defined in Section 5.3 .
“ Distributions ” means any (i) distribution of any nature or kind, either directly or indirectly, to any Affiliate or equityholder of the Company, including any dividend or distribution in cash or property of any kind; a purchase, redemption, reduction, return or any other payment of capital; or any repayment or reduction of Indebtedness owing to an Affiliate or equityholder of Company; (ii) loans or other payments to an Affiliate or equityholder of the Company; and (iii) payment for or on behalf of an Affiliate equityholder of the Company by way of guaranty, indemnity or otherwise including in connection with any Affiliate Indebtedness; but shall not include any payments made to any equityholder or Affiliate of the Company under any services, advisory, tax sharing or agency agreement disclosed to the Holders and entered into on commercially reasonable terms and conditions.
“ Environmental Laws ” means any and all Federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including but not limited to those related to Hazardous Materials.
“ ERCOT ” means the Electric Reliability Council of Texas.
“ ERISA ” means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.
“ ERISA Affiliate ” means any trade or business (whether or not incorporated) that is treated as a single employer together with the Company under section 414 of the Code.
“ Event of Default ” is defined in Section 11 .
“ Exchange Act ” shall mean the Securities Exchange Act of 1934, as amended from time to time.
 
S CHEDULE B-4
(To Note Purchase Agreement)

“ FERC ” means the Federal Energy Regulatory Commission, or any successor agency to its duties and responsibilities.
“ Financing Documents ” means, collectively, this Agreement, the Notes, the Security Documents and any other documents, agreements or instruments entered into in connection with any of the foregoing.
“ FPA ” means the Federal Power Act, 16 U.S.C. §§791 et seq., as amended, and the regulations of the FERC thereunder.
“ GAAP ” means generally accepted accounting principles as in effect in the United States of America. In the event that any “Accounting Change” (as defined below) shall occur and such change results in a change in the method of calculation of financial covenants, ratios, standards or terms in this Agreement, then the Company and the holders agree to enter into negotiations in order to amend such provisions of this Agreement so as to reflect equitably such Accounting Changes with the desired result that the criteria for evaluating the financial condition of the Company, SDTS and Sharyland shall be the same after such Accounting Changes as if such Accounting Changes had not been made. Until such time as such an amendment shall have been executed and delivered by the Company and the holders, all financial covenants, ratios, standards and terms in this Agreement shall continue to be calculated or construed as if such Accounting Changes had not occurred. “ Accounting Changes ” refers to changes in accounting principles required by the promulgation of any rule, regulation, pronouncement or opinion by the Financial Accounting Standards Board of the American Institute of Certified Public Accountants or, if applicable, the SEC.
“ Governmental Authority ” means
(a) the government of:
(i) the United States of America or any State or other political subdivision thereof, or
(ii) any other jurisdiction in which the Company conducts all or any part of its business, or which asserts jurisdiction over any properties of the Company, or
(b) any entity exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, any such government, or
(c) ERCOT, or
(d) SPP, or
(e) the Texas Regional Entity.
“ Guaranty ” means, with respect to any Person, any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing any Indebtedness of any other Person in any manner, whether directly or indirectly, including (without limitation) obligations incurred through an agreement, contingent or otherwise, by such Person:
(a) to purchase such Indebtedness or any property constituting security therefor;
 
S CHEDULE B-5
(To Note Purchase Agreement)

(b) to advance or supply funds (i) for the purchase or payment of such indebtedness or obligation, or (ii) to maintain any working capital or other balance sheet condition or any income statement condition of any other Person or otherwise to advance or make available funds for the purchase or payment of such Indebtedness;
(c) to lease properties or to purchase properties or services primarily for the purpose of assuring the owner of such Indebtedness of the ability of any other Person to make payment of the Indebtedness; or
(d) otherwise to assure the owner of such Indebtedness against loss in respect thereof.
In any computation of the indebtedness or other liabilities of the obligor under any Guaranty, the indebtedness or other obligations that are the subject of such Guaranty shall be assumed to be direct obligations of such obligor.
“ Hazardous Material ” means any and all pollutants, toxic or hazardous wastes or other substances that might pose a hazard to health and safety, the removal of which may be required or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage or filtration of which is or shall be restricted, prohibited or penalized by any applicable law including, but not limited to, asbestos, urea formaldehyde foam insulation, polychlorinated biphenyls, petroleum, petroleum products, lead based paint, radon gas or similar restricted, prohibited or penalized substances.
“ Holder ” means, with respect to any Note the Person in whose name such Note is registered in the register maintained by the Company pursuant to Section 13.1 .
“ Indebtedness ” with respect to any Person means, at any time, without duplication,
(a) its liabilities for borrowed money and its redemption obligations in respect of mandatorily redeemable Preferred Stock;
(b) its liabilities for the deferred purchase price of property acquired by such Person (excluding accounts payable arising in the ordinary course of business but including all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property);
(c) (i) all liabilities appearing on its balance sheet in accordance with GAAP in respect of Capital Leases and (ii) all liabilities which would appear on its balance sheet in accordance with GAAP in respect of Synthetic Leases assuming such Synthetic Leases were accounted for as Capital Leases;
 
S CHEDULE B-6
(To Note Purchase Agreement)

(d) all liabilities for borrowed money secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities);
(e) all its liabilities in respect of letters of credit or instruments serving a similar function issued or accepted for its account by banks and other financial institutions (whether or not representing obligations for borrowed money);
(f) the aggregate Swap Termination Value of all Swap Contracts of such Person; and
(g) any Guaranty of such Person with respect to liabilities of a type described in any of clauses (a) through (f) hereof.
Indebtedness of any Person shall include all obligations of such Person of the character described in clauses (a) through (g) to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is deemed to be extinguished under GAAP.
“ Initial NPA ” is defined in the recitals hereto.
“ Institutional Investor ” means (a) any Purchaser of a Note, (b) any Holder of a Note holding (together with one or more of its Affiliates) more than 5% of the aggregate principal amount of the Notes then outstanding, (c) any bank, trust company, savings and loan association or other financial institution, any pension plan, any investment company, any insurance company, any broker or dealer, or any other similar financial institution or entity, regardless of legal form, and (d) any Related Fund of any Holder of any Note.
“ Lien ” means, with respect to any Person, any mortgage, lien, pledge, charge, security interest or other encumbrance, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or Capital Lease, upon or with respect to any property or asset of such Person (including in the case of stock, stockholder agreements, voting trust agreements and all similar arrangements).
“ Material Adverse Effect ” means a material adverse effect on: (i) the business, operations, affairs, financial condition assets or properties of the Company, (ii) the ability of the Company to perform its obligations under this Agreement, the Notes or any Financing Document to which it is a party; (iii) the validity or enforceability of the Notes, this Agreement or any Financing Document.
“ Maturity Date ” means December 30, 2020.
“ Member ” means Energy Trans Alliance L.P., a Delaware limited partnership.
“ Membership Collateral ” is defined and described in the Pledge Agreement
“ Minimum Debt Service Reserve Requirement ” means, on any date, scheduled principal plus interest payable on the Notes on the two Payment Dates following such date.
“ Moody’s ” means Moody’s Investors Service, Inc.
 
S CHEDULE B-7
(To Note Purchase Agreement)

“ Multiemployer Plan ” means any Plan that is a “multiemployer plan” (as such term is defined in section 4001 (a)(3) of ERISA).
“ NAIC ” means the National Association of Insurance Commissioners or any successor thereto.
“ New Operator ” means SU FERC, L.L.C., a Texas limited liability company and a wholly-owned subsidiary of Sharyland.
“ Non-Recourse Debt ” means Indebtedness of a Project Finance Subsidiary that, if secured, is secured solely by a pledge of collateral owned by that Project Finance Subsidiary and the ownership interests in such Project Finance Subsidiary and for which no Person other than such Project Finance Subsidiary is personally liable.
“ Notes ” is defined in Section 1 .
“ O&M Costs ” is defined in the SDTS 2010 Note Agreement, it being understood that each reference to the “Company” in such definition is a reference to SDTS.
“ Obligation ” means any loan, advance, debt, liability, and obligation of performance, howsoever arising, owed by the Company to the Collateral Agent or the Holders of any kind or description (whether or not evidenced by any note or instrument and whether or not for the payment of money), direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, pursuant to the terms of this Agreement, any Note or any of the other Financing Documents, including all principal, interest, Yield-Maintenance Amounts, fees, charges, expenses, attorneys’ fees and accountants fees payable or reimbursable by the Company under this Agreement or any of the other Financing Documents.
“ Officer’s Certificate ” means a certificate of a Senior Financial Officer or of any other officer of the Company whose responsibilities extend to the subject matter of such certificate.
“ Payment Date ” means October 15, 2010 and the 15th day of January, April, July and October thereafter up to the Maturity Date, and the Maturity Date.
“ PBGC ” means the Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto.
“ Permit ” means any action, approval, consent, waiver, exemption, variance, franchise, order, permit, authorization, right or license of or from a Governmental Authority, provided that interests or estates in real property, shall not be considered Permits.
“ Permitted Investment ” means any (a) marketable direct obligation of the United States of America, (b) marketable obligation directly and fully guaranteed as to interest and principal by the United States of America, (c) demand deposit with Depositary, or time deposit, certificate of deposit and banker’s acceptance issued by any member bank of the Federal Reserve System which is organized under the laws of the United States of America or any state thereof or any United States branch of a foreign bank, in each case whose equity capital is in excess of $500,000,000 and whose long-term debt securities are rated “A” or better by S&P and “A2” or
 
S CHEDULE B-8
(To Note Purchase Agreement)

better by Moody’s, (d) commercial paper or tax exempt obligations given the highest rating by Moody’s and S&P, (e) obligations of a commercial bank described in clause (c) above, in respect of the repurchase of obligations of the type as described in clauses (a) and (b) hereof, provided that such repurchase obligation shall be fully secured by obligations of the type described in said clauses (a) and (b) and the possession of such obligation shall be transferred to, and segregated from other obligations owned by, any such bank, (f) instrument rated “AAA” by S&P and “Aaa” by Moody’s issued by investment companies and having an original maturity of 180 days or less, (g) eurodollar certificates of deposit issued by any bank described in clause (c) above, and (h) marketable security rated not less than “A-I” by S&P or not less than “Prime-l” by Moody’s. In no event shall Permitted Investments include any obligation, certificate of deposit, acceptance, commercial paper or instrument which by its terms matures (A) more than 180 days after the date of investment, unless a bank meeting the requirements of clause (c) above shall have agreed to repurchase such obligation, certificate of deposit, acceptance, commercial paper or instrument at its purchase price plus earned interest within no more than 90 days after its purchase thereunder or (B) after the next Payment Date.
“ Permitted Lien ” is defined in Section 10.5 .
“ Permitted Secured Indebtedness ” means Indebtedness of the Company incurred pursuant to Section 10.6(b) , provided that at least 5 Business Days prior to the incurrence of such Indebtedness, the Company shall (a) notify the Holders of the intent to incur such Indebtedness, which notice shall set forth in reasonable detail (i) the amount and proposed economic terms of such Indebtedness, (ii) the type of lender or purchaser and (iii) the proposed collateral for such Indebtedness (which proposed collateral may include any or all of the “Collateral” as defined in the Collateral Agency Agreement), and (b) if the Indebtedness is proposed to be secured by any property of the Company or any other collateral, deliver to the Collateral Agent and the other parties to the Collateral Agency Agreement an executed joinder agreement pursuant to which all the proposed holders of such Indebtedness have become party to the Collateral Agency Agreement.
“ Person ” means an individual, partnership, corporation, limited liability company, association, trust, unincorporated organization, business entity or Governmental Authority.
“ Plan ” means an “employee benefit plan” (as defined in section 3(3) of ERISA) subject to Title I of ERISA that is or, within the preceding five years, has been established or maintained, or to which contributions are or, within the preceding five years, have been made or required to be made, by the Company or any ERISA Affiliate or with respect to which the Company or any ERISA Affiliate may have any liability.
“ Pledge Agreement ” is defined in Section 4.12(b) .
“ Preferred Stock ” means any class of capital stock of a Person that is preferred over any other class of capital stock (or similar equity interests) of such Person as to the payment of dividends or the payment of any amount upon liquidation or dissolution of such Person.
 
S CHEDULE B-9
(To Note Purchase Agreement)

“ Project Finance Subsidiary ” means a special purpose Wholly-Owned Subsidiary of SDTS created to develop a new project under the System Lease and to finance the project solely with Non-Recourse Debt.
“ property ” or “ properties ” means, unless otherwise specifically limited, real or personal property of any kind, tangible or intangible, choate or inchoate.
“ PTE ” is defined in Section 6.2(a) .
“ Purchaser ” is defined in the first paragraph of this Agreement.
“ Qualified Institutional Buyer ” means any Person who is a “qualified institutional buyer” within the meaning of such term as set forth in Rule 144A(a)(1) under the Securities Act.
“ RBC ” means Royal Bank of Canada, a Canadian banking institution.
“ RBC Agreement ” means that certain $20,000,000 Credit Agreement, dated the date hereof, among SDTS, as Borrower and RBC, as lender and letter of credit provider.
“ Related Fund ” means, with respect to any Holder of any Note, any fund or entity that (i) invests in Securities or bank loans, and (ii) is advised or managed by such Holder, the same investment advisor as such Holder or by an Affiliate of such Holder or such investment advisor.
“ Required Holders ” means, at any time, the Holders of at least 51% in principal amount of the Notes at the time outstanding (exclusive of Notes then owned by the Company or any of its Affiliates).
“ Required Permit ” is defined in Section 5.10 .
“ Requirements of Law ” means as to any Person, the certificate of incorporation or formation and by-laws or partnership or operating agreement or other organizational or governing documents of such Person, and any local, state or Federal law, regulation, rule, ordinances or determination, interpretation or order of an arbitrator or a court or other Governmental Authority, and any Required Permit, in each case applicable to or binding upon such Person or any of its properties or its business or to which such Person or any of its properties or its business is subject.
“ Responsible Officer ” means any Senior Financial Officer and any other officer of the Company with responsibility for the administration of the relevant portion of this Agreement.
“ Restricted Payment Conditions ” is defined in Section 10.9 .
“ SDTS ” means Sharyland Distribution & Transmission Services, L.L.C.
“ SDTS 2009 Note Agreement ” means the Note Purchase Agreement, dated December 31, 2009, among SDTS and the holders from time to time of SDTS’s 7.25% Senior Notes due December 30, 2029 issued thereunder.

S CHEDULE B-10
(To Note Purchase Agreement)

“ SDTS 2010 Note Agreement ” means the Amended and Restated Note Purchase Agreement, as amended and restated as of the dated the date hereof, among SDTS and the purchasers named therein, pursuant to which SDTS will sell, and such purchasers will purchase, SDTS’s 6.47% Senior Notes due September 30, 2030.
“ SEC ” shall mean the Securities and Exchange Commission of the United States, or any successor thereto.
“ Secured Parties ” means, from time to time, the Holders, all other Persons party to the Collateral Agency Agreement (other than the Company) and the Collateral Agent.
“ Securities ” or “ Security ” shall have the meaning specified in Section 2(1) of the Securities Act.
“ Securities Act ” means the Securities Act of 1933, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.
“ Security Agreement ” is defined in Section 4.12(a) .
“ Security Documents ” means the Security Agreement, the Pledge Agreement, the Depositary Agreement, the Deposit Account Control Agreement, the Collateral Agency Agreement, and any other security documents, financing statements and the like filed or recorded in connection with the foregoing.
“ Senior Financial Officer ” means the chief financial officer, principal accounting officer, treasurer or comptroller of the Company or the Member, as applicable.
“ Sharyland ” means Sharyland Utilities, L.P., a Texas limited partnership.
“ SPP ” means the Southwest Power Pool.
“ Structuring Fee ” is defined in Section 4.7 .
“ Subsidiary ” means, as to any Person, any other Person in which such first Person or one or more of its Subsidiaries or such first Person and one or more of its Subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar functions) of such second Person and any partnership or joint venture if more than a 50% interest in the profits or capital thereof is owned by such first Person or one or more of its Subsidiaries or such first Person and one or more of its Subsidiaries (unless such partnership or joint venture can and does ordinarily take major business actions without the prior approval of such Person or one or more of its Subsidiaries). Unless the context otherwise clearly requires, any reference to a “Subsidiary” is a reference to a Subsidiary of the Company.
“ SVO ” means the Securities Valuation Office of the NAIC or any successor to such Office.
 
S CHEDULE B-11
(To Note Purchase Agreement)

“ Swap Contract ” means (a) any and all interest rate swap transactions, basis swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward foreign exchange transactions, cap transactions, floor transactions, currency options, spot contracts or any other similar transactions or any of the foregoing (including, but without limitation, any options to enter into any of the foregoing), and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., or any International Foreign Exchange Master Agreement.
“ Swap Termination Value ” means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a), the amounts(s) determined as the mark-to-market values(s) for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts.
“ Synthetic Lease ” means, at any time, any lease (including leases that may be terminated by the lessee at any time) of any property (a) that is accounted for as an operating lease under GAAP and (b) in respect of which the lessee retains or obtains ownership of the property so leased for U.S. Federal income tax purposes, other than any such lease under which such Person is the lessor.
“ System Lease ” means the Master System Lease Agreement, dated as of December 31, 2009, between SDTS, as lessor, and Sharyland, as lessee, as supplemented by Lease Supplement (Cap Rock Assets), dated as of July 13, 2010, or any lease supplement entered into in replacement of such Lease Supplement and as further supplemented by additional lease supplements entered into by SDTS and Sharyland in accordance with Section 9.8(b) of the SDTS 2010 Note Agreement.
“ Total Debt ” means, with respect to the Company, all Indebtedness of the Company on a consolidated basis; provided, however, that for purposes of calculating the Company’s Total Debt to Capitalization Ratio, the Company’s Total Debt (i) shall exclude Non-Recourse Debt of a Project Finance Subsidiary of SDTS and that portion of the Swap Termination Value defined in clause (b) of the definition of “Swap Termination Value” and (ii) shall include Indebtedness of Sharyland.
“ Total Debt to Capitalization Ratio ” means, with respect to the Company, the Total Debt, divided by the sum of Total Debt plus the combined capitalization of the Company and SDTS, as shown on the Company’s and SDTS’s balance sheets.
“ Transfer ” means, with respect to any item, the sale, exchange, conveyance, lease, transfer or other disposition of such item.
 
S CHEDULE B-12
(To Note Purchase Agreement)

“ USA Patriot Act ” means United States Public Law 107-56, Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 2001, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.
“ Wholly-Owned Subsidiary ” means, at any time, any Subsidiary one hundred percent of all of the equity interests and voting interests of which are owned by any one or more of the Company and the Company’s other Wholly-Owned Subsidiaries at such time.
“ Yield-Maintenance Amount ” is defined in Section 8.6 .
 
S CHEDULE B-13
(To Note Purchase Agreement)

RULES OF INTERPRETATION
 
1.	The singular includes the plural and the plural includes the singular; and words in the masculine, neuter or feminine gender shall be read and construed as though in either of the other genders where the context so requires.	
 
2.	The word “or” is not exclusive.	
 
3.	A reference to any law includes any amendment or modification to such law, and all regulations, rulings and other laws and regulations promulgated under such law.	
 
4.	A reference to a Person includes its successors and permitted assigns.	
 
5.	Accounting terms have the meanings assigned to them by GAAP, as applied by the accounting entity to which they refer.	
 
6.	The words “include,” “includes” and “including” are not limiting.	
 
7.	A reference in a document to an Article, Section, Exhibit, Schedule, Annex or Appendix is to the Article, Section, Exhibit, Schedule, Annex or Appendix of such document unless otherwise indicated. Exhibits, Schedules, Annexes or Appendices to any document shall be deemed incorporated by reference in such document.	
 
8.	References to “knowledge” or words of similar import refer to the actual knowledge of the current officers of the relevant Person, without any duty of investigation unless otherwise indicated.	
 
9.	References to any document, instrument or agreement (a) shall include all exhibits, schedules and other attachments thereto, (b) shall include all documents, instruments or agreements issued or executed in replacement thereof, and (c) shall mean such document, instrument or agreement, or replacement or predecessor thereto, as amended, modified and supplemented from time to time and in effect at any given time.	
 
10.	The words “hereof,” “herein” and “hereunder” and words of similar import when used in any document shall refer to such document as a whole and not to any particular provision of such document.	
 
11.	References to “days” shall mean calendar days, unless the term “Banking Days” shall be used. References to a time of day shall mean such time in New York City, unless otherwise specified.	
 
12.	The section and subsection headings in a document are for convenience of reference only and shall neither be deemed to be a part of such document nor modify, define, expand or limit any of the terms or provisions thereof.	
 
S CHEDULE B-14
(To Note Purchase Agreement)

Exhibit 10.29
EXECUTION COPY
FIRST AMENDMENT, dated as of June 9, 2011 (this “ First Amendment ”) to the AMENDED AND RESTATED NOTE PURCHASE AGREEMENT, dated as of July 13, 2010 (the “ Agreement ”), between TRANSMISSION AND DISTRIBUTION COMPANY, L.L.C., a Texas limited liability company (the “ Company ”), and the holders of the notes party thereto (“ Holders ”). Capitalized terms used but not otherwise defined in this First Amendment shall have the meanings set forth in the Agreement and the rules of interpretation set forth therein shall apply to this First Amendment.
W I T N E S S E T H:
WHEREAS, the Company and each of the Holders are parties to the Agreement;
WHEREAS, the Company has requested that the Holders amend the Agreement, as more fully described herein; and
WHEREAS, each Holder is willing to agree to such amendment, but only upon the terms and subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual agreements herein contained and other good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Amendments to Section 10.1 (Transactions with Affiliates) of the Agreement . Clause (ii) of Section 10.1 of the Agreement is hereby amended in its entirety as follows:
“(ii) Sharyland, pursuant to (x) the System Lease and (y) the SP Lease”
2. Amendments to Section 10.2 (Merger, Consolidation, etc.) of the Agreement . Clause (i) of Section 10.2 of the Agreement is hereby amended by adding the phrase “as amended by the First Amendment dated as of June 9, 2011 (“the First SDTS Amendment”)” after the term “SDTS 2010 Note Agreement,” in the fourth line thereof.
3. Amendments to Schedule B (Defined Terms) of the Agreement . Schedule B of the Agreement is hereby amended by adding the following new definitions:
“ CREZ Project ” shall mean the five transmission lines, four substations and other facilities in Texas identified and awarded to Sharyland by the Public Utility Commission of Texas (the “PUCT”) in Docket Number 37902.
“ First Amendment ” shall mean the First Amendment to this Agreement, dated June 9, 2011.
“ First Amendment Effective Date ” shall have the meaning ascribed to such term in Section 4 of the First Amendment.
“ SP ” shall mean Sharyland Projects, L.L.C., a Project Finance Subsidiary.
 
TDC First Amendment - 1

“ SP Lease ” shall mean the CREZ Master System Lease Agreement and Supplements proposed to be entered between SP, as lessor, and Sharyland, as lessee, with respect to the CREZ Project.
4. Conditions to First Amendment Effective Date . This First Amendment shall become effective upon the date (the “ First Amendment Effective Date ”) the Holders shall have received counterparts of this First Amendment, duly executed and delivered by the Company and each of the other Holders.
5. Representations and Warranties . In order to induce the Holders to enter into this First Amendment, the Company hereby represents and warrants that (i) each of the representations and warranties made by the Company in the Financing Documents is true and correct in all material respects on and as of the date hereof, before and after giving effect to the effectiveness of this First Amendment, as if made on and as of the date hereof, except to the extent such representations and warranties expressly relate to a specific earlier date, in which case such representations and warranties were true and correct in all material respects as of such earlier date and (ii) no Default or Event of Default has occurred and is continuing on the date hereof or after giving effect to the transactions contemplated herein.
6. Continuing Effect of Financing Documents . Except as expressly set forth herein, this First Amendment shall not constitute an amendment or waiver of any provision of the Agreement and shall not be construed as an amendment, waiver or consent to any further or future action on the part of the Company that would require an amendment, waiver or consent of the Holders. Except as expressly amended hereby, the provisions of the Agreement are and shall remain in full force and effect. This First Amendment shall be deemed a Financing Document for purposes of the Agreement.
7. Fees . In accordance with Section 15.1 of the Agreement, the Company shall have paid the fees, charges and disbursements of the Purchaser’s special counsel in connection with this Amendment.
8. Counterparts . This First Amendment may be executed by one or more of the parties hereto on any number of separate counterparts (including by facsimile), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed signature page to this First Amendment by facsimile or electronic transmission shall be as effective as the delivery of a manually executed counterpart of this First Amendment.
9. Severability . Any provision of this First Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
10. Integration . This First Amendment and the other Financing Documents represent the agreement of the Company and the Holders with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by any Holder relative to the subject matter hereof not expressly set forth or referred to herein or in the other Financing Documents.
 
TDC First Amendment - 2

11. GOVERNING LAW . THIS FIRST AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS FIRST AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
[Signatures on Following Page]
 
TDC First Amendment - 3

IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written.

TRANSMISSION AND DISTRIBUTION
COMPANY, L.L.C.	
		
By:	 	/s/ W. Kirk Baker	
Name:	 	W. Kirk Baker	
Title:	 	President	
 
[Signature Page - TDC First Amendment]

			
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA	
		
By:	 	/s/ Richard Carrell	
Name:	 	Richard Carrell	
Title:	 	Vice President	

PRUCO LIFE INSURANCE COMPANY	
		
By:	 	/s/ Richard Carrell	
Name:	 	Richard Carrell	
Title:	 	Vice President	

PRUDENTIAL RETIREMENT INSURANCE AND ANNUITY COMPANY
 	
By:	 	Prudential Investment Management, Inc.,
as investment manager	
			
	 	By:	 	/s/ Richard Carrell	
	 	Name:	 	Richard Carrell	
	 	Title:	 	Vice President	
.
 
[Signature Page - TDC First Amendment]

Exhibit 10.30
Execution Version
SECOND AMENDMENT, dated as of December 10, 2014 (this “ Second Amendment ”) to the AMENDED AND RESTATED NOTE PURCHASE AGREEMENT, dated as of July 13, 2010 (as heretofore amended, restated, supplemented and otherwise modified, the “ Agreement ”), between TRANSMISSION AND DISTRIBUTION COMPANY, L.L.C. (the “ Company ”), a Texas limited liability company and the holders of the notes party thereto, as purchasers thereunder (the “ Holders ”). Capitalized terms used but not otherwise defined in this Second Amendment shall have the meanings set forth in the Agreement (as amended hereby) and the rules of interpretation set forth therein (as amended hereby) shall apply to this Second Amendment.
W I T N E S S E T H :
WHEREAS, the Company and the Holders are parties to the Agreement;
WHEREAS, the Company has requested that the Holders amend the Agreement, as more fully described herein; and
WHEREAS, each Holder party hereto (such Holders constituting the Required Holders) is willing to agree to such amendment, but only upon the terms and subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual agreements herein contained and other good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Amendments to the Agreement . The Agreement is amended to read in its entirety as set forth on Annex A hereto.
2. Conditions to Second Amendment Effective Date . This Second Amendment shall become effective upon the date the Holders shall have received counterparts of this Second Amendment, duly executed and delivered by the Company and the other Holders.
3. Representations and Warranties to the Holders . In order to induce the Holders to enter into this Second Amendment, the Company hereby represents and warrants as follows:
 
 	(i)	The Company has the limited liability power and authority to execute and deliver this Second Amendment and to carry out the terms and provisions of this Second Amendment and the Agreement, as amended hereby, and has taken all necessary limited liability company action to authorize the execution and delivery by the Company of this Second Amendment and the performance under this Second Amendment and the Agreement, as amended hereby. The Company has duly executed and delivered this Second Amendment, and this Second Amendment constitutes the legal, valid and binding obligation of the Company, enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws	

 	affecting the enforcement of creditors’ rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law).	
 
 	(ii)	The execution and delivery by the Company of this Second Amendment and the performance under this Second Amendment and the Agreement, as amended hereby, do not (i) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of the Company under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter or limited partnership or limited liability company agreement, or any other agreement or instrument to which the Company is bound or by which the Company or any of its properties may be bound or affected, (ii) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to the Company or (iii) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to the Company.	
 
 	(iii)	No consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority is required in connection with the execution or delivery by the Company of this Second Amendment or the performance under this Second Amendment and the Agreement, as amended hereby.	
 
 	(iv)	No Default or Event of Default has occurred and is continuing on the date hereof after giving effect to the transactions contemplated herein.	
4. Continuing Effect of Financing Documents . Except as expressly set forth herein, this Second Amendment shall not constitute an amendment or waiver of any provision of the Agreement and shall not be construed as an amendment, waiver or consent to any further or future action on the part of the Company that would require an amendment, waiver or consent of the Holders. Except as expressly amended hereby, the provisions of the Agreement are and shall remain in full force and effect. This Second Amendment shall be deemed a Financing Document for purposes of the Agreement.
5. Fees . In accordance with Section 15.1 of the Agreement, the Company shall have paid the fees, charges and disbursements of the Holders’ special counsel in connection with this Second Amendment.
6. Counterparts . This Second Amendment may be executed by one or more of the parties hereto on any number of separate counterparts (including by facsimile), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed signature page to this Second Amendment by facsimile or electronic transmission shall be as effective as the delivery of a manually executed counterpart of this Second Amendment.
 
2

7. Severability . Any provision of this Second Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
8. Integration . This Second Amendment and the other Financing Documents represent the agreement of the Company and the Holders with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by any Holder relative to the subject matter hereof not expressly set forth or referred to herein or in the other Financing Documents.
9. GOVERNING LAW . THIS SECOND AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS SECOND AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
[ Signatures of Following Page ]
 
3

IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be duly executed and delivered by their property and duly authorized officers as of the day and year first above written.

TRANSMISSION AND DISTRIBUTION COMPANY, L.L.C.	
		
By:	 	/s/ Brant Meleski	
	 	Name:	 	Brant Meleski	
	 	Title:	 	Senior Vice President and Chief Financial Officer	
 
Signature Page
Second Amendment, Direction and Waiver

					
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA	
		
By:	 	/s/ Richard Carrell	
	 	Vice President	
	
PRUCO LIFE INSURANCE COMPANY	
		
By:	 	/s/ Richard Carrell	
	 	Vice President	
	
PRUDENTIAL RETIREMENT INSURANCE AND ANNUITY COMPANY	
		
By:	 	Prudential Investment Management, Inc., as investment manager	
			
	 	By:	 	/s/ Richard Carrell	
	 		 	Vice President	
 
Signature Page
Second Amendment, Direction and Waiver

Annex A
Amended and Restated Note Purchase Agreement, as amended by the Second Amendment
[See attached.]

EXECUTION VERSION

 
T RANSMISSION AND D ISTRIBUTION C OMPANY , L.L.C.
$25,000,000
8.5% Senior Notes due December 30, 2020

A MENDED AND R ESTATED N OTE P URCHASE A GREEMENT

Dated July 13, 2010
AS AMENDED BY :
F IRST A MENDMENT DATED AS OF J UNE  9, 2011
S ECOND A MENDMENT DATED AS OF D ECEMBER  10, 2014

 

							
 	  	Page	 	
	
TABLE OF CONTENTS	  	
			
SECTION 1.	 	AUTHORIZATION OF NOTES	  	 	2	 	
			
SECTION 2.	 	SALE AND PURCHASE OF NOTES	  	 	2	 	
			
SECTION 3.	 	CLOSING	  	 	2	 	
			
SECTION 4.	 	CONDITIONS TO CLOSING	  	 	3	 	
			
Section 4.1.	 	Representations and Warranties	  	 	3	 	
Section 4.2.	 	Performance; No Default	  	 	3	 	
Section 4.3.	 	Compliance Certificates	  	 	3	 	
Section 4.4.	 	Opinions of Counsel	  	 	3	 	
Section 4.5.	 	Purchase Permitted By Applicable Law, Etc.	  	 	3	 	
Section 4.6.	 	Sale of Notes	  	 	4	 	
Section 4.7.	 	Payment of Special Counsel and Other Fees and Expenses	  	 	4	 	
Section 4.8.	 	Private Placement Number	  	 	4	 	
Section 4.9.	 	Changes in Structure	  	 	4	 	
Section 4.10.	 	Funding Instructions	  	 	4	 	
Section 4.11.	 	Proceedings and Documents	  	 	4	 	
Section 4.12.	 	Security Agreement, Etc.	  	 	5	 	
Section 4.13.	 	UCC Searches; and Litigation Searches	  	 	6	 	
Section 4.14.	 	Financial Statements	  	 	6	 	
Section 4.15.	 	Consents and Approvals	  	 	6	 	
Section 4.16.	 	Debt Service Reserve Account	  	 	6	 	
			
SECTION 5.	 	REPRESENTATIONS AND WARRANTIES OF THE COMPANY	  	 	6	 	
			
Section 5.1.	 	Organization; Power and Authority	  	 	6	 	
Section 5.2.	 	Authorization, Etc.	  	 	7	 	
Section 5.3.	 	Disclosure	  	 	7	 	
Section 5.4.	 	Organization and Ownership of Interests in the Company	  	 	7	 	
Section 5.5.	 	Financial Statements; Material Liabilities	  	 	7	 	
Section 5.6.	 	Compliance with Laws, Other Instruments, Etc.	  	 	8	 	
Section 5.7.	 	Governmental Authorizations, Etc.	  	 	8	 	
Section 5.8.	 	Litigation; Observance of Agreements, Statutes and Orders	  	 	8	 	
Section 5.9.	 	Taxes	  	 	8	 	
Section 5.10.	 	Permits; Material Agreements	  	 	9	 	
Section 5.11.	 	Compliance with ERISA	  	 	9	 	
Section 5.12.	 	Private Offering by the Company	  	 	10	 	
Section 5.13.	 	Use of Proceeds; Margin Regulations	  	 	10	 	
Section 5.14.	 	Existing Indebtedness; Future Liens	  	 	10	 	
Section 5.15.	 	Foreign Assets Control Regulations, Etc.	  	 	10	 	
Section 5.16.	 	Status under Certain Statutes	  	 	11	 	
Section 5.17.	 	Collateral	  	 	11	 	
 
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TABLE OF CONTENTS
(continued)

 	  	Page	 	
			
SECTION 6.	 	REPRESENTATIONS OF THE PURCHASERS	  	 	11	 	
			
Section 6.1.	 	Purchase for Investment	  	 	11	 	
Section 6.2.	 	Source of Funds	  	 	12	 	
			
SECTION 7.	 	INFORMATION	  	 	13	 	
			
Section 7.1.	 	Financial and Business Information	  	 	13	 	
Section 7.2.	 	Officer’s Certificate	  	 	16	 	
Section 7.3.	 	Visitation	  	 	16	 	
			
SECTION 8.	 	PAYMENT AND PREPAYMENT OF THE NOTES	  	 	16	 	
			
Section 8.1.	 	Amortization; Maturity	  	 	16	 	
Section 8.2.	 	Optional Prepayments with Yield-Maintenance Amount	  	 	17	 	
Section 8.3.	 	Allocation of Partial Prepayments	  	 	17	 	
Section 8.4.	 	Maturity; Surrender, Etc.	  	 	17	 	
Section 8.5.	 	Purchase of Notes	  	 	17	 	
Section 8.6.	 	Yield-Maintenance Amount	  	 	18	 	
			
SECTION 9.	 	AFFIRMATIVE COVENANTS	  	 	19	 	
			
Section 9.1.	 	Compliance with Law	  	 	19	 	
Section 9.2.	 	Payment of Taxes and Claims	  	 	19	 	
Section 9.3.	 	Existence, Etc.	  	 	20	 	
Section 9.4.	 	Books and Records	  	 	20	 	
Section 9.5.	 	Collateral; Further Assurances	  	 	20	 	
Section 9.6.	 	Financial Ratios	  	 	20	 	
Section 9.7.	 	Debt Service Reserve Account	  	 	20	 	
			
SECTION 10.	 	NEGATIVE COVENANTS	  	 	20	 	
			
Section 10.1.	 	Transactions with Affiliates	  	 	20	 	
Section 10.2.	 	Merger, Consolidation, Etc.	  	 	21	 	
Section 10.3.	 	Line of Business	  	 	21	 	
Section 10.4.	 	Terrorism Sanctions Regulations	  	 	22	 	
Section 10.5.	 	Liens	  	 	22	 	
Section 10.6.	 	Indebtedness	  	 	22	 	
Section 10.7.	 	Loans, Advances, Investments and Contingent Liabilities	  	 	23	 	
Section 10.8.	 	No Subsidiaries	  	 	23	 	
Section 10.9.	 	Restricted Payments	  	 	23	 	
Section 10.10.	 	Amendments to Organizational Documents; Exercise of Rights	  	 	23	 	
Section 10.11.	 	ERISA Compliance	  	 	24	 	
Section 10.12.	 	Regulation	  	 	25	 	
Section 10.13.	 	Additional Financial Covenants	  	 	25	 	
			
SECTION 11.	 	EVENTS OF DEFAULT	  	 	25	 	
 
ii

TABLE OF CONTENTS
(continued)

 	  	Page	 	
			
SECTION 12.	 	REMEDIES ON DEFAULT, ETC.	  	 	28	 	
			
Section 12.1.	 	Acceleration	  	 	28	 	
Section 12.2.	 	Other Remedies	  	 	29	 	
Section 12.3.	 	Rescission	  	 	29	 	
Section 12.4.	 	No Waivers or Election of Remedies, Expenses, Etc.	  	 	29	 	
			
SECTION 13.	 	REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES	  	 	30	 	
			
Section 13.1.	 	Registration of Notes	  	 	30	 	
Section 13.2.	 	Transfer and Exchange of Notes	  	 	30	 	
Section 13.3.	 	Replacement of Notes	  	 	31	 	
			
SECTION 14.	 	PAYMENTS ON NOTES	  	 	31	 	
			
Section 14.1.	 	Place of Payment	  	 	31	 	
Section 14.2.	 	Home Office Payment	  	 	32	 	
			
SECTION 15.	 	EXPENSES, ETC.	  	 	32	 	
			
Section 15.1.	 	Transaction Expenses	  	 	32	 	
Section 15.2.	 	Survival	  	 	32	 	
			
SECTION 16.	 	SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT	  	 	33	 	
			
SECTION 17.	 	AMENDMENT AND WAIVER	  	 	33	 	
			
Section 17.1.	 	Requirements	  	 	33	 	
Section 17.2.	 	Solicitation of Holders of Notes	  	 	33	 	
Section 17.3.	 	Binding Effect, etc .	  	 	34	 	
Section 17.4.	 	Notes Held by Company, etc .	  	 	34	 	
			
SECTION 18.	 	NOTICES	  	 	34	 	
			
SECTION 19.	 	REPRODUCTION OF DOCUMENTS	  	 	35	 	
			
SECTION 20.	 	CONFIDENTIAL INFORMATION	  	 	35	 	
			
SECTION 21.	 	SUBSTITUTION OF PURCHASER	  	 	36	 	
			
SECTION 22.	 	MISCELLANEOUS	  	 	36	 	
			
Section 22.1.	 	Successors and Assigns	  	 	36	 	
Section 22.2.	 	Payments Due on Non-Business Days	  	 	36	 	
Section 22.3.	 	Accounting Terms	  	 	37	 	
Section 22.4.	 	Severability	  	 	37	 	
Section 22.5.	 	Construction, etc .	  	 	37	 	
 
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TABLE OF CONTENTS
(continued)

 	  	Page	 	
			
Section 22.6.	 	Counterparts	  	 	37	 	
Section 22.7.	 	Governing Law	  	 	37	 	
Section 22.8.	 	Jurisdiction and Process; Waiver of Jury Trial	  	 	37	 	
Section 22.9.	 	Transaction References	  	 	38	 	
 
iv

					
S CHEDULE A	  	—	  	I NFORMATION R ELATING TO P URCHASERS	
			
S CHEDULE  B	  	—	  	D EFINED T ERMS	
			
Schedule 5.3	  	—	  	Disclosure Materials	
			
Schedule 5.4	  	—	  	Ownership of the Company and Subsidiaries; Officers	
			
Schedule 5.5	  	—	  	Financial Statements	
			
Schedule 5.7	  	—	  	Government Authorizations	
			
Schedule 5.10	  	—	  	Required Permits	
			
Schedule 5.14	  	—	  	Indebtedness	
			
Schedule 8.1	  	—	  	Principal Amortization Schedule	
			
Schedule 10.6	  	—	  	Existing Indebtedness	
			
Exhibit 1	  	—	  	Form of 8.5% Senior Secured Note due December 30, 2020	
Security Documents

Exhibit S-1	  	Form of Security Agreement	
		
Exhibit S-2	  	Form of Pledge Agreement	
		
Exhibit S-3	  	Form of Depositary Agreement	
		
Exhibit S-4	  	Form of Deposit Account Control Agreement	
		
Exhibit S-5	  	Form of Collateral Agency Agreement	
 
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8.5% Senior Notes due December 30, 2020
July 13, 2010
T O E ACH OF THE P URCHASERS L ISTED IN
Schedule A Hereto:
Ladies and Gentlemen:
Transmission and Distribution Company, L.L.C., a Texas limited liability company (the “ Company ”), agrees with each of the purchasers whose names appear at the end hereof (each, a “ Purchaser ” and, collectively, the “ Purchasers ”) as follows (this “ Agreement ”):
RECITALS
WHEREAS, Hunt Transmission Services, L.L.C. (“ Hunt ”) entered into an Agreement and Plan of Merger, dated as of December 17, 2009 (the “ Acquisition Agreement ”), pursuant to which HTS Acquisition Sub., Inc, a Delaware corporation and a wholly owned indirect subsidiary of Hunt (“ Merger Sub ”) merged with and into Cap Rock Holding Corporation (“ Holding ”), a Delaware corporation, which owns directly or indirectly all of the capital stock of Cap Rock Intermediate, Inc., a Delaware corporation (the acquisition and the transactions related therein, the “ Merger ”);
WHEREAS, in connection with the Merger, Merger Sub entered into that certain Note Purchase Agreement, dated as of July 13, 2010 (the “ Acquisition Date ”), among Merger Sub, as issuer, and the Purchasers, as purchasers thereunder, with respect to the issuance of 8.5% Senior Notes due September 30, 2020, in the aggregate principal amount of $25,000,000 (the “ Initial NPA ”);
WHEREAS, Holding as the survivor of the merger with Merger Sub, succeeded to and assumed by operation of law all of the rights, duties, obligations and liabilities of Merger Sub under the Initial NPA, and Holding has confirmed its obligations under the Initial NPA pursuant to that certain Ratification Agreement, dated the Acquisition Date, executed by Holding in favor of the Purchasers;
WHEREAS, Cap Rock Intermediate, Inc., pursuant to and in accordance with the Plan of Conversion, dated as of the Acquisition Date, was converted from a Delaware corporation to a Delaware limited liability company, as so converted Cap Rock Intermediate LLC (“ CR Intermediate ”);
WHEREAS, pursuant to the Assumption Agreement, dated as of the Acquisition Date, between Holding and CR Intermediate, CR Intermediate, with the consent of the Administrative Agent and the Purchasers, assumed all of the rights, duties, obligations and liabilities of Holding under the Initial NPA;

WHEREAS, pursuant to the Agreement and Plan of Merger, dated as of the Acquisition Date, between CR Intermediate and the Company, CR Intermediate was merged into the Company with the Company being the surviving corporation and succeeding by operation of law to the Initial NPA; and
WHEREAS, subject to and on the terms and conditions set forth herein, the parties hereto wish to amend and restate the Initial NPA in its entirety as set forth herein, with the Initial NPA as so amended and restated being hereinafter referred to as the “ Agreement ”;
NOW, THEREFORE, in consideration of the premises and agreements hereinafter set forth, the parties hereto agree as follows:
SECTION 1. AUTHORIZATION OF NOTES.
The Company will authorize the issue and sale of $25,000,000 aggregate principal amount of its 8.5% Senior Notes due December 30, 2020 (the “ Notes ”, such term to include any such notes issued in substitution therefor pursuant to Section 13 ). The Notes shall be substantially in the form set out in Exhibit 1 . Certain capitalized and other terms used in this Agreement are defined in Schedule B ; and references to a “Schedule” or an “Exhibit” are, unless otherwise specified, to a Schedule or an Exhibit attached to this Agreement.
SECTION 2. SALE AND PURCHASE OF NOTES.
Subject to the terms and conditions of this Agreement, the Company will issue and sell to each Purchaser and each Purchaser will purchase from the Company, at the Closing provided for in Section 3 , Notes in the principal amount specified opposite such Purchaser’s name in Schedule A at the purchase price of 100% of the principal amount thereof. The Purchasers’ obligations hereunder are several and not joint obligations and no Purchaser shall have any liability to any Person for the performance or non-performance of any obligation by any other Purchaser hereunder.
SECTION 3. CLOSING.
The sale and purchase of the Notes to be purchased by each Purchaser shall occur at the offices of Bingham McCutchen, 399 Park Avenue, New York, NY, at 11:00 a.m., New York time, at a closing (the “ Closing ”) on July 13, 2010 or on such other Business Day thereafter on or prior to July 16, 2010 as may be agreed upon by the Company and the Purchasers. At the Closing the Company will deliver to each Purchaser the Notes to be purchased by such Purchaser in the form of a single Note (or such greater number of Notes in denominations of at least $1,000,000 as such Purchaser may request) dated the Closing Date and registered in such Purchaser’s name (or in the name of its nominee), against delivery by such Purchaser to the Company or its order of immediately available funds in the amount of the purchase price therefor by wire transfer of immediately available funds for the account of the Company to TDC BofA Account, account number 4426343347 at Bank of America, 915 Main Street, Dallas, TX 75202, ABA: 026009593 or to such other account as established in a flow of funds memorandum that is agreed upon between the Company and the Purchasers. If at the Closing the Company shall fail to tender such Notes to any Purchaser as provided above in this Section 3 , or any of the conditions specified in Section 4 shall not have been fulfilled to such Purchaser’s satisfaction,
 
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such Purchaser shall, at its election, be relieved of all further obligations under this Agreement, without thereby waiving any rights such Purchaser may have by reason of such failure or such nonfulfillment.
SECTION 4. CONDITIONS TO CLOSING.
Each Purchaser’s obligation to purchase and pay for the Notes to be sold to such Purchaser at the Closing is subject to the fulfillment to the satisfaction of each Purchaser, prior to or at the Closing, of the following conditions:
Section 4.1. Representations and Warranties . The representations and warranties of the Company in this Agreement shall be correct when made and at the time of the Closing.
Section 4.2. Performance; No Default . The Company shall have performed and complied with all agreements and conditions contained in this Agreement required to be performed or complied with by it prior to or at the Closing and after giving effect to the issue and sale of the Notes (and the application of the proceeds thereof as contemplated by Section 5.13 ) no Default or Event of Default shall have occurred and be continuing.
Section 4.3. Compliance Certificates.
(a) Company’s Closing Certificates . The Company shall have delivered to each Purchaser an officer’s certificate, dated the Closing Date, certifying that (i) the conditions specified in Sections 4.1 and 4.2 have been fulfilled, and (ii) that each of the other conditions precedent to the occurrence of the Closing has been satisfied.
(b) Company’s Authority Certificate . The Company shall have delivered to each Purchaser a certificate of its secretary, dated the Closing Date, certifying as to the resolutions attached thereto and other corporate proceedings by the Company relating to the authorization, execution and delivery of the Notes and this Agreement and the other Financing Documents to which it is a party.
Section 4.4. Opinions of Counsel . Such Purchaser shall have received opinions in form and substance satisfactory to such Purchaser, dated the date of the Closing (a)(i) from Mayer Brown LLP, counsel for the Company and the Member, covering such matters incident to the transactions contemplated hereby as such Purchaser or its counsel may reasonably request and (ii) from Sutherland, Asbill & Brennan LLP, special counsel for the Company and the Member, covering Federal and Texas regulatory matters (and the Company hereby instructs its counsel to deliver such opinions to the Purchasers and the Secured Parties), and (b) from Bingham McCutchen LLP, in connection with such transactions, in form and substance satisfactory to the Purchasers and covering such other matters incident to such transactions as the Purchasers may reasonably request.
Section 4.5. Purchase Permitted By Applicable Law, Etc. On the date of the Closing such Purchaser’s purchase of Notes shall (a) be permitted by the laws and regulations of each jurisdiction to which such Purchaser is subject, without recourse to provisions (such as section 1405(a)(8) of the New York Insurance Law) permitting limited investments by insurance companies without restriction as to the character of the particular investment, (b) not violate any
 
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applicable law or regulation (including, without limitation, Regulation T, U or X of the Board of Governors of the Federal Reserve System) and (c) not subject such Purchaser to any tax, penalty or liability under or pursuant to any applicable law or regulation, which law or regulation was not in effect on the date hereof. If requested by such Purchaser, such Purchaser shall have received an Officer’s Certificate certifying as to such matters of fact as such Purchaser may reasonably specify to enable such Purchaser to determine whether such purchase is so permitted.
Section 4.6. Sale of Notes . Contemporaneously with the Closing, (a) the Company shall sell to each Purchaser and each Purchaser shall purchase the Notes to be purchased by it at the Closing as specified in Schedule A , (b) the transactions contemplated by the SDTS 2010 Note Agreement shall be consummated and (c) the transactions contemplated by the RBC Agreement shall be consummated.
Section 4.7. Payment of Special Counsel and Other Fees and Expenses. Without limiting the provisions of Section 15.1 , the Company shall have paid on or before the Closing: (a) the fees, charges and disbursements of the Purchasers’ special counsel, Bingham McCutchen LLP, and the Purchasers’ Texas counsel to the extent reflected in a statement of such counsel rendered to the Company at least one Business Day prior to the Closing and (b) all other fees, including to the extent not paid pursuant to the Initial NPA a structuring fee in the amount of $250,000 to Prudential (the “ Structuring Fee ”), and out-of-pocket costs and expenses (including legal fees and expenses and consultant fees and expenses) and other compensation contemplated hereby or by the other Financing Documents, or pursuant to separate letter agreements, payable to the Purchasers.
Section 4.8. Private Placement Number . A Private Placement Number issued by Standard & Poor’s CUSIP Service Bureau (in cooperation with the SVO) shall have been obtained for the Notes.
Section 4.9. Changes in Structure . The Cap Rock Transaction shall be consummated prior to or contemporaneously with the Closing. The Company shall not have changed its jurisdiction of formation or been a party to any merger or consolidation or succeeded to all or any substantial part of the liabilities of any other entity, at any time following the date of the most recent financial statements referred to in Schedule 5.5 , except in connection with the Cap Rock Transaction.
Section 4.10. Funding Instructions . At least one Business Day prior to the date of the Closing, each Purchaser shall have received written instructions signed by a Responsible Officer on letterhead of the Company confirming the information specified in Section 3 including (i) the name and address of the transferee bank, (ii) such transferee bank’s ABA number and (iii) the account name and number into which the purchase price for the Notes is to be deposited.
Section 4.11. Proceedings and Documents . Each Purchaser shall have received the following, each to be (i) dated the Closing Date unless otherwise indicated, and (ii) in form and substance satisfactory to the Purchasers:
(a) The Notes to be purchased by the Purchasers;
 
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(b) This Agreement and each other Financing Document, duly executed, authorized and delivered by each party thereto;
(c) The certificates of formation of the Company and the Member, each certified as of a recent date by the Secretary of State of the State of Texas or the State of Delaware, as appropriate, and by such Person’s secretary or other authorized officer;
(d) The organizational documents of the Company and the Member, certified by such Person’s secretary or other authorized officer;
(e) With respect to the Company and the Member, an incumbency certificate signed by the secretary and one other officer of such Person, certifying as to the names, titles and true signatures of the officers of such Person authorized to sign this Agreement, the Notes, the other Financing Documents to which such Person is a party and other documents to be delivered hereunder or thereunder;
(f) A certificate of the secretary of the Company and the Member attaching resolutions of its management committee or other governing body evidencing approval of the transactions contemplated by this Agreement and the other Financing Documents to which such Person is a party and, with respect to the Company, the issuance of the Notes, and in each case, the execution, delivery and performance thereof, and authorizing certain officers to execute and deliver the same, and certifying that such resolutions were duly and validly adopted and have not since been amended, revoked or rescinded;
(g) Good standing certificates as to the Company and the Member from all relevant jurisdictions;
(h) Evidence of the filing and acceptance of financing statements which name the Company, as debtor, and the Collateral Agent, as secured party, in all applicable offices, together with copies of such financing statements;
(i) A schedule of all Required Permits, together with copies thereof certified by officers of the Company as being true, correct and complete, in full force and effect and not subject to any appeal or further proceeding;
(j) Copies of the documents delivered in connection with the consummation of the transactions contemplated by the SDTS 2010 Note Agreement and the RBC Agreement; and
(k) Such additional documents or certificates with respect to such legal matters or limited liability company, general partnership or other proceedings related to the transactions contemplated hereby as may be reasonably requested by the Purchasers.
Section 4.12. Security Agreement, Etc. The Obligations shall be secured by a perfected first priority security interest (subject to Permitted Liens) in the Collateral in favor of the Collateral Agent, for the benefit of the Secured Parties, and the Company will deliver or cause to be delivered to the Purchasers and the Collateral Agent on the Closing Date the following, each of which shall be in full force and effect:
(a) A Security Agreement in the form of Exhibit S-1 , duly executed by each of the Company and the Collateral Agent (the “ Security Agreement ”);
 
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(b) An Assignment of Membership Interest Pledge Agreement in the form of Exhibit S-2 , duly executed by the Member in favor of the Collateral Agent (the “ Pledge Agreement ”); and
(c) A Depositary Agreement in the form of Exhibit S-4 , duly executed by each of the Company, the Collateral Agent and the Depositary (the “ Depositary Agreement ”) and the Deposit Account Control Agreement in the form of Exhibit S-4 , duly executed by each of the Company, the Collateral Agent, and the Deposit Account Bank (the “ Deposit Account Control Agreement ”);
(d) Such other documents, instruments and agreements any Purchaser may reasonably request to grant to the Collateral Agent first priority (subject only to Permitted Liens) perfected Liens on the Collateral.
Section 4.13. UCC Searches; and Litigation Searches. The Collateral Agent and the Purchasers shall have received UCC and litigation searches of the Company and the Member, which searches shall (i) confirm that no Liens other than Permitted Liens exist on the Collateral and that such Persons are not subject to any litigation, and (ii) be otherwise in substance satisfactory to the Collateral Agent and the Purchasers.
Section 4.14. Financial Statements. The Purchasers shall have received unaudited financial statements of the Company for the calendar quarter ended March 31, 2010.
Section 4.15. Consents and Approvals. All Required Permits and all governmental and third party permits and regulatory and other approvals required to be in effect in connection with the issuance of the Notes hereunder have been obtained and are in effect, all applicable waiting periods have expired without any materially adverse action being taken by any applicable authority, and copies of the documentation thereof shall have been delivered to each Purchaser.
Section 4.16. Debt Service Reserve Account. Contemporaneously with the Closing, the Company shall deposit or cause to be deposited the Minimum Debt Service Reserve Requirement in the Debt Service Reserve Account.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each Purchaser that each of the representations and warranties made by SDTS in the SDTS 2010 Note Agreement is true and correct on the date hereof. The Company represents and warrants to each Purchaser that:
Section 5.1. Organization; Power and Authority . The Company is a limited liability company duly organized, validly existing and in good standing under the laws of its jurisdiction of formation, and is duly qualified and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected
 
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to have a Material Adverse Effect. The Company has the limited liability company power and authority to transact the business it transacts and proposes to transact, to execute and deliver this Agreement and the other Financing Documents to which it is a party and to perform the provisions hereof and thereof.
Section 5.2. Authorization, Etc. This Agreement and the other Financing Documents have been duly authorized by all necessary limited liability company or limited partnership action on the part of the Company and the Member, and this Agreement and the other Financing Documents constitute, and upon execution and delivery thereof each Note will constitute, a legal, valid and binding obligation of the Company and the Member, enforceable against it in accordance with its terms, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors’ rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).
Section 5.3. Disclosure . This Agreement, the other Financing Documents and the documents, certificates or other writings delivered to the Purchasers by or on behalf of the Company in connection with the transactions contemplated hereby, and the financial statements listed in Schedule 5.5 (this Agreement, and such documents, certificates or other writings listed on Schedule 5.3 , and such financial statements delivered to each Purchaser and listed on Schedule 5.5 being referred to, collectively, as the “ Disclosure Documents ”), taken as a whole, do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading in light of the circumstances under which they were made. The projections and pro forma financial information contained in the materials referenced above are based upon good faith estimates and assumptions believed by management of the Company to be reasonable at the time made and on the Closing Date, it being recognized by each Purchaser that such financial information as it relates to future events is not to be viewed as fact and that actual results during the period or periods covered by such financial information may differ from the projected results set forth therein by a material amount. Except as disclosed in the Disclosure Documents, since December 31, 2009, there has been no change in the financial condition, operations, business, properties or prospects of the Company except changes that individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. There is no fact known to the Company that could reasonably be expected to have a Material Adverse Effect that has not been set forth herein or in the Disclosure Documents.
Section 5.4. Organization and Ownership of Interests in the Company . Schedule 5.4 contains a complete and correct list and description of (i) the Company’s jurisdiction of its organization and its ownership structure, (ii) the Company’s Subsidiaries, and (iii) the Company’s senior officers. The Company has no Subsidiaries as of the Closing Date except as shown on Schedule 5.4 .
Section 5.5. Financial Statements; Material Liabilities . The Company has delivered to each Purchaser copies of the financial statements listed on Schedule 5.5 . All of such financial statements (including in each case the related schedules and notes) fairly present in all material respects the consolidated financial positions of the Company as of the respective dates specified in such Schedule and the results of operations and cash flows for the respective periods so specified and have been prepared in accordance with GAAP consistently applied throughout the
 
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periods involved except as set forth in the notes thereto (subject, in the case of any interim financial statements, to normal year-end adjustments). The Company has no material liabilities that are not disclosed on such financial statements or otherwise disclosed in the Disclosure Documents.
Section 5.6. Compliance with Laws, Other Instruments, Etc. The execution, delivery and performance by the Company of this Agreement and the Notes and the other Financing Documents to which it is a party, do not and will not (i) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of the Company under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter or limited partnership or limited liability company agreement, or any other agreement or instrument to which the Company is bound or by which the Company or any of its properties may be bound or affected, (ii) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to the Company or (iii) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to such Person.
Section 5.7. Governmental Authorizations, Etc. Except as set forth on Schedule 5.7 , no consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority is required in connection with the execution, delivery or performance by the Company of this Agreement or the Notes or any of the other Financing Documents to which it is a party.
Section 5.8. Litigation; Observance of Agreements, Statutes and Orders . (a) There are no actions, suits, investigations or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company or its property in any court or before any arbitrator of any kind or before or by any Governmental Authority that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.
(b) The Company is not in default under any agreement or any order, judgment, decree or ruling of any court, arbitrator or Governmental Authority or is in violation of any applicable law, ordinance, rule or regulation (including without limitation Environmental Laws or the USA Patriot Act) of any Governmental Authority, which default or violation, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.
Section 5.9. Taxes . The Company has filed all material tax returns that are required to have been filed (or timely requests for extensions have been filed, have been granted, and are not expired) in any jurisdiction, and has paid all taxes shown to be due and payable on such returns and all other taxes and assessments levied upon it or its properties, assets, income or franchises, to the extent such taxes and assessments have become due and payable and before they have become delinquent, except for any taxes and assessments (i) the amount of which is not individually or in the aggregate material or (ii) the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which such Person has established adequate reserves in accordance with GAAP. The Company knows of no basis for any tax or assessment that could reasonably be expected to have a Material Adverse Effect. The charges, accruals and reserves on the books of the Company in respect of Federal, state or other taxes for all fiscal periods are adequate.
 
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Section 5.10. Permits; Material Agreements . The Company owns or possesses all governmental and third party licenses, permits, franchises, authorizations, that are material to its business (collectively, the “Required Permits”), without known conflict with the rights of others. All Required Permits are listed in Schedule 5.10 . The agreements listed on Schedule 5.10 constitute and include all material contracts and agreements to which the Company is a party. Each such agreement is in full force and effect, and constitutes the legal, valid and binding obligation of each party thereto as of the date hereof.
Section 5.11. Compliance with ERISA . (a) The Company and each ERISA Affiliate have operated and administered each Plan in compliance with all applicable laws except for such instances of noncompliance as have not resulted in and could not reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any ERISA Affiliate has incurred any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans (as defined in section 3 of ERISA), and no event, transaction or condition has occurred or exists that could reasonably be expected to result in the incurrence of any such liability by the Company or any ERISA Affiliate, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate, in either case pursuant to Title I or IV of ERISA or to such penalty or excise tax provisions or to Section 401(a)(29), 412 or 430(k) of the Code or section 4068 of ERISA, other than such liabilities or Liens as would not be individually or in the aggregate material.
(b) The ratio of (x) the aggregate actuarial value of assets as defined in and determined in accordance with Code section 430(g)(3)(B) and adopted by the Company under each Plan (other than a Multiemployer Plan) to (y) the present value of the aggregate benefit liabilities under each such Plan, exceeds 80%, as determined as of the end of such Plan’s most recently ended plan year on the basis of the actuarial assumptions specified for funding purposes in such Plan’s most recent actuarial valuation report. The terms “current value” and “present value” have the meanings specified in section 3 of ERISA.
(c) The Company and its ERISA Affiliates have not incurred withdrawal liabilities (and are not subject to contingent withdrawal liabilities) under section 4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate are material.
(d) The expected postretirement benefit obligation (determined as of the last day of the Company’s most recently ended calendar year in accordance with Financial Accounting Standards Board Statement No. 106, without regard to liabilities attributable to continuation coverage mandated by section 4980B of the Code) of the Company is not material to it.
(e) The execution and delivery of this Agreement and the issuance and sale of the Notes hereunder will not involve any non-exempt prohibited transaction under section 406 of ERISA or in connection with which a tax could be imposed pursuant to section 4975(c)(1)(A)-(D) of the Code. The representation by the Company to each Purchaser in the first sentence of this Section 5.11(e) is made in reliance upon and subject to the accuracy of such Purchaser’s representation in Section 6.2 as to the sources of the funds used to pay the purchase price of the Notes to be purchased by such Purchaser.
 
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Section 5.12. Private Offering by the Company . Neither the Company nor anyone acting on its behalf has offered the Notes or any similar securities for sale to, or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof with, any person other than the Purchasers and not more than five other Institutional Investors, each of which has been offered the Notes at a private sale for investment. Neither the Company nor anyone acting on its behalf has taken, or will take, any action that would subject the issuance or sale of the Notes to the registration requirements of Section 5 of the Securities Act or to the registration requirements of any securities or blue sky laws of any applicable jurisdiction.
Section 5.13. Use of Proceeds; Margin Regulations . The Company applied the proceeds of the sale of the Notes to (i) make an equity contribution to SDTS, (ii) pay all fees, expenses and costs related to Closing, and (iii) to fund the Debt Service Reserve Account in accordance with the terms of the Depositary Agreement. No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for the purpose of buying or carrying any margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System (12 CFR 221), or for the purpose of buying or carrying or trading in any securities under such circumstances as to involve the Company in a violation of Regulation X of said Board (12 CFR 224) or to involve any broker or dealer in a violation of Regulation T of said Board (12 CFR 220). As used in this Section, the terms “margin stock” and “purpose of buying or carrying” shall have the meanings assigned to them in Regulation U.
Section 5.14. Existing Indebtedness; Future Liens . (a)  Schedule 5.14 sets forth a complete and correct list of all outstanding Indebtedness of the Company as of March 31, 2010 (including a description of the obligors and obligees, principal amount outstanding and collateral therefor, if any, and Guaranty thereof, if any). Since March 31, 2010, there has been no material change in the amounts, interest rates, sinking funds, installment payments or maturities of the Indebtedness of the Company. The Company is not in default and no waiver of default is currently in effect, in the payment of any principal or interest on any of its Indebtedness and no event or condition exists with respect to any of its Indebtedness that would permit (or that with notice or the lapse of time, or both, would permit) one or more Persons to cause such Indebtedness to become due and payable before its stated maturity or before its regularly scheduled dates of payment.
(b) The Company has not agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its property, whether now owned or hereafter acquired, to be subject to a Lien not otherwise permitted by Section 10.5 .
(c) The Company is not a party to, nor otherwise subject to any provision contained in, any instrument evidencing Indebtedness of the Company, any agreement relating thereto or any other agreement (including, but not limited to, its charter or other organizational document) which limits the amount of, or otherwise imposes restrictions on the incurring of, Indebtedness of the Company.
Section 5.15. Foreign Assets Control Regulations, Etc. (a) Neither the sale of the Notes by the Company hereunder nor the use of the proceeds thereof will violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto.
 
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(b) Neither the Company nor the Member: (i) is a Person described or designated in the Specially Designated Nationals and Blocked Persons List of the Office of Foreign Assets Control or in Section 1 of the Anti-Terrorism Order or (ii) engages in any dealings or transactions with any such Person. The Company and the Member are in compliance, in all material respects, with the USA Patriot Act.
(c) No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for any payments to any governmental official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977, as amended, assuming in all cases that such Act applies to the Company and the Member.
Section 5.16. Status under Certain Statutes . (a) The Company is not an “investment company” or a company “controlled” by an “investment company” within the meaning of the Investment Company Act of 1940, as amended, or an “investment adviser” within the meaning of the Investment Advisers Act of 1940, as amended.
(b) The Company is not a “public utility” under the FPA and the regulations of FERC thereunder. The execution, delivery and performance of the Company’s obligations under the Financing Documents requires no authorization of approval by, or notice to, and is not subject to the jurisdiction of, FERC under the FPA.
(c) The Company is not a “holding company” under PUHCA and the regulations of FERC thereunder and will not become such a “holding company” as a result of the Cap Rock Transaction.
(d) Solely by virtue of the execution, delivery and performance of the Financing Documents, no Purchaser will become subject to any of the provisions of the FPA, PUHCA (based on FERC’s currently effective definitions under PUHCA) or the Public Utility Regulatory Act of Texas, or to regulation under any such statute.
Section 5.17. Collateral . Intentionally Omitted.
SECTION 6. REPRESENTATIONS OF THE PURCHASERS.
Section 6.1. Purchase for Investment . Each Purchaser severally represents that it is an “Accredited Investor” as defined in Rule 501 of Regulation D under the Securities Act. Each Purchaser severally represents that it is purchasing the Notes for its own account or for one or more separate accounts maintained by such Purchaser or for the account of one or more pension or trust funds and not with a view to the distribution thereof, provided that the disposition of such Purchaser’s property shall at all times be within such Purchaser’s control. Each Purchaser understands that the Notes have not been registered under the Securities Act and may be resold only if registered pursuant to the provisions of the Securities Act or if an exemption from registration is available, except under circumstances where neither such registration nor such an exemption is required by law, and that the Company is not required to register the Notes.
 
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Section 6.2. Source of Funds. Each Purchaser severally represents that at least one of the following statements is an accurate representation as to each source of funds (a “ Source ”) to be used by such Purchaser to pay the purchase price of the Notes to be purchased by such Purchaser hereunder:
(a) the Source is an “insurance company general account” (as the term is defined in the United States Department of Labor’s Prohibited Transaction Exemption (“ PTE ”) 95-60) in respect of which the reserves and liabilities (as defined by the annual statement for life insurance companies approved by the National Association of Insurance Commissioners (the “ NAIC Annual Statement ”)) for the general account contract(s) held by or on behalf of any employee benefit plan together with the amount of the reserves and liabilities for the general account contract(s) held by or on behalf of any other employee benefit plans maintained by the same employer (or affiliate thereof as defined in PTE 95-60) or by the same employee organization in the general account do not exceed 10% of the total reserves and liabilities of the general account (exclusive of separate account liabilities) plus surplus as set forth in the NAIC Annual Statement filed with such Purchaser’s state of domicile; or
(b) the Source is a separate account that is maintained solely in connection with such Purchaser’s fixed contractual obligations under which the amounts payable, or credited, to any employee benefit plan (or its related trust) that has any interest in such separate account (or to any participant or beneficiary of such plan (including any annuitant)) are not affected in any manner by the investment performance of the separate account; or
(c) the Source is either (i) an insurance company pooled separate account, within the meaning of PTE 90-1 or (ii) a bank collective investment fund, within the meaning of the PTE 91-38 and, except as disclosed by such Purchaser to the Company in writing pursuant to this clause (c), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; or
(d) the Source constitutes assets of an “investment fund” (within the meaning of Part V of PTE 84-14 (the “ QPAM Exemption ”)) managed by a “qualified professional asset manager” or “QPAM” (within the meaning of Part V of the QPAM Exemption), no employee benefit plan’s assets that are included in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Section V(c)(1) of the QPAM Exemption) of such employer or by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, the conditions of Part I(c) and (g) of the QPAM Exemption are satisfied as of the last day of the most recent calendar quarter, the QPAM does not own a 10% or more interest in the Company and no Person controlling or controlled by the QPAM (applying the definition of “control” in Section V(e) of the QPAM Exemption) owns a 20% or more interest in the Company (or less than 20% but greater than 10% if such Person exercises control over the management or policies of the Company by reason of its ownership interest) and (i) the identity of such QPAM and (ii) the names of all employee benefit plans whose assets are included in such investment fund have been disclosed to the Company in writing pursuant to this clause (d); or
 
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(e) the Source constitutes assets of a “plan(s)” (within the meaning of Section IV of PTE 96-23 (the “ INHAM Exemption ”)) managed by an “in-house asset manager” or “INHAM” (within the meaning of Part IV of the INHAM Exemption), the conditions of Part I(a), (g) and (h) of the INHAM Exemption are satisfied, neither the INHAM nor a person controlling or controlled by the INHAM (applying the definition of “control” in Section IV(d) of the INHAM Exemption) owns a 5% or more interest in the Company and (i) the identity of such INHAM and (ii) the name(s) of the employee benefit plan(s) whose assets constitute the Source have been disclosed to the Company in writing pursuant to this clause (e); or
(f) the Source is a governmental plan; or
(g) the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this clause (g); or
(h) the Source does not include assets of any employee benefit plan, other than a plan exempt from the coverage of ERISA.
As used in this Section 6.2 , the terms “ employee benefit plan, ” “ governmental plan, ” and “ separate account ” shall have the respective meanings assigned to such terms in section 3 of ERISA.
SECTION 7. INFORMATION.
Section 7.1. Financial and Business Information. The Company shall deliver to each Holder of Notes:
(a) Quarterly Statements — within 45 days after the end of each quarterly fiscal period in each calendar year of the Company and its Subsidiaries (excluding the last quarterly fiscal period of each such calendar year), duplicate copies of
(i) balance sheets of the Company and its Subsidiaries on a consolidated basis as at the end of such quarter, and
(ii) profit and loss statements and cash flows statements for the Company and its Subsidiaries on a consolidated basis for such quarter and (in the case of the second and third quarters) for the portion of the calendar year ending with such quarter,
setting forth in each case in comparative form the figures for the corresponding periods in the previous calendar year, all in reasonable detail, prepared in accordance with GAAP applicable to quarterly financial statements generally, and certified by a Senior Financial Officer of the Company as fairly presenting, in all material respects, the financial position of the companies being reported on and their results of operations and cash flows, subject to changes resulting from year-end adjustments;
 
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(b) Annual Statements — within 105 days after the end of each calendar year of the Company, duplicate copies of
(i) balance sheets of the Company on a consolidated basis as at the end of such year, and
(ii) statements of income, profit and loss statements and cash flows statements for the Company on a consolidated basis for such year,
setting forth in each case in comparative form the figures for the previous calendar year, all in reasonable detail, prepared in accordance with GAAP, and accompanied by
(A) an opinion thereon of Ernst & Young LLP or another independent public accounting firm of nationally recognized standing selected by the Company (herein, the “ Approved Accountant ”), which opinion shall state that such financial statements present fairly, in all material respects, the financial position of the companies being reported upon and their results of operations and cash flows and have been prepared in conformity with GAAP, and that the examination of the Approved Accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and that such audit provides a reasonable basis for such opinion in the circumstances, and
(B) a certificate of the Approved Accountants stating that they have reviewed this Agreement and stating further whether, in making their audit, they have become aware of any condition or event that then constitutes a Default or an Event of Default, and, if they are aware that any such condition or event then exists, specifying the nature and period of the existence thereof (it being understood that the Approved Accountants shall not be liable, directly or indirectly, for any failure to obtain knowledge of any Default or Event of Default unless the Approved Accountants should have obtained knowledge thereof in making an audit in accordance with generally accepted auditing standards or did not make such an audit);
(c) Other Reports — promptly upon their becoming available, and to the extent not otherwise required to be delivered pursuant to another provision of this Agreement, one copy of (i) each financial statement and such other reports and notices as a Holder may reasonably request sent by the Company to its Member, (ii) each report or filing (without exhibits except as expressly requested by such Holder) other than regular and periodic reports and filings made by the Company to any state or Federal regulatory body, and (iii) each report or notice made by SDTS to the holders of its notes issued pursuant to the SDTS 2009 Note Agreement or the SDTS 2010 Note Agreement;
(d) Notice of Default or Event of Default — promptly, and in any event within 5 Business Days after (i) a Responsible Officer of the Company becoming aware of the existence of any Default or Event of Default or that any Person has given any notice or taken any action
 
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with respect to a claimed default hereunder or that any Person has given any notice or taken any action with respect to a claimed default of the type referred to in Section 11(f) , a written notice specifying the nature and period of existence thereof and what action the Company is taking or proposes to take with respect thereto and (ii) the Company receives a written notice of default under a System Lease from the applicable Qualified Lessee, a copy of such notice of default or a written notice specifying the nature and period of existence of such default and what action the Company is taking or proposes to take with respect thereto;
(e) [ Intentionally Omitted ] ;
(f) [ Intentionally Omitted ];
(g) Notices from Governmental Authority — promptly, and in any event within 5 Business Days of receipt of (or knowledge thereof by a Responsible Officer of the Company) copies of any notice to the Company, any Subsidiary, or the Member from any Federal or state Governmental Authority relating to any order, ruling, statute or other law or regulation that could reasonably be expected to have a Material Adverse Effect;
(h) Other Notices — promptly, and in any event within 5 Business Days of receipt (or knowledge by a Responsible Officer of the Company) thereof:
(i) any pending or threatened adversarial or contested proceeding of or before a Governmental Authority that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect;
(ii) any litigation or proceeding taken or threatened in writing against the Company, the Member or any Subsidiary, that, if successful, could reasonably be expected to result in a Material Adverse Effect.
(i) Annual Operating Budgets — As soon as available and in any event within 30 days after the close of each fiscal year of each of Sharyland and SDTS, the annual budget of each of Sharyland and SDTS.
(j) Information Required by Rule 144A — upon the request of such Holder (and shall deliver to any qualified institutional buyer designated by such Holder), such financial and other information as such Holder may reasonably determine to be necessary in order to permit compliance with the information requirements of Rule 144A under the Securities Act in connection with the resale of Notes, except at such times as the Company is subject to the reporting requirements of section 13 or 15(d) of the Exchange Act (for the purpose of this Section 7.1(j) , the term “qualified institutional buyer” shall have the meaning specified in Rule 144A under the Securities Act); and
(k) Requested Information — with reasonable promptness, such other data and information relating to the business, operations, affairs, financial condition, assets or properties of the Company or relating to the ability of the Company to perform its obligations hereunder and under the Notes as from time to time may be reasonably requested by any such Holder of Notes.
 
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Section 7.2. Officer’s Certificate . Each set of financial statements delivered pursuant to Section 7.1(a) or Section 7.1(b) shall be accompanied by a certificate of a Senior Financial Officer setting forth:
(a) Covenant Compliance — the information (including detailed calculations) required in order to establish whether the Company was in compliance with the requirements of Sections 9.6, 10.6 and 10.9 of this Agreement, during the quarterly or annual period covered by the statements then being furnished (including with respect to each such Section, where applicable, the calculations of the maximum or minimum amount, ratio or percentage, as the case may be, permissible under the terms of such Sections, and the calculation of the amount, ratio or percentage then in existence); and
(b) Event of Default — a statement that such Senior Financial Officer has reviewed the relevant terms hereof and has made, or caused to be made, under his or her supervision, a review of the transactions and conditions of the Company from the beginning of the quarterly or annual period covered by the statements then being furnished to the date of the certificate and that no Default or an Event of Default has occurred and is continuing or, if any such condition or event has occurred and is continuing (including, without limitation, any such event or condition resulting from the failure of the Company to comply with any Environmental Law), specifying the nature and period of existence thereof and what action the Company shall have taken or proposes to take with respect thereto.
Section 7.3. Visitation . The Company shall permit the representatives of each Holder of Notes that is an Institutional Investor:
(a) No Default — if no Default or Event of Default then exists, at the expense of such Holder (or in the case of the Collateral Agent, the Holders) and upon reasonable prior notice, to visit the principal executive office of the Company, to discuss the affairs, finances and accounts of the Company with the Company’s officers, and (with the consent of the Company, which consent will not be unreasonably withheld) its independent public accountants, and (with the consent of the Company, which consent will not be unreasonably withheld) to visit the other offices and properties of the Company, all at such reasonable times and as often as may be reasonably requested in writing; and
(b) Default — if a Default or Event of Default then exists, at the expense of the Company to visit and inspect any of the offices or properties of the Company, to examine all its books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss its affairs, finances and accounts with its officers and independent public accountants (and by this provision the Company authorizes said accountants to discuss the affairs, finances and accounts of the Company), all at such times and as often as may be reasonably requested.
SECTION 8. PAYMENT AND PREPAYMENT OF THE NOTES.
Section 8.1. Amortization; Maturity . On each Payment Date, the Company will prepay the principal amounts set forth in the amortization schedule attached hereto as Schedule 8.1 (the “ Amortization Schedule ”) (or such lesser principal amount as shall then be outstanding) of the Notes at par and without payment of the Yield-Maintenance Amount or any
 
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premium, provided that upon any partial prepayment of the Notes pursuant to Section 8.2 , the principal amount of each required prepayment of the Notes becoming due under this Section 8.1 on and after the date of such prepayment shall be reduced in the same proportion as the aggregate unpaid principal amount of the Notes is reduced as a result of the prepayment. The entire unpaid principal balance of the Notes shall be due and payable on the Maturity Date.
Section 8.2. Optional Prepayments with Yield-Maintenance Amount. The Company may, at its option, upon notice as provided below, prepay at any time all, or from time to time any part of, the Notes, in an amount not less than $1,000,000 in the case of a partial prepayment, at 100% of the principal amount so prepaid, and the Yield-Maintenance Amount determined for the prepayment date with respect to such principal amount. The Company will give each Holder of Notes written notice of each optional prepayment under this Section 8.2 not less than 30 days and not more than 60 days prior to the date fixed for such prepayment. Each such notice shall specify such date (which shall be a Business Day), the aggregate principal amount of the Notes to be prepaid on such date, the principal amount of each Note held by such Holder to be prepaid (determined in accordance with Section 8.3 ), and the interest to be paid on the prepayment date with respect to such principal amount being prepaid, and shall be accompanied by a certificate of a Senior Financial Officer as to the estimated Yield-Maintenance Amount due in connection with such prepayment (calculated as if the date of such notice were the date of the prepayment), setting forth the details of such computation. Two Business Days prior to such prepayment, the Company shall deliver to each Holder of Notes a certificate of a Senior Financial Officer specifying the calculation of such Yield-Maintenance Amount as of the specified prepayment date.
Section 8.3. Allocation of Partial Prepayments . In the case of each partial prepayment of the Notes, the principal amount of the Notes to be prepaid shall be allocated among all of the Notes at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof not theretofore called for prepayment.
Section 8.4. Maturity; Surrender, Etc. In the case of each prepayment of Notes pursuant to this Section 8 , the principal amount of each Note to be prepaid shall mature and become due and payable on the date fixed for such prepayment (which shall be a Business Day), together with interest on such principal amount accrued to such date and the applicable Yield-Maintenance Amount, if any. From and after such date, unless the Company shall fail to pay such principal amount when so due and payable, together with the interest and Yield-Maintenance Amount, if any, as aforesaid, interest on such principal amount shall cease to accrue. Any Note paid or prepaid in full shall be surrendered to the Company and cancelled and shall not be reissued, and no Note shall be issued in lieu of any prepaid principal amount of any Note.
Section 8.5. Purchase of Notes . The Company will not and will not permit any Affiliate to purchase, redeem, prepay or otherwise acquire, directly or indirectly, any of the outstanding Notes except (a) upon the payment or prepayment of the Notes in accordance with the terms of this Agreement and the Notes or (b) pursuant to Section 13.2(b) ; provided that if an Affiliate which does not Control and is not Controlled by the Company has so acquired any of the outstanding Notes, such acquisition shall not constitute an Event of Default. The Company will promptly cancel all Notes acquired by it or any Affiliate pursuant to any payment or prepayment of Notes pursuant to any provision of this Agreement and no Notes may be issued in substitution or exchange for any such Notes.
 
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Section 8.6. Yield-Maintenance Amount .
“ Yield-Maintenance Amount ” means, with respect to any Note, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Note over the amount of such Called Principal, provided that the Yield-Maintenance Amount may in no event be less than zero. For the purposes of determining the Yield-Maintenance Amount, the following terms have the following meanings:
“ Called Principal ” means, with respect to any Note, the principal of such Note that is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1 , as the context requires.
“ Discounted Value ” means, with respect to the Called Principal of any Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Notes is payable) equal to the Reinvestment Yield with respect to such Called Principal.
“ Reinvestment Yield ” means, with respect to the Called Principal of any Note, 0.50% over the yield to maturity implied by (i) the yields reported as of 10:00 a.m. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the display designated as “Page PX1” (or such other display as may replace Page PX1) on Bloomberg Financial Markets for the most recently issued actively traded on the run U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or (ii) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable (including by way of interpolation), the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (or any comparable successor publication) for U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date.
In the case of each determination under clause (i) or clause (ii), as the case may be, of the preceding paragraph, such implied yield will be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between (1) the applicable U.S. Treasury security with the maturity closest to and greater than such Remaining Average Life and (2) the applicable U.S. Treasury security with the maturity closest to and less than such Remaining Average Life. The Reinvestment Yield shall be rounded to the number of decimal places as appears in the interest rate of the applicable Note.
“ Remaining Average Life ” means, with respect to any Called Principal, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i) such Called Principal
 
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into (ii) the sum of the products obtained by multiplying (a) the principal component of each Remaining Scheduled Payment with respect to such Called Principal by (b) the number of years (calculated to the nearest one-twelfth year) that will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment.
“ Remaining Scheduled Payments ” means, with respect to the Called Principal of any Note, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, provided that if such Settlement Date is not a date on which interest payments are due to be made under the terms of the Notes, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to Section 8.2 or 12.1 .
“ Settlement Date ” means, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1 , as the context requires.
SECTION 9. AFFIRMATIVE COVENANTS.
The Company covenants that so long as any of the Notes are outstanding:
Section 9.1. Compliance with Law . Without limiting Section 10.4 , the Company will, and will cause its Subsidiaries to, comply with all laws, ordinances or governmental rules or regulations to which it is subject, including, without limitation, ERISA, the USA Patriot Act and Environmental Laws, and will obtain and maintain in effect all licenses, certificates, permits, franchises and other governmental authorizations necessary to the ownership of its properties or to the conduct of its businesses to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
Section 9.2. Payment of Taxes and Claims . The Company will, and will cause each of its Subsidiaries to, file all tax returns required to be filed in any jurisdiction and to pay and discharge all taxes shown to be due and payable on such returns and all other taxes, assessments, governmental charges, or levies imposed on them or any of their properties, assets, income or franchises, to the extent the same have become due and payable and before they have become delinquent and all claims for which sums have become due and payable that have or might become a Lien on properties or assets of the Company or any Subsidiary, provided that none of the Company or any Subsidiary need pay any such tax, assessment, charge, levy or claim if (i) the amount, applicability or validity thereof is contested by such Person on a timely basis in good faith and in appropriate proceedings, and such Person has established adequate reserves therefor in accordance with GAAP on its books or (ii) the nonpayment of all such taxes, assessments, charges, levies and claims in the aggregate could not reasonably be expected to have a Material Adverse Effect.
 
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Section 9.3. Existence, Etc. The Company will at all times preserve and keep in full force and effect its limited liability company existence and all rights and franchises of the Company unless, in the good faith judgment of the Company, the termination of or failure to preserve and keep in full force and effect such corporate existence, right or franchise could not, individually or in the aggregate, have a Material Adverse Effect. The Company will cause each of its Subsidiaries to at all times preserve and keep in full force and effect its limited liability company, corporate or limited partnership existence, except as permitted pursuant to Section 10.2 .
Section 9.4. Books and Records . The Company will, and will cause each of its Subsidiaries to, maintain proper books of record and account in conformity with GAAP and all applicable requirements of any Governmental Authority having legal or regulatory jurisdiction over such Person.
Section 9.5. Collateral; Further Assurances . The Company shall take all actions necessary to insure that the Collateral Agent, on behalf of the Secured Parties, has and continues to have in all relevant jurisdictions duly and validly created, attached, perfected and enforceable first-priority Liens on the Collateral constituting UCC Collateral, in each case, to the extent required under the Security Documents (including after-acquired Collateral), subject to no Liens other than Permitted Liens. The Company shall cause the Obligations to constitute direct senior secured obligations of the Company and to rank senior in right of payment and to rank senior in right of security (other than Permitted Liens) with respect to Collateral granted in the Security Documents to all other Indebtedness of the Company (other than Permitted Secured Indebtedness, with which it shall be pari passu in accordance with the terms of the Collateral Agency Agreement).
Section 9.6. Financial Ratios. (a) The Company shall at all times maintain, on a consolidated basis, a Total Debt to Capitalization Ratio of not more than 0.75 to 1.00.
(b) The Company shall maintain, for each period of four consecutive fiscal quarters, a Consolidated Debt Service Coverage Ratio of at least 1.20 to 1.00; provided that for purposes of this Section 9.6(b), the Debt Service Coverage Ratio shall be deemed to be 1.20 to 1.00 for the three fiscal quarters ending December 31, 2009, March 31, 2010 and June 30, 2010.
Section 9.7. Debt Service Reserve Account. The Company shall establish and maintain a Debt Service Reserve Account at the Depositary in accordance with the Depositary Agreement and shall fund the Debt Service Reserve Account as required in the Depositary Agreement. All amounts held in the Debt Service Reserve Account shall be held in cash or in Permitted Investments.
SECTION 10. NEGATIVE COVENANTS.
The Company covenants that so long as any of the Notes are outstanding:
Section 10.1. Transactions with Affiliates . The Company will not and will not cause or permit any Subsidiary to enter into directly or indirectly any transaction or group of related transactions (including without limitation the purchase, lease, sale or exchange of properties of any kind or the rendering of any service) with any Affiliate, other than, (i) transactions with
 
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Project Finance Subsidiaries as permitted by Section 9.7(b) of the SDTS 2010 Note Agreement and other transactions between or among the Company and one or more Subsidiaries, or any subset thereof, to the extent permitted under Sections 10.3, 10.6 and 10.7, (ii) in the case of a Qualified Lessee, pursuant to a Lease or another lease of transmission and distribution assets that satisfies clause (vii) of this Section 10.1, (iii) any Qualified Lessee Affiliate Loan and any Indebtedness permitted under Section 10.6(d)(ii) of the SDTS 2010 Note Agreement, (iv) transactions entered into in connection with the Cross Valley Project on or prior to the Cross Valley Project Transfer and the Golden Spread Project on or prior to the Golden Spread Project Transfer, (v) ROFO Transfers, (vi) payment of customary fees and reasonable out of pocket costs to, and indemnities for the benefit of, directors, officers and employees of the Borrower and its Subsidiaries in the ordinary course of business, or (vii) upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would be obtained in a comparable arms-length transaction with a Person not an Affiliate; provided that transactions will be deemed to meet the requirements of this clause (vii) if (A) prior to a Qualifying IPO, such transaction are on terms approved by the holders of a majority of the equity interests of InfraREIT held by Persons who do not have a separate material interest in such transaction other than by virtue of their ownership of such equity interests, or by a majority of the directors nominated by such Persons, and (B) upon the completion of a Qualifying IPO and thereafter, such transactions are on terms approved by a majority of the board of directors (or comparable governing body) of InfraREIT or an Affiliate thereof who are “independent” (as such term is defined pursuant to the rules of the primary exchange on which the equity interests are then listed for trading), or a majority of the “Independent” members of a committee of any such board of directors (or comparable governing body).
Section 10.2. Merger, Consolidation, Etc. The Company will not and will not cause or permit any of its Subsidiaries to consolidate with or merge with any other Person or convey, transfer or lease all or substantially all of its assets in a single transaction or series of transactions to any Person except that (i) SDTS and its Subsidiaries may engage in transactions permitted under Section 10.2 of the SDTS 2010 Note Agreement, (ii) so long as immediately after giving effect to such merger or consolidation or such conveyance, transfer or lease of all or substantially all of its assets, no Default or Event of Default shall have occurred or will result therefrom, the Company or any Subsidiary may merge or consolidate with another Person, and any Subsidiary may convey, transfer or lease all or substantially all of its assets to another Person, so long as, after giving effect to such merger or consolidation, or such conveyance, transfer or lease of all or substantially all of its assets, (a) with respect to any merger or consolidation to which the Company is a party, the Company shall be the surviving entity, (b) with respect to any merger or consolidation to which a Subsidiary is a party but the Company is not, a Subsidiary (other than a Project Finance Subsidiary) shall be the surviving entity and (c) with respect to any conveyance, transfer or lease of all or substantially all of its assets by the Company or any Subsidiary, the Company or another Subsidiary (other than a Project Finance Subsidiary) shall be the transferee or lessee of such assets, and (iii) the FERC Merger shall be permitted.
Section 10.3. Line of Business . The Company will not engage in any business other than owning the outstanding membership interest in SDTS and in other Subsidiaries (permitted under Section 10.8 ), the general business nature of which, when taken as a whole, is the transmission and distribution of electric power and the provision of ancillary services. The Company will not cause or permit any Subsidiary to engage in any business if, as a result, the
 
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general nature of the business in which the Company and its Subsidiaries, taken as a whole, would then be engaged would be substantially changed from the transmission and distribution of electric power and the provision of ancillary services.
Section 10.4. Terrorism Sanctions Regulations . The Company will not and will not permit any Controlled Entity (a) to become (including by virtue of being owned or controlled by a Blocked Person), own or control a Blocked Person or any Person that is the target of sanctions imposed by the United Nations or by the European Union, or (b) directly or indirectly to have any investment in or engage in any dealing or transaction (including, without limitation, any investment, dealing or transaction involving the proceeds of the Notes) with any Person if such investment, dealing or transaction (i) would cause any holder to be in violation of any applicable United States (federal or state) anti-terrorism law or regulation applicable to such holder, or (ii) is prohibited by or subject to sanctions under any U.S. Economic Sanctions, or (c) to engage, nor shall any Affiliate of either engage, in any activity that could subject such Person or any holder to sanctions under CISADA or any similar law or regulation with respect to Iran or any other country that is subject to U.S. Economic Sanctions.
Section 10.5. Liens . The Company will not directly or indirectly create, incur, assume or permit to exist (upon the happening of a contingency or otherwise) any Lien on or with respect to the Collateral or any other property of the Company, whether now owned or held or hereafter acquired, or any income or profits therefrom, or assign or otherwise convey any right to receive income or profits, or on any other asset now owned or hereafter acquired by the Company, except (each, a “ Permitted Lien ”):
(a) Liens created by the Financing Documents;
(b) Liens for taxes, assessments or other governmental charges which are not yet due and payable or the payment of which is not at the time required by Section 9.2 ;
(c) any attachment or judgment Lien, unless such attachment or judgment Lien constitutes an Event of Default under Section 11(l) hereof;
(d) Liens existing on the Second Amendment Date and securing the Indebtedness of the Company referred to in Schedule 10.6 hereto;
(e) Any interest of title of a lessor under leases; and
(f) Liens securing Permitted Secured Indebtedness on a pari passu basis with the Obligations in accordance with the terms of the Collateral Agency Agreement.
Section 10.6. Indebtedness . The Company will not incur, or in any manner become or be liable in respect of any Indebtedness, except the following Indebtedness, which may be incurred subject to the requirements of the last paragraph of this section:
(a) Indebtedness evidenced by the Financing Documents;
(b) Indebtedness existing on the Second Amendment Date and referred to in Schedule 10.6 hereto; or
 
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(c) Indebtedness of the Company that if incurred, would not result in a breach of Section 9.6(a) ; provided , that if the Indebtedness is proposed to be secured by any property of the Company or any other Collateral, then at least 5 Business Days (or such shorter period reasonably agreed by the Required Holders) prior to the incurrence of Indebtedness, the Company shall (x) notify the Holders of the intent to incur such Indebtedness, which notice shall set forth in reasonable detail (i) the amount and proposed economic terms of such Indebtedness, (ii) the type of lender or purchaser and (iii) the proposed collateral for such Indebtedness (which proposed collateral may include any or all of the “Collateral” as defined in the Collateral Agency Agreement), and (y) deliver to the Collateral Agent and the other parties to the Collateral Agency Agreement an executed joinder agreement pursuant to which all the proposed holders of such Indebtedness have become party to the Collateral Agency Agreement.
Indebtedness may be incurred under this Section 10.6(c) only if no Default or Event of Default exists or, as a result of such incurrence would exist.
Section 10.7. Loans, Advances, Investments and Contingent Liabilities . The Company will not make or permit to remain outstanding any loan or advance to, or extend credit other than credit extended in the ordinary course of business to any Person, or own, purchase or acquire any stock, obligations or securities of, or any other interest in, or make any capital contribution to, any Person, or commit to do any of the foregoing, except (a) Permitted Investments, (b) ownership, purchase and acquisition of equity interests in and capital contributions to Project Finance Subsidiaries, (c) Investments in Wholly-Owned Subsidiaries other than Project Finance Subsidiaries and (d) Qualified Lessee Affiliate Loans.
Section 10.8. No Subsidiaries. The Company shall have no Subsidiaries other than Project Finance Subsidiaries and Wholly Owned Subsidiaries. The Company shall give the Holders notice 5 Business Days prior to creating any new Subsidiaries.
Section 10.9. Restricted Payments . The Company will not, directly or indirectly, make or declare any Distribution unless the following conditions are met (the “ Restricted Payment Conditions ”):
(a) there does not exist and, after giving effect to the proposed Distribution, there will not exist, a Default or an Event of Default; and
(b) the balance in the Debt Service Reserve Account equals the Minimum Debt Service Reserve Requirement.
The Company shall deliver to the Holders and the Collateral Agent before a Distribution is made a certificate of a Responsible Officer of the Company stating that each of the foregoing conditions has been satisfied and, if requested by any Holder, providing supporting data and calculations.
Section 10.10. Amendments to Organizational Documents; Exercise of Rights . The Company will not, and shall use commercially reasonable efforts not to permit the Member to, amend, supplement, terminate, replace or waive any provision of the Company Agreement or other organization documents. The Company will not exercise its voting and other rights as a member of SDTS in a manner that would (i) alter or restrict the Company’s right to receive, or
 
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SDTS ability to make, distributions or (ii) cause or result in an act or omission by SDTS that constitutes or contributes to the occurrence of a “Default” or “Event of Default” under the SDTS 2009 Financing Documents or the SDTS 2010 Financing Documents or any Security Document to which SDTS is a party. Notwithstanding this Section 10.10 , the Company may, without the consent of the Purchasers, amend the Company Agreement as may be required to facilitate or implement any of the following:
(a) to reflect the contribution of additional capital by the Member;
(b) to reflect a change that is of an inconsequential nature and does not adversely affect any Holders in any material respect, or to cure any ambiguity, or correct or supplement any provision, not inconsistent with law or with the provisions of this Agreement; and
(c) to satisfy any requirements, conditions, or guidelines contained in any order, directive, opinion, ruling or regulation of a Federal or state agency or contained in Federal or state law.
The Company will provide notice to the Holders at least 5 Business Days prior to taking any such action under the foregoing sentence of this Section 10.10 .
Section 10.11. ERISA Compliance .
(a) Relationship of Vested Benefits to Plan Assets. The Company will not as of the last day of any calendar year permit any Plan to be “at risk” within the meaning of Section 303 of ERISA to the extent such action could reasonably be expected to result in a Material Adverse Effect. The Company and its ERISA Affiliates will not incur withdrawal liabilities (and will not become subject to contingent withdrawal liabilities) under section 4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate could reasonably be expected to result in a Material Adverse Effect.
(b) Valuations. For the purposes of clause (a) above, all assumptions and methods used to determine the actuarial valuation of vested and unvested employee benefits under any Plan at any time maintained by the Company and the present value of assets of any such Plan shall be reasonably consistent with those determinations made for purposes of Section 5.11 .
(c) Prohibited Actions. The Company will not, nor, as applicable, will any Plan at any time maintained by the Company
(i) engage in any action that could reasonably be expected to cause the execution and delivery of this Agreement and the issuance and sale of the Notes hereunder to result in a non-exempt “ prohibited transaction ” (as such term is defined in Section 406 of ERISA and Section 4975(c) of the Code;
(ii) fail to meet the minimum funding standards of Section 302 of ERISA or Sections 412 and 430 of the Code, or seek or obtain a waiver thereof or fail to make any required contribution to a Multiemployer Plan; or
(iii) terminate any such Plan in a manner which could result in the imposition of a Lien on the Property of the Company pursuant to Section 4068 of ERISA that could reasonably be expected to result in a Material Adverse Effect.
 
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Section 10.12. Regulation .
(a) The Company shall not be or become subject to FERC jurisdiction under the FPA; provided , however , that the Company shall not be in default of the forgoing negative covenant if the Company becomes subject to FERC jurisdiction under the FPA solely as a result of a change to the FPA or in FERC’s interpretation thereof or regulations thereunder, if the Company takes all necessary actions to comply with applicable FERC requirements; and
(b) The Company shall not violate in any material respect any regulation or order of the Public Utility Commission of Texas applicable to it.
Section 10.13. Additional Financial Covenants .
(a) If the Company shall at any time enter into one or more agreements pursuant to which Indebtedness in an aggregate principal amount greater than $10,000,000 shall be outstanding and such agreement contains one or more financial covenants which are more restrictive on the Company and its Subsidiaries than the financial covenants contained in Section 9.6 of this Agreement, then such more restrictive financial covenants and any related definitions (the “ Additional Financial Covenants ”) shall automatically be deemed to be incorporated into Section 9.6 of this Agreement by reference from the time such other agreement becomes binding upon the Company until such time as such other Indebtedness is repaid in full and all commitments related thereto are terminated; provided , that if at the time of any such repayment or the termination of any such commitment a Default or Event of Default shall exist under this Agreement, then such Additional Financial Covenants shall continue in full force and effect under this Agreement so long as such Default or Event of Default continues to exist. So long as such Additional Financial Covenants shall be in effect, no modification or waiver of such Additional Financial Covenants shall be effective unless the Required Holders shall have consented thereto pursuant to Section 17.1 hereof. Promptly but in no event more than 5 Business Days following the execution of any agreement providing for Additional Financial Covenants, the Company shall furnish each Holder with a copy of such agreement. Upon written request of the Required Holders, the Company will enter into an amendment to this Agreement pursuant to which this Agreement will be formally amended to incorporate the Additional Financial Covenants on the terms set forth herein.
SECTION 11. EVENTS OF DEFAULT.
An “ Event of Default ” shall exist if any of the following conditions or events shall occur and be continuing:
(a) the Company defaults in the payment of any principal or Yield-Maintenance Amount, if any, on any Note when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise; or
 
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(b) the Company defaults in the payment of any interest on any Note for more than five days after the same becomes due and payable; or
(c) the Company defaults in the performance of or compliance with any term contained in Section 7.1(d), 9.6 or Section 10 ; or
(d) the Company defaults in the performance of or compliance with any term contained herein (other than those referred to in Sections 11(a) , (b)  and (c) ) or in any other Financing Document (other than those referred to in another paragraph of this Section 11 ) and such default is not remedied within 30 days after the earlier of (i) a Responsible Officer obtaining actual knowledge of such default and (ii) the Company receiving written notice of such default from the Collateral Agent or Holder of a Note (any such written notice to be identified as a “notice of default” and to refer specifically to this Section 11(d) ); or
(e) any representation or warranty made in writing by or on behalf of the Company or by any officer of the Company in this Agreement or any other Financing Document or in any writing furnished in connection with the transactions contemplated hereby proves to have been false or incorrect in any material respect on the date as of which made; or
(f) (i) A default or event of default occurs under the SDTS 2009 Note Agreement or the SDTS 2010 Note Agreement or the RBC Agreement and such failure continues for more than any cure period specified therefor; or
(g) (i) the Certificate of Conveniences and Necessity (#30192, #30026, #30114 and #30191) issued or transferred by the Public Utility Commission of Texas to Sharyland and, prior to the FERC Merger, the FERC Operator, is terminated without being timely replaced, revoked or otherwise is not in effect; or (ii) except as could not reasonably be expected to result in a Material Adverse Effect, any other Required Permit is terminated without being timely replaced (if such terminated Permit continues to be a Required Permit), revoked or otherwise is not in effect; provided , however , that the termination without immediate renewal of any franchise agreement pursuant to which the Qualified Lessee operating the applicable portion of the System is authorized to operate the System and collect fees for services shall not constitute an Event of Default if the parties to the franchise agreement continue to perform in accordance with the terms of such agreement notwithstanding the termination; or
(h) (i) any Lien granted to the Collateral Agent on any material portion of the Collateral, taken as a whole, pursuant to any of the Security Documents is invalid, void, unenforceable or unperfected or ceases to have first priority (subject to Permitted Liens), or any Person commences any proceeding or takes any other action to render any such Lien invalid, or to avoid any such Lien or to render any such Lien unenforceable or unperfected or to challenge the priority of such Lien, in each case for any reason other than as expressly permitted hereunder or thereunder (including by amendment, waiver and/or consent granted in accordance with the terms hereunder or thereunder) or satisfaction in full of the Obligations; or (ii) an event of default occurs under any Permitted Secured Indebtedness, or the Company fails to comply with any material terms of the Collateral Agency Agreement or commences any proceeding or takes any other action to render any part of the Collateral Agency Agreement unenforceable for any reason other than as expressly permitted hereunder or thereunder (including by amendment, waiver and/or consent granted in accordance with the terms hereunder or thereunder) or satisfaction in full of the Obligations; or
 
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(i) without limiting clause (h), (i) the Company is in default (as principal or as guarantor or other surety) in the payment of any principal of or premium or make-whole amount or interest on any Indebtedness that is outstanding in an aggregate principal amount of at least $2,500,000 beyond any period of grace provided with respect thereto, (ii) the Company is in default in the performance of or compliance with any term of any evidence of any Indebtedness (including any mortgage, indenture or other agreement relating thereto), which Indebtedness is in an aggregate outstanding principal amount of at least $2,500,000, and as a consequence of such default or condition such Indebtedness has become, or has been declared (or one or more Persons are entitled to declare such Indebtedness to be), due and payable before its stated maturity or before its regularly scheduled dates of payment, or (iii) as a consequence of the occurrence or continuation of any event or condition (other than the passage of time or the right of the holder of Indebtedness to convert such Indebtedness into equity interests), (x) the Company has become obligated to purchase or repay Indebtedness before its regular maturity or before its regularly scheduled dates of payment in an aggregate outstanding principal amount of at least $2,500,000, or (y) one or more Persons have the right to require the Company to purchase or repay such Indebtedness in an aggregate outstanding principal amount of at least $2,500,000; or
(j) the Company (i) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the filing against it or, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes corporate action for the purpose of any of the foregoing; or
(k) a court or Governmental Authority of competent jurisdiction enters an order appointing, without consent by the Company, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of the Company or any such petition shall be filed against the Company and such petition shall not be dismissed within 90 days; or
(l) a final judgment or judgments for the payment of money aggregating in excess of $2,500,000 are rendered against the Company and which judgments are not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay; or
(m) (i) Hunt Family Members cease to Control Sharyland, (ii) any Person other than a Qualified Lessee shall be the lessee under any lease with respect to the System, (iii) the Member shall cease to own or control, directly or indirectly, 90% of the outstanding equity interest of
 
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SDTS, or (iv) Hunt Family Members cease to own and control, directly or indirectly, at least 5% of the outstanding equity interests of the Member, unless (x) InfraREIT has become a publicly held company, or (y) SDTS has total assets on its balance sheet valued at $1,000,000,000 or greater; or
(n) if (i) any Plan shall fail to satisfy the minimum funding standards of ERISA or the Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under Section 412 of the Code, (ii) a notice of intent to terminate any Plan shall have been or is reasonably expected to be filed with the PBGC or the PBGC shall have instituted proceedings under ERISA section 4042 to terminate or appoint a trustee to administer any Plan or the PBGC shall have notified the Company or any ERISA Affiliate that a Plan may become a subject of any such proceedings, (iii) any Plan shall be “at-risk” within the meaning of Section 303 of ERISA as of the last day of any calendar year, (iv) the Company or any ERISA Affiliate shall have incurred or is reasonably expected to incur any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, (v) the Company or any ERISA Affiliate withdraws from any Multiemployer Plan, or (vi) the Company establishes or amends any employee welfare benefit plan that provides post-employment welfare benefits in a manner that would increase the liability of the Company thereunder; and any such event or events described in clauses (i) through (vi) above, either individually or together with any other such event or events, could reasonably be expected to have a Material Adverse Effect.
As used in Section 11(n) , the terms “ employee benefit plan ” and “ employee welfare benefit plan ” shall have the respective meanings assigned to such terms in section 3 of ERISA.
SECTION 12. REMEDIES ON DEFAULT, ETC.
Section 12.1. Acceleration . (a) If an Event of Default with respect to the Company described in Section 11(j) or (k)  (other than an Event of Default described in clause (i) of Section 11(j) or described in clause (vi) of Section 11(j) by virtue of the fact that such clause encompasses clause (i) of Section 11(j) ) has occurred, all the Notes then outstanding shall automatically become immediately due and payable.
(b) If any other Event of Default has occurred and is continuing, any Holder or Holders of more than 51% in principal amount of the Notes at the time outstanding may at any time at its or their option, by notice or notices to the Company, declare all the Notes then outstanding to be immediately due and payable.
(c) If any Event of Default described in Section 11(a) or (b)  has occurred and is continuing, any Holder or Holders of Notes at the time outstanding affected by such Event of Default may at any time, at its or their option, by notice or notices to the Company, declare all the Notes held by it or them to be immediately due and payable.
Upon any Notes becoming due and payable under this Section 12.1 , whether automatically or by declaration, such Notes will forthwith mature and the entire unpaid principal amount of such Notes, plus (x) all accrued and unpaid interest thereon (including, but not limited to, interest accrued thereon at the Default Rate) and (y) the Yield-Maintenance Amount
 
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determined in respect of such principal amount (to the full extent permitted by applicable law), shall all be immediately due and payable, in each and every case without presentment, demand, protest or further notice, all of which are hereby waived. The Company acknowledges, and the parties hereto agree, that each Holder of a Note has the right to maintain its investment in the Notes free from repayment by the Company (except as herein specifically provided for) and that the provision for payment of a Yield-Maintenance Amount by the Company in the event that the Notes are prepaid or are accelerated as a result of an Event of Default, is intended to provide compensation for the deprivation of such right under such circumstances.
Section 12.2. Other Remedies . If any Default or Event of Default has occurred and is continuing, and irrespective of whether any Notes have become or have been declared immediately due and payable under Section 12.1 , the Holder of any Note at the time outstanding may proceed to protect and enforce the rights of such Holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in any Note, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise.
Section 12.3. Rescission . At any time after any Notes have been declared due and payable pursuant to Section 12.1(b) or (c) , the Holders of not less than 51% in principal amount of the Notes then outstanding, by written notice to the Company, may rescind and annul any such declaration and its consequences if (a) the Company has paid all overdue interest on the Notes, all principal of and Yield-Maintenance Amount, if any, on any Notes that are due and payable and are unpaid other than by reason of such declaration, and all interest on such overdue principal and Yield-Maintenance Amount, if any, and (to the extent permitted by applicable law) any overdue interest in respect of the Notes, at the Default Rate, (b) neither the Company nor any other Person shall have paid any amounts which have become due solely by reason of such declaration, (c) all Events of Default and Defaults, other than non-payment of amounts that have become due solely by reason of such declaration, have been cured or have been waived pursuant to Section 17 , and (d) no judgment or decree has been entered for the payment of any monies due pursuant hereto or to the Notes. No rescission and annulment under this Section 12.3 will extend to or affect any subsequent Event of Default or Default or impair any right consequent thereon.
Section 12.4. No Waivers or Election of Remedies, Expenses, Etc. No course of dealing and no delay on the part of any Holder of any Note in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice such Holder’s rights, powers or remedies. No right, power or remedy conferred by this Agreement or by any Note upon any Holder thereof shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. Without limiting the obligations of the Company under Section 15 , the Company will pay to the Holder of each Note on demand such further amount as shall be sufficient to cover all costs and expenses of such Holder incurred in any enforcement or collection under this Section 12 , including, without limitation, reasonable attorneys’ fees, expenses and disbursements.
 
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SECTION 13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES.
Section 13.1. Registration of Notes . The Company shall keep at its principal executive office a register for the registration and registration of transfers of Notes. The name and address of each Holder of one or more Notes, each transfer thereof and the name and address of each transferee of one or more Notes shall be registered in such register. Prior to due presentment for registration of transfer, the Person in whose name any Note shall be registered shall be deemed and treated as the owner and Holder thereof for all purposes hereof, and the Company shall not be affected by any notice or knowledge to the contrary. The Company shall give to any Holder of a Note that is an Institutional Investor, promptly upon request therefor, a complete and correct copy of the names and addresses of all registered Holders of Notes. In addition to and not in limitation of any representations contained herein, each Holder acknowledges and agrees that the Notes have not been registered under the Securities Act and may not be transferred except pursuant to registration or an exemption therefrom and in compliance with Section 13.2(b) hereof.
Section 13.2. Transfer and Exchange of Notes . (a) Subject to compliance with Section 13.2(b) , upon surrender of any Note to the Company at the address and to the attention of the designated officer (all as specified in Section 18(iii) ), for registration of transfer or exchange (and in the case of a surrender for registration of transfer accompanied by a written instrument of transfer duly executed by the registered Holder of such Note or such Holder’s attorney duly authorized in writing and accompanied by the relevant name, address and other information for notices of each transferee of such Note or part thereof), within ten Business Days thereafter, the Company shall execute and deliver, at the Company’s expense (except as provided below), one or more new Notes (as requested by the Holder thereof) in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Note. Each such new Note shall be payable to such Person as such Holder may request and shall be substantially in the form of Exhibit 1 . Each such new Note shall be dated and bear interest from the date to which interest shall have been paid on the surrendered Note or dated the date of the surrendered Note if no interest shall have been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of Notes. Notes shall not be transferred in denominations of less than $1,000,000, provided that if necessary to enable the registration of transfer by a Holder of its entire holding of Notes, one Note may be in a denomination of less than $1,000,000. Any transferee, by its acceptance of a Note registered in its name (or the name of its nominee), shall be deemed to have made the representations set forth in Section 6.1 and Section 6.2 .
(b) Each Holder hereby agrees that it will not offer for sale or sell any of its Notes or disclose any Confidential Information to any prospective transferee of the Notes, other than to an Affiliate, or to another Holder without first delivering written notice to the Company (a “Right of First Offer Notice” ) of its intent to sell such Notes and disclose such Confidential Information. Such Right of First Offer Notice shall contain a reasonably detailed description of the proposed terms of such sale, including, without limitation, the proposed purchase price (the “Proposed Purchase Price” ) for such Notes and the names of up to ten prospective purchasers. If the Company so desires it may, within 5 Business Days of the receipt of such Right of First Offer Notice, inform such Holder in writing of its intent to purchase, or have an Affiliate or Institutional Investor designated by the Company purchase, such Notes (a “Purchase Notice” )
 
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from the Holder delivering such Right of First Offer Notice at the Proposed Purchase Price, provided, however , that if at such time a Default or Event of Default shall have occurred and be continuing, the Company shall not purchase, and shall not allow any Affiliate or Institutional Investor designated by the Company to purchase, the Notes of the Holder delivering such Right of First Offer Notice. The aggregate principal amount of the Notes specified in such Purchase Notice shall be purchased by the Company, or such Affiliate or Institutional Investor, for the Proposed Purchase Price, together with accrued interest on such Notes to the purchase date, on the date specified by the Company in such Purchase Notice, which shall be not more than 30 days following delivery of such Purchase Notice. If a Holder does not receive a Purchase Notice from the Company within 5 Business Days after the delivery of a Right of First Offer Notice to the Company, such Holder shall have the right to sell its Notes identified in such Right of First Offer Notice to one or more of the prospective purchasers identified in such Right of First Offer Notice for a price which is not less than the Proposed Purchase Price identified in such Right of First Offer Notice for a period of 120 days from the date of such Right of First Offer Notice. In the event that the prospective purchasers identified by a Holder in a Right of First Offer Notice shall decline to purchase the Notes within such 120 day period, then the Holder may identify up to 10 additional Institutional Investors through a new Right of First Offer Notice.
Section 13.3. Replacement of Notes . Upon receipt by the Company at the address and to the attention of the designated officer (all as specified in Section 18(iii) ) of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Note (which evidence shall be, in the case of an Institutional Investor, notice from such Institutional Investor of such ownership and such loss, theft, destruction or mutilation), and
(a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (provided that if the Holder of such Note is, or is a nominee for, an original Purchaser or another Holder of a Note with a minimum net worth of at least $100,000,000 or a Qualified Institutional Buyer, such Person’s own unsecured agreement of indemnity shall be deemed to be satisfactory), or
(b) in the case of mutilation, upon surrender and cancellation thereof,
within ten Business Days thereafter, the Company at its own expense shall execute and deliver, in lieu thereof, a new Note, dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Note or dated the date of such lost, stolen, destroyed or mutilated Note if no interest shall have been paid thereon.
SECTION 14. PAYMENTS ON NOTES.
Section 14.1. Place of Payment . Subject to Section 14.2 , payments of principal, Yield-Maintenance Amount, if any, and interest becoming due and payable on the Notes shall be made in New York City, New York at the principal office of JPMorgan Chase Bank National Association in such jurisdiction. The Company may at any time, by notice to each Holder of a Note, change the place of payment of the Notes so long as such place of payment shall be either the principal office of the Company in such jurisdiction or the principal office of a bank or trust company in such jurisdiction.
 
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Section 14.2. Home Office Payment . So long as any Purchaser or its nominee shall be the Holder of any Note, and notwithstanding anything contained in Section 14.1 or in such Note to the contrary, the Company will pay all sums becoming due on such Note for principal, Yield-Maintenance Amount, if any, and interest by the method and at the address specified for such purpose below such Purchaser’s name in Schedule A , or by such other method or at such other address as such Purchaser shall have from time to time specified to the Company in writing for such purpose, without the presentation or surrender of such Note or the making of any notation thereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment or prepayment in full of any Note, such Purchaser shall surrender such Note for cancellation, reasonably promptly after any such request, to the Company at its principal executive office or at the place of payment most recently designated by the Company pursuant to Section 14.1 . Prior to any sale or other disposition of any Note held by a Purchaser or its nominee, such Purchaser will, at its election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender such Note to the Company in exchange for a new Note or Notes pursuant to Section 13.2 . The Company will afford the benefits of this Section 14.2 to any Institutional Investor that is the direct or indirect transferee of any Note purchased by a Purchaser under this Agreement and that has made the same agreement relating to such Note as the Purchasers have made in this Section 14.2 .
SECTION 15. EXPENSES, ETC.
Section 15.1. Transaction Expenses . Whether or not the transactions contemplated hereby are consummated, the Company will pay all costs and expenses (including reasonable attorneys’ fees of one firm of special counsel and, if reasonably required by the Required Holders, local or other counsel) incurred by the Purchasers and each other Holder of a Note in connection with such transactions and in connection with any amendments, waivers or consents under or in respect of this Agreement or the Notes (whether or not such amendment, waiver or consent becomes effective), including, without limitation: (a) the costs and expenses incurred in enforcing or defending (or determining whether or how to enforce or defend) any rights under this Agreement or the Notes or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement or the Notes, or by reason of being a Holder of any Note, but only to the extent such subpoena or legal proceeding arises out of matters related to the Company, (b) the costs and expenses, including financial advisors’ fees, incurred in connection with the insolvency or bankruptcy of the Company or in connection with any work-out or restructuring of the transactions contemplated hereby and by the Notes and (c) the costs and expenses incurred in connection with the initial filing of this Agreement and all related documents and financial information with the SVO provided. The Company will pay, and will save each Purchaser and each other Holder of a Note harmless from, all claims in respect of any fees, costs or expenses, if any, of brokers and finders (other than those, if any, retained by a Purchaser or other Holder in connection with its purchase of the Notes).
Section 15.2. Survival . The obligations of the Company under this Section 15 will survive the payment or transfer of any Note, the enforcement, amendment or waiver of any provision of this Agreement or the Notes, and the termination of this Agreement.
 
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SECTION 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT.
All representations and warranties contained herein shall survive the execution and delivery of this Agreement and the Notes, the purchase or transfer by any Purchaser of any Note or portion thereof or interest therein and the payment of any Note, and may be relied upon by any subsequent Holder of a Note, regardless of any investigation made at any time by or on behalf of such Purchaser or any other Holder of a Note; provided , that no representation or warranty shall be deemed to be made as of any time other than the date of execution and delivery of this Agreement or such other document, certificate, instrument or agreement containing such representation or warranty. All statements contained in any certificate or other instrument delivered by or on behalf of the Company pursuant to this Agreement shall be deemed representations and warranties of the Company under this Agreement. Subject to the preceding sentence, this Agreement and the Notes embody the entire agreement and understanding between each Purchaser and the Company and supersede all prior agreements and understandings relating to the subject matter hereof.
SECTION 17. AMENDMENT AND WAIVER.
Section 17.1. Requirements . This Agreement and the Notes may be amended, and the observance of any term hereof or of the Notes may be waived (either retroactively or prospectively), with (and only with) the written consent of the Company and the Required Holders, except that (a) no amendment or waiver of any of the provisions of Section 1, 2, 3, 4, 5 , 6 or 21 hereof, or any defined term (as it is used therein), will be effective as to any Purchaser unless consented to by such Purchaser in writing, and (b) no such amendment or waiver may, without the written consent of the Holder of each Note at the time outstanding affected thereby, (i) subject to the provisions of Section 12 relating to acceleration or rescission, change the amount or time of any prepayment or payment of principal of, or reduce the rate or change the time of payment or method of computation of interest or of the Yield-Maintenance Amount on, the Notes, (ii) change the percentage of the principal amount of the Notes the Holders of which are required to consent to any such amendment or waiver, or (iii) amend any of Section 8, 11(a), 11(b), 12, 17 or 20 .
Section 17.2. Solicitation of Holders of Notes .
(a) Solicitation. The Company will provide each Holder of the Notes (irrespective of the amount of Notes then owned by it) with sufficient information, sufficiently far in advance of the date a decision is required, to enable such Holder to make an informed and considered decision with respect to any proposed amendment, waiver or consent in respect of any of the provisions hereof or of the Notes. The Company will deliver executed or true and correct copies of each amendment, waiver or consent effected pursuant to the provisions of this Section 17 to each Holder of outstanding Notes promptly following the date on which it is executed and delivered by, or receives the consent or approval of, the requisite Holders of Notes.
(b) Payment. The Company will not directly or indirectly pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, or grant any security or provide other credit support, to any Holder of Notes as consideration for or as an
 
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inducement to the entering into by any Holder of Notes of any waiver or amendment of any of the terms and provisions hereof unless such remuneration is concurrently paid, or security is concurrently granted or other credit support concurrently provided, on the same terms, ratably to each Holder of Notes then outstanding even if such Holder did not consent to such waiver or amendment.
Section 17.3. Binding Effect, etc. Any amendment or waiver consented to as provided in this Section 17 applies equally to all Holders of Notes and is binding upon them and upon each future Holder of any Note and upon the Company without regard to whether such Note has been marked to indicate such amendment or waiver. No such amendment or waiver will extend to or affect any obligation, covenant, agreement, Default or Event of Default not expressly amended or waived or impair any right consequent thereon. No course of dealing between the Company and the Holder of any Note nor any delay in exercising any rights hereunder or under any Note shall operate as a waiver of any rights of any Holder of such Note. As used herein, the term “this Agreement” and references thereto shall mean this Agreement as it may from time to time be amended or supplemented.
Section 17.4. Notes Held by Company, etc. Solely for the purpose of determining whether the Holders of the requisite percentage of the aggregate principal amount of Notes then outstanding approved or consented to any amendment, waiver or consent to be given under this Agreement or the Notes, or have directed the taking of any action provided herein or in the Notes to be taken upon the direction of the Holders of a specified percentage of the aggregate principal amount of Notes then outstanding, Notes directly or indirectly owned by the Company or any of its Affiliates shall be deemed not to be outstanding.
SECTION 18. NOTICES.
All notices and communications provided for hereunder shall be in writing and sent (a) by telecopy if the sender on the same day sends a confirming copy of such notice by a recognized overnight delivery service (charges prepaid), or (b) by registered or certified mail with return receipt requested (postage prepaid), or (c) by a recognized overnight delivery service (with charges prepaid). Any such notice must be sent:
(i) if to any Purchaser or its nominee, to such Purchaser or nominee at the address specified for such communications in Schedule A , or at such other address as such Purchaser or nominee shall have specified to the Company in writing,
(ii) if to any other Holder of any Note, to such Holder at such address as such other Holder shall have specified to the Company in writing, and
(iii) if to the Company, to the Company at 1807 Ross Avenue, 4 th Floor, Dallas, Texas 75201, facsimile: (972) 499-1870 to the attention of David Campbell, or at such other address as the Company shall have specified to the Holder of each Note in writing.
Notices under this Section 18 will be deemed given only when actually received.
 
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SECTION 19. REPRODUCTION OF DOCUMENTS.
This Agreement and all documents relating thereto, including, without limitation, (a) consents, waivers and modifications that may hereafter be executed, (b) documents received by any Purchaser at the Closing (except the Notes themselves), and (c) financial statements, certificates and other information previously or hereafter furnished to any Purchaser, may be reproduced by such Purchaser by any photographic, photostatic, electronic, digital, or other similar process and such Purchaser may destroy any original document so reproduced. The Company agrees and stipulates that, to the extent permitted by applicable law, any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by such Purchaser in the regular course of business) and any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. This Section 19 shall not prohibit the Company or any other Holder of Notes from contesting any such reproduction to the same extent that it could contest the original, or from introducing evidence to demonstrate the inaccuracy of any such reproduction.
SECTION 20. CONFIDENTIAL INFORMATION.
For the purposes of this Section 20 , “Confidential Information” means Information delivered to any Purchaser by or on behalf of the Company in connection with the transactions contemplated by or otherwise pursuant to this Agreement, provided that such term does not include information that (a) other than as a result of disclosure by any Purchaser or its employees or agents in violation of this Section 20 was publicly known or otherwise known to such Purchaser prior to the time of such disclosure, (b) other than as a result of disclosure by any Purchaser or its employees or agents in violation of this Section 20 subsequently becomes publicly known through no act or omission by such Purchaser or any Person acting on such Purchaser’s behalf, (c) other than as a result of disclosure by any Purchaser or its employees or agents in violation of this Section 20 otherwise becomes known to such Purchaser other than through disclosure by the Company or (d) constitutes financial statements delivered to such Purchaser under Section 7.1 that are otherwise publicly available. “ Information ” means information concerning the Company or its Subsidiaries, irrespective of its source or form of communication, furnished by or on behalf of the Company or any of its Subsidiaries, including without limitation notes, analyses, compilations, studies or other documents or records prepared by any Purchaser, which contain or reflect or were generated from information supplied by or on behalf of the Company or its Subsidiaries. Each Purchaser will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by such Purchaser in good faith to protect confidential information of third parties delivered to such Purchaser, provided that such Purchaser may deliver or disclose Confidential Information to (i) its directors, officers, employees, agents, attorneys, trustees and affiliates (to the extent such disclosure reasonably relates to the administration of the investment represented by its Notes), (ii) its financial advisors and other professional advisors who agree to hold confidential the Confidential Information substantially in accordance with the terms of this Section 20 , (iii) any other Holder of any Note, (iv) any Institutional Investor to which it sells or offers to sell such Note or any part thereof or any participation therein (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20 ), (v) any Person from which it offers to purchase any security of the Company (if such Person has agreed in writing
 
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prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20 ), (vi) any Federal or state regulatory authority having jurisdiction over such Purchaser, (vii) the NAIC or the SVO or, in each case, any similar organization, or any nationally recognized rating agency that requires access to information about such Purchaser’s investment portfolio, or (viii) any other Person to which such delivery or disclosure may be necessary or appropriate (w) to effect compliance with any law, rule, regulation or order applicable to such Purchaser, (x) in response to any subpoena or other legal process, (y) in connection with any litigation to which such Purchaser is a party or (z) if an Event of Default has occurred and is continuing, to the extent such Purchaser may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement or for the protection of the rights and remedies under such Purchaser’s Notes and this Agreement. Each Holder of a Note, by its acceptance of a Note, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Section 20 as though it were a party to this Agreement. On reasonable request by the Company in connection with the delivery to any Holder of a Note of information required to be delivered to such Holder under this Agreement or requested by such Holder (other than a Holder that is a party to this Agreement or its nominee), such Holder will enter into an agreement with the Company embodying the provisions of this Section 20 .
SECTION 21. SUBSTITUTION OF PURCHASER.
Each Purchaser shall have the right to substitute any one of its Affiliates as the purchaser of the Notes that it has agreed to purchase hereunder, by written notice to the Company, which notice shall be signed by both such Purchaser and such Affiliate, shall contain such Affiliate’s agreement to be bound by this Agreement and shall contain a confirmation by such Affiliate of the accuracy with respect to it of the representations set forth in Section 6 . Upon receipt of such notice, any reference to such Purchaser in this Agreement (other than in this Section 21 ), shall be deemed to refer to such Affiliate in lieu of such original Purchaser. In the event that such Affiliate is so substituted as a Purchaser hereunder and such Affiliate thereafter transfers to such original Purchaser all of the Notes then held by such Affiliate, upon receipt by the Company of notice of such transfer, any reference to such Affiliate as a “Purchaser” in this Agreement (other than in this Section 21 ), shall no longer be deemed to refer to such Affiliate, but shall refer to such original Purchaser, and such original Purchaser shall again have all the rights of an original Holder of the Notes under this Agreement.
SECTION 22. MISCELLANEOUS.
Section 22.1. Successors and Assigns . All covenants and other agreements contained in this Agreement by or on behalf of any of the parties hereto bind and inure to the benefit of their respective successors and assigns (including, without limitation, any subsequent Holder of a Note) whether so expressed or not.
Section 22.2. Payments Due on Non-Business Days . Anything in this Agreement or the Notes to the contrary notwithstanding (but without limiting the requirement in Section 8.4 that the notice of any optional prepayment specify a Business Day as the date fixed for such prepayment), any payment of principal of or Yield-Maintenance Amount or interest on any Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day without including the additional days elapsed in the computation of the interest payable on
 
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such next succeeding Business Day; provided that if the maturity date of any Note is a date other than a Business Day, the payment otherwise due on such maturity date shall be made on the next succeeding Business Day and shall include the additional days elapsed in the computation of interest payable on such next succeeding Business Day.
Section 22.3. Accounting Terms . All accounting terms used herein which are not expressly defined in this Agreement have the meanings respectively given to them in accordance with GAAP. Except as otherwise specifically provided herein, (i) all computations made pursuant to this Agreement shall be made in accordance with GAAP, and (ii) all financial statements shall be prepared in accordance with GAAP. For purposes of determining compliance with any financial covenants contained in this Agreement, any election by the Company to measure an item of Indebtedness using fair value (as permitted by Statement of Financial Accounting Standards No. 159 or any similar accounting standard) shall be disregarded and such determination shall be made as if such election had not been made.
Section 22.4. Severability . Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction.
Section 22.5. Construction, etc. Each covenant contained herein shall be construed (absent express provision to the contrary) as being independent of each other covenant contained herein, so that compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with any other covenant. Where any provision herein refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person.
For the avoidance of doubt, all Schedules and Exhibits attached to this Agreement shall be deemed to be a part hereof.
Section 22.6. Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the parties hereto.
Section 22.7. Governing Law . This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York excluding choice-of-law principles of the law of such State that would permit the application of the laws of a jurisdiction other than such State.
Section 22.8. Jurisdiction and Process; Waiver of Jury Trial . (a) The Company irrevocably submits to the non-exclusive jurisdiction of any New York State or Federal court sitting in the Borough of Manhattan, The City of New York, over any suit, action or proceeding arising out of or relating to this Agreement or the Notes. To the fullest extent permitted by applicable law, the Company irrevocably waives and agrees not to assert, by way of motion, as a
 
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defense or otherwise, any claim that it is not subject to the jurisdiction of any such court, any objection that it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum.
(b) The Company consents to process being served by or on behalf of any Holder of Notes in any suit, action or proceeding of the nature referred to in Section 22.8(a) by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, return receipt requested, to it at its address specified in Section 18 or at such other address of which such Holder shall then have been notified pursuant to said Section. The Company agrees that such service upon receipt (i) shall be deemed in every respect effective service of process upon it in any such suit, action or proceeding and (ii) shall, to the fullest extent permitted by applicable law, be taken and held to be valid personal service upon and personal delivery to it. Notices hereunder shall be conclusively presumed received as evidenced by a delivery receipt furnished by the United States Postal Service or any reputable commercial delivery service.
(c) In addition to and notwithstanding the provisions of Section 22.8(b) above, the Company hereby irrevocably appoints CT Corporation System as its agent to receive on its behalf and its property service of copies of the summons and complaint and any other process which may be served in any action or proceeding. Such service may be made by mailing or delivering a copy of such process to the Company, in care of the process agent at 111 Eighth Avenue, 13 th Floor, New York, New York 10011, and the Company hereby irrevocably authorizes and directs the process agent to accept such service on its behalf. If for any reason the process agent ceases to be available to act as process agent, the Company agrees immediately to appoint a replacement process agent satisfactory to the Required Holders.
(d) Nothing in this Section 22.8 shall affect the right of any Holder of a Note to serve process in any manner permitted by law, or limit any right that the Holders of any of the Notes may have to bring proceedings against the Company in the courts of any appropriate jurisdiction or to enforce in any lawful manner a judgment obtained in one jurisdiction in any other jurisdiction.
(e) The parties hereto hereby waive trial by jury in any action brought on or with respect to this Agreement, the Notes or any other document executed in connection herewith or therewith.
Section 22.9. Transaction References . The Company and the Holders shall not refer to the other on an internet site or in marketing materials, press releases, published “tombstone” announcements or any other print or electronic medium, except with the referenced party’s prior written consent, which may be withheld at its sole discretion.
*  *  *  *  *
 
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If you are in agreement with the foregoing, please sign the form of agreement on a counterpart of this Agreement and return it to the Company, whereupon this Agreement shall become a binding agreement between you and the Company.

Very truly yours,	
	
T RANSMISSION AND D ISTRIBUTION C OMPANY , L.L.C.	
		
 By	 	 	
	 	Name:	 	W. Kirk Baker	
	 	Title:	 	Senior Vice President and Chief Executive Officer	

									
This Agreement is hereby accepted and agreed to as of the date thereof.	 		 		
			
	 		 	Purchasers :	
			
	 		 	THE PRUDENTIAL INSURANCE COMPANY OF AMERICA	
				
	 		 	By:	 	 	
	 		 		 	Vice President	
			
	 		 	PRUCO LIFE INSURANCE COMPANY	
				
	 		 	By:	 	 	
	 		 		 	Vice President	
			
	 		 	PRUDENTIAL RETIREMENT INSURANCE AND ANNUITY COMPANY	
				
	 		 	By:	 	Prudential Investment Management, Inc., as investment manager	
					
	 		 		 	By:	 	 	
	 		 		 		 	Vice President	

DEFINED TERMS
As used herein, the following terms have the respective meanings set forth below or set forth in the Section hereof following such term:
“ 2014 Joinder Agreement ” means a joinder agreement substantially in the form attached to the Collateral Agency Agreement, to which each of the Company and the Member Administrative Agent, on behalf of itself and the other Lenders, is a party, pursuant to which the Member Administrative Agent became a Secured Party under the Collateral Agency Agreement.
“ Additional Financial Covenants ” shall have the meaning given to it in Section 10.13 hereof.
“ Affiliate ” means, at any time, and with respect to any Person, any other Person that at such time directly or indirectly through one or more intermediaries Controls, or is Controlled by, or is under common Control with, such first Person and, with respect to the Company, shall include any Person beneficially owning or holding, directly or indirectly, 10% or more of any class of voting or equity interest of the Company or any corporation of which the Company beneficially owns or holds, in the aggregate, directly or indirectly, 10% or more of any class of voting or equity interests; provided, however, that this definition shall at all times exclude owners or investors in the Member other than Hunt Family Members. Unless the context otherwise clearly requires, any reference to an “Affiliate” is a reference to an Affiliate of the Company.
“ Agreement ” is defined in the introductory paragraph of this Agreement.
“ Amortization Schedule ” is defined in Section 8.1(a) .
“ Anti-Terrorism Order ” means Executive Order No. 13,224 of September 24, 2001, Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit or Support Terrorism, 66 U.S. Fed. Reg. 49, 079 (2001), as amended.
“ Approved Accountant ” is defined in Section 7.1(b)(A) .
“Blocked Person” means (i) an OFAC Listed Person, (ii) an agent, department, or instrumentality of, or a Person otherwise beneficially owned by, controlled by or acting on behalf of, directly or indirectly, (x) any OFAC Listed Person or (y) any Person, entity, organization, foreign country or regime that is subject to any OFAC Sanctions Program, or (iii) a Person otherwise blocked, subject to sanctions under or engaged in any activity in violation of U.S. Economic Sanctions.
“ Business Day ” means any day other than a Saturday, a Sunday or a day on which commercial banks in New York City are required or authorized to be closed.
“ Capital Lease ” means, at any time, a lease with respect to which the lessee is required concurrently to recognize the acquisition of an asset and the incurrence of a liability in accordance with GAAP.
 
Schedule B-1
(To Note Purchase Agreement)

“ Cap Rock Transaction ” is defined in the SDTS 2010 Note Agreement.
“ Cash Flow ” means, for any period, the sum of the following (without duplication): (i) all cash paid to SDTS during such period under the System Leases, (ii) all cash distributions received by SDTS from Project Finance Subsidiaries of SDTS during such period, (iii) all interest and investment earnings, if any, paid to SDTS during such period on amounts on deposit in the account created under the Deposit Agreement, if any, (iv) revenues, if any, received by or on behalf of SDTS during such period under any insurance policy as business interruption insurance proceeds, (v) direct cash equity investments made by the Member in the Company during such period (excluding equity contributed to a Project Finance Subsidiary) in an amount not greater than the amount necessary to cause the Company to be in compliance with the financial covenants set forth in Section 9.6 (each such investment, an “ Equity Cure ”); provided, however, that during any period of four consecutive fiscal quarters, “Cash Flow” shall include an Equity Cure in no more than two of such quarters, (vi) proceeds of any borrowing made after the date hereof to the extent used to finance the payment of bullet or balloon installments of Indebtedness for borrowed money, (vii) to the extent that a direct Wholly-Owned Subsidiary is formed in the future, (x) all cash paid to such Subsidiary during such period under leases of such Subsidiary’s assets which is funded into the Deposit Account pursuant to the Deposit Account Control Agreement, (y) all interest and investment earnings paid to such Subsidiary during such period on amounts on deposit in an account subject to a deposit account control agreement in favor of the Collateral Agent (if any), and (z) revenues, if any, received by or on behalf of such Subsidiary during such period under any insurance policy as business interruption insurance proceeds and funded into the Deposit Account pursuant to the Deposit Account Control Agreement.
“ Cash Flow Available for Debt Service ” for any period, means (i) Cash Flow received during such period minus (ii)(A) all O&M Costs paid during such period and (B) if an Equity Cure has been made in any fiscal quarter during the period for which Cash Flow Available for Debt Service is calculated, the lesser of the aggregate amount of (x) such Equity Cure during such period and (y) the aggregate amount of cash distributions paid by the Company during such period.
“CISADA” means the Comprehensive Iran Sanctions, Accountability and Divestment Act.
“ Closing ” is defined in Section 3 .
“ Closing Date ” means the date upon which the Closing occurs.
“ Code ” means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder from time to time.
“ Collateral ” means all “Collateral” described in the Security Agreement and all Membership Collateral.
“ Collateral Agency Agreement ” means the Amended and Restated Collateral Agency Agreement, dated as of February 21, 2014, by and among the Collateral Agent, the Company and the Holders (as may be amended, restated, amended and restated or otherwise modified from time to time).
 
Schedule B-2
(To Note Purchase Agreement)

“ Collateral Agent ” means The Bank of New York Mellon Trust Company, N.A., a national association, acting in its capacity as Collateral Agent for itself and the other Secured Parties, or its successors in such capacity appointed pursuant to the terms of the Collateral Agency Agreement.
“ Company ” means Transmission and Distribution Company, L.L.C., a Texas limited liability company, or any successor that becomes such in the manner prescribed in Section 10.3 .
“ Company Agreement ” means that certain Amended and Restated Company Agreement of the Company, made effective as of December 2009, by the Member, as amended, supplemented or otherwise modified.
“ Confidential Information ” is defined in Section 20 .
“ Consolidated Debt Service Coverage Ratio ” means, for each period of four consecutive fiscal quarters, the quotient of (i) Cash Flow Available for Debt Service for such period to (ii) Debt Service for such period.
“Consolidated Net Worth ” means at any date, the sum of all amounts that would, in conformity with GAAP, be included on a consolidated balance sheet of the Company and its consolidated Subsidiaries under members’ equity at such date, plus minority interests, as determined in accordance with GAAP minus any members’ equity attributable to any Project Finance Subsidiary.
“Control ” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. “ Controlling ” and “ Controlled ” have meanings correlative thereto.
“ Controlled Entity ” means (i) any of the Subsidiaries of the Company and any of their or the Company’s respective Controlled Affiliates and (ii) if the Company has a parent company, such parent company and its Controlled Affiliates.
“CREZ Lease” means (A) prior to the effectiveness of the CREZ Lease Amendment and Restatement, the Amended and Restated Lease Agreement (CREZ Assets) dated as of April 30, 2013, between SP, as lessor, and Sharyland, as lessee, and (B) upon the effectiveness of the CREZ Lease Amendment and Restatement, the CREZ Lease Amendment and Restatement, as such lease may be amended, restated, supplemented or otherwise modified from time to time, or any new lease entered into in replacement thereof.
“CREZ Lease Amendment and Restatement” means the Second Amended and Restated Lease Agreement (CREZ Assets), between SP, as lessor, and Sharyland, as lessee, with respect to the CREZ Project.
 
Schedule B-3
(To Note Purchase Agreement)

“CREZ Project” shall mean the five transmission lines, four substations and other facilities in Texas identified and awarded to Sharyland by the Public Utility Commission of Texas (the “PUCT”) in Docket Number 37902.
“ Cross Valley Project ” means the approximately 49 mile transmission line in South Texas near the Mexican border, known as the “North Edinburg to Loma Alta 345 kV single-circuit transmission line” project, subsequently, renamed as the “North Edinburg to Palmito 345 kV double-circuit transmission line” project, which is built on double-circuit capable structures and the Palmito substation located on the eastern terminus of the Cross Valley Project. The Cross Valley Project is part of a 100 mile transmission line, which is jointly developed and permitted by Sharyland and Electric Transmission Texas.
“ Cross Valley Project Transfer ” means the sale and Transfer of all of the equity interests of CV Project Entity, L.L.C. to Cross Valley Partnership, L.P. for a purchase price at least equal to the Cross Valley Project’s rate base cost at such time.
“ Debt Service ” for any period, the aggregate (without duplication) of (i) all amounts of interest on the Notes and in respect of other Indebtedness of the Company or of SDTS required to be paid during such period, plus (ii) all amounts of principal on the Notes and in respect of other Indebtedness of the Company or of SDTS required to be paid during such period, excluding any optional prepayments of principal during such period, plus (iii) all other premiums, fees, costs, charges, expenses and indemnities due and payable to the Holders or the other Secured Parties and holders of other Indebtedness of the Company or of SDTS and agents acting on their behalf during such period.
“ Debt Service Reserve Account ” is defined in the Depositary Agreement.
“ Default ” means an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default.
“ Default Rate ” means that rate of interest per annum from time to time equal to the greater of (i) 10.5% per annum, and (ii) 2% over the rate of interest publicly announced by The Bank of New York Mellon from time to time in New York as its “base” or “prime” rate.
“ Depositary ” means The Bank of New York Mellon Trust Company, N.A., a national association, in its capacity as Depositary under the Depositary Agreement, or its successor in such capacity appointed pursuant to the terms of the Depositary Agreement.
“ Depositary Agreement ” is defined in Section 4.12(c) .
“ Deposit Account Control Agreement ” is defined in Section 4.12(c) .
“ Deposit Account Control Bank ” means Bank of America, N.A. in such capacity under the Deposit Account Control Agreement.
“ Development Agreement ” means that certain Development Agreement to be entered into among Hunt Transmission Services, L.L.C., Sharyland, InfraREIT and/or the Member in connection with one or more New Projects, pursuant to which Hunt Transmission Services, L.L.C. has granted InfraREIT a right of first offer related to the New Projects identified therein, as amended from time to time in accordance with its terms.
 
Schedule B-4
(To Note Purchase Agreement)

“ Disclosure Documents ” is defined in Section 5.3 .
“ Distributions ” means any dividend or other distribution (whether in cash, securities or other property) with respect to any equity interests of any Person, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, defeasance, acquisition, cancellation or termination of any such equity interests or on account of any return of capital to such Person’s stockholders, partners or members (or the equivalent Person thereof), or any option, warrant or other right to acquire any such dividend or other distribution or payment.
“ Environmental Laws ” means any and all Federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including but not limited to those related to Hazardous Materials.
“ ERCOT ” means the Electric Reliability Council of Texas.
“ ERISA ” means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.
“ ERISA Affiliate ” means any trade or business (whether or not incorporated) that is treated as a single employer together with the Company under section 414 of the Code.
“ Event of Default ” is defined in Section 11 .
“ Exchange Act ” shall mean the Securities Exchange Act of 1934, as amended from time to time.
“ FERC ” means the Federal Energy Regulatory Commission, or any successor agency to its duties and responsibilities.
“ FERC Lease ” means (A) prior to the effectiveness of the FERC Lease Amendment and Restatement, the Second Amended and Restated Lease Agreement, dated as of July 1, 2012, between FERC Owner and FERC Operator and (B) upon the effectiveness of the FERC Lease Amendment and Restatement, the FERC Lease Amendment and Restatement, as such lease may be amended, restated, supplemented or otherwise modified from time to time, or any new lease entered into in replacement thereof.
“ FERC Lease Amendment and Restatement ” means the Third Amended and Restated Lease Agreement (Stanton Transmission Loop Assets) between FERC Owner, as lessor, and FERC Operator, as lessee.
 
Schedule B-5
(To Note Purchase Agreement)

“ FERC Merger ” means the anticipated transaction or series of transactions pursuant to which SDTS FERC L.L.C. will merge into SDTS and SU FERC L.L.C. will merge into Sharyland.
“ FERC Operator ” means (A) prior to the FERC Merger, SU FERC, L.L.C., a Subsidiary of Sharyland, and (B) upon the completion of the FERC Merger, Sharyland.
“ FERC Owner ” means (A) prior to the FERC Merger, SDTS FERC, L.L.C., a Subsidiary of SDTS, and (B) upon the completion of the FERC Merger, SDTS.
“ Financing Documents ” means, collectively, this Agreement, the Notes, the Security Documents and any other documents, agreements or instruments entered into in connection with any of the foregoing.
“ FPA ” means the Federal Power Act, 16 U.S.C. §§791 et seq., as amended, and the regulations of the FERC thereunder.
“ GAAP ” means generally accepted accounting principles as in effect in the United States of America. In the event that any “Accounting Change” (as defined below) shall occur and such change results in a change in the method of calculation of financial covenants, ratios, standards or terms in this Agreement, then the Company and the Holders agree to enter into negotiations in order to amend such provisions of this Agreement so as to reflect equitably such Accounting Changes with the desired result that the criteria for evaluating the financial condition of the Company, SDTS and Sharyland shall be the same after such Accounting Changes as if such Accounting Changes had not been made. Until such time as such an amendment shall have been executed and delivered by the Company and the Holders, all financial covenants, ratios, standards and terms in this Agreement shall continue to be calculated or construed as if such Accounting Changes had not occurred. “ Accounting Changes ” refers to changes in accounting principles required by the promulgation of any rule, regulation, pronouncement or opinion by the Financial Accounting Standards Board of the American Institute of Certified Public Accountants or, if applicable, the SEC.
“ Golden Spread Project ” means a new 345 kilovolt transmission line that will be approximately 55 miles long and will connect the Golden Spread Electric Cooperative, Inc. Antelope-Elk Energy Center in Hale County, approximately 1.6 miles north of the City of Abernathy on County Road P, to the proposed White River Station that will be built by Sharyland in Floyd County, approximately 9 miles northeast of the City of Floydada and 1.1 miles east of the intersection of County Road 231 and County Road 200 and the Abernathy substation that is located in the western portion of the transmission line
“ Golden Spread Project Transfer ” means the sale and Transfer of all of the equity interests of the GS Project Entity to a Person Controlled by one or more Hunt Family Members for a purchase price at least equal to the Golden Spread Project’s rate base cost at such time
“ Governmental Authority ” means
(a) the government of:
(i) the United States of America or any State or other political subdivision thereof, or
(ii) any other jurisdiction in which the Company conducts all or any part of its business, or which asserts jurisdiction over any properties of the Company, or
 
Schedule B-6
(To Note Purchase Agreement)

(b) any entity exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, any such government, or
(c) ERCOT, or
(d) the Texas Regional Entity.
“ GS Project Entity ” shall mean a Project Finance Subsidiary of SDTS created to finance and develop the Golden Spread project.
“ Guaranty ” means, with respect to any Person, any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing any Indebtedness of any other Person in any manner, whether directly or indirectly, including (without limitation) obligations incurred through an agreement, contingent or otherwise, by such Person:
(a) to purchase such Indebtedness or any property constituting security therefor;
(b) to advance or supply funds (i) for the purchase or payment of such indebtedness or obligation, or (ii) to maintain any working capital or other balance sheet condition or any income statement condition of any other Person or otherwise to advance or make available funds for the purchase or payment of such Indebtedness;
(c) to lease properties or to purchase properties or services primarily for the purpose of assuring the owner of such Indebtedness of the ability of any other Person to make payment of the Indebtedness; or
(d) otherwise to assure the owner of such Indebtedness against loss in respect thereof.
In any computation of the indebtedness or other liabilities of the obligor under any Guaranty, the indebtedness or other obligations that are the subject of such Guaranty shall be assumed to be direct obligations of such obligor.
“ Hazardous Material ” means any and all pollutants, toxic or hazardous wastes or other substances that might pose a hazard to health and safety, the removal of which may be required or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage or filtration of which is or shall be restricted, prohibited or penalized by any applicable law including, but not limited to, asbestos, urea formaldehyde foam insulation, polychlorinated biphenyls, petroleum, petroleum products, lead based paint, radon gas or similar restricted, prohibited or penalized substances.
 
Schedule B-7
(To Note Purchase Agreement)

“ Holder ” means, with respect to any Note the Person in whose name such Note is registered in the register maintained by the Company pursuant to Section 13.1 .
“ Hunt Family Members ” means (i) Ray L. Hunt; (ii) the spouse of Ray L. Hunt and each of his children and siblings; (iii) the spouse and lineal descendants of any Person identified in the foregoing clause (ii); (iv) any trust or account primarily for the benefit of any Person or Persons identified in the foregoing clauses (i), (ii) or (iii); (v) any corporation, partnership or other entity in which any of the Persons identified in the foregoing clauses (i), (ii), (iii), or (iv) are the beneficial owners of and Control substantially all of the shares of capital stock, membership interests, partnership interests or other equity interests and options or warrants to acquire, or securities convertible into, capital stock, membership interest, partnership interests or other equity securities of an entity; and (vi) the personal representative or guardian of any of the Persons identified in the foregoing clauses (i), (ii) and (iii) upon such Person’s death for purposes of the administration of such Person’s estate or upon such Person’s disability or incompetency for purposes of the protection and management of the assets of such Person.
“ Indebtedness ” with respect to any Person means, at any time, without duplication,
(a) its liabilities for borrowed money and its redemption obligations in respect of mandatorily redeemable Preferred Stock;
(b) its liabilities for the deferred purchase price of property acquired by such Person (excluding accounts payable arising in the ordinary course of business but including all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property);
(c) (i) all liabilities appearing on its balance sheet in accordance with GAAP in respect of Capital Leases and (ii) all liabilities which would appear on its balance sheet in accordance with GAAP in respect of Synthetic Leases assuming such Synthetic Leases were accounted for as Capital Leases;
(d) all liabilities for borrowed money secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities);
(e) all its liabilities in respect of letters of credit or instruments serving a similar function issued or accepted for its account by banks and other financial institutions (whether or not representing obligations for borrowed money);
(f) the aggregate Swap Termination Value of all Swap Contracts of such Person; and
(g) any Guaranty of such Person with respect to liabilities of a type described in any of clauses (a) through (f) hereof.
Indebtedness of any Person shall include all obligations of such Person of the character described in clauses (a) through (g) to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is deemed to be extinguished under GAAP.
 
Schedule B-8
(To Note Purchase Agreement)

“ InfraREIT ” means Qualifying IPO, InfraREIT, L.L.C., a Delaware limited liability company, and any of its successors.
“ Initial NPA ” is defined in the recitals hereto.
“ Institutional Investor ” means (a) any Purchaser of a Note, (b) any Holder of a Note holding (together with one or more of its Affiliates) more than 5% of the aggregate principal amount of the Notes then outstanding, (c) any bank, trust company, savings and loan association or other financial institution, any pension plan, any investment company, any insurance company, any broker or dealer, or any other similar financial institution or entity, regardless of legal form, and (d) any Related Fund of any Holder of any Note.
“ Leases ” means (i) the System Leases, the CREZ Lease, the FERC Lease and any other leases of transmission and distribution and related assets to a Qualified Lessee under which the Company or any Subsidiary of the Company is a party as a lessor, and (ii) any lease of transmission and distribution and related assets pursuant to which Sharyland is the lessee and a Subsidiary of Sharyland or another Person Controlled by one or more Hunt Family Members is the lessor; provided , no such lease will qualify as a “Lease” hereunder if each of the three following criteria apply: (x) Sharyland is the lessee, (y) cash rental payments have become due and payable pursuant thereto, and (z) none of the Company, a Subsidiary of the Company or a Subsidiary of Sharyland is the lessor.
“ Lien ” means, with respect to any Person, any mortgage, lien, pledge, charge, security interest or other encumbrance, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or Capital Lease, upon or with respect to any property or asset of such Person, in each case in the nature of a security interest of any kind whatsoever.
“ Material Adverse Effect ” means a material adverse effect upon and/or material adverse developments with respect to (a) the operations, business, assets, properties, liabilities or financial condition of the Company and its Subsidiaries (taken as a whole), (b) the ability of the Company to perform its obligations under this Agreement, the Notes, and the Security Documents; (c) the validity or enforceability of the Notes, this Agreement or any other material Financing Document or the rights or remedies of the Holders hereunder or thereunder or (d) the validity, perfection or priority of the Collateral Agent’s Liens on any material Collateral.
“ Maturity Date ” means December 30, 2020.
“ McAllen Lease ” shall mean (A) prior to the effectiveness of the McAllen Lease Amendment and Restatement, the Second Amended and Restated Master System Lease Agreement, dated as of July 1, 2012, between SDTS, as lessor, and Sharyland, as lessee, and (B) upon the effectiveness of the McAllen Lease Amendment and Restatement, the McAllen Lease Amendment and Restatement, as such lease may be amended, restated, supplemented or otherwise modified from time to time, or any new lease entered into in replacement thereof.
“ McAllen Lease Amendment and Restatement ” the Third Amended and Restated Master System Lease Agreement (McAllen System), between SDTS, as lessor, and Sharyland, as lessee.
 
Schedule B-9
(To Note Purchase Agreement)

“ Member ” means InfraREIT Partners, LP, a Delaware limited partnership.
“ Member Administrative Agent ” means Bank of America, N.A., in its capacity as administrative agent under the Member Credit Agreement, or any successor administrative agent
“ Member Credit Agreement ” means that certain Credit Agreement dated as of January 3, 2014 among the Member, as borrower, the Member Administrative Agent, as administrative agent, and the other lenders, agencies and institutions from time to time party thereto.
“ Membership Collateral ” is defined and described in the Pledge Agreement
“ Minimum Debt Service Reserve Requirement ” means, on any date, scheduled principal plus interest payable on the Notes on the two Payment Dates following such date.
“ Moody’s ” means Moody’s Investors Service, Inc.
“ Multiemployer Plan ” means any Plan that is a “multiemployer plan” (as such term is defined in section 4001(a)(3) of ERISA).
“ NAIC ” means the National Association of Insurance Commissioners or any successor thereto.
“ New Project ” means any transmission or distribution project, including any such project acquired or built by a Project Finance Subsidiary, any “Footprint Project” (as defined in the Leases) that the Company or any Subsidiary of the Company funds pursuant to a Lease and any such project that InfraREIT or a Subsidiary thereof acquires pursuant to the Development Agreement.
“ Non-Recourse Debt ” means Indebtedness of a Project Finance Subsidiary that, if secured, is secured solely by a pledge of collateral owned by that Project Finance Subsidiary and the ownership interests in such Project Finance Subsidiary and for which no Person other than such Project Finance Subsidiary is personally liable.
“ Notes ” is defined in Section 1 .
“ O&M Costs ” is defined in the SDTS 2010 Note Agreement, it being understood that each reference to the “Company” in such definition is a reference to SDTS.
“ Obligation ” means any loan, advance, debt, liability, and obligation of performance, howsoever arising, owed by the Company to the Collateral Agent or the Holders of any kind or description (whether or not evidenced by any note or instrument and whether or not for the payment of money), direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, pursuant to the terms of this Agreement, any Note or any of the other Financing Documents, including all principal, interest, Yield-Maintenance Amounts, fees, charges, expenses, attorneys’ fees and accountants fees payable or reimbursable by the Company under this Agreement or any of the other Financing Documents.
 
Schedule B-10
(To Note Purchase Agreement)

“OFAC” means the Office of Foreign Assets Control, United States Department of the Treasury.
“OFAC Listed Person ” means a Person whose name appears on the list of Specially Designated Nationals and Blocked Persons published by OFAC.
“OFAC Sanctions Program” shall mean any economic or trade sanction that OFAC is responsible for administering and enforcing. A list of OFAC Sanctions Programs may be found at http://www.treasury.gov/resource-center/sanctions/Programs/Pages/Programs.aspx.
“ Officer’s Certificate ” means a certificate of a Senior Financial Officer or of any other officer of the Company whose responsibilities extend to the subject matter of such certificate.
“ Payment Date ” means October 15, 2010 and the 15th day of January, April, July and October thereafter up to the Maturity Date, and the Maturity Date.
“ PBGC ” means the Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto.
“ Permit ” means any action, approval, consent, waiver, exemption, variance, franchise, order, permit, authorization, right or license of or from a Governmental Authority, provided that interests or estates in real property, shall not be considered Permits.
“ Permitted Investment ” means any (a) marketable direct obligation of the United States of America, (b) marketable obligation directly and fully guaranteed as to interest and principal by the United States of America, (c) demand deposit with Depositary, or time deposit, certificate of deposit and banker’s acceptance issued by any member bank of the Federal Reserve System which is organized under the laws of the United States of America or any state thereof or any United States branch of a foreign bank, in each case whose equity capital is in excess of $500,000,000 and whose long-term debt securities are rated “A” or better by S&P and “A2” or better by Moody’s, (d) commercial paper or tax exempt obligations given the highest rating by Moody’s and S&P, (e) obligations of a commercial bank described in clause (c) above, in respect of the repurchase of obligations of the type as described in clauses (a) and (b) hereof, provided that such repurchase obligation shall be fully secured by obligations of the type described in said clauses (a) and (b) and the possession of such obligation shall be transferred to, and segregated from other obligations owned by, any such bank, (f) instrument rated “AAA” by S&P and “Aaa” by Moody’s issued by investment companies and having an original maturity of 180 days or less, (g) eurodollar certificates of deposit issued by any bank described in clause (c) above, and (h) marketable security rated not less than “A-1” by S&P or not less than “Prime-1” by Moody’s. In no event shall Permitted Investments include any obligation, certificate of deposit, acceptance, commercial paper or instrument which by its terms matures (A) more than 180 days after the date of investment, unless a bank meeting the requirements of clause (c) above shall have agreed to repurchase such obligation, certificate of deposit, acceptance, commercial paper or instrument at its purchase price plus earned interest within no more than 90 days after its purchase thereunder or (B) after the next Payment Date.
“ Permitted Lien ” is defined in Section 10.5 .
 
Schedule B-11
(To Note Purchase Agreement)

“ Permitted Secured Indebtedness ” means all Indebtedness of the Company incurred pursuant to Sections 10.6(a) and (c).
“ Person ” means an individual, partnership, corporation, limited liability company, association, trust, unincorporated organization, business entity or Governmental Authority.
“ Plan ” means an “employee benefit plan” (as defined in section 3(3) of ERISA) subject to Title I of ERISA that is or, within the preceding five years, has been established or maintained, or to which contributions are or, within the preceding five years, have been made or required to be made, by the Company or any ERISA Affiliate or with respect to which the Company or any ERISA Affiliate may have any liability.
“ Pledge Agreement ” is defined in Section 4.12(b).
“ Preferred Stock ” means any class of capital stock of a Person that is preferred over any other class of capital stock (or similar equity interests) of such Person as to the payment of dividends or the payment of any amount upon liquidation or dissolution of such Person.
“ Project Finance Subsidiary ” means a special purpose Subsidiary of a Person created to develop a New Project and to finance such New Project solely with Non-Recourse Debt and equity (including, for the avoidance of doubt, CV Project Entity, L.L.C. and the GS Project Entity.
“ property ” or “ properties ” means, unless otherwise specifically limited, real or personal property of any kind, tangible or intangible, choate or inchoate.
“ PTE ” is defined in Section 6.2(a) .
“ Purchaser ” is defined in the first paragraph of this Agreement.
“ Qualified Institutional Buyer ” means any Person who is a “qualified institutional buyer” within the meaning of such term as set forth in Rule 144A(a)(1) under the Securities Act.
“ Qualified Lessee ” means Sharyland and/or any other utility that is (x) approved or authorized by the applicable public utility commission or similar regulatory authority to operate and/or lease the transmission and/or distribution assets of the Company or any Subsidiary and (y) a party to a then-effective lease agreement with the Company or a Subsidiary thereof pursuant to which such utility leases and operates such entity’s transmission and/or distribution assets.
“ Qualified Lessee Affiliate Loan ” means loans made by InfaREIT Partners, LP or a Subsidiary thereof to Qualified Lessees from time to time on terms (x) in an aggregate principal amount not to exceed $10,000,000 at any time outstanding as long as the use of proceeds of such loans is limited to the acquisition or financing of equipment or other assets used in the Qualified Lessee’s operation or lease of transmission or distribution assets from the Company or a Subsidiary thereof pursuant to a Lease.
“ Qualifying IPO ” means an initial public offering of the equity interests of InfraREIT.
 
Schedule B-12
(To Note Purchase Agreement)

“ RBC ” means Royal Bank of Canada, a Canadian banking institution.
“ RBC Agreement ” means that certain Third Amended and Restated Credit Agreement, dated December 10, 2014, among SDTS, as Borrower, RBC, as administrative agent, and the lenders and other institutions from time to time party thereto, as amended, restated, supplemented or otherwise modified from time to time.
“ Related Fund ” means, with respect to any Holder of any Note, any fund or entity that (i) invests in Securities or bank loans, and (ii) is advised or managed by such Holder, the same investment advisor as such Holder or by an Affiliate of such Holder or such investment advisor.
“ Required Holders ” means, at any time, the Holders of at least 51% in principal amount of the Notes at the time outstanding (exclusive of Notes then owned by the Company or any of its Affiliates).
“ Required Permit ” is defined in Section 5.10 .
“ Requirements of Law ” means as to any Person, the certificate of incorporation or formation and by-laws or partnership or operating agreement or other organizational or governing documents of such Person, and any local, state or Federal law, regulation, rule, ordinances or determination, interpretation or order of an arbitrator or a court or other Governmental Authority, and any Required Permit, in each case applicable to or binding upon such Person or any of its properties or its business or to which such Person or any of its properties or its business is subject.
“ Responsible Officer ” means any Senior Financial Officer and any other officer of the Company with responsibility for the administration of the relevant portion of this Agreement.
“ Restricted Payment Conditions ” is defined in Section 10.9.
“ ROFO Transfer ” means the sale and transfer to Persons Controlled by one or more Hunt Family Members of any assets located in the Texas Panhandle related to the CREZ Project that are categorized as ROFO projects under the Development Agreement with an aggregate fair market value not to exceed $5,000,000.
“ SDTS ” means Sharyland Distribution & Transmission Services, L.L.C.
“ SDTS 2009 Note Agreement ” means the Amended and Restated Note Purchase Agreement, dated September 14, 2010, among SDTS and the holders from time to time of SDTS’s 7.25% Senior Notes due December 30, 2029 issued thereunder, as amended, restated, supplemented and otherwise modified from time to time.
“ SDTS 2010 Note Agreement ” means the Amended and Restated Note Purchase Agreement, as amended and restated as of the dated the date hereof, among SDTS and the purchasers named therein, pursuant to which SDTS will sell, and such purchasers will purchase, SDTS’s 6.47% Senior Notes due September 30, 2030, as amended, restated, supplemented and otherwise modified from time to time.
 
Schedule B-13
(To Note Purchase Agreement)

“ SEC ” shall mean the Securities and Exchange Commission of the United States, or any successor thereto.
“ Second Amendment Date ” means December 10, 2014.
“ Secured Parties ” means, from time to time, the Holders and all other Secured Parties (as defined in the Collateral Agency Agreement) from time to time.
“ Securities ” or “ Security ” shall have the meaning specified in Section 2(1) of the Securities Act.
“ Securities Act ” means the Securities Act of 1933, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.
“ Security Agreement ” is defined in Section 4.12(a) .
“ Security Documents ” means the Security Agreement, the Pledge Agreement, the Depositary Agreement, the Deposit Account Control Agreement, the Collateral Agency Agreement, the 2014 Joinder Agreement, and any other security documents, financing statements and the like filed or recorded in connection with the foregoing.
“ Senior Financial Officer ” means the chief financial officer, principal accounting officer, treasurer or comptroller of the Company or the Member, as applicable.
“ Sharyland ” means Sharyland Utilities, L.P., a Texas limited partnership.
“ SP ” shall mean Sharyland Projects, L.L.C., a Project Finance Subsidiary of SDTS.
“ Structuring Fee ” is defined in Section 4.7.
“ Subsidiary ” means, as to any Person, any other Person in which such first Person or one or more of its Subsidiaries or such first Person and one or more of its Subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar functions) of such second Person and any partnership or joint venture if more than a 50% interest in the profits or capital thereof is owned by such first Person or one or more of its Subsidiaries or such first Person and one or more of its Subsidiaries (unless such partnership or joint venture can and does ordinarily take major business actions without the prior approval of such Person or one or more of its Subsidiaries). Unless the context otherwise clearly requires, any reference to a “Subsidiary” is a reference to a Subsidiary of the Company and, prior to the completion of the FERC Merger, shall include the FERC Owner. Prior to the completion of the FERC Merger, all references herein to a Subsidiary of Sharyland shall include the FERC Operator.
“ SVO ” means the Securities Valuation Office of the NAIC or any successor to such Office.
“ Swap Contract ” means (a) any and all interest rate swap transactions, basis swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity
 
Schedule B-14
(To Note Purchase Agreement)

swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward foreign exchange transactions, cap transactions, floor transactions, currency options, spot contracts or any other similar transactions or any of the foregoing (including, but without limitation, any options to enter into any of the foregoing), and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., or any International Foreign Exchange Master Agreement.
“ Swap Termination Value ” means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a), the amounts(s) determined as the mark-to-market values(s) for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts.
“ Synthetic Lease ” means, at any time, any lease (including leases that may be terminated by the lessee at any time) of any property (a) that is accounted for as an operating lease under GAAP and (b) in respect of which the lessee retains or obtains ownership of the property so leased for U.S. Federal income tax purposes, other than any such lease under which such Person is the lessor.
“ System ” means the Company’s and/or any Subsidiary’s (other than a Project Finance Subsidiary’s) integrated electrical transmission and distribution facilities located primarily in the State of Texas and the systems and other property necessary to operate the transmission and distribution facilities, and all improvements to and expansions of such facilities, and each New Project (upon its completion) owned by the Company or a Subsidiary; provided that, for purposes hereof, “System” shall not be deemed to include any easements held by the Company or any Subsidiary.
“ System Leases ” means (i) the McAllen Lease, (ii) the Stanton/Brady/Celeste Lease (iii) upon the effectiveness thereof, the Lease Agreement (ERCOT Transmission Assets), between SDTS, as lessor, and Sharyland, as lessee, (iv) upon the completion of the FERC Merger, the FERC Lease and (v) any and all other Leases and supplements thereto in connection with the System and the transmission and distribution facilities ancillary thereto and any easements associated therewith, in the case of each of the foregoing clauses (i) through (v), as amended, restated, supplemented or otherwise modified from time to time, or any new lease entered into in replacement thereof .
“ Total Debt ” means, with respect to the Company, all Indebtedness of the Company on a consolidated basis; provided, however , that for purposes of calculating the Company’s Total Debt to Capitalization Ratio, the Company’s Total Debt shall exclude Non-Recourse Debt of a Project Finance Subsidiary of SDTS and that portion of the Swap Termination Value defined in clause (b) of the definition of “Swap Termination Value” and shall include Indebtedness of Sharyland on a consolidated basis (excluding Non-Recourse Debt of a Project Finance Subsidiary of Sharyland).
 
Schedule B-15
(To Note Purchase Agreement)

“ Total Debt to Capitalization Ratio ” means, with respect to the Company, (a) the Total Debt, divided by (b) the sum of (i) Total Debt plus (ii) the Company’s Consolidated Net Worth for such period plus (iii) if positive, Sharyland’s Consolidated Net Worth for such period.
“ Transfer ” means, with respect to any item, the sale, exchange, conveyance, lease, transfer or other disposition of such item.
“ UCC Collateral ” means the Collateral that is of a type in which a valid security interest can be created under Article 8 or Article 9 of the Uniform Commercial Code as in effect in New York.
“U.S. Economic Sanctions” shall mean United States economic sanctions, including but not limited to, the Trading with the Enemy Act, the International Emergency Economic Powers Act, CISADA or any similar law or regulation with respect to Iran or any other country, the Sudan Accountability and Divestment Act, any OFAC Sanctions Program, or any economic sanctions regulations administered and enforced by the United States or any enabling legislation or executive order relating to any of the foregoing.
“ USA Patriot Act ” means United States Public Law 107-56, Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 2001, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.
“ Wholly-Owned Subsidiary ” means, at any time, any Subsidiary at least 90% of all of the equity and voting interests of which are owned by any one or more of the Company and the Company’s other Wholly-Owned Subsidiaries and the remaining equity and voting interests of such Subsidiary, if any, are owned by a Qualified Lessee at such time.
“ Yield-Maintenance Amount ” is defined in Section 8.6 .
 
Schedule B-16
(To Note Purchase Agreement)

RULES OF INTERPRETATION
 
1.	The singular includes the plural and the plural includes the singular; and words in the masculine, neuter or feminine gender shall be read and construed as though in either of the other genders where the context so requires.	
 
2.	The word “or” is not exclusive.	
 
3.	A reference to any law includes any amendment or modification to such law, and all regulations, rulings and other laws and regulations promulgated under such law.	
 
4.	A reference to a Person includes its successors and permitted assigns.	
 
5.	Accounting terms have the meanings assigned to them by GAAP, as applied by the accounting entity to which they refer.	
 
6.	The words “include,” “includes” and “including” are not limiting.	
 
7.	A reference in a document to an Article, Section, Exhibit, Schedule, Annex or Appendix is to the Article, Section, Exhibit, Schedule, Annex or Appendix of such document unless otherwise indicated. Exhibits, Schedules, Annexes or Appendices to any document shall be deemed incorporated by reference in such document.	
 
8.	References to “knowledge” or words of similar import refer to the actual knowledge of the current officers of the relevant Person, without any duty of investigation unless otherwise indicated.	
 
9.	References to any document, instrument or agreement (a) shall include all exhibits, schedules and other attachments thereto, (b) shall include all documents, instruments or agreements issued or executed in replacement thereof, and (c) shall mean such document, instrument or agreement, or replacement or predecessor thereto, as amended, modified and supplemented from time to time and in effect at any given time.	
 
10.	The words “hereof,” “herein” and “hereunder” and words of similar import when used in any document shall refer to such document as a whole and not to any particular provision of such document.	
 
11.	References to “days” shall mean calendar days, unless the term “Banking Days” shall be used. References to a time of day shall mean such time in New York City, unless otherwise specified.	
 
12.	The section and subsection headings in a document are for convenience of reference only and shall neither be deemed to be a part of such document nor modify, define, expand or limit any of the terms or provisions thereof.	
 
13.	References to agreements or other contractual obligations shall, unless otherwise specified, be deemed to refer to such agreements or contractual obligations as amended, supplemented, restated or otherwise modified from time to time.	
 
Schedule B-17
(To Note Purchase Agreement)

Exhibit 10.31
EXECUTION COPY

 
S HARYLAND D ISTRIBUTION  & T RANSMISSION S ERVICES , L.L.C.
$53,500,000
7.25% Senior Notes due December 30, 2029

A MENDED AND R ESTATED
N OTE P URCHASE A GREEMENT

Dated September 14, 2010

 

TABLE OF CONTENTS

 	  	Page	 	
SECTION 1. AUTHORIZATION OF NOTES	  	 	1	  	
		
SECTION 2. SALE AND PURCHASE OF NOTES	  	 	1	  	
		
SECTION 3. CLOSING	  	 	1	  	
		
SECTION 4. CONDITIONS TO CLOSING	  	 	2	  	
		
Section 4.1. Representations and Warranties	  	 	2	  	
Section 4.2. Performance; No Default	  	 	2	  	
Section 4.3. Compliance Certificates	  	 	2	  	
Section 4.4. Opinions of Counsel	  	 	2	  	
Section 4.5. Purchase Permitted By Applicable Law, Etc.	  	 	3	  	
Section 4.6. Sale of Other Notes	  	 	3	  	
Section 4.7. Payment of Special Counsel and Other Fees and Expenses	  	 	3	  	
Section 4.8. Private Placement Number	  	 	3	  	
Section 4.9. Changes in Structure	  	 	3	  	
Section 4.10. Funding Instructions	  	 	3	  	
Section 4.11. Proceedings and Documents	  	 	4	  	
Section 4.12. Deposit Agreement, Etc.	  	 	5	  	
Section 4.13. UCC Searches; and Litigation Searches	  	 	5	  	
Section 4.14. Insurance	  	 	5	  	
Section 4.15. Financial Statements	  	 	6	  	
Section 4.16. Consents and Approvals	  	 	6	  	
		
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY	  	 	6	  	
		
Section 5.1. Organization; Power and Authority	  	 	6	  	
Section 5.2. Authorization, Etc.	  	 	6	  	
Section 5.3. Disclosure	  	 	6	  	
Section 5.4. Organization and Ownership of Interest in the Company	  	 	7	  	
Section 5.5. Financial Statements; Material Liabilities	  	 	7	  	
Section 5.6. Compliance with Laws, Other Instruments, Etc.	  	 	7	  	
Section 5.7. Governmental Authorizations, Etc.	  	 	7	  	
Section 5.8. Litigation; Observance of Agreements, Statutes and Orders	  	 	7	  	
Section 5.9. Taxes	  	 	8	  	
Section 5.10. Title to Property; Leases	  	 	8	  	
Section 5.11. Insurance	  	 	8	  	
Section 5.12. Licenses, Permits, Etc.; Material Project Documents	  	 	8	  	
Section 5.13. Compliance with ERISA	  	 	9	  	
Section 5.14. Private Offering by the Company	  	 	9	  	
Section 5.15. Use of Proceeds; Margin Regulations	  	 	10	  	
Section 5.16. Existing Indebtedness; Future Liens	  	 	10	  	
Section 5.17. Foreign Assets Control Regulations, Etc.	  	 	10	  	
Section 5.18. Status under Certain Statutes	  	 	11	  	
 
i

TABLE OF CONTENTS
(continued)

 	  	Page	 	
Section 5.19. Environmental Matters	  	 	11	  	
Section 5.20. Force Majeure Events; Employees	  	 	12	  	
Section 5.21. Collateral	  	 	12	  	
		
SECTION 6. REPRESENTATIONS OF THE PURCHASERS	  	 	12	  	
		
Section 6.1. Purchase for Investment	  	 	12	  	
Section 6.2. Source of Funds	  	 	13	  	
		
SECTION 7. INFORMATION	  	 	14	  	
		
SECTION 8. PAYMENT AND PREPAYMENT OF THE NOTES	  	 	19	  	
		
Section 8.1. Amortization; Maturity;	  	 	19	  	
Section 8.2. Optional Prepayments with Yield-Maintenance Amount	  	 	19	  	
Section 8.3. Allocation of Partial Prepayments	  	 	19	  	
Section 8.4. Maturity; Surrender, Etc.	  	 	19	  	
Section 8.5. Purchase of Notes	  	 	19	  	
Section 8.6. Yield-Maintenance Amount	  	 	20	  	
		
SECTION 9. AFFIRMATIVE COVENANTS	  	 	21	  	
		
Section 9.1. Compliance with Law	  	 	21	  	
Section 9.2. Insurance	  	 	21	  	
Section 9.3. Maintenance of Properties	  	 	23	  	
Section 9.4. Payment of Taxes and Claims	  	 	23	  	
Section 9.5. Existence, Etc.	  	 	23	  	
Section 9.6. Books and Records	  	 	23	  	
Section 9.7. Collateral; Further Assurances	  	 	23	  	
Section 9.8. Material Project Documents	  	 	24	  	
Section 9.9. Financial Ratios	  	 	25	  	
		
SECTION 10. NEGATIVE COVENANTS	  	 	25	  	
		
Section 10.1. Transactions with Affiliates	  	 	25	  	
Section 10.2. Merger, Consolidation, Etc.	  	 	25	  	
Section 10.3. Line of Business	  	 	25	  	
Section 10.4. Terrorism Sanctions Regulations	  	 	25	  	
Section 10.5. Liens	  	 	25	  	
Section 10.6. Indebtedness	  	 	27	  	
Section 10.7. Loans, Advances, Investments and Contingent Liabilities	  	 	27	  	
Section 10.8. No Subsidiaries	  	 	27	  	
Section 10.9. Restricted Payments	  	 	28	  	
Section 10.10. Sale of Assets, Etc.	  	 	28	  	
Section 10.11. Sale or Discount of Receivables	  	 	28	  	
Section 10.12. Amendments to Organizational Documents	  	 	28	  	
 
ii

TABLE OF CONTENTS
(continued)

 	  	Page	 	
Section 10.13. Sale and Lease-Back	  	 	29	  	
Section 10.14. ERISA Compliance	  	 	29	  	
Section 10.15. No Margin Stock	  	 	30	  	
Section 10.16. Project Documents	  	 	30	  	
Section 10.17. Regulation	  	 	30	  	
Section 10.18. Swaps	  	 	31	  	
Section 10.19. Most Favored Lender	  	 	31	  	
		
SECTION 11. EVENTS OF DEFAULT	  	 	31	  	
		
SECTION 12. REMEDIES ON DEFAULT, ETC.	  	 	34	  	
		
Section 12.1. Acceleration	  	 	34	  	
Section 12.2. Other Remedies	  	 	35	  	
Section 12.3. Rescission	  	 	35	  	
Section 12.4. No Waivers or Election of Remedies, Expenses, Etc.	  	 	35	  	
		
SECTION 13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES	  	 	36	  	
		
Section 13.1. Registration of Notes	  	 	36	  	
Section 13.2. Transfer and Exchange of Notes	  	 	36	  	
Section 13.3. Replacement of Notes	  	 	37	  	
		
SECTION 14. PAYMENTS ON NOTES	  	 	37	  	
		
Section 14.1. Place of Payment	  	 	37	  	
Section 14.2. Home Office Payment	  	 	38	  	
		
SECTION 15. EXPENSES, ETC.	  	 	38	  	
		
Section 15.1. Transaction Expenses	  	 	38	  	
Section 15.2. Survival	  	 	38	  	
		
SECTION 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT	  	 	39	  	
		
SECTION 17. AMENDMENT AND WAIVER	  	 	39	  	
		
Section 17.1. Requirements	  	 	39	  	
Section 17.2. Solicitation of Holders of Notes	  	 	39	  	
Section 17.3. Binding Effect, etc.	  	 	40	  	
Section 17.4. Notes Held by Company, etc.	  	 	40	  	
		
SECTION 18. NOTICES	  	 	40	  	
		
SECTION 19. REPRODUCTION OF DOCUMENTS	  	 	41	  	
 
iii

TABLE OF CONTENTS
(continued)

 	  	Page	 	
SECTION 20. CONFIDENTIAL INFORMATION	  	 	41	  	
		
SECTION 21. SUBSTITUTION OF PURCHASER	  	 	42	  	
		
SECTION 22. MISCELLANEOUS	  	 	42	  	
		
Section 22.1. Successors and Assigns	  	 	42	  	
Section 22.2. Payments Due on Non-Business Days	  	 	42	  	
Section 22.3. Accounting Terms	  	 	43	  	
Section 22.4. Severability	  	 	43	  	
Section 22.5. Construction, etc.	  	 	43	  	
Section 22.6. Counterparts	  	 	43	  	
Section 22.7. Governing Law	  	 	43	  	
Section 22.8. Jurisdiction and Process; Waiver of Jury Trial	  	 	43	  	
Section 22.9. Transaction References	  	 	44	  	
 
iv

					
			
S CHEDULE A	 	—	  	I NFORMATION R ELATING TO P URCHASERS	
			
S CHEDULE B	 	—	  	D EFINED T ERMS	
			
Schedule 4.12(a)	 	—	  	Deeds of Trust	
			
Schedule 5.3	 	—	  	Disclosure Materials	
			
Schedule 5.4	 	—	  	Ownership of the Company and Subsidiaries; Officers	
			
Schedule 5.5	 	—	  	Financial Statements	
			
Schedule 5.7	 	—	  	Government Authorizations	
			
Schedule 5.12(a)	 	—	  	Required Permits	
			
Schedule 5.12(b)	 	—	  	Material Project Documents	
			
Schedule 5.16	 	—	  	Indebtedness	
			
Schedule 8.1	 	—	  	Principal Amortization Schedule	
			
Schedule 9.2	 	—	  	Insurance Requirements	
			
Schedule 10.1	 	—	  	Cap Rock Transaction	
			
Schedule 10.16	 	—	  	Certain Existing Leases	
			
Exhibit 1	 	—	  	Form of 7.25% Senior Secured Note due December 30, 2029	
 
v

7.25% Senior Notes due December 30, 2029
September 14, 2010
T O E ACH OF THE P URCHASERS L ISTED IN
Schedule A Hereto:
Ladies and Gentlemen:
This Amended and Restated Note Purchase Agreement (this “ Agreement ”), dated as of September 14, 2010, amends and restates the Note Purchase Agreement, dated as of December 31, 2009, (the “ 2009 SDTS Note Agreement ”), among Sharyland Distribution & Transmission Services, L.L.C., a Texas limited liability company (the “ Company ”), and the financial institutions listed on Schedule A to the 2009 SDTS Note Agreement or who later become a party thereto (each, a “ Purchaser ” and, collectively, the “ Purchasers ”).
SECTION 1. AUTHORIZATION OF NOTES .
The Company will authorize the issue and sale of $53,500,000 aggregate principal amount of its 7.25% Senior Notes due December 30, 2029 (the “ Notes ” , such term to include any such notes issued in substitution therefor pursuant to Section 13 ). The Notes shall be substantially in the form set out in Exhibit 1 . Certain capitalized and other terms used in this Agreement are defined in Schedule B ; and references to a “Schedule” or an “Exhibit” are, unless otherwise specified, to a Schedule or an Exhibit attached to this Agreement.
SECTION 2. SALE AND PURCHASE OF NOTES .
Subject to the terms and conditions of this Agreement, the Company will issue and sell to each Purchaser and each Purchaser will purchase from the Company, at the Closing provided for in Section 3 , Notes in the principal amount specified opposite such Purchaser’s name in Schedule A at the purchase price of 100% of the principal amount thereof. The Purchasers’ obligations hereunder are several and not joint obligations and no Purchaser shall have any liability to any Person for the performance or non-performance of any obligation by any other Purchaser hereunder.
SECTION 3. CLOSING .
The sale and purchase of the Notes to be purchased by each Purchaser shall occur at the offices of Bingham McCutchen, 399 Park Avenue, New York, NY, at 11:00 a.m., New York time, at a closing (the “ Closing ”) on December 31, 2009 or on such other Business Day thereafter on or prior to December 31, 2009 as may be agreed upon by the Company and the Purchasers. At the Closing the Company will deliver to each Purchaser the Notes to be purchased by such Purchaser in the form of a single Note (or such greater number of Notes in denominations of at least $1,000,000 as such Purchaser may request) dated the Closing Date and

registered in such Purchaser’s name (or in the name of its nominee), against delivery by such Purchaser to the Company or its order of immediately available funds in the amount of the purchase price therefor by wire transfer of immediately available funds for the account of the Company to account number 4426868026 at Bank of America, 901 Main Street, Dallas, TX 75202 ABA: 026009593. If at the Closing the Company shall fail to tender such Notes to any Purchaser as provided above in this Section 3 , or any of the conditions specified in Section 4 shall not have been fulfilled to such Purchaser’s satisfaction, such Purchaser shall, at its election, be relieved of all further obligations under this Agreement, without thereby waiving any rights such Purchaser may have by reason of such failure or such nonfulfillment.
SECTION 4. CONDITIONS TO CLOSING .
Each Purchaser’s obligation to purchase and pay for the Notes to be sold to such Purchaser at the Closing is subject to the fulfillment to the satisfaction of each Purchaser, prior to or at the Closing, of the following conditions:
Section 4.1. Representations and Warranties . The representations and warranties of the Company in this Agreement shall be correct when made and at the time of the Closing.
Section 4.2. Performance; No Default . The Company shall have performed and complied with all agreements and conditions contained in this Agreement required to be performed or complied with by it prior to or at the Closing and after giving effect to the issue and sale of the Notes (and the application of the proceeds thereof as contemplated by Section 5.14 ) no Default or Event of Default shall have occurred and be continuing. The Company shall not have entered into any transaction since December 31, 2008, that would have been prohibited by Sections 10.1 , and 10.10 through 10.12 of the 2009 SDTS Note Agreement had such Sections applied since such date.
Section 4.3. Compliance Certificates .
(a) Company’s Closing Certificates . The Company shall have delivered to each Purchaser an officer’s certificate, dated the Closing Date, certifying that (i) the conditions specified in Sections 4.1 and 4.2 have been fulfilled, and (ii) that each of the other conditions precedent to the occurrence of the Closing has been satisfied.
(b) Company’s Authority Certificate . The Company shall have delivered to each Purchaser a certificate of its secretary, dated the Closing Date, certifying as to the resolutions attached thereto and other corporate proceedings by the Company relating to the authorization, execution and delivery of the Notes and this Agreement and the other Transaction Documents to which it is a party.
Section 4.4. Opinions of Counsel . Such Purchaser shall have received opinions in form and substance satisfactory to such Purchaser, dated the date of the Closing (i) from Mayer Brown LLP, counsel for the Company and Sharyland, covering such matters incident to the transactions contemplated hereby as such Purchaser or its counsel may reasonably request and (ii) from Sutherland, Asbill & Brennan LLP, special counsel for the Company and Sharyland, covering federal and Texas regulatory matters (and the Company hereby instructs its counsel to deliver such opinion to the Purchasers and the Secured Parties), and (iii) from Bingham McCutchen
 
-2-

LLP, in connection with such transactions, in form and substance satisfactory to the Purchasers and covering such other matters incident to such transactions as the Purchasers may reasonably request.
Section 4.5. Purchase Permitted By Applicable Law, Etc . On the date of the Closing such Purchaser’s purchase of Notes shall (a) be permitted by the laws and regulations of each jurisdiction to which such Purchaser is subject, without recourse to provisions (such as section 1405(a)(8) of the New York Insurance Law) permitting limited investments by insurance companies without restriction as to the character of the particular investment, (b) not violate any applicable law or regulation (including, without limitation, Regulation T, U or X of the Board of Governors of the Federal Reserve System) and (c) not subject such Purchaser to any tax, penalty or liability under or pursuant to any applicable law or regulation, which law or regulation was not in effect on the date hereof. If requested by such Purchaser, such Purchaser shall have received an Officer’s Certificate certifying as to such matters of fact as such Purchaser may reasonably specify to enable such Purchaser to determine whether such purchase is so permitted.
Section 4.6. Sale of Other Notes . Contemporaneously with the Closing, the Company shall sell to each other Purchaser and each other Purchaser shall purchase the Notes to be purchased by it at the Closing as specified in Schedule A .
Section 4.7. Payment of Special Counsel and Other Fees and Expenses. Without limiting the provisions of Section 15.1 , the Company shall have paid on or before the Closing: (a) the fees, charges and disbursements of the Purchasers’ special counsel, Bingham McCutchen LLP and the Purchasers’ Texas counsel to the extent reflected in a statement of such counsel rendered to the Company at least one Business Day prior to the Closing and (b) all other fees, including a structuring fee in the amount of $535,000.00 to Prudential (the “ Structuring Fee ”), and out-of-pocket costs and expenses (including legal fees and expenses and consultant fees and expenses) and other compensation contemplated hereby or by the other Financing Documents, or pursuant to separate letter agreements, payable to the Purchasers.
Section 4.8. Private Placement Number . A Private Placement Number issued by Standard & Poor’s CUSIP Service Bureau (in cooperation with the SVO) shall have been obtained for the Notes.
Section 4.9. Changes in Structure . The transactions contemplated by the Contribution Agreement shall have been consummated. The Company shall not have changed its jurisdiction of formation or been a party to any merger or consolidation or succeeded to all or any substantial part of the liabilities of any other entity, at any time following the date of the most recent financial statements referred to in Schedule 5.5 , except that the Company shall have changed its type of organization from a Texas limited partnership to a Texas limited liability company.
Section 4.10. Funding Instructions . At least one Business Day prior to the date of the Closing, each Purchaser shall have received written instructions signed by a Responsible Officer on letterhead of the Company confirming the information specified in Section 3 including (i) the name and address of the transferee bank, (ii) such transferee bank’s ABA number and (iii) the account name and number into which the purchase price for the Notes is to be deposited.
 
-3-

Section 4.11. Proceedings and Documents . Each Purchaser shall have received the following, each to be (i) dated the Closing Date unless otherwise indicated, and (ii) in form and substance satisfactory to the Purchasers:
(a) The Notes to be purchased by the Purchasers;
(b) (i) This Agreement and each other Financing Document, duly executed, authorized and delivered by each party thereto, (ii) copies of the System Lease, the Contribution Agreement and each of the other Material Project Documents listed on Schedule 5.12(b) to the 2009 SDTS Note Agreement and any amendments or supplements thereto, in each case, duly authorized, executed and delivered by each party thereto, and certified by an authorized officer of the Company as being true, correct and complete and in full force and effect on the Closing Date, and (iii) copies of closing documents delivered in connection with the transactions contemplated by the Contribution Agreement, certified by an authorized officer of Sharyland as being true, correct and complete and in full force and effect, together with such officer’s certification that the transactions contemplated by the Contribution Agreement have been fully consummated;
(c) Copies of the Certificate of Convenience and Necessity and wholesale services tariff of Sharyland as issued by and in effect with the Public Utility Commission of Texas, certified by an authorized officer of Sharyland as being true, complete and accurate and in full force and effect;
(d) The certificates of formation of the Company and each Member, each certified as of a recent date by the Secretary of State of the State of Texas and by such Person’s secretary or other authorized officer;
(e) The organizational documents of each the Company and each Member, certified by such Person’s secretary or other authorized officer;
(f) With respect to each of the Company and Sharyland, an incumbency certificate signed by the secretary and one other officer of such Person, certifying as to the names, titles and true signatures of the officers of such Person authorized to sign this Agreement, the Notes, the other Financing Documents to which such Person is a party and other documents to be delivered hereunder or thereunder;
(g) A certificate of the secretary of the Company and Sharyland attaching resolutions of its management committee or other governing body evidencing approval of the transactions contemplated by this Agreement and the other Financing Documents to which such Person is a party and, with respect to the Company, the issuance of the Notes, and in each case, the execution, delivery and performance thereof, and authorizing certain officers to execute and deliver the same, and certifying that such resolutions were duly and validly adopted and have not since been amended, revoked or rescinded;
(h) Good standing certificates as to each of the Company and each Member from all relevant jurisdictions;
 
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(i) Evidence of the filing and acceptance of financing statements which name the Company, as debtor, and the Collateral Agent, as secured party, in all applicable offices, together with copies of such financing statements;
(j) A schedule of all Required Permits, together with copies thereof certified by officers of the Company as being true, correct and complete, in full force and effect and not subject to any appeal or further proceeding;
(k) Certified copies of the documents delivered in connection with the consummation of the transactions contemplated by the Contribution Agreement, and evidence of a capital contribution to Sharyland by its Members in the amount of $16,989,337 and the repayment of indebtedness owed to HLH Acquisitions, Inc. by Sharyland in such amount; and
(l) Such additional documents or certificates with respect to such legal matters or limited liability company, general partnership or other proceedings related to the transactions contemplated hereby as may be reasonably requested by the Purchasers.
Section 4.12. Deposit Agreement, Etc. The Obligations shall be secured by a perfected first priority security interest (subject to Permitted Liens) in the Collateral in favor of the Collateral Agent, for the benefit of the Secured Parties, and the Company will deliver or cause to be delivered to the Purchasers and the Collateral Agent on the Closing Date the following, each of which shall be in full force and effect:
(a) A Deposit Account Control Agreement in the form of Exhibit S-1 to the 2009 SDTS Note Agreement, duly executed by each of the Company, the Collateral Agent and Bank of America N.A. (the “ Deposit Agreement ”);
(b) A Deed of Trust in the form of Exhibit S-2 to the 2009 SDTS Note Agreement, duly executed by the Company;
(c) A Collateral Agency Agreement in the form of Exhibit S-3 to the 2009 SDTS Note Agreement, duly executed by the Company, the Collateral Agent and the Purchasers; and
(d) Such other documents, instruments and agreements any Purchaser may reasonably request to grant to the Collateral Agent first priority (subject only to Permitted Liens) perfected Liens on the Collateral.
Section 4.13. UCC Searches; and Litigation Searches. The Collateral Agent and the Purchasers shall have received UCC and litigation searches of the Company and each Member, which searches shall (i) confirm that no Liens other than Permitted Liens exist on the Collateral and that such Persons are not subject to any litigation, and (ii) be otherwise in substance satisfactory to the Collateral Agent and the Purchasers.
Section 4.14. Insurance. The Company shall have delivered to the Purchasers evidence of insurance in effect that meets the requirements of Section 9.2 , and the Purchasers shall have received an insurance consultant’s report, which shall be addressed to the Purchasers and shall be in form and substance satisfactory to the Purchasers.
 
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Section 4.15. Financial Statements. The Purchasers shall have received unaudited financial statements of the Company and each Member for the fiscal quarter ended September 30, 2009.
Section 4.16. Consents and Approvals. All Required Permits and all governmental and third party permits and regulatory and other approvals required to be in effect in connection with the issuance of the Notes hereunder have been obtained and are in effect, all applicable waiting periods have expired without any materially adverse action being taken by any applicable authority, and copies of the documentation thereof shall have been delivered to each Purchaser.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY .
The Company represents and warrants to each Purchaser as of the Closing Date that:
Section 5.1. Organization; Power and Authority. Each of the Company and each Member is a limited liability company or limited partnership, as applicable, duly organized, validly existing and in good standing under the laws of its jurisdiction of formation, and is duly qualified and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Each of the Company and each Member has the limited liability company or limited partnership, as applicable, power and authority to own or hold under lease the properties it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver this Agreement and the other Transaction Documents to which it is a party and to perform the provisions hereof and thereof.
Section 5.2. Authorization, Etc . This Agreement and the other Transaction Documents have been duly authorized by all necessary limited liability company or limited partnership, as applicable, action on the part of the Company and each Member, and this Agreement and the other Transaction Documents constitute, and upon execution and delivery thereof each Note will constitute, a legal, valid and binding obligation of the Company or such Member, as applicable, enforceable against such Person in accordance with its terms, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors’ rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).
Section 5.3. Disclosure . This Agreement, the other Transaction Documents and the documents, certificates or other writings delivered to the Purchasers by or on behalf of the Company or a Member, in connection with the transactions contemplated hereby, and the financial statements listed in Schedule 5.5 (this Agreement, and such documents, certificates or other writings and such financial statements delivered to each Purchaser and listed on Schedule 5.3 being referred to, collectively, as the “ Disclosure Documents ” ), taken as a whole, do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading in light of the circumstances under which they were made. The projections and pro forma financial information contained in the materials referenced above are based upon good faith estimates and assumptions believed by management of the Company and Sharyland to be reasonable at the time made and on the Closing Date, it
 
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being recognized by each Purchaser that such financial information as it relates to future events is not to be viewed as fact and that actual results during the period or periods covered by such financial information may differ from the projected results set forth therein by a material amount. Except as disclosed in the Disclosure Documents, since December 31, 2008, there has been no change in the financial condition, operations, business, properties or prospects of the Company or a Member except changes that individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. There is no fact known to the Company that could reasonably be expected to have a Material Adverse Effect that has not been set forth herein or in the Disclosure Documents.
Section 5.4. Organization and Ownership of Interest in the Company . Schedule 5.4 contains a complete and correct list and description of (i) each of the Company’s and each Member’s jurisdiction of its organization and its ownership structure, (ii) the Company’s and each Member’s Subsidiaries, and (iii) the Company’s and each Member’s senior officers. The Company has no Subsidiaries as of the Closing Date except as shown on Schedule 5.4 .
Section 5.5. Financial Statements; Material Liabilities . The Company and Sharyland have delivered to each Purchaser copies of the financial statements listed on Schedule 5.5 . All of such financial statements (including in each case the related schedules and notes) fairly present in all material respects the consolidated financial positions of the Company and Sharyland, each as of the respective dates specified in such Schedule and the results of their operations and cash flows for the respective periods so specified and have been prepared in accordance with GAAP consistently applied throughout the periods involved except as set forth in the notes thereto (subject, in the case of any interim financial statements, to normal year-end adjustments). Neither the Company nor Sharyland has any material liabilities that are not disclosed on such financial statements or otherwise disclosed in the Disclosure Documents.
Section 5.6. Compliance with Laws, Other Instruments, Etc . The execution, delivery and performance by the Company and the Members of this Agreement and the Notes and the other Transaction Documents to which it is a party, do not and will not (i) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of such Person under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter or limited partnership or limited liability company agreement, or any other agreement or instrument to which such Person is bound or by which such Person or any of its properties may be bound or affected, (ii) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to such Person or (iii) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to such Person.
Section 5.7. Governmental Authorizations, Etc . Except as set forth on Schedule 5.7 , no consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority is required in connection with the execution, delivery or performance by the Company or either Member of this Agreement or the Notes or any of the other Transaction Documents to which it is a party.
Section 5.8. Litigation; Observance of Agreements, Statutes and Orders . (a) There are no actions, suits, investigations or proceedings pending or, to the knowledge of the Company,
 
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threatened against or affecting the Company or either Member or any of their property in any court or before any arbitrator of any kind or before or by any Governmental Authority that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.
(b) None of the Company or either Member is in default under any term of any Material Project Document listed in Schedule 5.12(b) to the 2009 SDTS Note Agreement or any other agreement or any order, judgment, decree or ruling of any court, arbitrator or Governmental Authority or is in violation of any applicable law, ordinance, rule or regulation (including without limitation Environmental Laws or the USA Patriot Act) of any Governmental Authority, which default or violation, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.
(c) To the knowledge of the Company, after due inquiry, no breach or default under any of the Material Project Documents listed in Schedule 5.12(b) to the 2009 SDTS Note Agreement has occurred and is continuing.
Section 5.9. Taxes . Each of the Company and each Member has filed all tax returns that are required to have been filed in any jurisdiction, and has paid all taxes shown to be due and payable on such returns and all other taxes and assessments levied upon them or their properties, assets, income or franchises, to the extent such taxes and assessments have become due and payable and before they have become delinquent, except for any taxes and assessments (i) the amount of which is not individually or in the aggregate material or (ii) the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which such Person has established adequate reserves in accordance with GAAP. The Company knows of no basis for any other tax or assessment that could reasonably be expected to have a Material Adverse Effect. The charges, accruals and reserves on the books of the Company in respect of Federal, state or other taxes for all fiscal periods are adequate.
Section 5.10. Title to Property; Leases . The Company has good and sufficient title to the System, and the Company and Sharyland have good and sufficient title to their properties that individually or in the aggregate are material to them, free and clear of Liens (other than Permitted Liens). All leases that individually or in the aggregate are material to the Company or Sharyland are valid and subsisting and are in full force and effect in all material respects.
Section 5.11. Insurance . Sharyland has all insurance coverage required by Section 9.2 .
Section 5.12. Licenses, Permits, Etc.; Material Project Documents. The Company and Sharyland own or possess all governmental and third party licenses, permits, franchises, authorizations, patents, copyrights, proprietary software, service marks, trademarks and trade names, or rights thereto, that are material to the ownership, leasing, operating and maintenance of the System, including the Certificate of Convenience and Necessity (#30192) issued by the Public Utility Commission of Texas to Sharyland without known conflict with the rights of others. The Material Project Documents listed on Schedule 5.12(b) to the 2009 SDTS Note Agreement constitute and include all material contracts and agreements to which the Company or Sharyland is a party. Each Material Project Document listed in Schedule 5.12(b) to the 2009 SDTS Note Agreement is in full force and effect, and constitutes the legal, valid and binding obligation of each party thereto as of the date hereof.
 
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Section 5.13. Compliance with ERISA . (a) The Company and each ERISA Affiliate have operated and administered each Plan in compliance with all applicable laws except for such instances of noncompliance as have not resulted in and could not reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any ERISA Affiliate has incurred any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans (as defined in section 3 of ERISA), and no event, transaction or condition has occurred or exists that could reasonably be expected to result in the incurrence of any such liability by the Company or any ERISA Affiliate, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate, in either case pursuant to Title I or IV of ERISA or to such penalty or excise tax provisions or to section 401(a)(29) or 412 of the Code or section 4068 of ERISA, other than such liabilities or Liens as would not be individually or in the aggregate material.
(b) The present value of the aggregate benefit liabilities under each of the Plans (other than Multiemployer Plans), determined as of the end of such Plan’s most recently ended plan year on the basis of the actuarial assumptions specified for funding purposes in such Plan’s most recent actuarial valuation report did not exceed the aggregate current value of the assets of such Plan allocable to such benefit liabilities by an amount in excess of $6,000,000. The term “benefit liabilities” has the meaning specified in section 4001 of ERISA and the terms “current value” and “present value” have the meanings specified in section 3 of ERISA.
(c) The Company and its ERISA Affiliates have not incurred withdrawal liabilities (and are not subject to contingent withdrawal liabilities) under section 4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate are material.
(d) The expected postretirement benefit obligation (determined as of the last day of the Company’s most recently ended fiscal year in accordance with Financial Accounting Standards Board Statement No. 106, without regard to liabilities attributable to continuation coverage mandated by section 4980B of the Code) of the Company is not material to it.
(e) The execution and delivery of this Agreement and the issuance and sale of the Notes hereunder will not involve any non-exempt prohibited transaction under section 406 of ERISA or in connection with which a tax could be imposed pursuant to section 4975(c)(1)(A)-(D) of the Code. The representation by the Company to each Purchaser in the first sentence of this Section 5.13(e) is made in reliance upon and subject to the accuracy of such Purchaser’s representation in Section 6.2 as to the sources of the funds used to pay the purchase price of the Notes to be purchased by such Purchaser.
Section 5.14. Private Offering by the Company . Neither the Company nor anyone acting on its behalf has offered the Notes or any similar securities for sale to, or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof with, any person other than the Purchasers and not more than five other Institutional Investors, each of which has been offered the Notes at a private sale for investment. Neither the Company nor anyone acting on its behalf has taken, or will take, any action that would subject the issuance or sale of the Notes to the registration requirements of Section 5 of the Securities Act or to the registration requirements of any securities or blue sky laws of any applicable jurisdiction.
 
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Section 5.15. Use of Proceeds; Margin Regulations. The Company will apply the proceeds of the sale of the Notes to (i) repay outstanding Indebtedness in the amount of $35,174,448.28, (ii) to repay $17,020,929 of inter-company Indebtedness provided by HLH Acquisitions, Inc., and (iii) pay all fees, expenses and costs related to Closing, including legal fees and the Structuring Fee. No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for the purpose of buying or carrying any margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System (12 CFR 221), or for the purpose of buying or carrying or trading in any securities under such circumstances as to involve the Company in a violation of Regulation X of said Board (12 CFR 224) or to involve any broker or dealer in a violation of Regulation T of said Board (12 CFR 220). As used in this Section, the terms “margin stock” and “purpose of buying or carrying” shall have the meanings assigned to them in Regulation U.
Section 5.16. Existing Indebtedness; Future Liens . (a)  Schedule 5.16 sets forth a complete and correct list of all outstanding Indebtedness of the Company and each Member as of December 31, 2009 (including a description of the obligors and obligees, principal amount outstanding and collateral therefor, if any, and Guaranty thereof, if any). Except for the repayment of the “Affiliate Loan” described on Schedule 5.16 , since September 30, 2009, there has been no material change in the amounts, interest rates, sinking funds, installment payments or maturities of the Indebtedness of the Company or a Member. Neither the Company nor either Member is in default and no waiver of default is currently in effect, in the payment of any principal or interest on any of its Indebtedness and no event or condition exists with respect to any of its Indebtedness that would permit (or that with notice or the lapse of time, or both, would permit) one or more Persons to cause such Indebtedness to become due and payable before its stated maturity or before its regularly scheduled dates of payment.
(b) The Company has not agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its property, whether now owned or hereafter acquired, to be subject to a Lien not otherwise permitted by Section 10.6 of the 2009 SDTS Note Agreement.
(c) The Company is not a party to, nor otherwise subject to any provision contained in, any instrument evidencing Indebtedness of the Company, any agreement relating thereto or any other agreement (including, but not limited to, its charter or other organizational document) which limits the amount of, or otherwise imposes restrictions on the incurring of, Indebtedness of the Company.
Section 5.17. Foreign Assets Control Regulations, Etc . (a) Neither the sale of the Notes by the Company hereunder nor the use of the proceeds thereof will violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto.
(b) Neither the Company nor either Member: (i) is a Person described or designated in the Specially Designated Nationals and Blocked Persons List of the Office of Foreign Assets Control or in Section 1 of the Anti-Terrorism Order or (ii) engages in any dealings or transactions with any such Person. The Company and each Member is in compliance, in all material respects, with the USA Patriot Act.
 
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(c) No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for any payments to any governmental official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977, as amended, assuming in all cases that such Act applies to the Company and the Members.
Section 5.18. Status under Certain Statutes . (a) Neither Member nor the Company is an “investment company” or a company “controlled” by an “investment company” within the meaning of the Investment Company Act of 1940, as amended, or an “investment adviser” within the meaning of the Investment Advisers Act of 1940, as amended.
(b) Neither the Company nor either Member is a “public utility” under the FPA and the regulations of FERC thereunder. The execution, delivery and performance of the Company’s and Sharyland’s obligations under the Transaction Documents requires no authorization of approval by, or notice to, and is not subject to the jurisdiction of, FERC under the FPA.
(c) Sharyland and the holding company system of which it is a part have obtained a waiver of the requirements of 18 C.F.R. 366.21, 366.22 and 366.23 (FERC Docket No. PH06-59-000), but are subject to the FERC regulations relating to regulatory access to books and records. Sharyland and the holding company system of which it is a part have filed a notice of holding company status under FERC Docket no. HC06-1-000 and may be required to submit a revised notice of holding company status and/or a revised request for the waiver described in the preceding sentence as a result of the transactions contemplated in the Transaction Documents or in Schedule 10.2 of the 2009 SDTS Note Agreement. Under FERC’s currently effective regulations, the Company will be deemed not to be a “public-utility company” and as a result neither Member is a “holding company” under PUHCA.
(d) The Company is subject to regulation as an “electric utility” by the Public Utility Commission of Texas. The execution, delivery and performance of the Company’s and Sharyland’s obligations under the Transaction Documents requires no authorization or approval by, or notice to, the Public Utility Commission of Texas or under the Public Utility Regulatory Act of Texas other than those that have been obtained.
(e) Solely by virtue of the execution, delivery and performance of the Transaction Documents, no Purchaser will become subject to any of the provisions of the FPA, PUHCA (based on FERC’s currently effective definitions under PUHCA) or the Public Utility Regulatory Act of Texas, or to regulation under any such statute.
Section 5.19. Environmental Matters . (a) The Company has no knowledge of any claims nor has it received any notice of any claim, and no proceeding has been instituted raising any claim against the Company or a Member or any of their real properties now or formerly owned, leased or operated by any of them or other assets, alleging any damage to the environment or violation of any Environmental Laws, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect.
 
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(b) The Company has no knowledge of any facts which would give rise to any claim, public or private, of violation of Environmental Laws or damage to the environment emanating from, occurring on or in any way related to real properties now or formerly owned, leased or operated by the Company or either Member or to other assets or its use, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect.
(c) Neither the Company nor either Member has stored any Hazardous Materials on real properties now or formerly owned, leased or operated by any of them and has not disposed of any Hazardous Materials in a manner contrary to any Environmental Laws in each case in any manner that could reasonably be expected to result in a Material Adverse Effect; and
(d) All buildings on all real properties now owned, leased or operated by the Company a Member are in compliance with applicable Environmental Laws, except where failure to comply could not reasonably be expected to result in a Material Adverse Effect.
Section 5.20. Force Majeure Events; Employees. Neither the System nor any of the other assets of the Company or a Member have suffered any Force Majeure Event that is continuing. The Company has no employees.
Section 5.21. Collateral . The Collateral, as described in the Security Documents, constitutes all of the Company’s rights in the System Lease and the System. The security interests in the Collateral granted to the Collateral Agent (for the benefit of the Secured Parties) pursuant to the Financing Documents: (a) constitute as to personal property included in the Collateral and, with respect to subsequently acquired personal property included in the Collateral, will constitute, a perfected security interest and Lien under each applicable Uniform Commercial Code, and (b) are, and, with respect to such subsequently acquired property, will be, as to Collateral perfected under each applicable Uniform Commercial Code, superior and prior to the rights of all third Persons now existing or hereafter arising whether by way of mortgage, lien, security interests, encumbrance, assignment or otherwise, except for Permitted Liens. All action as is necessary has been taken to establish and perfect the Collateral Agent’s rights in and to, and the first lien priority of its Lien on, the Collateral, including any recording, filing, registration, delivery to the Collateral Agent, giving of notice or other similar action. The Security Documents and financing statements relating thereto have been duly filed or recorded in each office and in each jurisdiction where required in order to create and perfect the Lien and security interest described above and the priority thereof.
SECTION 6. REPRESENTATIONS OF THE PURCHASERS .
Section 6.1. Purchase for Investment. Each Purchaser severally represents that it is an “Accredited Investor” as defined in Rule 501 of Regulation D under the Securities Act. Each Purchaser severally represents that it is purchasing the Notes for its own account or for one or more separate accounts maintained by such Purchaser or for the account of one or more pension or trust funds and not with a view to the distribution thereof, provided that the disposition of such Purchaser’s property shall at all times be within such Purchaser’s control. Each Purchaser
 
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understands that the Notes have not been registered under the Securities Act and may be resold only if registered pursuant to the provisions of the Securities Act or if an exemption from registration is available, except under circumstances where neither such registration nor such an exemption is required by law, and that the Company is not required to register the Notes.
Section 6.2. Source of Funds. Each Purchaser severally represents that at least one of the following statements is an accurate representation as to each source of funds (a “Source”) to be used by such Purchaser to pay the purchase price of the Notes to be purchased by such Purchaser hereunder:
(a) the Source is an “insurance company general account” (as the term is defined in the United States Department of Labor’s Prohibited Transaction Exemption ( “PTE” ) 95-60) in respect of which the reserves and liabilities (as defined by the annual statement for life insurance companies approved by the National Association of Insurance Commissioners (the “NAIC Annual Statement” )) for the general account contract(s) held by or on behalf of any employee benefit plan together with the amount of the reserves and liabilities for the general account contract(s) held by or on behalf of any other employee benefit plans maintained by the same employer (or affiliate thereof as defined in PTE 95-60) or by the same employee organization in the general account do not exceed 10% of the total reserves and liabilities of the general account (exclusive of separate account liabilities) plus surplus as set forth in the NAIC Annual Statement filed with such Purchaser’s state of domicile; or
(b) the Source is a separate account that is maintained solely in connection with such Purchaser’s fixed contractual obligations under which the amounts payable, or credited, to any employee benefit plan (or its related trust) that has any interest in such separate account (or to any participant or beneficiary of such plan (including any annuitant)) are not affected in any manner by the investment performance of the separate account; or
(c) the Source is either (i) an insurance company pooled separate account, within the meaning of PTE 90-1 or (ii) a bank collective investment fund, within the meaning of the PTE 91-38 and, except as disclosed by such Purchaser to the Company in writing pursuant to this clause (c), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; or
(d) the Source constitutes assets of an “investment fund” (within the meaning of Part V of PTE 84-14 (the “QPAM Exemption” )) managed by a “qualified professional asset manager” or “QPAM” (within the meaning of Part V of the QPAM Exemption), no employee benefit plan’s assets that are included in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Section V(c)(l) of the QPAM Exemption) of such employer or by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, the conditions of Part I(c) and (g) of the QPAM Exemption are satisfied, neither the QPAM nor a person controlling or controlled by the QPAM (applying the definition of “control” in Section V(e) of the QPAM Exemption) owns a 5% or more interest in the Company and (i) the identity of such QPAM and (ii) the names of all employee benefit plans whose assets are included in such investment fund have been disclosed to the Company in writing pursuant to this clause (d); or
 
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(e) the Source constitutes assets of a “plan(s)” (within the meaning of Section IV of PTE 96-23 (the “INHAM Exemption” )) managed by an “in-house asset manager” or “INHAM” (within the meaning of Part IV of the INHAM Exemption), the conditions of Part I(a), (g) and (h) of the INHAM Exemption are satisfied, neither the INHAM nor a person controlling or controlled by the INHAM (applying the definition of “control” in Section IV(d) of the INHAM Exemption) owns a 5% or more interest in the Company and (i) the identity of such INHAM and (ii) the name(s) of the employee benefit plan(s) whose assets constitute the Source have been disclosed to the Company in writing pursuant to this clause (e); or
(f) the Source is a governmental plan; or
(g) the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this clause (g); or
(h) the Source does not include assets of any employee benefit plan, other than a plan exempt from the coverage of ERISA.
As used in this Section 6.2 , the terms “employee benefit plan,” “governmental plan,” and “separate account” shall have the respective meanings assigned to such terms in section 3 of ERISA.
SECTION 7. INFORMATION .
Section 7.1. Financial and Business Information. The Company shall deliver, and shall cause Sharyland to deliver, to each Holder of Notes:
(a) Quarterly Statements — within 45 days after the end of each quarterly fiscal period in each calendar year of such Person and its Subsidiaries (excluding the last quarterly fiscal period of each such calendar year), duplicate copies of
(i) balance sheets of such Person and its Subsidiaries on a consolidated basis as at the end of such quarter, and
(ii) profit and loss statements and cash flows statements for such Person and its Subsidiaries on a consolidated basis for such quarter and (in the case of the second and third quarters) for the portion of the calendar year ending with such quarter,
setting forth in each case in comparative form the figures for the corresponding periods in the previous calendar year, all in reasonable detail, prepared in accordance with GAAP applicable to quarterly financial statements generally, and certified by a Senior Financial Officer of such Person as fairly presenting, in all material respects, the financial position of the companies being reported on and their results of operations and cash flows, subject to changes resulting from year-end adjustments;
 
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(b) Annual Statements — within 105 days after the end of each calendar year of the Company and Sharyland, duplicate copies of
(i) balance sheets of such Person on a consolidated basis as at the end of such year, and
(ii) statements of income, profit and loss statements and cash flows statements for such Person on a consolidated basis for such year,
setting forth in each case in comparative form the figures for the previous calendar year, all in reasonable detail, prepared in accordance with GAAP, and accompanied by
(A) an opinion thereon of Ernst & Young LLP or another independent public accounting firm of nationally recognized standing selected by the Company (herein, the “ Approved Accountant ”), which opinion shall state that such financial statements present fairly, in all material respects, the financial position of the companies being reported upon and their results of operations and cash flows and have been prepared in conformity with GAAP, and that the examination of the Approved Accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and that such audit provides a reasonable basis for such opinion in the circumstances, and
(B) a certificate of the Approved Accountants stating that they have reviewed this Agreement and stating further whether, in making their audit, they have become aware of any condition or event that then constitutes a Default or an Event of Default, and, if they are aware that any such condition or event then exists, specifying the nature and period of the existence thereof (it being understood that the Approved Accountants shall not be liable, directly or indirectly, for any failure to obtain knowledge of any Default or Event of Default unless the Approved Accountants should have obtained knowledge thereof in making an audit in accordance with generally accepted auditing standards or did not make such an audit);
(c) Other Reports — promptly upon their becoming available, and to the extent not otherwise required to be delivered pursuant to another provision of this Agreement, one copy of (i) each financial statement and budget and such other reports and notices as a Holder may reasonably request sent by the Company or Sharyland to its members or partners, (ii) each report or filing (without exhibits except as expressly requested by such Holder) other than regular and periodic reports and filings made by the Company, Sharyland, New Owner or New Operator to any state or Federal regulatory body;
(d) Notice of Default or Event of Default — promptly, and in any event within 5 Business Days after a Responsible Officer becoming aware of the existence of any Default or Event of Default or that any Person has given any notice or taken any action with respect to a claimed default hereunder or that any Person has given any notice or taken any action with
 
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respect to a claimed default of the type referred to in Section 11(f) , a written notice specifying the nature and period of existence thereof and what action the Company or New Owner is taking or proposes to take with respect thereto;
(e) Audit Reports — promptly, and in any event within 5 Business Days after receipt the results of any non-routine audit reports relating to the Company, Sharyland, New Owner or New Operator;
(f) ERISA Matters — promptly, and in any event within 5 Business Days after a Responsible Officer becoming aware of any of the following, a written notice setting forth the nature thereof and the action, if any, that the Company or an ERISA Affiliate proposes to take with respect thereto:
(i) with respect to any Plan, any reportable event, as defined in section 4043(c) of ERISA and the regulations thereunder, for which notice thereof has not been waived pursuant to such regulations as in effect on the date hereof; or
(ii) the taking by the PBGC of steps to institute, or the threatening by the PBGC of the institution of, proceedings under section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Company or any ERISA Affiliate of a notice from a Multi-employer Plan that such action has been taken by the PBGC with respect to such Multi-employer Plan; or
(iii) any event, transaction or condition that could result in the incurrence of any liability by the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or such penalty or excise tax provisions, if such liability or Lien, taken together with any other such liabilities or Liens then existing, could reasonably be expected to have a Material Adverse Effect;
(g) Notices from Governmental Authority — promptly, and in any event within 5 Business Days of receipt (or knowledge) thereof copies of any notice to the Company, any Subsidiary, Sharyland or New Operator from any Federal or state Governmental Authority relating to any order, ruling, statute or other law or regulation that could reasonably be expected to have a Material Adverse Effect;
(h) Other Notices — promptly, and in any event within 5 Business Days of receipt (or knowledge by a Responsible Officer of the Company) thereof:
(i) any press releases and other statements made available generally by any of the Company, any Subsidiary, Sharyland or New Operator to the public concerning developments that are material to the Company, Sharyland or any of their Subsidiaries;
 
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(ii) notice of the occurrence of any condition or event that could reasonably be expected to result in a Material Adverse Effect;
(iii) copies of any notice of a violation or an event of default under any Material Project Document;
(iv) any actual termination or rescission or any written threat of termination or rescission of any Material Project Document, any amendment of or waiver under any Material Project Document;
(v) any material pending or threatened adversarial or contested proceeding of or before a Governmental Authority relating to the System or the System Lease, the Acquired System or the New Lease, or the FERC Assets;
(vi) any termination, suspension or other loss of any Required Permit, other than a termination of a Required Permit in accordance with its terms so long as the permit, if it is a Required Permit, is replaced on a timely basis so as not to interrupt operation of the System, the Acquired System or the FERC Assets;
(vii) any litigation or proceeding taken or threatened in writing against the Company, Sharyland or any of their Subsidiaries, that, if successful, could reasonably be expected to result in a Material Adverse Effect;
(viii) any Force Majeure Event or other claim of force majeure under any Material Project Document; and
(ix) copies of any notices delivered by the lessee under the System Lease or the New Lease;
(i) Annual Operating Budgets — As soon as available and in any event within 30 days after the close of each calendar year of each of Sharyland and the Company, the annual budget of each of Sharyland and the Company.
(j) Information Required by Rule 144A — upon the request of such Holder (and shall deliver to any qualified institutional buyer designated by such Holder), such financial and other information as such Holder may reasonably determine to be necessary in order to permit compliance with the information requirements of Rule 144A under the Securities Act in connection with the resale of Notes, except at such times as the Company is subject to the reporting requirements of section 13 or 15(d) of the Exchange Act (for the purpose of this Section 7.1(j) , the term “qualified institutional buyer” shall have the meaning specified in Rule 144A under the Securities Act); and
(k) Requested Information — with reasonable promptness, such other data and information relating to the business, operations, affairs, financial condition, assets or properties of the Company or relating to the ability of the Company to perform its obligations hereunder and under the Notes as from time to time may be reasonably requested by any such Holder of Notes.
 
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Section 7.2. Officer’s Certificate . Each set of financial statements delivered pursuant to Section 7.1(a) or Section 7.1(b) shall be accompanied by a certificate of a Senior Financial Officer setting forth:
(a) Covenant Compliance — the information (including detailed calculations) required in order to establish whether the Company was in compliance with the requirements of Sections 9.9, 10.6 and 10.9 of this Agreement, during the quarterly or annual period covered by the statements then being furnished (including with respect to each such Section, where applicable, the calculations of the maximum or minimum amount, ratio or percentage, as the case may be, permissible under the terms of such Sections, and the calculation of the amount, ratio or percentage then in existence); and
(b) Event of Default — a statement that such Senior Financial Officer has reviewed the relevant terms hereof and has made, or caused to be made, under his or her supervision, a review of the transactions and conditions of the Company from the beginning of the quarterly or annual period covered by the statements then being furnished to the date of the certificate and that such review shall not have disclosed the existence during such period of any condition or event that constitutes a Default or an Event of Default or, if any such condition or event existed or exists (including, without limitation, any such event or condition resulting from the failure of the Company to comply with any Environmental Law), specifying the nature and period of existence thereof and what action the Company shall have taken or proposes to take with respect thereto.
Section 7.3. Visitation . The Company shall permit, and shall cause Sharyland, New Owner and New Operator to permit, the representatives of each Holder of Notes that is an Institutional Investor:
(a) No Default — if no Default or Event of Default then exists, at the expense of such Holder (or in the case of the Collateral Agent, the Holders) and upon reasonable prior notice, to visit the principal executive office of such Person, to discuss the affairs, finances and accounts of such Person with such Person’s officers, and (with the consent of such Person, which consent will not be unreasonably withheld) its independent public accountants, and (with the consent of such Person, which consent will not be unreasonably withheld) to visit the other offices and properties of such Person, all at such reasonable times and as often as may be reasonably requested in writing; and
(b) Default — if a Default or Event of Default then exists, at the expense of the Company to visit and inspect any of the offices or properties of such Person, to examine all their respective books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers and independent public accountants (and by this provision the Company authorizes said accountants to discuss the affairs, finances and accounts of the Company), all at such times and as often as may be reasonably requested.
 
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SECTION 8. PAYMENT AND PREPAYMENT OF THE NOTES .
Section 8.1. Amortization; Maturity;
On March 30, 2010 and on the 30th day of each June, September, December and March thereafter to and including December 30, 2029, the Company will prepay the principal amounts set forth in the amortization schedule attached hereto as Schedule 8.1 (the “Amortization Schedule” ) (or such lesser principal amount as shall then be outstanding) of the Notes at par and without payment of the Yield-Maintenance Amount or any premium, provided that upon any partial prepayment of the Notes pursuant to Section 8.2 , the principal amount of each required prepayment of the Notes becoming due under this Section 8.1 on and after the date of such prepayment shall be reduced in the same proportion as the aggregate unpaid principal amount of the Notes is reduced as a result of the prepayment. The entire unpaid principal balance of the Notes shall be due and payable on the Maturity Date.
Section 8.2. Optional Prepayments with Yield-Maintenance Amount. The Company may, at its option, upon notice as provided below, prepay at any time all, or from time to time any part of, the Notes, in an amount not less than $1,000,000 in the case of a partial prepayment, at 100% of the principal amount so prepaid, and the Yield-Maintenance Amount determined for the prepayment date with respect to such principal amount. The Company will give each Holder of Notes written notice of each optional prepayment under this Section 8.2 not less than 30 days and not more than 60 days prior to the date fixed for such prepayment. Each such notice shall specify such date (which shall be a Business Day), the aggregate principal amount of the Notes to be prepaid on such date, the principal amount of each Note held by such Holder to be prepaid (determined in accordance with Section 8.3 ), and the interest to be paid on the prepayment date with respect to such principal amount being prepaid, and shall be accompanied by a certificate of a Senior Financial Officer as to the estimated Yield-Maintenance Amount due in connection with such prepayment (calculated as if the date of such notice were the date of the prepayment), setting forth the details of such computation. Two Business Days prior to such prepayment, the Company shall deliver to each Holder of Notes a certificate of a Senior Financial Officer specifying the calculation of such Yield-Maintenance Amount as of the specified prepayment date.
Section 8.3. Allocation of Partial Prepayments . In the case of each partial prepayment of the Notes, the principal amount of the Notes to be prepaid shall be allocated among all of the Notes at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof not theretofore called for prepayment.
Section 8.4. Maturity; Surrender, Etc . In the case of each prepayment of Notes pursuant to this Section 8 , the principal amount of each Note to be prepaid shall mature and become due and payable on the date fixed for such prepayment (which shall be a Business Day), together with interest on such principal amount accrued to such date and the applicable Yield-Maintenance Amount, if any. From and after such date, unless the Company shall fail to pay such principal amount when so due and payable, together with the interest and Yield-Maintenance Amount, if any, as aforesaid, interest on such principal amount shall cease to accrue. Any Note paid or prepaid in full shall be surrendered to the Company and cancelled and shall not be reissued, and no Note shall be issued in lieu of any prepaid principal amount of any Note.
Section 8.5. Purchase of Notes . The Company will not and will not permit any Affiliate to purchase, redeem, prepay or otherwise acquire, directly or indirectly, any of the
 
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outstanding Notes except (a) upon the payment or prepayment of the Notes in accordance with the terms of this Agreement and the Notes or (b) pursuant to Section 13.2(b) ; provided that if an Affiliate which does not Control and is not Controlled by the Company has so acquired any of the outstanding Notes, such acquisition shall not constitute an Event of Default. The Company will promptly cancel all Notes acquired by it or any Affiliate pursuant to any payment or prepayment of Notes pursuant to any provision of this Agreement and no Notes may be issued in substitution or exchange for any such Notes.
Section 8.6. Yield-Maintenance Amount .
“Yield-Maintenance Amount” means, with respect to any Note, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Note over the amount of such Called Principal, provided that the Yield-Maintenance Amount may in no event be less than zero. For the purposes of determining the Yield-Maintenance Amount, the following terms have the following meanings:
“Called Principal” means, with respect to any Note, the principal of such Note that is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1 , as the context requires.
“Discounted Value” means, with respect to the Called Principal of any Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Notes is payable) equal to the Reinvestment Yield with respect to such Called Principal.
“Reinvestment Yield” means, with respect to the Called Principal of any Note, .50% over the yield to maturity implied by (i) the yields reported as of 10:00 a.m. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the display designated as “Page PX1” (or such other display as may replace Page PX1) on Bloomberg Financial Markets for the most recently issued actively traded on the run U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or (ii) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable (including by way of interpolation), the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (or any comparable successor publication) for U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date.
In the case of each determination under clause (i) or clause (ii), as the case may be, of the preceding paragraph, such implied yield will be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between (1) the applicable U.S. Treasury security with the maturity closest to and greater than such Remaining Average Life and (2) the applicable U.S. Treasury security with the maturity closest to and less than such Remaining Average Life. The Reinvestment Yield shall be rounded to the number of decimal places as appears in the interest rate of the applicable Note.
 
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“Remaining Average Life” means, with respect to any Called Principal, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (a) the principal component of each Remaining Scheduled Payment with respect to such Called Principal by (b) the number of years (calculated to the nearest one-twelfth year) that will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment.
“Remaining Scheduled Payments” means, with respect to the Called Principal of any Note, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, provided that if such Settlement Date is not a date on which interest payments are due to be made under the terms of the Notes, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to Section 8.2 or 12.1 .
“Settlement Date” means, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1 , as the context requires.
SECTION 9. AFFIRMATIVE COVENANTS.
The Company covenants that so long as any of the Notes are outstanding:
Section 9.1. Compliance with Law . Without limiting Section 10.4 , the Company will, and will cause its Subsidiaries, including New Owner, to comply with all laws, ordinances or governmental rules or regulations to which it is subject, including, without limitation, ERISA, the USA Patriot Act and Environmental Laws, and will obtain and maintain in effect all licenses, certificates, permits, franchises and other governmental authorizations necessary to the ownership of its properties or to the conduct of its businesses to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
Section 9.2. Insurance . The Company will maintain or cause to be maintained and will cause its Subsidiaries, including New Owner, to maintain, with financially sound and reputable insurers, insurance with respect to their respective properties and businesses against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated, but in no event less than the insurance set forth in this Section 9.2 and Schedule 9.2 .
 
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(a) Insurance by the Company : The Company shall procure at its own expense and maintain in full force and effect at all times throughout the term of this Note Purchase Agreement insurance policies with insurance companies rated A-, 9 or higher by A.M. Best, or acceptable to the Required Holders if not so rated, and authorized to do business in the State of Texas.
(b) Amendment of Requirements : The Required Holders may at any time amend the requirements and approved insurance companies described in this Section 9.2 or Schedule 9.2 due to (i) new information not previously known by the Purchasers prior to the Closing Date or (ii) changed circumstances after Closing Date, in which in the reasonable judgment of the Required Holders either renders a required coverage to be materially inadequate or materially reduces the financial ability of the approved insurance companies to pay claims.
(c) Evidence of Insurance : On the Closing Date and on any anniversary thereafter, if so requested by a Holder or the Collateral Agent, the Company shall furnish the Holders and the Collateral Agent with approved certification of all required insurance. Such certification shall be executed by each insurer or by an authorized representative of each insurer where it is not practical for such insurer to execute the certificate itself. Such certification shall identify underwriters, the type of insurance, the insurance limits, and the policy term, and shall specifically list the special provisions enumerated for such insurance required by this Section 9.2 . Upon request, the Company will promptly furnish the Holders and the Collateral Agent with copies of all insurance certificates, binders, and cover notes or other evidence of such insurance relating to the Collateral.
(d) Insurance Report : Concurrently with the furnishing of the certification referred to in Section 9.2(c) and on an annual basis thereafter, the Company shall furnish the Holders with a certificate, signed by a Responsible Officer of the Company, stating that all premiums then due have been paid and that the insurance then carried or to be renewed is in accordance with the terms of this Section 9.2 . and Schedule 9.2 .
(e) Failure to Maintain Insurance : In the event the Company fails to take out or maintain the full insurance coverage required by this Section 9.2 and Schedule 9.2 , the Required Holders, upon thirty (30) days’ prior notice (unless the aforementioned insurance would lapse within such period, in which event notice should be given as soon as reasonably possible) to the Company of any such failure, may (but shall not be obligated to) take out (or cause the Collateral Agent to take out) the required policies of insurance and pay the premiums on the same. All amounts so advanced thereof by the Holders (or the Collateral Agent) shall become an additional obligation of the Company to the Holders (or the Collateral Agent), and the Company shall forthwith pay such amounts to the Holders (or the Collateral Agent).
(f) No Duty of Purchaser to Verify : No provision of this Section 9.2 or Schedule 9.2 or any other provision of this Agreement, any other Financing Document or any Project Document shall impose on the Holders or the Collateral Agent any duty or obligation to verify the existence or adequacy of the insurance coverage maintained by the Company, nor shall the Holders or the Collateral Agent be responsible for any representations or warranties made by or on behalf of the Company to any insurance company or underwriter.
 
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Section 9.3. Maintenance of Properties . The Company will, and will cause its Subsidiaries, including New Owner, to, maintain and keep, or cause to be maintained and kept, their respective properties in good repair, working order and condition (other than ordinary wear and tear), so that the business carried on in connection therewith may be properly conducted at all times. The Company shall, and shall cause Sharyland, New Owner and New Operator, as applicable, to operate and maintain the System, including the Acquired System, and the FERC Assets in accordance with, and make all repairs, alterations, additions and replacements which are necessary for the System, including the Acquired System, and the FERC Assets to meet, all Requirements of Law, including all Required Permits, all requirements of the Transaction Documents and Good Utility Practices.
Section 9.4. Payment of Taxes and Claims . The Company will, and will cause each of its Subsidiaries, including New Owner, to, file all tax returns required to be filed in any jurisdiction and to pay and discharge all taxes shown to be due and payable on such returns and all other taxes, assessments, governmental charges, or levies imposed on them or any of their properties, assets, income or franchises, to the extent the same have become due and payable and before they have become delinquent and all claims for which sums have become due and payable that have or might become a Lien on properties or assets of the Company or any Subsidiary, including New Owner, provided that none of the Company or any Subsidiary, including New Owner, need pay any such tax, assessment, charge, levy or claim if (i) the amount, applicability or validity thereof is contested by such Person on a timely basis in good faith and in appropriate proceedings, and such Person has established adequate reserves therefor in accordance with GAAP on its books or (ii) the nonpayment of all such taxes, assessments, charges, levies and claims in the aggregate could not reasonably be expected to have a Material Adverse Effect.
Section 9.5. Existence, Etc . The Company will at all times preserve and keep in full force and effect its limited liability company existence and all rights and franchises of the Company unless, in the good faith judgment of the Company, the termination of or failure to preserve and keep in full force and effect such corporate existence, right or franchise could not, individually or in the aggregate, have a Material Adverse Effect. The Company will cause each of its Subsidiaries, including New Owner, to at all times preserve and keep in full force and effect its limited liability company, corporate or limited partnership existence, except as permitted pursuant to Section 10.2 .
Section 9.6. Books and Records . The Company will, and will cause each of its Subsidiaries, Sharyland and New Operator to, maintain proper books of record and account in conformity with GAAP and all applicable requirements of any Governmental Authority having legal or regulatory jurisdiction over such Person.
Section 9.7. Collateral; Further Assurances. (a)  The Company shall take all actions necessary to insure that the Collateral Agent, on behalf of the Secured Parties, has and continues to have in all relevant jurisdictions duly and validly created, attached, perfected and enforceable first-priority Liens on the Collateral described in the Security Documents (including after-acquired Collateral), subject to no Liens other than Permitted Liens and rights of holders of Permitted Secured Indebtedness in compliance with the Collateral Agency Agreement. The Company shall cause the Obligations to constitute direct senior secured obligations of the Company and to rank senior in priority of payment, in right of security and in all other respects to all other Indebtedness of the Company (other than Permitted Secured Indebtedness, with which it shall be pari passu in accordance with the terms of the Collateral Agency Agreement).
 
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(b) Upon completion of each New Project, the Company may cause its Project Finance Subsidiary to Transfer the New Project to the Company and shall take all actions necessary to insure that (i) the New Project becomes a part of the Collateral, subject to the first priority Lien of the Security Documents, (ii) no Default or Event of Default occurs as a result of such Transfer, (iii) the Indebtedness of the Project Finance Subsidiary is either repaid in full at the time of the Transfer or becomes Permitted Secured Indebtedness, and (iv) the Project Finance Subsidiary is terminated or merged with and into the Company.
(c) If the Company acquires or leases any real property, the value (or aggregate rental costs) of which exceeds $1,000,000, the Company shall forthwith (and in any event, within five Business Days of such acquisition or lease) deliver to the Collateral Agent a fully executed mortgage or deed of trust over such real property, in form and substance satisfactory to the Required Holders and the Collateral Agent, together with such surveys, environmental reports and other documents and certificates with respect to such real estate as may be reasonably required by the Required Holders. The Company further agrees to take all other actions necessary to create in favor of the Collateral Agent for the benefit of the Secured Parties a valid and enforceable first priority Lien on such real estate, free and clear of all Liens except for Permitted Liens and rights of holders of Permitted Secured Indebtedness in compliance with the Collateral Agency Agreement.
Section 9.8. Material Project Documents . (a) The Company shall at all times (i) perform and observe all of the covenants under the Material Project Documents to which it is a party, (ii) take reasonable actions to enforce all of its rights and obligations thereunder, and (iii) maintain the Material Project Documents in full force and effect.
(b) Upon expiration or termination of the initial or any renewal term of the Lease Supplement or the New Lease (or any supplement or new lease entered into in replacement thereof in accordance with this Section 9.8(b) ), the Company shall, or shall cause New Owner to, enter into a supplement or new lease with respect to the Acquired System or the FERC Assets, as applicable: (i) having an initial term of at least five years, (ii) providing for renewal terms, (iii) requiring payment of a base rent that is sufficient during the initial and all renewal terms of such supplement or new lease to enable the Company to pay Debt Service with respect to the Notes and the Notes (as defined in the 2009 SDTS Note Agreement) when due, and (iv) (x) substantially in the form of the existing System Lease with respect to all non-economic provisions; provided that notwithstanding the foregoing, provisions that are administrative or ministerial in nature and provisions that are of an inconsequential nature and which do not adversely affect any Holder or which satisfy any requirements, conditions or guidelines contained in any order, directive, opinion, ruling or regulation of a Federal or state agency or contained in Federal or state law shall be deemed to be substantially in the form of the existing System Lease, or (y) otherwise in form and substance satisfactory to the Required Holders, which consent shall not be unreasonably withheld. If the Required Holders have a consent right pursuant to clause (iv)(y) hereof, the Holders shall make commercially reasonable efforts to respond to the Company’s request for such review within ten business days, provided that failure to so respond shall not be deemed a consent to such supplement or new lease.
 
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Section 9.9. Financial Ratios . (a) The Company shall at all times maintain, on a consolidated basis, a Total Debt to Capitalization Ratio of not more than 0.65 to 1.00.
(b) The Company shall maintain, for each period of four consecutive fiscal quarters, a Debt Service Coverage Ratio of at least 1.40 to 1.00; provided that for purposes of this Section 9.9(b) , the Debt Service Coverage Ratio shall be deemed to be 1.40 to 1.00 for the three calendar quarters ending December 31, 2009, March 31, 2010 and June 30, 2010.
SECTION 10. NEGATIVE COVENANTS .
The Company covenants that so long as any of the Notes are outstanding:
Section 10.1. Transactions with Affiliates . The Company will not and will not permit any Subsidiary (including New Owner), Sharyland or New Operator to enter into directly or indirectly any transaction or group of related transactions (including without limitation the purchase, lease, sale or exchange of properties of any kind or the rendering of any service) with any Affiliate (other than, in the case of (i) the Company, a Project Finance Subsidiary, as permitted by Section 9.7(b) , (ii) Sharyland, pursuant to the System Lease or (iii) New Owner and New Operator, pursuant to the New Lease), except in the ordinary course and upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would be obtained in a comparable arms-length transaction with a Person not an Affiliate.
Section 10.2. Merger, Consolidation, Etc . The Company will not nor will it cause or permit any of its Subsidiaries to consolidate with or merge with any other Person or convey, transfer or lease all or substantially all of its assets in a single transaction or series of transactions to any Person, except (i) pursuant to the System Lease or the New Lease, (ii) as permitted pursuant to Section 9.7(b) , or (iii) that so long as after giving effect to such merger or consolidation no Default or Event of Default shall have occurred or will result therefrom, the Company or any Subsidiary may merge or consolidate with another Person, so long as, after giving effect to such merger or consolidation, with respect to any merger or consolidation to which the Company is a party, the Company shall be the surviving entity, and with respect to any merger or consolidation to which a Subsidiary is a party but the Company is not, a Subsidiary shall be the surviving entity.
Section 10.3. Line of Business . The Company will not and will not permit any Subsidiary, including New Owner, to engage in any business if, as a result, the general nature of the business in which the Company and its Subsidiaries, including New Owner, taken as a whole, would then be engaged would be substantially changed from the transmission and distribution of electric power and the provision of ancillary services.
Section 10.4. Terrorism Sanctions Regulations . The Company will not and will not permit any Member or Subsidiary to (a) become a Person described or designated in the Specially Designated Nationals and Blocked Persons List of the Office of Foreign Assets Control or in Section 1 of the Anti-Terrorism Order or (b) engage in any dealings or transactions with any such Person.
Section 10.5. Liens. The Company will not, nor will it cause or permit any Subsidiary, including New Owner, to, directly or indirectly create, incur, assume or permit to exist (upon the
 
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happening of a contingency or otherwise) any Lien on or with respect to the Collateral or any other property of the Company or such Subsidiary, including New Owner, whether now owned or held or hereafter acquired, or any income or profits therefrom, or assign or otherwise convey any right to receive income or profits, or on any other asset now owned or hereafter acquired by the Company or such Subsidiary, except (each, a “ Permitted Lien ”):
(a) solely in the case of the Company, Liens created by the Financing Documents on assets of the Company; and
(b) solely in the case of a Project Finance Subsidiary, Liens on assets owned by that Project Finance Subsidiary and on the ownership interests in that Project Finance Subsidiary to secure its Non-Recourse Debt;
(c) Liens permitted pursuant to the terms of the Security Documents;
(d) Liens for taxes, assessments or other governmental charges which are not yet due and payable or the payment of which is not at the time required by Section 9.4 ;
(e) any attachment or judgment Lien, unless such attachment or judgment Lien constitutes an Event of Default under Section 11(l) hereof;
(f) RESERVED;
(g) Liens of a lessor of equipment to the Company or any Subsidiary, including New Owner, on such lessor’s leased equipment (but excluding equipment leased pursuant to a Capital Lease), including any of the foregoing which is evidenced by a protective Uniform Commercial Code filing;
(h) Mechanics’, warehousemen’s, carriers’, workers’, repairers’, landlords’, and other similar liens arising or incurred in the ordinary course of business and (i) which do not in the aggregate materially detract from the value of property or assets subject to such Liens or materially impair the continued use thereof in the operation of the business or (ii) which are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property or asset subject to such Liens, or other Liens incurred or deposits made in the ordinary course of business in connection with workers’ compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, trade contracts, leases, government contracts, performance and return-of-money bonds and other similar obligations incurred in the ordinary course of business (exclusive of obligations in respect of the payment for borrowed money);
(i) zoning, entitlement, restriction, and other land use and environmental regulations by Governmental Authorities and encroachments, easements, rights of way, covenants, restrictions or agreements which do not materially interfere with the continued use of any asset as currently used in the conduct of the business;
 
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(j) any encumbrances set forth in any franchise or governing ordinance under which any portion of the business is conducted which could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; and
(k) all rights of condemnation, eminent domain, or other similar right of any Person.
Section 10.6. Indebtedness. The Company will not, and will not cause or permit a Subsidiary or Sharyland or New Operator to, incur or in any manner become or be liable in respect of any Indebtedness, except the following Indebtedness, which may be incurred subject to the requirements of the last paragraph of this section:
(a) Indebtedness evidenced by the Financing Documents or the RBC Agreement;
(b) Indebtedness of the Company that (i) that is not related to, and does not support, Non-Recourse Debt of a Project Finance Subsidiary and (ii) if incurred, would not result in a breach of Section 9.9 ;
(c) (i) Non-Recourse Debt incurred by a Project Finance Subsidiary to fund a New Project and (ii) Indebtedness of a Wholly-Owned Subsidiary (other than a Project Finance Subsidiary) owed to the Company;
(d) Indebtedness of Sharyland allowed under the System Lease in an aggregate amount of up to $4,000,000;
(e) Indebtedness of the New Owner allowed under the New Lease in an aggregate amount up to $1,000,000 at any one time outstanding; or
(f) Indebtedness of the Company to any of its Wholly Owned Subsidiaries (other than a Project Finance Subsidiary), which by its terms is expressly subordinated to the Notes, and Indebtedness of any Wholly Owned Subsidiary (other than a Project Finance Subsidiary) to the Company or any other Wholly Owned Subsidiary of the Company (other than a Project Finance Subsidiary) not to exceed $5,000,000 at any one time outstanding and in each case to have a maturity date of less than one year later.
Indebtedness may be incurred under this Section 10.6 only if no Default or Event of Default is, or as a result of such incurrence would be, existing.
Section 10.7. Loans, Advances, Investments and Contingent Liabilities. The Company will not make or permit to remain outstanding any loan or advance to, or extend credit other than credit extended in the ordinary course of business to any Person, or own, purchase or acquire any stock, obligations or securities of, or any other interest in, or make any capital contribution to, any Person, or commit to do any of the foregoing, except (a) Permitted Investments, (b) equity interests in Project Finance Subsidiaries, or (c) loans to or equity interests in Wholly-Owned Subsidiaries (other than Project Finance Subsidiaries).
Section 10.8. No Subsidiaries. The Company shall have no subsidiaries other than Project Finance Subsidiaries and other Wholly-Owned Subsidiaries. The Company shall give the Holders notice 5 Business Days prior to creating any new Subsidiaries.
 
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Section 10.9. Restricted Payments . The Company will not, directly or indirectly, make or declare any Distribution unless the following conditions are met (the “ Restricted Payment Conditions ”):
(a) there does not exist and, after giving effect to the proposed Distribution, there will not exist, a Default or an Event of Default; and
(b) the Distribution is to be made no sooner than 15 days following a Payment Date.
The Company shall deliver to the Holders and the Collateral Agent before a Distribution is made a certificate of a Responsible Officer of the Company stating that each of the foregoing conditions has been satisfied and, if requested, providing supporting data and calculations.
Section 10.10. Sale of Assets, Etc. The Company will not nor will it cause or permit New Operator, Sharyland or any Subsidiary of the Company to transfer, or agree or otherwise commit to Transfer, any of its assets except :
(a) the Company shall lease the System to Sharyland pursuant to the System Lease; the Company shall lease the Acquired System to Sharyland pursuant to the Lease Supplement; and the New Owner shall lease the FERC Assets to New Operator pursuant to the New Lease;
(b) each Project Finance Subsidiary may Transfer the New Project developed and constructed by such Project Finance Subsidiary to the Company upon completion of the New Project in accordance with Section 9.7(b) ; and
(c) the Company, New Operator, Sharyland and any Subsidiary of any of them may sell assets that are obsolete or no longer used or useful in such Person’s business.
Section 10.11. Sale or Discount of Receivables. The Company will not nor will it cause or permit any Subsidiary or New Operator to sell with recourse, or discount or otherwise sell for less than the face value thereof, any of its notes or accounts receivable.
Section 10.12. Amendments to Organizational Documents . The Company will not nor will it cause or permit any of its Subsidiaries, Sharyland or any of Sharyland’s Subsidiaries to amend, supplement, terminate, replace or waive any provision of its operating agreement or other organization documents. Notwithstanding the preceding sentence, each of the Company, its Subsidiaries, Sharyland and Sharyland’s Subsidiaries may, without the consent of the Holders, amend its operating agreement as may be required to facilitate or implement any of the following:
(a) to reflect the contribution of additional capital by its members;
(b) to reflect a change that is of an inconsequential nature and does not adversely affect any Holders in any material respect, or to cure any ambiguity, or correct or supplement any provision, not inconsistent with law or with the provisions of this Agreement;
 
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(c) to satisfy any requirements, conditions, or guidelines contained in any order, directive, opinion, ruling or regulation of a Federal or state agency or contained in Federal or state law; and
(d) to take actions to avoid any material adverse consequences to such Person as a result of any change in law or interpretation of law applicable to Persons subject to regulation by the PUCT and FERC.
The Company will provide notice to the Holders at least 5 Business Days prior to taking any such action under the foregoing sentence of this Section 10.12.
Section 10.13. Sale and Lease-Back. Except for the System Lease and the New Lease, the Company will not, nor will it cause or permit any Subsidiary to, enter into any arrangement providing for the leasing by the Company or any Subsidiary of real or personal property which has been or is to be Transferred by the Company or Subsidiary to a lender or investor or to any Person to whom funds have been or are to be advanced by such lender or investor on the security of such property or rental obligations of the Company or any Subsidiary.
Section 10.14. ERISA Compliance .
(a) Relationship of Vested Benefits to Plan Assets . The Company will not as of the last day of any calendar year permit the aggregate ratio of (x) the aggregate actuarial value of assets as defined in and determined in accordance with Code Section 430(g)(3)(B) and adopted by Sharyland under each Plan (other than a Multiemployer Plan) to (y) the present value of the aggregate benefit liabilities under all Plans, determined in accordance with Title IV of ERISA, to be less than 80%. The Company and its ERISA Affiliates will not incur withdrawal liabilities (and will not become subject to contingent withdrawal liabilities) under section 4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate are material.
(b) Valuations . For the purposes of clause (a) above, all assumptions and methods used to determine the actuarial valuation of vested and unvested employee benefits under any Plan at any time maintained by the Company and the present value of assets of any such Plan shall be reasonably consistent with those determinations made for purposes of Section 5.13 of the 2010 SDTS Note Agreement.
(c) Prohibited Actions . The Company will not, nor, as applicable, will any Plan at any time maintained by the Company
(i) engage in any non-exempt “ prohibited transaction ” (as such term is defined in Section 406 or Section 2003(a) of ERISA;
(ii) fail to meet the minimum funding standards of Section 302 of ERISA or Sections 412 and 430 of the Code, or seek or obtain a waiver thereof or fail to make any required contribution to a Multiemployer Plan; or
(iii) terminate any such Plan in a manner which could result in the imposition of a Lien on the Property of the Company pursuant to Section 4068 of ERISA.
 
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Section 10.15. No Margin Stock . Anything herein contained to the contrary notwithstanding, the Company will not, nor will it permit any Subsidiary to, make or authorize any investment in, or otherwise purchase or carry, any margin stock.
Section 10.16. Project Documents .
(a) The Company will not amend, modify, supplement, replace, terminate or waive any provision of any Material Project Document to which it is party, or consent to any amendment, modification, supplement, replacement, termination or waiver of any Material Project Document, except that (i) the Company, Sharyland, New Owner and New Operator may enter into “Lease Supplements” as contemplated by the System Lease and the New Lease in accordance with Section 9.8(b) , and (ii) the Company may enter into modifications of Material Project Documents that are merely ministerial or corrective in nature.
(b) The Company shall not enter into any Additional Project Document, except (i) leases and lease supplements in accordance with Section 9.8(b), and (ii) limited liability company agreements or other organizational documents of Project Finance Subsidiaries or other Wholly-Owned Subsidiaries. The Company shall ensure that Sharyland does not enter into any new lease of transmission or distribution facilities other than the System Lease at any time prior to the Maturity Date; provided that for the avoidance of doubt, the foregoing provisions of this sentence shall not prohibit Sharyland from maintaining or entering into replacement leases for, or from amending or modifying the leases described in Schedule 10.16 .
Section 10.17. Regulation .
(a) Except as permitted in connection with the transactions described in Schedule 10.1 or in subsection (d) below, the Company shall not be or become, nor shall it permit Sharyland to be or become, subject to FERC jurisdiction under the FPA; provided, however, that the Company shall not be in default of the forgoing negative covenant if the Company or Sharyland becomes subject to FERC jurisdiction under the FPA solely as a result of a change to the FPA or in FERC’s interpretation thereof or regulations thereunder, if the Company or Sharyland takes all necessary actions to comply with applicable FERC requirements and the operation of the System is uninterrupted;
(b) The Company shall not become subject to regulation under PUHCA except to the extent and in the fashion it is subject to regulation on the Closing Date; provided, however, that the Company shall not be in default of the foregoing negative covenant if the Company becomes subject to additional such regulation solely as a result of a change to the PUHCA or in FERC’s interpretation thereof or the regulations thereunder if the Company takes all necessary actions to comply with PUHCA requirements and the operation of the System is uninterrupted. As a result of the Cap Rock Transaction, Sharyland will become a “holding company” under PUHCA and, together with the holding company system of which it is a part, may be required to submit to FERC a revised notice of holding company status and/or a revised request for waiver of the requirements of 18 C.F.R. §§ 366.21, 366.22, and 366.23;
(c) None of the Company nor Sharyland shall violate in any material respect any regulation or order of the Public Utility Commission of Texas applicable to it; and
 
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(d) None of the Company nor Sharyland shall own, operate or control any electrical generating, transmitting or distribution facility, nor effect or control any sale of electricity, outside of the ERCOT balancing authority area except (i) as permitted by FERC, as set forth in its declaratory order issued in Docket no. EL07-93-000 or (ii) interconnected transmission or distribution assets or systems located substantially in the State of Texas or deriving a majority of their revenue from customers within the State of Texas.
Section 10.18. Swaps . The Company will not, nor will it permit any Subsidiary, including New Owner, to, enter into any Swap Contracts, except that the Company may enter into Swap Contracts solely to hedge interest rate risk and not for speculative purposes.
Section 10.19. Most Favored Lender. The Company will not enter into, assume or otherwise become bound or obligated under any agreement creating or evidencing Indebtedness containing one or more Additional Covenants or Additional Defaults unless the Required Holders shall have given prior written consent to such agreement (the Required Holders hereby being deemed to have consented to the 2010 Note Agreement and the RBC Agreement as in effect on July 13, 2010); provided, however, in the event the Company shall enter into, assume or otherwise become bound by or obligated under any such agreement without the prior written consent of the Required Holders, the terms of this Agreement shall, without any further action on the party of the Company or any of the Holders of the Notes, be deemed to be amended automatically to include each Additional Covenant and each Additional Default contained in such agreement. The Company further covenants to promptly execute and deliver at its expense (including the fees and expenses of counsel for the Holders of the Notes) an amendment to this Agreement in form and substance satisfactory to the Required Holders evidencing the amendment of this Agreement to include such Additional Covenants and Additional Defaults, but that the execution and delivery of such amendment shall not be a precondition to the effectiveness of such amendment as provided for in this Section 10.19 , but shall merely be for the convenience of the parties hereto; provided that if the Company promptly executes and delivers at its expense such amendment of this Agreement to include such Additional Covenants and Additional Defaults, the Company shall not be in breach or default of the covenant in this Section 10.19 .
SECTION 11. EVENTS OF DEFAULT .
An “ Event of Default ” shall exist if any of the following conditions or events shall occur and be continuing:
(a) the Company defaults in the payment of any principal or Yield-Maintenance Amount, if any, on any Note when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise; or
(b) the Company defaults in the payment of any interest on any Note for more than five days after the same becomes due and payable; or
(c) the Company defaults in the performance of or compliance with any term contained in Section 7.1(d) , Section 9.2, 9.9 or Section 10 ; or
 
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(d) the Company defaults in the performance of or compliance with any term contained herein (other than those referred to in Sections 11(a) , (b)  and (c) ) or in any other Financing Document (other than those referred to in another paragraph of this Section 11 ) and such default is not remedied within 30 days after the earlier of (i) a Responsible Officer obtaining actual knowledge of such default and (ii) the Company receiving written notice of such default from the Collateral Agent or Holder of a Note (any such written notice to be identified as a “notice of default” and to refer specifically to this Section 11(d) ); or
(e) any representation or warranty made in writing by or on behalf of the Company or by any officer of the Company in this Agreement or any other Transaction Document or in any writing furnished in connection with the transactions contemplated hereby proves to have been false or incorrect in any material respect on the date as of which made; or
(f) (i) A default or event of default occurs under the System Lease or the New Lease or any other Material Project Document, and such failure continues for more than any cure period specified therefor; or (ii) the System Lease, the New Lease or any other Transaction Document is declared to be null and void or is otherwise unenforceable, or any party thereto claims that any such agreement is unenforceable; or
(g) any Required Permit is lost, terminated without being timely replaced (if the terminated Permit continues to be a Required Permit), revoked or otherwise is not in effect; provided, however, that the termination without immediate renewal of any franchise agreement pursuant to which the Company, a Member, New Owner or New Operator is authorized to operate the System, the Acquired System or the FERC Assets and collect fees for services shall not constitute an Event of Default if the parties to the franchise agreement continue to perform in accordance with the terms of such agreement notwithstanding the termination; or
(h) any Lien granted to the Collateral Agent pursuant to any of the Security Documents is invalid, void, unenforceable or unperfected or ceases to have first priority (subject to Permitted Liens), or any Person commences any proceeding or takes any other action to render any such Lien invalid, or to avoid any such Lien or to render any such Lien unenforceable or unperfected or to challenge the priority of such Lien, or an event of default occurs under any Indebtedness that is secured in whole or in part by the Collateral Agency Agreement, or any Person party to the Collateral Agency Agreement fails to comply with the terms thereof or commences any proceeding or takes any other action to render any part of the Collateral Agency Agreement unenforceable; or
(i) without limiting clause (h), (i) the Company, Sharyland, New Owner or New Operator is in default (as principal or as guarantor or other surety) in the payment of any principal of or premium or make-whole amount or interest on any Indebtedness that is outstanding in an aggregate principal amount of at least $10,000,000 ($2,000,000 in the case of Sharyland, New Owner or New Operator) beyond any period of grace provided with respect thereto, or (ii) the Company, Sharyland, New Owner or New Operator is in default in the performance of or compliance with any term of any evidence of any Indebtedness in an aggregate outstanding principal amount of at least $10,000,000 ($2,000,000 in the case of Sharyland, New Owner or New Operator) or of any mortgage, indenture or other agreement relating thereto or any other condition exists, and as a consequence of such default or condition
 
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such Indebtedness has become, or has been declared (or one or more Persons are entitled to declare such Indebtedness to be), due and payable before its stated maturity or before its regularly scheduled dates of payment, or (iii) as a consequence of the occurrence or continuation of any event or condition (other than the passage of time or the right of the holder of Indebtedness to convert such Indebtedness into equity interests), (x) the Company, Sharyland, New Owner or New Operator has become obligated to purchase or repay Indebtedness before its regular maturity or before its regularly scheduled dates of payment in an aggregate outstanding principal amount of at least $10,000,000 (or $2,000,000 in the case of Sharyland, New Owner or New Operator), or (y) one or more Persons have the right to require the Company, Sharyland, New Owner or New Operator to purchase or repay such Indebtedness, or (iv) a default or an event of default occurs under the 2010 SDTS Note Agreement or the RBC Agreement and such failure continues for more than any cure period specified therefor; or
(j) the Company, Sharyland, New Owner or New Operator (i) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes corporate action for the purpose of any of the foregoing; or
(k) a court or Governmental Authority of competent jurisdiction enters an order appointing, without consent by the Company, Sharyland, New Owner or New Operator, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of any such Person or any such petition shall be filed against any such Person and such petition shall not be dismissed within 90 days; or
(l) a final judgment or judgments for the payment of money aggregating in excess of $10,000,000 ($2,000,000 in the case of Sharyland, New Owner or New Operator) are rendered against such Person and which judgments are not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay; or
(m) if (i) any Plan shall fail to satisfy the minimum funding standards of ERISA or the Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under Section 412 of the Code, (ii) a notice of intent to terminate any Plan shall have been or is reasonably expected to be filed with the PBGC or the PBGC shall have instituted proceedings under ERISA section 4042 to terminate or appoint a trustee to administer any Plan or the PBGC shall have notified the Company or any ERISA Affiliate that a Plan may become a subject of any such proceedings, (iii) the aggregate funding ratio (as described in Section 10.14 ) under all Plans, determined in accordance with Title IV of ERISA as of the last day of any fiscal year, to be less than 80%, (iv) the Company or any ERISA
 
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Affiliate shall have incurred or is reasonably expected to incur any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, (v) the Company or any ERISA Affiliate withdraws from any Multiemployer Plan, or (vi) the Company establishes or amends any employee welfare benefit plan that provides post-employment welfare benefits in a manner that would increase the liability of the Company thereunder; and any such event or events described in clauses (i) through (vi) above, either individually or together with any other such event or events, could reasonably be expected to have a Material Adverse Effect; or
(n) (i) Members of the Ray L. Hunt family or trusts for the benefit of the Ray L. Hunt family cease to own, directly or indirectly, and control all of the outstanding equity interests of Sharyland and New Operator, (ii) Sharyland ceases to be the lessee under the System Lease within the initial term of such System Lease (without giving effect to any amendments, supplements or replacements thereof), (iii) Energy Trans Alliance, L.P. ceases to own, directly or indirectly, and control 90% of the outstanding equity interest of the Company, or (iv) members of the Ray L. Hunt family or trusts for the benefit of the Ray L. Hunt family cease to own, directly or indirectly, and control at least 5% of the outstanding equity interests of Energy Trans Alliance, L.P., unless (x) the general partner of Energy Trans Alliance, L.P. has become a publicly held company, or (y) the Company has total assets on its balance sheet valued at $1,000,000,000 or greater; or
(o) the Company defaults in the performance of or compliance with Section 9.8(b) .
As used in Section 11(m) , the terms “ employee benefit plan ” and “ employee welfare benefit plan ” shall have the respective meanings assigned to such terms in section 3 of ERISA.
SECTION 12. REMEDIES ON DEFAULT, ETC .
Section 12.1. Acceleration . (a) If an Event of Default with respect to the Company described in Section 11(j) or (k)  (other than an Event of Default described in clause (i) of Section 11(j) or described in clause (vi) of Section 11(j) by virtue of the fact that such clause encompasses clause (i) of Section 11(j) ) has occurred, all the Notes then outstanding shall automatically become immediately due and payable.
(b) If any other Event of Default has occurred and is continuing, any Holder or Holders of more than 51 % in principal amount of the Notes at the time outstanding may at any time at its or their option, by notice or notices to the Company, declare all the Notes then outstanding to be immediately due and payable.
(c) If any Event of Default described in Section 11(a) or (b)  has occurred and is continuing, any Holder or Holders of Notes at the time outstanding affected by such Event of Default may at any time, at its or their option, by notice or notices to the Company, declare all the Notes held by it or them to be immediately due and payable.
Upon any Notes becoming due and payable under this Section 12.1 , whether automatically or by declaration, such Notes will forthwith mature and the entire unpaid principal amount of such Notes, plus (x) all accrued and unpaid interest thereon (including, but not limited to, interest accrued thereon at the Default Rate) and (y) the Yield-Maintenance Amount
 
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determined in respect of such principal amount (to the full extent permitted by applicable law), shall all be immediately due and payable, in each and every case without presentment, demand, protest or further notice, all of which are hereby waived. The Company acknowledges, and the parties hereto agree, that each Holder of a Note has the right to maintain its investment in the Notes free from repayment by the Company (except as herein specifically provided for) and that the provision for payment of a Yield-Maintenance Amount by the Company in the event that the Notes are prepaid or are accelerated as a result of an Event of Default, is intended to provide compensation for the deprivation of such right under such circumstances.
Section 12.2. Other Remedies . If any Default or Event of Default has occurred and is continuing, and irrespective of whether any Notes have become or have been declared immediately due and payable under Section 12.1 , the Holder of any Note at the time outstanding may proceed to protect and enforce the rights of such Holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in any Note, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise.
Section 12.3. Rescission . At any time after any Notes have been declared due and payable pursuant to Section 12.1(b) or (c) , the Holders of not less than 51% in principal amount of the Notes then outstanding, by written notice to the Company, may rescind and annul any such declaration and its consequences if (a) the Company has paid all overdue interest on the Notes, all principal of and Yield-Maintenance Amount, if any, on any Notes that are due and payable and are unpaid other than by reason of such declaration, and all interest on such overdue principal and Yield-Maintenance Amount, if any, and (to the extent permitted by applicable law) any overdue interest in respect of the Notes, at the Default Rate, (b) neither the Company nor any other Person shall have paid any amounts which have become due solely by reason of such declaration, (c) all Events of Default and Defaults, other than non-payment of amounts that have become due solely by reason of such declaration, have been cured or have been waived pursuant to Section 17 , and (d) no judgment or decree has been entered for the payment of any monies due pursuant hereto or to the Notes. No rescission and annulment under this Section 12.3 will extend to or affect any subsequent Event of Default or Default or impair any right consequent thereon.
Section 12.4. No Waivers or Election of Remedies, Expenses, Etc . No course of dealing and no delay on the part of any Holder of any Note in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice such Holder’s rights, powers or remedies. No right, power or remedy conferred by this Agreement or by any Note upon any Holder thereof shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. Without limiting the obligations of the Company under Section 15 , the Company will pay to the Holder of each Note on demand such further amount as shall be sufficient to cover all costs and expenses of such Holder incurred in any enforcement or collection under this Section 12 , including, without limitation, reasonable attorneys’ fees, expenses and disbursements.
 
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SECTION 13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES .
Section 13.1. Registration of Notes . The Company shall keep at its principal executive office a register for the registration and registration of transfers of Notes. The name and address of each Holder of one or more Notes, each transfer thereof and the name and address of each transferee of one or more Notes shall be registered in such register. Prior to due presentment for registration of transfer, the Person in whose name any Note shall be registered shall be deemed and treated as the owner and Holder thereof for all purposes hereof, and the Company shall not be affected by any notice or knowledge to the contrary. The Company shall give to any Holder of a Note that is an Institutional Investor, promptly upon request therefor, a complete and correct copy of the names and addresses of all registered Holders of Notes. In addition to and not in limitation of any representations contained herein, each Holder acknowledges and agrees that the Notes have not been registered under the Securities Act and may not be transferred except pursuant to registration or an exemption therefrom and in compliance with Section 13.2(b) hereof.
Section 13.2. Transfer and Exchange of Notes . (a) Subject to compliance with Section 13.2(b) , upon surrender of any Note to the Company at the address and to the attention of the designated officer (all as specified in Section 18(iii) ), for registration of transfer or exchange (and in the case of a surrender for registration of transfer accompanied by a written instrument of transfer duly executed by the registered Holder of such Note or such Holder’s attorney duly authorized in writing and accompanied by the relevant name, address and other information for notices of each transferee of such Note or part thereof), within ten Business Days thereafter, the Company shall execute and deliver, at the Company’s expense (except as provided below), one or more new Notes (as requested by the Holder thereof) in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Note. Each such new Note shall be payable to such Person as such Holder may request and shall be substantially in the form of Exhibit 1 . Each such new Note shall be dated and bear interest from the date to which interest shall have been paid on the surrendered Note or dated the date of the surrendered Note if no interest shall have been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of Notes. Notes shall not be transferred in denominations of less than $1,000,000, provided that if necessary to enable the registration of transfer by a Holder of its entire holding of Notes, one Note may be in a denomination of less than $1,000,000. Any transferee, by its acceptance of a Note registered in its name (or the name of its nominee), shall be deemed to have made the representations set forth in Section 6.1 and Section 6.2 .
(b) Each Holder hereby agrees that it will not offer for sale or sell any of its Notes or disclose any Confidential Information to any prospective transferee of the Notes, other than to an Affiliate, or to another Holder without first delivering written notice to the Company (a “ Right of First Offer Notice ”) of its intent to sell such Notes and disclose such Confidential Information. Such Right of First Offer Notice shall contain a reasonably detailed description of the proposed terms of such sale, including, without limitation, the proposed purchase price (the “ Proposed Purchase Price ”) for such Notes and the names of up to ten prospective purchasers. If the Company so desires it may, within 5 Business Days of the receipt of such Right of First Offer Notice, inform such Holder in writing of its intent to purchase, or have an Affiliate or Institutional Investor designated by the Company purchase, such Notes (a “ Purchase Notice ”)
 
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from the Holder delivering such Right of First Offer Notice at the Proposed Purchase Price, provided, however , that if at such time a Default or Event of Default shall have occurred and be continuing, the Company shall not purchase, and shall not allow any Affiliate or Institutional Investor designated by the Company to purchase, the Notes of the Holder delivering such Right of First Offer Notice. The aggregate principal amount of the Notes specified in such Purchase Notice shall be purchased by the Company, or such Affiliate or Institutional Investor, for the Proposed Purchase Price, together with accrued interest on such Notes to the purchase date, on the date specified by the Company in such Purchase Notice, which shall be not more than 30 days following delivery of such Purchase Notice. If a Holder does not receive a Purchase Notice from the Company within 5 Business Days after the delivery of a Right of First Offer Notice to the Company, such Holder shall have the right to sell its Notes identified in such Right of First Offer Notice to one or more of the prospective purchasers identified in such Right of First Offer Notice for a price which is not less than the Proposed Purchase Price identified in such Right of First Offer Notice for a period of 120 days from the date of such Right of First Offer Notice. In the event that the prospective purchasers identified by a Holder in a Right of First Offer Notice shall decline to purchase the Notes within such 120 day period, then the Holder may identify up to 10 additional Institutional Investors through a new Right of First Offer Notice.
Section 13.3. Replacement of Notes . Upon receipt by the Company at the address and to the attention of the designated officer (all as specified in Section 18(iii) ) of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Note (which evidence shall be, in the case of an Institutional Investor, notice from such Institutional Investor of such ownership and such loss, theft, destruction or mutilation), and
(a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (provided that if the Holder of such Note is, or is a nominee for, an original Purchaser or another Holder of a Note with a minimum net worth of at least $100,000,000 or a Qualified Institutional Buyer, such Person’s own unsecured agreement of indemnity shall be deemed to be satisfactory), or
(b) in the case of mutilation, upon surrender and cancellation thereof,
within ten Business Days thereafter, the Company at its own expense shall execute and deliver, in lieu thereof, a new Note, dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Note or dated the date of such lost, stolen, destroyed or mutilated Note if no interest shall have been paid thereon.
SECTION 14. PAYMENTS ON NOTES .
Section 14.1. Place of Payment . Subject to Section 14.2 , payments of principal, Yield-Maintenance Amount, if any, and interest becoming due and payable on the Notes shall be made in New York City, New York at the principal office of JPMorgan Chase Bank National Association in such jurisdiction. The Company may at any time, by notice to each Holder of a Note, change the place of payment of the Notes so long as such place of payment shall be either the principal office of the Company in such jurisdiction or the principal office of a bank or trust company in such jurisdiction.
 
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Section 14.2. Home Office Payment . So long as any Purchaser or its nominee shall be the Holder of any Note, and notwithstanding anything contained in Section 14.1 or in such Note to the contrary, the Company will pay all sums becoming due on such Note for principal, Yield-Maintenance Amount, if any, and interest by the method and at the address specified for such purpose below such Purchaser’s name in Schedule A , or by such other method or at such other address as such Purchaser shall have from time to time specified to the Company in writing for such purpose, without the presentation or surrender of such Note or the making of any notation thereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment or prepayment in full of any Note, such Purchaser shall surrender such Note for cancellation, reasonably promptly after any such request, to the Company at its principal executive office or at the place of payment most recently designated by the Company pursuant to Section 14.1 . Prior to any sale or other disposition of any Note held by a Purchaser or its nominee, such Purchaser will, at its election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender such Note to the Company in exchange for a new Note or Notes pursuant to Section 13.2 . The Company will afford the benefits of this Section 14.2 to any Institutional Investor that is the direct or indirect transferee of any Note purchased by a Purchaser under this Agreement and that has made the same agreement relating to such Note as the Purchasers have made in this Section 14.2 .
SECTION 15. EXPENSES, ETC .
Section 15.1. Transaction Expenses . Whether or not the transactions contemplated hereby are consummated, the Company will pay all costs and expenses (including reasonable attorneys’ fees of one firm of special counsel and, if reasonably required by the Required Holders, local or other counsel) incurred by the Purchasers and each other Holder of a Note in connection with such transactions and in connection with any amendments, waivers or consents under or in respect of this Agreement or the Notes (whether or not such amendment, waiver or consent becomes effective), including, without limitation: (a) the costs and expenses incurred in enforcing or defending (or determining whether or how to enforce or defend) any rights under this Agreement or the Notes or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement or the Notes, or by reason of being a Holder of any Note, but only to the extent such subpoena or legal proceeding arises out of matters related to the Company, (b) the costs and expenses, including financial advisors’ fees, incurred in connection with the insolvency or bankruptcy of the Company or in connection with any work-out or restructuring of the transactions contemplated hereby and by the Notes and (c) the costs and expenses incurred in connection with the initial filing of this Agreement and all related documents and financial information with the SVO provided. The Company will pay, and will save each Purchaser and each other Holder of a Note harmless from, all claims in respect of any fees, costs or expenses, if any, of brokers and finders (other than those, if any, retained by a Purchaser or other Holder in connection with its purchase of the Notes).
Section 15.2. Survival . The obligations of the Company under this Section 15 will survive the payment or transfer of any Note, the enforcement, amendment or waiver of any provision of this Agreement or the Notes, and the termination of this Agreement.
 
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SECTION 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT .
All representations and warranties contained herein shall survive the execution and delivery of this Agreement and the Notes, the purchase or transfer by any Purchaser of any Note or portion thereof or interest therein and the payment of any Note, and may be relied upon by any subsequent Holder of a Note, regardless of any investigation made at any time by or on behalf of such Purchaser or any other Holder of a Note; provided , that no representation or warranty shall be deemed to be made as of any time other than the date of execution and delivery of this Agreement or such other document, certificate, instrument or agreement containing such representation or warranty. All statements contained in any certificate or other instrument delivered by or on behalf of the Company pursuant to this Agreement shall be deemed representations and warranties of the Company under this Agreement. Subject to the preceding sentence, this Agreement and the Notes embody the entire agreement and understanding between each Purchaser and the Company and supersede all prior agreements and understandings relating to the subject matter hereof.
SECTION 17. AMENDMENT AND WAIVER .
Section 17.1. Requirements . This Agreement and the Notes may be amended, and the observance of any term hereof or of the Notes may be waived (either retroactively or prospectively), with (and only with) the written consent of the Company and the Required Holders, except that (a) no amendment or waiver of any of the provisions of Section 1, 2, 3, 4, 5, 6 or 21 hereof, or any defined term (as it is used therein), will be effective as to any Purchaser unless consented to by such Purchaser in writing, and (b) no such amendment or waiver may, without the written consent of the Holder of each Note at the time outstanding affected thereby, (i) subject to the provisions of Section 12 relating to acceleration or rescission, change the amount or time of any prepayment or payment of principal of, or reduce the rate or change the time of payment or method of computation of interest or of the Yield-Maintenance Amount on, the Notes, (ii) change the percentage of the principal amount of the Notes the Holders of which are required to consent to any such amendment or waiver, or (iii) amend any of Sections 8, 11(a), 11(b), 12, 17 or 20 .
Section 17.2. Solicitation of Holders of Notes .
(a) Solicitation . The Company will provide each Holder of the Notes (irrespective of the amount of Notes then owned by it) with sufficient information, sufficiently far in advance of the date a decision is required, to enable such Holder to make an informed and considered decision with respect to any proposed amendment, waiver or consent in respect of any of the provisions hereof or of the Notes. The Company will deliver executed or true and correct copies of each amendment, waiver or consent effected pursuant to the provisions of this Section 17 to each Holder of outstanding Notes promptly following the date on which it is executed and delivered by, or receives the consent or approval of, the requisite Holders of Notes.
(b) Payment . The Company will not directly or indirectly pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, or grant any security or provide other credit support, to any Holder of Notes as consideration for or as an
 
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inducement to the entering into by any Holder of Notes of any waiver or amendment of any of the terms and provisions hereof unless such remuneration is concurrently paid, or security is concurrently granted or other credit support concurrently provided, on the same terms, ratably to each Holder of Notes then outstanding even if such Holder did not consent to such waiver or amendment.
Section 17.3. Binding Effect, etc . Any amendment or waiver consented to as provided in this Section 17 applies equally to all Holders of Notes and is binding upon them and upon each future Holder of any Note and upon the Company without regard to whether such Note has been marked to indicate such amendment or waiver. No such amendment or waiver will extend to or affect any obligation, covenant, agreement, Default or Event of Default not expressly amended or waived or impair any right consequent thereon. No course of dealing between the Company and the Holder of any Note nor any delay in exercising any rights hereunder or under any Note shall operate as a waiver of any rights of any Holder of such Note. As used herein, the term “this Agreement” and references thereto shall mean this Agreement as it may from time to time be amended or supplemented.
Section 17.4. Notes Held by Company, etc . Solely for the purpose of determining whether the Holders of the requisite percentage of the aggregate principal amount of Notes then outstanding approved or consented to any amendment, waiver or consent to be given under this Agreement or the Notes, or have directed the taking of any action provided herein or in the Notes to be taken upon the direction of the Holders of a specified percentage of the aggregate principal amount of Notes then outstanding, Notes directly or indirectly owned by the Company or any of its Affiliates shall be deemed not to be outstanding.
SECTION 18. NOTICES .
All notices and communications provided for hereunder shall be in writing and sent (a) by telecopy if the sender on the same day sends a confirming copy of such notice by a recognized overnight delivery service (charges prepaid), or (b) by registered or certified mail with return receipt requested (postage prepaid), or (c) by a recognized overnight delivery service (with charges prepaid). Any such notice must be sent:
(i) if to any Purchaser or its nominee, to such Purchaser or nominee at the address specified for such communications in Schedule A , or at such other address as such Purchaser or nominee shall have specified to the Company in writing,
(ii) if to any other Holder of any Note, to such Holder at such address as such other Holder shall have specified to the Company in writing, and
(iii) if to the Company, to the Company at 1900 N. Akard Street, Dallas, TX 75201-2300, facsimile: (214) 855-6965 to the attention of W. Kirk Baker, or at such other address as the Company shall have specified to the Holder of each Note in writing.
Notices under this Section 18 will be deemed given only when actually received.
 
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SECTION 19. REPRODUCTION OF DOCUMENTS .
This Agreement and all documents relating thereto, including, without limitation, (a) consents, waivers and modifications that may hereafter be executed, (b) documents received by any Purchaser at the Closing (except the Notes themselves), and (c) financial statements, certificates and other information previously or hereafter furnished to any Purchaser, may be reproduced by such Purchaser by any photographic, photostatic, electronic, digital, or other similar process and such Purchaser may destroy any original document so reproduced. The Company agrees and stipulates that, to the extent permitted by applicable law, any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by such Purchaser in the regular course of business) and any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. This Section 19 shall not prohibit the Company or any other Holder of Notes from contesting any such reproduction to the same extent that it could contest the original, or from introducing evidence to demonstrate the inaccuracy of any such reproduction.
SECTION 20. CONFIDENTIAL INFORMATION .
For the purposes of this Section 20 , “Confidential Information” means Information delivered to any Purchaser by or on behalf of the Company in connection with the transactions contemplated by or otherwise pursuant to this Agreement, provided that such term does not include information that (a) other than as a result of disclosure by any Purchaser or its employees or agents in violation of this Section 20 was publicly known or otherwise known to such Purchaser prior to the time of such disclosure, (b) other than as a result of disclosure by any Purchaser or its employees or agents in violation of this Section 20 subsequently becomes publicly known through no act or omission by such Purchaser or any Person acting on such Purchaser’s behalf, (c) other than as a result of disclosure by any Purchaser or its employees or agents in violation of this Section 20 otherwise becomes known to such Purchaser other than through disclosure by the Company or (d) constitutes financial statements delivered to such Purchaser under Section 7.1 that are otherwise publicly available. “ Information ” means information concerning the Company or its Subsidiaries, irrespective of its source or form of communication, furnished by or on behalf of the Company or any of its Subsidiaries, including without limitation notes, analyses, compilations, studies or other documents or records prepared by any Purchaser, which contain or reflect or were generated from information supplied by or on behalf of the Company or its Subsidiaries. Each Purchaser will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by such Purchaser in good faith to protect confidential information of third parties delivered to such Purchaser, provided that such Purchaser may deliver or disclose Confidential Information to (i) its directors, officers, employees, agents, attorneys, trustees and affiliates (to the extent such disclosure reasonably relates to the administration of the investment represented by its Notes), (ii) its financial advisors and other professional advisors who agree to hold confidential the Confidential Information substantially in accordance with the terms of this Section 20 , (iii) any other Holder of any Note, (iv) any Institutional Investor to which it sells or offers to sell such Note or any part thereof or any participation therein (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20 ), (v) any Person from which it offers to purchase any security of the Company (if such Person has agreed in writing
 
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prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20 ), (vi) any federal or state regulatory authority having jurisdiction over such Purchaser, (vii) the NAIC or the SVO or, in each case, any similar organization, or any nationally recognized rating agency that requires access to information about such Purchaser’s investment portfolio, or (viii) any other Person to which such delivery or disclosure may be necessary or appropriate (w) to effect compliance with any law, rule, regulation or order applicable to such Purchaser, (x) in response to any subpoena or other legal process, (y) in connection with any litigation to which such Purchaser is a party or (z) if an Event of Default has occurred and is continuing, to the
extent such Purchaser may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement or for the protection of the rights and remedies under such Purchaser’s Notes and this Agreement. Each Holder of a Note, by its acceptance of a Note, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Section 20 as though it were a party to this Agreement. On reasonable request by the Company in connection with the delivery to any Holder of a Note of information required to be delivered to such Holder under this Agreement or requested by such Holder (other than a Holder that is a party to this Agreement or its nominee), such Holder will enter into an agreement with the Company embodying the provisions of this Section 20 .
SECTION 21. SUBSTITUTION OF PURCHASER .
Each Purchaser shall have the right to substitute any one of its Affiliates as the purchaser of the Notes that it has agreed to purchase hereunder, by written notice to the Company, which notice shall be signed by both such Purchaser and such Affiliate, shall contain such Affiliate’s agreement to be bound by this Agreement and shall contain a confirmation by such Affiliate of the accuracy with respect to it of the representations set forth in Section 6 . Upon receipt of such notice, any reference to such Purchaser in this Agreement (other than in this Section 21 ), shall be deemed to refer to such Affiliate in lieu of such original Purchaser. In the event that such Affiliate is so substituted as a Purchaser hereunder and such Affiliate thereafter transfers to such original Purchaser all of the Notes then held by such Affiliate, upon receipt by the Company of notice of such transfer, any reference to such Affiliate as a “Purchaser” in this Agreement (other than in this Section 21 ), shall no longer be deemed to refer to such Affiliate, but shall refer to such original Purchaser, and such original Purchaser shall again have all the rights of an original Holder of the Notes under this Agreement.
SECTION 22. MISCELLANEOUS .
Section 22.1. Successors and Assigns . All covenants and other agreements contained in this Agreement by or on behalf of any of the parties hereto bind and inure to the benefit of their respective successors and assigns (including, without limitation, any subsequent Holder of a Note) whether so expressed or not.
Section 22.2. Payments Due on Non-Business Days . Anything in this Agreement or the Notes to the contrary notwithstanding (but without limiting the requirement in Section 8.4 that the notice of any optional prepayment specify a Business Day as the date fixed for such prepayment), any payment of principal of or Yield-Maintenance Amount or interest on any Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day without including the additional days elapsed in the computation of the interest payable on
 
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such next succeeding Business Day; provided that if the maturity date of any Note is a date other than a Business Day, the payment otherwise due on such maturity date shall be made on the next succeeding Business Day and shall include the additional days elapsed in the computation of interest payable on such next succeeding Business Day.
Section 22.3. Accounting Terms . All accounting terms used herein which are not expressly defined in this Agreement have the meanings respectively given to them in accordance with GAAP. Except as otherwise specifically provided herein, (i) all computations made pursuant to this Agreement shall be made in accordance with GAAP, and (ii) all financial statements shall be prepared in accordance with GAAP. For purposes of determining compliance with any financial covenants contained in this Agreement, any election by the Company to measure an item of Indebtedness using fair value (as permitted by Statement of Financial Accounting Standards No. 159 or any similar accounting standard) shall be disregarded and such determination shall be made as if such election had not been made.
Section 22.4. Severability . Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction.
Section 22.5. Construction, etc . Each covenant contained herein shall be construed (absent express provision to the contrary) as being independent of each other covenant contained herein, so that compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with any other covenant. Where any provision herein refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person.
For the avoidance of doubt, all Schedules and Exhibits attached to this Agreement shall be deemed to be a part hereof.
Section 22.6. Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the parties hereto.
Section 22.7. Governing Law . This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York excluding choice-of-law principles of the law of such State that would permit the application of the laws of a jurisdiction other than such State.
Section 22.8. Jurisdiction and Process; Waiver of Jury Trial . (a) The Company irrevocably submits to the non-exclusive jurisdiction of any New York State or federal court sitting in the Borough of Manhattan, The City of New York, over any suit, action or proceeding arising out of or relating to this Agreement or the Notes. To the fullest extent permitted by applicable law, the Company irrevocably waives and agrees not to assert, by way of motion, as a
 
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defense or otherwise, any claim that it is not subject to the jurisdiction of any such court, any objection that it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum.
(b) The Company consents to process being served by or on behalf of any Holder of Notes in any suit, action or proceeding of the nature referred to in Section 22.8(a) by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, return receipt requested, to it at its address specified in Section 18 or at such other address of which such Holder shall then have been notified pursuant to said Section. The Company agrees that such service upon receipt (i) shall be deemed in every respect effective service of process upon it in any such suit, action or proceeding and (ii) shall, to the fullest extent permitted by applicable law, be taken and held to be valid personal service upon and personal delivery to it. Notices hereunder shall be conclusively presumed received as evidenced by a delivery receipt furnished by the United States Postal Service or any reputable commercial delivery service.
(c) In addition to and notwithstanding the provisions of Section 22.8(b) above, the Company hereby irrevocably appoints CT Corporation System as its agent to receive on its behalf and its property service of copies of the summons and complaint and any other process which may be served in any action or proceeding. Such service may be made by mailing or delivering a copy of such process to the Company, in care of the process agent at 111 Eighth Avenue, 13 th Floor, New York, New York 10011, and the Company hereby irrevocably authorizes and directs the process agent to accept such service on its behalf. If for any reason the process agent ceases to be available to act as process agent, the Company agrees immediately to appoint a replacement process agent satisfactory to the Required Holders.
(d) Nothing in this Section 22.8 shall affect the right of any Holder of a Note to serve process in any manner permitted by law, or limit any right that the Holders of any of the Notes may have to bring proceedings against the Company in the courts of any appropriate jurisdiction or to enforce in any lawful manner a judgment obtained in one jurisdiction in any other jurisdiction.
(e) The parties hereto hereby waive trial by jury in any action brought on or with respect to this Agreement, the Notes or any other document executed in connection herewith or therewith.
Section 22.9. Transaction References . The Company and the Holders shall not refer to the other on an internet site or in marketing materials, press releases, published “tombstone” announcements or any other print or electronic medium, except with the referenced party’s prior written consent, which may be withheld at its sole discretion.
*    *    *    *    *
 
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If you are in agreement with the foregoing, please sign the form of agreement on a counterpart of this Agreement and return it to the Company, whereupon this Agreement shall become a binding agreement between you and the Company.

	 	Very truly yours,	
	
SHARYLAND DISTRIBUTION & TRANSMISSION SERVICES, L.L.C. ,
a Texas limited liability company	
			
	 	By:	 	/s/ Hunter L. Hunt	
	 		 	Name:	 	Hunter L. Hunt	
	 		 	Title:	 	President	
 
[Signature Page to Amended and Restated 2009 SDTS Note Agreement]

									
This Agreement is hereby accepted and agreed to as of the date thereof.	 		 		 		 		
			
	 		 	Purchasers :	
			
	 		 	THE PRUDENTIAL INSURANCE COMPANY OF AMERICA	
				
	 		 	By:	 	/s/ Richard Carrell	
	 		 		 	Vice President	
			
	 		 	PRUDENTIAL RETIREMENT INSURANCE AND ANNUITY COMPANY	
				
	 		 	By:	 	Prudential Investment Management, Inc.,	
	 		 		 	as investment manager	
					
	 		 		 	By:	 	/s/ Richard Carrell	
	 		 		 		 	Vice President	
 
[Signature Page to Amended and Restated 2009 SDTS Note Agreement]

DEFINED TERMS
As used herein, the following terms have the respective meanings set forth below or set forth in the Section hereof following such term:
“ 2010 NPA Joinder Agreement ” means the Joinder Agreement to the Collateral Agency Agreement, executed by the Company, the Collateral Agent and each Purchaser as a “Joining Party,” dated July 13, 2010.
“ 2010 SDTS Note Agreement ” means the Note Purchase Agreement, dated July 13, 2010, among the Company and the holders of the Company’s 6.47% Senior Notes due September 30, 2030, issued thereunder.
“ Acquired System ” means transmission and distribution facilities acquired by the Company as a result of its merger with Cap Rock Energy Corporation; provided, however, that the term “Acquired System” shall not include any FERC Assets.
“Additional Covenant” shall mean any affirmative or negative covenant or similar restriction applicable to the Company (regardless of whether such provision is labeled or otherwise characterized as a covenant) the subject matter of which either (i) is similar to that of any covenant in this Agreement, or related definitions in this Agreement, but contains one or more percentages, amounts or formulas that is more restrictive than those set forth herein or more beneficial to the Holder or Holders of the Indebtedness created or evidenced by the document in which such covenant or similar restriction is contained (and such covenant or similar restriction shall be deemed an Additional Covenant only to the extent that it is more restrictive or more beneficial) or (ii) is different from the subject matter of any covenant of this Agreement, or related definitions in this Agreement.
“Additional Default” shall mean any provision contained in any document or instrument creating or evidencing Indebtedness of the Company which permits the Holder or Holders of Indebtedness to accelerate (with the passage of time or giving of notice or both) the maturity thereof or otherwise requires the Company to purchase such Indebtedness prior to the stated maturity thereof and which either (i) is similar to any Default or Event of Default contained in this Agreement, or related definitions in this Agreement, but contains one or more percentages, amounts or formulas that is more restrictive or has a shorter grace period than those set forth herein or is more beneficial to the Holders of such other Indebtedness (and such provision shall be deemed an Additional Default only to the extent that it is more restrictive, has a shorter grace period or is more beneficial) or (ii) is different from the subject matter of any Default or Event of Default contained in this Agreement, or related definitions in this Agreement.
“Additional Project Document” means any contract or agreement related to the ownership, operation, maintenance, repair or use of the System or the Acquired System or the FERC Assets entered into by the Company or New Owner subsequent to the Closing Date that involves full payments or obligations in excess of $1,000,000.
“ Affiliate ” means, at any time, and with respect to any Person, any other Person that at such time directly or indirectly through one or more intermediaries Controls, or is Controlled by,
 
S CHEDULE B-1
(To Note Purchase Agreement)

or is under common Control with, such first Person and, with respect to the Company, shall include any Person beneficially owning or holding, directly or indirectly, 10% or more of any class of voting or equity interest of the Company or any corporation of which the Company beneficially owns or holds, in the aggregate, directly or indirectly, 10% or more of any class of voting or equity interests; provided, however, that this definition shall at all times exclude owners or investors in Energy Trans Alliance L.P., except for members of the Ray L. Hunt family, trusts for the benefit of the Ray L. Hunt family or entities controlled by members of the Ray L. Hunt family or such trusts. As used in this definition, “ Control ” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. Unless the context otherwise clearly requires, any reference to an “Affiliate” is a reference to an Affiliate of the Company.
“Agreement” is defined in the introductory paragraph of this Agreement.
“Amortization Schedule” is defined in Section 8.1(a) .
“Anti-Terrorism Order” means Executive Order No. 13,224 of September 24, 2001, Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit or Support Terrorism, 66 U.S. Fed. Reg. 49, 079 (2001), as amended.
“Approved Accountant” is defined in Section 7.1(b)(A) .
“Business Day” means any day other than a Saturday, a Sunday or a day on which commercial banks in New York City are required or authorized to be closed.
“ Cap Rock Transaction ” is described in Schedule 10.1 .
“Capital Lease” means, at any time, a lease with respect to which the lessee is required concurrently to recognize the acquisition of an asset and the incurrence of a liability in accordance with GAAP.
“ Cash Flow ” means, for any period, the sum of the following (without duplication): (i) all cash paid to the Company during such period under the System Lease, (ii) all cash distributions received by the Company from New Owner during such period, (iii) all interest and investment earnings, if any, paid to the Company during such period on amounts on deposit in the account created under the Deposit Agreement, (iv) revenues, if any, received by or on behalf of the Company during such period under any insurance policy as business interruption insurance proceeds, (v) direct cash equity investments made by TDC in the Company during such period (excluding equity contributed to a Project Finance Subsidiary) in an amount not greater than the amount necessary to cause the Company to be in compliance with the financial covenants set forth in Section 9.9 (each such investment, an “ Equity Cure ”); provided, however, that during any period of four consecutive fiscal quarters, “Cash Flow” shall include an Equity Cure in no more than two of such quarters, and (vi) proceeds of any borrowing made after the date hereof to the extent used to finance the payment of bullet or balloon installments of Indebtedness for borrowed money.
 
S CHEDULE B-2
(To Note Purchase Agreement)

“ Cash Flow Available for Debt Service ” for any period, means (i) Cash Flow received during such period minus (ii) (A) all O&M Costs paid during such period and (B) if an Equity Cure has been made in any fiscal quarter during the period for which Cash Flow Available for Debt Service is calculated, the lesser of the aggregate amount of (x) such Equity Cure during such period and (y) the aggregate amount of cash distributions paid by the Company during such period.
“Closing” is defined in Section 3 .
“Closing Date” means the date upon which the Closing occurred, December 31, 2009.
“Code” means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder from time to time.
“ Collateral ” means, collectively, the collateral described in each of the Security Documents.
“ Collateral Agency Agreement ” means the Amended and Restated Collateral Agency Agreement, dated as of July 13, 2010, among the Collateral Agent, the Company and the Holders and other lenders party thereto from time to time.
“Collateral Agent” means The Bank of New York Mellon Trust Company, N.A., a national association, acting in its capacity as collateral agent for itself and the other Secured Parties under the Financing Documents, or its successors in such capacity appointed pursuant to the terms of the Collateral Agency Agreement.
“Company” means Sharyland Distribution & Transmission Services, L.L.C., a Texas limited liability company, or any successor that becomes such in the manner prescribed in Section 10.2 .
“Confidential Information” is defined in Section 20 .
“Contribution Agreement” means the Contribution Agreement, dated as of December 31, 2009, between Sharyland and the Company.
“CREZ” means the Competitive Renewable Energy Zones electric transmission project overseen by ERCOT and the Public Utility Commission of Texas.
“CREZ Project” means the development and construction by a Project Finance Subsidiary of line segments and sub-stations in CREZ to connect to the System.
“ Debt Service ” for any period, the aggregate (without duplication) of (i) all amounts of interest on the Notes and in respect of other Indebtedness of the Company required to be paid during such period, plus (ii) all amounts of principal on the Notes and in respect of other Indebtedness of the Company or required to be paid during such period, excluding any optional prepayments of principal during such period, plus (iii) all other premiums, fees, costs, charges, expenses and indemnities due and payable to the Holders or the other Secured Parties and holders of other Indebtedness of the Company or and agents acting on their behalf during such period.
 
S CHEDULE B-3
(To Note Purchase Agreement)

“Debt Service Coverage Ratio” means, for each period of four consecutive fiscal quarters, the quotient of (i) Cash Flow Available for Debt Service for such period to (ii) Debt Service for such period.
“ Deeds of Trust ” means the Amended and Restated First Lien Deed of Trust, Security Agreement and Fixture Filing (Texas) and each First Lien Deed of Trust, Security Agreement, Assignment of Rents and Leases (Texas) by and from the Company, as grantor, to Peter M. Oxman, as trustee, for the benefit of the Collateral Agent and the Secured Parties, dated as of July 13, 2010.
“Default” means an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default.
“Default Rate” means that rate of interest per annum from time to time equal to the greater of (i) 2% per annum above the rate of interest stated in clause (a) of the first paragraph of the Notes, and (ii) 2% over the rate of interest publicly announced by The Bank of New York Mellon from time to time in New York as its “base” or “prime” rate.
“Deposit Agreement” means the Deposit Account Control Agreement, dated as of December 31, 2009, among the Company, the Collateral Agent and Bank of America, N.A.
“Disclosure Documents” is defined in Section 5.3 .
“Distributions” means any (i) distribution of any nature or kind, either directly or indirectly, to any Affiliate or equityholder of the Company, including any dividend or distribution in cash or property of any kind; a purchase, redemption, reduction, return or any other payment of capital; or any repayment or reduction of Indebtedness owing to an Affiliate or equityholder of Company; (ii) loans or other payments to an Affiliate or equityholder of the Company; and (iii) payment for or on behalf of an Affiliate equityholder of the Company by way of guaranty, indemnity or otherwise including in connection with any Affiliate Indebtedness; but shall not include any payments made to any equityholder or Affiliate of the Company under any services, advisory, tax sharing or agency agreement disclosed to the Holders and entered into on commercially reasonable terms and conditions.
“Environmental Laws” means any and all Federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including but not limited to those related to Hazardous Materials.
“ ERCOT ” means the Electric Reliability Council of Texas or any successor thereto.
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.
 
S CHEDULE B-4
(To Note Purchase Agreement)

“ERISA Affiliate” means any trade or business (whether or not incorporated) that is treated as a single employer together with the Company under section 414 of the Code.
“Event of Default” is defined in Section 11 .
“ Exchange Act ” shall mean the Securities Exchange Act of 1934, as amended from time to time.
“FERC” means the Federal Energy Regulatory Commission, or any successor agency to its duties and responsibilities.
“ FERC Assets ” is defined in the New Lease.
“ Financing Documents ” means, collectively, this Agreement, the 2010 SDTS Note Agreement, the Notes and the Notes (as defined in the 2010 SDTS Note Agreement), the Security Documents, and any other documents, agreements or instruments entered into in connection with any of the foregoing.
“Force Majeure Event” means any claim of force majeure by any Person under any Material Project Document, which would allow such Person to avoid all or any material part of its obligations thereunder and any other fire, explosion, accident, strike, slowdown or stoppage, lockout or other labor dispute (whether pending or, to the Company’s knowledge threatened), drought, storm, hail, earthquake, embargo, act of God or of the public enemy, or other casualty (whether or not covered by insurance), that could reasonably be expected to result in a Material Adverse Effect.
“ FPA ” means the Federal Power Act, 16 U.S.C. §§791 et seq., as amended, and the regulations of the FERC thereunder.
“ GAAP ” means generally accepted accounting principles as in effect in the United States of America. In the event that any “Accounting Change” (as defined below) shall occur and such change results in a change in the method of calculation of financial covenants, ratios, standards or terms in this Agreement, then the Company and the Holders agree to enter into negotiations in order to amend such provisions of this Agreement so as to reflect equitably such Accounting Changes with the desired result that the criteria for evaluating the financial condition of the Company and Sharyland shall be the same after such Accounting Changes as if such Accounting Changes had not been made. Until such time as such an amendment shall have been executed and delivered by the Company and the Holders, all financial covenants, ratios, standards and terms in this Agreement shall continue to be calculated or construed as if such Accounting Changes had not occurred. “ Accounting Changes ” refers to changes in accounting principles required by the promulgation of any rule, regulation, pronouncement or opinion by the Financial Accounting Standards Board of the American Institute of Certified Public Accountants or, if applicable, the SEC.
“Good Utility Practices” means “Good Utility Practice” as defined from time to time by the Public Utility Commission of Texas.
 
S CHEDULE B-5
(To Note Purchase Agreement)

“ Governmental Authority ” means
(a) the government of:
(i) the United States of America or any State or other political subdivision thereof, or
(ii) any other jurisdiction in which the Company conducts all or any part of its business, or which asserts jurisdiction over any properties of the Company, or
(b) any entity exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, any such government, or
(c) ERCOT, or
(d) SPP, or
(e) the Texas Regional Entity.
“Guaranty” means, with respect to any Person, any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing any Indebtedness of any other Person in any manner, whether directly or indirectly, including (without limitation) obligations incurred through an agreement, contingent or otherwise, by such Person:
(a) to purchase such Indebtedness or any property constituting security therefor;
(b) to advance or supply funds (i) for the purchase or payment of such indebtedness or obligation, or (ii) to maintain any working capital or other balance sheet condition or any income statement condition of any other Person or otherwise to advance or make available funds for the purchase or payment of such Indebtedness;
(c) to lease properties or to purchase properties or services primarily for the purpose of assuring the owner of such Indebtedness of the ability of any other Person to make payment of the Indebtedness; or
(d) otherwise to assure the owner of such Indebtedness against loss in respect thereof.
In any computation of the indebtedness or other liabilities of the obligor under any Guaranty, the indebtedness or other obligations that are the subject of such Guaranty shall be assumed to be direct obligations of such obligor.
“Hazardous Material” means any and all pollutants, toxic or hazardous wastes or other substances that might pose a hazard to health and safety, the removal of which may be required or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage or filtration of which is or shall be restricted, prohibited or penalized by any applicable law including, but not limited to, asbestos, urea formaldehyde foam insulation, polychlorinated biphenyls, petroleum, petroleum products, lead based paint, radon gas or similar restricted, prohibited or penalized substances.
 
S CHEDULE B-6
(To Note Purchase Agreement)

“Holder” means, with respect to any Note the Person in whose name such Note is registered in the register maintained by the Company pursuant to Section 13.1 .
“Indebtedness” with respect to any Person means, at any time, without duplication,
(a) its liabilities for borrowed money and its redemption obligations in respect of mandatorily redeemable Preferred Stock;
(b) its liabilities for the deferred purchase price of property acquired by such Person (excluding accounts payable arising in the ordinary course of business but including all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property);
(c) (i) all liabilities appearing on its balance sheet in accordance with GAAP in respect of Capital Leases and (ii) all liabilities which would appear on its balance sheet in accordance with GAAP in respect of Synthetic Leases assuming such Synthetic Leases were accounted for as Capital Leases;
(d) all liabilities for borrowed money secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities);
(e) all its liabilities in respect of letters of credit or instruments serving a similar function issued or accepted for its account by banks and other financial institutions (whether or not representing obligations for borrowed money);
(f) the aggregate Swap Termination Value of all Swap Contracts of such Person; and
(g) any Guaranty of such Person with respect to liabilities of a type described in any of clauses (a) through (f) hereof.
Indebtedness of any Person shall include all obligations of such Person of the character described in clauses (a) through (g) to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is deemed to be extinguished under GAAP.
“Institutional Investor” means (a) any Purchaser of a Note, (b) any Holder of a Note holding (together with one or more of its Affiliates) more than 5% of the aggregate principal amount of the Notes then outstanding, (c) any bank, trust company, savings and loan association or other financial institution, any pension plan, any investment company, any insurance company, any broker or dealer, or any other similar financial institution or entity, regardless of legal form, and (d) any Related Fund of any Holder of any Note.
“ Lease Supplement ” means the Lease Supplement (Cap Rock Assets), dated as of July 13, 2010 between the Company, as lessor, and Sharyland, as lessee.
 
S CHEDULE B-7
(To Note Purchase Agreement)

“Lien” means, with respect to any Person, any mortgage, lien, pledge, charge, security interest or other encumbrance, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or Capital Lease, upon or with respect to any property or asset of such Person (including in the case of stock, stockholder agreements, voting trust agreements and all similar arrangements).
“ Material Adverse Effect ” means a material adverse effect on: (i) the business, operations, affairs or financial condition of the Company, New Owner, Sharyland or New Operator (taken as a whole), or the System, the Acquired System or the FERC Assets (taken as a whole); (ii) the ability of the Company to perform its obligations under this Agreement, the Notes or any Transaction Document to which it is a party; (iii) the ability of Sharyland, New Owner or New Operator to perform under any of the Transaction Documents to which it is a party; or (iv) the validity or enforceability of the Notes, this Agreement or any Transaction Document.
“ Material Project Document ” means each of the agreements listed on Schedule 5.12(b), any Additional Project Document that replaces any of the foregoing, the System Lease and the Contribution Agreement.
“ Maturity Date ” means December 30, 2029.
“Members” means Sharyland and TDC.
“Moody’s” means Moody’s Investors Service, Inc.
“Multiemployer Plan” means any Plan that is a “multiemployer plan” (as such term is defined in section 4001(a)(3) of ERISA).
“NAIC” means the National Association of Insurance Commissioners or any successor thereto.
“ Negative Pledge Agreement ” means the Negative Pledge Agreement, dated as of July 13, 2010, executed by New Owner to the Collateral Agent for the benefit of the Secured Parties.
“ New Lease ” means the Lease Agreement, dated as of July 13, 2010, between New Owner and New Operator or any new lease entered into in replacement thereof in accordance with Section 9.8(b).
“ New Operator ” means SU FERC, L.L.C., a Texas limited liability company and a wholly-owned subsidiary of Sharyland.
“ New Owner ” means SDTS FERC, L.L.C., a Texas limited liability company and wholly-owned subsidiary of the Company.
“New Project” means a “New Project” (as defined in the System Lease) that the Company agrees to fund pursuant to Article 10 of the System Lease.
 
S CHEDULE B-8
(To Note Purchase Agreement)

“ Non-Recourse Debt ” means Indebtedness of a Project Finance Subsidiary that, if secured, is secured solely by a pledge of collateral owned by that Project Finance Subsidiary and the ownership interests in such Project Finance Subsidiary and for which no Person other than such Project Finance Subsidiary is personally liable.
“Notes” is defined in Section 1 .
“ O&M Costs ” means actual cash management and operation costs of the Company, property taxes, insurance premiums, consumables, fees and expenses of, and other amounts owing to, the Collateral Agent and the Depositary, and other costs and expenses in connection with the management or operation of the Company, but exclusive in all cases of (a) non-cash charges, including depreciation or obsolescence charges or reserves therefor, amortization of intangibles or other bookkeeping entries of a similar nature, (b) all other payments of Debt Service and Yield-Maintenance Amounts, if any, (c) costs of repair or replacement paid with insurance proceeds and (d) costs of due diligence and transition expenses related to the Cap Rock Transaction.
“Obligation” means any loan, advance, debt, liability, and obligation of performance, howsoever arising, owed by the Company to the Collateral Agent or the Holders of any kind or description (whether or not evidenced by any note or instrument and whether or not for the payment of money), direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, pursuant to the terms of this Agreement, any Note or any of the other Financing Documents, including all principal, interest, Yield-Maintenance Amounts, fees, charges, expenses, attorneys’ fees and accountants fees payable or reimbursable by the Company under this Agreement or any of the other Financing Documents.
“Officer’s Certificate” means a certificate of a Senior Financial Officer or of any other officer of the Company whose responsibilities extend to the subject matter of such certificate.
“Payment Date” means March 30, 2010 and the 30th day of June, September, December and March thereafter up to the Maturity Date, and the Maturity Date.
“PBGC” means the Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto.
“Permit” means any action, approval, consent, waiver, exemption, variance, franchise, order, permit, authorization, right or license of or from a Governmental Authority, provided that interests or estates in real property, shall not be considered Permits.
“Permitted Investment” means any (a) marketable direct obligation of the United States of America, (b) marketable obligation directly and fully guaranteed as to interest and principal by the United States of America, (c) demand deposit with Depositary, or time deposit, certificate of deposit and banker’s acceptance issued by any member bank of the Federal Reserve System which is organized under the laws of the United States of America or any state thereof or any United States branch of a foreign bank, in each case whose equity capital is in excess of $500,000,000 and whose long-term debt securities are rated “A” or better by S&P and “A2” or better by Moody’s, (d) commercial paper or tax exempt obligations given the highest rating by
 
S CHEDULE B-9
(To Note Purchase Agreement)

Moody’s and S&P, (e) obligations of a commercial bank described in clause (c) above, in respect of the repurchase of obligations of the type as described in clauses (a) and (b) hereof, provided that such repurchase obligation shall be fully secured by obligations of the type described in said clauses (a) and (b) and the possession of such obligation shall be transferred to, and segregated from other obligations owned by, any such bank, (f) instrument rated “AAA” by S&P and “Aaa” by Moody’s issued by investment companies and having an original maturity of 180 days or less, (g) eurodollar certificates of deposit issued by any bank described in clause (c) above, and (h) marketable security rated not less than “A-1” by S&P or not less than “Prime-1” by Moody’s. In no event shall Permitted Investments include any obligation, certificate of deposit, acceptance, commercial paper or instrument which by its terms matures (A) more than 180 days after the date of investment, unless a bank meeting the requirements of clause (c) above shall have agreed to repurchase such obligation, certificate of deposit, acceptance, commercial paper or instrument at its purchase price plus earned interest within no more than 90 days after its purchase thereunder or (B) after the next Payment Date.
“ Permitted Lien ” is defined in Section 10.5 .
“ Permitted Secured Indebtedness ” means Indebtedness of the Company incurred pursuant to Section 10.6(b), provided that at least 5 Business Days prior to the incurrence of such Indebtedness, the Company shall (a) notify the Holders of its intent to incur such Indebtedness, which notice shall set forth in reasonable detail (i) the amount and proposed economic terms of such Indebtedness, (ii) the type of lender or purchaser and (iii) the proposed collateral for such Indebtedness (which proposed collateral may include any or all of the Collateral), and (b) if the Indebtedness is proposed to be secured by any property of the Company or any of its Subsidiaries or any other collateral, deliver to the Collateral Agent and the other Secured Parties an executed joinder agreement, substantially in the form of Exhibit A attached to the Collateral Agency Agreement, pursuant to which all the proposed holders of such Indebtedness have become party to the Collateral Agency Agreement.
“ Person ” means an individual, partnership, corporation, cooperative corporation, limited liability company, association, trust, unincorporated organization, business entity or Governmental Authority.
“Plan” means an “employee benefit plan” (as defined in section 3(3) of ERISA) subject to Title I of ERISA that is or, within the preceding five years, has been established or maintained, or to which contributions are or, within the preceding five years, have been made or required to be made, by the Company or any ERISA Affiliate or with respect to which the Company or any ERISA Affiliate may have any liability.
“ Pledge Agreement (Company) ” means the Assignment of Membership Interests and Pledge Agreement, dated as of July 13, 2010, by the Company, with respect to its membership interests in New Owner, to the Collateral Agent for the benefit of the Secured Parties.
“ Pledge Agreement (TDC) ” means the Assignment of Membership Interests and Pledge Agreement, dated as of July 13, 2010, by TDC, with respect to its membership interests in the Company, to the Collateral Agent for the benefit of the Secured Parties.
 
S CHEDULE B-10
(To Note Purchase Agreement)

“ Pledge Agreements ” means, collectively, Pledge Agreement (TDC) and Pledge Agreement (Company).
“Preferred Stock” means any class of capital stock of a Person that is preferred over any other class of capital stock (or similar equity interests) of such Person as to the payment of dividends or the payment of any amount upon liquidation or dissolution of such Person.
“ Project Finance Subsidiary ” means a special purpose Wholly-Owned Subsidiary of the Company created to develop the CREZ Project or another New Project and to finance the project solely with Non-Recourse Debt and equity.
“property” or “properties” means, unless otherwise specifically limited, real or personal property of any kind, tangible or intangible, choate or inchoate.
“PTE” is defined in Section 6.2(a) .
“Purchaser” is defined in the first paragraph of this Agreement.
“Qualified Institutional Buyer” means any Person who is a “qualified institutional buyer” within the meaning of such term as set forth in Rule 144A(a)(1) under the Securities Act.
“ RBC ” means Royal Bank of Canada, a Canadian banking institution.
“ RBC Agreement ” means the Amendment and Restatement, dated July 13, 2010, of the Credit Agreement between SDTS, as Borrower, and RBC, as lender.
“ RBC Joinder Agreement ” means the Joinder Agreement to the Collateral Agency Agreement, executed by each of RBC and The Prudential Insurance Company of America as a “Joining Party,” dated July 13, 2010.
“Related Fund” means, with respect to any Holder of any Note, any fund or entity that (i) invests in Securities or bank loans, and (ii) is advised or managed by such Holder, the same investment advisor as such Holder or by an Affiliate of such Holder or such investment advisor.
“Required Holders” means, at any time, the Holders of at least 51% in principal amount of the Notes at the time outstanding (exclusive of Notes then owned by the Company or any of its Affiliates).
“Required Permit” means all governmental and third party licenses, permits, franchises, authorizations, patents, copyright, proprietary software, service marks, trademarks and trade names, or rights thereto, that are material to the ownership, leasing, operating and maintenance of the System, including the permits listed on Schedule 5.12(a).
“Requirements of Law” means as to any Person, the certificate of incorporation or formation and by-laws or partnership or operating agreement or other organizational or governing documents of such Person, and any local, state or Federal law, regulation, rule, ordinances or determination, interpretation or order of an arbitrator or a court or other Governmental Authority, and any Required Permit, in each case applicable to or binding upon such Person or any of its properties or its business or to which such Person or any of its properties or its business is subject.
 
S CHEDULE B-11
(To Note Purchase Agreement)

Responsible Officer” means any Senior Financial Officer and any other officer of the Company with responsibility for the administration of the relevant portion of this Agreement.
“Restricted Payment Conditions” is defined in Section 10.9 .
“SEC” shall mean the Securities and Exchange Commission of the United States, or any successor thereto.
“ Secured Parties ” means, from time to time, the Holders, all other Persons party to the Collateral Agency Agreement (other than the Company) and the Collateral Agent.
“Securities” or “Security” shall have the meaning specified in Section 2(1) of the Securities Act.
“Securities Act” means the Securities Act of 1933, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.
“Security Documents” means the Deeds of Trust, Deposit Agreement, the Collateral Agency Agreement, the 2010 NPA Joinder Agreement, the Pledge Agreements, the Negative Pledge Agreement, the RBC Joinder Agreement, and any other security documents, financing statements and the like filed or recorded in connection with the foregoing.
“Senior Financial Officer” means the chief financial officer, principal accounting officer, treasurer or comptroller of the Company or Sharyland, as applicable.
“Sharyland” means Sharyland Utilities, L.P., a Texas limited partnership.
“ SPP ” means the Southwest Power Pool or any successor thereto.
“Structuring Fee” is defined in Section 4.7.
“Subsidiary” means, as to any Person, any other Person in which such first Person or one or more of its Subsidiaries or such first Person and one or more of its Subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar functions) of such second Person and any partnership or joint venture if more than a 50% interest in the profits or capital thereof is owned by such first Person or one or more of its Subsidiaries or such first Person and one or more of its Subsidiaries (unless such partnership or joint venture can and does ordinarily take major business actions without the prior approval of such Person or one or more of its Subsidiaries). Unless the context otherwise clearly requires, any reference to a “Subsidiary” is a reference to a Subsidiary of the Company.
“SVO” means the Securities Valuation Office of the NAIC or any successor to such Office.
 
S CHEDULE B-12
(To Note Purchase Agreement)

“Swap Contract” means (a) any and all interest rate swap transactions, basis swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward foreign exchange transactions, cap transactions, floor transactions, currency options, spot contracts or any other similar transactions or any of the foregoing (including, but without limitation, any options to enter into any of the foregoing), and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., or any International Foreign Exchange Master Agreement.
“Swap Termination Value” means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a), the amounts(s) determined as the mark-to-market values(s) for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts.
“Synthetic Lease” means, at any time, any lease (including leases that may be terminated by the lessee at any time) of any property (a) that is accounted for as an operating lease under GAAP and (b) in respect of which the lessee retains or obtains ownership of the property so leased for U.S. federal income tax purposes, other than any such lease under which such Person is the lessor.
“ System ” means the Company’s integrated electrical transmission and distribution facilities located in the State of Texas and the systems and other property necessary to operate the transmission and distribution facilities, and all improvements to and expansions of such facilities, each New Project (upon its completion) and the Acquired System.
“ System Lease ” means the Master System Lease Agreement, dated as of December 31, 2009, between the Company, as lessor, and Sharyland, as lessee, as supplemented by the Lease Supplement or any lease supplement entered into in replacement of such Lease Supplement and as further supplemented by additional lease supplements entered into by the Company and Sharyland, each in accordance with Section 9.8(b) .
“TDC” means Transmission and Distribution Company, L.L.C., a Texas limited liability company.
“ Total Debt ” means, with respect to the Company, all Indebtedness of the Company on a consolidated basis; provided, however, that for purposes of calculating the Company’s Total Debt to Capitalization Ratio, the Company’s Total Debt (i) shall exclude Non-Recourse Debt of a Project Finance Subsidiary and that portion of the Swap Termination Value defined in clause (b) of the definition of “Swap Termination Value” and (ii) shall include Indebtedness of Sharyland on a consolidated basis.
 
S CHEDULE B-13
(To Note Purchase Agreement)

“ Total Debt to Capitalization Ratio ” means the Company’s Total Debt, divided by the sum of Total Debt plus the Company’s capitalization, as shown on the Company’s balance sheet.
“Transaction Documents” means, collectively, the Financing Documents and the Material Project Documents.
“ Transfer ” means, with respect to any item, the sale, exchange, conveyance, lease, transfer or other disposition of such item.
“USA Patriot Act” means United States Public Law 107-56, Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 2001, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.
“Wholly-Owned Subsidiary” means, at any time, any Subsidiary one hundred percent of all of the equity interests and voting interests of which are owned by any one or more of the Company and the Company’s other Wholly-Owned Subsidiaries at such time.
“Yield-Maintenance Amount” is defined in Section 8.6 .
 
S CHEDULE B-14
(To Note Purchase Agreement)

RULES OF INTERPRETATION
 
1.	The singular includes the plural and the plural includes the singular; and words in the masculine, neuter or feminine gender shall be read and construed as though in either of the other genders where the context so requires.	
 
2.	The word “or” is not exclusive.	
 
3.	A reference to any law includes any amendment or modification to such law, and all regulations, rulings and other laws and regulations promulgated under such law.	
 
4.	A reference to a Person includes its successors and permitted assigns.	
 
5.	Accounting terms have the meanings assigned to them by GAAP, as applied by the accounting entity to which they refer.	
 
6.	The words “include,” “includes” and “including” are not limiting.	
 
7.	A reference in a document to an Article, Section, Exhibit, Schedule, Annex or Appendix is to the Article, Section, Exhibit, Schedule, Annex or Appendix of such document unless otherwise indicated. Exhibits, Schedules, Annexes or Appendices to any document shall be deemed incorporated by reference in such document.	
 
8.	References to “knowledge” or words of similar import refer to the actual knowledge of the current officers of the relevant Person, without any duty of investigation unless otherwise indicated.	
 
9.	References to any document, instrument or agreement (a) shall include all exhibits, schedules and other attachments thereto, (b) shall include all documents, instruments or agreements issued or executed in replacement thereof, and (c) shall mean such document, instrument or agreement, or replacement or predecessor thereto, as amended, modified and supplemented from time to time and in effect at any given time.	
 
10.	The words “hereof,” “herein” and “hereunder” and words of similar import when used in any document shall refer to such document as a whole and not to any particular provision of such document.	
 
11.	References to “days” shall mean calendar days, unless the term “Banking Days” shall be used. References to a time of day shall mean such time in New York City, unless otherwise specified.	
 
12.	The section and subsection headings in a document are for convenience of reference only and shall neither be deemed to be a part of such document nor modify, define, expand or limit any of the terms or provisions thereof.	
 
S CHEDULE B-15
(To Note Purchase Agreement)

Exhibit 10.32
EXECUTION COPY
FIRST AMENDMENT, dated as of June 9, 2011 (this “ First Amendment ”) to the AMENDED AND RESTATED NOTE PURCHASE AGREEMENT, dated as of September 14, 2010 (the “ Agreement ”), between SHARYLAND DISTRIBUTION & TRANSMISSION SERVICES, L.L.C. (the “ Company ”), a Texas limited liability company and a wholly-owned Subsidiary of Transmission and Distribution Company L.L.C. (“ TDC ”), and the holders of the notes party thereto (“ Holders ”). Capitalized terms used but not otherwise defined in this First Amendment shall have the meanings set forth in the Agreement and the rules of interpretation set forth therein shall apply to this First Amendment.
W I T N E S S E T H:
WHEREAS, the Company and the Holders are parties to the Agreement;
WHEREAS, the Company has requested that the Holders amend the Agreement, as more fully described herein; and
WHEREAS, each Holder is willing to agree to such amendment, but only upon the terms and subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual agreements herein contained and other good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Amendments to Section 10.1 (Transactions with Affiliates) of the Agreement . Clause (ii) of Section 10.1 of the Agreement is hereby amended in its entirety as follows:
“(ii) Sharyland, pursuant to (x) the System Lease and (y) the SP Lease”
2. Amendments to Section 10.2 (Merger, Consolidation, etc.) of the Agreement . Clause (i) of Section 10.2 of the Agreement is hereby amended in its entirety as follows:
“(i) pursuant to the System Lease, the SP Lease or the New Lease”
3. Amendment to Section 10.6(d) (Indebtedness) of the Agreement . Section 10.6(d) of the Agreement is hereby amended by replacing the amount “$4,000,000” with “$5,000,000.”
4. Amendments to Section 10.10 (Sale of Assets, etc.) of the Agreement . Section 10.10(b) of the Agreement is hereby amended in its entirety as follows:
“(b) (i) each Project Finance Subsidiary may Transfer the New Project developed and constructed by such Project Finance Subsidiary to the Company upon completion of the New Project in accordance with Section 9.7(b); (ii) the Company may Transfer, or suffer the Transfer, of its ownership interests in a Project Finance Subsidiary and such Project Finance Subsidiary may Transfer, or suffer the Transfer, of the New Project developed by it and its other assets, in each case in connection with and pursuant to the exercise of remedies under the documentation governing Non-Recourse Debt incurred by such Project Finance Subsidiary to finance such New Project; and (iii) SP may lease the CREZ Project pursuant to the SP Lease;”
 
STDS First Amendment - 1

5. Amendments to Section 10.13 (Sale and Leaseback) of the Agreement . Section 10.13 of the Agreement is hereby amended in its entirety as follows:
“10.13 Sale and Lease-Back . Except for the System Lease, the SP Lease and the New Lease, the Company will not, nor will it cause or permit any Subsidiary to, enter into any arrangement providing for the leasing by the Company or any Subsidiary of real or personal property which has been or is to be Transferred by the Company or Subsidiary to a lender or investor or to any Person to whom funds have been or are to be advanced by such lender or investor on the security of such property or rental obligations of the Company or any Subsidiary.”
6. Amendments to Section 10.16 (Project Documents) of the Agreement . The second sentence of Section 10.16(b) of the Agreement is hereby amended in its entirety as follows:
“The Company shall ensure that Sharyland does not enter into any new lease of transmission or distribution facilities at any time prior to the Maturity Date other than the System Lease, the SP Lease or a lease with a Project Finance Subsidiary of a New Project; provided that for the avoidance of doubt, the foregoing provisions of this sentence shall not prohibit Sharyland from maintaining or entering into replacement leases for, or from amending or modifying, the leases described in Schedule 10.16. ”
7. Amendments to Schedule B (Defined Terms) of the Agreement . Schedule B of the Agreement is hereby amended:
(a) by adding the following new definitions :
“ CREZ Project ” shall mean the five transmission lines, four substations and other facilities in Texas identified and awarded to Sharyland by the Public Utility Commission of Texas (the “PUCT”) in Docket Number 37902.
“ First Amendment ” shall mean the First Amendment to this Agreement, dated June 9, 2011.
“ First Amendment Effective Date ” shall have the meaning ascribed to such term in Section 8 of the First Amendment.
“ SP ” shall mean Sharyland Projects, L.L.C., a Project Finance Subsidiary.
“ SP Lease ” shall mean the CREZ Master System Lease Agreement and Supplements proposed to be entered between SP, as lessor, and Sharyland, as lessee, with respect to the CREZ Project.
 
STDS First Amendment - 2

(b) by replacing the following existing definition in its entirety :
“ New Project ” shall mean the CREZ Project, any other transmission or distribution project acquired or built by a Project Finance Subsidiary and any “New Project” (as defined in the System Lease) that the Company agrees to fund pursuant to Article 10 of the System Lease.
8. Conditions to First Amendment Effective Date . This First Amendment shall become effective upon the date (the “ First Amendment Effective Date ”) the Holders shall have received counterparts of this First Amendment, duly executed and delivered by the Company and the other Holders.
9. Representations and Warranties . In order to induce the Holders to enter into this First Amendment, the Company hereby represents and warrants that (i) each of the representations and warranties made by the Company in the Financing Documents is true and correct in all material respects on and as of the date hereof, before and after giving effect to the effectiveness of this First Amendment, as if made on and as of the date hereof, except to the extent such representations and warranties expressly relate to a specific earlier date, in which case such representations and warranties were true and correct in all material respects as of such earlier date and (ii) no Default or Event of Default has occurred and is continuing on the date hereof or after giving effect to the transactions contemplated herein.
10. Continuing Effect of Financing Documents . Except as expressly set forth herein, this First Amendment shall not constitute an amendment or waiver of any provision of the Agreement and shall not be construed as an amendment, waiver or consent to any further or future action on the part of the Company that would require an amendment, waiver or consent of the Holders. Except as expressly amended hereby, the provisions of the Agreement are and shall remain in full force and effect. This First Amendment shall be deemed a Financing Document for purposes of the Agreement.
11. Fees . In accordance with Section 15.1 of the Agreement, the Company shall have paid the fees, charges and disbursements of the Purchaser’s special counsel in connection with this Amendment.
12. Counterparts . This First Amendment may be executed by one or more of the parties hereto on any number of separate counterparts (including by facsimile), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed signature page to this First Amendment by facsimile or electronic transmission shall be as effective as the delivery of a manually executed counterpart of this First Amendment.
13. Severability . Any provision of this First Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
 
STDS First Amendment - 3

14. Integration . This First Amendment and the other Financing Documents represent the agreement of the Company and the Holders with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by any Holder relative to the subject matter hereof not expressly set forth or referred to herein or in the other Financing Documents.
15. GOVERNING LAW . THIS FIRST AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS FIRST AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
[ Signatures on Following Page ]
 
STDS First Amendment - 4

IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written.

	 		 	SHARYLAND DISTRIBUTION &
TRANSMISSION SERVICES, L.L.C.	
					
	 		 		 	By:	 	/s/ W. Kirk Baker	
	 		 		 	Name: W. Kirk Baker
Title: President	
 
[Signature Page - STDS First Amendment]

											
	 		 	THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA	
						
	 		 		 	By:	 		 	/s/ Richard Carrell	
	 		 		 	Name: Richard Carrell
Title: Vice President	
			
	 		 	PRUDENTIAL RETIREMENT INSURANCE
AND ANNUITY COMPANY	
					
	 		 		 	By:	 	Prudential Investment Management, Inc., as
investment manager	
						
	 		 		 		 	By:	 	/s/ Richard Carrell	
	 		 		 		 	Name: Richard Carrell
Title: Vice President	
 
[Signature Page - STDS First Amendment]

Exhibit 10.33
Execution Version
SECOND AMENDMENT, dated as of October 15, 2013 (this “ Second Amendment ”) to the AMENDED AND RESTATED NOTE PURCHASE AGREEMENT, dated as of September 14, 2010 (as heretofore amended, restated, supplemented and otherwise modified, the “ Agreement ”), between SHARYLAND DISTRIBUTION & TRANSMISSION SERVICES, L.L.C. (the “ Company ”), a Texas limited liability company and a wholly-owned Subsidiary of Transmission and Distribution Company L.L.C. (“ TDC ”), and the holders of the notes party thereto (“ Holders ”). Capitalized terms used but not otherwise defined in this Second Amendment shall have the meanings set forth in the Agreement and the rules of interpretation set forth therein shall apply to this Second Amendment.
W I T N E S S E T H :
WHEREAS, the Company and the Holders are parties to the Agreement;
WHEREAS, the Company has requested that the Holders amend the Agreement, as more fully described herein; and
WHEREAS, each Holder party hereto (such Holders constituting the Required Holders) is willing to agree to such amendment, but only upon the terms and subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual agreements herein contained and other good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Amendments to the Agreement . The Agreement is amended to read in its entirety as set forth on Annex A hereto.
2. Amendments to Schedules . Schedule B of the Agreement is hereby amended and restated in its entirety as Schedule B attached hereto.
3. Amendments to Exhibits . The exhibits attached hereto as Exhibit 2 and Exhibit 3 shall be added as Exhibit 2 and Exhibit 3 , respectively, to the Agreement.
4. Conditions to Second Amendment Effective Date . This Second Amendment shall become effective upon the date the Holders shall have received counterparts of this Second Amendment, duly executed and delivered by the Company and the other Holders.
5. Representations and Warranties . In order to induce the Holders to enter into this Second Amendment, the Company hereby represents and warrants as follows:
 
 	(i)	The Company has the limited liability power and authority to execute and deliver this Second Amendment and to carry out the terms and provisions of this Second Amendment and the Agreement, as amended hereby, and has taken all necessary limited liability company action to authorize the execution and delivery by the Company of this Second Amendment and	

 	the performance under this Second Amendment and the Agreement, as amended hereby. The Company has duly executed and delivered this Second Amendment, and this Second Amendment constitutes the legal, valid and binding obligation of the Company, enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law).	
 
 	(ii)	The execution and delivery by the Company of this Second Amendment and the performance under this Second Amendment and the Agreement, as amended hereby, do not (i) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of the Company under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter or limited partnership or limited liability company agreement, or any other agreement or instrument to which the Company is bound or by which the Company or any of its properties may be bound or affected, (ii) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to the Company or (iii) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to the Company, which in the case of any of the foregoing clauses (i) through (iii), with respect to Material Project Documents, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.	
 
 	(iii)	No consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority is required in connection with the execution or delivery by the Company of this Second Amendment or the performance under this Second Amendment and the Agreement, as amended hereby.	
 
 	(iv)	No Default or Event of Default has occurred and is continuing on the date hereof or after giving effect to the transactions contemplated herein.	
6. Continuing Effect of Financing Documents . Except as expressly set forth herein, this Second Amendment shall not constitute an amendment or waiver of any provision of the Agreement and shall not be construed as an amendment, waiver or consent to any further or future action on the part of the Company that would require an amendment, waiver or consent of the Holders. Except as expressly amended hereby, the provisions of the Agreement are and shall remain in full force and effect. This Second Amendment shall be deemed a Financing Document for purposes of the Agreement.
 
2

7. Fees . In accordance with Section 15.1 of the Agreement, the Company shall have paid the fees, charges and disbursements of the Purchaser’s special counsel in connection with this Second Amendment.
8. Counterparts . This Second Amendment may be executed by one or more of the parties hereto on any number of separate counterparts (including by facsimile), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed signature page to this Second Amendment by facsimile or electronic transmission shall be as effective as the delivery of a manually executed counterpart of this Second Amendment.
9. Severability . Any provision of this Second Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
10. Integration . This Second Amendment and the other Financing Documents represent the agreement of the Company and the Holders with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by any Holder relative to the subject matter hereof not expressly set forth or referred to herein or in the other Financing Documents.
11. GOVERNING LAW . THIS SECOND AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS FIRST AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
[ Signatures of Following Page ]
 
3

IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be duly executed and delivered by their property and duly authorized officers as of the day and year first above written.

SHARYLAND DISTRIBUTION &
TRANSMISSION SERVICES, L.L.C.	
		
By	 	/s/ W. Kirk Baker	
	 	Name:	  	W. Kirk Baker	
	 	Title:	  	Senior Vice President	
 
[Signature Page- SDTS Second Amendment]

			
THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA	
		
By:	 	/s/ Richard Carrell	
	 	Vice President	

PRUDENTIAL RETIREMENT INSURANCE AND ANNUITY COMPANY	
		
By:	 	Prudential Investment Management, Inc.,
as investment manager	
			
	 	By:	  	/s/ Richard Carrell	
	 		  	Vice President	
 
[Signature Page- SDTS Second Amendment]

Annex A
Amended and Restated Note Purchase Agreement, as amended by the Second Amendment

 
 
S HARYLAND D ISTRIBUTION  & T RANSMISSION S ERVICES , L.L.C.
$53,500,000
7.25% Senior Notes due December 30, 2029

A MENDED AND R ESTATED
N OTE P URCHASE A GREEMENT

AS AMENDED BY :
F IRST A MENDMENT DATED AS OF J UNE 9, 2011
AND
S ECOND A MENDMENT DATED AS OF O CTOBER 15, 2013

 

TABLE OF CONTENTS

 	  	Page	 	
SECTION 1. AUTHORIZATION OF NOTES	  	 	1	  	
		
SECTION 2. SALE AND PURCHASE OF NOTES	  	 	1	  	
		
SECTION 3. CLOSING	  	 	1	  	
		
SECTION 4. CONDITIONS TO CLOSING	  	 	2	  	
		
Section 4.1 Representations and Warranties	  	 	2	  	
Section 4.2 Performance; No Default	  	 	2	  	
Section 4.3 Compliance Certificates	  	 	2	  	
Section 4.4 Opinions of Counsel	  	 	2	  	
Section 4.5 Purchase Permitted By Applicable Law, Etc	  	 	3	  	
Section 4.6 Sale of Other Notes	  	 	3	  	
Section 4.7 Payment of Special Counsel and Other Fees and Expenses	  	 	3	  	
Section 4.8 Private Placement Number	  	 	3	  	
Section 4.9 Changes in Structure	  	 	3	  	
Section 4.10 Funding Instructions	  	 	3	  	
Section 4.11 Proceedings and Documents	  	 	4	  	
Section 4.12 Deposit Agreement, Etc	  	 	5	  	
Section 4.13 UCC Searches; and Litigation Searches	  	 	5	  	
Section 4.14 Insurance	  	 	5	  	
Section 4.15 Financial Statements	  	 	6	  	
Section 4.16 Consents and Approvals	  	 	6	  	
		
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY	  	 	6	  	
		
Section 5.1 Organization; Power and Authority	  	 	6	  	
Section 5.2 Authorization, Etc	  	 	6	  	
Section 5.3 Disclosure	  	 	6	  	
Section 5.4 Organization and Ownership of Interest in the Company	  	 	7	  	
Section 5.5 Financial Statements; Material Liabilities	  	 	7	  	
Section 5.6 Compliance with Laws, Other Instruments, Etc	  	 	7	  	
Section 5.7 Governmental Authorizations, Etc	  	 	7	  	
Section 5.8 Litigation; Observance of Agreements, Statutes and Orders	  	 	8	  	
Section 5.9 Taxes	  	 	8	  	
Section 5.10 Title to Property; Leases	  	 	8	  	
Section 5.11 Insurance	  	 	8	  	
Section 5.12 Licenses, Permits, Etc	  	 	8	  	
Section 5.13 Compliance with ERISA	  	 	9	  	
Section 5.14 Private Offering by the Company	  	 	9	  	
Section 5.15 Use of Proceeds; Margin Regulations	  	 	10	  	
Section 5.16 Existing Indebtedness; Future Liens	  	 	10	  	
Section 5.17 Foreign Assets Control Regulations, Etc	  	 	10	  	
Section 5.18 Status under Certain Statutes	  	 	11	  	
Section 5.19 Environmental Matters	  	 	12	  	
Section 5.20 Force Majeure Events; Employees	  	 	12	  	

TABLE OF CONTENTS
(continued)

 	  	Page	 	
Section 5.21 Collateral	  	 	12	  	
		
SECTION 6. REPRESENTATIONS OF THE PURCHASERS	  	 	13	  	
		
Section 6.1 Purchase for Investment	  	 	13	  	
Section 6.2 Source of Funds	  	 	13	  	
		
SECTION 7. INFORMATION	  	 	14	  	
		
Section 7.1 Section 7	  	 	14	  	
Section 7.2 Officer’s Certificate	  	 	18	  	
Section 7.3 Visitation	  	 	18	  	
		
SECTION 8. PAYMENT AND PREPAYMENT OF THE NOTES	  	 	19	  	
		
Section 8.1 Amortization; Maturity;	  	 	19	  	
Section 8.2 Optional Prepayments with Yield-Maintenance Amount	  	 	19	  	
Section 8.3 Allocation of Partial Prepayments	  	 	19	  	
Section 8.4 Maturity; Surrender, Etc	  	 	20	  	
Section 8.5 Purchase of Notes	  	 	20	  	
Section 8.6 Yield-Maintenance Amount	  	 	20	  	
		
SECTION 9. AFFIRMATIVE COVENANTS	  	 	21	  	
		
Section 9.1 Compliance with Law	  	 	21	  	
Section 9.2 Insurance	  	 	22	  	
Section 9.3 Maintenance of Properties	  	 	23	  	
Section 9.4 Payment of Taxes and Claims	  	 	23	  	
Section 9.5 Existence, Etc	  	 	23	  	
Section 9.6 Books and Records	  	 	24	  	
Section 9.7 Collateral; Further Assurances	  	 	24	  	
Section 9.8 Material Project Documents	  	 	25	  	
Section 9.9 Financial Ratios	  	 	25	  	
		
SECTION 10. NEGATIVE COVENANTS	  	 	26	  	
		
Section 10.1 Transactions with Affiliates	  	 	26	  	
Section 10.2 Merger, Consolidation, Etc	  	 	26	  	
Section 10.3 Line of Business	  	 	26	  	
Section 10.4 Terrorism Sanctions Regulations	  	 	26	  	
Section 10.5 Liens	  	 	26	  	
Section 10.6 Indebtedness	  	 	28	  	
Section 10.7 Loans, Advances, Investments and Contingent Liabilities	  	 	28	  	
Section 10.8 No Subsidiaries	  	 	29	  	
Section 10.9 Restricted Payments	  	 	29	  	
Section 10.10 Sale of Assets, Etc	  	 	29	  	
Section 10.11 Sale or Discount of Receivables	  	 	29	  	
Section 10.12 Amendments to Organizational Documents	  	 	29	  	
Section 10.13 Sale and Lease-Back	  	 	30	  	
 
ii

TABLE OF CONTENTS
(continued)

 	  	Page	 	
Section 10.14 ERISA Compliance	  	 	30	  	
Section 10.15 No Margin Stock	  	 	31	  	
Section 10.16 Project Documents	  	 	31	  	
Section 10.17 Regulation	  	 	31	  	
Section 10.18 Swaps	  	 	32	  	
Section 10.19 Most Favored Lender	  	 	32	  	
		
SECTION 11. EVENTS OF DEFAULT	  	 	32	  	
		
SECTION 12. REMEDIES ON DEFAULT, ETC	  	 	35	  	
		
Section 12.1 Acceleration	  	 	35	  	
Section 12.2 Other Remedies	  	 	36	  	
Section 12.3 Rescission	  	 	36	  	
Section 12.4 No Waivers or Election of Remedies, Expenses, Etc	  	 	36	  	
		
SECTION 13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES	  	 	36	  	
		
Section 13.1 Registration of Notes	  	 	36	  	
Section 13.2 Transfer and Exchange of Notes	  	 	37	  	
Section 13.3 Replacement of Notes	  	 	38	  	
		
SECTION 14. PAYMENTS ON NOTES	  	 	38	  	
		
Section 14.1 Place of Payment	  	 	38	  	
Section 14.2 Home Office Payment	  	 	38	  	
		
SECTION 15. EXPENSES, ETC	  	 	39	  	
		
Section 15.1 Transaction Expenses	  	 	39	  	
Section 15.2 Survival	  	 	39	  	
		
SECTION 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT	  	 	39	  	
		
SECTION 17. AMENDMENT AND WAIVER	  	 	40	  	
		
Section 17.1 Requirements	  	 	40	  	
Section 17.2 Solicitation of Holders of Notes	  	 	40	  	
Section 17.3 Binding Effect, etc	  	 	40	  	
Section 17.4 Notes Held by Company, etc	  	 	41	  	
		
SECTION 18. NOTICES	  	 	41	  	
		
SECTION 19. REPRODUCTION OF DOCUMENTS	  	 	41	  	
		
SECTION 20. CONFIDENTIAL INFORMATION	  	 	42	  	
		
SECTION 21. SUBSTITUTION OF PURCHASER	  	 	43	  	
		
SECTION 22. MISCELLANEOUS	  	 	43	  	
		
Section 22.1 Successors and Assigns	  	 	43	  	
 
iii

TABLE OF CONTENTS
(continued)

 	  	Page	 	
Section 22.2 Payments Due on Non-Business Days	  	 	43	  	
Section 22.3 Accounting Terms	  	 	43	  	
Section 22.4 Severability	  	 	44	  	
Section 22.5 Construction, etc	  	 	44	  	
Section 22.6 Counterparts	  	 	44	  	
Section 22.7 Governing Law	  	 	44	  	
Section 22.8 Jurisdiction and Process; Waiver of Jury Trial	  	 	44	  	
Section 22.9 Transaction References	  	 	45	  	
 
iv

							
			
S CHEDULE A	  	 	—	  	  	I NFORMATION R ELATING TO P URCHASERS	
			
S CHEDULE B	  	 	—	  	  	D EFINED T ERMS	
			
Schedule 4.12(a)	  	 	—	  	  	Deeds of Trust	
			
Schedule 5.3	  	 	—	  	  	Disclosure Materials	
			
Schedule 5.4	  	 	—	  	  	Ownership of the Company and Subsidiaries; Officers	
			
Schedule 5.5	  	 	—	  	  	Financial Statements	
			
Schedule 5.7	  	 	—	  	  	Government Authorizations	
			
Schedule 5.12(a)	  	 	—	  	  	Required Permits	
			
Schedule 5.12(b)	  	 	—	  	  	Material Project Documents	
			
Schedule 5.16	  	 	—	  	  	Indebtedness	
			
Schedule 8.1	  	 	—	  	  	Principal Amortization Schedule	
			
Schedule 9.2	  	 	—	  	  	Insurance Requirements	
			
Schedule 10.1	  	 	__	  	  	Cap Rock Transaction	
			
Schedule 10.16	  	 	__	  	  	Certain Existing Leases	
			
Exhibit 1	  	 	—	  	  	Form of 7.25% Senior Secured Note due December 30, 2029	
			
Exhibit 2	  	 	—	  	  	Form of Subordination Terms	
			
Exhibit 3	  	 	—	  	  	Form of Subsidiary Guaranty	

7.25% Senior Notes due December 30, 2029
September 14, 2010
T O E ACH OF THE P URCHASERS L ISTED IN
Schedule A Hereto:
Ladies and Gentlemen:
This Amended and Restated Note Purchase Agreement (this “ Agreement ”), dated as of September 14, 2010, amends and restates the Note Purchase Agreement, dated as of December 31, 2009, (the “ 2009 SDTS Note Agreement ”), among Sharyland Distribution & Transmission Services, L.L.C., a Texas limited liability company (the “ Company ”), and the financial institutions listed on Schedule A to the 2009 SDTS Note Agreement or who later become a party thereto (each, a “ Purchaser ” and, collectively, the “ Purchasers ”).
SECTION 1. AUTHORIZATION OF NOTES.
The Company will authorize the issue and sale of $53,500,000 aggregate principal amount of its 7.25% Senior Notes due December 30, 2029 (the “Notes” , such term to include any such notes issued in substitution therefor pursuant to Section 13 ). The Notes shall be substantially in the form set out in Exhibit 1 . Certain capitalized and other terms used in this Agreement are defined in Schedule B ; and references to a “Schedule” or an “Exhibit” are, unless otherwise specified, to a Schedule or an Exhibit attached to this Agreement.
SECTION 2. SALE AND PURCHASE OF NOTES.
Subject to the terms and conditions of this Agreement, the Company will issue and sell to each Purchaser and each Purchaser will purchase from the Company, at the Closing provided for in Section 3 , Notes in the principal amount specified opposite such Purchaser’s name in Schedule A at the purchase price of 100% of the principal amount thereof. The Purchasers’ obligations hereunder are several and not joint obligations and no Purchaser shall have any liability to any Person for the performance or non-performance of any obligation by any other Purchaser hereunder.
SECTION 3. CLOSING.
The sale and purchase of the Notes to be purchased by each Purchaser shall occur at the offices of Bingham McCutchen, 399 Park Avenue, New York, NY, at 11:00 a.m., New York time, at a closing (the “ Closing ”) on December 31, 2009 or on such other Business Day thereafter on or prior to December 31, 2009 as may be agreed upon by the Company and the Purchasers. At the Closing the Company will deliver to each Purchaser the Notes to be purchased by such Purchaser in the form of a single Note (or such greater number of Notes in denominations of at least $1,000,000 as such Purchaser may request) dated the Closing Date and

registered in such Purchaser’s name (or in the name of its nominee), against delivery by such Purchaser to the Company or its order of immediately available funds in the amount of the purchase price therefor by wire transfer of immediately available funds for the account of the Company to account number 4426868026 at Bank of America, 901 Main Street, Dallas, TX 75202 ABA: 026009593. If at the Closing the Company shall fail to tender such Notes to any Purchaser as provided above in this Section 3 , or any of the conditions specified in Section 4 shall not have been fulfilled to such Purchaser’s satisfaction, such Purchaser shall, at its election, be relieved of all further obligations under this Agreement, without thereby waiving any rights such Purchaser may have by reason of such failure or such nonfulfillment.
SECTION 4. CONDITIONS TO CLOSING.
Each Purchaser’s obligation to purchase and pay for the Notes to be sold to such Purchaser at the Closing is subject to the fulfillment to the satisfaction of each Purchaser, prior to or at the Closing, of the following conditions:
Section 4.1 Representations and Warranties . The representations and warranties of the Company in this Agreement shall be correct when made and at the time of the Closing.
Section 4.2 Performance; No Default . The Company shall have performed and complied with all agreements and conditions contained in this Agreement required to be performed or complied with by it prior to or at the Closing and after giving effect to the issue and sale of the Notes (and the application of the proceeds thereof as contemplated by Section 5.14 ) no Default or Event of Default shall have occurred and be continuing. The Company shall not have entered into any transaction since December 31, 2008, that would have been prohibited by Sections 10.1, and 10.10 through 10.12 of the 2009 SDTS Note Agreement had such Sections applied since such date.
Section 4.3 Compliance Certificates.
(a) Company’s Closing Certificates . The Company shall have delivered to each Purchaser an officer’s certificate, dated the Closing Date, certifying that (i) the conditions specified in Sections 4.1 and 4.2 have been fulfilled, and (ii) that each of the other conditions precedent to the occurrence of the Closing has been satisfied.
(b) Company’s Authority Certificate . The Company shall have delivered to each Purchaser a certificate of its secretary, dated the Closing Date, certifying as to the resolutions attached thereto and other corporate proceedings by the Company relating to the authorization, execution and delivery of the Notes and this Agreement and the other Transaction Documents to which it is a party.
Section 4.4 Opinions of Counsel . Such Purchaser shall have received opinions in form and substance satisfactory to such Purchaser, dated the date of the Closing (i) from Mayer Brown LLP, counsel for the Company and Sharyland, covering such matters incident to the transactions contemplated hereby as such Purchaser or its counsel may reasonably request and (ii) from Sutherland, Asbill & Brennan LLP, special counsel for the Company and Sharyland, covering federal and Texas regulatory matters (and the Company hereby instructs its counsel to deliver such opinion to the Purchasers and the Secured Parties), and (iii) from Bingham
 
S CHEDULE A-2
(To Note Purchase Agreement)

McCutchen LLP, in connection with such transactions, in form and substance satisfactory to the Purchasers and covering such other matters incident to such transactions as the Purchasers may reasonably request.
Section 4.5 Purchase Permitted By Applicable Law, Etc . On the date of the Closing such Purchaser’s purchase of Notes shall (a) be permitted by the laws and regulations of each jurisdiction to which such Purchaser is subject, without recourse to provisions (such as section 1405(a)(8) of the New York Insurance Law) permitting limited investments by insurance companies without restriction as to the character of the particular investment, (b) not violate any applicable law or regulation (including, without limitation, Regulation T, U or X of the Board of Governors of the Federal Reserve System) and (c) not subject such Purchaser to any tax, penalty or liability under or pursuant to any applicable law or regulation, which law or regulation was not in effect on the date hereof. If requested by such Purchaser, such Purchaser shall have received an Officer’s Certificate certifying as to such matters of fact as such Purchaser may reasonably specify to enable such Purchaser to determine whether such purchase is so permitted.
Section 4.6 Sale of Other Notes . Contemporaneously with the Closing, the Company shall sell to each other Purchaser and each other Purchaser shall purchase the Notes to be purchased by it at the Closing as specified in Schedule A .
Section 4.7 Payment of Special Counsel and Other Fees and Expenses . Without limiting the provisions of Section 15.1, the Company shall have paid on or before the Closing: (a) the fees, charges and disbursements of the Purchasers’ special counsel, Bingham McCutchen LLP and the Purchasers’ Texas counsel to the extent reflected in a statement of such counsel rendered to the Company at least one Business Day prior to the Closing and (b) all other fees, including a structuring fee in the amount of $535,000.00 to Prudential (the “ Structuring Fee ”), and out-of-pocket costs and expenses (including legal fees and expenses and consultant fees and expenses) and other compensation contemplated hereby or by the other Financing Documents, or pursuant to separate letter agreements, payable to the Purchasers.
Section 4.8 Private Placement Number . A Private Placement Number issued by Standard & Poor’s CUSIP Service Bureau (in cooperation with the SVO) shall have been obtained for the Notes.
Section 4.9 Changes in Structure . The transactions contemplated by the Contribution Agreement shall have been consummated. The Company shall not have changed its jurisdiction of formation or been a party to any merger or consolidation or succeeded to all or any substantial part of the liabilities of any other entity, at any time following the date of the most recent financial statements referred to in Schedule 5.5, except that the Company shall have changed its type of organization from a Texas limited partnership to a Texas limited liability company.
Section 4.10 Funding Instructions . At least one Business Day prior to the date of the Closing, each Purchaser shall have received written instructions signed by a Responsible Officer on letterhead of the Company confirming the information specified in Section 3 including (i) the name and address of the transferee bank, (ii) such transferee bank’s ABA number and (iii) the account name and number into which the purchase price for the Notes is to be deposited.
 
S CHEDULE A-3
(To Note Purchase Agreement)

Section 4.11 Proceedings and Documents . Each Purchaser shall have received the following, each to be (i) dated the Closing Date unless otherwise indicated, and (ii) in form and substance satisfactory to the Purchasers:
(a) The Notes to be purchased by the Purchasers;
(b) (i) This Agreement and each other Financing Document, duly executed, authorized and delivered by each party thereto, (ii) copies of the System Lease, the Contribution Agreement and each of the other Material Project Documents listed on Schedule 5.12(b) to the 2009 SDTS Note Agreement and any amendments or supplements thereto, in each case, duly authorized, executed and delivered by each party thereto, and certified by an authorized officer of the Company as being true, correct and complete and in full force and effect on the Closing Date, and (iii) copies of closing documents delivered in connection with the transactions contemplated by the Contribution Agreement, certified by an authorized officer of Sharyland as being true, correct and complete and in full force and effect, together with such officer’s certification that the transactions contemplated by the Contribution Agreement have been fully consummated;
(c) Copies of the Certificate of Convenience and Necessity and wholesale services tariff of Sharyland as issued by and in effect with the Public Utility Commission of Texas, certified by an authorized officer of Sharyland as being true, complete and accurate and in full force and effect;
(d) The certificates of formation of the Company and each Member, each certified as of a recent date by the Secretary of State of the State of Texas and by such Person’s secretary or other authorized officer;
(e) The organizational documents of each the Company and each Member, certified by such Person’s secretary or other authorized officer;
(f) With respect to each of the Company and Sharyland, an incumbency certificate signed by the secretary and one other officer of such Person, certifying as to the names, titles and true signatures of the officers of such Person authorized to sign this Agreement, the Notes, the other Financing Documents to which such Person is a party and other documents to be delivered hereunder or thereunder;
(g) A certificate of the secretary of the Company and Sharyland attaching resolutions of its management committee or other governing body evidencing approval of the transactions contemplated by this Agreement and the other Financing Documents to which such Person is a party and, with respect to the Company, the issuance of the Notes, and in each case, the execution, delivery and performance thereof, and authorizing certain officers to execute and deliver the same, and certifying that such resolutions were duly and validly adopted and have not since been amended, revoked or rescinded;
(h) Good standing certificates as to each of the Company and each Member from all relevant jurisdictions;
 
S CHEDULE A-4
(To Note Purchase Agreement)

(i) Evidence of the filing and acceptance of financing statements which name the Company, as debtor, and the Collateral Agent, as secured party, in all applicable offices, together with copies of such financing statements;
(j) A schedule of all Required Permits, together with copies thereof certified by officers of the Company as being true, correct and complete, in full force and effect and not subject to any appeal or further proceeding;
(k) Certified copies of the documents delivered in connection with the consummation of the transactions contemplated by the Contribution Agreement, and evidence of a capital contribution to Sharyland by its Members in the amount of $16,989,337 and the repayment of indebtedness owed to HLH Acquisitions, Inc. by Sharyland in such amount; and
(l) Such additional documents or certificates with respect to such legal matters or limited liability company, general partnership or other proceedings related to the transactions contemplated hereby as may be reasonably requested by the Purchasers.
Section 4.12 Deposit Agreement, Etc . The Obligations shall be secured by a perfected first priority security interest (subject to Permitted Liens) in the Collateral in favor of the Collateral Agent, for the benefit of the Secured Parties, and the Company will deliver or cause to be delivered to the Purchasers and the Collateral Agent on the Closing Date the following, each of which shall be in full force and effect:
(a) A Deposit Account Control Agreement in the form of Exhibit S-1 to the 2009 SDTS Note Agreement, duly executed by each of the Company, the Collateral Agent and Bank of America N.A. (the “ Deposit Agreement ”);
(b) A Deed of Trust in the form of Exhibit S-2 to the 2009 SDTS Note Agreement, duly executed by the Company;
(c) A Collateral Agency Agreement in the form of Exhibit S-3 to the 2009 SDTS Note Agreement, duly executed by the Company, the Collateral Agent and the Purchasers; and
(d) Such other documents, instruments and agreements any Purchaser may reasonably request to grant to the Collateral Agent first priority (subject only to Permitted Liens) perfected Liens on the Collateral.
Section 4.13 UCC Searches; and Litigation Searches . The Collateral Agent and the Purchasers shall have received UCC and litigation searches of the Company and each Member, which searches shall (i) confirm that no Liens other than Permitted Liens exist on the Collateral and that such Persons are not subject to any litigation, and (ii) be otherwise in substance satisfactory to the Collateral Agent and the Purchasers.
Section 4.14 Insurance . The Company shall have delivered to the Purchasers evidence of insurance in effect that meets the requirements of Section 9.2 , and the Purchasers shall have received an insurance consultant’s report, which shall be addressed to the Purchasers and shall be in form and substance satisfactory to the Purchasers.
 
S CHEDULE A-5
(To Note Purchase Agreement)

Section 4.15 Financial Statements . The Purchasers shall have received unaudited financial statements of the Company and each Member for the fiscal quarter ended September 30, 2009.
Section 4.16 Consents and Approvals . All Required Permits and all governmental and third party permits and regulatory and other approvals required to be in effect in connection with the issuance of the Notes hereunder have been obtained and are in effect, all applicable waiting periods have expired without any materially adverse action being taken by any applicable authority, and copies of the documentation thereof shall have been delivered to each Purchaser.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each Purchaser as of the Closing Date that:
Section 5.1 Organization; Power and Authority . Each of the Company and each Member is a limited liability company or limited partnership, as applicable, duly organized, validly existing and in good standing under the laws of its jurisdiction of formation, and is duly qualified and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Each of the Company and each Member has the limited liability company or limited partnership, as applicable, power and authority to own or hold under lease the properties it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver this Agreement and the other Transaction Documents to which it is a party and to perform the provisions hereof and thereof.
Section 5.2 Authorization, Etc . This Agreement and the other Transaction Documents have been duly authorized by all necessary limited liability company or limited partnership, as applicable, action on the part of the Company and each Member, and this Agreement and the other Transaction Documents constitute, and upon execution and delivery thereof each Note will constitute, a legal, valid and binding obligation of the Company or such Member, as applicable, enforceable against such Person in accordance with its terms, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors’ rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).
Section 5.3 Disclosure . This Agreement, the other Transaction Documents and the documents, certificates or other writings delivered to the Purchasers by or on behalf of the Company or a Member, in connection with the transactions contemplated hereby, and the financial statements listed in Schedule 5. 5 (this Agreement, and such documents, certificates or other writings and such financial statements delivered to each Purchaser and listed on Schedule 5.3 being referred to, collectively, as the “Disclosure Documents ”), taken as a whole, do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading in light of the circumstances under which they were made. The projections and pro forma financial information contained in the materials
 
S CHEDULE A-6
(To Note Purchase Agreement)

referenced above are based upon good faith estimates and assumptions believed by management of the Company and Sharyland to be reasonable at the time made and on the Closing Date, it being recognized by each Purchaser that such financial information as it relates to future events is not to be viewed as fact and that actual results during the period or periods covered by such financial information may differ from the projected results set forth therein by a material amount. Except as disclosed in the Disclosure Documents, since December 31, 2008, there has been no change in the financial condition, operations, business, properties or prospects of the Company or a Member except changes that individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. There is no fact known to the Company that could reasonably be expected to have a Material Adverse Effect that has not been set forth herein or in the Disclosure Documents.
Section 5.4 Organization and Ownership of Interest in the Company . Schedule 5.4 contains a complete and correct list and description of (i) each of the Company’s and each Member’s jurisdiction of its organization and its ownership structure, (ii) the Company’s and each Member’s Subsidiaries, and (iii) the Company’s and each Member’s senior officers. The Company has no Subsidiaries as of the Closing Date except as shown on Schedule 5.4 .
Section 5.5 Financial Statements; Material Liabilities . The Company and Sharyland have delivered to each Purchaser copies of the financial statements listed on Schedule 5.5 . All of such financial statements (including in each case the related schedules and notes) fairly present in all material respects the consolidated financial positions of the Company and Sharyland, each as of the respective dates specified in such Schedule and the results of their operations and cash flows for the respective periods so specified and have been prepared in accordance with GAAP consistently applied throughout the periods involved except as set forth in the notes thereto (subject, in the case of any interim financial statements, to normal year-end adjustments). Neither the Company nor Sharyland has any material liabilities that are not disclosed on such financial statements or otherwise disclosed in the Disclosure Documents.
Section 5.6 Compliance with Laws, Other Instruments, Etc . The execution, delivery and performance by the Company and the Members of this Agreement and the Notes and the other Transaction Documents to which it is a party, do not and will not (i) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of such Person under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter or limited partnership or limited liability company agreement, or any other agreement or instrument to which such Person is bound or by which such Person or any of its properties may be bound or affected, (ii) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to such Person or (iii) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to such Person.
Section 5.7 Governmental Authorizations, Etc . Except as set forth on Schedule 5.7 , no consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority is required in connection with the execution, delivery or performance by the Company or either Member of this Agreement or the Notes or any of the other Transaction Documents to which it is a party.
 
S CHEDULE A-7
(To Note Purchase Agreement)

Section 5.8 Litigation; Observance of Agreements, Statutes and Orders . (a) There are no actions, suits, investigations or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company or either Member or any of their property in any court or before any arbitrator of any kind or before or by any Governmental Authority that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.
(b) None of the Company or either Member is in default under any term of any Material Project Document listed in Schedule 5.12(b) to the 2009 SDTS Note Agreement or any other agreement or any order, judgment, decree or ruling of any court, arbitrator or Governmental Authority or is in violation of any applicable law, ordinance, rule or regulation (including without limitation Environmental Laws or the USA Patriot Act) of any Governmental Authority, which default or violation, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.
(c) To the knowledge of the Company, after due inquiry, no breach or default under any of the Material Project Documents listed in Schedule 5.12(b) to the 2009 SDTS Note Agreement has occurred and is continuing.
Section 5.9 Taxes . Each of the Company and each Member has filed all tax returns that are required to have been filed in any jurisdiction, and has paid all taxes shown to be due and payable on such returns and all other taxes and assessments levied upon them or their properties, assets, income or franchises, to the extent such taxes and assessments have become due and payable and before they have become delinquent, except for any taxes and assessments (i) the amount of which is not individually or in the aggregate material or (ii) the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which such Person has established adequate reserves in accordance with GAAP. The Company knows of no basis for any other tax or assessment that could reasonably be expected to have a Material Adverse Effect. The charges, accruals and reserves on the books of the Company in respect of Federal, state or other taxes for all fiscal periods are adequate.
Section 5.10 Title to Property; Leases . The Company has good and sufficient title to the System, and the Company and Sharyland have good and sufficient title to their properties that individually or in the aggregate are material to them, free and clear of Liens (other than Permitted Liens). All leases that individually or in the aggregate are material to the Company or Sharyland are valid and subsisting and are in full force and effect in all material respects.
Section 5.11 Insurance . Sharyland has all insurance coverage required by Section 9.2 .
Section 5.12 Licenses, Permits, Etc .; Material Project Documents. The Company and Sharyland own or possess all governmental and third party licenses, permits, franchises, authorizations, patents, copyrights, proprietary software, service marks, trademarks and trade names, or rights thereto, that are material to the ownership, leasing, operating and maintenance of the System, including the Certificate of Convenience and Necessity (#30192) issued by the Public Utility Commission of Texas to Sharyland without known conflict with the rights of others. The Material Project Documents listed on Schedule 5.12(b) to the 2009 SDTS Note Agreement constitute and include all material contracts and agreements to which the Company or Sharyland is a party. Each Material Project Document listed in Schedule 5.12(b) to the 2009 SDTS Note Agreement is in full force and effect, and constitutes the legal, valid and binding obligation of each party thereto as of the date hereof.
 
S CHEDULE A-8
(To Note Purchase Agreement)

Section 5.13 Compliance with ERISA . (a) The Company and each ERISA Affiliate have operated and administered each Plan in compliance with all applicable laws except for such instances of noncompliance as have not resulted in and could not reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any ERISA Affiliate has incurred any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans (as defined in section 3 of ERISA), and no event, transaction or condition has occurred or exists that could reasonably be expected to result in the incurrence of any such liability by the Company or any ERISA Affiliate, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate, in either case pursuant to Title I or IV of ERISA or to such penalty or excise tax provisions or to section 401(a)(29) or 412 of the Code or section 4068 of ERISA, other than such liabilities or Liens as would not be individually or in the aggregate material.
(b) The present value of the aggregate benefit liabilities under each of the Plans (other than Multiemployer Plans), determined as of the end of such Plan’s most recently ended plan year on the basis of the actuarial assumptions specified for funding purposes in such Plan’s most recent actuarial valuation report did not exceed the aggregate current value of the assets of such Plan allocable to such benefit liabilities by an amount in excess of $6,000,000. The term “benefit liabilities” has the meaning specified in section 4001 of ERISA and the terms “current value” and “present value” have the meanings specified in section 3 of ERISA.
(c) The Company and its ERISA Affiliates have not incurred withdrawal liabilities (and are not subject to contingent withdrawal liabilities) under section 4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate are material.
(d) The expected postretirement benefit obligation (determined as of the last day of the Company’s most recently ended fiscal year in accordance with Financial Accounting Standards Board Statement No. 106, without regard to liabilities attributable to continuation coverage mandated by section 4980B of the Code) of the Company is not material to it.
(e) The execution and delivery of this Agreement and the issuance and sale of the Notes hereunder will not involve any non-exempt prohibited transaction under section 406 of ERISA or in connection with which a tax could be imposed pursuant to section 4975(c)(1)(A)-(D) of the Code. The representation by the Company to each Purchaser in the first sentence of this Section 5.13(e) is made in reliance upon and subject to the accuracy of such Purchaser’s representation in Section 6.2 as to the sources of the funds used to pay the purchase price of the Notes to be purchased by such Purchaser.
Section 5.14 Private Offering by the Company . Neither the Company nor anyone acting on its behalf has offered the Notes or any similar securities for sale to, or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof with, any person other than the Purchasers and not more than five other Institutional Investors, each of which has been offered the Notes at a private sale for investment. Neither the Company nor anyone acting on its behalf has taken, or will take, any action that would subject the issuance or sale of the Notes to the registration requirements of Section 5 of the Securities Act or to the registration requirements of any securities or blue sky laws of any applicable jurisdiction.
 
S CHEDULE A-9
(To Note Purchase Agreement)

Section 5.15 Use of Proceeds; Margin Regulations . The Company will apply the proceeds of the sale of the Notes to (i) repay outstanding Indebtedness in the amount of $35,174,448.28, (ii) to repay $17,020,929 of inter-company Indebtedness provided by HLH Acquisitions, Inc., and (iii) pay all fees, expenses and costs related to Closing, including legal fees and the Structuring Fee. No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for the purpose of buying or carrying any margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System (12 CFR 221), or for the purpose of buying or carrying or trading in any securities under such circumstances as to involve the Company in a violation of Regulation X of said Board (12 CFR 224) or to involve any broker or dealer in a violation of Regulation T of said Board (12 CFR 220). As used in this Section, the terms “margin stock” and “purpose of buying or carrying” shall have the meanings assigned to them in Regulation U.
Section 5.16 Existing Indebtedness; Future Liens . (a) Schedule 5.16 sets forth a complete and correct list of all outstanding Indebtedness of the Company and each Member as of December 31, 2009 (including a description of the obligors and obligees, principal amount outstanding and collateral therefor, if any, and Guaranty thereof, if any). Except for the repayment of the “Affiliate Loan” described on Schedule 5.16, since September 30, 2009, there has been no material change in the amounts, interest rates, sinking funds, installment payments or maturities of the Indebtedness of the Company or a Member. Neither the Company nor either Member is in default and no waiver of default is currently in effect, in the payment of any principal or interest on any of its Indebtedness and no event or condition exists with respect to any of its Indebtedness that would permit (or that with notice or the lapse of time, or both, would permit) one or more Persons to cause such Indebtedness to become due and payable before its stated maturity or before its regularly scheduled dates of payment.
(b) The Company has not agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its property, whether now owned or hereafter acquired, to be subject to a Lien not otherwise permitted by Section 10.6 of the 2009 SDTS Note Agreement.
(c) The Company is not a party to, nor otherwise subject to any provision contained in, any instrument evidencing Indebtedness of the Company, any agreement relating thereto or any other agreement (including, but not limited to, its charter or other organizational document) which limits the amount of, or otherwise imposes restrictions on the incurring of, Indebtedness of the Company.
Section 5.17 Foreign Assets Control Regulations, Etc . (a) Neither the sale of the Notes by the Company hereunder nor the use of the proceeds thereof will violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto.
 
S CHEDULE A-10
(To Note Purchase Agreement)

(b) Neither the Company nor either Member: (i) is a Person described or designated in the Specially Designated Nationals and Blocked Persons List of the Office of Foreign Assets Control or in Section 1 of the Anti-Terrorism Order or (ii) engages in any dealings or transactions with any such Person. The Company and each Member is in compliance, in all material respects, with the USA Patriot Act.
(c) No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for any payments to any governmental official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977, as amended, assuming in all cases that such Act applies to the Company and the Members.
Section 5.18 Status under Certain Statutes . (a) Neither Member nor the Company is an “investment company” or a company “controlled” by an “investment company” within the meaning of the Investment Company Act of 1940, as amended, or an “investment adviser” within the meaning of the Investment Advisers Act of 1940, as amended.
(b) Neither the Company nor either Member is a “public utility” under the FPA and the regulations of FERC thereunder. The execution, delivery and performance of the Company’s and Sharyland’s obligations under the Transaction Documents requires no authorization of approval by, or notice to, and is not subject to the jurisdiction of, FERC under the FPA.
(c) Sharyland and the holding company system of which it is a part have obtained a waiver of the requirements of 18 C.F.R. 366.21, 366.22 and 366.23 (FERC Docket No. PH06-59-000), but are subject to the FERC regulations relating to regulatory access to books and records. Sharyland and the holding company system of which it is a part have filed a notice of holding company status under FERC Docket no. HC06-1-000 and may be required to submit a revised notice of holding company status and/or a revised request for the waiver described in the preceding sentence as a result of the transactions contemplated in the Transaction Documents or in Schedule 10.2 of the 2009 SDTS Note Agreement. Under FERC’s currently effective regulations, the Company will be deemed not to be a “public-utility company” and as a result neither Member is a “holding company” under PUHCA.
(d) The Company is subject to regulation as an “electric utility” by the Public Utility Commission of Texas. The execution, delivery and performance of the Company’s and Sharyland’s obligations under the Transaction Documents requires no authorization or approval by, or notice to, the Public Utility Commission of Texas or under the Public Utility Regulatory Act of Texas other than those that have been obtained.
(e) Solely by virtue of the execution, delivery and performance of the Transaction Documents, no Purchaser will become subject to any of the provisions of the FPA, PUHCA (based on FERC’s currently effective definitions under PUHCA) or the Public Utility Regulatory Act of Texas, or to regulation under any such statute.
 
S CHEDULE A-11
(To Note Purchase Agreement)

Section 5.19 Environmental Matters . (a) The Company has no knowledge of any claims nor has it received any notice of any claim, and no proceeding has been instituted raising any claim against the Company or a Member or any of their real properties now or formerly owned, leased or operated by any of them or other assets, alleging any damage to the environment or violation of any Environmental Laws, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect.
(b) The Company has no knowledge of any facts which would give rise to any claim, public or private, of violation of Environmental Laws or damage to the environment emanating from, occurring on or in any way related to real properties now or formerly owned, leased or operated by the Company or either Member or to other assets or its use, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect.
(c) Neither the Company nor either Member has stored any Hazardous Materials on real properties now or formerly owned, leased or operated by any of them and has not disposed of any Hazardous Materials in a manner contrary to any Environmental Laws in each case in any manner that could reasonably be expected to result in a Material Adverse Effect; and
(d) All buildings on all real properties now owned, leased or operated by the Company a Member are in compliance with applicable Environmental Laws, except where failure to comply could not reasonably be expected to result in a Material Adverse Effect.
Section 5.20 Force Majeure Events; Employees . Neither the System nor any of the other assets of the Company or a Member have suffered any Force Majeure Event that is continuing. The Company has no employees.
Section 5.21 Collateral . The Collateral, as described in the Security Documents, constitutes all of the Company’s rights in the System Lease and the System. The security interests in the Collateral granted to the Collateral Agent (for the benefit of the Secured Parties) pursuant to the Financing Documents: (a) constitute as to personal property included in the Collateral and, with respect to subsequently acquired personal property included in the Collateral, will constitute, a perfected security interest and Lien under each applicable Uniform Commercial Code, and (b) are, and, with respect to such subsequently acquired property, will be, as to Collateral perfected under each applicable Uniform Commercial Code, superior and prior to the rights of all third Persons now existing or hereafter arising whether by way of mortgage, lien, security interests, encumbrance, assignment or otherwise, except for Permitted Liens. All action as is necessary has been taken to establish and perfect the Collateral Agent’s rights in and to, and the first lien priority of its Lien on, the Collateral, including any recording, filing, registration, delivery to the Collateral Agent, giving of notice or other similar action. The Security Documents and financing statements relating thereto have been duly filed or recorded in each office and in each jurisdiction where required in order to create and perfect the Lien and security interest described above and the priority thereof.
 
S CHEDULE A-12
(To Note Purchase Agreement)

SECTION 6. REPRESENTATIONS OF THE PURCHASERS.
Section 6.1 Purchase for Investment . Each Purchaser severally represents that it is an “Accredited Investor” as defined in Rule 501 of Regulation D under the Securities Act. Each Purchaser severally represents that it is purchasing the Notes for its own account or for one or more separate accounts maintained by such Purchaser or for the account of one or more pension or trust funds and not with a view to the distribution thereof, provided that the disposition of such Purchaser’s property shall at all times be within such Purchaser’s control. Each Purchaser understands that the Notes have not been registered under the Securities Act and may be resold only if registered pursuant to the provisions of the Securities Act or if an exemption from registration is available, except under circumstances where neither such registration nor such an exemption is required by law, and that the Company is not required to register the Notes.
Section 6.2 Source of Funds . Each Purchaser severally represents that at least one of the following statements is an accurate representation as to each source of funds (a “Source”) to be used by such Purchaser to pay the purchase price of the Notes to be purchased by such Purchaser hereunder:
(a) the Source is an “insurance company general account” (as the term is defined in the United States Department of Labor’s Prohibited Transaction Exemption ( “PTE” ) 95-60) in respect of which the reserves and liabilities (as defined by the annual statement for life insurance companies approved by the National Association of Insurance Commissioners (the “NAIC Annual Statement” )) for the general account contract(s) held by or on behalf of any employee benefit plan together with the amount of the reserves and liabilities for the general account contract(s) held by or on behalf of any other employee benefit plans maintained by the same employer (or affiliate thereof as defined in PTE 95-60) or by the same employee organization in the general account do not exceed 10% of the total reserves and liabilities of the general account (exclusive of separate account liabilities) plus surplus as set forth in the NAIC Annual Statement filed with such Purchaser’s state of domicile; or
(b) the Source is a separate account that is maintained solely in connection with such Purchaser’s fixed contractual obligations under which the amounts payable, or credited, to any employee benefit plan (or its related trust) that has any interest in such separate account (or to any participant or beneficiary of such plan (including any annuitant)) are not affected in any manner by the investment performance of the separate account; or
(c) the Source is either (i) an insurance company pooled separate account, within the meaning of PTE 90-1 or (ii) a bank collective investment fund, within the meaning of the PTE 91-38 and, except as disclosed by such Purchaser to the Company in writing pursuant to this clause (c), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; or
(d) the Source constitutes assets of an “investment fund” (within the meaning of Part V of PTE 84-14 (the “QPAM Exemption” )) managed by a “qualified professional asset manager” or “QPAM” (within the meaning of Part V of the QPAM Exemption), no employee benefit plan’s assets that are included in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Section V(c)(1) of the QPAM Exemption) of such employer or
 
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by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, the conditions of Part I(c) and (g) of the QPAM Exemption are satisfied, neither the QPAM nor a person controlling or controlled by the QPAM (applying the definition of “control” in Section V(e) of the QPAM Exemption) owns a 5% or more interest in the Company and (i) the identity of such QPAM and (ii) the names of all employee benefit plans whose assets are included in such investment fund have been disclosed to the Company in writing pursuant to this clause (d); or
(e) the Source constitutes assets of a “plan(s)” (within the meaning of Section IV of PTE 96-23 (the “INHAM Exemption” )) managed by an “in-house asset manager” or “INHAM” (within the meaning of Part IV of the INHAM Exemption), the conditions of Part I(a), (g) and (h) of the INHAM Exemption are satisfied, neither the INHAM nor a person controlling or controlled by the INHAM (applying the definition of “control” in Section IV(d) of the INHAM Exemption) owns a 5% or more interest in the Company and (i) the identity of such INHAM and (ii) the name(s) of the employee benefit plan(s) whose assets constitute the Source have been disclosed to the Company in writing pursuant to this clause (e); or
(f) the Source is a governmental plan; or
(g) the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this clause (g); or
(h) the Source does not include assets of any employee benefit plan, other than a plan exempt from the coverage of ERISA.
As used in this Section 6.2 , the terms “employee benefit plan,” “governmental plan,” and “separate account” shall have the respective meanings assigned to such terms in section 3 of ERISA.
SECTION 7. INFORMATION.
Section 7.1 Section 7 .1. Financial and Business Information. The Company shall deliver, and shall cause Sharyland to deliver, to each Holder of Notes:
(a) Quarterly Statements — within 45 days after the end of each quarterly fiscal period in each calendar year of such Person and its Subsidiaries (excluding the last quarterly fiscal period of each such calendar year), duplicate copies of
(i) balance sheets of such Person and its Subsidiaries on a consolidated basis as at the end of such quarter, and
(ii) profit and loss statements and cash flows statements for such Person and its Subsidiaries on a consolidated basis for such quarter and (in the case of the second and third quarters) for the portion of the calendar year ending with such quarter,
 
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setting forth in each case in comparative form the figures for the corresponding periods in the previous calendar year, all in reasonable detail, prepared in accordance with GAAP applicable to quarterly financial statements generally, and certified by a Senior Financial Officer of such Person as fairly presenting, in all material respects, the financial position of the companies being reported on and their results of operations and cash flows, subject to changes resulting from year-end adjustments;
(b) Annual Statements — within 105 days after the end of each calendar year of the Company and Sharyland, duplicate copies of
(i) balance sheets of such Person on a consolidated basis as at the end of such year, and
(ii) statements of income, profit and loss statements and cash flows statements for such Person on a consolidated basis for such year,
setting forth in each case in comparative form the figures for the previous calendar year, all in reasonable detail, prepared in accordance with GAAP, and accompanied by
(A) an opinion thereon of Ernst & Young LLP or another independent public accounting firm of nationally recognized standing selected by the Company (herein, the “ Approved Accountant ”), which opinion shall state that such financial statements present fairly, in all material respects, the financial position of the companies being reported upon and their results of operations and cash flows and have been prepared in conformity with GAAP, and that the examination of the Approved Accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and that such audit provides a reasonable basis for such opinion in the circumstances, and
(B) a certificate of the Approved Accountants stating that they have reviewed this Agreement and stating further whether, in making their audit, they have become aware of any condition or event that then constitutes a Default or an Event of Default, and, if they are aware that any such condition or event then exists, specifying the nature and period of the existence thereof (it being understood that the Approved Accountants shall not be liable, directly or indirectly, for any failure to obtain knowledge of any Default or Event of Default unless the Approved Accountants should have obtained knowledge thereof in making an audit in accordance with generally accepted auditing standards or did not make such an audit);
(c) Other Reports — promptly upon their becoming available, and to the extent not otherwise required to be delivered pursuant to another provision of this Agreement, one copy of (i) each financial statement and budget and such other reports and notices as a Holder may reasonably request sent by the Company or Sharyland to its members or partners, (ii)
 
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each report or filing (without exhibits except as expressly requested by such Holder) other than regular and periodic reports and filings made by the Company, Sharyland, New Owner or New Operator to any state or Federal regulatory body;
(d) Notice of Default or Event of Default — promptly, and in any event within 5 Business Days after a Responsible Officer becoming aware of the existence of any Default or Event of Default or that any Person has given any notice or taken any action with respect to a claimed default hereunder or that any Person has given any notice or taken any action with respect to a claimed default of the type referred to in Section 11(f) , a written notice specifying the nature and period of existence thereof and what action the Company or New Owner is taking or proposes to take with respect thereto;
(e) Audit Reports — promptly, and in any event within 5 Business Days after receipt the results of any non-routine audit reports relating to the Company, Sharyland, New Owner or New Operator;
(f) ERISA Matters — promptly, and in any event within 5 Business Days after a Responsible Officer becoming aware of any of the following, a written notice setting forth the nature thereof and the action, if any, that the Company or an ERISA Affiliate proposes to take with respect thereto:
(i) with respect to any Plan, any reportable event, as defined in section 4043(c) of ERISA and the regulations thereunder, for which notice thereof has not been waived pursuant to such regulations as in effect on the date hereof; or
(ii) the taking by the PBGC of steps to institute, or the threatening by the PBGC of the institution of, proceedings under section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Company or any ERISA Affiliate of a notice from a Multi-employer Plan that such action has been taken by the PBGC with respect to such Multi-employer Plan; or
(iii) any event, transaction or condition that could result in the incurrence of any liability by the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or such penalty or excise tax provisions, if such liability or Lien, taken together with any other such liabilities or Liens then existing, could reasonably be expected to have a Material Adverse Effect;
(g) Notices from Governmental Authority — promptly, and in any event within 5 Business Days of receipt (or knowledge) thereof copies of any notice to the Company,
 
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any Subsidiary, Sharyland or New Operator from any Federal or state Governmental Authority relating to any order, ruling, statute or other law or regulation that could reasonably be expected to have a Material Adverse Effect;
(h) Other Notices — promptly, and in any event within 5 Business Days of receipt (or knowledge by a Responsible Officer of the Company) thereof:
(i) any press releases and other statements made available generally by any of the Company, any Subsidiary, Sharyland or New Operator to the public concerning developments that are material to the Company, Sharyland or any of their Subsidiaries;
(ii) notice of the occurrence of any condition or event that could reasonably be expected to result in a Material Adverse Effect;
(iii) copies of any notice of a violation or an event of default under any Material Project Document;
(iv) any actual termination or rescission or any written threat of termination or rescission of any Material Project Document, any amendment of or waiver under any Material Project Document;
(v) any material pending or threatened adversarial or contested proceeding of or before a Governmental Authority relating to the System or the System Lease, the Acquired System or the New Lease, or the FERC Assets;
(vi) any termination, suspension or other loss of any Required Permit, other than a termination of a Required Permit in accordance with its terms so long as the permit, if it is a Required Permit, is replaced on a timely basis so as not to interrupt operation of the System, the Acquired System or the FERC Assets;
(vii) any litigation or proceeding taken or threatened in writing against the Company, Sharyland or any of their Subsidiaries, that, if successful, could reasonably be expected to result in a Material Adverse Effect;
(viii) any Force Majeure Event or other claim of force majeure under any Material Project Document; and
(ix) copies of any notices delivered by the lessee under the System Lease or the New Lease;
(i) Annual Operating Budgets — As soon as available and in any event within 30 days after the close of each calendar year of each of Sharyland and the Company, the annual budget of each of Sharyland and the Company.
 
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(j) Information Required by Rule 144A — upon the request of such Holder (and shall deliver to any qualified institutional buyer designated by such Holder), such financial and other information as such Holder may reasonably determine to be necessary in order to permit compliance with the information requirements of Rule 144A under the Securities Act in connection with the resale of Notes, except at such times as the Company is subject to the reporting requirements of section 13 or 15(d) of the Exchange Act (for the purpose of this Section 7.1(j) , the term “qualified institutional buyer” shall have the meaning specified in Rule 144A under the Securities Act); and
(k) Requested Information — with reasonable promptness, such other data and information relating to the business, operations, affairs, financial condition, assets or properties of the Company or relating to the ability of the Company to perform its obligations hereunder and under the Notes as from time to time may be reasonably requested by any such Holder of Notes.
Section 7.2 Officer’s Certificate . Each set of financial statements delivered pursuant to Section 7.1(a) or Section 7.1(b) shall be accompanied by a certificate of a Senior Financial Officer setting forth:
(a) Covenant Compliance — the information (including detailed calculations) required in order to establish whether the Company was in compliance with the requirements of Sections 9.9 , 10.6 and 10.9 of this Agreement, during the quarterly or annual period covered by the statements then being furnished (including with respect to each such Section, where applicable, the calculations of the maximum or minimum amount, ratio or percentage, as the case may be, permissible under the terms of such Sections, and the calculation of the amount, ratio or percentage then in existence); and
(b) Event of Default — a statement that such Senior Financial Officer has reviewed the relevant terms hereof and has made, or caused to be made, under his or her supervision, a review of the transactions and conditions of the Company from the beginning of the quarterly or annual period covered by the statements then being furnished to the date of the certificate and that such review shall not have disclosed the existence during such period of any condition or event that constitutes a Default or an Event of Default or, if any such condition or event existed or exists (including, without limitation, any such event or condition resulting from the failure of the Company to comply with any Environmental Law), specifying the nature and period of existence thereof and what action the Company shall have taken or proposes to take with respect thereto.
Section 7.3 Visitation . The Company shall permit, and shall cause Sharyland, New Owner and New Operator to permit, the representatives of each Holder of Notes that is an Institutional Investor:
(a) No Default — if no Default or Event of Default then exists, at the expense of such Holder (or in the case of the Collateral Agent, the Holders) and upon reasonable prior notice, to visit the principal executive office of such Person, to discuss the affairs, finances and accounts of such Person with such Person’s officers, and (with the consent of such Person, which consent will not be unreasonably withheld) its independent public accountants, and (with the
 
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consent of such Person, which consent will not be unreasonably withheld) to visit the other offices and properties of such Person, all at such reasonable times and as often as may be reasonably requested in writing; and
(b) Default — if a Default or Event of Default then exists, at the expense of the Company to visit and inspect any of the offices or properties of such Person, to examine all their respective books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers and independent public accountants (and by this provision the Company authorizes said accountants to discuss the affairs, finances and accounts of the Company), all at such times and as often as may be reasonably requested.
SECTION 8. PAYMENT AND PREPAYMENT OF THE NOTES.
Section 8.1 Amortization; Maturity; .
(a) On March 30, 2010 and on the 30th day of each June, September, December and March thereafter to and including December 30, 2029, the Company will prepay the principal amounts set forth in the amortization schedule attached hereto as Schedule 8.1 (the “Amortization Schedule” ) (or such lesser principal amount as shall then be outstanding) of the Notes at par and without payment of the Yield-Maintenance Amount or any premium, provided that upon any partial prepayment of the Notes pursuant to Section 8.2 , the principal amount of each required prepayment of the Notes becoming due under this Section 8.1 on and after the date of such prepayment shall be reduced in the same proportion as the aggregate unpaid principal amount of the Notes is reduced as a result of the prepayment. The entire unpaid principal balance of the Notes shall be due and payable on the Maturity Date.
Section 8.2 Optional Prepayments with Yield-Maintenance Amount . The Company may, at its option, upon notice as provided below, prepay at any time all, or from time to time any part of, the Notes, in an amount not less than $1,000,000 in the case of a partial prepayment, at 100% of the principal amount so prepaid, and the Yield-Maintenance Amount determined for the prepayment date with respect to such principal amount. The Company will give each Holder of Notes written notice of each optional prepayment under this Section 8. 2 not less than 30 days and not more than 60 days prior to the date fixed for such prepayment. Each such notice shall specify such date (which shall be a Business Day), the aggregate principal amount of the Notes to be prepaid on such date, the principal amount of each Note held by such Holder to be prepaid (determined in accordance with Section 8.3 ), and the interest to be paid on the prepayment date with respect to such principal amount being prepaid, and shall be accompanied by a certificate of a Senior Financial Officer as to the estimated Yield-Maintenance Amount due in connection with such prepayment (calculated as if the date of such notice were the date of the prepayment), setting forth the details of such computation. Two Business Days prior to such prepayment, the Company shall deliver to each Holder of Notes a certificate of a Senior Financial Officer specifying the calculation of such Yield-Maintenance Amount as of the specified prepayment date.
Section 8.3 Allocation of Partial Prepayments . In the case of each partial prepayment of the Notes, the principal amount of the Notes to be prepaid shall be allocated among all of the Notes at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof not theretofore called for prepayment.
 
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Section 8.4 Maturity; Surrender, Etc . In the case of each prepayment of Notes pursuant to this Section 8, the principal amount of each Note to be prepaid shall mature and become due and payable on the date fixed for such prepayment (which shall be a Business Day), together with interest on such principal amount accrued to such date and the applicable Yield-Maintenance Amount, if any. From and after such date, unless the Company shall fail to pay such principal amount when so due and payable, together with the interest and Yield-Maintenance Amount, if any, as aforesaid, interest on such principal amount shall cease to accrue. Any Note paid or prepaid in full shall be surrendered to the Company and cancelled and shall not be reissued, and no Note shall be issued in lieu of any prepaid principal amount of any Note.
Section 8.5 Purchase of Notes . The Company will not and will not permit any Affiliate to purchase, redeem, prepay or otherwise acquire, directly or indirectly, any of the outstanding Notes except (a) upon the payment or prepayment of the Notes in accordance with the terms of this Agreement and the Notes or (b) pursuant to Section 13.2(b) ; provided that if an Affiliate which does not Control and is not Controlled by the Company has so acquired any of the outstanding Notes, such acquisition shall not constitute an Event of Default. The Company will promptly cancel all Notes acquired by it or any Affiliate pursuant to any payment or prepayment of Notes pursuant to any provision of this Agreement and no Notes may be issued in substitution or exchange for any such Notes.
Section 8.6 Yield-Maintenance Amount .
“Yield-Maintenance Amount” means, with respect to any Note, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Note over the amount of such Called Principal, provided that the Yield-Maintenance Amount may in no event be less than zero. For the purposes of determining the Yield-Maintenance Amount, the following terms have the following meanings:
“Called Principal” means, with respect to any Note, the principal of such Note that is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1 , as the context requires.
“Discounted Value” means, with respect to the Called Principal of any Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Notes is payable) equal to the Reinvestment Yield with respect to such Called Principal.
“Reinvestment Yield” means, with respect to the Called Principal of any Note, .50% over the yield to maturity implied by (i) the yields reported as of 10:00 a.m. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the display designated as “Page PX1” (or such other display as may replace Page
 
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PX1) on Bloomberg Financial Markets for the most recently issued actively traded on the run U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or (ii) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable (including by way of interpolation), the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (or any comparable successor publication) for U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date.
In the case of each determination under clause (i) or clause (ii), as the case may be, of the preceding paragraph, such implied yield will be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between (1) the applicable U.S. Treasury security with the maturity closest to and greater than such Remaining Average Life and (2) the applicable U.S. Treasury security with the maturity closest to and less than such Remaining Average Life. The Reinvestment Yield shall be rounded to the number of decimal places as appears in the interest rate of the applicable Note.
“Remaining Average Life” means, with respect to any Called Principal, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (a) the principal component of each Remaining Scheduled Payment with respect to such Called Principal by (b) the number of years (calculated to the nearest one-twelfth year) that will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment.
“Remaining Scheduled Payments” means, with respect to the Called Principal of any Note, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, provided that if such Settlement Date is not a date on which interest payments are due to be made under the terms of the Notes, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to Section 8.2 or 12.1 .
“Settlement Date” means, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1 , as the context requires.
SECTION 9. AFFIRMATIVE COVENANTS.
The Company covenants that so long as any of the Notes are outstanding:
Section 9.1 Compliance with Law . Without limiting Section 10.4 , the Company will, and will cause its Subsidiaries, including New Owner, to comply with all laws, ordinances or governmental rules or regulations to which it is subject, including, without limitation, ERISA,
 
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the USA Patriot Act and Environmental Laws, and will obtain and maintain in effect all licenses, certificates, permits, franchises and other governmental authorizations necessary to the ownership of its properties or to the conduct of its businesses to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
Section 9.2 Insurance . The Company will maintain or cause to be maintained and will cause its Subsidiaries, including New Owner, to maintain, with financially sound and reputable insurers, insurance with respect to their respective properties and businesses against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated, but in no event less than the insurance set forth in this Section 9.2 and Schedule 9.2 .
(a) Insurance by the Company : The Company shall procure at its own expense and maintain in full force and effect at all times throughout the term of this Note Purchase Agreement insurance policies with insurance companies rated A-, 9 or higher by A.M. Best, or acceptable to the Required Holders if not so rated, and authorized to do business in the State of Texas.
(b) Amendment of Requirements : The Required Holders may at any time amend the requirements and approved insurance companies described in this Section 9.2 or Schedule 9.2 due to (i) new information not previously known by the Purchasers prior to the Closing Date or (ii) changed circumstances after Closing Date, in which in the reasonable judgment of the Required Holders either renders a required coverage to be materially inadequate or materially reduces the financial ability of the approved insurance companies to pay claims.
(c) Evidence of Insurance : On the Closing Date and on any anniversary thereafter, if so requested by a Holder or the Collateral Agent, the Company shall furnish the Holders and the Collateral Agent with approved certification of all required insurance. Such certification shall be executed by each insurer or by an authorized representative of each insurer where it is not practical for such insurer to execute the certificate itself. Such certification shall identify underwriters, the type of insurance, the insurance limits, and the policy term, and shall specifically list the special provisions enumerated for such insurance required by this Section 9.2 . Upon request, the Company will promptly furnish the Holders and the Collateral Agent with copies of all insurance certificates, binders, and cover notes or other evidence of such insurance relating to the Collateral.
(d) Insurance Report : Concurrently with the furnishing of the certification referred to in Section 9.2(c) and on an annual basis thereafter, the Company shall furnish the Holders with a certificate, signed by a Responsible Officer of the Company, stating that all premiums then due have been paid and that the insurance then carried or to be renewed is in accordance with the terms of this Section 9.2 . and Schedule 9.2 .
 
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(e) Failure to Maintain Insurance : In the event the Company fails to take out or maintain the full insurance coverage required by this Section 9.2 and Schedule 9.2 , the Required Holders, upon thirty (30) days’ prior notice (unless the aforementioned insurance would lapse within such period, in which event notice should be given as soon as reasonably possible) to the Company of any such failure, may (but shall not be obligated to) take out (or cause the Collateral Agent to take out) the required policies of insurance and pay the premiums on the same. All amounts so advanced thereof by the Holders (or the Collateral Agent) shall become an additional obligation of the Company to the Holders (or the Collateral Agent), and the Company shall forthwith pay such amounts to the Holders (or the Collateral Agent).
(f) No Duty of Purchaser to Verify : No provision of this Section 9.2 or Schedule 9.2 or any other provision of this Agreement, any other Financing Document or any Material Project Document shall impose on the Holders or the Collateral Agent any duty or obligation to verify the existence or adequacy of the insurance coverage maintained by the Company, nor shall the Holders or the Collateral Agent be responsible for any representations or warranties made by or on behalf of the Company to any insurance company or underwriter.
Section 9.3 Maintenance of Properties . The Company will, and will cause its Subsidiaries, including New Owner, to, maintain and keep, or cause to be maintained and kept, their respective properties in good repair, working order and condition (other than ordinary wear and tear), so that the business carried on in connection therewith may be properly conducted at all times. The Company shall, and shall cause Sharyland, New Owner and New Operator, as applicable, to operate and maintain the System, including the Acquired System, and the FERC Assets in accordance with, and make all repairs, alterations, additions and replacements which are necessary for the System, including the Acquired System, and the FERC Assets to meet, all Requirements of Law, including all Required Permits, all requirements of the Transaction Documents and Good Utility Practices.
Section 9.4 Payment of Taxes and Claims . The Company will, and will cause each of its Subsidiaries, including New Owner, to, file all tax returns required to be filed in any jurisdiction and to pay and discharge all taxes shown to be due and payable on such returns and all other taxes, assessments, governmental charges, or levies imposed on them or any of their properties, assets, income or franchises, to the extent the same have become due and payable and before they have become delinquent and all claims for which sums have become due and payable that have or might become a Lien on properties or assets of the Company or any Subsidiary, including New Owner, provided that none of the Company or any Subsidiary, including New Owner, need pay any such tax, assessment, charge, levy or claim if (i) the amount, applicability or validity thereof is contested by such Person on a timely basis in good faith and in appropriate proceedings, and such Person has established adequate reserves therefor in accordance with GAAP on its books or (ii) the nonpayment of all such taxes, assessments, charges, levies and claims in the aggregate could not reasonably be expected to have a Material Adverse Effect.
Section 9.5 Existence, Etc . The Company will at all times preserve and keep in full force and effect its limited liability company existence and all rights and franchises of the Company unless, in the good faith judgment of the Company, the termination of or failure to preserve and keep in full force and effect such corporate existence, right or franchise could not, individually or in the aggregate, have a Material Adverse Effect. The Company will cause each
 
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of its Subsidiaries, including New Owner, to at all times preserve and keep in full force and effect its limited liability company, corporate or limited partnership existence, except as permitted pursuant to Section 10.2 .
Section 9.6 Books and Records . The Company will, and will cause each of its Subsidiaries, Sharyland and New Operator to, maintain proper books of record and account in conformity with GAAP and all applicable requirements of any Governmental Authority having legal or regulatory jurisdiction over such Person.
Section 9.7 Collateral; Further Assurances . (a) The Company shall take all actions necessary to insure that the Collateral Agent, on behalf of the Secured Parties, has and continues to have in all relevant jurisdictions duly and validly created, attached, perfected and enforceable first-priority Liens on the Collateral described in the Security Documents (including, in accordance with clauses (c) and (d) of this Section 9.7, after-acquired Collateral), subject to no Liens other than Permitted Liens and rights of holders of Permitted Secured Indebtedness in compliance with the Collateral Agency Agreement. The Company shall cause the Obligations to constitute direct senior secured obligations of the Company and to rank senior in priority of payment, in right of security and in all other respects to all other Indebtedness of the Company (other than Permitted Secured Indebtedness, with which it shall be pari passu in accordance with the terms of the Collateral Agency Agreement).
(b) Upon completion of each New Project, the Company may cause its Project Finance Subsidiary to Transfer the New Project to the Company and shall take all actions necessary to insure that (i) the New Project becomes a part of the Collateral, subject to the first priority Lien of the Security Documents (subject to no Liens other than Permitted Liens), (ii) no Default or Event of Default occurs as a result of such Transfer, (iii) the Indebtedness of the Project Finance Subsidiary is either repaid in full at the time of the Transfer or becomes Permitted Secured Indebtedness, and (iv) the Project Finance Subsidiary is terminated or merged with and into the Company.
(c) If the Company acquires or leases any real property (other than an easement), the value (or aggregate rental costs) of which exceeds $1,000,000, the Company shall forthwith (and in any event, within five Business Days of such acquisition or lease) deliver to the Collateral Agent a fully executed mortgage or deed of trust over such real property, in form and substance satisfactory to the Required Holders and the Collateral Agent, together with such surveys, environmental reports and other documents and certificates with respect to such real estate as may be reasonably required by the Required Holders. The Company further agrees to take all other actions necessary to create in favor of the Collateral Agent for the benefit of the Secured Parties a valid and enforceable first priority Lien on such real estate, free and clear of all Liens except for Permitted Liens and rights of holders of Permitted Secured Indebtedness in compliance with the Collateral Agency Agreement.
(d) If, after the Second Amendment Date, the Company acquires or creates any new Subsidiary that is a Wholly-Owned Subsidiary (other than New Owner, any Subsidiary of the Company that is not organized under the laws of the United States, any state thereof or the District of Columbia, any Project Finance Subsidiary or any other Subsidiary that is prohibited from providing a Guaranty of the Obligations by any Requirement of Law), the Company shall
 
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forthwith (and in any event, within 30 days of such creation or acquisition (or such longer time as the Required Purchasers may agree), (i) execute and deliver to the Collateral Agent a Subsidiary Guaranty, (ii) deliver to the Collateral Agent a certificate of such Subsidiary, substantially consistent with those delivered on the Closing Date pursuant to Section 4.3(b), with appropriate insertions and attachments, (iii) take such actions reasonably necessary or advisable to grant to the Collateral Agent for the benefit of the Secured Parties a perfected and enforceable first-priority Lien in the Collateral described in the Security Documents with respect to such new Subsidiary, subject to no Liens other than Permitted Liens and rights of holders of Permitted Secured Indebtedness in compliance with the Collateral Agency Agreement, and including the filing of UCC financing statements in such jurisdictions as may be required by such Subsidiary Guaranty or by law or as may be reasonably requested by the Collateral Agent, (iv) deliver to the Collateral Agent the stock certificates (if any) representing equity interests issued by such Subsidiary, together with undated stock (or other transfer) powers, in blank, executed and delivered by a duly authorized officer of the Company, and (v) if reasonably requested by the Collateral Agent, deliver to the Collateral Agent legal opinions relating to the matters described above, which opinions shall be in form and substance reasonably satisfactory to the Collateral Agent.
Section 9.8 Material Project Documents . (a) The Company shall at all times (i) perform and observe all of the covenants under the Material Project Documents to which it is a party, (ii) take reasonable actions to enforce all of its rights and obligations thereunder, and (iii) maintain the Material Project Documents in full force and effect.
(b) Upon expiration or termination of the initial or any renewal term of the System Lease or the New Lease (or any supplement or new lease entered into in replacement thereof in accordance with this Section 9.8(b) ), the Company shall, or shall cause New Owner to, enter into a supplement or new lease with respect to the Acquired System or the FERC Assets, as applicable: (i) having an initial term of at least five years, (ii) providing for renewal terms, (iii) requiring payment of a base rent that is sufficient during the initial and all renewal terms of such supplement or new lease to enable the Company to pay Debt Service with respect to the Notes and the Notes (as defined in the 2009 SDTS Note Agreement) when due, and (iv) (x) substantially in the form of the existing System Lease with respect to all non-economic provisions; provided that notwithstanding the foregoing, provisions that are administrative or ministerial in nature and provisions that are of an inconsequential nature and which do not adversely affect any Holder or which satisfy any requirements, conditions or guidelines contained in any order, directive, opinion, ruling or regulation of a Federal or state agency or contained in Federal or state law shall be deemed to be substantially in the form of the existing System Lease, or (y) otherwise in form and substance satisfactory to the Required Holders, which consent shall not be unreasonably withheld. If the Required Holders have a consent right pursuant to clause (iv)(y) hereof, the Holders shall make commercially reasonable efforts to respond to the Company’s request for such review within ten business days, provided that failure to so respond shall not be deemed a consent to such supplement or new lease.
Section 9.9 Financial Ratios . (a) The Company shall at all times maintain, on a consolidated basis, a Total Debt to Capitalization Ratio of not more than 0.65 to 1.00.
 
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(b) The Company shall maintain, for each period of four consecutive fiscal quarters, a Debt Service Coverage Ratio of at least 1.40 to 1.00; provided that for purposes of this Section 9.9(b) , the Debt Service Coverage Ratio shall be deemed to be 1.40 to 1.00 for the three calendar quarters ending December 31, 2009, March 31, 2010 and June 30, 2010.
SECTION 10. NEGATIVE COVENANTS.
The Company covenants that so long as any of the Notes are outstanding:
Section 10.1 Transactions with Affiliates The Company will not and will not permit any Subsidiary (including New Owner), Sharyland or New Operator to enter into directly or indirectly any transaction or group of related transactions (including without limitation the purchase, lease, sale or exchange of properties of any kind or the rendering of any service) with any Affiliate (other than (i) in the case of the Company, a Project Finance Subsidiary, as permitted by Section 9.7(b ), (ii) in the case of Sharyland, pursuant to (x) the System Lease and (y) the SP Lease, (iii) in the case of New Owner and New Operator, pursuant to the New Lease or (iv) the Sharyland Affiliate Loan), except in the ordinary course and upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would be obtained in a comparable arms-length transaction with a Person not an Affiliate.
Section 10.2 Merger, Consolidation, Etc . The Company will not nor will it cause or permit any of its Subsidiaries to consolidate with or merge with any other Person or convey, transfer or lease all or substantially all of its assets in a single transaction or series of transactions to any Person, except (i) pursuant to the System Lease, the SP Lease or the New Lease, (ii) as permitted pursuant to Section 9.7(b) , or (iii) that so long as after giving effect to such merger or consolidation no Default or Event of Default shall have occurred or will result therefrom, the Company or any Subsidiary may merge or consolidate with another Person, so long as, after giving effect to such merger or consolidation, with respect to any merger or consolidation to which the Company is a party, the Company shall be the surviving entity, and with respect to any merger or consolidation to which a Subsidiary is a party but the Company is not, a Subsidiary shall be the surviving entity.
Section 10.3 Line of Business . The Company will not and will not permit any Subsidiary, including New Owner, to engage in any business if, as a result, the general nature of the business in which the Company and its Subsidiaries, including New Owner, taken as a whole, would then be engaged would be substantially changed from the transmission and distribution of electric power and the provision of ancillary services.
Section 10.4 Terrorism Sanctions Regulations . The Company will not and will not permit any Member or Subsidiary to (a) become a Person described or designated in the Specially Designated Nationals and Blocked Persons List of the Office of Foreign Assets Control or in Section 1 of the Anti-Terrorism Order or (b) engage in any dealings or transactions with any such Person.
Section 10.5 Liens . The Company will not, nor will it cause or permit any Subsidiary, including New Owner, to, directly or indirectly create, incur, assume or permit to exist (upon the happening of a contingency or otherwise) any Lien on or with respect to the Collateral or any
 
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other property of the Company or such Subsidiary, including New Owner, whether now owned or held or hereafter acquired, or any income or profits therefrom, or assign or otherwise convey any right to receive income or profits, or on any other asset now owned or hereafter acquired by the Company or such Subsidiary, except (each, a “ Permitted Lien ”):
(a) solely in the case of the Company, Liens created by the Financing Documents on assets of the Company; and
(b) solely in the case of a Project Finance Subsidiary, Liens on assets owned by that Project Finance Subsidiary and on the ownership interests in that Project Finance Subsidiary to secure its Non-Recourse Debt;
(c) Liens permitted pursuant to the terms of the Security Documents;
(d) Liens for taxes, assessments or other governmental charges which are not yet due and payable or the payment of which is not at the time required by Section 9.4 ;
(e) any attachment or judgment Lien, unless such attachment or judgment Lien constitutes an Event of Default under Section 11(l) hereof;
(f) RESERVED;
(g) Liens of a lessor of equipment to the Company or any Subsidiary, including New Owner, on such lessor’s leased equipment (but excluding equipment leased pursuant to a Capital Lease), including any of the foregoing which is evidenced by a protective Uniform Commercial Code filing;
(h) Mechanics’, warehousemen’s, carriers’, workers’, repairers’, landlords’, and other similar liens arising or incurred in the ordinary course of business and (i) which do not in the aggregate materially detract from the value of property or assets subject to such Liens or materially impair the continued use thereof in the operation of the business or (ii) which are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property or asset subject to such Liens, or other Liens incurred or deposits made in the ordinary course of business in connection with workers’ compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, trade contracts, leases, government contracts, performance and return-of-money bonds and other similar obligations incurred in the ordinary course of business (exclusive of obligations in respect of the payment for borrowed money);
(i) zoning, entitlement, restriction, and other land use and environmental regulations by Governmental Authorities and encroachments, easements, rights of way, covenants, restrictions or agreements which do not materially interfere with the continued use of any asset as currently used in the conduct of the business;
(j) any encumbrances set forth in any franchise or governing ordinance under which any portion of the business is conducted which could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect;
 
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(k) all rights of condemnation, eminent domain, or other similar right of any Person; and
(l) Liens securing Permitted Secured Indebtedness.
Section 10.6 Indebtedness . The Company will not, and will not cause or permit any Subsidiary or Sharyland or New Operator to, incur or in any manner become or be liable in respect of any Indebtedness, except the following Indebtedness, which may be incurred subject to the requirements of the last paragraph of this section:
(a) Indebtedness evidenced by the Financing Documents;
(b) Indebtedness of the Company that (i) that is not related to, and does not support, Non-Recourse Debt of a Project Finance Subsidiary and (ii) if incurred, would not result in a breach of Section 9.9 ;
(c) (i) Non-Recourse Debt incurred by a Project Finance Subsidiary to fund a New Project and (ii) Indebtedness of a Wholly-Owned Subsidiary (other than a Project Finance Subsidiary) owed to the Company;
(d) Indebtedness of Sharyland in an aggregate principal amount of up to (i) $5,000,000 on a senior secured basis and (ii) $10,000,000 on an unsecured subordinated basis on terms substantially similar to the terms set forth on Exhibit 2 hereto, in each case to the extent allowed under the System Lease;
(e) Indebtedness of the New Owner allowed under the New Lease in an aggregate amount up to $1,000,000 at any one time outstanding; or
(f) Indebtedness of the Company to any of its Wholly-Owned Subsidiaries (other than a Project Finance Subsidiary), which by its terms is expressly subordinated to the Notes, and Indebtedness of any Wholly-Owned Subsidiary (other than a Project Finance Subsidiary) to the Company or any other Wholly-Owned Subsidiary of the Company (other than a Project Finance Subsidiary) not to exceed $5,000,000 at any one time outstanding and in each case to have a maturity date of less than one year later; and
(g) the Sharyland Affiliate Loan.
Indebtedness may be incurred under this Section 10.6 only if no Default or Event of Default is, or as a result of such incurrence would be, existing.
Section 10.7 Loans, Advances, Investments and Contingent Liabilities . The Company will not make or permit to remain outstanding any loan or advance to, or extend credit other than credit extended in the ordinary course of business to any Person, or own, purchase or acquire any stock, obligations or securities of, or any other interest in, or make any capital contribution to, any Person, or commit to do any of the foregoing, except (a) Permitted Investments, (b) equity interests in Project Finance Subsidiaries, or (c) loans to or equity interests in Wholly-Owned Subsidiaries (other than Project Finance Subsidiaries).
 
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Section 10.8 No Subsidiaries . The Company shall have no subsidiaries other than Project Finance Subsidiaries and other Wholly-Owned Subsidiaries. The Company shall give the Holders notice 5 Business Days prior to creating any new Subsidiaries.
Section 10.9 Restricted Payments . The Company will not, directly or indirectly, make or declare any Distribution unless there does not exist and, after giving effect to the proposed Distribution, there will not exist, a Default or an Event of Default. The Company shall deliver to the Holders and the Collateral Agent before a Distribution is made a certificate of a Responsible Officer of the Company stating that the foregoing condition has been satisfied and, if requested, providing supporting data and calculations.
Section 10.10 Sale of Assets, Etc . The Company will not nor will it cause or permit New Operator, Sharyland or any Subsidiary of the Company to transfer, or agree or otherwise commit to Transfer, any of its assets except :
(a) the Company shall lease the System to Sharyland pursuant to the System Lease; the Company shall lease the Acquired System to Sharyland pursuant to the Lease Supplement; and the New Owner shall lease the FERC Assets to New Operator pursuant to the New Lease;
(b) (i) each Project Finance Subsidiary may Transfer the New Project developed and constructed by such Project Finance Subsidiary to the Company upon completion of the New Project in accordance with Section 9.7(b) ; (ii) the Company may Transfer, or suffer the Transfer of, its ownership interests in a Project Finance Subsidiary and such Project Finance Subsidiary may Transfer, or suffer the Transfer of, the New Project developed by it and its other assets, in each case in connection with and pursuant to the exercise of remedies under the documentation governing Non-Recourse Debt incurred by such Project Finance Subsidiary to finance such New Project; and (iii) SP may lease the CREZ Project pursuant to the SP Lease;
(c) the Company, New Operator, Sharyland and any Subsidiary of any of them may sell assets that are obsolete or no longer used or useful in such Person’s business.
Section 10.11 Sale or Discount of Receivables . The Company will not nor will it cause or permit any Subsidiary or New Operator to sell with recourse, or discount or otherwise sell for less than the face value thereof, any of its notes or accounts receivable.
Section 10.12 Amendments to Organizational Documents . The Company will not nor will it cause or permit any of its Subsidiaries, Sharyland or any of Sharyland’s Subsidiaries to amend, supplement, terminate, replace or waive any provision of its operating agreement or other organization documents. Notwithstanding the preceding sentence, each of the Company, its Subsidiaries, Sharyland and Sharyland’s Subsidiaries may, without the consent of the Holders, amend its operating agreement as may be required to facilitate or implement any of the following:
(a) to reflect the contribution of additional capital by its members;
 
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(b) to reflect a change that is of an inconsequential nature and does not adversely affect any Holders in any material respect, or to cure any ambiguity, or correct or supplement any provision, not inconsistent with law or with the provisions of this Agreement;
(c) to satisfy any requirements, conditions, or guidelines contained in any order, directive, opinion, ruling or regulation of a Federal or state agency or contained in Federal or state law; and
(d) to take actions to avoid any material adverse consequences to such Person as a result of any change in law or interpretation of law applicable to Persons subject to regulation by the PUCT and FERC.
The Company will provide notice to the Holders at least 5 Business Days prior to taking any such action under the foregoing sentence of this Section 10.12.
Section 10.13 Sale and Lease-Back . Except for the System Lease, the SP Lease and the New Lease, the Company will not, nor will it cause or permit any Subsidiary to, enter into any arrangement providing for the leasing by the Company or any Subsidiary of real or personal property which has been or is to be Transferred by the Company or Subsidiary to a lender or investor or to any Person to whom funds have been or are to be advanced by such lender or investor on the security of such property or rental obligations of the Company or any Subsidiary.
Section 10.14 ERISA Compliance .
(a) Relationship of Vested Benefits to Plan Assets. The Company will not as of the last day of any calendar year permit the aggregate funding ratio (as described in Section 5.13 ) under all Plans, determined in accordance with Title IV of ERISA, to be less than 80%. The Company and its ERISA Affiliates will not incur withdrawal liabilities (and will not become subject to contingent withdrawal liabilities) under section 4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate are material.
(b) Valuations. For the purposes of clause (a) above, all assumptions and methods used to determine the actuarial valuation of vested and unvested employee benefits under any Plan at any time maintained by the Company and the present value of assets of any such Plan shall be reasonably consistent with those determinations made for purposes of Section 5.13 of the 2010 SDTS Note Agreement.
(c) Prohibited Actions. The Company will not, nor, as applicable, will any Plan at any time maintained by the Company
(i) engage in any non-exempt “ prohibited transaction ” (as such term is defined in Section 406 or Section 2003(a) of ERISA;
(ii) fail to meet the minimum funding standards of Section 302 of ERISA or Sections 412 and 430 of the Code, or seek or obtain a waiver thereof or fail to make any required contribution to a Multiemployer Plan; or
 
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(iii) terminate any such Plan in a manner which could result in the imposition of a Lien on the Property of the Company pursuant to Section 4068 of ERISA.
Section 10.15 No Margin Stock . Anything herein contained to the contrary notwithstanding, the Company will not, nor will it permit any Subsidiary to, make or authorize any investment in, or otherwise purchase or carry, any margin stock.
Section 10.16 Project Documents .
(a) The Company will not amend, modify, supplement, replace, terminate or waive any provision of any Material Project Document to which it is party, or consent to any amendment, modification, supplement, replacement, termination or waiver of any Material Project Document, except that (i) the Company, Sharyland, New Owner and New Operator may enter into “Lease Supplements” as contemplated by the System Lease and the New Lease in accordance with Section 9.8(b), and (ii) the Company may enter into modifications of Material Project Documents that are merely ministerial or corrective in nature and, with respect to any covenant contained in any Material Project Document which corresponds to a covenant contained in this Agreement, may amend or modify such covenant so long as such covenant, as so amended or modified, is no more restrictive than the corresponding covenant contained in this Agreement.
(b) The Company shall ensure that Sharyland does not enter into any new lease of transmission or distribution facilities at any time prior to the Maturity Date other than the System Lease, the SP Lease or a lease with a Project Finance Subsidiary of a New Project; provided that for the avoidance of doubt, the foregoing provisions of this sentence shall not prohibit Sharyland from maintaining or entering into replacement leases for, or from amending or modifying, the leases described in Schedule 10.16 .
Section 10.17 Regulation .
(a) Except as permitted in connection with the transactions described in Schedule 10.1 or in subsection (d) below, the Company shall not be or become, nor shall it permit Sharyland to be or become, subject to FERC jurisdiction as a public utility under the FPA; provided, however, that the Company shall not be in default of the forgoing negative covenant if the Company or Sharyland becomes subject to FERC jurisdiction under the FPA solely as a result of a change to the FPA or in FERC’s interpretation thereof or regulations thereunder, if the Company or Sharyland takes all necessary actions to comply with applicable FERC requirements and the operation of the System is uninterrupted;
(b) The Company shall not become subject to regulation under PUHCA except to the extent and in the fashion it is subject to regulation on the Closing Date; provided, however, that the Company shall not be in default of the foregoing negative covenant if the Company becomes subject to additional such regulation solely as a result of a change to the PUHCA or in FERC’s interpretation thereof or the regulations thereunder if the Company takes all necessary actions to comply with PUHCA requirements and the operation of the System is uninterrupted. As a result of the Cap Rock Transaction, Sharyland will become a “holding
 
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company” under PUHCA and, together with the holding company system of which it is a part, may be required to submit to FERC a revised notice of holding company status and/or a revised request for waiver of the requirements of 18 C.F.R §§ 366.21, 366.22, and 366.23;
(c) None of the Company nor Sharyland shall violate in any material respect any regulation or order of the Public Utility Commission of Texas applicable to it; and
(d) None of the Company nor Sharyland shall own, operate or control any electrical generating, transmitting or distribution facility, nor effect or control any sale of electricity, outside of the ERCOT balancing authority area except (i) as permitted by FERC, as set forth in its declaratory order issued in Docket no. EL07-93-000 or (ii) interconnected transmission or distribution assets or systems located substantially in the State of Texas or deriving a majority of their revenue from customers within the State of Texas.
Section 10.18 Swaps . The Company will not, nor will it permit any Subsidiary, including New Owner, to, enter into any Swap Contracts, except that the Company may enter into Swap Contracts solely to hedge interest rate risk and not for speculative purposes.
Section 10.19 Most Favored Lender . If the Company shall, after the date hereof, enter into, assume or otherwise become bound or obligated under any agreement creating or evidencing Indebtedness containing one or more Additional Covenants or Additional Defaults, the terms of this Agreement shall, without any further action on the party of the Company or any of the Holders of the Notes, be deemed to be amended automatically to include each Additional Covenant and each Additional Default contained in such agreement. The Company shall promptly execute and deliver at its expense (including the fees and expenses of counsel for the Holders of the Notes) an amendment to this Agreement in form and substance satisfactory to the Required Holders evidencing the amendment of this Agreement to include such Additional Covenants and Additional Defaults, it being understood that the execution and delivery of such amendment shall not be a precondition to the effectiveness of such amendment as provided for in this Section 10.19, but shall merely be for the convenience of the parties hereto.
SECTION 11. EVENTS OF DEFAULT.
An “ Event of Default ” shall exist if any of the following conditions or events shall occur and be continuing:
(a) the Company defaults in the payment of any principal or Yield-Maintenance Amount, if any, on any Note when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise; or
(b) the Company defaults in the payment of any interest on any Note for more than five days after the same becomes due and payable; or
(c) the Company defaults in the performance of or compliance with any term contained in Section 7.1(d) , Section 9.2, 9.9 or Section 10 ; or
(d) the Company defaults in the performance of or compliance with any term contained herein (other than those referred to in Sections 11(a) , (b)  and (c) ) or in any other Financing Document (other than those referred to in another paragraph of this Section 11 ) and
 
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such default is not remedied within 30 days after the earlier of (i) a Responsible Officer obtaining actual knowledge of such default and (ii) the Company receiving written notice of such default from the Collateral Agent or Holder of a Note (any such written notice to be identified as a “notice of default” and to refer specifically to this Section 11(d) ); or
(e) any representation or warranty made in writing by or on behalf of the Company or by any officer of the Company in this Agreement or any other Transaction Document or in any writing furnished in connection with the transactions contemplated hereby proves to have been false or incorrect in any material respect on the date as of which made; or
(f) (i) A default or event of default occurs under the System Lease or the New Lease or any other Material Project Document, and such failure continues for more than any cure period specified therefor; or (ii) the System Lease, the New Lease or any other Transaction Document is declared to be null and void or is otherwise unenforceable, or any party thereto claims that any such agreement is unenforceable; or
(g) any Required Permit is lost, terminated without being timely replaced (if the terminated Permit continues to be a Required Permit), revoked or otherwise is not in effect; provided, however, that the termination without immediate renewal of any franchise agreement pursuant to which the Company, a Member, New Owner or New Operator is authorized to operate the System, the Acquired System or the FERC Assets and collect fees for services shall not constitute an Event of Default if the parties to the franchise agreement continue to perform in accordance with the terms of such agreement notwithstanding the termination; or
(h) any Lien granted to the Collateral Agent pursuant to any of the Security Documents is invalid, void, unenforceable or unperfected or ceases to have first priority (subject to Permitted Liens), or any Person commences any proceeding or takes any other action to render any such Lien invalid, or to avoid any such Lien or to render any such Lien unenforceable or unperfected or to challenge the priority of such Lien, or an event of default occurs under any Indebtedness that is secured in whole or in part by the Collateral Agency Agreement, or any Person party to the Collateral Agency Agreement fails to comply with the terms thereof or commences any proceeding or takes any other action to render any part of the Collateral Agency Agreement unenforceable; or
(i) without limiting clause (h), (i) the Company, Sharyland, New Owner or New Operator is in default (as principal or as guarantor or other surety) in the payment of any principal of or premium or make-whole amount or interest on any Indebtedness that is outstanding in an aggregate principal amount of at least $10,000,000 ($2,000,000 in the case of Sharyland, New Owner or New Operator) beyond any period of grace provided with respect thereto, or (ii) the Company, Sharyland, New Owner or New Operator is in default in the performance of or compliance with any term of any evidence of any Indebtedness in an aggregate outstanding principal amount of at least $10,000,000 ($2,000,000 in the case of Sharyland, New Owner or New Operator) or of any mortgage, indenture or other agreement relating thereto or any other condition exists, and as a consequence of such default or condition such Indebtedness has become, or has been declared (or one or more Persons are entitled to declare such Indebtedness to be), due and payable before its stated maturity or before its regularly scheduled dates of payment, or (iii) as a consequence of the occurrence or continuation
 
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of any event or condition (other than the passage of time or the right of the holder of Indebtedness to convert such Indebtedness into equity interests), (x) the Company, Sharyland, New Owner or New Operator has become obligated to purchase or repay Indebtedness before its regular maturity or before its regularly scheduled dates of payment in an aggregate outstanding principal amount of at least $10,000,000 (or $2,000,000 in the case of Sharyland, New Owner or New Operator), or (y) one or more Persons have the right to require the Company, Sharyland, New Owner or New Operator to purchase or repay such Indebtedness, or (iv) a default or an event of default occurs under the 2010 SDTS Note Agreement or the RBC Agreement and such failure continues for more than any cure period specified therefor; or
(j) the Company, Sharyland, New Owner or New Operator (i) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes corporate action for the purpose of any of the foregoing; or
(k) a court or Governmental Authority of competent jurisdiction enters an order appointing, without consent by the Company, Sharyland, New Owner or New Operator, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of any such Person or any such petition shall be filed against any such Person and such petition shall not be dismissed within 90 days; or
(l) a final judgment or judgments for the payment of money aggregating in excess of $10,000,000 ($2,000,000 in the case of Sharyland, New Owner or New Operator) are rendered against such Person (other than judgments payable by the Company, Sharyland, New Owner or New Operator rendered in connection with the condemnations in favor thereof) and which judgments are not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay; or
(m) if (i) any Plan shall fail to satisfy the minimum funding standards of ERISA or the Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under Section 412 of the Code, (ii) a notice of intent to terminate any Plan shall have been or is reasonably expected to be filed with the PBGC or the PBGC shall have instituted proceedings under ERISA section 4042 to terminate or appoint a trustee to administer any Plan or the PBGC shall have notified the Company or any ERISA Affiliate that a Plan may become a subject of any such proceedings, (iii) the aggregate funding ratio (as described in Section 10.14 ) under all Plans, determined in accordance with Title IV of ERISA as of the last day of any fiscal year, to be less than 80%, (iv) the Company or any ERISA Affiliate shall have incurred or is reasonably expected to incur any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit
 
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plans, (v) the Company or any ERISA Affiliate withdraws from any Multiemployer Plan, or (vi) the Company establishes or amends any employee welfare benefit plan that provides post-employment welfare benefits in a manner that would increase the liability of the Company thereunder; and any such event or events described in clauses (i) through (vi) above, either individually or together with any other such event or events, could reasonably be expected to have a Material Adverse Effect; or
(n) (i) Members of the Ray L. Hunt family or trusts for the benefit of the Ray L. Hunt family cease to own and control, directly or indirectly, all of the outstanding equity interests of Sharyland and New Operator, (ii) Sharyland ceases to be the lessee under the System Lease within the initial term of such System Lease (without giving effect to any amendments, supplements or replacements thereof), (iii) Electric Infrastructure Alliance of America, LP shall cease to own or control, directly or indirectly, 90% of the outstanding equity interest of the Company; or members of the Ray L. Hunt family or trusts for the benefit of the Ray L. Hunt family cease to own and control, directly or indirectly, at least 5% of the outstanding equity interests of Electric Infrastructure Alliance of America, LP, unless (x) the general partner of Electric Infrastructure Alliance of America, LP has become a publicly held company, or (y) the Company has total assets on its balance sheet valued at $1,000,000,000 or greater; or
(o) the Company defaults in the performance of or compliance with Section 9.8(b) .
As used in Section 11(m) , the terms “ employee benefit plan ” and “ employee welfare benefit plan ” shall have the respective meanings assigned to such terms in section 3 of ERISA.
SECTION 12. REMEDIES ON DEFAULT, ETC.
Section 12.1 Acceleration . (a) If an Event of Default with respect to the Company described in Section 11(j) or (k)  (other than an Event of Default described in clause (i) of Section 11(j) or described in clause (vi) of Section 11(j) by virtue of the fact that such clause encompasses clause (i) of Section 11(j) ) has occurred, all the Notes then outstanding shall automatically become immediately due and payable.
(b) If any other Event of Default has occurred and is continuing, any Holder or Holders of more than 51% in principal amount of the Notes at the time outstanding may at any time at its or their option, by notice or notices to the Company, declare all the Notes then outstanding to be immediately due and payable.
(c) If any Event of Default described in Section 11(a) or (b)  has occurred and is continuing, any Holder or Holders of Notes at the time outstanding affected by such Event of Default may at any time, at its or their option, by notice or notices to the Company, declare all the Notes held by it or them to be immediately due and payable.
Upon any Notes becoming due and payable under this Section 12.1 , whether automatically or by declaration, such Notes will forthwith mature and the entire unpaid principal amount of such Notes, plus (x) all accrued and unpaid interest thereon (including, but not limited to, interest accrued thereon at the Default Rate) and (y) the Yield-Maintenance Amount determined in respect of such principal amount (to the full extent permitted by applicable law), shall all be
 
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immediately due and payable, in each and every case without presentment, demand, protest or further notice, all of which are hereby waived. The Company acknowledges, and the parties hereto agree, that each Holder of a Note has the right to maintain its investment in the Notes free from repayment by the Company (except as herein specifically provided for) and that the provision for payment of a Yield-Maintenance Amount by the Company in the event that the Notes are prepaid or are accelerated as a result of an Event of Default, is intended to provide compensation for the deprivation of such right under such circumstances.
Section 12.2 Other Remedies . If any Default or Event of Default has occurred and is continuing, and irrespective of whether any Notes have become or have been declared immediately due and payable under Section 12.1 , the Holder of any Note at the time outstanding may proceed to protect and enforce the rights of such Holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in any Note, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise.
Section 12.3 Rescission. At any time after any Notes have been declared due and payable pursuant to Section 12.1(b ) or (c ), the Holders of not less than 51% in principal amount of the Notes then outstanding, by written notice to the Company, may rescind and annul any such declaration and its consequences if (a) the Company has paid all overdue interest on the Notes, all principal of and Yield-Maintenance Amount, if any, on any Notes that are due and payable and are unpaid other than by reason of such declaration, and all interest on such overdue principal and Yield-Maintenance Amount, if any, and (to the extent permitted by applicable law) any overdue interest in respect of the Notes, at the Default Rate, (b) neither the Company nor any other Person shall have paid any amounts which have become due solely by reason of such declaration, (c) all Events of Default and Defaults, other than non-payment of amounts that have become due solely by reason of such declaration, have been cured or have been waived pursuant to Section 17 , and (d) no judgment or decree has been entered for the payment of any monies due pursuant hereto or to the Notes. No rescission and annulment under this Section 12.3 will extend to or affect any subsequent Event of Default or Default or impair any right consequent thereon.
Section 12.4 No Waivers or Election of Remedies, Expenses, Etc . No course of dealing and no delay on the part of any Holder of any Note in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice such Holder’s rights, powers or remedies. No right, power or remedy conferred by this Agreement or by any Note upon any Holder thereof shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. Without limiting the obligations of the Company under Section 15 , the Company will pay to the Holder of each Note on demand such further amount as shall be sufficient to cover all costs and expenses of such Holder incurred in any enforcement or collection under this Section 12 , including, without limitation, reasonable attorneys’ fees, expenses and disbursements.
SECTION 13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES.
Section 13.1 Registration of Notes. The Company shall keep at its principal executive office a register for the registration and registration of transfers of Notes. The name and address of each Holder of one or more Notes, each transfer thereof and the name and address of each
 
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transferee of one or more Notes shall be registered in such register. Prior to due presentment for registration of transfer, the Person in whose name any Note shall be registered shall be deemed and treated as the owner and Holder thereof for all purposes hereof, and the Company shall not be affected by any notice or knowledge to the contrary. The Company shall give to any Holder of a Note that is an Institutional Investor, promptly upon request therefor, a complete and correct copy of the names and addresses of all registered Holders of Notes. In addition to and not in limitation of any representations contained herein, each Holder acknowledges and agrees that the Notes have not been registered under the Securities Act and may not be transferred except pursuant to registration or an exemption therefrom and in compliance with Section 13.2(b) hereof.
Section 13.2 Transfer and Exchange of Notes . (a) Subject to compliance with Section 13.2(b) , upon surrender of any Note to the Company at the address and to the attention of the designated officer (all as specified in Section 18(iii)), for registration of transfer or exchange (and in the case of a surrender for registration of transfer accompanied by a written instrument of transfer duly executed by the registered Holder of such Note or such Holder’s attorney duly authorized in writing and accompanied by the relevant name, address and other information for notices of each transferee of such Note or part thereof), within ten Business Days thereafter, the Company shall execute and deliver, at the Company’s expense (except as provided below), one or more new Notes (as requested by the Holder thereof) in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Note. Each such new Note shall be payable to such Person as such Holder may request and shall be substantially in the form of Exhibit 1 . Each such new Note shall be dated and bear interest from the date to which interest shall have been paid on the surrendered Note or dated the date of the surrendered Note if no interest shall have been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of Notes. Notes shall not be transferred in denominations of less than $1,000,000, provided that if necessary to enable the registration of transfer by a Holder of its entire holding of Notes, one Note may be in a denomination of less than $1,000,000. Any transferee, by its acceptance of a Note registered in its name (or the name of its nominee), shall be deemed to have made the representations set forth in Section 6.1 and Section 6.2 .
(b) Each Holder hereby agrees that it will not offer for sale or sell any of its Notes or disclose any Confidential Information to any prospective transferee of the Notes, other than to an Affiliate, or to another Holder without first delivering written notice to the Company (a “ Right of First Offer Notice ”) of its intent to sell such Notes and disclose such Confidential Information. Such Right of First Offer Notice shall contain a reasonably detailed description of the proposed terms of such sale, including, without limitation, the proposed purchase price (the “ Proposed Purchase Price ”) for such Notes and the names of up to ten prospective purchasers. If the Company so desires it may, within 5 Business Days of the receipt of such Right of First Offer Notice, inform such Holder in writing of its intent to purchase, or have an Affiliate or Institutional Investor designated by the Company purchase, such Notes (a “ Purchase Notice ”) from the Holder delivering such Right of First Offer Notice at the Proposed Purchase Price, provided, however , that if at such time a Default or Event of Default shall have occurred and be continuing, the Company shall not purchase, and shall not allow any Affiliate or Institutional Investor designated by the Company to purchase, the Notes of the Holder delivering such Right of First Offer Notice. The aggregate principal amount of the Notes specified in such Purchase
 
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Notice shall be purchased by the Company, or such Affiliate or Institutional Investor, for the Proposed Purchase Price, together with accrued interest on such Notes to the purchase date, on the date specified by the Company in such Purchase Notice, which shall be not more than 30 days following delivery of such Purchase Notice. If a Holder does not receive a Purchase Notice from the Company within 5 Business Days after the delivery of a Right of First Offer Notice to the Company, such Holder shall have the right to sell its Notes identified in such Right of First Offer Notice to one or more of the prospective purchasers identified in such Right of First Offer Notice for a price which is not less than the Proposed Purchase Price identified in such Right of First Offer Notice for a period of 120 days from the date of such Right of First Offer Notice. In the event that the prospective purchasers identified by a Holder in a Right of First Offer Notice shall decline to purchase the Notes within such 120 day period, then the Holder may identify up to 10 additional Institutional Investors through a new Right of First Offer Notice.
Section 13.3 Replacement of Notes. Upon receipt by the Company at the address and to the attention of the designated officer (all as specified in Section 18(iii) ) of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Note (which evidence shall be, in the case of an Institutional Investor, notice from such Institutional Investor of such ownership and such loss, theft, destruction or mutilation), and
(a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (provided that if the Holder of such Note is, or is a nominee for, an original Purchaser or another Holder of a Note with a minimum net worth of at least $100,000,000 or a Qualified Institutional Buyer, such Person’s own unsecured agreement of indemnity shall be deemed to be satisfactory), or
(b) in the case of mutilation, upon surrender and cancellation thereof,
within ten Business Days thereafter, the Company at its own expense shall execute and deliver, in lieu thereof, a new Note, dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Note or dated the date of such lost, stolen, destroyed or mutilated Note if no interest shall have been paid thereon.
SECTION 14. PAYMENTS ON NOTES.
Section 14.1 Place of Payment . Subject to Section 14.2 , payments of principal, Yield-Maintenance Amount, if any, and interest becoming due and payable on the Notes shall be made in New York City, New York at the principal office of JPMorgan Chase Bank National Association in such jurisdiction. The Company may at any time, by notice to each Holder of a Note, change the place of payment of the Notes so long as such place of payment shall be either the principal office of the Company in such jurisdiction or the principal office of a bank or trust company in such jurisdiction.
Section 14.2 Home Office Payment . So long as any Purchaser or its nominee shall be the Holder of any Note, and notwithstanding anything contained in Section 14.1 or in such Note to the contrary, the Company will pay all sums becoming due on such Note for principal, Yield-Maintenance Amount, if any, and interest by the method and at the address specified for such purpose below such Purchaser’s name in Schedule A , or by such other method or at such other
 
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address as such Purchaser shall have from time to time specified to the Company in writing for such purpose, without the presentation or surrender of such Note or the making of any notation thereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment or prepayment in full of any Note, such Purchaser shall surrender such Note for cancellation, reasonably promptly after any such request, to the Company at its principal executive office or at the place of payment most recently designated by the Company pursuant to Section 14.1 . Prior to any sale or other disposition of any Note held by a Purchaser or its nominee, such Purchaser will, at its election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender such Note to the Company in exchange for a new Note or Notes pursuant to Section 13.2 . The Company will afford the benefits of this Section 14.2 to any Institutional Investor that is the direct or indirect transferee of any Note purchased by a Purchaser under this Agreement and that has made the same agreement relating to such Note as the Purchasers have made in this Section 14.2 .
SECTION 15. EXPENSES, ETC.
Section 15.1 Transaction Expenses . Whether or not the transactions contemplated hereby are consummated, the Company will pay all costs and expenses (including reasonable attorneys’ fees of one firm of special counsel and, if reasonably required by the Required Holders, local or other counsel) incurred by the Purchasers and each other Holder of a Note in connection with such transactions and in connection with any amendments, waivers or consents under or in respect of this Agreement or the Notes (whether or not such amendment, waiver or consent becomes effective), including, without limitation: (a) the costs and expenses incurred in enforcing or defending (or determining whether or how to enforce or defend) any rights under this Agreement or the Notes or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement or the Notes, or by reason of being a Holder of any Note, but only to the extent such subpoena or legal proceeding arises out of matters related to the Company, (b) the costs and expenses, including financial advisors’ fees, incurred in connection with the insolvency or bankruptcy of the Company or in connection with any work-out or restructuring of the transactions contemplated hereby and by the Notes and (c) the costs and expenses incurred in connection with the initial filing of this Agreement and all related documents and financial information with the SVO provided. The Company will pay, and will save each Purchaser and each other Holder of a Note harmless from, all claims in respect of any fees, costs or expenses, if any, of brokers and finders (other than those, if any, retained by a Purchaser or other Holder in connection with its purchase of the Notes).
Section 15.2 Survival . The obligations of the Company under this Section 15 will survive the payment or transfer of any Note, the enforcement, amendment or waiver of any provision of this Agreement or the Notes, and the termination of this Agreement.
SECTION 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT.
All representations and warranties contained herein shall survive the execution and delivery of this Agreement and the Notes, the purchase or transfer by any Purchaser of any Note or portion thereof or interest therein and the payment of any Note, and may be relied upon by any subsequent Holder of a Note, regardless of any investigation made at any time by or on behalf of
 
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such Purchaser or any other Holder of a Note; provided , that no representation or warranty shall be deemed to be made as of any time other than the date of execution and delivery of this Agreement or such other document, certificate, instrument or agreement containing such representation or warranty. All statements contained in any certificate or other instrument delivered by or on behalf of the Company pursuant to this Agreement shall be deemed representations and warranties of the Company under this Agreement. Subject to the preceding sentence, this Agreement and the Notes embody the entire agreement and understanding between each Purchaser and the Company and supersede all prior agreements and understandings relating to the subject matter hereof.
SECTION 17. AMENDMENT AND WAIVER.
Section 17.1 Requirements . This Agreement and the Notes may be amended, and the observance of any term hereof or of the Notes may be waived (either retroactively or prospectively), with (and only with) the written consent of the Company and the Required Holders, except that (a) no amendment or waiver of any of the provisions of Section 1, 2, 3, 4, 5 , 6 or 21 hereof, or any defined term (as it is used therein), will be effective as to any Purchaser unless consented to by such Purchaser in writing, and (b) no such amendment or waiver may, without the written consent of the Holder of each Note at the time outstanding affected thereby, (i) subject to the provisions of Section 12 relating to acceleration or rescission, change the amount or time of any prepayment or payment of principal of, or reduce the rate or change the time of payment or method of computation of interest or of the Yield-Maintenance Amount on, the Notes, (ii) change the percentage of the principal amount of the Notes the Holders of which are required to consent to any such amendment or waiver, or (iii) amend any of Sections 8, 11(a), 11(b), 12, 17 or 20 .
Section 17.2 Solicitation of Holders of Notes .
(a) Solicitation. The Company will provide each Holder of the Notes (irrespective of the amount of Notes then owned by it) with sufficient information, sufficiently far in advance of the date a decision is required, to enable such Holder to make an informed and considered decision with respect to any proposed amendment, waiver or consent in respect of any of the provisions hereof or of the Notes. The Company will deliver executed or true and correct copies of each amendment, waiver or consent effected pursuant to the provisions of this Section 17 to each Holder of outstanding Notes promptly following the date on which it is executed and delivered by, or receives the consent or approval of, the requisite Holders of Notes.
(b) Payment. The Company will not directly or indirectly pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, or grant any security or provide other credit support, to any Holder of Notes as consideration for or as an inducement to the entering into by any Holder of Notes of any waiver or amendment of any of the terms and provisions hereof unless such remuneration is concurrently paid, or security is concurrently granted or other credit support concurrently provided, on the same terms, ratably to each Holder of Notes then outstanding even if such Holder did not consent to such waiver or amendment.
Section 17.3 Binding Effect, etc . Any amendment or waiver consented to as provided in this Section 17 applies equally to all Holders of Notes and is binding upon them and upon
 
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each future Holder of any Note and upon the Company without regard to whether such Note has been marked to indicate such amendment or waiver. No such amendment or waiver will extend to or affect any obligation, covenant, agreement, Default or Event of Default not expressly amended or waived or impair any right consequent thereon. No course of dealing between the Company and the Holder of any Note nor any delay in exercising any rights hereunder or under any Note shall operate as a waiver of any rights of any Holder of such Note. As used herein, the term “this Agreement” and references thereto shall mean this Agreement as it may from time to time be amended or supplemented.
Section 17.4 Notes Held by Company, etc . Solely for the purpose of determining whether the Holders of the requisite percentage of the aggregate principal amount of Notes then outstanding approved or consented to any amendment, waiver or consent to be given under this Agreement or the Notes, or have directed the taking of any action provided herein or in the Notes to be taken upon the direction of the Holders of a specified percentage of the aggregate principal amount of Notes then outstanding, Notes directly or indirectly owned by the Company or any of its Affiliates shall be deemed not to be outstanding.
SECTION 18. NOTICES.
All notices and communications provided for hereunder shall be in writing and sent (a) by telecopy if the sender on the same day sends a confirming copy of such notice by a recognized overnight delivery service (charges prepaid), or (b) by registered or certified mail with return receipt requested (postage prepaid), or (c) by a recognized overnight delivery service (with charges prepaid). Any such notice must be sent:
(i) if to any Purchaser or its nominee, to such Purchaser or nominee at the address specified for such communications in Schedule A , or at such other address as such Purchaser or nominee shall have specified to the Company in writing,
(ii) if to any other Holder of any Note, to such Holder at such address as such other Holder shall have specified to the Company in writing, and
(iii) if to the Company, to the Company at 1900 N. Akard Street, Dallas, TX 75201-2300, facsimile: (214) 855-6965 to the attention of W. Kirk Baker, or at such other address as the Company shall have specified to the Holder of each Note in writing.
Notices under this Section 18 will be deemed given only when actually received.
SECTION 19. REPRODUCTION OF DOCUMENTS.
This Agreement and all documents relating thereto, including, without limitation, (a) consents, waivers and modifications that may hereafter be executed, (b) documents received by any Purchaser at the Closing (except the Notes themselves), and (c) financial statements, certificates and other information previously or hereafter furnished to any Purchaser, may be reproduced by such Purchaser by any photographic, photostatic, electronic, digital, or other similar process and such Purchaser may destroy any original document so reproduced. The
 
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Company agrees and stipulates that, to the extent permitted by applicable law, any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by such Purchaser in the regular course of business) and any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. This Section 19 shall not prohibit the Company or any other Holder of Notes from contesting any such reproduction to the same extent that it could contest the original, or from introducing evidence to demonstrate the inaccuracy of any such reproduction.
SECTION 20. CONFIDENTIAL INFORMATION.
For the purposes of this Section 20 , “Confidential Information” means Information delivered to any Purchaser by or on behalf of the Company in connection with the transactions contemplated by or otherwise pursuant to this Agreement, provided that such term does not include information that (a) other than as a result of disclosure by any Purchaser or its employees or agents in violation of this Section 20 was publicly known or otherwise known to such Purchaser prior to the time of such disclosure, (b) other than as a result of disclosure by any Purchaser or its employees or agents in violation of this Section 20 subsequently becomes publicly known through no act or omission by such Purchaser or any Person acting on such Purchaser’s behalf, (c) other than as a result of disclosure by any Purchaser or its employees or agents in violation of this Section 20 otherwise becomes known to such Purchaser other than through disclosure by the Company or (d) constitutes financial statements delivered to such Purchaser under Section 7.1 that are otherwise publicly available. “ Information ” means information concerning the Company or its Subsidiaries, irrespective of its source or form of communication, furnished by or on behalf of the Company or any of its Subsidiaries, including without limitation notes, analyses, compilations, studies or other documents or records prepared by any Purchaser, which contain or reflect or were generated from information supplied by or on behalf of the Company or its Subsidiaries. Each Purchaser will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by such Purchaser in good faith to protect confidential information of third parties delivered to such Purchaser, provided that such Purchaser may deliver or disclose Confidential Information to (i) its directors, officers, employees, agents, attorneys, trustees and affiliates (to the extent such disclosure reasonably relates to the administration of the investment represented by its Notes), (ii) its financial advisors and other professional advisors who agree to hold confidential the Confidential Information substantially in accordance with the terms of this Section 20 , (iii) any other Holder of any Note, (iv) any Institutional Investor to which it sells or offers to sell such Note or any part thereof or any participation therein (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20 ), (v) any Person from which it offers to purchase any security of the Company (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20 ), (vi) any federal or state regulatory authority having jurisdiction over such Purchaser, (vii) the NAIC or the SVO or, in each case, any similar organization, or any nationally recognized rating agency that requires access to information about such Purchaser’s investment portfolio, or (viii) any other Person to which such delivery or disclosure may be necessary or appropriate (w) to effect compliance with any law, rule, regulation or order applicable to such Purchaser, (x) in response to any subpoena or other legal process, (y) in connection with any litigation to which such Purchaser is a party or (z) if an Event of Default has occurred and is continuing, to the
 
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extent such Purchaser may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement or for the protection of the rights and remedies under such Purchaser’s Notes and this Agreement. Each Holder of a Note, by its acceptance of a Note, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Section 20 as though it were a party to this Agreement. On reasonable request by the Company in connection with the delivery to any Holder of a Note of information required to be delivered to such Holder under this Agreement or requested by such Holder (other than a Holder that is a party to this Agreement or its nominee), such Holder will enter into an agreement with the Company embodying the provisions of this Section 20 .
SECTION 21. SUBSTITUTION OF PURCHASER.
Each Purchaser shall have the right to substitute any one of its Affiliates as the purchaser of the Notes that it has agreed to purchase hereunder, by written notice to the Company, which notice shall be signed by both such Purchaser and such Affiliate, shall contain such Affiliate’s agreement to be bound by this Agreement and shall contain a confirmation by such Affiliate of the accuracy with respect to it of the representations set forth in Section 6 . Upon receipt of such notice, any reference to such Purchaser in this Agreement (other than in this Section 21 ), shall be deemed to refer to such Affiliate in lieu of such original Purchaser. In the event that such Affiliate is so substituted as a Purchaser hereunder and such Affiliate thereafter transfers to such original Purchaser all of the Notes then held by such Affiliate, upon receipt by the Company of notice of such transfer, any reference to such Affiliate as a “Purchaser” in this Agreement (other than in this Section 21 ), shall no longer be deemed to refer to such Affiliate, but shall refer to such original Purchaser, and such original Purchaser shall again have all the rights of an original Holder of the Notes under this Agreement.
SECTION 22. MISCELLANEOUS.
Section 22.1 Successors and Assigns . All covenants and other agreements contained in this Agreement by or on behalf of any of the parties hereto bind and inure to the benefit of their respective successors and assigns (including, without limitation, any subsequent Holder of a Note) whether so expressed or not.
Section 22.2 Payments Due on Non-Business Days . Anything in this Agreement or the Notes to the contrary notwithstanding (but without limiting the requirement in Section 8.4 that the notice of any optional prepayment specify a Business Day as the date fixed for such prepayment), any payment of principal of or Yield-Maintenance Amount or interest on any Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day without including the additional days elapsed in the computation of the interest payable on such next succeeding Business Day; provided that if the maturity date of any Note is a date other than a Business Day, the payment otherwise due on such maturity date shall be made on the next succeeding Business Day and shall include the additional days elapsed in the computation of interest payable on such next succeeding Business Day.
Section 22.3 Accounting Terms . All accounting terms used herein which are not expressly defined in this Agreement have the meanings respectively given to them in accordance with GAAP. Except as otherwise specifically provided herein, (i) all computations made
 
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pursuant to this Agreement shall be made in accordance with GAAP, and (ii) all financial statements shall be prepared in accordance with GAAP. For purposes of determining compliance with any financial covenants contained in this Agreement, any election by the Company to measure an item of Indebtedness using fair value (as permitted by Statement of Financial Accounting Standards No. 159 or any similar accounting standard) shall be disregarded and such determination shall be made as if such election had not been made.
Section 22.4 Severability . Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction.
Section 22.5 Construction, etc . Each covenant contained herein shall be construed (absent express provision to the contrary) as being independent of each other covenant contained herein, so that compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with any other covenant. Where any provision herein refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person. For the avoidance of doubt, all Schedules and Exhibits attached to this Agreement shall be deemed to be a part hereof.
Section 22.6 Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the parties hereto.
Section 22.7 Governing Law . This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York excluding choice-of-law principles of the law of such State that would permit the application of the laws of a jurisdiction other than such State.
Section 22.8 Jurisdiction and Process; Waiver of Jury Trial . (a) The Company irrevocably submits to the non-exclusive jurisdiction of any New York State or federal court sitting in the Borough of Manhattan, The City of New York, over any suit, action or proceeding arising out of or relating to this Agreement or the Notes. To the fullest extent permitted by applicable law, the Company irrevocably waives and agrees not to assert, by way of motion, as a defense or otherwise, any claim that it is not subject to the jurisdiction of any such court, any objection that it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum.
(b) The Company consents to process being served by or on behalf of any Holder of Notes in any suit, action or proceeding of the nature referred to in Section 22.8(a) by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, return receipt requested, to it at its address specified in Section 18 or at such other address of which such Holder shall then have been notified pursuant to said Section. The
 
S CHEDULE A-44
(To Note Purchase Agreement)

Company agrees that such service upon receipt (i) shall be deemed in every respect effective service of process upon it in any such suit, action or proceeding and (ii) shall, to the fullest extent permitted by applicable law, be taken and held to be valid personal service upon and personal delivery to it. Notices hereunder shall be conclusively presumed received as evidenced by a delivery receipt furnished by the United States Postal Service or any reputable commercial delivery service.
(c) In addition to and notwithstanding the provisions of Section 22.8(b) above, the Company hereby irrevocably appoints CT Corporation System as its agent to receive on its behalf and its property service of copies of the summons and complaint and any other process which may be served in any action or proceeding. Such service may be made by mailing or delivering a copy of such process to the Company, in care of the process agent at 111 Eighth Avenue, 13 th Floor, New York, New York 10011, and the Company hereby irrevocably authorizes and directs the process agent to accept such service on its behalf. If for any reason the process agent ceases to be available to act as process agent, the Company agrees immediately to appoint a replacement process agent satisfactory to the Required Holders.
(d) Nothing in this Section 22.8 shall affect the right of any Holder of a Note to serve process in any manner permitted by law, or limit any right that the Holders of any of the Notes may have to bring proceedings against the Company in the courts of any appropriate jurisdiction or to enforce in any lawful manner a judgment obtained in one jurisdiction in any other jurisdiction.
(e) The parties hereto hereby waive trial by jury in any action brought on or with respect to this Agreement, the Notes or any other document executed in connection herewith or therewith.
Section 22.9 Transaction References . The Company and the Holders shall not refer to the other on an internet site or in marketing materials, press releases, published “tombstone” announcements or any other print or electronic medium, except with the referenced party’s prior written consent, which may be withheld at its sole discretion.
*    *    *    *    *
 
S CHEDULE A-45
(To Note Purchase Agreement)

If you are in agreement with the foregoing, please sign the form of agreement on a counterpart of this Agreement and return it to the Company, whereupon this Agreement shall become a binding agreement between you and the Company.

Very truly yours,	
	
SHARYLAND DISTRIBUTION AND
TRANSMISSION COMPANY, L.L.C.,
a Delaware limited liability company	
			
By:	 		 		
			
	 	By:  	 	 	
	 		 	Name:	
	 		 	Title:	
 
[S IGNATURE P AGE TO A MENDED AND R ESTATED 2009 SDTS N OTE A GREEMENT ]

This Agreement is hereby accepted and agreed to as of the date thereof.

Purchasers :	
	
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA	
		
By:	 	 	
	 	Vice President	
	
PRUDENTIAL RETIREMENT INSURANCE AND ANNUITY COMPANY	
		
By:	 	Prudential Investment Management, Inc.,
as investment manager	
			
	 	By:	 	 	
	 		 	Vice President	
 
[S IGNATURE P AGE TO A MENDED AND R ESTATED 2009 SDTS N OTE A GREEMENT ]

Schedule B
Definitions
[See attached.]
 
[Schedule B- SDTS Second Amendment]

DEFINED TERMS
As used herein, the following terms have the respective meanings set forth below or set forth in the Section hereof following such term:
“ 2010 NPA Joinder Agreement ” means the Joinder Agreement to the Collateral Agency Agreement, executed by the Company, the Collateral Agent and each purchaser of the 2030 Notes as a “Joining Party,” dated July 13, 2010.
“ 2010 SDTS Note Agreement ” means the Note Purchase Agreement, dated July 13, 2010, among the Company and the holders of the 2030 Notes, as the same may be amended, restated, supplemented or otherwise modified from time to time.
“ 2030 Notes ” means the Company’s 6.47% Senior Notes due September 30, 2030, issued under the 2010 SDTS Note Agreement.
“ Acquired System ” means transmission and distribution facilities acquired by the Company as a result of its merger with Cap Rock Energy Corporation; provided, however, that the term “Acquired System” shall not include any FERC Assets.
“Additional Covenant” shall mean any affirmative or negative covenant or similar restriction applicable to the Company (regardless of whether such provision is labeled or otherwise characterized as a covenant) the subject matter of which either (i) is similar to that of any covenant in this Agreement, or related definitions in this Agreement, but contains one or more percentages, amounts or formulas that is more restrictive than those set forth herein or more beneficial to the Holder or Holders of the Indebtedness created or evidenced by the document in which such covenant or similar restriction is contained (and such covenant or similar restriction shall be deemed an Additional Covenant only to the extent that it is more restrictive or more beneficial) or (ii) is different from the subject matter of any covenant of this Agreement, or related definitions in this Agreement.
“Additional Default” shall mean any provision contained in any document or instrument creating or evidencing Indebtedness of the Company which permits the Holder or Holders of Indebtedness to accelerate (with the passage of time or giving of notice or both) the maturity thereof or otherwise requires the Company to purchase such Indebtedness prior to the stated maturity thereof and which either (i) is similar to any Default or Event of Default contained in this Agreement, or related definitions in this Agreement, but contains one or more percentages, amounts or formulas that is more restrictive or has a shorter grace period than those set forth herein or is more beneficial to the Holders of such other Indebtedness (and such provision shall be deemed an Additional Default only to the extent that it is more restrictive, has a shorter grace period or is more beneficial) or (ii) is different from the subject matter of any Default or Event of Default contained in this Agreement, or related definitions in this Agreement.
“Additional Project Document” means any contract or agreement related to the ownership, operation, maintenance, repair or use of the System or the Acquired System or the FERC Assets entered into by the Company or New Owner subsequent to the Closing Date that involves full payments or obligations in excess of $1,000,000.
 
S CHEDULE B-1
(To Note Purchase Agreement)

“ Affiliate ” means, at any time, and with respect to any Person, any other Person that at such time directly or indirectly through one or more intermediaries Controls, or is Controlled by, or is under common Control with, such first Person and, with respect to the Company, shall include any Person beneficially owning or holding, directly or indirectly, 10% or more of any class of voting or equity interest of the Company or any corporation of which the Company beneficially owns or holds, in the aggregate, directly or indirectly, 10% or more of any class of voting or equity interests; provided, however, that this definition shall at all times exclude owners or investors in Electric Infrastructure Alliance of America, L.P., except for members of the Ray L. Hunt family, trusts for the benefit of the Ray L. Hunt family or entities controlled by members of the Ray L. Hunt family or such trusts. As used in this definition, “ Control ” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. Unless the context otherwise clearly requires, any reference to an “Affiliate” is a reference to an Affiliate of the Company.
“Agreement” is defined in the introductory paragraph of this Agreement.
“Amortization Schedule” is defined in Section 8.1(a) .
“Anti-Terrorism Order” means Executive Order No. 13,224 of September 24, 2001, Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit or Support Terrorism, 66 U.S. Fed. Reg. 49, 079 (2001), as amended.
“Approved Accountant” is defined in Section 7.1(b)(A) .
“Business Day” means any day other than a Saturday, a Sunday or a day on which commercial banks in New York City are required or authorized to be closed.
“ Cap Rock Transaction ” is described in Schedule 10.1 .
“Capital Lease” means, at any time, a lease with respect to which the lessee is required concurrently to recognize the acquisition of an asset and the incurrence of a liability in accordance with GAAP.
“ Cash Flow ” means, for any period, the sum of the following (without duplication): (i) all cash paid to the Company during such period under the System Lease, (ii) all cash distributions received by the Company from New Owner during such period, (iii) all interest and investment earnings, if any, paid to the Company during such period on amounts on deposit in the account created under the Deposit Agreement, (iv) revenues, if any, received by or on behalf of the Company during such period under any insurance policy as business interruption insurance proceeds, (v) direct cash equity investments made by TDC in the Company during such period (excluding equity contributed to a Project Finance Subsidiary) in an amount not greater than the amount necessary to cause the Company to be in compliance with the financial covenants set forth in Section 9.9 (each such investment, an “ Equity Cure ” ); provided, however, that during any period of four consecutive fiscal quarters, “Cash Flow” shall include an Equity Cure in no more than two of such quarters, and (vi) proceeds of any borrowing made after the date hereof to the extent used to finance the payment of bullet or balloon installments of Indebtedness for borrowed money.
 
S CHEDULE B-2
(To Note Purchase Agreement)

“ Cash Flow Available for Debt Service ” for any period, means (i) Cash Flow received during such period minus (ii) (A) all O&M Costs paid during such period and (B) if an Equity Cure has been made in any fiscal quarter during the period for which Cash Flow Available for Debt Service is calculated, the lesser of the aggregate amount of (x) such Equity Cure during such period and (y) the aggregate amount of cash distributions paid by the Company during such period.
“Closing” is defined in Section 3 .
“Closing Date” means December 31, 2009.
“Code” means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder from time to time.
“ Collateral ” means, collectively, the collateral described in each of the Security Documents.
“ Collateral Agency Agreement ” means the Amended and Restated Collateral Agency Agreement, dated as of July 13, 2010, by and among the Collateral Agent, the Company and the Holders and the other secured parties from time to time party thereto, as the same may be amended, restated, supplemented or otherwise modified from time to time.
“Collateral Agent” means The Bank of New York Mellon Trust Company, N.A., a national association, acting in its capacity as collateral agent for itself and the other Secured Parties under the Financing Documents, or its successors in such capacity appointed pursuant to the terms of the Collateral Agency Agreement.
“Company” means Sharyland Distribution & Transmission Services, L.L.C., a Texas limited liability company, or any successor that becomes such in the manner prescribed in Section 10.2 .
“Confidential Information” is defined in Section 20 .
“Contribution Agreement” means the Contribution Agreement, dated as of December 31, 2009, between Sharyland and the Company.
“CREZ” means the Competitive Renewable Energy Zones electric transmission project overseen by ERCOT and the Public Utility Commission of Texas.
“CREZ Project” shall mean the five transmission lines, four substations and other facilities in Texas identified and awarded to Sharyland by the Public Utility Commission of Texas (the “PUCT”) in Docket Number 37902.
“ Debt Service ” for any period, the aggregate (without duplication) of (i) all amounts of interest on the Notes and in respect of other Indebtedness of the Company required to be paid during such period, plus (ii) all amounts of principal on the Notes and in respect of other Indebtedness of the Company or required to be paid during such period, excluding any optional prepayments of principal during such period, plus (iii) all other premiums, fees, costs, charges,
 
S CHEDULE B-3
(To Note Purchase Agreement)

expenses and indemnities due and payable to the Holders or the other Secured Parties and holders of other Indebtedness of the Company or and agents acting on their behalf during such period.
“Debt Service Coverage Ratio” means, for each period of four consecutive fiscal quarters, the quotient of (i) Cash Flow Available for Debt Service for such period to (ii) Debt Service for such period.
“ Deeds of Trust ” means the Amended and Restated First Lien Deed of Trust, Security Agreement and Fixture Filing (Texas) and each First Lien Deed of Trust, Security Agreement, Assignment of Rents and Leases (Texas) by and from the Company, as grantor, to Peter M. Oxman, as trustee, for the benefit of the Collateral Agent and the Secured Parties, dated as of July 13, 2010, in each case as the same may be amended, restated, supplemented or otherwise modified from time to time.
“Default” means an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default.
“Default Rate” means that rate of interest per annum from time to time equal to the greater of (i) 2% per annum above the rate of interest stated in clause (a) of the first paragraph of the Notes, and (ii) 2% over the rate of interest publicly announced by The Bank of New York Mellon from time to time in New York as its “base” or “prime” rate.
“Deposit Agreement” means the Deposit Account Control Agreement, dated as of December 31, 2009, among the Company, the Collateral Agent and Bank of America, N.A.
“Disclosure Documents” is defined in Section 5.3 .
“ Distributions ” means any (i) distribution of any nature or kind, either directly or indirectly, to any Affiliate or equityholder of the Company, including any dividend or distribution in cash or property of any kind; a purchase, redemption, reduction, return or any other payment of capital; or any repayment or reduction of Indebtedness owing to an Affiliate or equityholder of Company; (ii) loans or other payments to an Affiliate or equityholder of the Company; and (iii) payment for or on behalf of an Affiliate equityholder of the Company by way of guaranty, indemnity or otherwise including in connection with any Affiliate Indebtedness; but shall not include any payments made to any equityholder or Affiliate of the Company under any services, advisory, tax sharing or agency agreement disclosed to the Holders and entered into on commercially reasonable terms and conditions.
“Environmental Laws” means any and all Federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including but not limited to those related to Hazardous Materials.
“ ERCOT ” means the Electric Reliability Council of Texas or any successor thereto.
 
S CHEDULE B-4
(To Note Purchase Agreement)

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.
“ERISA Affiliate” means any trade or business (whether or not incorporated) that is treated as a single employer together with the Company under section 414 of the Code.
“Event of Default” is defined in Section 11 .
“ Exchange Act ” shall mean the Securities Exchange Act of 1934, as amended from time to time.
“FERC” means the Federal Energy Regulatory Commission, or any successor agency to its duties and responsibilities.
“ FERC Assets ” is defined in the New Lease.
“ Financing Documents ” means, collectively, this Agreement, the 2010 SDTS Note Agreement, the Notes, the 2030 Notes, the RBC Agreement, the Security Documents, any other documents, agreements or instruments entered into in connection with any of the foregoing and any other documents, agreements or instruments from time to time constituting “Financing Documents” under the Collateral Agency Agreement.
“ First Amendment ” shall mean the First Amendment to this Agreement, dated June 9, 2011.
“ First Amendment Effective Date ” shall have the meaning ascribed to such term in Section 8 of the First Amendment.
“Force Majeure Event” means any claim of force majeure by any Person under any Material Project Document, which would allow such Person to avoid all or any material part of its obligations thereunder and any other fire, explosion, accident, strike, slowdown or stoppage, lockout or other labor dispute (whether pending or, to the Company’s knowledge threatened), drought, storm, hail, earthquake, embargo, act of God or of the public enemy, or other casualty (whether or not covered by insurance), that could reasonably be expected to result in a Material Adverse Effect.
“ FPA ” means the Federal Power Act, 16 U.S.C. §§791 et seq., as amended, and the regulations of the FERC thereunder.
“ GAAP ” means generally accepted accounting principles as in effect in the United States of America. In the event that any “Accounting Change” (as defined below) shall occur and such change results in a change in the method of calculation of financial covenants, ratios, standards or terms in this Agreement, then the Company and the Holders agree to enter into negotiations in order to amend such provisions of this Agreement so as to reflect equitably such Accounting Changes with the desired result that the criteria for evaluating the financial condition of the Company and Sharyland shall be the same after such Accounting Changes as if such Accounting Changes had not been made. Until such time as such an amendment shall have
 
S CHEDULE B-5
(To Note Purchase Agreement)

been executed and delivered by the Company and the Holders, all financial covenants, ratios, standards and terms in this Agreement shall continue to be calculated or construed as if such Accounting Changes had not occurred. “ Accounting Changes ” refers to changes in accounting principles required by the promulgation of any rule, regulation, pronouncement or opinion by the Financial Accounting Standards Board of the American Institute of Certified Public Accountants or, if applicable, the SEC.
“Good Utility Practices” means “Good Utility Practice” as defined from time to time by the Public Utility Commission of Texas.
“ Governmental Authority ” means
the government of:
the United States of America or any State or other political subdivision thereof, or
any other jurisdiction in which the Company conducts all or any part of its business, or which asserts jurisdiction over any properties of the Company, or
any entity exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, any such government, or
ERCOT, or
SPP, or
the Texas Regional Entity.
“Guaranty” means, with respect to any Person, any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing any Indebtedness of any other Person in any manner, whether directly or indirectly, including (without limitation) obligations incurred through an agreement, contingent or otherwise, by such Person:
to purchase such Indebtedness or any property constituting security therefor;
to advance or supply funds (i) for the purchase or payment of such indebtedness or obligation, or (ii) to maintain any working capital or other balance sheet condition or any income statement condition of any other Person or otherwise to advance or make available funds for the purchase or payment of such Indebtedness;
to lease properties or to purchase properties or services primarily for the purpose of assuring the owner of such Indebtedness of the ability of any other Person to make payment of the Indebtedness; or
otherwise to assure the owner of such Indebtedness against loss in respect thereof.
 
S CHEDULE B-6
(To Note Purchase Agreement)

In any computation of the indebtedness or other liabilities of the obligor under any Guaranty, the indebtedness or other obligations that are the subject of such Guaranty shall be assumed to be direct obligations of such obligor.
“Hazardous Material” means any and all pollutants, toxic or hazardous wastes or other substances that might pose a hazard to health and safety, the removal of which may be required or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage or filtration of which is or shall be restricted, prohibited or penalized by any applicable law including, but not limited to, asbestos, urea formaldehyde foam insulation, polychlorinated biphenyls, petroleum, petroleum products, lead based paint, radon gas or similar restricted, prohibited or penalized substances.
“Holder” means, with respect to any Note the Person in whose name such Note is registered in the register maintained by the Company pursuant to Section 13.1 .
“Indebtedness” with respect to any Person means, at any time, without duplication,
its liabilities for borrowed money and its redemption obligations in respect of mandatorily redeemable Preferred Stock;
its liabilities for the deferred purchase price of property acquired by such Person (excluding accounts payable arising in the ordinary course of business but including all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property);
(i) all liabilities appearing on its balance sheet in accordance with GAAP in respect of Capital Leases and (ii) all liabilities which would appear on its balance sheet in accordance with GAAP in respect of Synthetic Leases assuming such Synthetic Leases were accounted for as Capital Leases; provided , however , that for purposes of this definition (including with respect to clauses (i) and (ii) hereof), the System Lease, the New Lease and any similar lease shall not be treated as a capital lease;
all liabilities for borrowed money secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities);
all its liabilities in respect of letters of credit or instruments serving a similar function issued or accepted for its account by banks and other financial institutions (whether or not representing obligations for borrowed money); provided , however , that for purposes of this definition, any surety bonds or indemnification agreements entered into by Sharyland (with respect to which the Company or a subsidiary thereof has a reimbursement or backstop obligation) in connection with condemnation proceedings shall be excluded;
the aggregate Swap Termination Value of all Swap Contracts of such Person; and
 
S CHEDULE B-7
(To Note Purchase Agreement)

any Guaranty of such Person with respect to liabilities of a type described in any of clauses (a) through (f) hereof.
Indebtedness of any Person shall include all obligations of such Person of the character described in clauses (a) through (g) to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is deemed to be extinguished under GAAP.
“Institutional Investor” means (a) any Purchaser of a Note, (b) any Holder of a Note holding (together with one or more of its Affiliates) more than 5% of the aggregate principal amount of the Notes then outstanding, (c) any bank, trust company, savings and loan association or other financial institution, any pension plan, any investment company, any insurance company, any broker or dealer, or any other similar financial institution or entity, regardless of legal form, and (d) any Related Fund of any Holder of any Note.
“ Lease Supplement ” means the Lease Supplement (Cap Rock Assets), dated as of July 13, 2010 between the Company, as lessor, and Sharyland, as lessee.
“Lien” means, with respect to any Person, any mortgage, lien, pledge, charge, security interest or other encumbrance, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or Capital Lease, upon or with respect to any property or asset of such Person (including in the case of stock, stockholder agreements, voting trust agreements and all similar arrangements).
“ Material Adverse Effect ” means a material adverse effect on: (i) the business, operations, affairs or financial condition of the Company, New Owner, Sharyland or New Operator (taken as a whole), or the System, the Acquired System or the FERC Assets (taken as a whole); (ii) the ability of the Company to perform its obligations under this Agreement, the Notes or any Transaction Document to which it is a party; (iii) the ability of Sharyland, New Owner or New Operator to perform under any of the Transaction Documents to which it is a party; or (iv) the validity or enforceability of the Notes, this Agreement or any Transaction Document.
“ Material Project Document ” means each of the agreements listed on Schedule 5.12(b), any Additional Project Document that replaces any of the foregoing, the System Lease and the Contribution Agreement.
“ Maturity Date ” means December 30, 2029.
“Members” means Sharyland and TDC.
“ Moody’s ” means Moody’s Investors Service, Inc.
“Multiemployer Plan” means any Plan that is a “multiemployer plan” (as such term is defined in section 4001(a)(3) of ERISA).
“NAIC” means the National Association of Insurance Commissioners or any successor thereto.
 
S CHEDULE B-8
(To Note Purchase Agreement)

“ Negative Pledge Agreement ” means the Negative Pledge Agreement, dated as of July 13, 2010, executed by New Owner to the Collateral Agent for the benefit of the Secured Parties.
“ New Lease ” means the Lease Agreement, dated as of July 13, 2010, between New Owner and New Operator or any new lease entered into in replacement thereof in accordance with Section 9.8(b).
“ New Operator ” means SU FERC, L.L.C., a Texas limited liability company and a wholly-owned subsidiary of Sharyland.
“ New Owner ” means SDTS FERC, L.L.C., a Texas limited liability company and wholly-owned subsidiary of the Company.
“New Project” shall mean the CREZ Project, any other transmission or distribution project acquired or built by a Project Finance Subsidiary and any “New Project” (as defined in the System Lease) that the Company agrees to fund pursuant to Article 10 of the System Lease.
“ Non-Recourse Debt ” means Indebtedness of a Project Finance Subsidiary that, if secured, is secured solely by a pledge of collateral owned by that Project Finance Subsidiary and the ownership interests in such Project Finance Subsidiary and for which no Person other than such Project Finance Subsidiary is personally liable.
“Notes” is defined in Section 1 .
“ O&M Costs ” means actual cash management and operation costs of the Company, property taxes, insurance premiums, consumables, fees and expenses of, and other amounts owing to, the Collateral Agent and the depositary under the Deposit Agreement, and other costs and expenses in connection with the management or operation of the Company, but exclusive in all cases of (a) non-cash charges, including depreciation or obsolescence charges or reserves therefor, amortization of intangibles or other bookkeeping entries of a similar nature, (b) all other payments of Debt Service and Yield-Maintenance Amounts, if any, (c) costs of repair or replacement paid with insurance proceeds and (d) costs of due diligence and transition expenses related to the Cap Rock Transaction.
“Obligation” means any loan, advance, debt, liability, and obligation of performance, howsoever arising, owed by the Company to the Collateral Agent or the Holders of any kind or description (whether or not evidenced by any note or instrument and whether or not for the payment of money), direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, pursuant to the terms of this Agreement, any Note or any of the other Financing Documents, including all principal, interest, Yield-Maintenance Amounts, fees, charges, expenses, attorneys’ fees and accountants fees payable or reimbursable by the Company under this Agreement or any of the other Financing Documents.
“Officer’s Certificate” means a certificate of a Senior Financial Officer or of any other officer of the Company whose responsibilities extend to the subject matter of such certificate.
 
S CHEDULE B-9
(To Note Purchase Agreement)

“Payment Date” means March 30, 2010 and the 30th day of June, September, December and March thereafter up to the Maturity Date, and the Maturity Date.
“PBGC” means the Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto.
“Permit” means any action, approval, consent, waiver, exemption, variance, franchise, order, permit, authorization, right or license of or from a Governmental Authority, provided that interests or estates in real property, shall not be considered Permits.
“Permitted Investment” means any (a) marketable direct obligation of the United States of America, (b) marketable obligation directly and fully guaranteed as to interest and principal by the United States of America, (c) demand deposit with Depositary, or time deposit, certificate of deposit and banker’s acceptance issued by any member bank of the Federal Reserve System which is organized under the laws of the United States of America or any state thereof or any United States branch of a foreign bank, in each case whose equity capital is in excess of $500,000,000 and whose long-term debt securities are rated “A” or better by S&P and “A2” or better by Moody’s, (d) commercial paper or tax exempt obligations given the highest rating by Moody’s and S&P, (e) obligations of a commercial bank described in clause (c) above, in respect of the repurchase of obligations of the type as described in clauses (a) and (b) hereof, provided that such repurchase obligation shall be fully secured by obligations of the type described in said clauses (a) and (b) and the possession of such obligation shall be transferred to, and segregated from other obligations owned by, any such bank, (f) instrument rated “AAA” by S&P and “Aaa” by Moody’s issued by investment companies and having an original maturity of 180 days or less, (g) eurodollar certificates of deposit issued by any bank described in clause (c) above, and (h) marketable security rated not less than “A-1” by S&P or not less than “Prime-1” by Moody’s. In no event shall Permitted Investments include any obligation, certificate of deposit, acceptance, commercial paper or instrument which by its terms matures (A) more than 180 days after the date of investment, unless a bank meeting the requirements of clause (c) above shall have agreed to repurchase such obligation, certificate of deposit, acceptance, commercial paper or instrument at its purchase price plus earned interest within no more than 90 days after its purchase thereunder or (B) after the next Payment Date.
“ Permitted Lien ” is defined in Section 10.5.
“ Permitted Secured Indebtedness ” means Indebtedness of the Company incurred pursuant to Section 10.6(b), provided that at least 5 Business Days prior to the incurrence of such Indebtedness, the Company shall (a) notify the Holders of its intent to incur such Indebtedness, which notice shall set forth in reasonable detail (i) the amount and proposed economic terms of such Indebtedness, (ii) the type of lender or purchaser and (iii) the proposed collateral for such Indebtedness (which proposed collateral may include any or all of the Collateral), and (b) if the Indebtedness is proposed to be secured by any property of the Company or any of its Subsidiaries or any other collateral, deliver to the Collateral Agent and the other Secured Parties an executed joinder agreement, substantially in the form of Exhibit A attached to the Collateral Agency Agreement, pursuant to which all the proposed holders of such Indebtedness have become party to the Collateral Agency Agreement.
 
S CHEDULE B-10
(To Note Purchase Agreement)

“ Person ” means an individual, partnership, corporation, cooperative corporation, limited liability company, association, trust, unincorporated organization, business entity or Governmental Authority.
“Plan” means an “employee benefit plan” (as defined in section 3(3) of ERISA) subject to Title I of ERISA that is or, within the preceding five years, has been established or maintained, or to which contributions are or, within the preceding five years, have been made or required to be made, by the Company or any ERISA Affiliate or with respect to which the Company or any ERISA Affiliate may have any liability.
“ Pledge Agreement (Company) ” means the Assignment of Membership Interests and Pledge Agreement, dated as of July 13, 2010, by the Company, with respect to its membership interests in New Owner, to the Collateral Agent for the benefit of the Secured Parties.
“ Pledge Agreement (TDC) ” means the Assignment of Membership Interests and Pledge Agreement, dated as of July 13, 2010, by TDC, with respect to its membership interests in the Company, to the Collateral Agent for the benefit of the Secured Parties.
“ Pledge Agreements ” means, collectively, Pledge Agreement (TDC) and Pledge Agreement (Company).
“Preferred Stock” means any class of capital stock of a Person that is preferred over any other class of capital stock (or similar equity interests) of such Person as to the payment of dividends or the payment of any amount upon liquidation or dissolution of such Person.
“ Project Finance Subsidiary ” means a special purpose Wholly-Owned Subsidiary of the Company created to develop the CREZ Project or another New Project and to finance the project solely with Non-Recourse Debt and equity.
“property” or “properties” means, unless otherwise specifically limited, real or personal property of any kind, tangible or intangible, choate or inchoate.
“PTE” is defined in Section 6.2(a) .
“Purchaser” is defined in the first paragraph of this Agreement.
“Qualified Institutional Buyer” means any Person who is a “qualified institutional buyer” within the meaning of such term as set forth in Rule 144A(a)(1) under the Securities Act.
“ RBC ” means Royal Bank of Canada, a Canadian banking institution.
“ RBC Agreement ” means that certain Second Amended and Restated Credit Agreement, dated as of June 28, 2013, among the Company, as borrower, the lenders from time to time party thereto and RBC, administrative agent, as the same may be amended, restated, supplemented and otherwise modified from time to time.
 
S CHEDULE B-11
(To Note Purchase Agreement)

“ RBC Joinder Agreement ” means the Joinder Agreement to Amended and Restated Collateral Agency Agreement dated as of June 28, 2013 by and among the Collateral Agent, the Company, the Secured Parties then parties to the Collateral Agency Agreement and RBC, pursuant to which RBC was joined as a Secured Party under the Collateral Agency Agreement.
“Related Fund” means, with respect to any Holder of any Note, any fund or entity that (i) invests in Securities or bank loans, and (ii) is advised or managed by such Holder, the same investment advisor as such Holder or by an Affiliate of such Holder or such investment advisor.
“Required Holders” means, at any time, the Holders of at least 51% in principal amount of the Notes at the time outstanding (exclusive of Notes then owned by the Company or any of its Affiliates).
“Required Permit” means all governmental and third party licenses, permits, franchises, authorizations, patents, copyright, proprietary software, service marks, trademarks and trade names, or rights thereto, that are material to the ownership, leasing, operating and maintenance of the System, including the permits listed on Schedule 5.12(a).
“Requirements of Law” means as to any Person, the certificate of incorporation or formation and by-laws or partnership or operating agreement or other organizational or governing documents of such Person, and any local, state or Federal law, regulation, rule, ordinances or determination, interpretation or order of an arbitrator or a court or other Governmental Authority, and any Required Permit, in each case applicable to or binding upon such Person or any of its properties or its business or to which such Person or any of its properties or its business is subject.
“ Responsible Officer” means any Senior Financial Officer and any other officer of the Company with responsibility for the administration of the relevant portion of this Agreement.
“Restricted Payment Conditions” is defined in Section 10.9 .
“SEC” shall mean the Securities and Exchange Commission of the United States, or any successor thereto.
“ Second Amendment Date ” means October [ ], 2013.
“ Secured Parties ” means, from time to time, the Holders, all other persons party to the Collateral Agency Agreement (other than the Company) and the Collateral Agent.
“Securities” or “Security” shall have the meaning specified in Section 2(1) of the Securities Act.
“Securities Act” means the Securities Act of 1933, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.
 
S CHEDULE B-12
(To Note Purchase Agreement)

“ Security Documents ” means the Deeds of Trust, Deposit Agreement, the Collateral Agency Agreement, the 2010 NPA Joinder Agreement, the Pledge Agreements, the Negative Pledge Agreement, the RBC Joinder Agreement, and any other security documents, financing statements and the like filed or recorded in connection with the foregoing.
“Senior Financial Officer” means the chief financial officer, principal accounting officer, treasurer or comptroller of the Company or Sharyland, as applicable.
“Sharyland” means Sharyland Utilities, L.P., a Texas limited partnership.
“ Sharyland Affiliate Loan ” means collectively, intercompany loans, in an aggregate principal amount not to exceed $5,000,000 at any time outstanding, made by the Company to Sharyland from time to time for the purpose of financing capital expenditures.
“ SP ” shall mean Sharyland Projects, L.L.C., a Project Finance Subsidiary.
“ SP Lease ” shall mean the CREZ Master System Lease Agreement and Supplements proposed to be entered between SP, as lessor, and Sharyland, as lessee, with respect to the CREZ Project.
“ SPP ” means the Southwest Power Pool or any successor thereto.
“Structuring Fee” is defined in Section 4.7.
“Subsidiary” means, as to any Person, any other Person in which such first Person or one or more of its Subsidiaries or such first Person and one or more of its Subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar functions) of such second Person and any partnership or joint venture if more than a 50% interest in the profits or capital thereof is owned by such first Person or one or more of its Subsidiaries or such first Person and one or more of its Subsidiaries (unless such partnership or joint venture can and does ordinarily take major business actions without the prior approval of such Person or one or more of its Subsidiaries). Unless the context otherwise clearly requires, any reference to a “Subsidiary” is a reference to a Subsidiary of the Company.
“ Subsidiary Guaranty ” means each Guaranty provided by the Subsidiary Guarantors pursuant to Section 9.7(d) , if any, substantially in the form of Exhibit 3 to the Agreement.
“ Subsidiary Guarantor ” means any Subsidiary of the Company that is a guarantor under a Guaranty pursuant to Section 9.7(d) .
“SVO” means the Securities Valuation Office of the NAIC or any successor to such Office.
“Swap Contract” means (a) any and all interest rate swap transactions, basis swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index
 
S CHEDULE B-13
(To Note Purchase Agreement)

swaps or options, bond or bond price or bond index swaps or options or forward foreign exchange transactions, cap transactions, floor transactions, currency options, spot contracts or any other similar transactions or any of the foregoing (including, but without limitation, any options to enter into any of the foregoing), and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., or any International Foreign Exchange Master Agreement.
“Swap Termination Value” means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a), the amounts(s) determined as the mark-to-market values(s) for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts.
“Synthetic Lease” means, at any time, any lease (including leases that may be terminated by the lessee at any time) of any property (a) that is accounted for as an operating lease under GAAP and (b) in respect of which the lessee retains or obtains ownership of the property so leased for U.S. federal income tax purposes, other than any such lease under which such Person is the lessor.
“ System ” means the Company’s integrated electrical transmission and distribution facilities located primarily in the State of Texas and the systems and other property necessary to operate the transmission and distribution facilities, and all improvements to and expansions of such facilities, each New Project (upon its completion) and the Acquired System; provided that, for the purposes hereof, “System” shall not be deemed to include any easements held by the Company.
“ System Lease ” means (i) the Second Amended and Restated Master System Lease Agreement, dated as of July 1, 2012, between the Company, as lessor, and Sharyland, as lessee as supplemented by any lease supplement in accordance with Section 9.8(b)  of this Agreement and as further supplemented by any other lease supplement entered into by the Company and Sharyland permitted under Section 10.16, (ii) the Amended and Restated Lease Agreement (Stanton/Brady/Celeste Assets), dated as of July 1, 2012, between the Company, as lessor, and Sharyland, as lessee as supplemented by any other lease supplement in accordance with Section 9.8(b) of this Agreement and as further supplemented by any other lease supplement entered into by the Company and Sharyland permitted under Section 10.16 and (iii) any and all other leases in connection with the System and the transmission and distribution facilities ancillary thereto.
“TDC” means Transmission and Distribution Company, L.L.C., a Texas limited liability company.
“ Total Debt ” means, with respect to the Company, all Indebtedness of the Company on a consolidated basis; provided, however, that for purposes of calculating the
 
S CHEDULE B-14
(To Note Purchase Agreement)

Company’s Total Debt to Capitalization Ratio, the Company’s Total Debt (i) shall exclude Non-Recourse Debt of a Project Finance Subsidiary and that portion of the Swap Termination Value defined in clause (b) of the definition of “Swap Termination Value” and (ii) shall include Indebtedness of Sharyland on a consolidated basis.
“ Total Debt to Capitalization Ratio ” means the Company’s Total Debt, divided by the sum of Total Debt plus the Company’s capitalization, as shown on the Company’s balance sheet.
“Transaction Documents” means, collectively, the Financing Documents and the Material Project Documents.
“ Transfer ” means, with respect to any item, the sale, exchange, conveyance, lease, transfer or other disposition of such item.
“USA Patriot Act” means United States Public Law 107-56, Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 2001, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.
“Wholly-Owned Subsidiary” means, at any time, any Subsidiary one hundred percent of all of the equity interests and voting interests of which are owned by any one or more of the Company and the Company’s other Wholly-Owned Subsidiaries at such time.
“Yield-Maintenance Amount” is defined in Section 8.6 .
 
S CHEDULE B-15
(To Note Purchase Agreement)

Exhibit 10.34
Execution Version
THIRD AMENDMENT, DIRECTION AND WAIVER, dated as of December 10, 2014 (this “ Third Amendment, Direction and Waiver ”) to the AMENDED AND RESTATED NOTE PURCHASE AGREEMENT, dated as of September 14, 2010 (as heretofore amended, restated, supplemented and otherwise modified, the “ Agreement ”), between SHARYLAND DISTRIBUTION & TRANSMISSION SERVICES, L.L.C. (the “ Company ”), a Texas limited liability company and a wholly-owned Subsidiary of Transmission and Distribution Company L.L.C., and the holders of the notes party thereto (“ Holders ”). Capitalized terms used but not otherwise defined in this Third Amendment, Direction and Waiver shall have the meanings set forth in the Agreement (as amended hereby) and the rules of interpretation set forth therein (as amended hereby) shall apply to this Third Amendment, Direction and Waiver.
W I T N E S S E T H :
WHEREAS, the Company and the Holders are parties to the Agreement;
WHEREAS, the Company has requested that the Holders amend the Agreement, as more fully described herein; and
WHEREAS, each Holder party hereto (such Holders constituting the Required Holders) is willing to agree to such amendment, but only upon the terms and subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual agreements herein contained and other good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Amendments to the Agreement . The Agreement is amended to read in its entirety as set forth on Annex A hereto.
2. Amendments to Schedules . Schedule B of the Agreement is hereby amended and restated in its entirety as Schedule B attached to Annex A.
3. Amendments to Exhibits . Exhibit 2 and Exhibit 3 of the Agreement are hereby amended and restated in their entirety as Exhibit 2 and Exhibit 3, respectively, attached to Annex A.
4. Conditions to Third Amendment, Direction and Waiver Effective Date . This Third Amendment, Direction and Waiver shall become effective upon the date the Collateral Agent and the Holders shall have received counterparts of this Third Amendment, Direction and Waiver, duly executed and delivered by the Company and the other Holders.

5. Representations and Warranties to the Holders . In order to induce the Holders to enter into this Third Amendment, Direction and Waiver, the Company hereby represents and warrants as follows:
 
 	(i)	The Company has the limited liability power and authority to execute and deliver this Third Amendment, Direction and Waiver and to carry out the terms and provisions of this Third Amendment, Direction and Waiver and the Agreement, as amended hereby, and has taken all necessary limited liability company action to authorize the execution and delivery by the Company of this Third Amendment, Direction and Waiver and the performance under this Third Amendment, Direction and Waiver and the Agreement, as amended hereby. The Company has duly executed and delivered this Third Amendment, Direction and Waiver, and this Third Amendment, Direction and Waiver constitutes the legal, valid and binding obligation of the Company, enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law).	
 
 	(ii)	The execution and delivery by the Company of this Third Amendment, Direction and Waiver and the performance under this Third Amendment, Direction and Waiver and the Agreement, as amended hereby, do not (i) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of the Company under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter or limited partnership or limited liability company agreement, or any other agreement or instrument to which the Company is bound or by which the Company or any of its properties may be bound or affected, (ii) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to the Company or (iii) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to the Company, which in the case of any of the foregoing clauses (i) through (iii), with respect to Material Project Documents, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.	
 
 	(iii)	No consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority is required in connection with the execution or delivery by the Company of this Third Amendment, Direction and Waiver or the performance under this Third Amendment, Direction and Waiver and the Agreement, as amended hereby.	
 
 	(iv)	No Default or Event of Default has occurred and is continuing on the date hereof after giving effect to the transactions contemplated herein.	
6. Direction to Collateral Agent . The Holders party hereto, in accordance with Sections 2.1 and 5.2 of the Amended and Restated Collateral Agency Agreement dated as of July 13, 2010
 
2

(the “ Collateral Agency Agreement ”), among The Bank of New York Mellon Trust Company, N.A., as collateral agent for the benefit of the Secured Parties (as defined therein) (in such capacity, the “ Collateral Agent ”), the Company and the other Secured Parties, hereby authorize and direct the Collateral Agent, at the sole cost and expense of the Company, as follows:
 
 	(i)	Upon the effectiveness of this Third Amendment, Direction and Waiver (together with the effectiveness of directions from the other holders and lenders referred to in Section 7(ii)(b) below), to execute and deliver to the Company an amendment and restatement of the Collateral Agency Agreement and of the other Collateral Documents in the forms attached hereto as Annex B .	
 
 	(ii)	Upon the completion of the FERC Merger, to execute and deliver to the Company a termination of each of the FERC Negative Pledge Agreement and the FERC Pledge Agreement in the form attached hereto as Annex C , such other releases, assignments, terminations and similar documents as the Company shall reasonably request and to authorize the filing of any UCC-3 amendment or termination statements, in each case as may be necessary or reasonably requested by the Company, in order to evidence such termination and release.	
The parties hereto acknowledge and agree that the Collateral Agent shall be a third party beneficiary of Sections 6 and 7 of this Third Amendment, Direction and Waiver.
7. Representations and Warranties to the Collateral Agent .
 
 	(i)	Pursuant to Section 5.2 of the Collateral Agency Agreement, (i) The Prudential Insurance Company of America, as a Holder, hereby certifies that the outstanding principal amount of its Notes is $11,893,698.00, and (ii) Prudential Retirement Insurance and Annuity Company, as a Holder, hereby certifies that the outstanding principal amount of its Notes is $35,240,586.00.	
 
 	(ii)	In order to induce the Collateral Agent to take the actions requested in Section 6 hereof, the Company hereby represents and warrants to the Collateral Agent that (a) no Default or Event of Default has occurred and is continuing on the date hereof and (b) consents and waivers from lenders and holders constituting the Required Secured Parties (as defined in the Collateral Agency Agreement) will be obtained in connection with the request for the Collateral Agent to take the actions requested in Section 6 hereof.	
8. Waiver . The Holders party hereto hereby waive non-compliance by the Company with Section 2 of that certain Deposit Account Control Agreement, dated as of December 31, 2009, among the Company, the Collateral Agent and Bank of America, N.A in so far as the Company’s opening and maintenance of that certain money market account with Bank of America, N.A. which was closed as of September 25, 2014 violates or has violated the provisions set forth therein.
 
3

9. Continuing Effect of Financing Documents . Except as expressly set forth herein, this Third Amendment, Direction and Waiver shall not constitute an amendment or waiver of any provision of the Agreement and shall not be construed as an amendment, waiver or consent to any further or future action on the part of the Company that would require an amendment, waiver or consent of the Holders. Except as expressly amended hereby, the provisions of the Agreement are and shall remain in full force and effect. This Third Amendment, Direction and Waiver shall be deemed a Financing Document for purposes of the Agreement.
10. Fees . In accordance with Section 15.1 of the Agreement, the Company shall have paid the fees, charges and disbursements of the Holders’ special counsel in connection with this Third Amendment, Direction and Waiver.
11. Counterparts . This Third Amendment, Direction and Waiver may be executed by one or more of the parties hereto on any number of separate counterparts (including by facsimile), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed signature page to this Third Amendment, Direction and Waiver by facsimile or electronic transmission shall be as effective as the delivery of a manually executed counterpart of this Third Amendment, Direction and Waiver.
12. Severability . Any provision of this Third Amendment, Direction and Waiver which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
13. Integration . This Third Amendment, Direction and Waiver and the other Financing Documents represent the agreement of the Company and the Holders with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by any Holder relative to the subject matter hereof not expressly set forth or referred to herein or in the other Financing Documents.
14. GOVERNING LAW . THIS THIRD AMENDMENT AND DIRECTION AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS FIRST AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
[ Signatures of Following Page ]
 
4

IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment, Direction and Waiver to be duly executed and delivered by their properly and duly authorized officers as of the day and year first above written.

SHARYLAND DISTRIBUTION & TRANSMISSION SERVICES, L.L.C.	
		
By:	 	/s/ Brant Meleski	
	 	Name:	 	Brant Meleski	
	 	Title:	 	Chief Financial Officer	
 
Signature Page
Third Amendment, Direction and Waiver

						
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA		

By:	 	/s/ Richard Carrell		
	 	Vice President		
		
PRUDENTIAL RETIREMENT INSURANCE AND ANNUITY COMPANY		
			
By:	 	Prudential Investment Management, Inc.,		
	 	as investment manager		
				
	 	By:	 	/s/ Richard Carrell		
	 		 	Vice President		
 
Signature Page
Third Amendment, Direction and Waiver

Annex A
Amended and Restated Note Purchase Agreement, as amended by the Third Amendment, Direction and Waiver

Execution Version

 
S HARYLAND D ISTRIBUTION  & T RANSMISSION S ERVICES , L.L.C.
$53,500,000
7.25% Senior Notes due December 30, 2029

A MENDED AND R ESTATED
N OTE P URCHASE A GREEMENT

AS AMENDED BY :
F IRST A MENDMENT DATED AS OF J UNE  9, 2011
S ECOND A MENDMENT DATED AS OF O CTOBER  15, 2013
AND
Third Amendment dated as of December 10, 2014

 
 
A NNEX A-i
(Amended and Restated Note Purchase Agreement)

TABLE OF CONTENTS

 	  	Page	 	
		
ARTICLE I AUTHORIZATION OF NOTES	  	 	1	 	
		
ARTICLE II SALE AND PURCHASE OF NOTES	  	 	1	 	
		
ARTICLE III CLOSING	  	 	1	 	
		
ARTICLE IV CONDITIONS TO CLOSING	  	 	2	 	
		
SECTION 4.2. Performance; No Default	  	 	2	 	
SECTION 4.3. Compliance Certificates	  	 	2	 	
SECTION 4.4. Opinions of Counsel	  	 	2	 	
SECTION 4.5. Purchase Permitted By Applicable Law, Etc.	  	 	3	 	
SECTION 4.6. Sale of Other Notes	  	 	3	 	
SECTION 4.7. Payment of Special Counsel and Other Fees and Expenses	  	 	3	 	
SECTION 4.8. Private Placement Number	  	 	3	 	
SECTION 4.9. Changes in Structure	  	 	3	 	
SECTION 4.10. Funding Instructions	  	 	3	 	
SECTION 4.11. Proceedings and Documents	  	 	4	 	
SECTION 4.12. Deposit Agreement, Etc.	  	 	5	 	
SECTION 4.13. UCC Searches; and Litigation Searches	  	 	5	 	
SECTION 4.14. Insurance	  	 	5	 	
SECTION 4.15. Financial Statements	  	 	6	 	
SECTION 4.16. Consents and Approvals	  	 	6	 	
		
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY	  	 	6	 	
		
SECTION 5.1. Organization; Power and Authority	  	 	6	 	
SECTION 5.2. Authorization, Etc.	  	 	6	 	
SECTION 5.3. Disclosure	  	 	6	 	
SECTION 5.4. Organization and Ownership of Interest in the Company	  	 	7	 	
SECTION 5.5. Financial Statements; Material Liabilities	  	 	7	 	
SECTION 5.6. Compliance with Laws, Other Instruments, Etc.	  	 	7	 	
SECTION 5.7. Governmental Authorizations, Etc.	  	 	8	 	
SECTION 5.8. Litigation; Observance of Agreements, Statutes and Orders	  	 	8	 	
SECTION 5.9. Taxes	  	 	8	 	
SECTION 5.10. Title to Property; Leases	  	 	8	 	
SECTION 5.11. Insurance	  	 	8	 	
SECTION 5.12. Licenses, Permits, Etc.	  	 	9	 	
SECTION 5.13. Compliance with ERISA	  	 	9	 	
SECTION 5.14. Private Offering by the Company	  	 	10	 	
SECTION 5.15. Use of Proceeds; Margin Regulations	  	 	10	 	
SECTION 5.16. Existing Indebtedness; Future Liens	  	 	10	 	
SECTION 5.17. Foreign Assets Control Regulations, Etc.	  	 	11	 	
SECTION 5.18. Status under Certain Statutes	  	 	11	 	
SECTION 5.19. Environmental Matters	  	 	12	 	
 
A NNEX A-ii
(Amended and Restated Note Purchase Agreement)

TABLE OF CONTENTS
(continued)

 	  	Page	 	
		
SECTION 5.20. Force Majeure Events; Employees	  	 	12	 	
SECTION 5.21. Collateral	  	 	12	 	
		
ARTICLE VI REPRESENTATIONS OF THE PURCHASERS	  	 	13	 	
		
SECTION 6.1. Purchase for Investment	  	 	13	 	
SECTION 6.2. Source of Funds	  	 	13	 	
		
ARTICLE VII INFORMATION	  	 	15	 	
		
SECTION 7.1. Financial and Business Information	  	 	15	 	
SECTION 7.2. Officer’s Certificate	  	 	17	 	
SECTION 7.3. [Intentionally Omitted]	  	 	18	 	
		
ARTICLE VIII PAYMENT AND PREPAYMENT OF THE NOTES	  	 	18	 	
		
SECTION 8.1. Amortization; Maturity	  	 	18	 	
SECTION 8.2. Optional Prepayments with Yield-Maintenance Amount	  	 	18	 	
SECTION 8.3. Allocation of Partial Prepayments	  	 	19	 	
SECTION 8.4. Maturity; Surrender, Etc.	  	 	19	 	
SECTION 8.5. Purchase of Notes	  	 	19	 	
SECTION 8.6. Yield-Maintenance Amount	  	 	19	 	
		
ARTICLE IX AFFIRMATIVE COVENANTS	  	 	21	 	
		
SECTION 9.1. Compliance with Law	  	 	21	 	
SECTION 9.2. Insurance	  	 	21	 	
SECTION 9.3. Maintenance of Properties	  	 	21	 	
SECTION 9.4. Payment of Taxes and Claims	  	 	22	 	
SECTION 9.5. Existence, Etc.	  	 	22	 	
SECTION 9.6. Books and Records; Inspection Rights	  	 	22	 	
SECTION 9.7. Collateral; Further Assurances	  	 	22	 	
SECTION 9.8. Material Project Documents	  	 	24	 	
SECTION 9.9. Financial Ratios	  	 	25	 	
		
ARTICLE X NEGATIVE COVENANTS	  	 	25	 	
		
SECTION 10.1. Transactions with Affiliates	  	 	25	 	
SECTION 10.2. Merger, Consolidation, Etc.	  	 	25	 	
SECTION 10.3. Line of Business	  	 	26	 	
SECTION 10.4. Terrorism Sanctions Regulations	  	 	26	 	
SECTION 10.5. Liens	  	 	26	 	
SECTION 10.6. Indebtedness	  	 	27	 	
SECTION 10.7. Loans, Advances, Investments and Contingent Liabilities	  	 	29	 	
SECTION 10.8. No Subsidiaries	  	 	29	 	
SECTION 10.9. Restricted Payments	  	 	29	 	
SECTION 10.10. Sale of Assets, Etc.	  	 	29	 	
 
A NNEX A-iii
(Amended and Restated Note Purchase Agreement)

TABLE OF CONTENTS
(continued)

 	  	Page	 	
		
SECTION 10.11. Sale or Discount of Receivables	  	 	30	 	
SECTION 10.12. Amendments to Organizational Documents	  	 	30	 	
SECTION 10.13. Sale and Lease-Back	  	 	31	 	
SECTION 10.14. ERISA Compliance	  	 	31	 	
SECTION 10.15. No Margin Stock	  	 	32	 	
SECTION 10.16. Project Documents	  	 	32	 	
SECTION 10.17. Regulation	  	 	32	 	
SECTION 10.18. Swaps	  	 	33	 	
SECTION 10.19. Additional Financial Covenants	  	 	33	 	
		
ARTICLE XI EVENTS OF DEFAULT	  	 	34	 	
		
ARTICLE XII REMEDIES ON DEFAULT, ETC.	  	 	37	 	
		
SECTION 12.1. Acceleration	  	 	37	 	
SECTION 12.2. Other Remedies	  	 	38	 	
SECTION 12.3. Rescission	  	 	38	 	
SECTION 12.4. No Waivers or Election of Remedies, Expenses, Etc.	  	 	38	 	
		
ARTICLE XIII REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES	  	 	39	 	
		
SECTION 13.1. Registration of Notes	  	 	39	 	
SECTION 13.2. Transfer and Exchange of Notes	  	 	39	 	
SECTION 13.3. Replacement of Notes	  	 	40	 	
		
ARTICLE XIV PAYMENTS ON NOTES	  	 	41	 	
		
SECTION 14.1. Place of Payment	  	 	41	 	
SECTION 14.2. Home Office Payment	  	 	41	 	
		
ARTICLE XV EXPENSES, ETC.	  	 	41	 	
		
SECTION 15.1. Transaction Expenses	  	 	41	 	
SECTION 15.2. Survival	  	 	42	 	
		
ARTICLE XVI SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT	  	 	42	 	
		
ARTICLE XVII AMENDMENT AND WAIVER	  	 	42	 	
		
SECTION 17.1. Requirements	  	 	42	 	
SECTION 17.2. Solicitation of Holders of Notes	  	 	43	 	
SECTION 17.3. Binding Effect, Etc.	  	 	43	 	
SECTION 17.4. Notes Held by Company, Etc.	  	 	43	 	
		
ARTICLE XVIII NOTICES	  	 	43	 	
 
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TABLE OF CONTENTS
(continued)

 	  	Page	 	
		
ARTICLE XIX REPRODUCTION OF DOCUMENTS	  	 	44	 	
		
ARTICLE XX CONFIDENTIAL INFORMATION	  	 	44	 	
		
ARTICLE XXI SUBSTITUTION OF PURCHASER	  	 	46	 	
		
ARTICLE XXII MISCELLANEOUS	  	 	46	 	
		
SECTION 22.1. Successors and Assigns	  	 	46	 	
SECTION 22.2. Payments Due on Non-Business Days	  	 	46	 	
SECTION 22.3. Accounting Terms	  	 	47	 	
SECTION 22.4. Severability	  	 	47	 	
SECTION 22.5. Construction, etc.	  	 	47	 	
SECTION 22.6. Counterparts	  	 	47	 	
SECTION 22.7. Governing Law	  	 	47	 	
SECTION 22.8. Jurisdiction and Process; Waiver of Jury Trial	  	 	47	 	
SECTION 22.9. Transaction References	  	 	48	 	
 
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S CHEDULE A	  	—	    	I NFORMATION R ELATING TO P URCHASERS	
			
S CHEDULE B	  	—	    	D EFINED T ERMS	
			
Schedule 4.12(a)	  	—	    	Deeds of Trust	
			
Schedule 5.3	  	—	    	Disclosure Materials	
			
Schedule 5.4	  	—	    	Ownership of the Company and Subsidiaries; Officers	
			
Schedule 5.5	  	—	    	Financial Statements	
			
Schedule 5.7	  	—	    	Government Authorizations	
			
Schedule 5.12(a)	  	—	    	Required Permits	
			
Schedule 5.12(b)	  	—	    	Material Project Documents	
			
Schedule 5.16	  	—	    	Indebtedness	
			
Schedule 8.1	  	—	    	Principal Amortization Schedule	
			
Schedule 9.2	  	—	    	Insurance Requirements	
			
Schedule 10.1	  	—	    	Cap Rock Transaction	
			
Schedule 10.20	  	—	    	Burdensome Agreements	
			
Exhibit 1	  	—	    	Form of 7.25% Senior Secured Note due December 30, 2029	
			
Exhibit 2	  	—	    	Form of Subordination Terms	
			
Exhibit 3	  	—	    	Form of Subsidiary Guaranty	
 
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7.25% Senior Notes due December 30, 2029
September 14, 2010
T O E ACH OF THE P URCHASERS L ISTED IN
Schedule A Hereto:
Ladies and Gentlemen:
This Amended and Restated Note Purchase Agreement (this “ Agreement ”), dated as of September 14, 2010, amends and restates the Note Purchase Agreement, dated as of December 31, 2009, (the “ 2009 SDTS Note Agreement ”), among Sharyland Distribution & Transmission Services, L.L.C., a Texas limited liability company (the “ Company ”), and the financial institutions listed on Schedule A to the 2009 SDTS Note Agreement or who later become a party thereto (each, a “ Purchaser ” and, collectively, the “ Purchasers ”).
ARTICLE I
Authorization of Notes
The Company will authorize the issue and sale of $53,500,000 aggregate principal amount of its 7.25% Senior Notes due December 30, 2029 (the “Notes” , such term to include any such notes issued in substitution therefor pursuant to Section 13 ). The Notes shall be substantially in the form set out in Exhibit 1 . Certain capitalized and other terms used in this Agreement are defined in Schedule B ; and references to a “Schedule” or an “Exhibit” are, unless otherwise specified, to a Schedule or an Exhibit attached to this Agreement.
ARTICLE II
Sale and Purchase of Notes
Subject to the terms and conditions of this Agreement, the Company will issue and sell to each Purchaser and each Purchaser will purchase from the Company, at the Closing provided for in Section 3 , Notes in the principal amount specified opposite such Purchaser’s name in Schedule A at the purchase price of 100% of the principal amount thereof. The Purchasers’ obligations hereunder are several and not joint obligations and no Purchaser shall have any liability to any Person for the performance or non-performance of any obligation by any other Purchaser hereunder.
ARTICLE III
Closing
The sale and purchase of the Notes to be purchased by each Purchaser shall occur at the offices of Bingham McCutchen, 399 Park Avenue, New York, NY, at 11:00 a.m., New York time, at a closing (the “ Closing ”) on December 31, 2009 or on such other Business Day thereafter on or prior to December 31, 2009 as may be agreed upon by the Company and the
 
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Purchasers. At the Closing the Company will deliver to each Purchaser the Notes to be purchased by such Purchaser in the form of a single Note (or such greater number of Notes in denominations of at least $1,000,000 as such Purchaser may request) dated the Closing Date and registered in such Purchaser’s name (or in the name of its nominee), against delivery by such Purchaser to the Company or its order of immediately available funds in the amount of the purchase price therefor by wire transfer of immediately available funds for the account of the Company to account number 4426868026 at Bank of America, 901 Main Street, Dallas, TX 75202 ABA: 026009593. If at the Closing the Company shall fail to tender such Notes to any Purchaser as provided above in this Section 3 , or any of the conditions specified in Section 4 shall not have been fulfilled to such Purchaser’s satisfaction, such Purchaser shall, at its election, be relieved of all further obligations under this Agreement, without thereby waiving any rights such Purchaser may have by reason of such failure or such nonfulfillment.
ARTICLE IV
Conditions to Closing
Each Purchaser’s obligation to purchase and pay for the Notes to be sold to such Purchaser at the Closing is subject to the fulfillment to the satisfaction of each Purchaser, prior to or at the Closing, of the following conditions:
SECTION 4.1. Representations and Warranties . The representations and warranties of the Company in this Agreement shall be correct when made and at the time of the Closing.
SECTION 4.2. Performance; No Default . The Company shall have performed and complied with all agreements and conditions contained in this Agreement required to be performed or complied with by it prior to or at the Closing and after giving effect to the issue and sale of the Notes (and the application of the proceeds thereof as contemplated by Section 5.14 ) no Default or Event of Default shall have occurred and be continuing. The Company shall not have entered into any transaction since December 31, 2008 that would have been prohibited by Sections 10.1 and 10.10 through 10.12 of the 2009 SDTS Note Agreement had such Sections applied since such date.
SECTION 4.3. Compliance Certificates.
Company’s Closing Certificates . The Company shall have delivered to each Purchaser an officer’s certificate, dated the Closing Date, certifying that (i) the conditions specified in Sections 4.1 and 4.2 have been fulfilled, and (ii) that each of the other conditions precedent to the occurrence of the Closing has been satisfied.
Company’s Authority Certificate . The Company shall have delivered to each Purchaser a certificate of its secretary, dated the Closing Date, certifying as to the resolutions attached thereto and other corporate proceedings by the Company relating to the authorization, execution and delivery of the Notes and this Agreement and the other Transaction Documents to which it is a party.
SECTION 4.4. Opinions of Counsel . Such Purchaser shall have received opinions in form and substance satisfactory to such Purchaser, dated the date of the Closing (i) from Mayer Brown LLP, counsel for the Company and Sharyland, covering such matters incident to the transactions contemplated hereby as such Purchaser or its counsel may reasonably request and
 
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(ii) from Sutherland, Asbill & Brennan LLP, special counsel for the Company and Sharyland, covering federal and Texas regulatory matters (and the Company hereby instructs its counsel to deliver such opinion to the Purchasers and the Secured Parties), and (iii) from Bingham McCutchen LLP, in connection with such transactions, in form and substance satisfactory to the Purchasers and covering such other matters incident to such transactions as the Purchasers may reasonably request.
SECTION 4.5. Purchase Permitted By Applicable Law, Etc . On the date of the Closing such Purchaser’s purchase of Notes shall (a) be permitted by the laws and regulations of each jurisdiction to which such Purchaser is subject, without recourse to provisions (such as section 1405(a)(8) of the New York Insurance Law) permitting limited investments by insurance companies without restriction as to the character of the particular investment, (b) not violate any applicable law or regulation (including, without limitation, Regulation T, U or X of the Board of Governors of the Federal Reserve System) and (c) not subject such Purchaser to any tax, penalty or liability under or pursuant to any applicable law or regulation, which law or regulation was not in effect on the date hereof. If requested by such Purchaser, such Purchaser shall have received an Officer’s Certificate certifying as to such matters of fact as such Purchaser may reasonably specify to enable such Purchaser to determine whether such purchase is so permitted.
SECTION 4.6. Sale of Other Notes . Contemporaneously with the Closing, the Company shall sell to each other Purchaser and each other Purchaser shall purchase the Notes to be purchased by it at the Closing as specified in Schedule A .
SECTION 4.7. Payment of Special Counsel and Other Fees and Expenses . Without limiting the provisions of Section 15.1, the Company shall have paid on or before the Closing: (a) the fees, charges and disbursements of the Purchasers’ special counsel, Bingham McCutchen LLP and the Purchasers’ Texas counsel to the extent reflected in a statement of such counsel rendered to the Company at least one Business Day prior to the Closing and (b) all other fees, including a structuring fee in the amount of $535,000.00 to Prudential (the “ Structuring Fee ”), and out-of-pocket costs and expenses (including legal fees and expenses and consultant fees and expenses) and other compensation contemplated hereby or by the other Financing Documents, or pursuant to separate letter agreements, payable to the Purchasers.
SECTION 4.8. Private Placement Number . A Private Placement Number issued by Standard & Poor’s CUSIP Service Bureau (in cooperation with the SVO) shall have been obtained for the Notes.
SECTION 4.9. Changes in Structure . The transactions contemplated by the Contribution Agreement shall have been consummated. The Company shall not have changed its jurisdiction of formation or been a party to any merger or consolidation or succeeded to all or any substantial part of the liabilities of any other entity, at any time following the date of the most recent financial statements referred to in Schedule 5.5 , except that the Company shall have changed its type of organization from a Texas limited partnership to a Texas limited liability company.
SECTION 4.10. Funding Instructions . At least one Business Day prior to the date of the Closing, each Purchaser shall have received written instructions signed by a Responsible
 
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Officer on letterhead of the Company confirming the information specified in Section 3 including (i) the name and address of the transferee bank, (ii) such transferee bank’s ABA number and (iii) the account name and number into which the purchase price for the Notes is to be deposited.
SECTION 4.11. Proceedings and Documents . Each Purchaser shall have received the following, each to be (i) dated the Closing Date unless otherwise indicated, and (ii) in form and substance satisfactory to the Purchasers:
(a) The Notes to be purchased by the Purchasers;
(b) (i) This Agreement and each other Financing Document, duly executed, authorized and delivered by each party thereto, (ii) copies of the System Lease, the Contribution Agreement and each of the other Material Project Documents listed on Schedule 5.12(b) to the 2009 SDTS Note Agreement and any amendments or supplements thereto, in each case, duly authorized, executed and delivered by each party thereto, and certified by an authorized officer of the Company as being true, correct and complete and in full force and effect on the Closing Date, and (iii) copies of closing documents delivered in connection with the transactions contemplated by the Contribution Agreement, certified by an authorized officer of Sharyland as being true, correct and complete and in full force and effect, together with such officer’s certification that the transactions contemplated by the Contribution Agreement have been fully consummated;
(c) Copies of the Certificate of Convenience and Necessity and wholesale services tariff of Sharyland as issued by and in effect with the Public Utility Commission of Texas, certified by an authorized officer of Sharyland as being true, complete and accurate and in full force and effect;
(d) The certificates of formation of the Company and each Member, each certified as of a recent date by the Secretary of State of the State of Texas and by such Person’s secretary or other authorized officer;
(e) The organizational documents of each the Company and each Member, certified by such Person’s secretary or other authorized officer;
(f) With respect to each of the Company and Sharyland, an incumbency certificate signed by the secretary and one other officer of such Person, certifying as to the names, titles and true signatures of the officers of such Person authorized to sign this Agreement, the Notes, the other Financing Documents to which such Person is a party and other documents to be delivered hereunder or thereunder;
(g) A certificate of the secretary of the Company and Sharyland attaching resolutions of its management committee or other governing body evidencing approval of the transactions contemplated by this Agreement and the other Financing Documents to which such Person is a party and, with respect to the Company, the issuance of the Notes, and in each case, the execution, delivery and performance thereof, and authorizing certain officers to execute and deliver the same, and certifying that such resolutions were duly and validly adopted and have not since been amended, revoked or rescinded;
 
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(Amended and Restated Note Purchase Agreement)

(h) Good standing certificates as to each of the Company and each Member from all relevant jurisdictions;
(i) Evidence of the filing and acceptance of financing statements which name the Company, as debtor, and the Collateral Agent, as secured party, in all applicable offices, together with copies of such financing statements;
(j) A schedule of all Required Permits, together with copies thereof certified by officers of the Company as being true, correct and complete, in full force and effect and not subject to any appeal or further proceeding;
(k) Certified copies of the documents delivered in connection with the consummation of the transactions contemplated by the Contribution Agreement, and evidence of a capital contribution to Sharyland by its Members in the amount of $16,989,337 and the repayment of indebtedness owed to HLH Acquisitions, Inc. by Sharyland in such amount; and
(l) Such additional documents or certificates with respect to such legal matters or limited liability company, general partnership or other proceedings related to the transactions contemplated hereby as may be reasonably requested by the Purchasers.
SECTION 4.12. Deposit Agreement, Etc. . The Obligations shall be secured by a perfected first priority security interest (subject to Permitted Liens) in the Collateral in favor of the Collateral Agent, for the benefit of the Secured Parties, and the Company will deliver or cause to be delivered to the Purchasers and the Collateral Agent on the Closing Date the following, each of which shall be in full force and effect:
(a) the Deposit Agreement;
(b) A Deed of Trust in the form of Exhibit S-2 to the 2009 SDTS Note Agreement, duly executed by the Company;
(c) A Collateral Agency Agreement in the form of Exhibit S-3 to the 2009 SDTS Note Agreement, duly executed by the Company, the Collateral Agent and the Purchasers; and
(d) Such other documents, instruments and agreements any Purchaser may reasonably request to grant to the Collateral Agent first priority (subject only to Permitted Liens) perfected Liens on the Collateral.
SECTION 4.13. UCC Searches; and Litigation Searches . The Collateral Agent and the Purchasers shall have received UCC and litigation searches of the Company and each Member, which searches shall (i) confirm that no Liens other than Permitted Liens exist on the Collateral and that such Persons are not subject to any litigation, and (ii) be otherwise in substance satisfactory to the Collateral Agent and the Purchasers.
SECTION 4.14. Insurance . The Company shall have delivered to the Purchasers evidence of insurance in effect that meets the requirements of Section 9.2 , and the Purchasers shall have received an insurance consultant’s report, which shall be addressed to the Purchasers and shall be in form and substance satisfactory to the Purchasers.
 
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(Amended and Restated Note Purchase Agreement)

SECTION 4.15. Financial Statements . The Purchasers shall have received unaudited financial statements of the Company and each Member for the fiscal quarter ended September 30, 2009.
SECTION 4.16. Consents and Approvals . All Required Permits and all governmental and third party permits and regulatory and other approvals required to be in effect in connection with the issuance of the Notes hereunder have been obtained and are in effect, all applicable waiting periods have expired without any materially adverse action being taken by any applicable authority, and copies of the documentation thereof shall have been delivered to each Purchaser.
ARTICLE V
Representations and Warranties of the Company.
The Company represents and warrants to each Purchaser as of the Closing Date that:
SECTION 5.1. Organization; Power and Authority . Each of the Company and each Member is a limited liability company or limited partnership, as applicable, duly organized, validly existing and in good standing under the laws of its jurisdiction of formation, and is duly qualified and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Each of the Company and each Member has the limited liability company or limited partnership, as applicable, power and authority to own or hold under lease the properties it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver this Agreement and the other Transaction Documents to which it is a party and to perform the provisions hereof and thereof.
SECTION 5.2. Authorization, Etc. This Agreement and the other Transaction Documents have been duly authorized by all necessary limited liability company or limited partnership, as applicable, action on the part of the Company and each Member, and this Agreement and the other Transaction Documents constitute, and upon execution and delivery thereof each Note will constitute, a legal, valid and binding obligation of the Company or such Member, as applicable, enforceable against such Person in accordance with its terms, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors’ rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).
SECTION 5.3. Disclosure . This Agreement, the other Transaction Documents and the documents, certificates or other writings delivered to the Purchasers by or on behalf of the Company or a Member, in connection with the transactions contemplated hereby, and the financial statements listed in Schedule 5. 5 (this Agreement, and such documents, certificates or other writings and such financial statements delivered to each Purchaser and listed on
 
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(Amended and Restated Note Purchase Agreement)

Schedule 5.3 being referred to, collectively, as the “ Disclosure Documents ”), taken as a whole, do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading in light of the circumstances under which they were made. The projections and pro forma financial information contained in the materials referenced above are based upon good faith estimates and assumptions believed by management of the Company and Sharyland to be reasonable at the time made and on the Closing Date, it being recognized by each Purchaser that such financial information as it relates to future events is not to be viewed as fact and that actual results during the period or periods covered by such financial information may differ from the projected results set forth therein by a material amount. Except as disclosed in the Disclosure Documents, since December 31, 2008, there has been no change in the financial condition, operations, business, properties or prospects of the Company or a Member except changes that individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. There is no fact known to the Company that could reasonably be expected to have a Material Adverse Effect that has not been set forth herein or in the Disclosure Documents.
SECTION 5.4. Organization and Ownership of Interest in the Company . Schedule 5.4 contains a complete and correct list and description of (i) each of the Company’s and each Member’s jurisdiction of its organization and its ownership structure, (ii) the Company’s and each Member’s Subsidiaries, and (iii) the Company’s and each Member’s senior officers. The Company has no Subsidiaries as of the Closing Date except as shown on Schedule 5.4 .
SECTION 5.5. Financial Statements; Material Liabilities . The Company and Sharyland have delivered to each Purchaser copies of the financial statements listed on Schedule 5.5 . All of such financial statements (including in each case the related schedules and notes) fairly present in all material respects the consolidated financial positions of the Company and Sharyland, each as of the respective dates specified in such Schedule and the results of their operations and cash flows for the respective periods so specified and have been prepared in accordance with GAAP consistently applied throughout the periods involved except as set forth in the notes thereto (subject, in the case of any interim financial statements, to normal year-end adjustments). Neither the Company nor Sharyland has any material liabilities that are not disclosed on such financial statements or otherwise disclosed in the Disclosure Documents.
SECTION 5.6. Compliance with Laws, Other Instruments, Etc. . The execution, delivery and performance by the Company and the Members of this Agreement and the Notes and the other Transaction Documents to which it is a party, do not and will not (i) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of such Person under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter or limited partnership or limited liability company agreement, or any other agreement or instrument to which such Person is bound or by which such Person or any of its properties may be bound or affected, (ii) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to such Person or (iii) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to such Person.
 
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(Amended and Restated Note Purchase Agreement)

SECTION 5.7. Governmental Authorizations, Etc. . Except as set forth on Schedule 5.7 , no consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority is required in connection with the execution, delivery or performance by the Company or either Member of this Agreement or the Notes or any of the other Transaction Documents to which it is a party.
SECTION 5.8. Litigation; Observance of Agreements, Statutes and Orders .
(a) There are no actions, suits, investigations or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company or either Member or any of their property in any court or before any arbitrator of any kind or before or by any Governmental Authority that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.
(b) None of the Company or either Member is in default under any term of any Material Project Document listed in Schedule 5.12(b) to the 2009 SDTS Note Agreement or any other agreement or any order, judgment, decree or ruling of any court, arbitrator or Governmental Authority or is in violation of any applicable law, ordinance, rule or regulation (including without limitation Environmental Laws or the USA Patriot Act) of any Governmental Authority, which default or violation, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.
(c) To the knowledge of the Company, after due inquiry, no breach or default under any of the Material Project Documents listed in Schedule 5.12(b) to the 2009 SDTS Note Agreement has occurred and is continuing.
SECTION 5.9. Taxes . Each of the Company and each Member has filed all tax returns that are required to have been filed in any jurisdiction, and has paid all taxes shown to be due and payable on such returns and all other taxes and assessments levied upon them or their properties, assets, income or franchises, to the extent such taxes and assessments have become due and payable and before they have become delinquent, except for any taxes and assessments (i) the amount of which is not individually or in the aggregate material or (ii) the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which such Person has established adequate reserves in accordance with GAAP. The Company knows of no basis for any other tax or assessment that could reasonably be expected to have a Material Adverse Effect. The charges, accruals and reserves on the books of the Company in respect of Federal, state or other taxes for all fiscal periods are adequate.
SECTION 5.10. Title to Property; Leases . The Company has good and sufficient title to the System, and the Company and Sharyland have good and sufficient title to their properties that individually or in the aggregate are material to them, free and clear of Liens (other than Permitted Liens). All leases that individually or in the aggregate are material to the Company or Sharyland are valid and subsisting and are in full force and effect in all material respects.
SECTION 5.11. Insurance . Sharyland has all insurance coverage required by Section 9.2 .
 
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(Amended and Restated Note Purchase Agreement)

SECTION 5.12. Licenses, Permits, Etc. Material Project Documents. The Company and Sharyland own or possess all governmental and third party licenses, permits, franchises, authorizations, patents, copyrights, proprietary software, service marks, trademarks and trade names, or rights thereto, that are material to the ownership, leasing, operating and maintenance of the System, including the Certificate of Convenience and Necessity (#30192) issued by the Public Utility Commission of Texas to Sharyland without known conflict with the rights of others. The Material Project Documents listed on Schedule 5.12(b) to the 2009 SDTS Note Agreement constitute and include all material contracts and agreements to which the Company or Sharyland is a party. Each Material Project Document listed in Schedule 5.12(b) to the 2009 SDTS Note Agreement is in full force and effect, and constitutes the legal, valid and binding obligation of each party thereto as of the date hereof.
SECTION 5.13. Compliance with ERISA .
(a) The Company and each ERISA Affiliate have operated and administered each Plan in compliance with all applicable laws except for such instances of noncompliance as have not resulted in and could not reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any ERISA Affiliate has incurred any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans (as defined in section 3 of ERISA), and no event, transaction or condition has occurred or exists that could reasonably be expected to result in the incurrence of any such liability by the Company or any ERISA Affiliate, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate, in either case pursuant to Title I or IV of ERISA or to such penalty or excise tax provisions or to section 401(a)(29) or 412 of the Code or section 4068 of ERISA, other than such liabilities or Liens as would not be individually or in the aggregate material.
(b) The present value of the aggregate benefit liabilities under each of the Plans (other than Multiemployer Plans), determined as of the end of such Plan’s most recently ended plan year on the basis of the actuarial assumptions specified for funding purposes in such Plan’s most recent actuarial valuation report did not exceed the aggregate current value of the assets of such Plan allocable to such benefit liabilities by an amount that could reasonably be expected to result in a Material Adverse Effect. The term “benefit liabilities” has the meaning specified in section 4001 of ERISA and the terms “current value” and “present value” have the meanings specified in section 3 of ERISA.
(c) The Company and its ERISA Affiliates have not incurred withdrawal liabilities (and are not subject to contingent withdrawal liabilities) under section 4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate are material.
(d) The expected postretirement benefit obligation (determined as of the last day of the Company’s most recently ended fiscal year in accordance with Financial Accounting Standards Board Statement No. 106, without regard to liabilities attributable to continuation coverage mandated by section 4980B of the Code) of the Company is not material to it.
(e) The execution and delivery of this Agreement and the issuance and sale of the Notes hereunder will not involve any non-exempt prohibited transaction under section 406 of
 
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ERISA or in connection with which a tax could be imposed pursuant to section 4975(c)(1)(A)-(D) of the Code. The representation by the Company to each Purchaser in the first sentence of this Section 5.13(e) is made in reliance upon and subject to the accuracy of such Purchaser’s representation in Section 6.2 as to the sources of the funds used to pay the purchase price of the Notes to be purchased by such Purchaser.
SECTION 5.14. Private Offering by the Company . Neither the Company nor anyone acting on its behalf has offered the Notes or any similar securities for sale to, or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof with, any person other than the Purchasers and not more than five other Institutional Investors, each of which has been offered the Notes at a private sale for investment. Neither the Company nor anyone acting on its behalf has taken, or will take, any action that would subject the issuance or sale of the Notes to the registration requirements of Section 5 of the Securities Act or to the registration requirements of any securities or blue sky laws of any applicable jurisdiction.
SECTION 5.15. Use of Proceeds; Margin Regulations . The Company will apply the proceeds of the sale of the Notes to (i) repay outstanding Indebtedness in the amount of $35,174,448.28, (ii) to repay $17,020,929 of inter-company Indebtedness provided by HLH Acquisitions, Inc., and (iii) pay all fees, expenses and costs related to Closing, including legal fees and the Structuring Fee. No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for the purpose of buying or carrying any margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System (12 CFR 221), or for the purpose of buying or carrying or trading in any securities under such circumstances as to involve the Company in a violation of Regulation X of said Board (12 CFR 224) or to involve any broker or dealer in a violation of Regulation T of said Board (12 CFR 220). As used in this Section, the terms “margin stock” and “purpose of buying or carrying” shall have the meanings assigned to them in Regulation U.
SECTION 5.16. Existing Indebtedness; Future Liens .
(a) Schedule 5.16 sets forth a complete and correct list of all outstanding Indebtedness of the Company and each Member as of December 31, 2009 (including a description of the obligors and obligees, principal amount outstanding and collateral therefor, if any, and Guaranty thereof, if any). Except for the repayment of the “Affiliate Loan” described on Schedule 5.16, since September 30, 2009, there has been no material change in the amounts, interest rates, sinking funds, installment payments or maturities of the Indebtedness of the Company or a Member. Neither the Company nor either Member is in default and no waiver of default is currently in effect, in the payment of any principal or interest on any of its Indebtedness and no event or condition exists with respect to any of its Indebtedness that would permit (or that with notice or the lapse of time, or both, would permit) one or more Persons to cause such Indebtedness to become due and payable before its stated maturity or before its regularly scheduled dates of payment.
(b) The Company has not agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its property, whether now owned or hereafter acquired, to be subject to a Lien not otherwise permitted by Section 10.6 of the 2009 SDTS Note Agreement.
(c) The Company is not a party to, nor otherwise subject to any provision contained in, any instrument evidencing Indebtedness of the Company, any agreement relating thereto or any other agreement (including, but not limited to, its charter or other organizational document) which limits the amount of, or otherwise imposes restrictions on the incurring of, Indebtedness of the Company.
 
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(Amended and Restated Note Purchase Agreement)

SECTION 5.17. Foreign Assets Control Regulations, Etc.
(a) Neither the sale of the Notes by the Company hereunder nor the use of the proceeds thereof will violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto.
(b) Neither the Company nor either Member: (i) is a Person described or designated in the Specially Designated Nationals and Blocked Persons List of the Office of Foreign Assets Control or in Section 1 of the Anti-Terrorism Order or (ii) engages in any dealings or transactions with any such Person. The Company and each Member is in compliance, in all material respects, with the USA Patriot Act.
(c) No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for any payments to any governmental official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977, as amended, assuming in all cases that such Act applies to the Company and the Members.
SECTION 5.18. Status under Certain Statutes .
(a) Neither Member nor the Company is an “investment company” or a company “controlled” by an “investment company” within the meaning of the Investment Company Act of 1940, as amended, or an “investment adviser” within the meaning of the Investment Advisers Act of 1940, as amended.
(b) Neither the Company nor either Member is a “public utility” under the FPA and the regulations of FERC thereunder. The execution, delivery and performance of the Company’s and Sharyland’s obligations under the Transaction Documents requires no authorization of approval by, or notice to, and is not subject to the jurisdiction of, FERC under the FPA.
(c) Sharyland and the holding company system of which it is a part have obtained a waiver of the requirements of 18 C.F.R. 366.21, 366.22 and 366.23 (FERC Docket No. PH06-59-000), but are subject to the FERC regulations relating to regulatory access to books and records. Sharyland and the holding company system of which it is a part have filed a notice of holding company status under FERC Docket no. HC06-1-000 and may be required to submit a revised notice of holding company status and/or a revised request for the waiver described in the preceding sentence as a result of the transactions contemplated in the Transaction Documents or in Schedule 10.2 of the 2009 SDTS Note Agreement. Under FERC’s currently effective regulations, the Company will be deemed not to be a “public-utility company” and as a result neither Member is a “holding company” under PUHCA.
 
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(d) The Company is subject to regulation as an “electric utility” by the Public Utility Commission of Texas. The execution, delivery and performance of the Company’s and Sharyland’s obligations under the Transaction Documents requires no authorization or approval by, or notice to, the Public Utility Commission of Texas or under the Public Utility Regulatory Act of Texas other than those that have been obtained.
(e) Solely by virtue of the execution, delivery and performance of the Transaction Documents, no Purchaser will become subject to any of the provisions of the FPA, PUHCA (based on FERC’s currently effective definitions under PUHCA) or the Public Utility Regulatory Act of Texas, or to regulation under any such statute.
SECTION 5.19. Environmental Matters .
(a) The Company has no knowledge of any claims nor has it received any notice of any claim, and no proceeding has been instituted raising any claim against the Company or a Member or any of their real properties now or formerly owned, leased or operated by any of them or other assets, alleging any damage to the environment or violation of any Environmental Laws, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect.
(b) The Company has no knowledge of any facts which would give rise to any claim, public or private, of violation of Environmental Laws or damage to the environment emanating from, occurring on or in any way related to real properties now or formerly owned, leased or operated by the Company or either Member or to other assets or its use, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect.
(c) Neither the Company nor either Member has stored any Hazardous Materials on real properties now or formerly owned, leased or operated by any of them and has not disposed of any Hazardous Materials in a manner contrary to any Environmental Laws in each case in any manner that could reasonably be expected to result in a Material Adverse Effect; and
(d) All buildings on all real properties now owned, leased or operated by the Company a Member are in compliance with applicable Environmental Laws, except where failure to comply could not reasonably be expected to result in a Material Adverse Effect.
SECTION 5.20. Force Majeure Events; Employees . Neither the System nor any of the other assets of the Company or a Member have suffered any Force Majeure Event that is continuing. The Company has no employees.
SECTION 5.21. Collateral . The Collateral, as described in the Security Documents, constitutes all of the Company’s rights in the System Lease and the System. The security interests in the Collateral granted to the Collateral Agent (for the benefit of the Secured Parties) pursuant to the Financing Documents: (a) constitute as to personal property included in the
 
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(Amended and Restated Note Purchase Agreement)

Collateral and, with respect to subsequently acquired personal property included in the Collateral, will constitute, a perfected security interest and Lien under each applicable Uniform Commercial Code, and (b) are, and, with respect to such subsequently acquired property, will be, as to Collateral perfected under each applicable Uniform Commercial Code, superior and prior to the rights of all third Persons now existing or hereafter arising whether by way of mortgage, lien, security interests, encumbrance, assignment or otherwise, except for Permitted Liens. All action as is necessary has been taken to establish and perfect the Collateral Agent’s rights in and to, and the first lien priority of its Lien on, the Collateral, including any recording, filing, registration, delivery to the Collateral Agent, giving of notice or other similar action. The Security Documents and financing statements relating thereto have been duly filed or recorded in each office and in each jurisdiction where required in order to create and perfect the Lien and security interest described above and the priority thereof.
ARTICLE VI
Representations of the Purchasers.
SECTION 6.1. Purchase for Investment . Each Purchaser severally represents that it is an “Accredited Investor” as defined in Rule 501 of Regulation D under the Securities Act. Each Purchaser severally represents that it is purchasing the Notes for its own account or for one or more separate accounts maintained by such Purchaser or for the account of one or more pension or trust funds and not with a view to the distribution thereof, provided that the disposition of such Purchaser’s property shall at all times be within such Purchaser’s control. Each Purchaser understands that the Notes have not been registered under the Securities Act and may be resold only if registered pursuant to the provisions of the Securities Act or if an exemption from registration is available, except under circumstances where neither such registration nor such an exemption is required by law, and that the Company is not required to register the Notes.
SECTION 6.2. Source of Funds . Each Purchaser severally represents that at least one of the following statements is an accurate representation as to each source of funds (a “ Source ”) to be used by such Purchaser to pay the purchase price of the Notes to be purchased by such Purchaser hereunder:
(a) the Source is an “insurance company general account” (as the term is defined in the United States Department of Labor’s Prohibited Transaction Exemption (“ PTE ”) 95-60) in respect of which the reserves and liabilities (as defined by the annual statement for life insurance companies approved by the National Association of Insurance Commissioners (the “ NAIC Annual Statement ”)) for the general account contract(s) held by or on behalf of any employee benefit plan together with the amount of the reserves and liabilities for the general account contract(s) held by or on behalf of any other employee benefit plans maintained by the same employer (or affiliate thereof as defined in PTE 95-60) or by the same employee organization in the general account do not exceed 10% of the total reserves and liabilities of the general account (exclusive of separate account liabilities) plus surplus as set forth in the NAIC Annual Statement filed with such Purchaser’s state of domicile; or
(b) the Source is a separate account that is maintained solely in connection with such Purchaser’s fixed contractual obligations under which the amounts payable, or credited, to any employee benefit plan (or its related trust) that has any interest in such separate account (or to any participant or beneficiary of such plan (including any annuitant)) are not affected in any manner by the investment performance of the separate account; or
 
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(Amended and Restated Note Purchase Agreement)

(c) the Source is either (i) an insurance company pooled separate account, within the meaning of PTE 90-1 or (ii) a bank collective investment fund, within the meaning of the PTE 91-38 and, except as disclosed by such Purchaser to the Company in writing pursuant to this clause (c), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; or
(d) the Source constitutes assets of an “investment fund” (within the meaning of Part V of PTE 84-14 (the “ QPAM Exemption ” )) managed by a “qualified professional asset manager” or “ QPAM ” (within the meaning of Part V of the QPAM Exemption), no employee benefit plan’s assets that are included in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Part V(c)(1) of the QPAM Exemption) of such employer or by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, the conditions of Part I(c) and (g) of the QPAM Exemption are satisfied, neither the QPAM nor a person controlling or controlled by the QPAM (applying the definition of “control” in Part V(e) of the QPAM Exemption) owns a 5% or more interest in the Company and (i) the identity of such QPAM and (ii) the names of all employee benefit plans whose assets are included in such investment fund have been disclosed to the Company in writing pursuant to this clause (d); or
(e) the Source constitutes assets of a “plan(s)” (within the meaning of Section IV of PTE 96-23 (the “ INHAM Exemption ” )) managed by an “in-house asset manager” or “INHAM” (within the meaning of Part IV of the INHAM Exemption), the conditions of Part I(a), (g) and (h) of the INHAM Exemption are satisfied, neither the INHAM nor a person controlling or controlled by the INHAM (applying the definition of “control” in Section IV(d) of the INHAM Exemption) owns a 5% or more interest in the Company and (i) the identity of such INHAM and (ii) the name(s) of the employee benefit plan(s) whose assets constitute the Source have been disclosed to the Company in writing pursuant to this clause (e); or
(f) the Source is a governmental plan; or
(g) the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this clause (g); or
(h) the Source does not include assets of any employee benefit plan, other than a plan exempt from the coverage of ERISA.
As used in this Section 6.2 , the terms “employee benefit plan,” “governmental plan,” and “separate account” shall have the respective meanings assigned to such terms in section 3 of ERISA.
 
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(Amended and Restated Note Purchase Agreement)

ARTICLE VII
Information.
SECTION 7.1. Financial and Business Information.
The Company shall deliver, and shall cause Sharyland to deliver, and shall use commercially reasonable efforts to cause each other Qualified Lessee (other than any Consolidated Qualified Lessee) to deliver, to each Holder of Notes ( provided , that no default shall arise under this Section 7.1 as a result of the failure by a Qualified Lessee other than Sharyland to deliver financial statements and other documents in accordance with the requirements of an applicable Lease and such Lease is terminated in accordance with Section 9.14 hereunder):
(a) Quarterly Statements — within 45 days after the end of each quarterly fiscal period in each calendar year of such Person and its Subsidiaries (excluding the last quarterly fiscal period of each such calendar year), duplicate copies of
(i) balance sheets of such Person and its Subsidiaries on a consolidated basis as at the end of such quarter, and
(ii) profit and loss statements and cash flows statements for such Person and its Subsidiaries on a consolidated basis for such quarter and (in the case of the second and third quarters) for the portion of the calendar year ending with such quarter,
(iii) setting forth in each case in comparative form the figures for the corresponding periods in the previous calendar year, all in reasonable detail, prepared in accordance with GAAP applicable to quarterly financial statements generally, and certified by a Senior Financial Officer of such Person as fairly presenting, in all material respects, the financial position of the companies being reported on and their results of operations and cash flows, subject to changes resulting from year-end adjustments;
(b) Annual Statements — within 90 days after the end of each calendar year of the Company and each Qualified Lessee (other than a Consolidated Qualified Lessee), as applicable, duplicate copies of
(i) balance sheets of such Person and its Subsidiaries on a consolidated basis as at the end of such year; and
(ii) statements of income, profit and loss statements and cash flow statements for such Person and its Subsidiaries on a consolidated basis for such year,
setting forth in each case in comparative form the figures for the previous calendar year, all in reasonable detail, prepared in accordance with GAAP, and accompanied by
(A) an opinion thereon of Ernst & Young LLP or another independent public accounting firm of nationally recognized standing selected by the Company or such Qualified Lessee (herein, the “ Approved Accountant ”), which opinion shall state that such financial statements present fairly, in all material respects, the financial position of the companies being reported upon and their results of operations and cash flows and have been
 
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(Amended and Restated Note Purchase Agreement)

prepared in conformity with GAAP, and that the examination of the Approved Accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and that such audit provides a reasonable basis for such opinion in the circumstances, and
(B) a certificate of the Approved Accountants stating that they have reviewed this Agreement and stating further whether, in making their audit, they have become aware of any condition or event that then constitutes a Default or an Event of Default, and, if they are aware that any such condition or event then exists, specifying the nature and period of the existence thereof (it being understood that the Approved Accountants shall not be liable, directly or indirectly, for any failure to obtain knowledge of any Default or Event of Default unless the Approved Accountants should have obtained knowledge thereof in making an audit in accordance with generally accepted auditing standards or did not make such an audit);
(c) Other Reports — promptly upon their becoming available, and to the extent not otherwise required to be delivered pursuant to another provision of this Agreement, one copy of (i) each financial statement and budget and such other reports and notices as a Holder may reasonably request sent by the Company or any Qualified Lessee to its Subsidiaries, (ii) each report or filing (without exhibits except as expressly requested by such Holder) other than regular and periodic reports and filings made by the Company, any Subsidiary, or any Qualified Lessee to any state or Federal regulatory body and (iii) each report and filing made by the Company to its lenders;
(d) Notice of Default or Event of Default — promptly, and in any event within 5 Business Days after (i) a Responsible Officer of the Company becoming aware of the existence of any Default or Event of Default or that any Person has given any notice or taken any action with respect to a claimed default hereunder or that any Person has given any notice or taken any action with respect to a claimed default of the type referred to in Section 11(i) , a written notice specifying the nature and period of existence thereof and what action the Company or any Subsidiary is taking or proposes to take with respect thereto and (ii) the Company receives a written notice of default under a System Lease from the applicable Qualified Lessee, a copy of such notice of default or a written notice specifying the nature and period of existence of such default and what action the Company is taking or proposes to take with respect thereto;
(e) [Intentionally Omitted];
(f) [Intentionally Omitted];
(g) Notices from Governmental Authority — promptly, and in any event within 5 Business Days of receipt (or knowledge thereof by a Responsible Officer of the Company) of copies of any notice to the Company, any Subsidiary, or any Qualified Lessee from any Federal or state Governmental Authority relating to any order, ruling, statute or other law or regulation that could reasonably be expected to have a Material Adverse Effect;
 
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(Amended and Restated Note Purchase Agreement)

(h) Other Notices — promptly, and in any event within 5 Business Days of receipt (or knowledge by a Responsible Officer of the Company) thereof:
(i) any pending or threatened adversarial or contested proceeding of or before a Governmental Authority relating to the System or the System Leases that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect;
(ii) any litigation or proceeding taken or threatened in writing against the Company, any Subsidiary, or any Qualified Lessee, that, if successful, could reasonably be expected to result in a Material Adverse Effect;
(i) Annual Operating Budgets — As soon as available and in any event within 30 days after the close of each calendar year of the Company and each Qualified Lessee (other than a Consolidated Qualified Lessee), as the case may be,, the annual budget of the Company and its Subsidiaries and each Qualified Lessee, as applicable.
(j) Information Required by Rule 144A — upon the request of such Holder (and shall deliver to any qualified institutional buyer designated by such Holder), such financial and other information as such Holder may reasonably determine to be necessary in order to permit compliance with the information requirements of Rule 144A under the Securities Act in connection with the resale of Notes, except at such times as the Company is subject to the reporting requirements of section 13 or 15(d) of the Exchange Act (for the purpose of this Section 7.1(j) , the term “ qualified institutional buyer ” shall have the meaning specified in Rule 144A under the Securities Act); and
(k) Requested Information — with reasonable promptness, such other data and information relating to the business, operations, affairs, financial condition, assets or properties of the Company or relating to the ability of the Company to perform its obligations hereunder and under the Notes as from time to time may be reasonably requested by any such Holder of Notes.
SECTION 7.2. Officer’s Certificate . Each set of financial statements delivered pursuant to Section 7.1(a) or Section 7.1(b) shall be accompanied by a certificate of a Senior Financial Officer of each Qualified Lessee (other than a Consolidated Qualified Lessee) or the Company, as applicable, setting forth:
(a) Covenant Compliance — the information (including detailed calculations) required in order to establish whether the Company was in compliance with the requirements of Sections 9.9 , 10.6 and 10.9 of this Agreement, during the quarterly or annual period covered by the statements then being furnished (including with respect to each such Section, where applicable, the calculations of the maximum or minimum amount, ratio or percentage, as the case may be, permissible under the terms of such Sections, and the calculation of the amount, ratio or percentage then in existence); and
 
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(b) Event of Default — a statement that such Senior Financial Officer has reviewed the relevant terms hereof and has made, or caused to be made, under his or her supervision, a review of the transactions and conditions of the Company from the beginning of the quarterly or annual period covered by the statements then being furnished to the date of the certificate and that no Default or an Event of Default has occurred and is continuing (or in the case of any Qualified Lessee, any default or event of default has occurred and is continuing under any Leases to which it is a party, which default or event of default constitutes an Event of Default pursuant to Section 11(f)) or, if any such condition or event has occurred and is continuing (including, without limitation, any such event or condition resulting from the failure of the Company to comply with any Environmental Law), (or in the case of any Qualified Lessee, any default or event of default has occurred and is continuing under any Leases to which it is a party, which default or event of default constitutes an Event of Default pursuant to Section 11(f)), specifying the nature and period of existence thereof and what action the Company shall have taken or proposes to take with respect thereto.
SECTION 7.3. [Intentionally Omitted]
ARTICLE VIII
Payment and Prepayment of the Notes.
SECTION 8.1. Amortization; Maturity. On March 30, 2010 and on the 30th day of each June, September, December and March thereafter to and including December 30, 2029, the Company will prepay the principal amounts set forth in the amortization schedule attached hereto as Schedule 8.1 (the “ Amortization Schedule ”) (or such lesser principal amount as shall then be outstanding) of the Notes at par and without payment of the Yield-Maintenance Amount or any premium, provided that upon any partial prepayment of the Notes pursuant to Section 8.2 , the principal amount of each required prepayment of the Notes becoming due under this Section 8.1 on and after the date of such prepayment shall be reduced in the same proportion as the aggregate unpaid principal amount of the Notes is reduced as a result of the prepayment. The entire unpaid principal balance of the Notes shall be due and payable on the Maturity Date.
SECTION 8.2. Optional Prepayments with Yield-Maintenance Amount . The Company may, at its option, upon notice as provided below, prepay at any time all, or from time to time any part of, the Notes, in an amount not less than $1,000,000 in the case of a partial prepayment, at 100% of the principal amount so prepaid, and the Yield-Maintenance Amount determined for the prepayment date with respect to such principal amount. The Company will give each Holder of Notes written notice of each optional prepayment under this Section 8.2 not less than 30 days and not more than 60 days prior to the date fixed for such prepayment. Each such notice shall specify such date (which shall be a Business Day), the aggregate principal amount of the Notes to be prepaid on such date, the principal amount of each Note held by such Holder to be prepaid (determined in accordance with Section 8.3 ), and the interest to be paid on the prepayment date with respect to such principal amount being prepaid, and shall be accompanied by a certificate of a Senior Financial Officer as to the estimated Yield-Maintenance Amount due in connection with such prepayment (calculated as if the date of such notice were the date of the prepayment), setting forth the details of such computation. Two Business Days prior to such prepayment, the Company shall deliver to each Holder of Notes a certificate of a Senior Financial Officer specifying the calculation of such Yield-Maintenance Amount as of the specified prepayment date.
 
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(Amended and Restated Note Purchase Agreement)

SECTION 8.3. Allocation of Partial Prepayments . In the case of each partial prepayment of the Notes, the principal amount of the Notes to be prepaid shall be allocated among all of the Notes at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof not theretofore called for prepayment.
SECTION 8.4. Maturity; Surrender, Etc. . In the case of each prepayment of Notes pursuant to this Section 8 , the principal amount of each Note to be prepaid shall mature and become due and payable on the date fixed for such prepayment (which shall be a Business Day), together with interest on such principal amount accrued to such date and the applicable Yield-Maintenance Amount, if any. From and after such date, unless the Company shall fail to pay such principal amount when so due and payable, together with the interest and Yield-Maintenance Amount, if any, as aforesaid, interest on such principal amount shall cease to accrue. Any Note paid or prepaid in full shall be surrendered to the Company and cancelled and shall not be reissued, and no Note shall be issued in lieu of any prepaid principal amount of any Note.
SECTION 8.5. Purchase of Notes . The Company will not and will not permit any Affiliate to purchase, redeem, prepay or otherwise acquire, directly or indirectly, any of the outstanding Notes except (a) upon the payment or prepayment of the Notes in accordance with the terms of this Agreement and the Notes or (b) pursuant to Section 13.2(b) ; provided that if an Affiliate which does not Control and is not Controlled by the Company has so acquired any of the outstanding Notes, such acquisition shall not constitute an Event of Default. The Company will promptly cancel all Notes acquired by it or any Affiliate pursuant to any payment or prepayment of Notes pursuant to any provision of this Agreement and no Notes may be issued in substitution or exchange for any such Notes.
SECTION 8.6. Yield-Maintenance Amount .
“Yield-Maintenance Amount” means, with respect to any Note, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Note over the amount of such Called Principal, provided that the Yield-Maintenance Amount may in no event be less than zero. For the purposes of determining the Yield-Maintenance Amount, the following terms have the following meanings:
“Called Principal” means, with respect to any Note, the principal of such Note that is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1 , as the context requires.
“Discounted Value” means, with respect to the Called Principal of any Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Notes is payable) equal to the Reinvestment Yield with respect to such Called Principal.
 
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“Reinvestment Yield” means, with respect to the Called Principal of any Note, .50% over the yield to maturity implied by (i) the yields reported as of 10:00 a.m. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the display designated as “Page PX1” (or such other display as may replace Page PX1) on Bloomberg Financial Markets for the most recently issued actively traded on the run U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or (ii) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable (including by way of interpolation), the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (or any comparable successor publication) for U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date.
In the case of each determination under clause (i) or clause (ii), as the case may be, of the preceding paragraph, such implied yield will be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between (1) the applicable U.S. Treasury security with the maturity closest to and greater than such Remaining Average Life and (2) the applicable U.S. Treasury security with the maturity closest to and less than such Remaining Average Life. The Reinvestment Yield shall be rounded to the number of decimal places as appears in the interest rate of the applicable Note.
“Remaining Average Life” means, with respect to any Called Principal, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (a) the principal component of each Remaining Scheduled Payment with respect to such Called Principal by (b) the number of years (calculated to the nearest one-twelfth year) that will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment.
“Remaining Scheduled Payments” means, with respect to the Called Principal of any Note, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, provided that if such Settlement Date is not a date on which interest payments are due to be made under the terms of the Notes, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to Section 8.2 or 12.1 .
“Settlement Date” means, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1 , as the context requires.
 
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ARTICLE IX
Affirmative Covenants.
The Company covenants that so long as any of the Notes are outstanding:
SECTION 9.1. Compliance with Law . Without limiting Section 10.4 , the Company will, and will cause its Subsidiaries to comply with all laws, ordinances or governmental rules or regulations to which it is subject, including, without limitation, ERISA, the USA Patriot Act and Environmental Laws, and will obtain and maintain in effect all licenses, certificates, permits, franchises and other governmental authorizations necessary to the ownership of its properties or to the conduct of its businesses to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
SECTION 9.2. Insurance.
(a) Maintenance of Insurance . The Company will maintain or cause to be maintained and will cause its Subsidiaries to maintain, with financially sound and reputable insurers, insurance with respect to their respective properties and businesses against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated.
(b) Evidence of Insurance: Promptly upon request by a Holder or the Collateral Agent, the Company shall furnish the Holders and the Collateral Agent with approved certification of all required insurance. Such certification shall be executed by each insurer or by an authorized representative of each insurer where it is not practical for such insurer to execute the certificate itself. Such certification shall identify underwriters, the type of insurance, the insurance limits, and the policy term, and shall specifically list the special provisions enumerated for such insurance required by this Section 9.2 . Upon request, the Company will promptly furnish the Holders and the Collateral Agent with copies of all insurance certificates, binders, and cover notes or other evidence of such insurance relating to the Collateral.
(c) No Duty of Purchaser to Verify: No provision of this Section 9.2 or any other provision of this Agreement, any other Financing Document or any Lease shall impose on the Holders or the Collateral Agent any duty or obligation to verify the existence or adequacy of the insurance coverage maintained by the Company, nor shall the Holders or the Collateral Agent be responsible for any representations or warranties made by or on behalf of the Company to any insurance company or underwriter.
SECTION 9.3. Maintenance of Properties . The Company will, and will cause its Subsidiaries, Sharyland and Qualified Lessees that are Affiliates of the Company to, and will use commercially reasonable efforts to cause the other Qualified Lessees to, (a) maintain, preserve and protect in all material respects all of its respective material properties (including any such properties comprising any material portion of the System) and equipment necessary in the operation of its respective business (taken as a whole) in good, working order and condition, ordinary wear and tear excepted; and (b) make all necessary repairs thereto and renewals and replacements thereof.
 
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(Amended and Restated Note Purchase Agreement)

SECTION 9.4. Payment of Taxes and Claims . The Company will, and will cause each of its Subsidiaries to, file all tax returns required to be filed in any jurisdiction and to pay and discharge all taxes shown to be due and payable on such returns and all other taxes, assessments, governmental charges, or levies imposed on them or any of their properties, assets, income or franchises, to the extent the same have become due and payable and before they have become delinquent and all claims for which sums have become due and payable that have or might become a Lien on properties or assets of the Company or any Subsidiary, provided that none of the Company or any Subsidiary need pay any such tax, assessment, charge, levy or claim if (i) the amount, applicability or validity thereof is contested by such Person on a timely basis in good faith and in appropriate proceedings, and such Person has established adequate reserves therefor in accordance with GAAP on its books or (ii) the nonpayment of all such taxes, assessments, charges, levies and claims in the aggregate could not reasonably be expected to have a Material Adverse Effect.
SECTION 9.5. Existence, Etc. . Except as permitted under Section 10.2 , the Company will, and will cause each of its Subsidiaries, at all times preserve and keep in full force and effect its respective limited liability company, corporate or limited partnership existence and all rights and franchises of the Company unless (other than with respect to the Company’s existence), in the good faith judgment of the Company, the termination of or failure to preserve and keep in full force and effect such limited liability company, corporate or limited partnership existence, right or franchise could not, individually or in the aggregate, have a Material Adverse Effect.
SECTION 9.6. Books and Records; Inspection Rights . The Company will, and will cause each of its Subsidiaries and Sharyland to, and will use commercially reasonable efforts to cause other Qualified Lessees to, maintain proper books of record and account in conformity with GAAP and all applicable requirements of any Governmental Authority having legal or regulatory jurisdiction over such Person. The Company will permit representatives and independent contractors of the Holders of the Notes to visit and inspect any of its properties, to examine its corporate, financial and operating records, and make copies thereof or abstracts therefrom, and to discuss its affairs, finances and accounts with its directors, officers, and independent public accountants, all at the expense of the Company and at such reasonable times during normal business hours no more than once per calendar year, upon reasonable advance notice to the Company; provided , however, that when an Event of Default has occurred and is continuing, any Holder of the Notes (or any of its respective representatives or independent contractors) may do any of the foregoing at the expense of the Company at any time during normal business hours and as often as reasonably desired.
SECTION 9.7. Collateral; Further Assurances
(a) The Company shall take all actions necessary to insure that the Collateral Agent, on behalf of the Secured Parties (or in the case of Real Property Collateral, the Trustee named in the Deeds of Trust, for the benefit of the Collateral Agent and the other Secured Parties), has and continues to have in all relevant jurisdictions duly and validly created, attached and enforceable Liens on the Collateral, including perfected first-priority Liens on Collateral constituting UCC Collateral or Real Property Collateral, in each case, to the extent required under the Security Documents (including, in accordance with clauses (c) and (d) of this Section 9.7 , after-acquired Collateral), subject to no Liens other than Permitted Liens. The Company shall cause the Obligations to constitute direct
 
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senior secured obligations of the Company and to be senior in right of payment and to rank senior in right of security (other than Permitted Liens) with respect to Collateral granted in the Security Documents to all other Indebtedness of the Company (other than Permitted Secured Indebtedness, with which it shall be pari passu in accordance with the terms of the Collateral Agency Agreement).
(b) Upon completion of each New Project of a Project Finance Subsidiary, the Company may cause any such Project Finance Subsidiary to Transfer the New Project to the Company and upon such Transfer, the Company shall take all actions necessary to insure that (w) the New Project becomes a part of the Collateral to the extent required under the Security Documents and Section 9.7(c), subject to the first priority Lien of the Security Documents (subject to no Liens other than Permitted Liens and rights of holders of Permitted Secured Indebtedness in accordance with the Collateral Agency Agreement), (x) no Default or Event of Default occurs as a result of such Transfer, (y) the Indebtedness of the Project Finance Subsidiary is either repaid in full at the time of the Transfer or becomes Permitted Secured Indebtedness in accordance with the Collateral Agency Agreement, and (z) the Project Finance Subsidiary is liquidated or merged with and into the Company.
(c) If, after the Third Amendment Date, the Company acquires any Real Property Collateral, the Company shall forthwith (and in any event, within five Business Days of such acquisition or such longer period of time as reasonably agreed by the Required Holders) deliver to the Collateral Agent a fully executed mortgage or deed of trust over the Company’s interests in such Real Property Collateral, in form and substance satisfactory to the Required Holders and the Collateral Agent, together with such surveys, environmental reports and other documents and certificates with respect to such real estate as may be reasonably required by the Required Holders. The Company further agrees to take all other actions necessary to create in favor of the Trustee named therein for the benefit of the Collateral Agent and the other Secured Parties a valid and enforceable first priority Lien on the Company’s interests in such Real Property Collateral, free and clear of all Liens except for Permitted Liens and rights of holders of Permitted Secured Indebtedness in compliance with the Collateral Agency Agreement. The Company shall not create in favor of any Person a Lien on the Company’s interests in real property acquired or leased after the Third Amendment Date other than Permitted Liens (but excluding Permitted Liens that constitute Permitted Secured Indebtedness other than the Notes).
(d) If, after the Third Amendment Date, the Company acquires or creates any new Subsidiary (other than any Subsidiary of the Company that is not organized under the laws of the United States, any state thereof or the District of Columbia, any Project Finance Subsidiary and any other Subsidiary that is prohibited from providing a Guaranty of the Obligations by any Requirement of Law), the Company shall or cause such Subsidiary forthwith (and in any event, within 30 days of such creation or acquisition (or such longer time as the Required Holders may agree):
(i) execute and deliver to the Collateral Agent a Subsidiary Guaranty;
(ii) to deliver to the Collateral Agent a certificate of such Subsidiary, substantially consistent with those delivered on the Closing Date pursuant to Section 4.03(b) , with appropriate insertions and attachments;
 
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(iii) to take such actions reasonably necessary or advisable to grant to the Collateral Agent for the benefit of the Secured Parties (or, in the case of Real Property Collateral, the Trustee named in the Deeds of Trust, for the benefit of the Collateral Agent and the other Secured Parties) a perfected and enforceable first-priority Lien in the Collateral described in the Security Documents with respect to such new Subsidiary, subject to no Liens other than Permitted Liens and rights of holders of Permitted Secured Indebtedness in compliance with the Collateral Agency Agreement, and including the filing of UCC financing statements in such jurisdictions as may be required by such Subsidiary Guaranty or by law or as may be reasonably requested by the Collateral Agent;
(iv) to deliver to the Collateral Agent the stock certificates (if any) representing equity interests issued by such Subsidiary, together with undated stock (or other transfer) powers, in blank, executed and delivered by a duly authorized officer of the Company; and
(v) if reasonably requested by the Collateral Agent, to deliver to the Collateral Agent legal opinions relating to the matters described above, which opinions shall be in form and substance reasonably satisfactory to the Collateral Agent.
SECTION 9.8. Material Project Documents.
(a) The Company shall at all times (i) perform and observe all of the covenants under the Material Project Documents to which it is a party and take reasonable actions to enforce all of its rights thereunder, other than to the extent the same could not reasonably be expected to have a Material Adverse Effect, (ii) subject to the provisions of clause (b) of this Section 9.8, maintain the System Leases (other than Leases constituting System Leases only pursuant to clause (5) of the definition thereof) in full force and effect, and (iii) maintain the Leases (other than the System Leases referred to in the foregoing clause (ii) of this Section 9.8(a)) to which it or any of its Subsidiaries is a party in full force and effect, except to the extent the same could not reasonably be expected to have a Material Adverse Effect.
(b) If the term of a Lease with the Company or one of its Subsidiaries expires and the Qualified Lessee under such Lease has either ceased operating the related assets or has ceased paying rent as required under the applicable Lease, the Company shall, or shall cause a Subsidiary, as applicable, to enter into a supplement or a new Lease with respect to the related leasehold assets with a Qualified Lessee that provides for rent that, when combined with all other expected revenue, will, in the reasonable judgment of the Company, as of the commencement date of such supplement or new Lease, generate sufficient revenue to satisfy the requirements of Section 9.9 and will not otherwise result in a materially worse position for the Company as compared to the terms of the applicable expired Lease. Each such new Lease shall have a term of at least five years. Notwithstanding the foregoing, if (i) such expired Lease relates to transmission and/or distribution assets that are not generating significant revenue, (ii) the failure to renew such Lease would not constitute a Material Adverse Effect and (iii) the Company reasonably believes it will generate sufficient revenue and hold sufficient assets (without giving effect to the leasehold assets with respect to such Lease) to satisfy the requirements of Section 9.9 , then this Section 9.8(b) will not require a supplement or new lease with respect to such leasehold assets.
 
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SECTION 9.9. Financial Ratios
(a) The Company shall at all times maintain, on a consolidated basis, a Total Debt to Capitalization Ratio of not more than 0.65 to 1.00.
(b) The Company shall maintain, for each period of four consecutive fiscal quarters, a Debt Service Coverage Ratio of at least 1.40 to 1.00; provided that for purposes of this Section 9.9(b) , the Debt Service Coverage Ratio shall be deemed to be 1.40 to 1.00 for the three calendar quarters ending December 31, 2009, March 31, 2010 and June 30, 2010.
ARTICLE X
Negative Covenants.
The Company covenants that so long as any of the Notes are outstanding:
SECTION 10.1. Transactions with Affiliates . The Company will not and will not permit any Subsidiary to enter into directly or indirectly any transaction or group of related transactions (including without limitation the purchase, lease, sale or exchange of properties of any kind or the rendering of any service) with any Affiliate other than (i) transactions with Project Finance Subsidiaries, as permitted by Section 9.7(b)(ii) and other transactions between or among the Company and one or more Subsidiaries, or any subset thereof, to the extent permitted under Sections 10.2 , 10.6 , 10.7 , 10.10 and 10.14 , (ii) Leases with Qualified Lessees and transactions relating thereto, (iii) any Qualified Lessee Affiliate Loan and any Indebtedness permitted under Section 10.6(d)(ii) , (iv) payment of customary fees and reasonable out of pocket costs to, and indemnities for the benefit of, directors, officers and employees of the Company and its Subsidiaries in the ordinary course of business, (v) Investments permitted pursuant to Section 10.7 , (vi) transactions entered into in connection with the Cross Valley Project on or prior to the Cross Valley Project Transfer and the Golden Spread Project on or prior to the Golden Spread Project Transfer, (vii) ROFO Transfers, and (viii) upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would be obtained in a comparable arms-length transaction with a Person not an Affiliate; provided that any transaction will be deemed to meet the requirements of this clause (viii) if, (x) prior to a Qualifying IPO, such transaction is on terms approved by the holders of a majority of the Capital Stock of InfraREIT held by Persons who do not have a separate material interest in such transaction other than by virtue of their ownership of such Capital Stock, or by a majority of the directors nominated by such Persons, and (y) upon the completion of a Qualifying IPO and thereafter, such transaction is on terms approved by a majority of the board of directors (or comparable governing body) of InfraREIT or an Affiliate thereof who are “independent” (as such term is defined pursuant to the rules of the primary exchange on which the Capital Stock is listed for trading), or a majority of the “independent” members of a committee of any such board of directors (or comparable governing body).
SECTION 10.2. Merger, Consolidation, Etc. . The Company will not nor will it cause or permit any of its Subsidiaries to consolidate with or merge with any other Person or Transfer all or substantially all of its assets in a single transaction or series of transactions to any Person, except (i) pursuant to the System Leases or any other Lease, (ii) as permitted pursuant to
 
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Section 9.7(b) , (iii) that so long as both before and after giving effect to such merger or consolidation or Transfer of all or substantially all of its assets to another Person no Default or Event of Default exists, the Company or any Subsidiary may merge or consolidate with another Person, and the Company or any Subsidiary may Transfer all or substantially all of its assets to another Person, so long as, after giving effect to such merger or consolidation, or such Transfer of all or substantially all of its assets, (A) with respect to any merger or consolidation to which the Company is a party, the Company shall be the surviving entity, (B) with respect to any merger or consolidation to which a Subsidiary is a party but the Company is not, a Subsidiary (other than a Project Finance Subsidiary) shall be the surviving entity and (C) with respect to any Transfer of all or substantially all of its assets by the Company or a Subsidiary, the Company or another Subsidiary (other than a Project Finance Subsidiary) shall be the transferee or lessee of such assets (except to the extent permitted by clauses (i) and (ii) of this Section 10.2 , or (iv) the FERC Merger.
SECTION 10.3. Line of Business . The Company will not and will not permit any Subsidiary to engage in any business if, as a result, the general nature of the business in which the Company and its Subsidiaries taken as a whole, would then be engaged would be substantially changed from the transmission and distribution of electric power and the provision of ancillary services.
SECTION 10.4. Terrorism Sanctions Regulations . The Company will not and will not permit any Controlled Entity (a) to become (including by virtue of being owned or controlled by a Blocked Person), own or control a Blocked Person or any Person that is the target of sanctions imposed by the United Nations or by the European Union, or (b) directly or indirectly to have any investment in or engage in any dealing or transaction (including, without limitation, any investment, dealing or transaction involving the proceeds of the Notes) with any Person if such investment, dealing or transaction (i) would cause any holder to be in violation of any applicable United States (federal or state) anti-terrorism law or regulation applicable to such holder, or (ii) is prohibited by or subject to sanctions under any U.S. Economic Sanctions, or (c) to engage, nor shall any Affiliate of either engage, in any activity that could subject such Person or any holder to sanctions under CISADA or any similar law or regulation with respect to Iran or any other country that is subject to U.S. Economic Sanctions.
SECTION 10.5. Liens . The Company will not, nor will it cause or permit any Subsidiary to, directly or indirectly create, incur, assume or permit to exist (upon the happening of a contingency or otherwise) any Lien on or with respect to the Collateral or any other property of the Company or such Subsidiary, whether now owned or held or hereafter acquired, or any income or profits therefrom, or assign or otherwise convey any right to receive income or profits, or on any other asset now owned or hereafter acquired by the Company or such Subsidiary, except (each, a “ Permitted Lien ”):
(a) solely in the case of the Note Parties, Liens created or permitted by the Financing Documents on the assets of the Note Parties; and
(b) (i) solely in the case of a Project Finance Subsidiary, Liens on assets owned by that Project Finance Subsidiary and (ii) Liens on the Capital Stock in that Project Finance Subsidiary, in each case to secure its Non-Recourse Debt;
 
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(c) Liens created or permitted pursuant to the terms of the Security Documents, including Cash Collateral (as defined in the Collateral Agency Agreement);
(d) Liens for Taxes which are not yet due and payable or the payment of which is not at the time required by Section 9.4 ;
(e) any attachment or judgment Lien, unless such attachment or judgment Lien constitutes an Event of Default under Section 11(l) hereof;
(f) Liens of a lessor of equipment to the Company or any Subsidiary on such lessor’s leased equipment (but excluding equipment leased pursuant to a Capital Lease), including any of the foregoing which is evidenced by a protective UCC filing;
(g) Mechanics’, warehousemen’s, carriers’, workers’, repairers’, landlords’, and other similar liens arising or incurred in the ordinary course of business and (i) which do not in the aggregate materially detract from the value of property or assets subject to such Liens or materially impair the continued use thereof in the operation of the business or (ii) which are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property or asset subject to such Liens, or other Liens incurred or deposits made in the ordinary course of business in connection with workers’ compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, trade contracts, leases, government contracts, performance and return-of-money bonds and other similar obligations incurred in the ordinary course of business (exclusive of obligations in respect of the payment for borrowed money);
(h) zoning, entitlement, restriction, and other land use and environmental regulations by Governmental Authorities and encroachments, easements, rights of way, covenants, restrictions or agreements which do not materially interfere with the continued use of any asset as currently used in the conduct of the business;
(i) any encumbrances set forth in any franchise or governing ordinance under which any portion of the business is conducted which could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect;
(j) all rights of condemnation, eminent domain, or other similar right of any Person;
(k) any interest of title of a lessor under leases; and
(l) Liens securing Permitted Secured Indebtedness on a pari passu basis with the Obligations in accordance with the terms of the Collateral Agency Agreement.
SECTION 10.6. Indebtedness . The Company will not, and will not cause or permit any Subsidiary or Sharyland to incur any Indebtedness, and will use commercially reasonable efforts not to permit any Qualified Lessee or Subsidiaries of Specified Qualified Lessees to incur Indebtedness for borrowed money, in each case except the following Indebtedness, which may be incurred subject to the requirements of the last paragraph of this section:
(a) Indebtedness evidenced by the Financing Documents;
 
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(b) Indebtedness of the Company (i) that is not related to, and does not support, Non-Recourse Debt of a Project Finance Subsidiary and (ii) if incurred, would not result in a breach of Section 9.9 ; provided that if the Indebtedness is proposed to be secured by any of the Collateral, then at least five Business Days (or such shorter period reasonably agreed by the Required Holders) prior to the incurrence of such Indebtedness, the Company shall (x) notify the Holders of its intent to incur such Indebtedness, which notice shall set forth in reasonable detail (A) the amount and proposed economic terms of such Indebtedness, (B) by type of lender or purchaser and (C) the proposed collateral for such Indebtedness (which proposed collateral may include any or all of the Collateral) and (y) deliver to the Collateral Agent and the other Secured Parties an executed joinder agreement substantially in the form of Exhibit A to the Collateral Agency Agreement pursuant to which all the proposed holders of such Indebtedness have become party to the Collateral Agency Agreement;
(c) (i) Non-Recourse Debt incurred by a Project Finance Subsidiary of the Company (including Non-Recourse Debt incurred by such Project Finance Subsidiary prior to being acquired by the Company or a Subsidiary) to fund a New Project and (ii) any Indebtedness in the form of a pledge of Capital Stock in a Project Finance Subsidiary as security for Non-Recourse Debt of such Project Finance Subsidiary;
(d) Indebtedness of any such Qualified Lessee (i) in an aggregate principal amount for such Qualified Lessee of up to the greater of (A) $5,000,000 and (B) an amount equal to 1% of the sum of, without duplication, (x) the total amount of the Consolidated Net Plant of such Qualified Lessee, plus (y) the total amount of the Consolidated Net Plant of any guarantor(s) of such Qualified Lessee’s obligations under the applicable Leases, plus (z) the total amount of Leased Consolidated Net Plant, in each case on a senior secured basis and (ii) in an aggregate principal amount for such Qualified Lessee of up to the greater of (A) $10,000,000 and (B) an amount equal to 1.5% of the sum of, without duplication, (x) the total amount of the Consolidated Net Plant of such Qualified Lessee, plus (y) the total amount of the Consolidated Net Plant of any guarantor(s) of such Qualified Lessee’s obligations under the applicable Leases, plus (z) the total amount of Leased Consolidated Net Plant, in each case on an unsecured subordinated basis on terms substantially similar to the terms set forth on Exhibit 2, to the extent allowed under the Leases to which such Qualified Lessee is a party as a lessee or tenant thereunder; provided , that for purposes of this clause (d), all Consolidated Qualified Lessees will be treated as one Qualified Lessee;
(e) Indebtedness of the Company to any of its Subsidiaries, which by its terms is expressly subordinated to the Obligations, and Indebtedness of any Subsidiary to the Company or any other Subsidiary of the Company not to exceed $5,000,000 at any one time outstanding and in each case to have a maturity date of less than one year;
(f) any Qualified Lessee Affiliate Loan and other Indebtedness of Qualified Lessees otherwise acceptable to the Required Holders; and
(g) Indebtedness of Subsidiaries of Specified Qualified Lessees incurred in an aggregate principal amount for each such Specified Qualified Lessee of up to the product of (x)
 
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such Specified Qualified Lessee’s Consolidated Net Plant (derived from its most recently prepared consolidated balance sheet, prepared in accordance with GAAP but adjusted to reverse the effects of failed sale-leaseback accounting in a manner reasonably determined by such Specified Qualified Lessee in good faith) multiplied by (y) the lesser of (A) the sum of such Specified Qualified Lessee’s then-current PUCT-regulated debt-to-equity ratio (expressed as a percentage) and 5% or (B) 65%; provided that such Indebtedness must be Non-Recourse Debt to such Specified Qualified Lessee.
Indebtedness may be incurred under this Section 10.6 only if no Default or Event of Default is, or as a result of such incurrence would be, existing.
SECTION 10.7. Loans, Advances, Investments and Contingent Liabilities . The Company will not make or permit to remain outstanding any loan or advance to, or extend credit other than credit extended in the ordinary course of business to any Person, or own, purchase or acquire any stock, obligations or securities of, or any other interest in, or make any capital contribution to, any Person (collectively, “ Investments ”), or commit to do any of the foregoing, except (a) Permitted Investments, (b) ownership, purchase and acquisition of equity interests in and capital contributions to Project Finance Subsidiaries of the Company and Wholly-Owned Subsidiaries, (c) loans, advances and extensions of credit to Subsidiary Guarantors and other Wholly-Owned Subsidiaries (other than Project Finance Subsidiaries) not required to provide a Guaranty pursuant to Section 9.7(d), (d) any Qualified Lessee Affiliate Loan or (e) Investments made in connection with the Cross Valley Project and the Golden Spread Project prior to the Cross Valley Project Transfer and the Golden Spread Project Transfer and (f) the ROFO Transfers.
SECTION 10.8. No Subsidiaries . The Company shall have no subsidiaries other than Project Finance Subsidiaries and Wholly-Owned Subsidiaries.
SECTION 10.9. Restricted Payments . The Company will not, directly or indirectly, make or declare any Distribution unless there does not exist and, after giving effect to the proposed Distribution, there will not exist, a Default or an Event of Default. The Company shall deliver to the Holders and the Collateral Agent before a Distribution is made a certificate of a Responsible Officer of the Company stating that the foregoing condition has been satisfied and, if requested, providing supporting data and calculations.
SECTION 10.10. Sale of Assets, Etc. . The Company will not, nor will it cause or permit any Subsidiary, to Transfer, or agree or otherwise commit to Transfer, any of its assets with a fair market value of greater than $15,000,000, in the aggregate during the term of this Agreement (“ Asset Sale ”) except :
(a) the Company or a Subsidiary shall lease the System or other transmission and distribution assets and related assets pursuant to a Lease to which the Company or a Subsidiary thereof is a party;
(b) (i) each Project Finance Subsidiary of the Company may Transfer its assets to the Company or its Wholly-Owned Subsidiaries in accordance with Section 9.7(b) ; and (ii) the Company may Transfer, or suffer the Transfer of, its ownership interests in a Project
 
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Finance Subsidiary and such Project Finance Subsidiary may Transfer, or suffer the Transfer of its assets, in each case in connection with and pursuant to the exercise of remedies under the documentation governing Non-Recourse Debt incurred by such Project Finance Subsidiary;
(c) Asset Sales (i) among the Company and the Subsidiary Guarantors (or a subset thereof), (ii) among Subsidiaries that are not Subsidiary Guarantors and (iii) from Subsidiaries to the Company or a Subsidiary Guarantor;
(d) in connection with an acquisition that is not prohibited under this Agreement, (i) Asset Sales of operating assets and related assets to a Qualified Lessee and (ii) Asset Sales of property acquired after the Third Amendment Date that are not electric transmission or distribution assets, in each case (x) which are, in the aggregate, not material in relation to the assets acquired and (y) upon fair and reasonable terms no less favorable to such Person than would be obtained in a comparable arms-length transaction with a Person not an Affiliate;
(e) Permitted Liens;
(f) Investments permitted by Section 10.7 , transactions permitted by Section 10.2 and Distributions permitted by Section 10.9 ;
(g) Asset Sales made in connection with the Cross Valley Project Transfer and the Golden Spread Project Transfer;
(h) ROFO Transfers; and
(i) Asset Sales of assets that are obsolete or no longer used or useful in such Person’s business.
SECTION 10.11. Sale or Discount of Receivables . The Company will not nor will it cause or permit any Subsidiary to sell with recourse, or discount or otherwise sell for less than the face value thereof, any of its notes or accounts receivable.
SECTION 10.12. Amendments to Organizational Documents . The Company will not nor will it cause or permit any of its Subsidiaries to, and shall use commercially reasonable efforts not to permit, any Qualified Lessee or any of its Subsidiaries to, amend, supplement, terminate, replace or waive any provision of its operating agreement or other organization documents after the Third Amendment Date. Notwithstanding this Section 10.2 , the Company, its Subsidiaries, any Qualified Lessee and its Subsidiaries may, without the consent of the Holders, amend their respective operating agreement or similar organizational documents as may be required to facilitate or implement any of the following:
(a) to reflect (i) the contribution of any new capital or additional capital by new or existing members or partners of such Person, (ii) the addition of new members or partners of such Person, or (iii) any adjustment, termination, reduction or redemption of equity interests of its members, partners or other holders of equity interests or the issuance of additional equity interests in such Person; provided, that after giving effect to any such changes, no Event of Default would exist under Sections 10.8 , or 12(n) ;
 
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(b) to reflect a change that does not adversely affect any Holders in any material respect, or to cure any ambiguity, or correct or supplement any provision, not inconsistent with law or with the provisions of this Agreement;
(c) to satisfy any requirements, conditions, or guidelines contained in any order, directive, opinion, ruling or regulation of a federal or state agency or contained in federal or state law;
(d) to take actions to avoid any material adverse consequences to such Person as a result of any change in law or interpretation of law applicable to Persons subject to regulation by the PUCT and FERC; and
(e) to effect the dissolution, liquidation, merger or consolidation of any Person that is not otherwise prohibited under this Agreement.
The Company will provide prompt notice to the Holders upon taking any such action under the foregoing sentence of this Section 10.12 .
SECTION 10.13. Sale and Lease-Back . Except for the System Leases, the CREZ Lease and any other Lease, the Company will not, nor will it cause or permit any Subsidiary to, enter into any arrangement providing for the leasing by the Company or any Subsidiary of real or personal property which has been or is to be Transferred by the Company or such Subsidiary to a lender or investor or to any Person to whom funds have been or are to be advanced by such lender or investor on the security of such property or rental obligations of the Company or any Subsidiary.
SECTION 10.14. ERISA Compliance
(a) Relationship of Vested Benefits to Plan Assets . The Company will not as of the last day of any calendar year permit any Plan to be “at risk” within the meaning of Section 303 of ERISA to the extent such action could reasonably be expected to result in a Material Adverse Effect. The Company and its ERISA Affiliates will not incur withdrawal liabilities (and will not become subject to contingent withdrawal liabilities) under section 4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate could reasonably be expected to result in a Material Adverse Effect.
(b) Valuations. For the purposes of clause (a) above, all assumptions and methods used to determine the actuarial valuation of vested and unvested employee benefits under any Plan at any time maintained by the Company and the present value of assets of any such Plan shall be reasonably consistent with those determinations made for purposes of Section 5.13 .
(c) Prohibited Actions . The Company will not, nor, as applicable, will any Plan at any time maintained by the Company:
(i) engage in any action that could reasonably be expected to cause the execution and delivery of this Agreement and the issuance and sale of the Notes to result in a non-exempt “prohibited transaction” (as such term is defined in Section 406 of ERISA and Section 4975(c) of the Code);
 
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(ii) fail to meet the minimum funding standards of Section 302 of ERISA or Sections 412 and 430 of the Code, or seek or obtain a waiver thereof or fail to make any required contribution to a Multiemployer Plan; or
(iii) terminate any such Plan in a manner which could result in the imposition of a Lien on the Property of the Company pursuant to Section 4068 of ERISA that could reasonably be expected to result in a Material Adverse Effect.
SECTION 10.15. No Margin Stock . Anything herein contained to the contrary notwithstanding, the Company will not, nor will it permit any Subsidiary to, make or authorize any investment in, or otherwise purchase or carry, any margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System of the United States) that violates the provisions, or for any purpose that violates the provisions, of Regulation U of the Board of Governors of the Federal Reserve System of the United States.
SECTION 10.16. Project Documents.
(a) The Company will not, and will not permit any Subsidiary to, amend, modify, supplement, replace, renew, extend, terminate or waive any provision of any Lease to which the Company or such Subsidiary is party, or consent to any amendment, modification, supplement, replacement, renewal, extension, termination or waiver of any such Lease except (i) the consummation of the FERC Lease Assumptions in connection with the FERC Merger, (ii) to the extent the same could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect and (iii) if the Company reasonably believes, after giving effect thereto, the Company will generate sufficient revenue and hold sufficient assets to satisfy the requirements of Section 9.9 .
(b) The Company shall use commercially reasonable efforts to ensure that no Specified Qualified Lessee enters into any lease of transmission or distribution facilities other than (i) the Leases (including maintaining or entering into new Leases or replacement Leases and amending or modifying Leases to the extent not prohibited under this Agreement) and (ii) any other leases consented to by Required Holders.
SECTION 10.17. Regulation.
(a) The Company shall not be or become, and shall use commercially reasonable efforts not to permit any Specified Qualified Lessee to be or become, subject to FERC jurisdiction as a public utility under the FPA; provided , however , that the Company shall not be in default of the forgoing negative covenant if the Company or any Specified Qualified Lessee becomes subject to FERC jurisdiction under the FPA solely as a result of a change to the FPA or in FERC’s interpretation thereof or regulations thereunder, if the Company or such Specified Qualified Lessee takes all necessary actions to comply with applicable FERC requirements and the operation of the System is uninterrupted; and
 
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(b) The Company shall not, and shall use commercially reasonable efforts to cause any Specified Qualified Lessee not to violate in any material respect any regulation or order of the Public Utility Commission of Texas applicable to it.
(c) None of the Company nor any Specified Qualified Lessee shall own, operate or control any electrical generating, transmitting or distribution facility, nor effect or control any sale of electricity, outside of the ERCOT balancing area authority except (i) as permitted by FERC, as set forth in its declaratory order issued in Docket no. EL07-93-000 or (ii) interconnected transmission or distribution assets or systems located substantially in the State of Texas or deriving a majority of their revenue from customers within the State of Texas.
SECTION 10.18. Swaps . The Company will not, nor will it permit any Subsidiary to, enter into any Swap Contracts, except that the Company and its Project Finance Subsidiaries may enter into Swap Contracts solely to hedge interest rate risk and not for speculative purposes.
SECTION 10.19. Additional Financial Covenants . If the Company shall at any time enter into one or more agreements pursuant to which Indebtedness in an aggregate principal amount greater than $25,000,000 shall be outstanding and such agreement contains one or more financial covenants which are more restrictive on the Company and its Subsidiaries than the financial covenants contained in Section 9.9 of this Agreement, then such more restrictive financial covenants and any related definitions (the “ Additional Financial Covenants ”) shall automatically be deemed to be incorporated into Section 9.9 of this Agreement by reference from the time such other agreement becomes binding upon the Company until such time as such other Indebtedness is repaid in full and all commitments related thereto are terminated; provided , that if at the time of any such repayment or the termination of any such commitment a Default or Event of Default shall exist under this Agreement, then such Additional Financial Covenants shall continue in full force and effect under this Agreement so long as such Default or Event of Default continues to exist. So long as such Additional Financial Covenants shall be in effect, no modification or waiver of such Additional Financial Covenants shall be effective unless the Required Holders shall have consented thereto pursuant to Section 17.1 hereof. Promptly but in no event more than 5 Business Days following the execution of any agreement providing for Additional Financial Covenants, the Company shall furnish each Holder with a copy of such agreement. Upon written request of the Required Holders, the Company will enter into an amendment to this Agreement pursuant to which this Agreement will be formally amended to incorporate the Additional Financial Covenants on the terms set forth herein.
SECTION 10.20. Burdensome Agreements . The Company will not enter into or permit any Subsidiary Guarantor or Subsidiary of a Subsidiary Guarantor to enter into any Contractual Obligation that limits the right (a) of such Subsidiary to make Distributions to the Company or any Subsidiary Guarantor or to otherwise transfer property to the Company or any Subsidiary Guarantor, (b) of any Subsidiary of the Company to guarantee the Indebtedness of the Company or (c) of the Company or any Subsidiary Guarantor to create, incur, assume or suffer to exist Liens on property of such Person, in each case except for (i) restrictions arising under any Requirement of Law, (ii) customary restrictions and conditions contained in any agreement relating to the sale or other
 
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disposition of assets not prohibited under this Agreement pending the consummation of such sale or other disposition, (iii) this Agreement, the other Note Documents, Permitted Liens (other than Liens permitted under Section 10.5(k) ), any document or instrument evidencing or granting any such Permitted Liens and the agreements listed on Schedule 10.20 ; (iv) any Contractual Obligation relating to Indebtedness permitted pursuant to Section 10.6 (including Liens permitted pursuant to Section 10.5 ) to the extent, in the good faith judgment of the Company, such limitations and requirements described in clauses (a), (b) or (c) above (x) are on customary market terms for Indebtedness of such type at the time entered into, so long as the Company has determined in good faith that such restrictions would not reasonably be expected to impair in any material respect the ability of the Note Parties to meet their ongoing payment obligations under the Note Documents, or (y) are not materially more restrictive, taken as a whole with respect to the Company and the Subsidiaries than the restrictions in the Note Documents, (v) with respect to clause (c), any negative pledge incurred or provided in favor of any holder of Indebtedness permitted under Section 10.6(c) solely to the extent any such negative pledge relates to the property financed by or the subject of such Indebtedness, (vi) non-assignment provisions in franchise agreements, licenses, easements, leases, indemnities or other agreements and (vii) restrictions on any property or any Person contained in any asset or stock sale agreement or other similar agreements entered into with respect to such property or Person to the extent (x) the sale or other disposition of such property or Person is not prohibited by this Agreement and (y) such restrictions relate only to the property or Person to be sold or otherwise disposed of.
ARTICLE XI
Events of Default.
An “ Event of Default ” shall exist if any of the following conditions or events shall occur and be continuing:
(a) the Company defaults in the payment of any principal or Yield-Maintenance Amount, if any, on any Note when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise; or
(b) the Company defaults in the payment of any interest on any Note, fees or other amounts for more than five days after the same becomes due and payable; or
(c) the Company defaults in the performance of or compliance with any term contained in Section 7.1(d) , Section 9.9 or Section 10 ; or
(d) the Company defaults in the performance of or compliance with any term contained herein (other than those referred to in Sections 11(a) , (b)  and (c) ) or in any other Note Document (other than those referred to in another paragraph of this Section 11 ) and such default is not remedied within 30 days after the earlier of (i) a Responsible Officer obtaining actual knowledge of such default and (ii) the Company receiving written notice of such default from the Collateral Agent or Holder of a Note (any such written notice to be identified as a “notice of default” and to refer specifically to this Section 11(d) ) ; or
(e) any representation or warranty made in writing by or on behalf of the Company or by any officer of the Company in this Agreement or any other Note Document or in any writing furnished in connection with the transactions contemplated hereby proves to have been false or incorrect in any material respect on the date as of which made; or
 
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(f) with respect to any Lease to which the Company or a Subsidiary thereof is a party (other than Leases pursuant to which the Company recognized revenue, in the aggregate, that constituted 10% or less of the total consolidated revenue of the Company and its Subsidiaries (other than Project Finance Subsidiaries) as set forth on the face of the consolidated statements of operations for the four consecutive fiscal quarter period that ended on the date of the financial statements most recently delivered pursuant to Section 7.1 ), (i) any such Lease is declared to be null and void or is otherwise unenforceable, or any party thereto claims that any such agreement is unenforceable (unless, within 90 days after such declaration or claim, replaced by a Lease that complies with the provisions of Section 10.16 ), (ii) one or more payment defaults in an amount in excess of $10,000,000 in the aggregate occurs across all such Leases, after giving effect to any cure periods specified therefor or (iii) any default or event of default (other than those referred to in clause (i) or (ii) of this Section 11(f) ) occurs under any such Lease that could reasonably be expected to have a Material Adverse Effect and such failure continues for more than 90 days; or
(g) (i) the Certificate of Conveniences and Necessity (#30192, #30026, #30114 and #30191) issued or transferred by the Public Utility Commission of Texas to Sharyland and, prior to the FERC Merger, the FERC Operator, is terminated without being timely replaced, revoked or otherwise is not in effect; or (ii) except as could not reasonably be expected to result in a Material Adverse Effect, any other Required Permit is terminated without being timely replaced (if the terminated Permit continues to be a Required Permit), revoked or otherwise is not in effect; provided , however, that the termination without immediate renewal of any franchise agreement pursuant to which the Qualified Lessee operating the applicable portion of the System is authorized to operate the System and collect fees for services shall not constitute an Event of Default if the parties to the franchise agreement continue to perform in accordance with the terms of such agreement notwithstanding the termination; or
(h) any Security Document or any other security document entered into pursuant to Section 9.7 ceases to give the Collateral Agent perfected first priority Liens (subject to Permitted Liens) purported to be created thereby in a material portion of the Collateral, taken as a whole, for any reason other than as expressly permitted hereunder or thereunder (including by amendment, waiver and/or consent granted in accordance with the terms hereunder or thereunder) or satisfaction in full of the Obligations; or any Note Document, at any time after its execution and delivery and for any reason other than as expressly permitted hereunder or thereunder (including by amendment, waiver and/or consent granted in accordance with the terms hereunder or thereunder) or satisfaction in full of all the Obligations, ceases to be in full force and effect; or any Note Party contests in any manner the validity or enforceability of any Note Document; or any Note Party denies that it has any further liability or obligation under any Note Document or purports to revoke, terminate or rescind any Note Document, other than, for each of the foregoing, as expressly permitted hereunder or thereunder (including by amendment, waiver and/or consent granted in accordance with the terms hereunder or thereunder) or satisfaction in full of the Obligations; or
 
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(i) without limiting clause (h), (i) the Company or any Specified Qualified Lessee is in default (as principal or as guarantor or other surety) in the payment of any principal of or premium or make-whole amount or interest on any Indebtedness that is outstanding in an aggregate principal amount of at least, in the case of the Company or Sharyland, $10,000,000 or, in the case of any other Specified Qualified Lessee, $2,000,000, in each case beyond any period of grace provided with respect thereto, or (ii) the Company or any Specified Qualified Lessee is in default in the performance of or compliance with any term of any evidence of any Indebtedness (including any mortgage, indenture or other agreement relating thereto), which Indebtedness, in the case of the Company or Sharyland, is in an aggregate outstanding principal amount of at least $10,000,000 (for each such Person individually) or, in the case of any other Specified Qualified Lessee, is an amount that could reasonably be expected to result in a Material Adverse Effect, and as a consequence of such default or condition one or more Persons are entitled to declare such Indebtedness to be due and payable before its stated maturity or before its regularly scheduled dates of payment, (iii) as a consequence of the occurrence or continuation of any event or condition (other than the passage of time or the right of the holder of Indebtedness to convert such Indebtedness into equity interests), Indebtedness of the Company or Sharyland in an aggregate outstanding principal amount of at least $10,000,000 (for each such Person individually) has become or has been declared due and payable before its stated maturity or before its regularly scheduled dates of payment, or (iv) a default or an event of default occurs under the 2010 SDTS Note Purchase Agreement or the RBC Agreement, and such failure continues for more than any cure period specified therefor and has not otherwise been waived; or
(j) the Company or Sharyland or, to the extent the same could reasonably be expected to result in a Material Adverse Effect, any other Qualified Lessee (i) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the filing against it or, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes corporate action for the purpose of any of the foregoing; or
(k) a court or Governmental Authority of competent jurisdiction enters an order appointing, without consent by the Company, any Subsidiary, Sharyland or, to the extent the same could reasonably be expected to result in a Material Adverse Effect, any other Qualified Lessee, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of any such Person or any such petition shall be filed against any such Person and such petition shall not be dismissed within 60 days; or
(l) a final judgment or judgments for the payment of money is rendered against the Company or a Qualified Lessee, in the case of the Company or Sharyland, aggregating in excess of $10,000,000 or $2,000,000, respectively, or, in the case of any other Qualified Lessee, to the extent the same could reasonably be expected to result in a Material
 
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Adverse Effect, other than, in each case, judgments payable by the Company or such Qualified Lessee, rendered in connection with the condemnations in favor thereof, and which judgments are not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay; or
(m) if (i) any Plan shall fail to satisfy the minimum funding standards of ERISA or the Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under Section 412 of the Code, (ii) a notice of intent to terminate any Plan shall have been or is reasonably expected to be filed with the PBGC or the PBGC shall have instituted proceedings under ERISA section 4042 to terminate or appoint a trustee to administer any Plan or the PBGC shall have notified the Company or any ERISA Affiliate that a Plan may become a subject of any such proceedings, (iii) any Plan shall be “at-risk” within the meaning of Section 303 of ERISA as of the last day of any calendar year, (iv) the Company or any ERISA Affiliate shall have incurred or is reasonably expected to incur any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, (v) the Company or any ERISA Affiliate withdraws from any Multiemployer Plan, or (vi) the Company establishes or amends any employee welfare benefit plan that provides post-employment welfare benefits in a manner that would increase the liability of the Company thereunder; and any such event or events described in clauses (i) through (vi) above, either individually or together with any other such event or events, could reasonably be expected to have a Material Adverse Effect; or
(n) Hunt Family Members cease to Control Sharyland, or any Person other than a Qualified Lessee shall be the lessee under any lease with respect to the System; or
(o) (i) InfraREIT Partners shall cease to own or control, directly or indirectly, 90% of the outstanding equity interest of the Company; or (ii) Hunt Family Members cease to own and control, directly or indirectly, at least 5% of the outstanding equity interests of InfraREIT Partners, unless in the case of clause (ii), (x) the general partner of InfraREIT Partners has become a publicly held company, or (y) the Company has total assets on its balance sheet valued at $1,000,000,000 or greater.
As used in Section 11(m) , the terms “ employee benefit plan ” and “ employee welfare benefit plan ” shall have the respective meanings assigned to such terms in section 3 of ERISA.
ARTICLE XII
Remedies on Default, Etc.
SECTION 12.1. Acceleration. (a) If an Event of Default with respect to the Company described in Section 11(j) or (k)  (other than an Event of Default described in clause (i) of Section 11(j) or described in clause (vi) of Section 11(j) by virtue of the fact that such clause encompasses clause (i) of Section 11(j) ) has occurred, all the Notes then outstanding shall automatically become immediately due and payable.
(b) If any other Event of Default has occurred and is continuing, any Holder or Holders of more than 51% in principal amount of the Notes at the time outstanding may at any time at its or their option, by notice or notices to the Company, declare all the Notes then outstanding to be immediately due and payable.
(c) If any Event of Default described in Section 11(a) or (b)  has occurred and is continuing, any Holder or Holders of Notes at the time outstanding affected by such Event of Default may at any time, at its or their option, by notice or notices to the Company, declare all the Notes held by it or them to be immediately due and payable.
 
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Upon any Notes becoming due and payable under this Section 12.1 , whether automatically or by declaration, such Notes will forthwith mature and the entire unpaid principal amount of such Notes, plus (x) all accrued and unpaid interest thereon (including, but not limited to, interest accrued thereon at the Default Rate) and (y) the Yield-Maintenance Amount determined in respect of such principal amount (to the full extent permitted by applicable law), shall all be immediately due and payable, in each and every case without presentment, demand, protest or further notice, all of which are hereby waived. The Company acknowledges, and the parties hereto agree, that each Holder of a Note has the right to maintain its investment in the Notes free from repayment by the Company (except as herein specifically provided for) and that the provision for payment of a Yield-Maintenance Amount by the Company in the event that the Notes are prepaid or are accelerated as a result of an Event of Default, is intended to provide compensation for the deprivation of such right under such circumstances.
SECTION 12.2. Other Remedies . If any Default or Event of Default has occurred and is continuing, and irrespective of whether any Notes have become or have been declared immediately due and payable under Section 12.1 , the Holder of any Note at the time outstanding may proceed to protect and enforce the rights of such Holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in any Note, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise.
SECTION 12.3. Rescission . At any time after any Notes have been declared due and payable pursuant to Section 12.1(b ) or (c) , the Holders of not less than 51% in principal amount of the Notes then outstanding, by written notice to the Company, may rescind and annul any such declaration and its consequences if (a) the Company has paid all overdue interest on the Notes, all principal of and Yield-Maintenance Amount, if any, on any Notes that are due and payable and are unpaid other than by reason of such declaration, and all interest on such overdue principal and Yield-Maintenance Amount, if any, and (to the extent permitted by applicable law) any overdue interest in respect of the Notes, at the Default Rate, (b) neither the Company nor any other Person shall have paid any amounts which have become due solely by reason of such declaration, (c) all Events of Default and Defaults, other than non-payment of amounts that have become due solely by reason of such declaration, have been cured or have been waived pursuant to Section 17 , and (d) no judgment or decree has been entered for the payment of any monies due pursuant hereto or to the Notes. No rescission and annulment under this Section 12.3 will extend to or affect any subsequent Event of Default or Default or impair any right consequent thereon.
SECTION 12.4. No Waivers or Election of Remedies, Expenses, Etc . No course of dealing and no delay on the part of any Holder of any Note in exercising any right, power or
 
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remedy shall operate as a waiver thereof or otherwise prejudice such Holder’s rights, powers or remedies. No right, power or remedy conferred by this Agreement or by any Note upon any Holder thereof shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. Without limiting the obligations of the Company under Section 15 , the Company will pay to the Holder of each Note on demand such further amount as shall be sufficient to cover all costs and expenses of such Holder incurred in any enforcement or collection under this Section 12 , including, without limitation, reasonable attorneys’ fees, expenses and disbursements.
ARTICLE XIII
Registration; Exchange; Substitution of Notes.
SECTION 13.1. Registration of Notes . The Company shall keep at its principal executive office a register for the registration and registration of transfers of Notes. The name and address of each Holder of one or more Notes, each transfer thereof and the name and address of each transferee of one or more Notes shall be registered in such register. Prior to due presentment for registration of transfer, the Person in whose name any Note shall be registered shall be deemed and treated as the owner and Holder thereof for all purposes hereof, and the Company shall not be affected by any notice or knowledge to the contrary. The Company shall give to any Holder of a Note that is an Institutional Investor, promptly upon request therefor, a complete and correct copy of the names and addresses of all registered Holders of Notes. In addition to and not in limitation of any representations contained herein, each Holder acknowledges and agrees that the Notes have not been registered under the Securities Act and may not be transferred except pursuant to registration or an exemption therefrom and in compliance with Section 13.2(b) hereof.
SECTION 13.2. Transfer and Exchange of Notes.
(a) Subject to compliance with Section 13.2(b) , upon surrender of any Note to the Company at the address and to the attention of the designated officer (all as specified in Section 18(iii)), for registration of transfer or exchange (and in the case of a surrender for registration of transfer accompanied by a written instrument of transfer duly executed by the registered Holder of such Note or such Holder’s attorney duly authorized in writing and accompanied by the relevant name, address and other information for notices of each transferee of such Note or part thereof), within ten Business Days thereafter, the Company shall execute and deliver, at the Company’s expense (except as provided below), one or more new Notes (as requested by the Holder thereof) in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Note. Each such new Note shall be payable to such Person as such Holder may request and shall be substantially in the form of Exhibit 1 . Each such new Note shall be dated and bear interest from the date to which interest shall have been paid on the surrendered Note or dated the date of the surrendered Note if no interest shall have been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of Notes. Notes shall not be transferred in denominations of less than $1,000,000, provided that if necessary to enable the registration of transfer by a Holder of its entire holding of Notes, one Note may be in a denomination of less than $1,000,000. Any transferee, by its acceptance of a Note registered in its name (or the name of its nominee), shall be deemed to have made the representations set forth in Section 6.1 and Section 6.2 .
 
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(b) Each Holder hereby agrees that it will not offer for sale or sell any of its Notes or disclose any Confidential Information to any prospective transferee of the Notes, other than to an Affiliate, or to another Holder without first delivering written notice to the Company (a “ Right of First Offer Notice ”) of its intent to sell such Notes and disclose such Confidential Information. Such Right of First Offer Notice shall contain a reasonably detailed description of the proposed terms of such sale, including, without limitation, the proposed purchase price (the “ Proposed Purchase Price ”) for such Notes and the names of up to ten prospective purchasers. If the Company so desires it may, within 5 Business Days of the receipt of such Right of First Offer Notice, inform such Holder in writing of its intent to purchase, or have an Affiliate or Institutional Investor designated by the Company purchase, such Notes (a “ Purchase Notice ”) from the Holder delivering such Right of First Offer Notice at the Proposed Purchase Price, provided, however , that if at such time a Default or Event of Default shall have occurred and be continuing, the Company shall not purchase, and shall not allow any Affiliate or Institutional Investor designated by the Company to purchase, the Notes of the Holder delivering such Right of First Offer Notice. The aggregate principal amount of the Notes specified in such Purchase Notice shall be purchased by the Company, or such Affiliate or Institutional Investor, for the Proposed Purchase Price, together with accrued interest on such Notes to the purchase date, on the date specified by the Company in such Purchase Notice, which shall be not more than 30 days following delivery of such Purchase Notice. If a Holder does not receive a Purchase Notice from the Company within 5 Business Days after the delivery of a Right of First Offer Notice to the Company, such Holder shall have the right to sell its Notes identified in such Right of First Offer Notice to one or more of the prospective purchasers identified in such Right of First Offer Notice for a price which is not less than the Proposed Purchase Price identified in such Right of First Offer Notice for a period of 120 days from the date of such Right of First Offer Notice. In the event that the prospective purchasers identified by a Holder in a Right of First Offer Notice shall decline to purchase the Notes within such 120 day period, then the Holder may identify up to 10 additional Institutional Investors through a new Right of First Offer Notice.
SECTION 13.3. Replacement of Notes . Upon receipt by the Company at the address and to the attention of the designated officer (all as specified in Section 18(iii) ) of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Note (which evidence shall be, in the case of an Institutional Investor, notice from such Institutional Investor of such ownership and such loss, theft, destruction or mutilation), and
(a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (provided that if the Holder of such Note is, or is a nominee for, an original Purchaser or another Holder of a Note with a minimum net worth of at least $100,000,000 or a Qualified Institutional Buyer, such Person’s own unsecured agreement of indemnity shall be deemed to be satisfactory), or
(b) in the case of mutilation, upon surrender and cancellation thereof, within ten Business Days thereafter, the Company at its own expense shall execute and deliver, in lieu thereof, a new Note, dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Note or dated the date of such lost, stolen, destroyed or mutilated Note if no interest shall have been paid thereon.
 
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ARTICLE XIV
Payments on Notes.
SECTION 14.1. Place of Payment . Subject to Section 14.2 , payments of principal, Yield-Maintenance Amount, if any, and interest becoming due and payable on the Notes shall be made in New York City, New York at the principal office of JPMorgan Chase Bank National Association in such jurisdiction. The Company may at any time, by notice to each Holder of a Note, change the place of payment of the Notes so long as such place of payment shall be either the principal office of the Company in such jurisdiction or the principal office of a bank or trust company in such jurisdiction.
SECTION 14.2. Home Office Payment . So long as any Purchaser or its nominee shall be the Holder of any Note, and notwithstanding anything contained in Section 14.1 or in such Note to the contrary, the Company will pay all sums becoming due on such Note for principal, Yield-Maintenance Amount, if any, and interest by the method and at the address specified for such purpose below such Purchaser’s name in Schedule A , or by such other method or at such other address as such Purchaser shall have from time to time specified to the Company in writing for such purpose, without the presentation or surrender of such Note or the making of any notation thereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment or prepayment in full of any Note, such Purchaser shall surrender such Note for cancellation, reasonably promptly after any such request, to the Company at its principal executive office or at the place of payment most recently designated by the Company pursuant to Section 14.1 . Prior to any sale or other disposition of any Note held by a Purchaser or its nominee, such Purchaser will, at its election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender such Note to the Company in exchange for a new Note or Notes pursuant to Section 13.2 . The Company will afford the benefits of this Section 14.2 to any Institutional Investor that is the direct or indirect transferee of any Note purchased by a Purchaser under this Agreement and that has made the same agreement relating to such Note as the Purchasers have made in this Section 14.2 .
ARTICLE XV
Expenses, Etc.
SECTION 15.1. Transaction Expenses . Whether or not the transactions contemplated hereby are consummated, the Company will pay all costs and expenses (including reasonable attorneys’ fees of one firm of special counsel and, if reasonably required by the Required Holders, local or other counsel) incurred by the Purchasers and each other Holder of a Note in connection with such transactions and in connection with any amendments, waivers or consents under or in respect of this Agreement or the Notes (whether or not such amendment, waiver or consent becomes effective), including, without limitation:
(a) the costs and expenses incurred in enforcing or defending (or determining whether or how to enforce or defend) any rights under this Agreement or the Notes or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement or the Notes, or by reason of being a Holder of any Note, but only to the extent such subpoena or legal proceeding arises out of matters related to the Company,
 
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(b) the costs and expenses, including financial advisors’ fees, incurred in connection with the insolvency or bankruptcy of the Company or in connection with any work-out or restructuring of the transactions contemplated hereby and by the Notes and
(c) the costs and expenses incurred in connection with the initial filing of this Agreement and all related documents and financial information with the SVO provided. The Company will pay, and will save each Purchaser and each other Holder of a Note harmless from, all claims in respect of any fees, costs or expenses, if any, of brokers and finders (other than those, if any, retained by a Purchaser or other Holder in connection with its purchase of the Notes).
SECTION 15.2. Survival . The obligations of the Company under this Section 15 will survive the payment or transfer of any Note, the enforcement, amendment or waiver of any provision of this Agreement or the Notes, and the termination of this Agreement.
ARTICLE XVI
Survival of Representations and Warranties; Entire Agreement.
All representations and warranties contained herein shall survive the execution and delivery of this Agreement and the Notes, the purchase or transfer by any Purchaser of any Note or portion thereof or interest therein and the payment of any Note, and may be relied upon by any subsequent Holder of a Note, regardless of any investigation made at any time by or on behalf of such Purchaser or any other Holder of a Note; provided , that no representation or warranty shall be deemed to be made as of any time other than the date of execution and delivery of this Agreement or such other document, certificate, instrument or agreement containing such representation or warranty. All statements contained in any certificate or other instrument delivered by or on behalf of the Company pursuant to this Agreement shall be deemed representations and warranties of the Company under this Agreement. Subject to the preceding sentence, this Agreement and the Notes embody the entire agreement and understanding between each Purchaser and the Company and supersede all prior agreements and understandings relating to the subject matter hereof.
ARTICLE XVII
Amendment and Waiver.
SECTION 17.1. Requirements. This Agreement and the Notes may be amended, and the observance of any term hereof or of the Notes may be waived (either retroactively or prospectively), with (and only with) the written consent of the Company and the Required Holders, except that (a) no amendment or waiver of any of the provisions of Section 1, 2, 3, 4, 5 , 6 or 21 hereof, or any defined term (as it is used therein), will be effective as to any Purchaser unless consented to by such Purchaser in writing, and (b) no such amendment or waiver may, without the written consent of the Holder of each Note at the time outstanding affected thereby, (i) subject to the provisions of Section 12 relating to acceleration or rescission, change the amount or time of any prepayment or payment of principal of, or reduce the rate or change the time of payment or method of computation of interest or of the Yield-Maintenance Amount on, the Notes, (ii) change the percentage of the principal amount of the Notes the Holders of which are required to consent to any such amendment or waiver, or (iii) amend any of Sections 8, 11(a), 11(b), 12, 17 or 20 .
 
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SECTION 17.2. Solicitation of Holders of Notes.
(a) Solicitation . The Company will provide each Holder of the Notes (irrespective of the amount of Notes then owned by it) with sufficient information, sufficiently far in advance of the date a decision is required, to enable such Holder to make an informed and considered decision with respect to any proposed amendment, waiver or consent in respect of any of the provisions hereof or of the Notes. The Company will deliver executed or true and correct copies of each amendment, waiver or consent effected pursuant to the provisions of this Section 17 to each Holder of outstanding Notes promptly following the date on which it is executed and delivered by, or receives the consent or approval of, the requisite Holders of Notes.
(b) Payment. The Company will not directly or indirectly pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, or grant any security or provide other credit support, to any Holder of Notes as consideration for or as an inducement to the entering into by any Holder of Notes of any waiver or amendment of any of the terms and provisions hereof unless such remuneration is concurrently paid, or security is concurrently granted or other credit support concurrently provided, on the same terms, ratably to each Holder of Notes then outstanding even if such Holder did not consent to such waiver or amendment.
SECTION 17.3. Binding Effect, Etc . Any amendment or waiver consented to as provided in this Section 17 applies equally to all Holders of Notes and is binding upon them and upon each future Holder of any Note and upon the Company without regard to whether such Note has been marked to indicate such amendment or waiver. No such amendment or waiver will extend to or affect any obligation, covenant, agreement, Default or Event of Default not expressly amended or waived or impair any right consequent thereon. No course of dealing between the Company and the Holder of any Note nor any delay in exercising any rights hereunder or under any Note shall operate as a waiver of any rights of any Holder of such Note. As used herein, the term “this Agreement” and references thereto shall mean this Agreement as it may from time to time be amended or supplemented.
SECTION 17.4. Notes Held by Company, Etc . Solely for the purpose of determining whether the Holders of the requisite percentage of the aggregate principal amount of Notes then outstanding approved or consented to any amendment, waiver or consent to be given under this Agreement or the Notes, or have directed the taking of any action provided herein or in the Notes to be taken upon the direction of the Holders of a specified percentage of the aggregate principal amount of Notes then outstanding, Notes directly or indirectly owned by the Company or any of its Affiliates shall be deemed not to be outstanding.
ARTICLE XVIII
Notices.
All notices and communications provided for hereunder shall be in writing and sent (a) by telecopy if the sender on the same day sends a confirming copy of such notice by a recognized overnight delivery service (charges prepaid), or (b) by registered or certified mail with return receipt requested (postage prepaid), or (c) by a recognized overnight delivery service (with charges prepaid). Any such notice must be sent:
(i) if to any Purchaser or its nominee, to such Purchaser or nominee at the address specified for such communications in Schedule A, or at such other address as such Purchaser or nominee shall have specified to the Company in writing,
 
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(ii) if to any other Holder of any Note, to such Holder at such address as such other Holder shall have specified to the Company in writing, and
(iii) if to the Company, to the Company at 1900 N. Akard Street, Dallas, TX 75201-2300, facsimile: (214) 855-6965 to the attention of W. Kirk Baker, or at such other address as the Company shall have specified to the Holder of each Note in writing.
Notices under this Section 18 will be deemed given only when actually received.
ARTICLE XIX
Reproduction of Documents.
This Agreement and all documents relating thereto, including, without limitation, (a) consents, waivers and modifications that may hereafter be executed, (b) documents received by any Purchaser at the Closing (except the Notes themselves), and (c) financial statements, certificates and other information previously or hereafter furnished to any Purchaser, may be reproduced by such Purchaser by any photographic, photostatic, electronic, digital, or other similar process and such Purchaser may destroy any original document so reproduced. The Company agrees and stipulates that, to the extent permitted by applicable law, any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by such Purchaser in the regular course of business) and any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. This Section 19 shall not prohibit the Company or any other Holder of Notes from contesting any such reproduction to the same extent that it could contest the original, or from introducing evidence to demonstrate the inaccuracy of any such reproduction.
ARTICLE XX
Confidential Information.
For the purposes of this Section 20 , “Confidential Information” means Information delivered to any Purchaser by or on behalf of the Company in connection with the transactions contemplated by or otherwise pursuant to this Agreement, provided that such term does not include information that:
(a) other than as a result of disclosure by any Purchaser or its employees or agents in violation of this Section 20 was publicly known or otherwise known to such Purchaser prior to the time of such disclosure,
(b) other than as a result of disclosure by any Purchaser or its employees or agents in violation of this Section 20 subsequently becomes publicly known through no act or omission by such Purchaser or any Person acting on such Purchaser’s behalf,
 
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(c) other than as a result of disclosure by any Purchaser or its employees or agents in violation of this Section 20 otherwise becomes known to such Purchaser other than through disclosure by the Company or
(d) constitutes financial statements delivered to such Purchaser under Section 7.1 that are otherwise publicly available.
“ Information ” means information concerning the Company or its Subsidiaries, irrespective of its source or form of communication, furnished by or on behalf of the Company or any of its Subsidiaries, including without limitation notes, analyses, compilations, studies or other documents or records prepared by any Purchaser, which contain or reflect or were generated from information supplied by or on behalf of the Company or its Subsidiaries. Each Purchaser will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by such Purchaser in good faith to protect confidential information of third parties delivered to such Purchaser, provided that such Purchaser may deliver or disclose Confidential Information to:
(i) its directors, officers, employees, agents, attorneys, trustees and affiliates (to the extent such disclosure reasonably relates to the administration of the investment represented by its Notes),
(ii) its financial advisors and other professional advisors who agree to hold confidential the Confidential Information substantially in accordance with the terms of this Section 20 ,
(iii) any other Holder of any Note,
(iv) any Institutional Investor to which it sells or offers to sell such Note or any part thereof or any participation therein (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20 ),
(v) any Person from which it offers to purchase any security of the Company (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20 ),
(vi) any federal or state regulatory authority having jurisdiction over such Purchaser,
(vii) the NAIC or the SVO or, in each case, any similar organization, or any nationally recognized rating agency that requires access to information about such Purchaser’s investment portfolio, or
(viii) any other Person to which such delivery or disclosure may be necessary or appropriate (w) to effect compliance with any law, rule, regulation or order applicable to such Purchaser, (x) in response to any subpoena or other legal process, (y) in connection with any litigation to which such Purchaser is a party or (z) if an Event of Default has occurred and is continuing, to the extent such
 
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Purchaser may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement or for the protection of the rights and remedies under such Purchaser’s Notes and this Agreement.
Each Holder of a Note, by its acceptance of a Note, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Section 20 as though it were a party to this Agreement. On reasonable request by the Company in connection with the delivery to any Holder of a Note of information required to be delivered to such Holder under this Agreement or requested by such Holder (other than a Holder that is a party to this Agreement or its nominee), such Holder will enter into an agreement with the Company embodying the provisions of this Section 20 .
ARTICLE XXI
Substitution of Purchaser.
Each Purchaser shall have the right to substitute any one of its Affiliates as the purchaser of the Notes that it has agreed to purchase hereunder, by written notice to the Company, which notice shall be signed by both such Purchaser and such Affiliate, shall contain such Affiliate’s agreement to be bound by this Agreement and shall contain a confirmation by such Affiliate of the accuracy with respect to it of the representations set forth in Section 6 . Upon receipt of such notice, any reference to such Purchaser in this Agreement (other than in this Section 21 ), shall be deemed to refer to such Affiliate in lieu of such original Purchaser. In the event that such Affiliate is so substituted as a Purchaser hereunder and such Affiliate thereafter transfers to such original Purchaser all of the Notes then held by such Affiliate, upon receipt by the Company of notice of such transfer, any reference to such Affiliate as a “Purchaser” in this Agreement (other than in this Section 21 ), shall no longer be deemed to refer to such Affiliate, but shall refer to such original Purchaser, and such original Purchaser shall again have all the rights of an original Holder of the Notes under this Agreement.
ARTICLE XXII
Miscellaneous.
SECTION 22.1. Successors and Assigns . All covenants and other agreements contained in this Agreement by or on behalf of any of the parties hereto bind and inure to the benefit of their respective successors and assigns (including, without limitation, any subsequent Holder of a Note) whether so expressed or not.
SECTION 22.2. Payments Due on Non-Business Days . Anything in this Agreement or the Notes to the contrary notwithstanding (but without limiting the requirement in Section 8.4 that the notice of any optional prepayment specify a Business Day as the date fixed for such prepayment), any payment of principal of or Yield-Maintenance Amount or interest on any Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day without including the additional days elapsed in the computation of the interest payable on such next succeeding Business Day; provided that if the maturity date of any Note is a date other than a Business Day, the payment otherwise due on such maturity date shall be made on the next succeeding Business Day and shall include the additional days elapsed in the computation of interest payable on such next succeeding Business Day.
 
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SECTION 22.3. Accounting Terms . All accounting terms used herein which are not expressly defined in this Agreement have the meanings respectively given to them in accordance with GAAP. Except as otherwise specifically provided herein, (i) all computations made pursuant to this Agreement shall be made in accordance with GAAP, and (ii) all financial statements shall be prepared in accordance with GAAP. For purposes of determining compliance with any financial covenants contained in this Agreement, any election by the Company to measure an item of Indebtedness using fair value (as permitted by Statement of Financial Accounting Standards No. 159 or any similar accounting standard) shall be disregarded and such determination shall be made as if such election had not been made.
SECTION 22.4. Severability . Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction.
SECTION 22.5. Construction, etc. . Each covenant contained herein shall be construed (absent express provision to the contrary) as being independent of each other covenant contained herein, so that compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with any other covenant. Where any provision herein refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person. For the avoidance of doubt, all Schedules and Exhibits attached to this Agreement shall be deemed to be a part hereof.
SECTION 22.6. Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the parties hereto.
SECTION 22.7. Governing Law . This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York excluding choice-of-law principles of the law of such State that would permit the application of the laws of a jurisdiction other than such State.
SECTION 22.8. Jurisdiction and Process; Waiver of Jury Trial.
(a) The Company irrevocably submits to the non-exclusive jurisdiction of any New York State or federal court sitting in the Borough of Manhattan, The City of New York, over any suit, action or proceeding arising out of or relating to this Agreement or the Notes. To the fullest extent permitted by applicable law, the Company irrevocably waives and agrees not to assert, by way of motion, as a defense or otherwise, any claim that it is not subject to the jurisdiction of any such court, any objection that it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum.
(b) The Company consents to process being served by or on behalf of any Holder of Notes in any suit, action or proceeding of the nature referred to in Section 22.8(a) by
 
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mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, return receipt requested, to it at its address specified in Section 18 or at such other address of which such Holder shall then have been notified pursuant to said Section. The Company agrees that such service upon receipt (i) shall be deemed in every respect effective service of process upon it in any such suit, action or proceeding and (ii) shall, to the fullest extent permitted by applicable law, be taken and held to be valid personal service upon and personal delivery to it. Notices hereunder shall be conclusively presumed received as evidenced by a delivery receipt furnished by the United States Postal Service or any reputable commercial delivery service.
(c) In addition to and notwithstanding the provisions of Section 22.8(b) above, the Company hereby irrevocably appoints CT Corporation System as its agent to receive on its behalf and its property service of copies of the summons and complaint and any other process which may be served in any action or proceeding. Such service may be made by mailing or delivering a copy of such process to the Company, in care of the process agent at 111 Eighth Avenue, 13 th Floor, New York, New York 10011, and the Company hereby irrevocably authorizes and directs the process agent to accept such service on its behalf. If for any reason the process agent ceases to be available to act as process agent, the Company agrees immediately to appoint a replacement process agent satisfactory to the Required Holders.
(d) Nothing in this Section 22.8 shall affect the right of any Holder of a Note to serve process in any manner permitted by law, or limit any right that the Holders of any of the Notes may have to bring proceedings against the Company in the courts of any appropriate jurisdiction or to enforce in any lawful manner a judgment obtained in one jurisdiction in any other jurisdiction.
(e) The parties hereto hereby waive trial by jury in any action brought on or with respect to this Agreement, the Notes or any other document executed in connection herewith or therewith.
SECTION 22.9. Transaction References . The Company and the Holders shall not refer to the other on an internet site or in marketing materials, press releases, published “tombstone” announcements or any other print or electronic medium, except with the referenced party’s prior written consent, which may be withheld at its sole discretion.
*  *  *  *  *
 
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DEFINED TERMS
As used herein, the following terms have the respective meanings set forth below or set forth in the Section hereof following such term:
“ 2010 SDTS Note Agreement ” means the Note Purchase Agreement, dated July 13, 2010, among the Company and the holders of the 2030 Notes, as the same may be amended, restated, supplemented or otherwise modified from time to time.
“ 2030 Notes ” means the Company’s 6.47% Senior Notes due September 30, 2030, issued under the 2010 SDTS Note Agreement.
“ Additional Financial Covenants ” shall have the meaning given to it in Section 10.19 hereof.
“ Affiliate ” means, at any time, and with respect to any Person, any other Person that at such time directly or indirectly through one or more intermediaries Controls, or is Controlled by, or is under common Control with, such first Person and, with respect to the Company, shall include any Person beneficially owning or holding, directly or indirectly, 10% or more of any class of voting or equity interest of the Company or any corporation of which the Company beneficially owns or holds, in the aggregate, directly or indirectly, 10% or more of any class of voting or equity interests; provided, however, that this definition shall at all times exclude owners or investors in InfraREIT Partners, L.P., except for Hunt Family Members. Unless the context otherwise clearly requires, any reference to an “Affiliate” is a reference to an Affiliate of the Company.
“Agreement” is defined in the introductory paragraph of this Agreement.
“Amortization Schedule” is defined in Section 8.1(a) .
“Anti-Terrorism Order” means Executive Order No. 13,224 of September 24, 2001, Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit or Support Terrorism, 66 U.S. Fed. Reg. 49, 079 (2001), as amended.
“Approved Accountant” is defined in Section 7.1(b)(A) .
“Blocked Person” means (i) an OFAC Listed Person, (ii) an agent, department, or instrumentality of, or a Person otherwise beneficially owned by, controlled by or acting on behalf of, directly or indirectly, (x) any OFAC Listed Person or (y) any Person, entity, organization, foreign country or regime that is subject to any OFAC Sanctions Program, or (iii) a Person otherwise blocked, subject to sanctions under or engaged in any activity in violation of U.S. Economic Sanctions.
“Business Day” means any day other than a Saturday, a Sunday or a day on which commercial banks in New York City are required or authorized to be closed.
 
Schedule B-1
(To Annex A)

“Capital Lease” means, at any time, a lease with respect to which the lessee is required concurrently to recognize the acquisition of an asset and the incurrence of a liability in accordance with GAAP.
“Capital Stock” of any Person shall mean any and all shares, interests, rights to purchase, warrants, options, participation, patronage capital or other equivalents of or interest in (however designated) equity of such Person, including any preferred stock, any limited or general partnership interest and any limited liability company membership interest.
“ Cash Flow ” means, for any period, the sum of the following (without duplication): (i) all cash paid to the Company during such period under the Leases, (ii) all cash distributions received by the Company from Project Finance Subsidiaries of the Company during such period, (iii) all interest and investment earnings, if any, paid to the Company during such period on amounts on deposit in the account created under the Deposit Agreement, (iv) revenues, if any, received by or on behalf of the Company during such period under any insurance policy as business interruption insurance proceeds, (v) direct cash equity investments made by TDC in the Company during such period (excluding equity contributed to a Project Finance Subsidiary) in an amount not greater than the amount necessary to cause the Company to be in compliance with the financial covenants set forth in Section 9.9 (each such investment, an “ Equity Cure ”); provided , however , that during any period of four consecutive fiscal quarters, “Cash Flow” shall include an Equity Cure in no more than two of such quarters and (vi) proceeds of any borrowing made after the date hereof to the extent used to finance the payment of bullet or balloon installments of Indebtedness for borrowed money.
“ Cash Flow Available for Debt Service ” for any period, means (i) Cash Flow received during such period minus (ii) (A) all O&M Costs paid during such period and (B) if an Equity Cure has been made in any fiscal quarter during the period for which Cash Flow Available for Debt Service is calculated, the lesser of the aggregate amount of (x) such Equity Cure during such period and (y) the aggregate amount of cash distributions paid by the Company during such period.
“CISADA” means the Comprehensive Iran Sanctions, Accountability and Divestment Act.
“Closing” is defined in Section 3 .
“Closing Date” means December 31, 2009.
“Code” means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder from time to time.
“ Collateral ” means, collectively, the collateral described in each of the Security Documents.
“ Collateral Agency Agreement ” means the Second Amended and Restated Collateral Agency Agreement, dated as of the Third Amendment Date, among the Collateral Agent, the Company, the Holders and the holders of the other Permitted Secured Indebtedness from time to time party thereto (as the same may be amended, restated, amended and restated, supplemented, joined or otherwise modified from time to time).
 
Schedule B-2
(To Annex A)

“Collateral Agent” means The Bank of New York Mellon Trust Company, N.A., a national association, acting in its capacity as collateral agent for itself and the other Secured Parties, or its successors in such capacity appointed pursuant to the terms of the Collateral Agency Agreement.
“Company” means Sharyland Distribution & Transmission Services, L.L.C., a Texas limited liability company, or any successor that becomes such in the manner prescribed in Section 10.2 .
“Confidential Information” is defined in Section 20 .
“ Consolidated Net Plant ” means, with respect to any Person, as of the date of determination, the net plant set forth on the face of the consolidated balance sheet of such Person or absent such amount on the consolidated balance sheet, the total plant of such Person on a consolidated basis minus accumulated depreciation set forth in the footnotes of the consolidated financial statements, in each case for the fiscal quarter ended on the date of the last financial statements delivered pursuant to Section 7.1 .
“Consolidated Qualified Lessee” shall mean any Qualified Lessee that is consolidated into the financial statements of another Qualified Lessee.
“Contractual Obligation” shall mean as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound.
“Contribution Agreement” means the Contribution Agreement, dated as of December 31, 2009, between Sharyland and the Company.
“Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise.
“ Controlled Entity ” means (i) any of the Subsidiaries of the Company and any of their or the Company’s respective Controlled Affiliates and (ii) if the Company has a parent company, such parent company and its Controlled Affiliates.
“CREZ Lease” shall mean (A) prior to the effectiveness of the CREZ Lease Amendment and Restatement, the Amended and Restated Lease Agreement (CREZ Assets) dated as of April 30, 2013, between SP, as lessor, and Sharyland, as lessee, and (B) upon the effectiveness of the CREZ Lease Amendment and Restatement, the CREZ Lease Amendment and Restatement, as such lease may be amended, restated, supplemented or otherwise modified from time to time, or any new lease entered into in replacement thereof, in accordance with Section 9.8(b) and/or 10.12 of this Agreement, as applicable.
 
Schedule B-3
(To Annex A)

“CREZ Lease Amendment and Restatement” shall mean the Second Amended and Restated Lease Agreement (CREZ Assets), between SP, as lessor, and Sharyland, as lessee, with respect to the CREZ Project.
“CREZ Project” shall mean the five transmission lines, four substations and other facilities in Texas identified and awarded to Sharyland by the Public Utility Commission of Texas (the “PUCT”) in Docket Number 37902.
“Cross Valley Project” means the approximately 49 mile transmission line in South Texas near the Mexican border, known as the “North Edinburg to Loma Alta 345 kV single-circuit transmission line” project, subsequently, renamed as the “North Edinburg to Palmito 345 kV double-circuit transmission line” project, which is built on double-circuit capable structures and the Palmito substation located on the eastern terminus of the Cross Valley Project. The Cross Valley Project is part of a 100 mile transmission line, which is jointly developed and permitted by Sharyland and Electric Transmission Texas.
“Cross Valley Project Transfer” shall mean the sale and Transfer of all of the Capital Stock of CV Project Entity, L.L.C., a Project Finance Subsidiary of the Company, to Cross Valley Partnership, L.P., a Person Controlled by one or more Hunt Family Members, for a purchase price at least equal to the Cross Valley Project’s rate base cost at such time.
“ Debt Service ” for any period, the aggregate (without duplication) of (i) all amounts of interest on the Notes and in respect of other Indebtedness of the Company required to be paid during such period, plus (ii) all amounts of principal on the Notes and in respect of other Indebtedness of the Company or required to be paid during such period, excluding any optional prepayments of principal during such period, plus (iii) all other premiums, fees, costs, charges, expenses and indemnities due and payable to the Holders or the other Secured Parties and holders of other Indebtedness of the Company or and agents acting on their behalf during such period.
“Debt Service Coverage Ratio” means, for each period of four consecutive fiscal quarters, the quotient of (i) Cash Flow Available for Debt Service for such period to (ii) Debt Service for such period.
“ Deeds of Trust ” means (i) the Amended and Restated First Lien Deed of Trust, Security Agreement and Fixture Filing (Texas) and each First Lien Deed of Trust, Security Agreement, Assignment of Rents and Leases and Fixture Filing (Texas) by and from the Company, as grantor, to Peter M. Oxman, as trustee, for the benefit of the Collateral Agent and the other Secured Parties, dated as of July 13, 2010, in each case as the same may be amended, restated, supplemented or otherwise modified from time to time and (ii) each other deed of trust by and from the Company, as grantor, for the benefit of the Collateral Agent and the other Secured Parties entered into from time to time.
“Default” means an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default.
“Default Rate” means that rate of interest per annum from time to time equal to the greater of (i) 2% per annum above the rate of interest stated in clause (a) of the first paragraph of the Notes, and (ii) 2% over the rate of interest publicly announced by The Bank of New York Mellon from time to time in New York as its “base” or “prime” rate.
 
Schedule B-4
(To Annex A)

“Deposit Agreement” means the Amended and Restated Deposit Account Control Agreement, dated as of the Third Amendment Date, among the Company, the Collateral Agent and Bank of America, N.A.
“Designated Jurisdiction” means any country or territory to the extent that such country or territory itself is the subject of any Sanction.
“Development Agreement” means that certain Development Agreement to be entered into among Hunt Transmission Services, L.L.C., Sharyland, InfraREIT and/or InfraREIT Partners in connection with one or more New Projects, pursuant to which Hunt Transmission Services, L.L.C. has granted InfraREIT a right of first offer related to the New Projects identified therein, as amended from time to time in accordance with its terms.
“Disclosure Documents” is defined in Section 5.3 .
“Distributions” means any dividend or other distribution (whether in cash, securities or other property) with respect to any Capital Stock of any Person, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, defeasance, acquisition, cancellation or termination of any such Capital Stock or on account of any return of capital to such Person’s stockholders, partners or members (or the equivalent Person thereof), or any option, warrant or other right to acquire any such dividend or other distribution or payment.
“Environmental Laws” means any and all Federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including but not limited to those related to Hazardous Materials.
“ ERCOT ” means the Electric Reliability Council of Texas or any successor thereto.
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.
“ERISA Affiliate” means any trade or business (whether or not incorporated) that is treated as a single employer together with the Company under section 414 of the Code.
“Event of Default” is defined in Section 11 .
“ Exchange Act ” shall mean the Securities Exchange Act of 1934, as amended from time to time.
“FERC” means the Federal Energy Regulatory Commission, or any successor agency to its duties and responsibilities.
 
Schedule B-5
(To Annex A)

“ FERC Lease ” shall mean (A) prior to the effectiveness of the FERC Lease Amendment and Restatement, the Second Amended and Restated Lease Agreement, dated as of July 1, 2012, between FERC Owner and FERC Operator and (B) upon the effectiveness of the FERC Lease Amendment and Restatement, the FERC Lease Amendment and Restatement, as such lease may be amended, restated, supplemented or otherwise modified from time to time, or any new lease entered into in replacement thereof, in accordance with Section 9.8(b) and/or 10.12 of this Agreement, as applicable.
“FERC Lease Amendment and Restatement” shall mean the Third Amended and Restated Lease Agreement (Stanton Transmission Loop Assets) between FERC Owner, as lessor, and FERC Operator, as lessee.
“ FERC Lease Assumptions ” shall mean the anticipated assumptions of the FERC Lease in connection with the FERC Merger (i) by the Company as the lessor thereunder, as successor in interest to FERC Owner and (ii) by Sharyland of the FERC Lease as the lessee, as successor in interest to the FERC Operator.
“ FERC Merger ” shall mean the anticipated transaction or series of transactions pursuant to which SDTS FERC L.L.C. will merge into the Company and SU FERC L.L.C. will merge into Sharyland.
“ FERC Operator ” shall mean (A) prior to the FERC Merger, SU FERC, L.L.C., a Subsidiary of Sharyland, and (B) upon the completion of the FERC Merger, Sharyland.
“ FERC Owner ” shall mean (A) prior to the FERC Merger, SDTS FERC, L.L.C., a Subsidiary of the Company, and (B) upon the completion of the FERC Merger, the Company.
“ Financing Documents ” means, collectively, this Agreement, the 2010 SDTS Note Agreement, the Notes, the 2030 Notes, the RBC Agreement, the Security Documents, any other documents, agreements or instruments entered into in connection with any of the foregoing and any other documents, agreements or instruments from time to time constituting “ Financing Agreements ” under the Collateral Agency Agreement.
“Force Majeure Event” means any claim of force majeure by any Person under any Material Project Document, which would allow such Person to avoid all or any material part of its obligations thereunder and any other fire, explosion, accident, strike, slowdown or stoppage, lockout or other labor dispute (whether pending or, to the Company’s knowledge threatened), drought, storm, hail, earthquake, embargo, act of God or of the public enemy, or other casualty (whether or not covered by insurance), that could reasonably be expected to result in a Material Adverse Effect.
“FPA” means the Federal Power Act, 16 U.S.C. §§791 et seq., as amended, and the regulations of the FERC thereunder.
“ GAAP ” means generally accepted accounting principles as in effect in the United States of America. In the event that any “Accounting Change” (as defined below) shall occur and such change results in a change in the method of calculation of financial covenants, ratios, standards or terms in this Agreement, then the Company and the Holders agree to enter into negotiations in order to amend such provisions of this Agreement so as to reflect equitably such Accounting Changes with the desired result that the criteria for evaluating the financial condition of the
 
Schedule B-6
(To Annex A)

Company and Sharyland shall be the same after such Accounting Changes as if such Accounting Changes had not been made. Until such time as such an amendment shall have been executed and delivered by the Company and the Holders, all financial covenants, ratios, standards and terms in this Agreement shall continue to be calculated or construed as if such Accounting Changes had not occurred. “ Accounting Changes ” refers to changes in accounting principles required by the promulgation of any rule, regulation, pronouncement or opinion by the Financial Accounting Standards Board of the American Institute of Certified Public Accountants or, if applicable, the SEC.
“Golden Spread Project” shall mean a new 345 kilovolt transmission line that will be approximately 55 miles long and will connect the Golden Spread Electric Cooperative, Inc. Antelope-Elk Energy Center in Hale County, approximately 1.6 miles north of the City of Abernathy on County Road P, to the proposed White River Station that will be built by Sharyland in Floyd County, approximately 9 miles northwest of the City of Floydada and 1.1 miles east of the intersection of County Road 231 and County Road 200 and the Abernathy substation that is located in the western portion of the transmission line.
“Golden Spread Project Transfer” shall mean the sale and Transfer of all of the Capital Stock of GS Project Entity to a Person Controlled by one or more Hunt Family Members for a purchase price at least equal to the Golden Spread Project’s rate base cost at such time.
“Good Utility Practices” means “Good Utility Practice” as defined from time to time by the Public Utility Commission of Texas.
“ Governmental Authority ” means
(a) the government of:
(i) the United States of America or any State or other political subdivision thereof, or
(ii) any other jurisdiction in which the Company conducts all or any part of its business, or which asserts jurisdiction over any properties of the Company, or
(b) any entity exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, any such government, or
(c) ERCOT, or
(d) the Texas Regional Entity.
“GS Project Entity ” means a Project Finance Subsidiary of the Company created to finance and develop the Golden Spread Project.
“Guaranty” means, with respect to any Person, any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection) of such
 
Schedule B-7
(To Annex A)

Person guaranteeing or in effect guaranteeing any Indebtedness of any other Person in any manner, whether directly or indirectly, including (without limitation) obligations incurred through an agreement, contingent or otherwise, by such Person:
(a) to purchase such Indebtedness or any property constituting security therefor;
(b) to advance or supply funds (i) for the purchase or payment of such indebtedness or obligation, or (ii) to maintain any working capital or other balance sheet condition or any income statement condition of any other Person or otherwise to advance or make available funds for the purchase or payment of such Indebtedness;
(c) to lease properties or to purchase properties or services primarily for the purpose of assuring the owner of such Indebtedness of the ability of any other Person to make payment of the Indebtedness; or
(d) otherwise to assure the owner of such Indebtedness against loss in respect thereof.
In any computation of the indebtedness or other liabilities of the obligor under any Guaranty, the indebtedness or other obligations that are the subject of such Guaranty shall be assumed to be direct obligations of such obligor.
“Hazardous Material” means any and all pollutants, toxic or hazardous wastes or other substances that might pose a hazard to health and safety, the removal of which may be required or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage or filtration of which is or shall be restricted, prohibited or penalized by any applicable law including, but not limited to, asbestos, urea formaldehyde foam insulation, polychlorinated biphenyls, petroleum, petroleum products, lead based paint, radon gas or similar restricted, prohibited or penalized substances.
“Holder” means, with respect to any Note the Person in whose name such Note is registered in the register maintained by the Company pursuant to Section 13.1 .
“Hunt Family Members” means (i) Ray L. Hunt; (ii) the spouse of Ray L. Hunt and each of his children and siblings; (iii) the spouse and lineal descendants of any Person identified in the foregoing clause (ii); (iv) any trust or account primarily for the benefit of any Person or Persons identified in the foregoing clauses (i), (ii) or (iii); (v) any corporation, partnership or other entity in which any of the Persons identified in the foregoing clauses (i), (ii), (iii) or (iv) are the beneficial owners of substantially all of the shares of capital stock, membership interests, partnership interests or other equity interests and options or warrants to acquire, or securities convertible into, capital stock, membership interests, partnership interests, or other equity securities of an entity; and (vi) the personal representative or guardian of any of the Persons identified in the foregoing clauses (i), (ii) and (iii) upon such Person’s death for purposes of the administration of such Person’s estate or upon such Person’s disability or incompetency for purposes of protection and management of the assets of such Person.
 
Schedule B-8
(To Annex A)

“Indebtedness” with respect to any Person means, at any time, without duplication,
(a) its liabilities for borrowed money and its redemption obligations in respect of mandatorily redeemable Preferred Stock;
(b) its liabilities for the deferred purchase price of property acquired by such Person (excluding accounts payable arising in the ordinary course of business but including all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property);
(c) (i) all liabilities appearing on its balance sheet in accordance with GAAP in respect of Capital Leases and (ii) all liabilities which would appear on its balance sheet in accordance with GAAP in respect of Synthetic Leases assuming such Synthetic Leases were accounted for as Capital Leases; provided , however , that for purposes of this definition (including with respect to clauses (i) and (ii) hereof), the System Leases, any other Lease and any similar lease shall not be treated as a capital lease;
(d) all liabilities for borrowed money secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities);
(e) all its liabilities in respect of letters of credit or instruments serving a similar function issued or accepted for its account by banks and other financial institutions (whether or not representing obligations for borrowed money); provided , however , that for purposes of this definition, any surety bonds or indemnification agreements entered into by Sharyland (with respect to which the Company or a subsidiary thereof has a reimbursement or backstop obligation) in connection with condemnation proceedings shall be excluded;
(f) the aggregate Swap Termination Value of all Swap Contracts of such Person; and
(g) any Guaranty of such Person with respect to liabilities of a type described in any of clauses (a) through (f) hereof.
Indebtedness of any Person shall include all obligations of such Person of the character described in clauses (a) through (g) to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is deemed to be extinguished under GAAP.
“InfraREIT” shall mean InfraREIT, L.L.C., a Delaware limited liability company, and its successors.
“InfraREIT Partners” shall mean InfraREIT Partners, LP, a Delaware limited partnership.
“Institutional Investor” means (a) any Purchaser of a Note, (b) any Holder of a Note holding (together with one or more of its Affiliates) more than 5% of the aggregate principal amount of the Notes then outstanding, (c) any bank, trust company, savings and loan association or other financial institution, any pension plan, any investment company, any insurance company, any broker or dealer, or any other similar financial institution or entity, regardless of legal form, and (d) any Related Fund of any Holder of any Note.
 
Schedule B-9
(To Annex A)

“Investments” has the meaning given to it in Section 10.7.
“Investment Grade Credit Rating” means with respect to any Person, a rating of the long-term unsecured debt securities of such Person (or if such rating is unavailable, issuer rating) equal to or higher than (1) “BBB-” (or the equivalent) with a stable or better outlook by Standard & Poor’s Financial Services LLC, or (2) “Baa3” (or the equivalent) with a stable or better outlook by Moody’s Corporation; provided , that if such Person has a rating from both Standard & Poor’s Financing Services LLC and Moody’s Corporation, then the applicable rating shall be deemed to be the lower of the two.
“Leased Consolidated Net Plant” shall mean that portion of the Consolidated Net Plant of the lessor of a Lease between such lessor and a Qualified Lessee that is the subject of such Lease.
“Leases” means (i) the System Leases, the CREZ Lease, the FERC Lease and any other leases of transmission and distribution and related assets to a Qualified Lessee under which the Company or any Subsidiary of the Company is a party as a lessor and (ii) any lease of transmission and distribution and related assets pursuant to which Sharyland is the lessee and a Subsidiary of Sharyland or another Person Controlled by one or more Hunt Family Members is the lessor; provided, no such lease will qualify as a “Lease” hereunder if each of the three following criteria apply; (x) Sharyland is the lessee, (y) cash rental payments have become due and payable pursuant thereto and (z) none of the Company, a Subsidiary of the Company or a Subsidiary of Sharyland is the lessor.
“Lien” means, with respect to any Person, any mortgage, lien, pledge, charge, security interest or other encumbrance, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or Capital Lease, upon or with respect to any property or asset of such Person, in each case, in the nature of a security interest of any kind or nature whatsoever.
“ Material Adverse Effect ” means a material adverse effect upon and/or material adverse developments with respect to (a) the operations, business, assets, properties, liabilities or financial condition of the Company and its Subsidiaries (taken as a whole); (b) the ability of the Note Parties (taken as a whole) to perform their obligations under the Note Documents; (c) the legality, validity or enforceability of this Agreement or any other Note Document or the rights or remedies of the Collateral Agent or the Holders hereunder or thereunder or (d) the validity, perfection or priority of the Collateral Agent’s Liens on any material Collateral.
“ Material Project Document ” means (i) any contract or agreement that is related to the ownership, operation, maintenance, management service, repair or use of the System entered into by the Company or any Subsidiary subsequent to the Third Amendment Date that involves full payments or obligations of the Company or any Subsidiary in excess of $5,000,000 in any calendar year, and (ii) System Leases, but shall exclude any documents subject to Section 10.12 herein.
“ Maturity Date ” means December 30, 2029.
 
Schedule B-10
(To Annex A)

“McAllen Lease” shall mean (A) prior to the effectiveness of the McAllen Lease Amendment and Restatement, the Second Amended and Restated Master System Lease Agreement, dated as of July 1, 2012, between Company, as lessor, and Sharyland, as lessee, and (B) upon the effectiveness of the McAllen Lease Amendment and Restatement, the McAllen Lease Amendment and Restatement, as such lease may be amended, restated, supplemented or otherwise modified from time to time, or any new lease entered into in replacement thereof, in accordance with Section 9.7(b) and/or 10.12 of this Agreement, as applicable.
“McAllen Lease Amendment and Restatement” shall mean the Third Amended and Restated Master System Lease Agreement (McAllen System), between the Company, as lessor, and Sharyland, as lessee.
“Moody’s” means Moody’s Investors Service, Inc.
“Multiemployer Plan” means any Plan that is a “multiemployer plan” (as such term is defined in section 4001(a)(3) of ERISA).
“NAIC” means the National Association of Insurance Commissioners or any successor thereto.
“Negative Pledge Agreement” shall mean the Amended and Restated Negative Pledge Agreement, dated as of the Third Amendment Date among FERC Owner and the Collateral Agent.
“New Project” shall mean any transmission or distribution project, including any such project acquired or built by a Project Finance Subsidiary, any “Footprint Project” (as defined in the Leases) that the Company or a Subsidiary of the Company funds pursuant to a Lease and any such project that InfraREIT or a Subsidiary thereof acquires pursuant to the Development Agreement, including, for the avoidance of doubt, the Cross Valley Project and the Golden Spread Project.
“ Non-Recourse Debt ” means Indebtedness of a Project Finance Subsidiary or a Subsidiary of Sharyland, as the case may be, that, if secured, is secured solely by a pledge of collateral owned by such Project Finance Subsidiary or such Subsidiary of Sharyland, as the case may be, and the Capital Stock in such Project Finance Subsidiary or such Subsidiary of Sharyland, as the case may be, and for which no Person other than such Project Finance Subsidiary or such Subsidiary of Sharyland, as the case may be, is personally liable.
“Notes” is defined in Section 1 .
“ Note Documents ” means this Agreement, the Notes, the Security Documents, the Subsidiary Guaranties and any amendment, waiver, supplement or other modification to any of the foregoing.
“ Note Parties ” means the Company and each Subsidiary that is a party to a Note Document, as applicable.
 
Schedule B-11
(To Annex A)

“ O&M Costs ” means actual cash management and operation costs of the Company, taxes payable by the Company, insurance premiums, consumables, fees and expenses of, and other amounts owing to, the Collateral Agent and the depositary under the Deposit Agreement, and other costs and expenses in connection with the management or operation of the Company, but exclusive in all cases of (a) non-cash charges, including depreciation or obsolescence charges or reserves therefor, amortization of intangibles or other bookkeeping entries of a similar nature, (b) all other payments of Debt Service and Yield-Maintenance Amounts, if any, (c) costs of repair or replacement paid with insurance proceeds and (d) development costs related to any Project Finance Subsidiary.
“Obligation” means any loan, advance, debt, liability, and obligation of performance, howsoever arising, owed by the Company to the Collateral Agent or the Holders of any kind or description (whether or not evidenced by any note or instrument and whether or not for the payment of money), direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, pursuant to the terms of this Agreement, any Note or any of the other Note Documents, including all principal, interest, Yield-Maintenance Amounts, fees, charges, expenses, attorneys’ fees and accountants fees payable or reimbursable by the Company under this Agreement or any of the other Note Documents.
“OFAC” means the Office of Foreign Assets Control, United States Department of the Treasury.
“OFAC Listed Person ” means a Person whose name appears on the list of Specially Designated Nationals and Blocked Persons published by OFAC.
“OFAC Sanctions Program” shall mean any economic or trade sanction that OFAC is responsible for administering and enforcing. A list of OFAC Sanctions Programs may be found at http://www.treasury.gov/resource-center/sanctions/Programs/Pages/Programs.aspx.
“Officer’s Certificate” means a certificate of a Senior Financial Officer or of any other officer of the Company whose responsibilities extend to the subject matter of such certificate.
“Payment Date” means March 30, 2010 and the 30th day of June, September, December and March thereafter up to the Maturity Date, and the Maturity Date.
“PBGC” means the Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto.
“Permit” means any action, approval, consent, waiver, exemption, variance, franchise, order, permit, authorization, right or license of or from a Governmental Authority, provided that interests or estates in real property, shall not be considered Permits.
“Permitted Investment” means any (a) marketable direct obligation of the United States of America, (b) marketable obligation directly and fully guaranteed as to interest and principal by the United States of America, (c) demand deposit with Bank of America N.A.,, or time deposit, certificate of deposit and banker’s acceptance issued by any member bank of the Federal Reserve System which is organized under the laws of the United States of America or any state thereof or any United States branch of a foreign bank, in each case whose equity capital is in
 
Schedule B-12
(To Annex A)

excess of $500,000,000 and whose long-term debt securities are rated “A” or better by S&P and “A2” or better by Moody’s, (d) commercial paper or tax exempt obligations given the highest rating by Moody’s and S&P, (e) obligations of a commercial bank described in clause (c) above, in respect of the repurchase of obligations of the type as described in clauses (a) and (b) hereof, provided that such repurchase obligation shall be fully secured by obligations of the type described in said clauses (a) and (b) and the possession of such obligation shall be transferred to, and segregated from other obligations owned by, any such bank, (f) instrument rated “AAA” by S&P and “Aaa” by Moody’s issued by investment companies and having an original maturity of 180 days or less, (g) eurodollar certificates of deposit issued by any bank described in clause (c) above, and (h) marketable security rated not less than “A-1” by S&P or not less than “Prime-1” by Moody’s. In no event shall Permitted Investments include any obligation, certificate of deposit, acceptance, commercial paper or instrument which by its terms matures (A) more than 180 days after the date of investment, unless a bank meeting the requirements of clause (c) above shall have agreed to repurchase such obligation, certificate of deposit, acceptance, commercial paper or instrument at its purchase price plus earned interest within no more than 90 days after its purchase thereunder or (B) after the next Payment Date.
“ Permitted Lien ” is defined in Section 10.5.
“ Permitted Secured Indebtedness ” has the meaning given to it in the Collateral Agency Agreement.
“ Person ” means an individual, partnership, corporation, cooperative corporation, limited liability company, association, trust, unincorporated organization, business entity or Governmental Authority.
“Plan” means an “employee benefit plan” (as defined in section 3(3) of ERISA) subject to Title I of ERISA that is or, within the preceding five years, has been established or maintained, or to which contributions are or, within the preceding five years, have been made or required to be made, by the Company or any ERISA Affiliate or with respect to which the Company or any ERISA Affiliate may have any liability.
“ Pledge Agreement” means the Amended and Restated Assignment of Membership Interests and Pledge Agreement, dated as of the Third Amendment Date, by TDC, with respect to its membership interests in the Company, to the Collateral Agent.
“Pledge Agreement (FERC)” means the Amended and Restated Assignment of Membership Interests and Pledge Agreement, dated as of the Third Amendment Date, by the Company, with respect to its membership interests in the FERC Owner, to the Collateral Agent.
“Preferred Stock” means any class of capital stock of a Person that is preferred over any other class of capital stock (or similar equity interests) of such Person as to the payment of dividends or the payment of any amount upon liquidation or dissolution of such Person.
“ Project Finance Subsidiary ” means a special purpose Subsidiary of a Person created to develop a New Project and to finance such New Project solely with Non-Recourse Debt and equity (including, for the avoidance of doubt, CV Project Entity, L.L.C.).
 
Schedule B-13
(To Annex A)

“property” or “properties” means, unless otherwise specifically limited, real or personal property of any kind, tangible or intangible, choate or inchoate.
“PTE” is defined in Section 6.2(a) .
“Purchaser” is defined in the first paragraph of this Agreement.
“Qualified Institutional Buyer” means any Person who is a “qualified institutional buyer” within the meaning of such term as set forth in Rule 144A(a)(1) under the Securities Act.
“Qualified Lessee” means Sharyland and/or any other utility that is (x) approved or authorized by the applicable public utility commission or similar regulatory authority to operate and/or lease the transmission and/or distribution assets of the Company or any Subsidiary and (y) a party to a then-effective lease agreement with the Company or a Subsidiary thereof pursuant to which such utility leases and operates such entity’s transmission and/or distribution assets.
“ Qualified Lessee Affiliate Loan ” means loans made by InfaREIT Partners or a Subsidiary thereof to Qualified Lessees from time to time in an aggregate principal amount not to exceed $10,000,000 at any time outstanding as long as the use of proceeds of such loans is limited to the acquisition or financing of equipment or other assets used in the Qualified Lessee’s operation or lease of transmission or distribution assets from the Company or a Subsidiary thereof pursuant to a Lease.
“Qualifying IPO” means an initial public offering of the Capital Stock of InfraREIT pursuant to a registration statement filed with the SEC.
“ RBC ” means Royal Bank of Canada, a Canadian banking institution.
“ RBC Agreement ” means that certain Third Amended and Restated Credit Agreement, dated as of the Third Amendment Date, among the Company, as borrower, the lenders from time to time party thereto and RBC, administrative agent, as the same may be amended, restated, supplemented and otherwise modified from time to time.
“Real Property Collateral ” means (i) any fee owned real property (other than easements and rights of way) with a fair market value in excess of $3,000,000 and (ii) any lease of real property (other than easements and rights of way) with an annual rental value in excess of $1,000,000, which lease relates to or arises in connection with any transmission and distribution assets, excluding (x) leases otherwise prohibiting the transfer or granting of a Lien on or security interest in such leasehold interest pursuant to the terms of any agreement permitted under Section 10.20 and (y) leases with respect to which the Company is unable, after commercially reasonable efforts, to obtain such landlord consents as may be reasonably required so as to enable the Company to comply with the requirements of Section 9.7(c).
“Related Fund” means, with respect to any Holder of any Note, any fund or entity that (i) invests in Securities or bank loans, and (ii) is advised or managed by such Holder, the same investment advisor as such Holder or by an Affiliate of such Holder or such investment advisor.
 
Schedule B-14
(To Annex A)

“Required Holders” means, at any time, the Holders of at least 51% in principal amount of the Notes at the time outstanding (exclusive of Notes then owned by the Company or any of its Affiliates).
“Required Permit” means all governmental and third party licenses, permits, franchises, authorizations, patents, copyright, proprietary software, service marks, trademarks and trade names, or rights thereto, that are material to the ownership, leasing, operating and maintenance of the System, including the permits listed on Schedule 5.12(a).
“Requirements of Law” means as to any Person, the certificate of incorporation or formation and by-laws or partnership or operating agreement or other organizational or governing documents of such Person, and any local, state or Federal law, regulation, rule, ordinances or determination, interpretation or order of an arbitrator or a court or other Governmental Authority, and any Required Permit, in each case applicable to or binding upon such Person or any of its properties or its business or to which such Person or any of its properties or its business is subject.
“Responsible Officer” means any Senior Financial Officer and any other officer of the Company with responsibility for the administration of the relevant portion of this Agreement.
“Restricted Payment Conditions” is defined in Section 10.9 .
“ROFO Transfer” shall mean the sale and Transfer to Persons Controlled by one or more Hunt Family Members of any assets located in the Texas Panhandle related to the CREZ Project that are categorized as ROFO Projects under the Development Agreement with an aggregate fair market value not to exceed $5,000,000.
“Sanctions” means any international economic sanction administered or enforced by the United States Government (including without limitation, OFAC), the United Nations Security Council, the European Union, Her Majesty’s Treasury or other relevant sanctions authority.
“SEC” shall mean the Securities and Exchange Commission of the United States, or any successor thereto.
“ Secured Parties ” means the Collateral Agent, the Holders and the other Secured Parties (as defined in the Collateral Agency Agreement) from time to time.
“Securities” or “Security” shall have the meaning specified in Section 2(1) of the Securities Act.
“Securities Act” means the Securities Act of 1933, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.
“ Security Agreement ” means the Security Agreement, dated as of the Third Amendment Date, among the Company and the Collateral Agent.
“ Security Documents ” means (i) the Collateral Agency Agreement, Security Agreement, the Deeds of Trust, the Pledge Agreement and the Deposit Agreement, (ii) prior to the
 
Schedule B-15
(To Annex A)

completion of the FERC Merger, the Pledge Agreement (FERC) and the Negative Pledge Agreement and (iii) other security documents entered into pursuant to Section 9.7 and any other security documents, financing statements and the like filed or recorded in connection with the foregoing.
“Senior Financial Officer” means the chief financial officer, principal accounting officer, treasurer or comptroller of the Company or a Qualified Lessee, as applicable.
“Sharyland” means Sharyland Utilities, L.P., a Texas limited partnership.
“ SP ” shall mean Sharyland Projects, L.L.C., a Project Finance Subsidiary.
“Specified Qualified Lessee” shall mean Sharyland and any Qualified Lessee (a) (i) without an Investment Grade Credit Rating or (ii) whose obligations under the applicable Leases are not guaranteed by an entity with an Investment Grade Rating and (b) whose business is limited to the leasing of transmission and/or distribution assets from the Company or any of its Subsidiaries or Affiliates.
“Stanton/Brady/Celeste Lease” shall mean (A) prior to the effectiveness of the Stanton/Brady/Celeste Lease Amendment and Restatement, the Amended and Restated Lease Agreement (Stanton/Brady/Celeste Assets), dated as of July 1, 2012, between the Company, as lessor, and Sharyland, as lessee, and (B) upon the effectiveness of the Stanton/Brady/Celeste Lease Amendment and Restatement, the Stanton/Brady/Celeste Lease Amendment and Restatement, as such lease may be amended restated, supplemented or otherwise modified from time to time, or any new lease entered into in replacement thereof, in accordance with Section 9.7(b) and/or 10.12 of this Agreement, as applicable.
“Stanton/Brady/Celeste Lease Amendment and Restatement” shall mean the Second Amended and Restated Lease Agreement (Stanton/Brady/Celeste Assets), between the Company, as lessor, and Sharyland, as lessee.
“Structuring Fee” is defined in Section 4.7.
“Subsidiary” means, as to any Person, any other Person in which such first Person or one or more of its Subsidiaries or such first Person and one or more of its Subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar functions) of such second Person and any partnership or joint venture if more than a 50% interest in the profits or capital thereof is owned by such first Person or one or more of its Subsidiaries or such first Person and one or more of its Subsidiaries (unless such partnership or joint venture can and does ordinarily take major business actions without the prior approval of such Person or one or more of its Subsidiaries). Unless the context otherwise clearly requires, any reference to a “Subsidiary” is a reference to a Subsidiary of the Company and, prior to the completion of the FERC Merger, shall include the FERC Owner. Prior to the completion of the FERC Merger, all references herein to a Subsidiary of Sharyland shall include the FERC Operator.
“ Subsidiary Guaranty ” means each Guaranty provided by the Subsidiary Guarantors pursuant to Section 9.7(d) , if any, substantially in the form of Exhibit 3 to the Agreement.
 
Schedule B-16
(To Annex A)

“ Subsidiary Guarantor ” means any Subsidiary of the Company that is a guarantor under a Guaranty pursuant to Section 9.7(d ).
“SVO” means the Securities Valuation Office of the NAIC or any successor to such Office.
“Swap Contract” means (a) any and all interest rate swap transactions, basis swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward foreign exchange transactions, cap transactions, floor transactions, currency options, spot contracts or any other similar transactions or any of the foregoing (including, but without limitation, any options to enter into any of the foregoing), and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., or any International Foreign Exchange Master Agreement.
“Swap Termination Value” means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a), the amounts(s) determined as the mark-to-market values(s) for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts.
“Synthetic Lease” means, at any time, any lease (including leases that may be terminated by the lessee at any time) of any property (a) that is accounted for as an operating lease under GAAP and (b) in respect of which the lessee retains or obtains ownership of the property so leased for U.S. federal income tax purposes, other than any such lease under which such Person is the lessor.
“ System ” means the Company’s and/or any Subsidiary’s (other than a Project Finance Subsidiary’s) integrated electrical transmission and distribution facilities located primarily in the State of Texas and the systems and other property necessary to operate the transmission and distribution facilities, and all improvements to and expansions of such facilities, and each New Project (upon its completion) owned by the Company or a Subsidiary thereof; provided that, for the purposes hereof, “System” shall not be deemed to include any easements held by the Company or any Subsidiary.
“ System Leases ” means (1) the McAllen Lease, (2) the Stanton/Brady/Celeste Lease, (3) upon the effectiveness thereof, the Lease Agreement (ERCOT Transmission Assets) between the Company, as lessor, and Sharyland, as lessee, (4) upon the completion of the FERC Merger, the FERC Lease and (5) any and all other Leases and supplements thereto in connection with the System and the transmission and distribution facilities ancillary thereto and any easements associated therewith, in the case of each of the foregoing clauses (1) through (5) as amended, restated, supplemented or otherwise modified from time to time, or any new lease entered into in replacement thereof, in accordance with Section 9.8 and/or 10.12 of this Agreement, as applicable.
 
Schedule B-17
(To Annex A)

“Taxes” shall mean all present or future taxes, levies, imposts, duties, deductions, withholdings (including backup withholding), assessments, fees or other charges imposed by any Governmental Authority, including any interest, additions to tax or penalties applicable thereto.
“TDC” means Transmission and Distribution Company, L.L.C., a Texas limited liability company.
“ Third Amendment Date ” means December 10, 2014.
“ Total Debt ” means, with respect to the Company, all Indebtedness of the Company on a consolidated basis; provided , however , that for purposes of calculating the Company’s Total Debt to Capitalization Ratio, the Company’s Total Debt shall exclude Non-Recourse Debt of a Project Finance Subsidiary of the Company and that portion of the Swap Termination Value defined in clause (b) of the definition of “Swap Termination Value” and shall include Indebtedness of Sharyland on a consolidated basis (excluding Non-Recourse Debt of a Project Finance Subsidiary of Sharyland).
“ Total Debt to Capitalization Ratio ” means (a) the Company’s Total Debt, divided by (b) the sum of (i) Total Debt plus (ii) the Company’s capitalization, as shown on the Company’s balance sheet plus (iii) if positive, Sharyland’s capitalization, as shown on its balance sheet.
“Transaction Documents” means, collectively, the Note Documents and the Leases to which the Company or a Subsidiary thereof is a party.
“ Transfer ” means, with respect to any item, the sale, exchange, conveyance, lease, transfer or other disposition of such item.
“UCC” shall mean, with respect to any jurisdiction, the Uniform Commercial Code as in effect in such jurisdiction.
“UCC Collateral” means the Collateral that is of a type in which a valid security interest can be created under Article 8 or Article 9 of the UCC as in effect in New York.
“U.S. Economic Sanctions” shall mean United States economic sanctions, including but not limited to, the Trading with the Enemy Act, the International Emergency Economic Powers Act, CISADA or any similar law or regulation with respect to Iran or any other country, the Sudan Accountability and Divestment Act, any OFAC Sanctions Program, or any economic sanctions regulations administered and enforced by the United States or any enabling legislation or executive order relating to any of the foregoing.
“USA Patriot Act” means United States Public Law 107-56, Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 2001, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.
 
Schedule B-18
(To Annex A)

“Wholly-Owned Subsidiary” means, at any time, any Subsidiary one hundred percent of all of the voting interests of which are owned by any one or more of the Company and the Company’s other Wholly-Owned Subsidiaries at such time.
“Yield-Maintenance Amount” is defined in Section 8.6 .
 
Schedule B-19
(To Annex A)

RULES OF INTERPRETATION
 
1.	The singular includes the plural and the plural includes the singular; and words in the masculine, neuter or feminine gender shall be read and construed as though in either of the other genders where the context so requires.	
 
2.	The word “or” is not exclusive.	
 
3.	A reference to any law includes any amendment or modification to such law, and all regulations, rulings and other laws and regulations promulgated under such law.	
 
4.	A reference to a Person includes its successors and permitted assigns.	
 
5.	Accounting terms have the meanings assigned to them by GAAP (as defined in the applicable Financing Agreement), as applied by the accounting entity to which they refer.	
 
6.	The words “include,” “includes” and “including” are not limiting.	
 
7.	A reference in a document to an Article, Section, Exhibit, Schedule, Annex or Appendix is to the Article, Section, Exhibit, Schedule, Annex or Appendix of such document unless otherwise indicated. Exhibits, Schedules, Annexes or Appendices to any document shall be deemed incorporated by reference in such document.	
 
8.	References to “knowledge” or words of similar import refer to the actual knowledge of the current officers of the relevant Person, without any duty of investigation unless otherwise indicated.	
 
9.	References to any document, instrument or agreement (a) shall include all exhibits, schedules and other attachments thereto, (b) shall include all documents, instruments or agreements issued or executed in replacement thereof, and (c) shall mean such document, instrument or agreement, or replacement or predecessor thereto, as amended, modified and supplemented from time to time and in effect at any given time.	
 
10.	The words “hereof,” “herein” and “hereunder” and words of similar import when used in any document shall refer to such document as a whole and not to any particular provision of such document.	
 
11.	References to “days” shall mean calendar days, unless the term “Banking Days” shall be used. References to a time of day shall mean such time in New York City, unless otherwise specified.	
 
12.	The section and subsection headings in a document are for convenience of reference only and shall neither be deemed to be a part of such document nor modify, define, expand or limit any of the terms or provisions thereof.	
 
13.	References to agreements or other contractual obligations shall, unless otherwise specified, be deemed to refer to such agreements or contractual obligations as amended, supplemented, restated or otherwise modified from time to time.	
 
Schedule B-20
(To Annex A)

Exhibit 10.35

INFRAREIT, INC.
AMENDED AND RESTATED
REGISTRATION RIGHTS AND LOCK-UP AGREEMENT

Dated as of                      , 2015

TABLE OF CONTENTS
Page

ARTICLE 1 DEFINITIONS	  	 	2	  	
Section 1.1	 	Definitions	  	 	2	  	
Section 1.2	 	Interpretation	  	 	7	  	
		
ARTICLE 2 LOCK-OUT PERIOD FOR OFFERING	  	 	7	  	
Section 2.1	 	Lock-Out Period for Offering	  	 	7	  	
		
ARTICLE 3 REGISTRATION RIGHTS	  	 	8	  	
Section 3.1	 	Shelf Registration Under the Securities Act	  	 	8	  	
Section 3.2	 	Registration Procedures	  	 	11	  	
Section 3.3	 	Suspension of Use of the Shelf Registration Statement	  	 	16	  	
Section 3.4	 	Lockout Periods for Holder Sales	  	 	16	  	
Section 3.5	 	Piggy-Back Registration	  	 	17	  	
Section 3.6	 	Indemnification	  	 	18	  	
Section 3.7	 	Rule 144; Reports under Exchange Act	  	 	21	  	
		
ARTICLE 4 MISCELLANEOUS	  	 	21	  	
Section 4.1	 	Notices	  	 	21	  	
Section 4.2	 	Further Action	  	 	22	  	
Section 4.3	 	Successors and Assigns	  	 	22	  	
Section 4.4	 	Amendment and Waiver	  	 	22	  	
Section 4.5	 	Additional Holders	  	 	23	  	
Section 4.6	 	Severability	  	 	23	  	
Section 4.7	 	Counterparts	  	 	23	  	
Section 4.8	 	Governing Law	  	 	24	  	
Section 4.9	 	Waiver of Jury Trial	  	 	24	  	
Section 4.10	 	Forum Selection and Consent to Jurisdiction	  	 	24	  	
Section 4.11	 	Entire Understanding	  	 	24	  	
Section 4.12	 	No Third Party Beneficiaries	  	 	24	  	
Section 4.13    	 	No Presumption Against Drafter	  	 	24	  	
 
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INFRAREIT, INC.
AMENDED AND RESTATED
REGISTRATION RIGHTS AND LOCK-UP AGREEMENT
THIS AMENDED AND RESTATED REGISTRATION RIGHTS AND LOCK-UP AGREEMENT (this “ Agreement ”) is made and entered into as of                       , 2015, among InfraREIT, Inc., a Maryland corporation (together with its successors and assigns, the “ Company ”), and each of the persons listed on the attached Schedule A who become signatories to this Agreement (each, an “ Initial Holder ” and collectively, the “ Initial Holders ”).
RECITALS
WHEREAS, some of the Initial Holders and InfraREIT, L.L.C., a Delaware limited liability company formerly known as Electric Infrastructure Alliance of America, L.L.C. (the “ Predecessor Company ”), were parties to a Registration Rights and Lock-Up Agreement, dated as of November 23, 2010 (the “ Original Agreement ”);
WHEREAS, the Company is contemplating a firmly underwritten public offering (the “ Offering ”) of shares of the Company’s common stock, par value $0.01 per share (“ Common Shares ”), registered under the Securities Act (as defined below);
WHEREAS, immediately following the closing of the Offering (the “ Closing ”), the Predecessor Company will merge (the “ Merger ”) with and into the Company, with the Company surviving as the general partner of InfraREIT Partners, L.P., a Delaware limited partnership formerly known as Electric Infrastructure Alliance of America, L.P. (together with its successors and assigns, the “ Operating Partnership ”);
WHEREAS, certain Initial Holders are owners, or will become owners immediately following the consummation of the Merger, of Partnership Units (as defined below) and as such are granted a Redemption Right (as defined below) under the Second Amended and Restated Agreement of Limited Partnership of the Operating Partnership that will become effective upon the Closing (as it may be amended, supplemented or otherwise modified from time to time, the “ Partnership Agreement ”), pursuant to which such Initial Holders may receive Common Shares calculated in accordance with the Partnership Agreement and such Initial Holders have elected to become Holders (as defined below) under this Agreement;
WHEREAS, upon consummation of the Merger, certain Initial Holders will hold Common Shares directly and will hold additional Common Shares upon the conversion of shares of Class A common stock, par value $0.01 per share, and Class C common stock, par value $0.01 per share, of the Company into Common Shares on or about 32 days following the date of the Closing in accordance with the Amended and Restated Charter of the Company (the “ Charter ”); and
WHEREAS, the parties hereto desire to amend and restate the Original Agreement in its entirety to substitute the Company for the Predecessor Company and record their understanding regarding the registration and transfer of Registrable Securities.

NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
Section 1.1 Definitions . Capitalized terms used in this Agreement (including exhibits, schedules and amendments) shall have the meanings set forth below or in the Section of this Agreement referred to below, except as otherwise expressly indicated or limited by the context in which they appear in this Agreement.
“ Affiliate ” means, with respect to any Person, any Person directly or indirectly controlling, controlled by or under common control with such Person. For purposes of this definition, “control,” when used with respect to any Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms “controlling” and “controlled” have meanings correlative to the foregoing.
“ Agreement ” has the meaning set forth in the preamble to this Agreement.
“ Board of Directors ” or “ Board ” means the board of directors of the Company or any similar governing body of its successors and assigns.
“ Business Day ” means any day other than a Saturday, Sunday or other day in which commercial banks in New York, New York are authorized or required by law or executive order to be closed; provided that as long as Marubeni Corporation or its Controlled Affiliate is a Founding Investor, “Business Day” shall also exclude each public holiday in Tokyo, Japan if Marubeni Corporation or such Controlled Affiliate has delivered to the Company at least ten (10) days prior to the end of a calendar year a list of public holidays in Tokyo, Japan during the next calendar year.
“ Charter ” has the meaning set forth in the recitals to this Agreement.
“ Closing ” has the meaning set forth in the recitals to this Agreement.
“ Closing Price ” means the last reported sale price of a unit of a security regular way on a given day or, in case no such sale takes place on such day, the average of the reported closing bid and asked prices regular way, in each case on the New York Stock Exchange or such other principal national securities exchange on which the security is listed or admitted to trading, or, if the security is not listed or admitted to trading on any national securities exchange, the average of the closing bid and asked prices as furnished by any nationally recognized member of FINRA selected from time to time by the Company, reasonably and in good faith, for that purpose, or, if no such prices are furnished, the fair market value of the security as estimated by the Company using an identical valuation formula to that used in determining the pricing for the Company’s then most-recent sale of more than thirty five million dollars ($35,000,000) of similar securities to unaffiliated third parties, or if no such sale has occurred, as determined in good faith by the Board, which estimate shall be prepared at the expense of the Company; provided that any determination of the “Closing Price” of any security hereunder shall be based on the assumption that such security is freely transferable without registration under the Securities Act.
 
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“ Commission ” means the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act.
“ Common Shares ” has the meaning set forth in the recitals to this Agreement.
“ Company ” has the meaning set forth in the preamble to this Agreement.
“ Controlled Affiliate ” means, with respect to any Founding Investor, (a) any corporation, limited liability company, joint venture or other Entity of which a majority of the economic interest, and either (x) a majority of the voting power or (y) the right to direct the disposition of a majority of the shares of capital stock, membership interests, partnership interests or other equity interests and options or warrants to acquire, or securities convertible into, capital stock, membership interests, partnership interests or other equity securities of such Entity, are held, directly or indirectly, by such Founding Investor or by another Person in respect of which such Founding Investor is a Controlled Affiliate, or (b) any corporation, limited liability company, joint venture or other Entity of which such Founding Investor controls the voting power in such Entity and has the right to direct the disposition of the assets of such Entity.
“ Entity ” means any general partnership, limited partnership, proprietorship, corporation, joint venture, joint stock company, limited liability company, limited liability partnership, business trust, estate, governmental entity, cooperative, association or other foreign or domestic enterprise, including accounts or funds managed by a Holder or any of its subsidiaries.
“ Exchange Act ” means the Securities Exchange Act of 1934, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time of reference.
“ FINRA ” means the Financial Industry Regulatory Authority, Inc.
“ Founding Investor ” means each of John Hancock Life Insurance Company (U.S.A.), Marubeni Corporation, Teachers Insurance and Annuity Association of America, the OpTrust Original Founding Investor and Hunt-InfraREIT, L.L.C. (formerly known as Hunt EIAA, L.L.C.).
“ GAAP ” means generally accepted accounting principles in the United States, as consistently applied by the Company and the Operating Partnership.
“ Holder ” means (i) any Initial Holder who is the record or beneficial owner of any Registrable Security or any assignee or transferee of such Registrable Security (including assignments or transfers of Registrable Securities to such assignees or transferees as a result of the foreclosure on any loans secured by such Registrable Securities) (x) to the extent permitted under the Partnership Agreement or the Charter, as applicable, and (y)  provided such assignee or transferee agrees in writing to be bound by all the provisions hereof, unless such owner, assignee or transferee acquires such Registrable Security in a public distribution pursuant to a registration statement under the Securities Act or pursuant to transactions exempt from registration under the Securities Act where securities sold in such transaction may be resold without subsequent registration under the Securities Act and (ii) any other Person who becomes a Holder in accordance with Section 4.5(a) hereof.
 
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“ Holder Notice ” has the meaning set forth in Section 3.1(f) .
“ Initial Holder ” and “ Initial Holders ” have the meaning set forth in the preamble to this Agreement.
“ Issuer Shelf Registration Statement ” has the meaning set forth in Section 3.1(b) .
“ Notice and Questionnaire ” means a written notice, substantially in the form attached as Exhibit A , delivered by a Holder to the Company (i) notifying the Company of such Holder’s desire to include Registrable Securities held by it in a Shelf Registration Statement, (ii) containing all information about such Holder required to be included in such registration statement in accordance with applicable law, including Item 507 of Regulation S-K promulgated under the Securities Act, as amended from time to time, or any similar successor rule thereto, and (iii) pursuant to which such Holder agrees to be bound by the terms and conditions hereof.
“ Offering ” has the meaning set forth in the recitals to this Agreement.
“ Operating Partnership ” has the meaning set forth in the recitals to this Agreement.
“ OpTrust Original Founding Investor ” means, collectively, OPSEU Pension Plan Trust Fund, OpTrust Infrastructure N.A. Inc., and any other Controlled Affiliate of OPSEU Pension Plan Trust Fund which holds Common Shares as of the date of this Agreement.
“ Original Agreement ” has the meaning set forth in the recitals to this Agreement.
“ Partnership Agreement ” has the meaning set forth in the recitals to this Agreement.
“ Partnership Unit ” has the meaning set forth in the Partnership Agreement.
“ Permitted Transferee ” has the meaning set forth in the Partnership Agreement.
“ Person ” means any individual, corporation, proprietorship, firm, partnership, limited partnership, limited liability company, trust, association or other Entity.
“ Prospectus ” means the prospectus included in the Shelf Registration Statement, including any preliminary prospectus, and any amendment or supplement thereto, including any supplement relating to the terms of the offering of any portion of the Registrable Securities covered by the Shelf Registration Statement, and in each case including all material incorporated by reference therein.
“ Publicly Traded ” means listed or admitted to trading on the New York Stock Exchange, NYSE Amex, the NASDAQ Stock Market or another national securities exchange, or any successor to any of the foregoing.
 
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“ Redeemable Units ” means Partnership Units that are redeemable for Common Shares pursuant to the Redemption Right.
“ Redemption Right ” has the meaning set forth in the Partnership Agreement.
“ Registrable Securities ” means, with respect to any Holder, (a) all Common Shares owned, either of record or beneficially, by the Holder, (b) any Common Shares that may be issued upon redemption of Redeemable Units held by the Holder that are exchanged for Common Shares upon a redemption of Partnership Units pursuant to the Partnership Agreement, (c) any securities issued upon conversion or exchange of such Common Shares, or (d) any securities issued or issuable with respect to such Common Shares by way of conversion, exchange, stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise, including securities issued or issuable as a dividend or other distribution with respect to or in replacement of any shares referred to above. As to any particular Registrable Securities, they shall cease to be Registrable Securities at the earliest time as one of the following shall have occurred: (i) a registration statement (including a Resale Shelf Registration Statement) covering the sale or other transfer of such Common Shares has been declared effective by the Commission and all such Common Shares have been disposed of pursuant to such effective registration statement; (ii) such shares (other than Restricted Shares) were issued pursuant to an effective registration statement (including an Issuer Shelf Registration Statement) and are freely tradeable by the Holder without restriction; (iii) such Common Shares have been publicly sold under Rule 144; (iv) such Common Shares are held by each Holder who is an Affiliate of the Company if all of such Common Shares are eligible for sale pursuant to Rule 144 and could be sold in one transaction in accordance with the volume limitations contained in Rule 144(e)(1)(i); (v) such Common Shares are held by Holders who are not Affiliates of the Company that are eligible for sale pursuant to Rule 144(d); or (vi) such Common Shares have been otherwise transferred in a transaction that constitutes a sale thereof under the Securities Act, the Company has delivered to the Holder’s transferee a new certificate or other evidence of ownership for such Common Shares not bearing the Securities Act restricted stock legend and such Common Shares subsequently may be publicly resold or otherwise transferred by such transferee without restriction or registration under the Securities Act. For the avoidance of doubt, Registrable Securities shall be deemed to include all Common Shares held by a Holder, including Common Shares issuable upon redemption of Redeemable Units, without regard to the ownership limitations set forth in the Charter, to the maximum extent necessary to accommodate the sale of Common Shares pursuant to a registered offering in accordance with Section 8.7.C of the Partnership Agreement.
“ Registration Expenses ” means any and all expenses incident to performance of or compliance with this Agreement, including: (i) all applicable registration and filing fees imposed by the Commission, FINRA or any other self-regulatory organization; (ii) all fees and expenses incurred in connection with compliance with state securities or “blue sky” laws (including reasonable fees and disbursements of counsel in connection with qualification of any of the Registrable Securities under any state securities or blue sky laws and the preparation of a blue sky memorandum) and compliance with the rules of FINRA; (iii) all expenses of any Persons in preparing or assisting in preparing, word processing, printing and distributing the Shelf Registration Statement, any Prospectus, certificates and other documents relating to the
 
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performance of and compliance with this Agreement; (iv) all fees and expenses incurred in connection with the listing, if any, of any of the Registrable Securities on any securities exchange or exchanges pursuant to Section 3.2(m) ; (v) the fees and disbursements of counsel for the Company and of the independent public accountants of the Company, including the expenses of any special audits or “cold comfort” letters required by or incident to such performance and compliance; and (vi) the fees and expenses, not to exceed $100,000 in the aggregate for all Shelf Registrations effected pursuant to this Agreement, of one counsel for all the Holders (which counsel shall be chosen by the Holders and be reasonably acceptable to the Company). Registration Expenses shall specifically exclude underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of Registrable Securities by a Selling Holder, all of which shall be borne by such Holder in all cases.
“ Requesting Holders ” has the meaning set forth in Section 3.1(f) .
“ Resale Rules ” has the meaning set forth in Section 3.7 .
“Resale Shelf Registration Statement” has the meaning set forth in Section 3.1(a) .
“ Restricted Shares ” means Common Shares issued under an Issuer Shelf Registration Statement which if sold by the holder thereof would constitute “restricted securities” as defined under Rule 144 or would otherwise be subject to volume limitations under Rule 144.
“ Rule 144 ” means Rule 144 (or any similar provision then in force) promulgated under the Securities Act.
“ Securities Act ” means the Securities Act of 1933, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time of reference.
“ Selling Expenses ” means (a) any underwriting discounts and commissions or similar charges attributable to the sale of Registrable Shares included in a registration, (b) any transfer taxes relating to the sale or disposition of Registrable Securities by a Selling Holder or (c) any other expenses of the Selling Holders that do not constitute Registration Expenses.
“ Selling Holder ” means any Holder who sells Registrable Securities pursuant to a public offering registered hereunder.
“ Shelf Registration ” means a registration required pursuant to Section 3.1 .
“ Shelf Registration Statement ” means a Resale Shelf Registration Statement or an Issuer Shelf Registration Statement, as applicable.
“ Suspension Notice ” has the meaning set forth in Section 3.3(a) .
“ Transfer ” means, whether by operation of law or otherwise, any sale, transfer, distribution, assignment, bequest, lease, pledge, hypothecation, encumbrance, grant of a security interest in, or grant, issue, sale or conveyance of any option, warrant or right to acquire or to otherwise dispose of, transfer, or permit to be transferred (including (a) the granting of any option or entering into any agreement for the sale, transfer or other disposition of Common
 
6

Shares or Partnership Units, (b) the sale, transfer, assignment or other disposition of any securities or rights convertible into or exchangeable for Common Shares, but excluding (i) the exchange or conversion of any security of the Company for Common Shares or the Operating Partnership for Partnership Units or (ii) the redemption of Partnership Units pursuant to Section 8.7 of the Partnership Agreement, as applicable, (c) any transfer or other disposition of any interest in Common Shares or Partnership Units as a result of a change in the marital status of the holder thereof), and (d) any change in the citizenship or country of formation, incorporation, organization or domicile of the holder of Common Shares or Partnership Units). For clarity, a “Transfer” shall include any transaction, occurrence or event described in the foregoing clauses (a), (b), (c) or (d) that is effected, occurs or arises directly or indirectly, including without limitation, by a sale, transfer or assignment of a controlling interest in a Holder or by way of a merger, consolidation, business combination or similar transaction; provided , however , for any Holder which has issued securities of a class that are Publicly Traded (or securities of a class which are similarly traded publicly on a securities exchange or market in any other jurisdiction), “Transfer” shall not include a sale of any such securities of a class which are so publicly traded. The term “ Transferred ” shall have correlative meanings.
“ Underwriting Notice ” has the meaning set forth in Section 3.1(f) .
“ Violation ” has the meaning set forth in Section 3.6(a) .
Section 1.2 Interpretation . Unless the context otherwise requires: (i) a technical accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (ii) “or” is not exclusive; (iii) references to “Articles,” “Sections” and “Exhibits” refer to the articles, sections and the exhibits to this Agreement, unless explicitly stated or the context requires otherwise; (iv) “herein,” “hereof” and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section, Exhibit or other subdivision; (v) references to statutes, regulations and rules include subsequent amendments and successors thereto unless the context otherwise requires; (vi) the various headings of this Agreement are provided herein for convenience only and shall not affect the meaning or interpretation of this Agreement or any provision hereof; (vii) wherever from the context it appears appropriate, each term stated in either the singular or the plural shall include the singular and the plural, and pronouns stated in either the masculine, the feminine or the neuter gender shall include the masculine, feminine and neuter; (viii) “including” means “including, without limitation”; and (ix) if any payment hereunder shall become due on any day which is not a Business Day, such payment shall be made on the next succeeding Business Day.
ARTICLE 2
LOCK-OUT PERIOD FOR OFFERING
Section 2.1 Lock-Out Period for Offering . Each Holder hereby acknowledges and agrees that it is subject to the lock-out period described in Section 2.1 of the Original Agreement, and, in furtherance of such provision, has executed a lock-up agreement with the underwriters in connection with the Offering, pursuant to which such Holder has agreed not to Transfer any Registrable Securities for a period of time following the closing of the Offering subject to the terms and conditions of such lock-up agreement.
 
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ARTICLE 3
REGISTRATION RIGHTS
Section 3.1 Shelf Registration Under the Securities Act .
(a) Filing of Resale Shelf Registration Statement . The Company shall use its commercially reasonable efforts to cause to be filed on the first Business Day after the first anniversary of the Closing, or as soon as reasonably practicable thereafter, a registration statement on an appropriate form for an offering to be made on a delayed or continuous basis pursuant to Rule 415 under the Securities Act (the “ Resale Shelf Registration Statement ”) and providing for the sale by the Holders of all, but not less than all, of their Registrable Securities in accordance with the terms hereof and will use its commercially reasonable efforts to cause the Resale Shelf Registration Statement to be declared effective by the Commission as soon thereafter as is practicable. The Company agrees to use its commercially reasonable efforts to keep the Resale Shelf Registration Statement with respect to the Registrable Securities continuously effective for a period expiring on the date on which all remaining Registrable Securities covered by the Resale Shelf Registration Statement have been sold. Subject to Section 3.2(b) below, the Company further agrees to amend the Resale Shelf Registration Statement if and as required by the rules, regulations or instructions applicable to the registration form used by the Company for the Resale Shelf Registration Statement or by the Securities Act or any rules and regulations thereunder.
(b) Filing of an Issuer Shelf Registration Statement . The Company may, at its option, satisfy its obligation to prepare and file a Resale Shelf Registration Statement pursuant to Section 3.1(a) above with respect to Common Shares issuable upon redemption of Partnership Units pursuant to the Partnership Agreement (the “ Redeemable Units ”) by preparing and filing with the Commission no later than ten (10) Business Days after the first anniversary of the Closing, or as soon as reasonably practicable thereafter, a registration statement on an appropriate form for an offering to be made on a delayed or continuous basis pursuant to Rule 415 under the Securities Act (an “ Issuer Shelf Registration Statement ”) providing for the issuance by the Company of Common Shares registered under the Securities Act, from time to time, to the Holders of such Redeemable Units in lieu of the Operating Partnership’s obligation to pay cash for such Redeemable Units. The Company shall use commercially reasonable efforts to cause the Issuer Shelf Registration Statement to be declared effective by the Commission as promptly as reasonably practicable after filing thereof. The Company shall use commercially reasonable efforts, subject to Sections 3.1(d) and 3.3 hereof, to keep the Issuer Shelf Registration Statement continuously effective for a period expiring on the date all of the Common Shares covered by such Issuer Shelf Registration Statement have been issued by the Company pursuant thereto. If the Company shall exercise its rights under this Section 3.1(b) , Holders (other than Holders of Restricted Shares) shall have no right to have Common Shares issued or issuable upon exchange of the Redeemable Units included in a Resale Shelf Registration Statement pursuant to Section 3.1(a) above.
 
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(c) Inclusion in Shelf Registration Statement . Each Holder that has delivered a duly completed and executed Notice and Questionnaire to the Company as promptly as practicable after receipt of the Company’s request for such document, but in no event later than twenty (20) Business Days thereafter, shall be entitled to have its Registrable Securities included in the applicable Shelf Registration Statement and shall be named as a selling securityholder in such Shelf Registration Statement and the related prospectus in such a manner as to permit such Holder to deliver such prospectus to purchasers of Registrable Securities in accordance with applicable law. If required by applicable law, subject to the terms and conditions hereof, after effectiveness of the applicable Shelf Registration Statement, the Company shall file a supplement to such prospectus or amendment to such Shelf Registration Statement not less frequently than once a quarter as necessary to name as selling securityholders therein any Holders that provide to the Company a duly completed and executed Notice and Questionnaire and shall use commercially reasonable efforts to cause any post-effective amendment to such Shelf Registration Statement filed for such purpose to be declared effective by the Commission as promptly as reasonably practicable after the filing thereof.
(d) Subsequent Filing . The Company shall prepare and file such additional registration statements as necessary every three (3) years and use commercially reasonable efforts to cause such registration statements to be declared effective by the Commission so that the registration statement remains continuously effective, subject to Section 3.3 hereof, with respect to resales of Registrable Securities as of and for the periods required under Section 3.1(a) or (b)  hereof, as applicable, such subsequent registration statements to constitute an Issuer Shelf Registration Statement or a Resale Shelf Registration Statement, as the case may be, hereunder.
(e) Expenses . Except as provided herein, the Company shall pay all Registration Expenses in connection with the registration pursuant to Section 3.1(a) and Section 3.1(b) and the performance of the Company’s obligations under this Section 3.1 and Section 3.2 . The Company shall not be liable for any underwriting or brokerage discounts and commissions, the fees and expenses of counsel retained by any Holder (other than the fees and expenses, not to exceed $100,000 in the aggregate for all Shelf Registrations effected pursuant to this Agreement, of one counsel reasonably acceptable to the Company for all the Holders, which fees and expenses of counsel are Registration Expenses hereunder), and transfer taxes, if any, relating to the sale or disposition of such Holder’s Registrable Securities pursuant to the Shelf Registration Statement or Rule 144.
(f) Underwritten Offering .
(i) If any of the Registrable Securities covered by the Shelf Registration are to be sold in an underwritten public offering, one or more Holders intending to pursue such underwritten offering (the “ Requesting Holders ”) shall deliver a notice to the Company of such intent (the “ Holder Notice ”), and within ten (10) Business Days after receipt of the notice of intent from such Holder for an underwritten offering, the Company shall give written notice (the “ Underwriting Notice ”) of such notice of intent to all other Holders and such other Holders shall be entitled to include in such an underwritten offering all or part of their respective Registrable Securities by notice to the Company for inclusion therein within fifteen (15) Business Days after the Underwriting Notice is given. All notices made pursuant to this Section 3.1(f) shall specify the aggregate number of Registrable Securities to be included. The
 
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Company agrees to cooperate with any such request for an underwritten offering and to take all such other reasonable actions in connection therewith as provided in Section 3.2(p) ; provided that (x) the Holder Notice must be delivered by Requesting Holders that hold in the aggregate at least ten percent (10%) of the then outstanding Registrable Securities and (y) the Registrable Securities to be included in such underwritten public offering shall have an aggregate value equal to or greater than fifty million dollars ($50,000,000), based upon the Closing Price as of the date of receipt of the Holder Notice by the Company; and provided , further , that the Company shall not be obligated to effect more than four (4) underwritten offerings hereunder; and provided , further , that the Company shall not be obligated to effect, or take any action to effect, an underwritten offering within ninety (90) days following the last date on which an underwritten offering was effected pursuant to this Section 3.1(f) or if longer, the length of any lock-up required by the underwriters in the prior underwritten offering; and provided , further , that the Company shall not be obligated to effect, or take any action to effect, an underwritten offering if the Company responds to the Holder Notice with an indication that the Company has the good faith intention to commence, within 90 days of the Holder Notice, an underwritten primary offering to which Section 3.5 will apply, in which case the Holders may not request an underwritten offering pursuant to this Section 3.1(f) during such 90-day period (the Company may not exercise its rights under this proviso more than one time during any 12-month period).
(ii) In the case of any firm commitment underwritten offering, if the managing underwriter or underwriters of such offering advise the Company in writing that in its or their opinion the number of Registrable Securities proposed to be sold in such offering exceeds the number of Registrable Securities that can be sold in such offering without adversely affecting the market for the Common Shares, the Company will include in such offering the number of Registrable Securities that in the opinion of such managing underwriter or underwriters can be sold without adversely affecting the market for the Common Shares. In such event, the number of Registrable Securities to be offered for the account of each Holder requesting to include Registrable Securities in such offering (including the Holder providing the initial Holder Notice) shall be reduced pro rata on the basis of the relative number of Registrable Securities requested by each such Holder to be included in such offering to the extent necessary to reduce the total number of Registrable Securities to be included in such offering to the number recommended by such managing underwriter or underwriters.
(iii) No Person may participate in any underwritten offerings hereunder unless such Person (A) agrees to sell such Person’s securities on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (B) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements and these registration rights provided for in this Article 3 .
 
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(g) Selection of Underwriters . If any of the Registrable Securities covered by the Shelf Registration are to be sold in an underwritten offering, the Company shall have the right to select the investment banker or investment bankers and manager or managers that will underwrite the offering and to approve the underwriting arrangements; provided , however , that such investment bankers and managers and underwriting arrangements must be reasonably acceptable to the Selling Holders holding a majority of the Registrable Securities to be sold in the underwritten offering.
(h) Company’s Ability to Delay . The Company may delay the filing of a registration statement under this Section 3.1 only if it would be entitled to delay such filing pursuant to, and for such time as is permitted by, Section 3.3 below.
(i) Form S-3 . The Company agrees to use its commercially reasonable efforts to meet the general eligibility requirements under the Securities Act for the use of a registration statement on Form S-3.
Section 3.2 Registration Procedures . In connection with the obligations of the Company with respect to the applicable Shelf Registration Statement contemplated by Section 3.1 , the Company shall (except as otherwise provided in this Agreement), as expeditiously as possible after the Company’s obligations vest under Section 3.1 :
(a) prepare and file with the Commission the Shelf Registration Statement, which shall (i) be available for the sale of the Registrable Securities in accordance with the intended method or methods of distribution by the Selling Holders thereof and (ii) comply as to form in all material respects with the requirements of the applicable form and include all financial statements required by the Commission to be filed therewith;
(b) (i) prepare and file with the Commission such amendments to the Shelf Registration Statement as may be necessary to keep the Shelf Registration Statement effective for the applicable period; (ii) cause the Prospectus to be amended or supplemented as required and to be filed as required by Rule 424 or any similar rule that may be adopted under the Securities Act; (iii) respond as promptly as practicable to any comments received from the Commission with respect to the Shelf Registration Statement or any amendment thereto; and (iv) comply with the provisions of the Securities Act with respect to the disposition of all securities covered by the Shelf Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the Selling Holders thereof;
(c) promptly furnish to each Selling Holder of Registrable Securities, without charge, as many copies of each Prospectus and any amendment or supplement thereto as such Selling Holder may reasonably request in order to facilitate the public sale or other disposition of the Registrable Securities; the Company consents to the use of the Prospectus and any amendment or supplement thereto by each such Selling Holder of Registrable Securities in connection with the offering and sale of the Registrable Securities covered by the Prospectus or amendment or supplement thereto;
 
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(d) use its commercially reasonable efforts to register or qualify the Registrable Securities by the time the Shelf Registration Statement is declared effective by the Commission under all applicable state securities or blue sky laws of such jurisdictions in the United States and its territories and possessions as any Holder of Registrable Securities covered by the Shelf Registration Statement shall reasonably request in writing, keep each such registration or qualification effective during the period the Shelf Registration Statement is required to be kept effective or during the period offers or sales are being made by a Selling Holder, whichever is shorter; provided , however , that in connection therewith, the Company shall not be required to (i) qualify as a foreign corporation to do business or to register as a broker or dealer in any such jurisdiction where it would not otherwise be required to qualify or register but for this Section 3.2(d) , (ii) subject itself to taxation in any such jurisdiction, or (iii) file a general consent to service of process in any such jurisdiction;
(e) notify each Holder of Registrable Securities promptly and, if requested by such Holder, confirm in writing, (i) when the Shelf Registration Statement and any post-effective amendments thereto have become effective, (ii) when any amendment or supplement to the Prospectus has been filed with the Commission, (iii) of the issuance by the Commission or any state securities authority of any stop order suspending the effectiveness of the Shelf Registration Statement or any part thereof or the initiation of any proceedings for that purpose, (iv) if the Company receives any notification with respect to the suspension of the qualification of the Registrable Securities for offer or sale in any jurisdiction or the initiation of any proceeding for such purpose, and (v) of the happening of any event during the period the Shelf Registration Statement is effective as a result of which (A) the Shelf Registration Statement contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading or (B) the Prospectus as then amended or supplemented contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading;
(f) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of the Shelf Registration Statement or any part thereof as promptly as possible;
(g) furnish to each Selling Holder of Registrable Securities, without charge, at least one conformed copy of the Shelf Registration Statement and any post-effective amendment thereto (without documents incorporated therein by reference or exhibits thereto, unless requested);
(h) cooperate with the Selling Holders of Registrable Securities to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any Securities Act legend; and enable certificates for such Registrable Securities to be issued for such numbers of shares and registered in such names as the Selling Holders may reasonably request at least ten (10) Business Days prior to any sale of Registrable Securities; and in connection therewith, if required by the Company’s transfer agent, the Company shall, promptly after the effectiveness of a Shelf Registration Statement, cause an opinion of counsel as to the effectiveness of such Shelf
 
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Registration Statement to be delivered to and maintained with its transfer agent, together with any other authorizations, certificates and directions required by the transfer agent which authorize and direct the transfer agent to issue such Registrable Securities without legend upon sale by the Selling Holder of such Registrable Securities under such Shelf Registration Statement;
(i) upon the occurrence of any event contemplated by clause (v) of Section 3.2(e) , use its commercially reasonable efforts promptly to prepare and file an amendment or a supplement to the Prospectus or any document incorporated therein by reference or prepare, file and obtain effectiveness of a post-effective amendment to the Shelf Registration Statement, or file any other required document, in any such case to the extent necessary so that, as thereafter delivered to the purchasers of the Registrable Securities, such Prospectus as then amended or supplemented will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading;
(j) make available for inspection by the Holders of Registrable Securities and any counsel, accountants or other representatives retained by such Holders all financial and other records, pertinent corporate documents and properties of the Company and cause the officers, trustees and employees of the Company to supply all such records, documents or information reasonably requested by such Holders, counsel, accountants or representatives in connection with the Shelf Registration Statement; provided , however , that such records, documents or information which the Company determines in good faith to be confidential and notifies such Holders, counsel, accountants or representatives in writing that such records, documents or information are confidential shall not be disclosed by such Holders, counsel, accountants or representatives unless (i) such disclosure is ordered pursuant to a subpoena or other order from a court of competent jurisdiction, or (ii) such records, documents or information become generally available to the public other than through a breach of this Agreement;
(k) a reasonable time prior to the filing of the Shelf Registration Statement or any amendment thereto, or any Prospectus or any amendment or supplement thereto, provide copies of such document (not including any documents incorporated by reference therein unless requested) to the Holders of Registrable Securities;
(l) provide one (1) legal counsel to the Holders (which counsel shall be chosen by the Holders and be reasonably acceptable to the Company) with an opportunity to review and comment upon each Shelf Registration Statement and any related Prospectus included therein at least five (5) Business Days prior to their initial filing with the Commission and upon all amendments and supplements thereto such lesser period prior to their filing with the Commission as shall be reasonable and appropriate under the circumstances, and the Company shall not file any documents to which such legal counsel to the Holders reasonably objects in writing (it being agreed that such writing may for this purpose be in electronic format); provided that any fees and expenses of such counsel shall be borne by the parties as provided in Section 3.1(e) ;
 
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(m) use its commercially reasonable efforts to cause all Registrable Securities to be listed on any national securities exchange on which similar securities issued by the Company are then listed;
(n) provide a CUSIP number for all Registrable Securities, not later than the effective date of the Shelf Registration Statement;
(o) use its commercially reasonable efforts to make available to its security holders, as soon as reasonably practicable, an earnings statement covering at least twelve (12) months which shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder;
(p) if requested by a Selling Holder or any underwriters engaged by such Selling Holder for purposes of distributing the Registrable Securities, enter into such agreements (including an underwriting agreement in form, scope and substance as is customary in underwritten offerings) and take all such other reasonable actions in connection therewith (including those reasonably requested by the underwriters or such Selling Holder) in order to expedite or facilitate the disposition of such Registrable Securities, and in such connection, (i) make such representations and warranties to the underwriters with respect to the business of the Company and the Shelf Registration Statement, Prospectus and documents, if any, incorporated or deemed to be incorporated by reference therein, in each case, in form, substance and scope as are customarily made by issuers to underwriters in underwritten offerings, and confirm the same if and when requested; (ii) obtain customary opinions of counsel to the Company and updates thereof (which shall be in form and substance reasonably satisfactory to the Selling Holders or to the underwriters and their counsel, as the case may be), addressed to such Selling Holder and, if applicable, each of the underwriters; (iii) obtain “cold comfort” letters and updates thereof from the independent registered public accountants of the Company, addressed to such Selling Holder and, if applicable, each of the underwriters, such letters to be in customary form and covering matters of the type customarily covered in “cold comfort” letters in connection with any such offerings (in each case, to the extent permitted by applicable accounting rules and guidelines); (iv) if an underwriting agreement is entered into, the same shall contain indemnification provisions and procedures no less favorable to the underwriters than those set forth in Section 3.6 and cross indemnification by the underwriters in form and substance as is customary in connection with such offering, in favor of the Company or the Selling Holders, as the case may be; and (v) deliver such documents and certificates as may be reasonably requested by the managing underwriters and their counsel to evidence the continued validity of the representations and warranties made pursuant to clause (i) above of this Section 3.2(p) and to evidence compliance with any customary conditions contained in the underwriting agreement entered into by the Company;
(q) otherwise comply in all material respects with all applicable rules and regulations of the Commission that are applicable to the Company in connection with any Shelf Registration Statement and the disposition of all Registrable Securities covered by such Shelf Registration Statement, including by filing with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act in order to keep any Shelf Registration Statement effective; and
 
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(r) subject to the foregoing, take all other reasonable actions necessary to facilitate disposition by the Holders pursuant to such Shelf Registration Statement.
Each Selling Holder agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3.2(e)(iii) , (iv)  and (v)  hereof or upon receipt of a Suspension Notice, such Selling Holder will forthwith discontinue disposition of Registrable Securities pursuant to the Shelf Registration Statement covering such Registrable Securities until such Selling Holder’s receipt of written notice from the Company that such disposition may be made and, in the case of Section 3.2(e)(v) hereof or, if applicable, Section 3.3 hereof, copies of any supplemented or amended prospectus contemplated by Section 3.2(e)(v) hereof or, if applicable, prepared under Section 3.3 hereof, and, if so directed by the Company, such Selling Holder will deliver to the Company all copies, other than permanent file copies, then in such Selling Holder’s possession, of the most recent prospectus covering such Registrable Securities at the time of receipt of such notice. Each Selling Holder of Registrable Securities agrees that it will immediately notify the Company at any time when a prospectus relating to the registration of such Registrable Securities is required to be delivered under the Securities Act of the happening of an event as a result of which information previously furnished by such Selling Holder to the Company in writing for inclusion in such prospectus contains an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made.
The Company may require each Selling Holder of Registrable Securities to furnish to the Company in writing such information regarding the proposed distribution by such Selling Holder of such Registrable Securities as the Company may from time to time reasonably request in writing.
In connection with and as a condition to the Company’s obligations with respect to the Shelf Registration Statement pursuant to Section 3.1 and this Section 3.2 , each Selling Holder covenants and agrees that (i) it will not offer or sell any Registrable Securities under the Shelf Registration Statement until it has received copies of the Prospectus as then amended or supplemented as contemplated by Section 3.2(c) and notice from the Company that the Shelf Registration Statement and any post-effective amendments thereto have become effective as contemplated by Section 3.2(e) ; (ii) such Holder and any of its officers, directors or Affiliates, if any, must comply with the provisions of Regulation M under the Exchange Act as applicable to them in connection with sales of Registrable Securities pursuant to the Shelf Registration Statement; and (iii) such Selling Holder and any of its officers, directors or Affiliates, if any, must enter into such customary written agreements as the Company shall reasonably request to ensure compliance with clause (ii) above.
 
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Section 3.3 Suspension of Use of the Shelf Registration Statement .
(a) Notwithstanding anything to the contrary contained herein, the Company shall not be required to take any of the actions described in Section 3.1(a) , Section 3.2(a) , clauses (i), (ii) or (iii) of Section 3.2(b) , Section 3.2(d) or Section 3.2(i) with respect to each Holder holding Registrable Securities, and each Holder holding Registrable Securities agrees not to effect any sale of Registrable Securities through the Shelf Registration Statement, for a period not to exceed ninety (90) days from the date of the Suspension Notice (as defined below) in the event that the Company delivers written notice (each, a “ Suspension Notice ”) to each such Selling Holder of Registrable Securities to the effect that in the good faith judgment of the Board, as a result of a pending material corporate development or transaction, it would be seriously detrimental to the Company or its stockholders to cause the Shelf Registration Statement or such filings to be made or to become effective or to amend or supplement the Shelf Registration Statement or to permit the continued use thereof and that such Selling Holder may not make offers or sales under the Shelf Registration Statement for a period not to exceed ninety (90) days from the date of such Suspension Notice; provided , however , that the Company may deliver only two (2) such Suspension Notices within any twelve (12) month period and the period(s) of time addressed by such Suspension Notices shall not exceed one hundred twenty (120) days in the aggregate in any twelve (12) month period.
(b) If all reports required to be filed by the Company pursuant to the Exchange Act have not been filed by the required date without regard to any extension, or if the consummation of any business combination by the Company has occurred or is probable for purposes of Rule 3-05 or Article 11 of Regulation S-X promulgated under the Securities Act or any similar successor rule, or if a post-effective amendment must be filed to update the prospectus pursuant to Section 10(a)(3) of the Securities Act, upon written notice thereof by the Company to the Holders, the rights of the Holders to offer, sell or distribute any Registrable Securities pursuant to a Shelf Registration Statement or to require the Company to take action with respect to the registration or sale of any Registrable Securities pursuant to a Shelf Registration Statement shall be suspended until the date on which the Company has filed such reports or obtained and filed the financial information required by Rule 3-05 or Article 11 of Regulation S-X to be included or incorporated by reference, as applicable, in a Shelf Registration Statement, and the Company shall use commercially reasonable efforts to file the required reports or post-effective amendment or obtain and file the financial information required to be included or incorporated by reference, as applicable, as promptly as commercially practicable, and shall notify the Holders as promptly as practicable when such suspension is no longer required.
Section 3.4 Lockout Periods for Holder Sales . In the event (a) of an underwritten offering covered by the Shelf Registration following the delivery of an Underwriting Notice or (b) the Company intends to issue shares of beneficial interest to the public in an underwritten offering after the Closing, each Holder agrees, if requested by the managing underwriter or underwriters for such underwritten offering, not to effect any Transfer of Registrable Securities or any securities convertible into or exchangeable or exercisable for such Registrable Securities, including a sale pursuant to Rule 144, except with the consent of the managing underwriter or underwriters, during the period reasonably required by the underwriter or underwriters for such offering, which shall not be longer than the period beginning ten (10) Business Days prior to the consummation of such underwritten offering and ending on the day that is ninety (90) days after the consummation of such underwritten offering; provided that the foregoing restriction shall not
 
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apply with respect to any non-public Transfer by any Holder to a Permitted Transferee of such Holder. Notwithstanding the foregoing, this Section 3.4 shall not be applicable to or otherwise be binding on any Holder unless it is applicable to and otherwise binding on all Holders who hold at least one percent (1%) of the Company’s Common Shares and the Company causes all of its executive officers and directors to be similarly bound.
Section 3.5 Piggy-Back Registration.
(a) If at any time on or after the date hereof, the Company proposes to register Common Shares under the Securities Act (other than (i) a registration statement on Form S-4 or S-8, or any successor or other forms promulgated for similar purposes, or (ii) a registration statement with respect to corporate reorganizations or other transactions under Rule 145 of the Securities Act or any successor rule promulgated for similar purposes), whether or not for sale for its own account (including, without limitation, any registration effected pursuant to Section 3.1 hereof), in a manner which would permit registration of Registrable Securities for sale to the public under the Securities Act, each Holder shall have the right to include in such registration all or part of the Registrable Securities held by such Holder (the “ Piggyback Registration Right ”). At such time, the Company shall give prompt written notice to all Holders of Registrable Securities of its intention to register Common Shares.
(b) Any Holder wishing to exercise its Piggyback Registration Right shall deliver to the Company a written notice within fifteen (15) days after the receipt of the Company’s notice. Such Holder’s written notice shall specify the number of Common Shares intended to be disposed of by such Holder, which might be all or a portion of such Holder’s Registrable Securities. The Company will, subject to Sections 3.5(c) and (f)  below, use its commercially reasonable efforts to effect the registration under the Securities Act of all Registrable Securities which the Company has been so requested to register by the Holders thereof, to the extent requisite to permit the disposition of the Registrable Securities so to be registered; provided that (x) if, at any time after giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to proceed with the proposed registration of the securities to be sold by it, the Company may, at its election, give written notice of such determination to each Holder of Registrable Securities and, thereupon, shall be relieved of its obligation to register any Registrable Securities in connection with such registration, and (y) if such registration involves an underwritten offering, all Holders of Registrable Securities requesting to be included in the Company’s registration must sell their Registrable Securities to the underwriters selected by the Company on the same terms and conditions as apply to the Company (including entering into an underwriting agreement in customary form with the underwriter or underwriters selected for such offering by the Company), as may be customary or appropriate in combined primary and secondary offerings.
(c) If a registration requested pursuant to this Section 3.5 involves an underwritten public offering, any Holder of Registrable Securities requesting to be included in such registration may elect, in writing at least one (1) day prior to the first use of a preliminary prospectus in connection with such registration, not to register such securities in connection with such registration.
 
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(d) All Holders of Registrable Securities requesting to be included in any registration shall cooperate with the Company in all reasonable respects by supplying information and executing documents relating to such Holder or the Registrable Securities owned by such Holder in connection with such registration and shall enter into such undertakings and take such other action relating to a proposed offering which the Company or the underwriters may reasonably request as being necessary to ensure compliance with federal and state securities laws and the rules or other requirements of a securities exchange listing or otherwise to effectuate an offering.
(e) The Company shall pay all Registration Expenses incurred in connection with each registration of Registrable Securities pursuant to this Section 3.5 . All Selling Expenses applicable to Registrable Securities sold by Holders incurred in connection with each registration pursuant to this Section 3.5 shall be borne by the Holders of the Registrable Securities so registered pro rata based on the number of securities so registered.
(f) If a registration pursuant to this Section 3.5 involves an underwritten offering and the managing underwriter determines in good faith that marketing factors require a limitation on the number of securities to be underwritten, the number of securities that may be included will be limited to the number of securities that, in the opinion of such underwriter, should be included, and the securities to be included in the underwriting shall be allocated, first, to the Company and, second, pro rata to all other requesting Holders on the basis of the relative number of Registrable Securities then requested to be sold by each such Holder (provided that any securities thereby allocated to any such Holder that exceed such Holder’s request will be reallocated among the remaining requesting Holders in like manner).
Section 3.6 Indemnification . In the event Common Shares are sold by Holders pursuant to the Offering or any Registrable Securities are included in a Shelf Registration under Section  3.1 or in a registration statement pursuant to Section 3.5:
(a) Indemnity by the Company . Without limitation of any other indemnity provided to any Holder, to the extent permitted by law, the Company will indemnify and hold harmless each Holder, the Affiliates, officers, directors and partners of each Holder, any underwriter (as defined in the Securities Act), and each Person, if any, who controls such Holder or underwriter (within the meaning of the Securities Act or the Exchange Act), against any losses, claims, damages, liabilities and expenses (joint or several) to which they may become subject under the Securities Act, the Exchange Act or any other federal or state law, as and when incurred, insofar as such losses, claims, damages, liabilities and expenses (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a “ Violation ”): (i) any untrue statement or alleged untrue statement of a material fact contained in a registration statement (including any preliminary Prospectus or final Prospectus contained therein or any amendments or supplements thereto or any “issuer free writing prospectus” (as defined in Rule 433 under the Securities Act) related thereto), (ii) the omission or alleged
 
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omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading or (iii) any other violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law, and the Company will reimburse each such Holder, Affiliate, officer, director, partner, underwriter or controlling person for any reasonable legal or other expenses incurred by them in connection with investigating or defending any such loss, claim, damage, liability, expense or action; provided , however , that the Company shall not be liable to any Holder in any such case for any such loss, claim, damage, liability, expense or action to the extent that it arises out of or is based upon a Violation which occurs (A) in reliance upon and in conformity with written information furnished expressly for use in the Offering registration statement or the Shelf Registration Statement or Prospectus by any such Holder or any officer, director, partner or controlling person thereof or (B) by such Holder’s failure to deliver a copy of the Offering registration statement or the Shelf Registration Statement or Prospectus or any amendments or supplements thereto after the Company has furnished such Holder with a sufficient number of copies of the same.
(b) Indemnity by Holders . In connection with any registration in which a Holder is participating, each such Holder will furnish to the Company in writing such information and affidavits as the Company reasonably requests for use in connection with the Shelf Registration Statement or Prospectus or registration statement pursuant to Section 3.5 and, to the extent permitted by law, will indemnify the Company, its directors and officers and each Person who controls the Company (within the meaning of the Securities Act or Exchange Act) against any losses, claims, damages, liabilities and expenses resulting from any Violation, but only to the extent that such Violation occurs in reliance upon and in conformity with any information so furnished in writing by such Holder expressly for use in the Shelf Registration Statement or Prospectus or registration statement pursuant to Section 3.5 or by virtue of such Holder’s failure to deliver a copy of the Shelf Registration Statement or Prospectus or registration statement pursuant to Section 3.5 or any amendments or supplements thereto after the Company has furnished such Holder with a sufficient number of copies of the same; provided that the obligation to indemnify will be several and not joint and several with any other Person and will be limited to the net amount received by such Holder from the sale of Registrable Securities pursuant to the Shelf Registration Statement or registration statement pursuant to Section 3.5.
(c) Notice; Right to Defend . Promptly after receipt by an indemnified party under this Section 3.6 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 3.6 , deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, if the indemnifying party agrees in writing that it will be responsible for any costs, expenses, judgments, damages and losses incurred by the indemnified party with respect to such claim, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties and the indemnified party may participate in such defense at such party’s expense;
 
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provided , however , that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if the indemnified party reasonably believes that representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding, provided that the indemnifying party shall not be responsible for the fees and expenses of more than one counsel for the indemnified parties. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall relieve such indemnifying party of any liability to the indemnified party under this Section 3.6 only if and to the extent that such failure is materially prejudicial to its ability to defend such action, and the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party other than under this Section 3.6 .
(d) Contribution . If the indemnification provided for in this Section 3.6 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other hand in connection with the statements or omissions which resulted in such loss, liability, claim, damage or expense as well as any other relevant equitable considerations. The relative fault of the indemnifying party and the indemnified party shall be determined by reference to, among other things, whether the untrue statement or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. Notwithstanding the foregoing, the amount any Holder shall be obligated to contribute pursuant to this Section 3.6(d) shall be limited to an amount equal to the net proceeds to such Holder of the Registrable Securities sold pursuant to the Shelf Registration Statement or registration statement pursuant to Section 3.5 that gives rise to such obligation to contribute (less the aggregate amount of any damages which the Holder has otherwise been required to pay in respect of such loss, claim, damage, liability or expense or any substantially similar loss, claim, damage, liability or expense arising from the sale of such Registrable Securities).
(e) Survival of Indemnity and Contribution . The indemnification and contribution provided by this Section 3.6 shall be a continuing right to indemnification and contribution and shall survive the registration and sale of any securities by any Person entitled to indemnification and contribution hereunder and the expiration or termination of this Agreement.
 
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Section 3.7 Rule 144; Reports under Exchange Act . From and after the time of the effective date of the Shelf Registration Statement filed with the Commission pursuant to Section 3.1(a) , in order to permit the Holders to sell the Registrable Securities they hold, if they so desire, from time to time pursuant to Rule 144 promulgated by the Commission or any successor to such rule or any other rule or regulation of the Commission that may at any time permit a Holder to sell Registrable Securities to the public without registration (the “ Resale Rules ”), the Company will:
(a) comply with all rules and regulations of the Commission applicable in connection with use of the Resale Rules;
(b) make and keep adequate and current public information available, as those terms are understood and defined in the Resale Rules, at all times;
(c) file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act as required by the Resale Rules;
(d) furnish annually to all Holders material containing the information required by Rule 14a-3(b) under the Exchange Act and Items 401, 402 and 403 of Regulation S-K of the Commission;
(e) furnish to any Holder so long as such Holder owns any Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of the Resale Rules, the Securities Act and the Exchange Act, (ii) a copy of the most recent annual or quarterly report of the Company and any other reports and documents so filed by the Company and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the Commission which permits the selling of any such securities to the public without registration; and
(f) take any action (including cooperating with the Holder to cause the transfer agent to remove any restrictive legends on such securities) as shall be reasonably requested by any Holder or which shall otherwise facilitate the sale of Registrable Securities from time to time by the Holders pursuant to the Resale Rules.
ARTICLE 4
MISCELLANEOUS
Section 4.1 Notices . In order to be deemed effective, all documents to be delivered and all notices, approvals, authorizations, demands, requests, reports and/or consents to be given or obtained by any party to this Agreement shall be deemed received, unless earlier received, (i) if sent by certified or registered mail, return receipt requested, when actually delivered as aforesaid, except that such delivery shall be prior to 5:00 p.m., recipient’s time, on any Business Day and if a notice is not delivered on a Business Day or is delivered after 5:00 p.m., recipient’s time, such notice shall be deemed to have been received by such recipient at the commencement of such recipient’s first Business Day next following the time of delivery, (ii) if sent by overnight mail or international courier, when actually delivered as aforesaid, except that such delivery shall be prior to 5:00 p.m., recipient’s time, on any Business Day and if a notice is not delivered on a Business Day or is delivered after 5:00 p.m., recipient’s time, such notice shall be deemed to have been received by such recipient at the commencement of such recipient’s first Business Day
 
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next following the time of delivery, (iii) if sent by email or facsimile transmission, prior to 5:00 p.m., recipient’s time, on any Business Day and if a notice is not transmitted on a Business Day or is transmitted after 5:00 p.m., recipient’s time, such notice shall be deemed to have been received by such recipient at the commencement of such recipient’s first Business Day next following transmission of such notice, provided that confirmatory notice is sent promptly thereafter by first-class mail, postage prepaid, and (iv) if delivered by hand, on the date of receipt, at the address set forth below:
 
 	(a)	To the Company:	
InfraREIT, Inc.
1807 Ross Avenue, 4th Floor
Dallas, Texas 75201
Attention: General Counsel
Facsimile:
Email Address: Legal@Huntutility.com
 
 	(b)	To any Holder:	
to the address of such Holder as it appears in the Company’s records.
The above addresses may be changed for future communications or delivery of notice hereunder by giving notice of such change to the others listed above in the manner prescribed by this Section 4.1 . All notices shall be deemed effective when received by all applicable parties at the addresses set forth above (as such addresses may be changed by the parties in accordance herewith). Notwithstanding the foregoing, no notice shall be deemed ineffective because of any party’s refusal to accept delivery at the address specified for the giving of such notice in accordance herewith.
Section 4.2 Further Action . The parties shall execute and deliver all documents, provide all information and take or refrain from taking action as may be necessary or appropriate to achieve the purposes of this Agreement.
Section 4.3 Successors and Assigns . Except as otherwise expressly provided herein, this Agreement shall inure to the benefit of and be binding upon the successors and assigns of the Company and each of the Holders (including, for the avoidance of doubt, (x) any subsequent holder of Registrable Securities, whether or not any express assignment has been made and (y) any entity which is the successor to the Company by merger, consolidation or similar transaction); provided , however , that upon any Transfer of Registrable Securities pursuant to a registration statement or under any Resale Rule that permits a Holder to sell Registrable Securities to the public without registration, this Agreement shall not inure to the benefit of the transferee; and provided , further , that the term “ Holder ” as used in this Agreement shall include any transferee to whose benefit this Agreement has so inured.
Section 4.4 Amendment and Waiver . This Agreement may be amended, and the observance of any term of this Agreement may be waived, but only with the written consent of the Company and Holders then holding a majority of the outstanding Registrable Securities; provided , however , that the effect of any such amendment will be that the consenting Holders
 
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will not be treated more favorably than all other Holders (without regard to any differences in effect that such amendment or waiver may have on the Holders due to the differing amounts of Registrable Securities held by such Holders); and provided , further , that without the consent of any other Holder, but with the written agreement of the Company (other than in the case of a waiver of any right to which a Holder is entitled hereunder), any Holder may from time to time enter into one or more agreements amending, modifying or waiving the provisions of this Agreement with respect to such Holder if such action does not adversely affect the rights or interest of any other Holder and such agreements do not provide any more favorable rights to such Holder than the rights set forth herein. No delay on the part of any party in the exercise of any right, power or remedy shall operate as a waiver thereof, nor shall any single or partial exercise by any party of any right, power or remedy preclude any other or further exercise thereof, or the exercise of any other right, power or remedy.
Section 4.5 Additional Holders .
(a) Notwithstanding the provisions of Section 4.3 , additional Persons may be added as Holders under this Agreement in connection with the acquisition of Common Shares by such Persons by executing a joinder to this Agreement and such Person shall become a Holder for all purposes of this Agreement.
(b) The Company will not enter into any contract, arrangement or understanding from and after the date hereof with any future Holders with respect to Common Shares that has the effect of establishing rights or otherwise benefiting such person in a manner more favorable in any material respect with respect to the matters contemplated by Article 3 of this Agreement than the rights and benefits established in favor of the Holders with respect to Common Shares pursuant to this Agreement, unless the Company shall grant similar rights or benefits in favor of the Holders party hereto.
Section 4.6 Severability . Whenever possible, each provision of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, provided , however , if performance of any provision of this Agreement, at the time such performance shall be due, shall transcend the limit of validity prescribed by law, then the obligation to be performed shall be reduced to the limit of such validity; and if any clause or provision contained in this Agreement operates or would operate to invalidate this Agreement, in whole or in part, then such clause or provision only shall be held ineffective, as though not herein contained, and the remainder of this Agreement shall remain operative and in full force and effect. The parties shall negotiate in good faith a replacement clause or provision as consistent with the ineffective clause or provision as is practicable under law.
Section 4.7 Counterparts . This Agreement may be executed and delivered in one or more counterparts (including by means of facsimile or electronic mail transmission), each of which when so executed and delivered shall be deemed an original, none of which need contain the signatures of each of the parties hereto and all of which together shall constitute one and the same instrument binding on all the parties hereto. Each party shall become bound by this Agreement immediately upon affixing its signature hereto.
 
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Section 4.8 Governing Law . THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS.
Section 4.9 Waiver of Jury Trial . TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE PARTIES HEREBY IRREVOCABLY WAIVE ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
Section 4.10 Forum Selection and Consent to Jurisdiction . ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT, SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF NEW YORK LOCATED IN THE BOROUGH OF MANHATTAN OR IN A UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK LOCATED IN THE BOROUGH OF MANHATTAN. EACH OF THE PARTIES HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK LOCATED IN THE BOROUGH OF MANHATTAN AND OF A UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK LOCATED IN THE BOROUGH OF MANHATTAN FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE. EACH OF THE PARTIES HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
Section 4.11 Entire Understanding . This Agreement contains the entire understanding and agreement among the parties with respect to the subject matter hereof and supersedes any prior written or oral understandings or agreements among them with respect thereto, including the Original Agreement.
Section 4.12 No Third Party Beneficiaries . This Agreement is solely for the benefit of the parties hereto and no provisions of this Agreement shall be deemed to confer upon any other party any remedy, claim, liability, reimbursement, cause of action or other right.
Section 4.13 No Presumption Against Drafter . Each of the parties hereto have jointly participated in the negotiation and drafting of this Agreement. In the event of an ambiguity or if a question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by each of the parties hereto and no presumptions or burdens of proof shall arise favoring any party by virtue of the authorship of any of the provisions of this Agreement.
[Remainder of Page Intentionally Left Blank]
 
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IN WITNESS WHEREOF, the undersigned has executed this Registration Rights and Lock-Up Agreement as of the date and year first above written.

INFRAREIT, INC.	
a Maryland corporation	
		
By:	 	 	
Name:	 		
Title:	 		
[Signature Page to Registration Rights and Lock-Up Agreement]

Schedule A
Holders
John Hancock Life Insurance Company (U.S.A.)
Marubeni Corporation
MC Transmission Holdings, Inc.
OPTrust N.A. Holdings Trust
Teachers Insurance and Annuity Association of America
Hunt-InfraREIT, L.L.C.
The names of other individuals on file with the Company
 
Schedule A-1

EXHIBIT A
INFRAREIT, INC.
FORM OF NOTICE AND QUESTIONNAIRE
The undersigned beneficial holder of shares of Common Stock, par value $0.01 per share (“Common Shares”), of InfraREIT, Inc. (the “Company”) and/or units of limited partnership interests (“Partnership Units” and, together with the Common Shares, the “Registrable Securities”) of InfraREIT Partners, L.P. (the “Operating Partnership”), understands that the Company has filed or intends to file with the Securities and Exchange Commission one or more registration statements (collectively, the “Shelf Registration Statement”) for the registration and resale under Rule 415 of the Securities Act of 1933, as amended (the “Securities Act”), of the Registrable Securities in accordance with the terms of the Amended and Restated Registration Rights and Lock-Up Agreement (the “Registration Rights Agreement”), dated                     , 2015, among the Company and the holders listed on Schedule A thereto. A copy of the Registration Rights Agreement is available from the Company upon request at the address set forth below. All capitalized terms not otherwise defined herein shall have the meanings set forth in the Registration Rights Agreement.
Each beneficial owner of Registrable Securities is entitled to the benefits of the Registration Rights Agreement. To be included in a Shelf Registration Statement, this Notice and Questionnaire must be completed, executed and delivered to the Company at the address set forth herein as promptly as practicable after receipt of this request, but in no event later than twenty (20) Business Days thereafter. We will give notice of the filing and effectiveness of the Shelf Registration Statement by issuing a press release and by mailing a notice to the holders of Registrable Securities at their addresses set forth in the register of the registrar.
Beneficial owners that do not complete this Notice and Questionnaire and deliver it to the Company as provided below will not be named as selling security holders in the prospectus and therefore will not be permitted to acquire and/or sell any Registrable Securities pursuant to the Shelf Registration Statement. Beneficial owners are encouraged to complete and deliver this Notice and Questionnaire prior to the effectiveness of the Shelf Registration Statement so that such beneficial owners may be named as selling security holders in the related prospectus at the time of effectiveness. Upon receipt of a completed Notice and Questionnaire from a beneficial owner following the effectiveness of the Shelf Registration Statement, in accordance with the Registration Rights Agreement, the Company will file such amendments to the Shelf Registration Statement or additional shelf registration statements or supplements to the related prospectus as are necessary to permit such holder to deliver such prospectus to purchasers of Registrable Securities.
Certain legal consequences arise from being named as selling security holders in a Shelf Registration Statement and the related prospectus. Accordingly, holders and beneficial owners of Registrable Securities are advised to consult their own securities law counsel regarding the consequences of being named or not being named as a selling security holder in a Shelf Registration Statement and the related prospectus.
 
Exhibit A-1

NOTICE
The undersigned beneficial owner (the “ Selling Security Holder ”) of Registrable Securities hereby elects to include in the prospectus forming a part of the Shelf Registration Statement the Registrable Securities beneficially owned by it and listed below in Item 3 (unless otherwise specified under Item 3). The undersigned, by signing and returning this Notice and Questionnaire, understands that it will be bound by the terms and conditions of this Notice and Questionnaire and the Registration Rights Agreement.
The undersigned hereby provides the following information to the Company and represents and warrants to the Company that such information is accurate and complete:
QUESTIONNAIRE

			
1.	 	(a)	  	Full Legal Name of Selling Security Holder:

	 	(b)	  	Full Legal Name of registered holder (if not the same as (a) above) through which Registrable Securities listed in Item (3) below are held:

	 	(c)	  	Full Legal Name of DTC Participant (if applicable and if not the same as (b) above) through which Registrable Securities listed in Item (3) below are held:

	 	(d)	  	List below the individual or individuals who exercise voting and/or dispositive powers with respect to the Registrable Securities listed in Item (3) below:

		
2.	 	Address for Notices to Selling Security Holder:	

	 	 	
			
	 	Telephone:	 	 	
			
	 	Fax:	 	 	
			
	 	E-mail address:	 	 	
			
	 	Contact Person:	 	 	
 
Exhibit A-2

					
3.	 	Beneficial Ownership of Registrable Securities:
 
Type of Registrable Securities beneficially owned, and number of Common Shares and/or Partnership Units, as the case may be, beneficially owned:

4.	 	Beneficial Ownership of Securities of the Company Owned by the Selling Security Holder:
 
Except as set forth below in this Item (4), the undersigned is not the beneficial or registered owner of any securities of the Company, other than the Registrable Securities listed above in Item (3).
 
Type and amount of other securities beneficially owned by the Selling Security Holder:

Exhibit A-3

					
5.	 	Broker-Dealer Status:
 	
	 	(a) Is the Selling Security Holder a broker-dealer?
 
Yes              No ____
 
(b) If the Selling Security Holder is a broker-dealer, did the Selling Security Holder receive the Registrable Securities as compensation for investment banking services to the Company?
 
Yes ____     No ____
 
Note: If “yes” to Question 5(b), the Commission’s staff has indicated that the Selling Security Holder should be identified as an underwriter in the Registration Statement and related prospectus.
 
(c) Is the Selling Security Holder an affiliate of a broker-dealer?
 
Yes ____     No ____
 
(d) If the Selling Stockholder is an affiliate of a broker-dealer, does the Selling Security Holder certify that it purchased the Registrable Securities in the ordinary course of business, and at the time of the purchase of the Registrable Securities to be sold, the Selling Security Holder had no agreements or understandings, directly or indirectly, with any person to distribute the Registrable Securities?
 
Yes ____     No ____
 
Note: If “no” to Question 5(d), the Commission’s staff has indicated that the Selling Stockholder should be identified as an underwriter in the Registration Statement and related prospectus.	
		
6.	 	Relationship with the Company
 
Except as set forth below, neither the undersigned nor any of its affiliates, officers, directors or principal equity holders (5% or more) has held any position or office or has had any other material relationship with the Company (or its predecessors or affiliates) during the past three years.
 
State any exceptions here:

 
Exhibit A-4

					
7.	 	Plan of Distribution
 
Except as set forth below, the undersigned (including its donees or pledgees) intends to distribute the Registrable Securities listed above in Item (3) pursuant to the Shelf Registration Statement only as follows and will not be offering any of such Registrable Securities pursuant to an agreement, arrangement or understanding entered into with a broker or dealer prior to the effective date of the Shelf Registration Statement. Such Registrable Securities may be sold from time to time directly by the undersigned or, alternatively, through underwriters or broker-dealers or agents. If the Registrable Securities are sold through underwriters or broker-dealers, the Selling Security Holder will be responsible for underwriting discounts or commissions or agent’s commissions. Such Registrable Securities may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of sale, at varying prices determined at the time of sale, or at negotiated prices. Such sales may be effected in transactions (which may involve crosses or block transactions):
 	
	 	(i)     on any national securities exchange or quotation service on which the Registrable Securities may be listed or quoted at the time of sale;
 
(ii)    in the over-the-counter market;
 
(iii)  in transactions other than on such exchanges or services or in the over-the-counter market; or
 
(iv)   through the writing of options.
 
In connection with sales of the Registrable Securities or otherwise, the undersigned may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the Registrable Securities and deliver Registrable Securities to close out such short positions, or loan or pledge Registrable Securities to broker-dealers that in turn may sell such securities.
 
State any exceptions here:

 
Note:	In no event may such method(s) of distribution take the form of an underwritten offering of the Registrable Securities without the prior written agreement of the Company.	
 
Exhibit A-5

ACKNOWLEDGEMENTS
The undersigned acknowledges that it understands its obligation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and the rules thereunder relating to stock manipulation, particularly Regulation M thereunder (or any successor rules or regulations), in connection with any offering of Registrable Securities pursuant to the Registration Rights Agreement. The undersigned agrees that neither it nor any person acting on its behalf will engage in any transaction in violation of such provisions.
The Selling Security Holder hereby acknowledges its obligations under the Registration Rights Agreement to indemnify and hold harmless certain persons as and to the extent provided therein. Pursuant to the Registration Rights Agreement, the Company has agreed under certain circumstances to indemnify the Selling Security Holders against certain liabilities.
In accordance with the undersigned’s obligation under the Registration Rights Agreement to provide such information as may be required by law for inclusion in the Shelf Registration Statement, the undersigned agrees to promptly notify the Company of any inaccuracies or changes in the information provided herein that may occur subsequent to the date hereof at any time while the applicable Shelf Registration Statement remains effective. All notices hereunder and pursuant to the Registration Rights Agreement shall be made in writing at the address set forth below.
In the event that the undersigned transfers all or any portion of the Registrable Securities listed in Item 3 above after the date on which such information is provided to the Company, the undersigned agrees to notify the transferee(s) at the time of transfer of its rights and obligations under this Notice and Questionnaire and the Registration Rights Agreement.
By signing this Notice and Questionnaire, the undersigned consents to the disclosure of the information contained herein in its answers to Items (1) through (7) above and the inclusion of such information in the applicable Shelf Registration Statement and the related prospectus. The undersigned understands that such information will be relied upon by the Company in connection with the preparation or amendment of the applicable Shelf Registration Statement and the related prospectus.
Once this Notice and Questionnaire is executed by the Selling Security Holder and received by the Company, the terms of this Notice and Questionnaire and the representations and warranties contained herein shall be binding on, shall inure to the benefit of and shall be enforceable by the respective successors, heirs, personal representatives and assigns of the Company and the Selling Security Holder with respect to the Registrable Securities beneficially owned by such Selling Security Holder and listed in Item 3 above.
This Notice and Questionnaire shall be governed by, and construed in accordance with, the laws of the State of Delaware, without regard to the principles of conflicts of law.
 
Exhibit A-6

IN WITNESS WHEREOF, the undersigned, by authority duly given, has caused this Notice and Questionnaire to be executed and delivered either in person or by its duly authorized agent.

	 		 	Beneficial Owner	
				
	 		 	By	 	 	
	 		 		 	Name:
Title:	
				
Dated:	 		 		 		
Please return the completed and executed Notice and Questionnaire to:
InfraREIT, Inc.
1807 Ross Avenue, 4th Floor
Dallas, Texas 75201
Attention: General Counsel
 
Exhibit A-7

Exhibit 10.37
EXECUTION COPY
LICENSE AGREEMENT
This LICENSE AGREEMENT (this “ Agreement ”), effective as of November 23, 2010 (the “ Effective Date ”), is by and between ENERGY INFRASTRUCTURE ALLIANCE OF AMERICA, L.L.C., a Delaware limited liability company (the “ Manager ”), ELECTRIC INFRASTRUCTURE ALLIANCE OF AMERICA, L.L.C., a Delaware limited liability company which intends to elect to be taxed as a REIT (as defined below) for U.S. federal income tax purposes (the “ Company ”), and ELECTRIC INFRASTRUCTURE ALLIANCE OF AMERICA, L.P., a Delaware limited partnership (the “ Operating Partnership ”; together with the Company, the “ Licensees ”).
WHEREAS, the Manager and the Licensees have entered into a Management Agreement as of the Effective Date (the “ Management Agreement ”) pursuant to which the Manager shall perform certain management services for the Licensees; and
WHEREAS, the Manager is willing to grant to the Licensees a non-exclusive license to use the Licensed Intellectual Property (as defined below) within the Business (as defined below) in accordance with the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and obligations set forth in this Agreement, and of other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows:
1. Definitions .
“ Affiliate ” with regard to a Person, means a Person that controls, is controlled by, or is under common control with such original Person. For purposes of this definition, “control,” when used with respect to any Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “affiliated,” “controlling” and “controlled” have meanings correlative to the foregoing.
“ Agreement ” has the meaning set forth in the Preamble.
“ Business ” means (i) the development, construction, acquisition, ownership, disposition of, or other activities related to investment in, Electric Systems Projects by any EIAA Investment Vehicle or any of its Subsidiaries and (ii) the qualification of the Company or any EIAA Parallel REIT for U.S. federal income tax purposes as a REIT.
“ Business Day ” means any day other than a Saturday, Sunday or other day on which commercial banks in New York, New York are authorized or required by law or executive order to be closed.
“ Company ” has the meaning set forth in the Preamble.
“ Company Agreement ” means the Amended and Restated Agreement of Limited Liability Company Agreement of the Company, dated November 23, 2010, as it may be amended, supplemented, restated or otherwise modified from time to time.
“ Confidential Information ” means the Licensed Intellectual Property, including, without limitation, all methods and concepts utilized therein and any notes, memoranda, summaries, analyses, and compilations thereof, and other writings based thereon. Notwithstanding the foregoing, Confidential Information shall not include (a) any Company Data (as defined in the Management Agreement) and (b) any particular information if and to the extent the Licensees can
 
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demonstrate by reasonable proof that such information (i) was, at the time of disclosure to the Licensees, already known to the Licensees, (ii) was at the time of disclosure to the Licensees, or subsequently became, through no act, omission or fault of the Licensees or their respective affiliates or personnel, publicly available, (iii) was, after disclosure to the Licensees, lawfully and independently received by the Licensees from a third party who, to the best of the Licensees’ knowledge, had the right to disclose it without restriction or (iv) was independently developed by the Licensees, or for the Licensees (other than by the Manager or its Affiliates that are not Licensees), without use of or reference to Confidential Information; provided, however, that, for purposes of the preceding clause (b), any combination of information shall not be deemed to be “publicly available” or “already known to the Licensees” for purposes hereof (and, therefore, not be considered Confidential Information hereunder) as a result of the individual elements or components of such information being generally disclosed, published or otherwise discussed in the public domain (absent such elements and/or components being publicly available or otherwise known by the Licensees in the specific combination and applying the particular methodology devised by the Manager or its Affiliates in the creation of the Licensed Intellectual Property).
“ Created ” has the meaning set forth in Section 2.3 .
“ Effective Date ” has the meaning set forth in the Preamble.
“ EIAA Investment Vehicle ” means each of the Company, the Operating Partnership, any EIAA Parallel REIT and any EIAA Parallel Partnership.
“ EIAA Parallel Partnership ” means any limited partnership other than the Operating Partnership which has been formed to acquire, develop, construct, own or dispose of one or more Electric Systems Projects in which some or all of the same investors who are party to the Company Agreement, directly or indirectly, hold equity interests.
“ EIAA Parallel REIT ” means each REIT formed to act as general partner of, and invest in, an EIAA Parallel Partnership.
“ Electric Systems Project ” means a business, project or assets relating primarily to (i) the transmission or distribution of electricity, or (ii) a vertically integrated electric utility.
“ Entity ” means any partnership, limited partnership, proprietorship, corporation, joint venture, joint stock company, limited liability company, limited liability partnership, business trust, estate, governmental entity, cooperative, association or other foreign or domestic enterprise.
“ Equity Interests ” means any shares of capital stock, membership interests, partnership interests, or other equity interests and options or warrants to acquire, or securities convertible into, capital stock, membership interests, partnership interests, or other equity securities of an Entity.
“ Governmental Authority ” means the government of any nation, state, province or other political subdivision thereof or any other such person or entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including, without limitation, the Securities Valuation Office of the National Association of Insurance Commissioners or any similar or successor authority.
“ Improvements ” means, individually and collectively, all discoveries, inventions, know-how, techniques, methodologies, modifications, improvements, works of authorship, designs and data (whether or not protectable under patent, copyright, trade secrecy or similar laws) relating to additions, developments, enhancements, updates and other changes in or to the Licensed Intellectual Property.
 
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“ Intellectual Property Rights ” means, in any and all jurisdictions throughout the world, all (a) inventions and discoveries (whether or not patentable or reduced to practice), patents, patent applications, invention disclosures, industrial designs, mask works and statutory invention registrations, (b) trademarks, service marks, domain names, trade dress, trade names and other identifiers of source or goodwill, including registrations and applications for registration thereof and including the goodwill symbolized thereby or associated therewith, (c) published and unpublished works of authorship, whether copyrightable or not, copyrights therein and thereto, registrations, applications, renewals and extensions therefor, and any and all rights associated therewith, (d) confidential and proprietary information, including trade secrets, know how and invention rights, (e) rights of privacy and publicity, (f) database rights, and (g) any and all other proprietary rights.
“ Licensed Intellectual Property ” means the Intellectual Property Rights of the Manager used in the Business and set forth on Schedule A .
“ Licensees ” has the meaning set forth in the Preamble.
“ Management Agreement ” has the meaning set forth in the Recitals.
“ Manager ” has the meaning set forth in the Preamble.
“ Master Agreement ” means the Electric Infrastructure Alliance of America Master Securityholders’ Agreement, dated November 23, 2010, by and among, the Operating Partnership, the Company, Hunt EIAA, L.L.C. and the other investors who are signatories thereto, as such agreement may be amended, restated, supplemented or otherwise modified from time to time.
“ Operating Partnership ” has the meaning set forth in the Preamble.
“ Person ” means any individual, corporation, proprietorship, firm, partnership, limited partnership, limited liability company, trust, association or other Entity.
“ REIT ” means a real estate investment trust under Section 856 of the Internal Revenue Code of 1986, as amended and in effect from time to time, as interpreted by the applicable regulations thereunder.
“ Subsidiary ” means, with respect to any Person, any corporation, limited liability company, trust, partnership or joint venture, or other Entity of which a majority of (i) the voting power of the voting equity securities or (ii) the outstanding Equity Interests is owned, directly or indirectly, by such Person.
2. Grant of Rights .
2.1 License . In consideration of the amounts payable by the Operating Partnership to the Manager under the Management Agreement and of the mutual covenants and agreements contained herein and in the Management Agreement, the Manager hereby grants to the Licensees, and the Licensees hereby accept, a worldwide, perpetual, irrevocable, non-exclusive, royalty-free, fully paid-up right and license to use, reproduce, enhance, create adaptations or derivative works from, further develop, modify, customize, all through any medium now known or hereinafter invented, and otherwise exploit the Licensed Intellectual Property solely for the Licensees’ (for themselves and on behalf of their respective
 
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Subsidiaries’) internal use within the Business and otherwise in accordance with the terms of this Agreement. To the extent any Subsidiaries of the Licensees are given access to Confidential Information, the Licensees shall (a) cause such Subsidiaries to comply with the terms of this Agreement, and (b) be responsible and liable for any failure of such Subsidiaries to so comply. The Licensees shall not have the right to grant sublicenses to the Licensed Intellectual Property.
2.2 EIAA Parallel REITs and EIAA Parallel Partnerships . If an EIAA Parallel REIT or an EIAA Parallel Partnership is formed during the term of the Management Agreement in accordance with the Master Agreement, then such EIAA Parallel REIT or EIAA Parallel Partnership, as the case may be, at the time of such entity’s formation, shall be added as an additional “Licensee” under this Agreement upon its execution of a joinder to this Agreement in form and substance reasonably satisfactory to the Manager.
2.3 No Transfer of Ownership . This Agreement does not convey to the Licensees any ownership rights in or to any Licensed Intellectual Property by implication, estoppel or otherwise. As between the parties hereto, the Licensed Intellectual Property, and any Improvements conceived, discovered, developed, created or reduced to practice or fixed in a tangible medium of expression (collectively, “ Created ”) by one or more employees, consultants, sublicensees or direct and indirect equity holders of the Manager shall be the sole and exclusive property of the Manager. The Licensed Intellectual Property includes any Improvements owned by the Manager that may be Created prior to the termination or expiration of the Management Agreement, but does not include, and no license is granted to the Licensees with respect to, any Improvements that may be Created at any time on or after the termination or expiration of the Management Agreement.
2.4 Licensee Improvements . In the event that any of the Licensees has rights in any Improvements Created at any time prior to the termination or expiration of the Management Agreement, such Licensee shall and hereby does grant to the Manager and its Affiliates a worldwide, perpetual, irrevocable, non-exclusive, royalty-free, fully paid-up right and license, with the right to grant sublicenses, to use and reproduce, enhance, create adaptations or derivative works from, further develop, enhance, modify, customize, all through any medium now known or hereinafter invented, and otherwise exploit such Improvements. Prior to the termination or expiration of the Management Agreement, the Licensees shall disclose to the Manager within a reasonable time period all such Improvements as they are Created.
3. Warranties; Disclaimer of Warranties . The Manager represents and warrants to the Licensees, as of the date hereof, that: (a) to the knowledge of the Manager, the Manager has the right to grant to the Licensees the license to the Licensed Intellectual Property pursuant hereto and the Licensed Intellectual Property is free of all liens or encumbrances, or third party claims that would prevent the Licensees’ permitted use thereof as set forth herein; and (b) to the knowledge of the Manager, the Licensed Intellectual Property does not infringe or misappropriate a third party’s Intellectual Property Rights. EXCEPT AS PROVIDED ABOVE, THE LICENSED INTELLECTUAL PROPERTY, INCLUDING IF APPLICABLE ANY IMPROVEMENTS HEREAFTER DEVELOPED OR OTHERWISE CREATED BY THE MANAGER, IS PROVIDED “AS IS”, AND ALL CONDITIONS, REPRESENTATIONS, AND WARRANTIES, WHETHER EXPRESS, IMPLIED OR STATUTORY, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE (EVEN IF INFORMED OF SUCH PURPOSE), VALIDITY, NON-INFRINGEMENT, TITLE, OR ARISING FROM A COURSE OF DEALING, USAGE, OR TRADE PRACTICE, ARE HEREBY EXCLUDED EXCEPT TO THE EXTENT SUCH EXCLUSION IS PROHIBITED BY APPLICABLE LAW. NO REPRESENTATION OR WARRANTY IS MADE REGARDING THE RESULTS OF ANY LICENSED INTELLECTUAL PROPERTY, INCLUDING IF APPLICABLE ANY IMPROVEMENTS HEREAFTER DEVELOPED OR OTHERWISE CREATED BY THE MANAGER, OR THAT THE LICENSED INTELLECTUAL PROPERTY, INCLUDING IF APPLICABLE ANY IMPROVEMENTS HEREAFTER DEVELOPED OR OTHERWISE CREATED BY THE MANAGER, SHALL MEET THE LICENSEES’ REQUIREMENTS.
 
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4. Limitation of Liability . IN NO EVENT SHALL ANY PARTY HERETO BE LIABLE FOR ANY LOST REVENUE, LOST PROFITS, DAMAGE TO REPUTATION, BUSINESS INTERRUPTION, OR ANY OTHER INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL, PUNITIVE, EXEMPLARY OR ANY SIMILAR TYPE OF DAMAGES ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT, THE USE OR THE INABILITY TO USE THE LICENSED INTELLECTUAL PROPERTY, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES; PROVIDED THAT THE FOREGOING LIMITATION ON LIABILITY WILL NOT APPLY TO (A) A KNOWING AND INTENTIONAL BREACH OF SECTION 5 (CONFIDENTIALITY) BY A LICENSEE OR ITS AGENTS OR (B) A PARTY’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.
5. Confidentiality . Confidential Information shall remain the sole property of the Manager. Each Licensee will use the same care and discretion to avoid disclosure, publication or dissemination of any Confidential Information licensed or provided to it under this Agreement as such Licensee uses with its own confidential information that it does not wish to disclose, publish or disseminate (but in no event less than a reasonable degree of care). Each Licensee will use the Confidential Information only in accordance with this Agreement and for purposes that are reasonably related to the Business. A Licensee may disclose Confidential Information to any employees, affiliates, contractors, consultants, attorneys, auditors and other third parties acting on its behalf (each, an “ Agent ”) that have a need to know and are obligated to maintain the confidentiality of the Confidential Information upon provisions similar to those contained in this Agreement. Each Licensee will ensure that those Agents who are given access to any of the Confidential Information have been informed of the provisions of this Agreement and have agreed to comply with all of its provisions. The Licensees will be responsible for any breach of this Agreement by its Agents (which shall be understood to not include the Manager); provided that a Licensee or any of its Agents may disclose Confidential Information to the extent that such Licensee or Agent (i) is required by applicable law, by any rule, regulation, order or directive of a regular auditor or a Governmental Authority or by legal process to disclose such Confidential Information, in which event (excluding any ordinary course inspection or examination of an Agent by a regular auditor or a Governmental Authority unrelated to the Licensees or any of their respective Subsidiaries or any ordinary course information filing by an Agent with a Governmental Authority) the Licensees shall, unless not permitted by applicable law, provide the Manager with prompt notice of such requirement so that the Manager may seek, at its cost and expense, an appropriate protective order or other appropriate remedy or take reasonable steps to resist or narrow the scope of such request or legal process or (ii) receives the prior written consent of the Manager. The Licensees shall promptly notify the Manager of any actual or threatened breach of these confidentiality provisions or infringement or misappropriation of the Licensed Intellectual Property of which the Licensees have knowledge, and the Licensees shall reasonably cooperate with the Manager in connection therewith. Notwithstanding anything in this Agreement to the contrary, each Licensee (and each Agent of a Licensee) may disclose to any and all persons, without limitation of any kind, the U.S. federal income tax treatment and tax structure of the Company or any EIAA Parallel REIT or any transactions undertaken by any Licensee or its Subsidiaries, except to the extent maintaining confidentiality is necessary to comply with any U.S. federal, state or foreign securities laws, it being understood and agreed that, for this purpose, (a) the name of, or any other identifying information regarding, any Licensee or any investor in any Licensee (or any Subsidiary thereof), or any investment or transaction entered into by any Licensee or its Subsidiaries or (b) any performance or other information relating to any Licensee or its Subsidiaries does not constitute such tax treatment or tax structure information. If the disclosure of tax treatment or tax structure information or information regarding the transactions undertaken by a Licensee or its Subsidiaries described in the preceding sentence is made to a Person other than a Governmental Authority, such Licensee shall provide the Manager with prompt notice of such disclosure.
6. Breach . If a party hereto commits a breach of this Agreement, the other party may seek
 
5

injunctive relief or other appropriate remedies (without the requirement of posting bond) restraining the breaching party from further breaches and compelling compliance with the provisions of this Agreement. The Manager shall not, under any circumstances (including bankruptcy or insolvency of any of the Licensees), terminate this Agreement. Without limiting the preceding sentence, in the event of any breach of this Agreement by the Licensees, the Licensees shall continue to have the benefit of the license granted pursuant to this Agreement, it being understood that the Manager may not terminate this Agreement in such case, but may exercise all other remedies available to it at law or in equity, including, without limitation, seeking specific performance or other equitable remedies and/or monetary damages. Each party hereto acknowledges that the other’s businesses are unique and recognizes and affirms that in the event of a breach of this Agreement by a party hereto, money damages may be inadequate and the other party may have no adequate remedy at law. Accordingly, the parties hereto agree that the other party shall have the right to enforce its rights and the other’s obligations hereunder not only by an action or actions for damages but also by an action or actions seeking specific performance, injunctive, and/or other equitable relief, in each case, without the requirement of posting a bond or proving actual damages.
7. Term . This Agreement shall commence as of the Effective Date and shall remain in effect in perpetuity with respect to the Licensed Intellectual Property, and with respect to any patents issued on the Licensed Intellectual Property, until the expiration of the term of the last-to-expire of the patent rights within such Licensed Intellectual Property (including any extension to any such patent rights). Without limiting the foregoing, the Manager shall not have the right to terminate this Agreement under any circumstances, including the bankruptcy or insolvency of the Licensees.
8. Miscellaneous .
8.1 Relationship of Parties . For the purposes of this Agreement, each party hereto shall be, and shall be deemed to be, an independent contractor and not an agent, partner, joint venturer, representative or employee of any other party. No party hereto shall have authority to make any statements, representations, compromise of rights or commitments of any kind, assume or create any obligations, or to accept process for or take any other action which shall be binding on any other party hereto, except as may be explicitly provided for herein or in the Management Agreement or authorized in writing by such other party.
8.2 Notices . In order to be deemed effective, all documents to be delivered and all notices, approvals, authorizations, demands, requests, reports and/or consents to be given or obtained by any party to this Agreement shall be deemed received, unless earlier received, (i) if sent by certified or registered mail, return receipt requested, when actually delivered as aforesaid, except that such delivery shall be prior to 5:00 p.m., recipient’s time, on any Business Day and if a notice is not delivered on a Business Day or is delivered after 5:00 p.m., recipient’s time, such notice shall be deemed to have been received by such recipient at the commencement of such recipient’s first Business Day next following the time of delivery, (ii) if sent by overnight mail or international courier, when actually delivered as aforesaid, except that such delivery shall be prior to 5:00 p.m., recipient’s time, on any Business Day and if a notice is not delivered on a Business Day or is delivered after 5:00 p.m., recipient’s time, such notice shall be deemed to have been received by such recipient at the commencement of such recipient’s first Business Day next following the time of delivery, (iii) if sent by email or facsimile transmission, prior to 5:00 p.m., recipient’s time, on any Business Day and if a notice is not transmitted on a Business Day or is transmitted after 5:00 p.m., recipient’s time, such notice shall be deemed to have been received by such recipient at the commencement of such recipient’s first Business Day next following transmission of such notice, provided that confirmatory notice is sent promptly thereafter by first-class mail, postage prepaid, and (iv) if delivered by hand, on the date of receipt, at the address set forth below:
To the Manager:
Energy Infrastructure Alliance of America, L.L.C.
1900 North Akard Street
 
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Dallas, Texas 75201
E-mail: jklopf@hunttransmission.com
Facsimile: (214) 855-6965
Attention: Jeffrey A. Klopf
To the Company:
Electric Infrastructure Alliance of America, L.L.C.
1900 North Akard Street
Dallas, Texas 75201
E-mail: kbaker@huntoil.com
Facsimile: (214) 855-6965
Attention: W. Kirk Baker
To the Operating Partnership:
Electric Infrastructure Alliance of America, L.P.
1900 North Akard Street
Dallas, Texas 75201
E-mail: jklopf@hunttransmission.com
Facsimile: (214) 855-6965
Attention: Jeffrey A. Klopf
8.3 Entire Agreement . This Agreement contains the entire understanding and agreement among the parties hereto with respect to the subject matter hereof and supersedes any prior written or oral understandings or agreements among them with respect thereto. Except as otherwise expressly provided in this Agreement, no amendment, modification or discharge of this Agreement shall be valid or binding unless set forth in writing and duly executed by each of the parties hereto.
8.4 Binding; Assignment . This Agreement shall be binding on the parties hereto and any successor or permitted assign of such party. No assignment by any Licensee shall be effective for any purpose without the written consent and approval of the Manager. Upon any such transfer, such Licensee shall not be released from any liabilities arising hereunder from and after the effective date of such transfer.
8.5 No Third-Party Beneficiaries . This Agreement is solely for the benefit of the parties hereto and (i) none of the provisions of this Agreement shall be for the benefit of, or shall be enforceable by, any creditor of any party thereto and (ii) no provisions of this Agreement shall be deemed to confer upon any other Person any remedy, claim, liability, reimbursement, cause of action or other right.
8.6 No Presumption Against Drafter . Each of the parties hereto have jointly participated in the negotiation and drafting of this Agreement. In the event of an ambiguity or a question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by each of the parties hereto and no presumptions or burdens of proof shall arise favoring any party by virtue of the authorship of any of the provisions of this Agreement.
8.7 Severability . Whenever possible, each provision of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, however, if performance of any provision of this Agreement, at the time such performance shall be due, shall transcend the limit of validity prescribed by law, then the obligation to be performed shall be reduced to the limit of such validity; and if any clause or provision contained in this Agreement operates or would operate to invalidate this Agreement, in whole or in part, then such clause or provision only shall be held ineffective, as though not herein contained, and the remainder of this Agreement shall remain operative and in full force and effect. The parties hereto shall negotiate in good faith a replacement clause or provision as consistent with the ineffective clause or provision as is practicable under law.
 
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8.8 Modification . This Agreement shall not be changed, modified, or amended, in whole or in part, except by an instrument in writing signed by all parties hereto, or their respective successors or assignees.
8.9 Waiver . Neither the failure nor any delay on the part of a party hereto to exercise any right, remedy, power or privilege or insist on strict performance under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver.
8.10 Governing Law . THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS.
8.11 Waiver of Jury Trial . TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE PARTIES HEREBY IRREVOCABLY WAIVE ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
8.12 Forum Selection and Consent to Jurisdiction . ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT, SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF NEW YORK LOCATED IN THE BOROUGH OF MANHATTAN OR IN A UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK LOCATED IN THE BOROUGH OF MANHATTAN. EACH OF THE PARTIES HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK LOCATED IN THE BOROUGH OF MANHATTAN AND OF A UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK LOCATED IN THE BOROUGH OF MANHATTAN FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE. EACH OF THE PARTIES HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
8.13 Licensees’ Retained Rights . The parties acknowledge and agree that the Licensed Intellectual Property is “intellectual property” as defined in Section 101(35A) of Chapter 11 of the United States Code, as the same may be amended from time to time (the “ Code ”), which is being licensed hereunder in a contemporaneous exchange for value. The parties further acknowledge and agree that if the Manager becomes a debtor or debtor in possession under any chapter of the Code, then if it elects to reject, or a trustee on behalf of it elects to reject, this Agreement or any agreement supplementary hereto, pursuant to Section 365 of the Code, or if this Agreement or any agreement supplementary hereto is deemed to be rejected pursuant to Section 365 of the Code for any reason, then this Agreement, and any agreement supplementary hereto, shall be governed by Section 365(n) of the Code and the Licensees will retain and may elect to fully exercise their rights under this Agreement in accordance with Section 365(n) of the Code. Upon written request from Licensees to the Manager (and, if applicable, the Manager’s trustee in bankruptcy) of Licensees’ election to proceed under Section 365(n) of the Code, the Manager (or, if applicable, the Manager’s trustee in bankruptcy) shall comply in all respects with Section 365(n) of the Code, including, without limitation, providing Licensees with the Licensed Intellectual Property and not interfering with the rights of Licensees as provided in this Agreement to obtain access to the Licensed Intellectual Property from the Manager, the bankruptcy trustee or any third-party agent.
 
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8.14 Execution in Counterparts . This Agreement may be executed and delivered in one or more counterparts (including by means of facsimile or electronic mail transmission), each of which when so executed and delivered shall be deemed an original, none of which need contain the signatures of each of the parties hereto and all of which together shall constitute one and the same instrument binding on all the parties hereto. Each party shall become bound by this Agreement immediately upon affixing its signature hereto.
[Signature Page Follows]
 
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IN WITNESS WHEREOF, the Company, the Operating Partnership and the Manager have executed this Agreement as of the day and year first above written.

ELECTRIC INFRASTRUCTURE ALLIANCE OF AMERICA, L.L.C.	
			
	 	By:	 	/s/ W. Kirk Baker	
	 	Name:  	 	W. Kirk Baker	
	 	Title:	 	Senior Vice President	
	
ELECTRIC INFRASTRUCTURE ALLIANCE OF AMERICA, L.P.	
	
By: Electric Infrastructure Alliance of America, L.L.C., its general partner	
			
	 	By:	 	/s/ W. Kirk Baker	
	 	Name:	 	W. Kirk Baker	
	 	Title:	 	Senior Vice President	
	
ENERGY INFRASTRUCTURE ALLIANCE OF AMERICA, L.L.C.	
			
	 	By:	 	/s/ Jeffery A. Klopf	
	 	Name:	 	Jeffery A. Klopf	
	 	Title:	 	Vice president	
[S IGNATURE PAGE TO EIAA L ICENSE A GREEMENT ]

SCHEDULE A
LICENSED INTELLECTUAL PROPERTY
The Licensed Intellectual Property consists of the methods, processes, techniques, know-how and other information and trade secrets of the Manager utilized for including electricity transmission and distribution systems and other electric utility assets in a REIT, such that the rental income from the leasing of such assets qualifies as “rent from real property” for a REIT under U.S. federal income tax purposes, and includes all associated plans and strategies, analytics, forecasts, financial and tax structures, legal structures, contract terms, management structures, systems, processes, algorithms, mathematical models, financial models, valuation models, information relating to modeling relationships, investment and structuring strategies and paradigms, methods of identifying and obtaining regulatory approvals and other regulatory knowledge, and governing organizational procedures, and any patent that may be issued to the Manager or one of its Affiliates with respect to claims therein that encompass any of the foregoing which are used or useful for establishing and/or maintaining a REIT as described above. For clarity, the Licensed Intellectual Property shall be understood to include such methods, processes, techniques, know-how and other information and trade secrets as were provided by the Manager to the Licensees in written (including electronic) form.
For purposes of this Agreement, the Licensed Intellectual Property shall not be deemed to include any software, databases, applications or other Intellectual Property Rights (or embodiments thereof) that are owned by and/or licensed from a third party, including as such items may be incorporated into or required for the use of the items set forth above on this Schedule A , including, without limitation: (i) Microsoft Windows and Microsoft Office Suite; (ii) Oracle software; and (iii) SAP software.
For clarity, the Licensed Intellectual Property shall not include any information furnished to the Manager or its Affiliates related to any such Affiliate’s investment in any Licensee to the extent such information is subject to an attorney-client or similar legal privilege.
 
A-1

Exhibit 10.38
EXECUTION COPY
INTELLECTUAL PROPERTY ASSIGNMENT AGREEMENT
This Assignment shall be effective as of the 1 st day of December, 2014.
WHEREAS, Hunt Utility Services, LLC (formerly known as InfraREIT Capital Partners, LLC), a Delaware limited liability company, having an address of 1807 Ross Avenue, 4th Floor, Dallas, Texas 75201 (hereafter “ Assignor ”), is the owner of all rights, title and interest in and to the “InfraREIT” name, the domain name “infrareitinc.com” and the domain names identified on Exhibit A hereto, together with the goodwill of the business symbolized thereby and associated therewith (hereinafter the “ Intellectual Property ”), and has not abandoned the Intellectual Property; and
WHEREAS, InfraREIT Partners, LP, a Delaware limited partnership, having an address of 1807 Ross Avenue, 4th Floor, Dallas, Texas 75201 (hereafter “ Assignee ”), desires to acquire all right, title and interest in and to the Intellectual Property, including, but not limited to, the related registrations and pending applications therefor, together with the goodwill of the business symbolized by the Intellectual Property throughout the world.
NOW THEREFORE, in consideration of the premises, promises and mutual covenants recited herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged and accepted, the parties agree as follows:
1. Assignor does hereby irrevocably set over, transfer, grant, convey and assign to Assignee, its successors and assigns, without reservation of any rights, title or interest, all of Assignor’s rights, title and interest in and to the Intellectual Property, whether arising out of common law or otherwise, together with the goodwill of the business symbolized by the Intellectual Property, the same to be held and enjoyed by Assignee, for its own use and enjoyment, and for the use and enjoyment of its successors, assigns, subsidiaries or other legal representatives, including InfraREIT, Inc., a Maryland corporation (the “ REIT ”), as the same would have been held and enjoyed by Assignor if this Assignment had not been made, including, but not limited to, all common-law rights of Assignor in and/or to the Intellectual Property, and Assignor’s right to sue, recover and collect for any and all claims, demands and/or causes for action, both at law and in equity, that Assignor may have on account of any infringement, claim of unfair competition, likelihood of confusion or dilution of the Intellectual Property, or any other claim or cause of action related to the Intellectual Property prior to and following the effective date of this Assignment.
2. Notwithstanding anything to the contrary herein, the term “Intellectual Property” does not include any rights related to the globe logo, the use of which will be governed by the license set forth in the Management Agreement between Assignee, Assignor and the REIT dated on or around the date hereof.
3. This Assignment shall be binding upon the parties, their successors and assigns and shall not be modified except in a writing signed by each party.

4. This Assignment is made under and shall be governed and interpreted in accordance with the laws of the State of Texas, without regard to that state’s choice of law principals, as if it were a contract wholly made and performed within the State of Texas. The Parties agree that proper venue for any and all action concerning breach of or enforcement of this Assignment shall be either in federal or state court in Dallas, Texas.
5. This Assignment supersedes any prior agreement or understanding between the parties relating to the subject matter hereof. No waiver of any term or condition of this Assignment or of any breach of this Assignment shall be effective unless in writing and signed by the party charged with waiver, and shall not be deemed a waiver of any other term, condition, or breach of this Assignment, or of the same term, condition, or breach effected at any other time. If any provision of this Assignment shall be determined to be invalid or unenforceable, the remainder of this Assignment shall remain in full force and effect.
[Signature page follows]

IN WITNESS WHEREOF, the parties hereto have caused this Assignment to be executed by their duly authorized representatives, having full power and authority to do so, which shall be effective as of the date first written above.

HUNT UTILITY SERVICES, LLC	
		
By:	 	/s/ David A. Campbell	
	 	Name: David A. Campbell	
	 	Title: President	
	
INFRAREIT PARTNERS, LP ,	
	
By: InfraREIT, L.L.C., its general partner	
		
By:	 	/s/ David A. Campbell	
	 	Name: David A. Campbell	
	 	Title: President	
Signature Page to Intellectual Property Assignment Agreement

EXHIBIT A
INFRAREITCAPITAL.COM
INFRAREITCAPITAL.INFO
INFRAREITCAPITAL.NET
INFRAREITCAPITAL.ORG
INFRAREITCP.COM
INFRAREITINC.COM
INFRAREITINC.INFO
INFRAREITINC.NET
INFRAREITINC.ORG
INFRAREITPARTNERS.COM
INFRAREITPARTNERS.INFO
INFRAREITPARTNERS.NET
INFRAREITPARTNERS.ORG
INFRAREITPARTNERSLP.COM
INFRAREITPARTNERSLP.INFO
INFRAREITPARTNERSLP.NET
INFRAREITPARTNERSLP.ORG
INFRA-REIT.COM
ENERGYINFRASTRUCTUREALLIANCE.COM
ENERGYIAA.COM
ELECTRICINFRASTRUCTUREALLIANCE.COM
ELECTRICIAA.COM
EIAAREIT.COM

Exhibit 10.46
PROMISSORY NOTE

$1,000,000	 	November 20, 2014	
FOR VALUE RECEIVED, InfraREIT, Inc. (the “ Issuer ”), hereby unconditionally promises to pay to the order of Hunt Consolidated, Inc., or its assigns (the “ Noteholder ,” and together with the Issuer, the “ Parties ”), the principal amount of $1,000,000 (the “ Loan ”) as provided in this Promissory Note (this “ Note ”).
1. Definitions . Capitalized terms used herein shall have the meanings set forth in this Section 1.
“ Business Day ” means a day other than a Saturday, Sunday or other day on which commercial banks in Dallas, Texas are authorized or required by Law to close.
“ Default ” means any of the events specified in Section 5 which constitutes an Event of Default or which, upon the giving of notice, the lapse of time, or both pursuant to Section 6 would, unless cured or waived, become an Event of Default.
“ Event of Default ” has the meaning set forth in Section 5.
“ Governmental Authority ” means the government of any nation or any political subdivision thereof, whether at the national, state, municipal or any other level, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of, or pertaining to, government.
“ Issuer ” has the meaning set forth in the introductory paragraph.
“ Loan ” has the meaning set forth in the introductory paragraph.
“ Material Adverse Effect ” means a material adverse effect on (a) the validity or enforceability of the Note; (b) the rights or remedies of the Noteholder hereunder; or (c) the Issuer’s ability to perform any of its material obligations hereunder.
“ Maturity Date ” means November 1, 2015.
“ Note ” has the meaning set forth in the introductory paragraph.
“ Noteholder ” has the meaning set forth in the introductory paragraph.
“ Parties ” has the meaning set forth in the introductory paragraph.
“ Person ” means any individual, corporation, limited liability company, trust, joint venture, association, company, limited or general partnership, unincorporated organization, Governmental Authority or other entity.

2. Payment Date; Prepayments .
2.1 Interest . Interest shall accrue on the unpaid principal balance of the Loan at the rate of 2.5%, compounded annually.
2.2. Payment Date . The aggregate unpaid principal amount of the Loan, and all accrued and unpaid interest, shall be due and payable on the Maturity Date.
2.3. Optional Prepayment . The Issuer may prepay the Loan (which prepayment shall include accrued and unpaid interest) in whole or in part at any time or from time to time, and without premium or penalty.
3. Representations and Warranties . The Issuer hereby represents and warrants to the Noteholder as of the date hereof as follows.
3.1. Existence; Power and Authority : The Issuer is a corporation duly incorporated, validly existing and in good standing under the laws of Maryland and has the requisite power and authority, and the legal right, to execute and deliver this Note and to perform its obligations hereunder.
3.2. Authorization; Execution and Delivery . The execution and delivery of this Note by the Issuer and the performance of its obligations hereunder have been duly authorized by all necessary corporate action in accordance with all applicable laws. The Issuer has duly executed and delivered this Note.
3.3 No Approvals . No consent or authorization of, filing with, notice to or other act by, or in respect of, any Governmental Authority or any other Person is required in order for the Issuer to execute, deliver, or perform any of its obligations under this Note.
3.4 No Violations The execution and delivery of this Note and the consummation by the Issuer of the transactions contemplated hereby do not and will not (a) violate any provision of the Issuer’s organizational documents; (b) violate any law or order applicable to the Issuer or by which any of its properties or assets may be bound; or (c) constitute a default under any material agreement or contract by which the Issuer may be bound, except for such defaults that would not reasonably be expected to have a Material Adverse Effect.
3.5 Enforceability . The Note is a valid, legal and binding obligation of the Issuer, enforceable against the Issuer in accordance with its terms except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law).
4. Affirmative Covenants . Until all amounts outstanding in this Note have been paid in full, the Issuer shall:
4.1. Maintenance of Existence . (a) Preserve, renew and maintain in full force and effect its corporate or organizational existence and (b) take all reasonable action to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its business,
 
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except, in each case, where the failure to do so would not reasonably be expected to have a Material Adverse Effect.
4.2. Compliance . Comply with (a) all of the terms and provisions of its organizational documents; (b) its obligations under its material contracts and agreements; and (c) all Laws and Orders applicable to it and its business, except, in each case, where the failure to do so would not reasonably be expected to have a Material Adverse Effect.
4.3. Notice of Events of Default . As soon as reasonably practicable and in any event within ten (10) Business Days after it becomes aware that a Default or an Event of Default has occurred, Issuer will notify the Noteholder in writing of the nature and extent of such Default or Event of Default and the action, if any, it has taken or proposes to take with respect to such Default or Event of Default.
4.4. Further Assurances . Upon the request of the Noteholder, promptly execute and deliver such further instruments and do or cause to be done such further acts as may be necessary or advisable to carry out the intent and purposes of this Note.
5. Events of Default . The occurrence and continuance of any of the following shall constitute an Event of Default hereunder:
5.1. Breach of Representations and Warranties . Any representation or warranty made or deemed made by the Issuer to the Noteholder herein is incorrect in any material respect on the date as of which such representation or warranty was made or deemed made.
5.2. Breach of Covenants . The Issuer fails to observe or perform any material covenant, obligation, condition or agreement contained in this Note and such failure continues for 30 days after written notice to the Issuer.
5.3. Bankruptcy .
(a) the Issuer commences any case, proceeding or other action (i) under any existing or future Law relating to bankruptcy, insolvency, reorganization, or other relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it as bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts or (ii) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, or the Issuer makes a general assignment for the benefit of its creditors;
(b) there is commenced against the Issuer any case, proceeding or other action of a nature referred to in Section 5.3(a) above which (i) results in the entry of an order for relief or any such adjudication or appointment or (ii) remains undismissed, undischarged or unbonded for a period of 120 days;
(c) there is commenced against the Issuer any case, proceeding or other action seeking issuance of a warrant of attachment, execution or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which has
 
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not been vacated, discharged, or stayed or bonded pending appeal within 120 days from the entry thereof;
(d) the Issuer takes any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in Section 5.3(a), Section 5.3(b) or Section 5.3(c) above; or
(e) the Issuer is generally not, or shall be unable to, or admits in writing its inability to, pay its debts as they become due.
6. Remedies . Upon the occurrence of any Event of Default and at any time thereafter during the continuance of such Event of Default, the Noteholder may at its option, by written notice to the Issuer (a) declare the entire principal amount of this Note immediately due and payable; and/or (b) exercise any or all of its rights, powers or remedies under applicable Law or in equity; provided , however that, if an Event of Default described in Section 5.3 shall occur, the principal of the Loan shall become immediately due and payable without any notice, declaration or other act on the part of the Noteholder. No course of dealing, forbearance, indulgence, failure or delay on the part of the holder of this Note in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor as an acquiescence in any default. No single or partial exercise of any such right, power or remedy shall preclude any other or further exercise thereof or the exercise of any other right, power or remedy. No notice to or demand upon the Issuer shall entitle the Issuer to other or further notice or demand in similar or other circumstances. The remedies provided for herein are cumulative and are not exclusive of any other remedies that may be available to the holder of this Note pursuant to agreement, under applicable Law, in equity or otherwise.
7. Miscellaneous .
7.1. Notices .
(a) All notices, requests or other communications required or permitted to be delivered hereunder shall be delivered in writing, in each case to the address specified below or to such other address as such Party may from time to time specify in writing in compliance with this provision:
 
 	(i)	If to the Issuer:	
InfraREIT, Inc.
Attn: Ben Nelson
Telephone: (214) 978-8979
E-mail: bnelson@huntutility.com
 
 	(ii)	If to the Noteholder:	
Hunt Consolidated, Inc.
Attn: Donna German
Telephone: (214) 978-8000
E-mail: dgerman@huntconsolidated.com
 
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(b) Notices if (i) mailed by certified or registered mail or sent by hand or overnight courier service shall be deemed to have been given when received; (ii) sent by facsimile during the recipient’s normal business hours shall be deemed to have been given when sent (and if sent after normal business hours shall be deemed to have been given at the opening of the recipient’s business on the next business day); and (iii) sent by e-mail shall be deemed received upon the sender’s receipt of an acknowledgment from the intended recipient (such as by the “return receipt requested” function, as available, return e-mail or other written acknowledgment).
7.2. Unconditional Obligations . The obligations of the Issuer to make the payments provided for in this Note are absolute and unconditional and not subject to any defense, set-off, counterclaim, rescission, recoupment or adjustment whatsoever.
7.3. Governing Law . This Note and any claim, controversy, dispute or cause of action (whether in contract or tort or otherwise) based upon, arising out of or relating to this Note and the transactions contemplated hereby shall be governed by the laws of the State of Texas
7.3. Counterparts; Integration; Effectiveness . This Note and any amendments, waivers, consents or supplements hereto may be executed in counterparts, each of which shall constitute an original, but all taken together shall constitute a single contract. This Note constitutes the entire contract between the Parties with respect to the subject matter hereof and supersede all previous agreements and understandings, oral or written, with respect thereto. Delivery of an executed counterpart of a signature page to this Note by facsimile or in electronic format shall be effective as delivery of a manually executed counterpart of this Note.
7.4. Successors and Assigns . This Note may be assigned or transferred by the Noteholder to any Person. The Issuer may not assign or transfer this Note or any of its rights hereunder without the prior written consent of the Noteholder. This Note shall inure to the benefit of, and be binding upon, the Parties and their permitted assigns.
7.5. Waiver of Notice . The Issuer hereby waives demand for payment, presentment for payment, protest, notice of payment, notice of dishonor, notice of nonpayment, notice of acceleration of maturity and diligence in taking any action to collect sums owing hereunder.
7.6. Interpretation . For purposes of this Note (a) the words “include,” “includes” and “including” shall be deemed to be followed by the words “without limitation”; (b) the word “or” is not exclusive; and (c) the words “herein,” “hereof,” “hereby,” “hereto” and “hereunder” refer to this Note as a whole. The definitions given for any defined terms in this Note shall apply equally to both the singular and plural forms of the terms defined. This Note shall be construed without regard to any presumption or rule requiring construction or interpretation against the party drafting an instrument or causing any instrument to be drafted.
7.7. Amendments and Waivers . No term of this Note may be waived, modified or amended except by an instrument in writing signed by both of the parties hereto. Any waiver of the terms hereof shall be effective only in the specific instance and for the specific purpose given.
 
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7.8. Headings . The headings of the various Sections and subsections herein are for reference only and shall not define, modify, expand or limit any of the terms or provisions hereof.
7.9. No Waiver; Cumulative Remedies . No failure to exercise and no delay in exercising on the part of the Noteholder, of any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law.
7.10. Severability . If any term or provision of this Note is invalid, illegal or unenforceable in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other term or provision of this Note or invalidate or render unenforceable such term or provision in any other jurisdiction. Upon such determination that any term or other provision is invalid, illegal or unenforceable, the parties hereto shall negotiate in good faith to modify this Note so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the transactions contemplated hereby be consummated as originally contemplated to the greatest extent possible.
[Remainder of Page Intentionally Left Blank]
 
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IN WITNESS WHEREOF, the undersigned has executed and delivered this Note as of the day and year first above written.

INFRAREIT, INC.	
		
By:	 	/s/ David Hernandez	
	 	Name:	 	David Hernandez	
	 	Title:	 	Senior Vice President	

ACKNOWLEDGED AND ACCEPTED	
	
HUNT CONSOLIDATED, INC.	
		
By:	 	/s/ Donna Cannon	
	 	Name:	 	Donna Cannon	
	 	Title:	 	Assistant Treasurer	
 
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Exhibit 10.47
INFRAREIT, INC.
2015 EQUITY INCENTIVE PLAN
InfraREIT, Inc., a Maryland corporation (the “Company”), sets forth herein the terms of its 2015 Equity Incentive Plan (the “Plan”), as follows:
1. PURPOSE
This Plan is intended to (a) provide awards to eligible persons, who are primarily Outside Directors in accordance with the Company’s Non-Employee Director Compensation Policy and as a result of the Manager serving as the Company’s external manager, as an incentive to stimulate their efforts towards the success of the Company and to operate and manage its business in a manner that will provide for the long term growth and profitability of the Company; (b) provide a means of attracting, obtaining and retaining able personnel, whose present and potential contributions to the welfare of the Company are important; and (c) provide a means by which such individuals can acquire and maintain equity ownership, or awards, the value of which is tied to the performance of the Company, thereby strengthening their concern for the welfare of the Company. To this end, the Plan provides for the grant of stock options, stock appreciation rights, restricted stock, unrestricted stock, stock units (including deferred stock units), dividend equivalent rights, long-term incentive units and cash bonus awards. Any of these awards may, but need not, be made as performance incentives to reward attainment of annual or long-term performance goals in accordance with the terms hereof. Although the Plan is primarily intended to apply to Outside Directors, the Plan may serve as a means for providing incentives to other Service Providers from time to time.
2. DEFINITIONS
For purposes of interpreting the Plan and related documents (including Award Agreements), the following definitions shall apply:
2.1 “Affiliate” means, with respect to the Company or the Manager, respectively, any company or other trade or business that controls, is controlled by or is under common control with the Company or the Manager within the meaning of Rule 405 of Regulation C under the Securities Act, including, without limitation, any Subsidiary. For purposes of granting stock options or stock appreciation rights, an entity may not be considered an Affiliate of the Company or the Manager, respectively, unless the Company or the Manager holds a “controlling interest” in such entity, where the term “controlling interest” has the same meaning as provided in Treasury Regulation Section 1.414(c)-2(b)(2)(i), provided that the language “at least 50 percent” is used instead of “at least 80 percent” and, provided further, that where granting of stock options or stock appreciation rights is based upon a legitimate business criteria, the language “at least 20 percent” is used instead of “at least 80 percent” each place it appears in Treasury Regulation Section 1.414(c)-2(b)(2)(i).
2.2 “Annual Incentive Award” means an Award, denominated in cash, made subject to attainment of performance goals (as described in Section 14) over a Performance Period of up to one year (the Company’s fiscal year, unless otherwise specified by the Committee).

2.3 “Applicable Entity” means the Company, its Affiliates or the Manager and its Affiliates.
2.4 “Applicable Laws” means the legal requirements relating to the Plan and the Awards under applicable provisions of the corporate, securities, tax and other laws, rules, regulations and government orders, and the rules of any applicable stock exchange or national market system, of any jurisdiction applicable to Awards granted to residents therein.
2.5 “Award” means a grant of an Option, Stock Appreciation Right, Restricted Stock, Unrestricted Stock, Stock Unit, Dividend Equivalent Right, Performance Award, Annual Incentive Award, LTIP Unit, or Other Equity-Based Award under the Plan.
2.6 “Award Agreement” means the agreement between the Company and a Participant that evidences and sets out the terms and conditions of an Award.
2.7 “Benefit Arrangement” shall have the meaning set forth in Section 16.
2.8 “Board” means the Board of Directors of the Company.
2.9 “Cause” means, with respect to any Participant, as determined by the Committee and unless otherwise provided in an applicable agreement (including but not limited to any applicable employment agreement) between such Participant and the Applicable Entity (a) violations by such Participant of such Participant’s obligations to the Applicable Entity (other than as a result of incapacity due to physical or mental illness) which are demonstrably willful and deliberate on such Participant’s part, which are committed in bad faith or without reasonable belief that such violations are in the best interests of the Applicable Entity and which are not remedied within a reasonable period of time after such Participant’s receipt of written notice from the Company specifying such violations, (b) the conviction of such Participant of a felony involving an act of dishonesty intended to result in substantial personal enrichment of such Participant at the expense of the Applicable Entity or (c) prior to a Change in Control, such other events as shall be determined by the Committee, in its sole discretion. Any determination by the Committee whether an event constituting Cause shall have occurred shall be final, binding and conclusive.
2.10 “Change in Control” means:
(1) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than fifty percent (50%) of either (i) the then outstanding shares of common stock, par value $0.01 per share, of the Company (the “Outstanding Company Stock”) or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this subsection (1), the following acquisitions shall not constitute a Change in Control: (i) any acquisition by the Company; (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation or trust controlled by the Company; and
 
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(iii) any acquisition by any entity pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (3) of this Section 2.10; or
(2) Individuals who, as of the date hereof, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or
(3) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), in each case unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than fifty percent (50%) of, respectively, the then outstanding common shares and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the entity resulting from such Business Combination (including, without limitation, a corporation that as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Stock and Outstanding Company Voting Securities, as the case may be, and (ii) no Person (excluding any corporation or trust resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation or trust resulting from such Business Combination) beneficially owns, directly or indirectly, thirty-five percent (35%) or more of the then outstanding shares of the corporation or trust resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation or trust except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation or trust resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or
(4) Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company and consummation of such transaction.
Notwithstanding the foregoing, no event or condition shall constitute a Change in Control to the extent that the event or condition in connection with any Plan provision or Award under this Plan would result in the imposition of an applicable tax under Code Section 409A.
 
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2.11 “Code” means the Internal Revenue Code of 1986, as now in effect or as hereafter amended. References in the Plan to any Code Section shall be deemed to include, as applicable, regulations promulgated under such Code Section.
2.12 “Committee” means a committee of, and designated from time to time by resolution of, the Board, which shall be constituted as provided in Section 3.1 (or, if no Committee has been designated, the Board itself).
2.13 “Company” means InfraREIT, Inc., a Maryland corporation.
2.14 “Covered Employee” means a Participant who is a covered employee within the meaning of Code Section 162(m)(3).
2.15 “Determination Date” means the Grant Date or such other date as of which the Fair Market Value of a share of Stock is required to be established for purposes of the Plan.
2.16 “Disability” means the Participant is unable to perform each of the essential duties of such Participant’s position by reason of a medically determinable physical or mental impairment which is potentially permanent in character or which can be expected to last for a continuous period of not less than 12 months; provided, however, that, with respect to rules regarding expiration of an Incentive Stock Option following termination of the Participant’s Service, Disability shall mean the Participant is unable to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. Notwithstanding the foregoing, no circumstances or condition shall constitute a Disability to the extent that, if it were, a 20% tax would be imposed upon or with respect to any Award to the extent that the circumstances or condition in connection with any Plan provision or Award under this Plan would result in the imposition of an applicable tax under Code Section 409A.
2.17 “Dividend Equivalent Right” means a contingent right, granted to a Participant under Section 13, to receive cash, Stock, other Awards or other property equal in value to dividends paid with respect to a specified number of shares of Stock, or other periodic payments; provided that no Dividend Equivalent Rights may be granted in connection with, or related to, an Award of Restricted Stock, Options or SARs.
2.18 “Effective Date” means December 1, 2014, the date the Plan was approved by the common stockholders of the Company.
2.19 “Exchange Act” means the Securities Exchange Act of 1934, as now in effect or as hereafter amended.
2.20 “Fair Market Value” means the fair market value of a share of Stock for purposes of the Plan, which shall be determined as of any Determination Date as follows:
(a) If on such Determination Date the shares of Stock are listed on a Stock Exchange, or are publicly traded on another established securities market (a “Securities Market”), the Fair Market Value of a share of Stock shall be the closing price of the
 
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Stock as reported on such Stock Exchange or such Securities Market (provided that, if there is more than one such Stock Exchange or Securities Market, the Committee shall designate the appropriate Stock Exchange or Securities Market for purposes of the Fair Market Value determination). If there is no such reported closing price on such Determination Date, the Fair Market Value of a share of Stock shall be the closing price of the Stock on the prior trading day on which any sale of Stock has been reported on such Stock Exchange or such Securities Market.
(b) If on such Determination Date the shares of Stock are not listed on a Stock Exchange or publicly traded on a Securities Market, the Fair Market Value of a share of Stock shall be the value of the Stock as determined by the Committee by the reasonable application of a reasonable valuation method, in a manner consistent with Code Section 409A.
Notwithstanding this Section 2.20 or Section 19.3, for purposes of determining taxable income and the amount of the related tax withholding obligation pursuant to Section 19.3, for any shares of Stock subject to an Award that are sold by or on behalf of a Participant on the same date on which such shares of Stock may first be sold pursuant to the terms of the related Award Agreement, the Fair Market Value of such shares of Stock shall be the sale price of such shares of Stock on such date (or if sales of such shares of Stock are effectuated at more than one sale price, the weighted average sale price of such shares of Stock on such date).
2.21 “Family Member” means a person who is a spouse, former spouse, child, stepchild, grandchild, parent, stepparent, grandparent, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother, sister, brother-in-law, or sister-in-law, including adoptive relationships, of the Participant, any person sharing the Participant’s household (other than a tenant or employee), a trust in which any one or more of these persons have more than fifty percent (50%) of the beneficial interest, a foundation in which any one or more of these persons (or the Participant) control the management of assets, and any other entity in which one or more of these persons (or the Participant) own more than fifty percent (50%) of the voting interests.
2.22 “Grant Date” means, as determined by the Committee, the latest to occur of (i) the date as of which the Company completes the corporate action constituting the Award, (ii) the date on which the recipient of an Award first becomes eligible to receive an Award under Section 6, or (iii) such other date as may be specified by the Committee.
2.23 “Incentive Stock Option” means an “incentive stock option” within the meaning of Code Section 422, or the corresponding provision of any subsequently enacted tax statute, as amended from time to time.
2.24 “Long-Term Incentive Unit” or “LTIP Unit” means an Award under Section 15 of an interest in the Operating Partnership.
2.25 “Manager” means Hunt Utility Services, LLC, or any successor or replacement entity, if any, providing management services to the Company.
 
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2.26 “Non-qualified Stock Option” means an Option that is not an Incentive Stock Option.
2.27 “Operating Partnership” means the operating partnership affiliated with the Company, if any.
2.28 “Option” means an option to purchase one or more shares of Stock pursuant to the Plan.
2.29 “Option Price” means the exercise price for each share of Stock subject to an Option.
2.30 “Other Agreement” shall have the meaning set forth in Section 16.
2.31 “Other Equity-Based Award” means a right or other interest that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, Stock, other than an Option, Stock Appreciation Right, Restricted Stock, Unrestricted Stock, Stock Units, Dividend Equivalent Right, LTIP Unit, Performance Award, or Annual Incentive Award.
2.32 “Outside Director” means a member of the Board who is not (i) an officer or employee of the Company or the Manager or (ii) a Director of the Manager.
2.33 Participant” means a person who receives or holds an Award under the Plan.
2.34 “Performance Award” means an Award (other than an Award denominated in cash or settled only in cash) made subject to the attainment of performance goals (as described in Section 14) over a Performance Period of up to ten (10) years.
2.35 “Performance-Based Compensation” means compensation under an Award that is intended to satisfy the requirements of Code Section 162(m) for “qualified performance-based compensation” paid to Covered Employees. Notwithstanding the foregoing, nothing in the Plan shall be construed to mean that an Award which does not satisfy the requirements for “qualified performance-based compensation” under Code Section 162(m) does not constitute performance-based compensation for other purposes, including for purposes of Code Section 409A.
2.36 “Performance Measures” means the business criteria listed in Section 14.6 on which the performance goals for Performance Awards intended to qualify as Performance-Based Compensation are based. These business criteria, together with the eligibility criteria and maximum Award amounts specified in Section 6, have been approved by the Company’s stockholders in a separate vote in order to qualify Awards as Performance-Based Compensation.
2.37 “Performance Period” means the period of time during which the performance goals must be met in order to determine the degree of payout and/or vesting with respect to an Award.
2.38 “Plan” means this InfraREIT, Inc. 2015 Equity Incentive Plan, as amended from time to time.
 
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2.39 “Purchase Price” means the purchase price for each share of Stock pursuant to a grant of Restricted Stock, Stock Units or Unrestricted Stock.
2.40 “Reporting Person” means a person who is required to file reports under Section 16(a) of the Exchange Act.
2.41 “Restricted Stock” means shares of Stock, awarded to a Participant pursuant to Section 10.
2.42 “SAR Exercise Price” means the per share exercise price of a SAR granted to a Participant under Section 9.
2.43 “Securities Act” means the Securities Act of 1933, as now in effect or as hereafter amended.
2.44 “Service” means service as a Service Provider to any Applicable Entity. Unless otherwise stated in the applicable Award Agreement, a Participant’s change in position or duties shall not result in interrupted or terminated Service, so long as such Participant continues to be a Service Provider to any Applicable Entity. Subject to the preceding sentence, whether a termination of Service shall have occurred for purposes of the Plan shall be determined by the Committee, which determination shall be final, binding and conclusive. Notwithstanding any other provision to the contrary, for any individual providing services solely as a director, only service to the Company or any of its Subsidiaries constitutes Service. If the Service Provider’s employment or other service relationship is with an Affiliate of the Company or the Manager and that entity ceases to be an Affiliate of the Company or the Manager, a termination of Service shall be deemed to have occurred when the entity ceases to be an Affiliate of the Company or the Manager unless the Service Provider transfers his or her employment or other service relationship to the Company or the Manager or their remaining Affiliates. With respect to any Award subject to Code Section 409A, termination of Service shall mean a “separation from service” as interpreted within the meaning of Section 409A of the Code and Treasury Regulation 1.409A-1(h).
2.45 “Service Provider” means the Manager, an Affiliate of the Manager or an employee, officer, director, or a consultant or adviser (who is a natural person) providing services to an Applicable Entity, including an Outside Director.
2.46 “Stock” means the common stock, par value $0.01 per share, of the Company.
2.47 “Stock Appreciation Right” or “SAR” means a right granted to a Participant under Section 9.
2.48 “Stock Exchange” means the New York Stock Exchange or another established national or regional stock exchange.
2.49 “Stock Unit” means a bookkeeping entry representing the equivalent of one share of Stock awarded to a Participant pursuant to Section 10.
 
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2.50 “Subsidiary” means any “subsidiary corporation” of the Company or Manager within the meaning of Code Section 424(f).
2.51 “Substitute Award” means an Award granted upon assumption of, or in substitution for, outstanding awards previously granted by a company or other entity acquired by the Company or an Affiliate or with which the Company or an Affiliate combined.
2.52 “Ten Percent Stockholder” means an individual who owns more than ten percent (10%) of the total combined voting power of all classes of outstanding voting securities of the Company, its parent or any of its Subsidiaries. In determining stock ownership, the attribution rules of Code Section 424(d) shall be applied.
2.53 “Unrestricted Stock” shall have the meaning set forth in Section 11.
Unless the context otherwise requires, all references in the Plan to “including” shall mean “including without limitation.”
3. ADMINISTRATION OF THE PLAN
3.1 Committee. The Plan shall be administered by the Committee. The Committee, upon and after such time as it is covered in Section 16 of the Exchange Act, shall consist of at least two individuals each of whom shall be a “nonemployee director” as defined in Rule 16b-3 as promulgated by the Securities and Exchange Commission (“Rule 16b-3”) under the Exchange Act and shall, at such times as the Company is subject to Code Section 162(m) (to the extent relief from the limitation of Code Section 162(m) is sought with respect to Awards), qualify as “outside directors” for purposes of Code Section 162(m); provided that no action taken by the Committee (including without limitation grants) shall be invalidated because any or all of the members of the Committee fails to satisfy the foregoing requirements of this sentence. The acts of a majority of the members present at any meeting of the Committee at which a quorum is present, or acts approved in writing by a majority of the entire Committee, shall be the acts of the Committee for purposes of the Plan. If and to the extent applicable, no member of the Committee may act as to matters under the Plan specifically relating to such member. Notwithstanding the other foregoing provisions of this Section 3.1 , any Award under the Plan to a person who is a member of the Committee shall be made and administered by the Board. If no Committee is designated by the Board to act for these purposes, the Board shall have the rights and responsibilities of the Committee hereunder and under the Award Agreements.
(a) Subject to the provisions of the Plan, including Section 15 hereof, the Committee shall in its discretion as reflected by the terms of the Award Agreements (i) authorize the granting of Awards to Service Providers; (ii) determine the eligibility of a Service Provider to receive an Award (subject to the individual participant limitations provided hereunder), as well as determine the number of Shares to be covered under any Award Agreement, considering the position and responsibilities of the Service Provider, the nature and value to the Company of the Service Provider’s present and potential contribution to the success of one or more Applicable Entities and such other factors as the Committee may deem relevant; (iii) determine the terms, provisions and conditions of each Award (which may not be inconsistent with the terms of the Plan); (iv) prescribe the
 
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form of instruments evidencing such Awards; (v) make recommendations to the Board with respect to any Award that is subject to Board approval; and (vi) take such other actions as are prescribed under the Plan.
(b) The Award Agreement shall contain such other terms, provisions and conditions not inconsistent herewith as shall be determined by the Committee. In the event that any Award Agreement or other agreement hereunder provides (without regard to this sentence) for the obligation of an Applicable Entity to purchase or repurchase Shares from a Participant or any other person, then, notwithstanding the provisions of the Award Agreement or such other agreement, such obligation shall not apply to the extent that the purchase or repurchase would not be permitted under Applicable Law. The Participant shall take whatever additional actions and execute whatever additional documents the Committee may in its reasonable judgment deem necessary or advisable in order to carry out or affect one or more of the obligations or restrictions imposed on the Plan pursuant to the express provisions of the Plan and the Award Agreement.
(c) The Committee may make such rules and regulations and establish such procedures for the administration of the Plan as it deems appropriate. In the event of conflict between the terms of an Award Agreement and an employment agreement between the Company and the Participant, absent language to the contrary, the terms of such employment agreement shall be binding. Without limiting the generality of the foregoing, the Committee may (i) determine the extent, if any, to which Awards shall be forfeited (whether or not such forfeiture is expressly contemplated hereunder); (ii) interpret and construe the Plan and the Award Agreements hereunder, with such interpretations to be conclusive and binding on all persons and otherwise accorded the maximum deference permitted by law, provided that the Committee’s interpretation shall not be entitled to deference on and after a Change in Control except to the extent that such interpretations are made exclusively by members of the Committee who are individuals who served as Committee members before the Change in Control; and (iii) take any other actions and make any other determinations or decisions that it deems necessary or appropriate in connection with the Plan or the administration or interpretation thereof. In the event of any dispute or disagreement as to the interpretation of the Plan or of any rule, regulation or procedure, or as to any question, right or obligation arising from or related to the Plan, the decision of the Committee, except as provided in clause (ii) of the foregoing sentence, shall be final and binding upon all persons.
3.2 Terms of Awards. Subject to the other terms and conditions of the Plan, the Committee shall have full and final authority to:
(a) designate Participants;
(b) determine the type or types of Awards to be made to a Participant;
(c) determine the number of shares of Stock to be subject to an Award;
 
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(d) establish the terms and conditions of each Award (including, but not limited to, the exercise price of any Option, the nature and duration of any restriction or condition (or provision for lapse thereof) relating to the vesting, exercise, transfer, or forfeiture of an Award or the shares of Stock subject thereto, the treatment of an Award in the event of a Change in Control, and any terms or conditions that may be necessary to qualify Options as Incentive Stock Options);
(e) prescribe the form of each Award Agreement evidencing an Award; and
(f) amend, modify, or reprice the terms of any outstanding Award subject to the restrictions of Section 3.4. Such authority specifically includes the authority, in order to effectuate the purposes of the Plan but without amending the Plan, to make or modify Awards to eligible individuals who are foreign nationals or are individuals who are employed outside the United States to recognize differences in local law, tax policy, or custom. Notwithstanding the foregoing, no amendment, modification or supplement of any Award shall, without the consent of the Participant, impair the Participant’s rights under such Award.
3.3 Forfeiture; Recoupment. The Company may reserve the right in an Award Agreement to cause a forfeiture of the gain realized by a Participant with respect to an Award thereunder on account of actions taken by, or failed to be taken by, such Participant in violation or breach of or in conflict with any (a) employment agreement, (b) non-competition agreement, (c) agreement prohibiting solicitation of employees or clients of the Company or any Affiliate, (d) confidentiality obligation with respect to the Company or any Affiliate, (e) secondment agreement, or (f) other agreement, as and to the extent specified in such Award Agreement. The Company may annul an outstanding Award if the Participant thereof is an employee and is terminated for Cause as defined in the Plan or the applicable Award Agreement or for “cause” as defined in any other agreement between the Applicable Entity and such Participant, as applicable.
Any Award granted pursuant to the Plan is subject to mandatory repayment by the Participant to the Company to the extent the Participant is or in the future becomes subject to any Company “clawback” or recoupment policy that requires the repayment by the Participant to the Company of compensation paid by the Company to the Participant in the event that the Participant fails to comply with, or violates, the terms or requirements of such policy. Such policy may authorize the Company to recover from a Participant incentive-based compensation (including Options awarded as compensation) awarded to or received by such Participant during a period of up to three (3) years, as determined by the Committee, preceding the date on which the Company is required to prepare an accounting restatement due to material noncompliance by the Company, as a result of misconduct, with any financial reporting requirement under the federal securities laws.
Furthermore, if the Company is required to prepare an accounting restatement due to the material noncompliance of the Company, as a result of misconduct, with any financial reporting requirement under the federal securities laws, and any Award Agreement so provides, any Participant of an Award under such Award Agreement who knowingly engaged in such misconduct, was grossly negligent in engaging in such misconduct, knowingly failed to prevent
 
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such misconduct or was grossly negligent in failing to prevent such misconduct, shall reimburse the Company the amount of any payment in settlement of an Award earned or accrued during the 12-month period following the first public issuance or filing with the United States Securities and Exchange Commission (whichever first occurred) of the financial document that contained information affected by such material noncompliance.
Notwithstanding any other provision of the Plan or any provision of any Award Agreement, if the Company is required to prepare an accounting restatement, then Participants shall forfeit any cash or Stock received in connection with an Award (or an amount equal to the Fair Market Value of such Stock on the date of delivery if the Participant no longer holds the shares of Stock) if pursuant to the terms of the Award Agreement for such Award, the amount of the Award earned or the vesting in the Award was explicitly based on the achievement of pre-established performance goals set forth in the Award Agreement (including earnings, gains, or other performance goals) that are later determined, as a result of the accounting restatement, not to have been achieved.
3.4 No Repricing. Except in connection with a corporate transaction involving the Company (including, without limitation, any stock dividend, distribution (whether in the form of cash, shares of Stock, other securities or other property), stock split, extraordinary cash dividend, recapitalization, change in control, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of shares of Stock or other securities or similar transaction), the Company may not, without obtaining stockholder approval: (a) amend the terms of outstanding Options or SARs to reduce the exercise price of such outstanding Options or SARs; (b) cancel outstanding Options or SARs in exchange for or substitution of Options or SARs with an exercise price that is less than the exercise price of the original Options or SARs; or (c) cancel outstanding Options or SARs with an exercise price below the current stock price in exchange for cash or other securities.
3.5 Deferral Arrangement. The Committee may permit or require the deferral of any award payment into a deferred compensation arrangement, subject to such rules and procedures as it may establish, which may include provisions for the payment or crediting of interest or Dividend Equivalent Rights and, in connection therewith, provisions for converting such credits into Stock Units and for restricting deferrals to comply with hardship distribution rules affecting tax-qualified retirement plans subject to Code Section 401(k)(2)(B)(i)(IV) or unforeseeable emergency rules of Code Section 409A(a)(2)(B)(ii).
3.6 No Liability. The Committee and each member thereof shall be entitled to, in good faith, rely or act upon any report or other information furnished to him or her by any person serving as an officer, employee or legal counsel of the Company or any of its Subsidiaries, independent auditors, consultants or any other agents assisting in the administration of this Plan. Members of the Committee and any person serving as an officer or employee of the Company or any of its Subsidiaries acting at the direction or on behalf of the Committee shall not be personally liable for any action or determination taken or made in good faith with respect to this Plan, and shall, to the fullest extent permitted by law, be indemnified and held harmless by the Company with respect to any such action or determination.
 
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3.7 Stock Issuance/Book-Entry. Notwithstanding any provision of the Plan to the contrary, the issuance of the shares of Stock under the Plan may be evidenced in such a manner as the Committee, in its discretion, deems appropriate, including, without limitation, book-entry or direct registration or the issuance of one or more share certificates.
4. STOCK SUBJECT TO THE PLAN
4.1 Number of Shares of Stock Available for Awards. Subject to Section 4.2, and subject to adjustments as provided in Section 18, the total number of shares of Stock available for issuance under the Plan, in the aggregate, may not exceed 375,000 shares (which approximates 0.6% of the shares of Stock issued and outstanding upon completion of the initial public offering of the Company’s common stock, including any shares of Stock that may be issued upon exercise of the underwriters’ option to purchase additional shares, on a fully diluted basis (assuming, if applicable, the exercise of all outstanding options and the conversion of all warrants and convertible securities, including common or limited partner units in the Operating Partnership and LTIP Units, into shares of Stock)). Subject to adjustment as provided in Section 18, the maximum number of shares of Stock available for issuance as Incentive Stock Options shall not exceed 200,000 shares. Shares of Stock issued or to be issued under the Plan shall be made available from (i) authorized but unissued Shares, (ii) Shares held in the treasury of the Company, or (iii) previously issued Shares reacquired by the Company, including Shares purchased on the open market.
4.2 Adjustments in Authorized Shares of Stock. The Committee shall have the right to substitute or assume Awards in connection with mergers, reorganizations, separations, or other transactions to which Code Section 424(a) applies. The number of shares of Stock reserved pursuant to Section 4 shall be increased by the corresponding number of awards assumed, and in the case of a substitution, by the net increase in the number of shares of Stock subject to awards before and after substitution. Available shares under a shareholder approved plan of an acquired company (as appropriately adjusted to reflect the transaction) may be used for Awards under the Plan and do not reduce the number of shares of Stock available under the Plan, subject to applicable stock exchange requirements.
4.3 Share Usage. Shares of Stock covered by an Award shall be counted as used as of the Grant Date. If any Award expires, is forfeited or is terminated without having been exercised or is paid in cash without delivery of Stock, then any shares of Stock covered by such lapsed, cancelled, expired, unexercised or cash-settled portion of such Award or grant shall be available for the grant or settlement of other Awards under this Plan. Any shares of Stock tendered or withheld to satisfy the grant or exercise price or tax withholding obligation pursuant to any Award shall not increase the number of shares available for future grants of Awards. If shares of Stock are issued in settlement of an SAR, the number of shares of Stock available under the Plan shall be reduced by the number of shares of Stock for which the SAR was exercised rather than the number of shares of Stock issued in settlement of the SAR. To the extent permitted by Applicable Law or the rules of any exchange on which the shares of Stock are listed for trading, shares of Stock issued in assumption of, or in substitution for, any outstanding awards of any entity acquired in any form of combination by the Company or any Affiliate shall not reduce the number of shares of Stock available for issuance under the Plan.
 
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5. EFFECTIVE DATE, DURATION AND AMENDMENTS
5.1 Effective Date. The Plan shall be effective as of the Effective Date.
5.2 Term. The Plan shall terminate automatically ten (10) years after the Effective Date and may be terminated on any earlier date as provided in Section 5.3.
5.3 Amendment and Termination of the Plan. The Board may, at any time and from time to time, amend, suspend, or terminate the Plan as to any shares of Stock as to which Awards have not been made. An amendment shall be contingent on approval of the Company’s stockholders to the extent stated by the Board, required by Applicable Laws or required by applicable stock exchange listing requirements. No amendment will be made to the no-repricing provisions of Section 3.4 or the option pricing provisions of Section 8.1 without the approval of the Company’s stockholders. No amendment, suspension, or termination of the Plan shall, without the consent of the Participant, impair rights or obligations under any Award theretofore awarded under the Plan.
6. AWARD ELIGIBILITY AND LIMITATIONS
6.1 Service Providers and Other Persons. Subject to this Section 6, Awards may be made under the Plan to: (i) any Service Provider, as the Committee shall determine and designate from time to time and (ii) any other individual whose participation in the Plan is determined to be in the best interests of the Company by the Committee.
6.2 Limitation on Shares of Stock Subject to Stock-Based Awards. During any time when the Company has a class of equity security registered under Section 12 of the Exchange Act and the transition period under Treasury Regulation Section 1.162-27(f)(2) has lapsed or does not apply:
(a) the maximum number of shares of Stock subject to Options or SARs that can be granted under the Plan to any person eligible for an Award under Section 6 is 75,000 shares with respect to any Service Provider who is not an Outside Director and 75,000 with respect to any Service Provider who is an Outside Director in a calendar year; and
(b) the maximum number of shares of Stock that can be granted under the Plan, other than pursuant to an Option or SARs, to any person eligible for an Award under Section 6 is 75,000 shares with respect to any Service Provider who is not an Outside Director and 75,000 shares with respect to any Service Provider who is an Outside Director in a calendar year.
The preceding limitations on Stock-based Awards in this Section 6.2 are subject to adjustment as provided in Section 18.
6.3 Stand-Alone, Additional, Tandem and Substitute Awards. Subject to Section 3.4, Awards granted under the Plan may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with, or in substitution or exchange for, any other Award or any award granted under another plan of the Company, any Affiliate, or any business entity to be
 
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acquired by the Company or an Affiliate, or any other right of a Participant to receive payment from the Company or any Affiliate. Such additional, tandem, and substitute or exchange Awards may be granted at any time. Subject to Section 3.4, if an Award is granted in substitution or exchange for another Award, the Committee shall require the surrender of such other Award in consideration for the grant of the new Award. In addition, Awards may be granted in lieu of cash compensation, including in lieu of cash amounts payable under other plans of the Company or any Affiliate. Notwithstanding Section 8.1 and Section 9.1 but subject to Section 3.4, the Option Price of an Option or the grant price of an SAR that is a Substitute Award may be less than 100% of the Fair Market Value of a share of Stock on the original date of grant; provided, that, the Option Price or grant price is determined in accordance with the principles of Code Section 424 and the regulations thereunder for any Incentive Stock Option and consistent with Code Section 409A for any other Option or SAR.
7. AWARD AGREEMENT
Each Award granted pursuant to the Plan shall be evidenced by an Award Agreement, in such form or forms as the Committee shall from time to time determine. Award Agreements granted from time to time or at the same time need not contain similar provisions but shall be consistent with the terms of the Plan. Each Award Agreement evidencing an Award of Options shall specify whether such Options are intended to be Non-qualified Stock Options or Incentive Stock Options, and in the absence of such specification such options shall be deemed Non-qualified Stock Options. No Option that is intended to be an Incentive Stock Option shall be invalid for failure to qualify as an Incentive Stock Option (and shall be considered a Non-qualified Stock Options in the event, and to the extent, of such failure).
8. TERMS AND CONDITIONS OF OPTIONS
8.1 Option Price. The Option Price of each Option shall be fixed by the Committee and stated in the Award Agreement evidencing such Option. Except in the case of Substitute Awards, the Option Price of each Option shall be at least the Fair Market Value of a share of Stock on the Grant Date; provided, however, that in the event that a Participant is a Ten Percent Stockholder, the Option Price of an Option granted to such Participant that is intended to be an Incentive Stock Option shall be not less than one hundred ten percent (110%) of the Fair Market Value of a share of Stock on the Grant Date. In no case shall the Option Price of any Option be less than the par value of a share of Stock.
8.2 Vesting. Subject to Sections 8.3 and 18.3, each Option granted under the Plan shall become exercisable at such times and under such conditions as shall be determined by the Committee and stated in the Award Agreement. For purposes of this Section 8.2, fractional numbers of shares of Stock subject to an Option shall be rounded down to the next nearest whole number.
8.3 Term. Each Option granted under the Plan shall terminate, and all rights to purchase shares of Stock thereunder shall cease, upon the expiration of ten (10) years from the date such Option is granted, or under such circumstances and on such date prior thereto as is set forth in the Plan or as may be fixed by the Committee and stated in the Award Agreement relating to such Option; provided, however, that in the event that the Participant is a Ten Percent
 
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Stockholder, an Option granted to such Participant that is intended to be an Incentive Stock Option shall not be exercisable after the expiration of five (5) years from its Grant Date.
8.4 Termination of Service. Each Award Agreement shall set forth the extent to which the Participant shall have the right to exercise the Option following termination of the Participant’s Service. Such provisions shall be determined in the sole discretion of the Committee, need not be uniform among all Options issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination of Service.
8.5 Limitations on Exercise of Option. Notwithstanding any other provision of the Plan, in no event may any Option be exercised, in whole or in part, prior to the date the Plan is approved by the stockholders of the Company as provided herein or after the occurrence of an event referred to in Section 18 which results in termination of the Option.
8.6 Method of Exercise. Subject to the terms of Section 12 and Section 19.3, an Option that is exercisable may be exercised by the Participant’s delivery to the Company of notice of exercise on any business day, at the Company’s principal office, on the form specified by the Company and in accordance with any additional procedures specified by the Committee. Such notice shall specify the number of shares of Stock with respect to which the Option is being exercised and shall be accompanied by payment in full of the Option Price of the shares of Stock for which the Option is being exercised plus the amount (if any) of federal and/or other taxes which the Company may, in its judgment, be required to withhold with respect to an Award.
8.7 Rights of Holders of Options. Unless otherwise stated in the applicable Award Agreement, a Participant or other person holding or exercising an Option shall have none of the rights of a stockholder (for example, the right to receive cash or dividend payments or distributions attributable to the subject shares of Stock or to direct the voting of the subject shares of Stock or to receive notice of any meeting of the Company’s stockholders) until the shares of Stock covered thereby are fully paid and issued to such Participant or other person. Except as provided in Section 18, no adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date of such issuance.
8.8 Delivery of Stock Certificates. Promptly after the exercise of an Option by a Participant and the payment in full of the Option Price with respect thereto, such Participant shall be entitled to receive such evidence of such Participant’s ownership of the shares of Stock subject to such Option as shall be consistent with Section 3.7.
8.9 Transferability of Options. Except as provided in Section 8.10, during the lifetime of a Participant, only the Participant (or, in the event of legal incapacity or incompetency, the Participant’s guardian or legal representative) may exercise an Option. Except as provided in Section 8.10, no Option shall be assignable or transferable by the Participant to whom it is granted, other than by will or the laws of descent and distribution.
8.10 Family Transfers. To the extent authorized in the applicable Award Agreement or by the Committee, in its sole discretion, a Participant may transfer, not for value, all or part of an Option which is not an Incentive Stock Option to any Family Member. For the purpose of this Section 8.10, a “not for value” transfer is a transfer which is (i) a gift, (ii) a transfer under a
 
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domestic relations order in settlement of marital property rights; or (iii) unless Applicable Laws do not permit such transfers, a transfer to an entity in which more than fifty percent (50%) of the voting interests are owned by Family Members (or the Participant) in exchange for an interest in that entity. Following a transfer under this Section 8.10, any such Option shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, and shares of Stock acquired pursuant to the Option shall be subject to the same restrictions on transfer of shares as would have applied to the Participant. Subsequent transfers of transferred Options are prohibited except to Family Members of the original Participant in accordance with this Section 8.10 or by will or the laws of descent and distribution. The events of termination of Service of Section 8.4 shall continue to be applied with respect to the original Participant, following which the Option shall be exercisable by the transferee only to the extent, and for the periods specified, in Section 8.4.
8.11 Limitations on Incentive Stock Options. An Option shall constitute an Incentive Stock Option only (i) if the Participant of such Option is an employee of the Company or any Subsidiary of the Company; (ii) to the extent specifically provided in the related Award Agreement; and (iii) to the extent that the aggregate Fair Market Value (determined at the time the Option is granted) of the shares of Stock with respect to which all Incentive Stock Options held by such Participant become exercisable for the first time during any calendar year (under the Plan and all other plans of the Participant’s employer and its Affiliates) does not exceed $100,000. Except to the extent provided in the regulations under Code Section 422, this limitation shall be applied by taking Options into account in the order in which they were granted.
8.12 Notice of Disqualifying Disposition. If any Participant shall make any disposition of shares of Stock issued pursuant to the exercise of an Incentive Stock Option under the circumstances provided in Code Section 421(b) (relating to certain disqualifying dispositions), such Participant shall notify the Company of such disposition within ten (10) days thereof.
9. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS
9.1 Right to Payment and Grant Price. A SAR shall confer on the Participant to whom it is granted a right to receive, upon exercise thereof, the excess of (A) the Fair Market Value of one share of Stock on the date of exercise over (B) the SAR Exercise Price as determined by the Committee. The Award Agreement for a SAR shall specify the SAR Exercise Price, which shall be at least the Fair Market Value of one (1) share of Stock on the date of grant. SARs may be granted in conjunction with all or part of an Option granted under the Plan or at any subsequent time during the term of such Option, in conjunction with all or part of any other Award or without regard to any Option or other Award; provided that a SAR that is granted subsequent to the Grant Date of a related Option must have a SAR Exercise Price that is no less than the greater of the Exercise Price of the related Option or the Fair Market Value of one share of Stock on the SAR Grant Date; provided further that a Participant may only exercise either the SAR or the Option with which it is granted in tandem and not both.
9.2 Other Terms. The Committee shall determine at the date of grant or thereafter, the time or times at which and the circumstances under which a SAR may be exercised in whole or in part (including based on achievement of performance goals and/or future service
 
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requirements), the time or times at which SARs shall cease to be or become exercisable following termination of Service or upon other conditions, the method of exercise, method of settlement, form of consideration payable in settlement, method by or forms in which shares of Stock will be delivered or deemed to be delivered to Participants, whether or not a SAR shall be in tandem or in combination with any other Award, and any other terms and conditions of any SAR.
9.3 Term. Each SAR granted under the Plan shall terminate, and all rights thereunder shall cease, upon the expiration of ten (10) years from the date such SAR is granted, or under such circumstances and on such date prior thereto as is set forth in the Plan or as may be fixed by the Committee and stated in the Award Agreement relating to such SAR.
9.4 Transferability of SARs. Except as provided in Section 9.5, during the lifetime of a Participant, only the Participant (or, in the event of legal incapacity or incompetency, the Participant’s guardian or legal representative) may exercise a SAR. Except as provided in Section 9.5, no SAR shall be assignable or transferable by the Participant to whom it is granted, other than by will or the laws of descent and distribution.
9.5 Family Transfers. To the extent authorized in the applicable Award Agreement or by the Committee, in its sole discretion, a Participant may transfer, not for value, all or part of a SAR to any Family Member. For the purpose of this Section 9.5, a “not for value” transfer is a transfer which is (i) a gift, (ii) a transfer under a domestic relations order in settlement of marital property rights; or (iii) unless Applicable Laws do not permit such transfers, a transfer to an entity in which more than fifty percent (50%) of the voting interests are owned by Family Members (or the Participant) in exchange for an interest in that entity. Following a transfer under this Section 9.5, any such SAR shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, and shares of Stock acquired pursuant to a SAR shall be subject to the same restrictions on transfer or shares as would have applied to the Participant. Subsequent transfers of transferred SARs are prohibited except to Family Members of the original Participant in accordance with this Section 9.5 or by will or the laws of descent and distribution.
10. TERMS AND CONDITIONS OF RESTRICTED STOCK AND STOCK UNITS
10.1 Grant of Restricted Stock or Stock Units. Awards of Restricted Stock or Stock Units may be made for consideration or no consideration (other than the par value of the shares of Stock which shall be deemed paid by past Service or, if so provided in the related Award Agreement or a separate agreement, the promise by the Participant to perform future Service to an Applicable Entity).
10.2 Restrictions. At the time a grant of Restricted Stock or Stock Units is made, the Committee may, in its sole discretion, establish a period of time (a “restricted period”) applicable to such Restricted Stock or Stock Units. Each Award of Restricted Stock or Stock Units may be subject to a different restricted period. An Award of Stock Units may include an Award of Dividend Equivalent Rights related to such Stock Units. The Committee may in its sole discretion, at the time a grant of Restricted Stock or Stock Units is made, prescribe restrictions in addition to or other than the expiration of the restricted period, including the satisfaction of
 
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corporate or individual performance objectives, which may be applicable to all or any portion of the Restricted Stock or Stock Units as described in Section 14. Neither Restricted Stock nor Stock Units may be sold, transferred, assigned, pledged or otherwise encumbered or disposed of during the restricted period or prior to the satisfaction of any other restrictions prescribed by the Committee with respect to such Restricted Stock or Stock Units.
10.3 Registration; Restricted Stock Certificates. Pursuant to Section 3.6, to the extent that ownership of Restricted Stock is evidenced by a book-entry registration or direct registration, such registration shall be notated to evidence the restrictions imposed on such Award of Restricted Stock under the Plan and the applicable Award Agreement. Subject to Section 3.6 and the immediately following sentence, the Company may issue, in the name of each Participant to whom Restricted Stock has been granted, stock certificates representing the total number of shares of Restricted Stock granted to the Participant, as soon as reasonably practicable after the Grant Date. The Committee may provide in an Award Agreement that either (i) the Secretary of the Company shall hold such certificates for the Participant’s benefit until such time as the shares of Restricted Stock are forfeited to the Company or the restrictions applicable thereto lapse and such Participant shall deliver a stock power to the Company with respect to each certificate, or (ii) such certificates shall be delivered to the Participant, provided, however, that such certificates shall bear a legend or legends that comply with the applicable securities laws and regulations and makes appropriate reference to the restrictions imposed under the Plan and the Award Agreement.
10.4 Rights of Holders of Restricted Stock. Unless the Committee otherwise provides in an Award Agreement, holders of Restricted Stock shall have the right to vote such shares of Stock and the right to receive any dividends declared or paid with respect to such shares of Stock. All distributions, if any, received by a Participant with respect to Restricted Stock as a result of any stock split, stock dividend, combination of stock, or other similar transaction shall be subject to the restrictions applicable to the original Grant.
10.5 Rights of Holders of Stock Units.
(a) Voting and Dividend Rights. Holders of Stock Units shall have no rights as stockholders of the Company (for example, the right to receive cash or dividend payments or distributions attributable to the shares of Stock subject to such Stock Units, to direct the voting of the shares of Stock subject to such Stock Units, or to receive notice of any meeting of the Company’s stockholders). The Committee shall provide in an Award Agreement evidencing a grant of Stock Units whether or not the holder of such Stock Units shall be entitled to receive Dividend Equivalent Rights with respect to such Stock Units, upon the Company’s payment of a cash dividend on its outstanding shares of Stock, a cash payment for each Stock Unit held equal to the per-stock dividend paid on the shares of Stock. Such Award Agreement may also provide that such Dividend Equivalent Rights will be deemed reinvested in additional Stock Units at a price per unit equal to the Fair Market Value of a share of Stock on the date that such dividend is paid and address whether such additional Stock Units shall include Dividend Equivalent Rights.
 
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(b) Creditor’s Rights. A holder of Stock Units shall have no rights other than those of a general creditor of the Company.
10.6 Termination of Service. Unless the Committee otherwise provides in an Award Agreement or in writing after the Award Agreement is issued, upon the termination of a Participant’s Service, any Restricted Stock or Stock Units held by such Participant that have not vested, or with respect to which all applicable restrictions and conditions have not lapsed, shall immediately be deemed forfeited. Upon forfeiture of Restricted Stock or Stock Units, the Participant shall have no further rights with respect to such Award, including but not limited to any right to vote Restricted Stock or any right to receive dividends or Dividend Equivalent Rights with respect to Restricted Stock or Stock Units.
10.7 Purchase of Restricted Stock and Shares of Stock Subject to Stock Units. The Participant shall be required, to the extent required by Applicable Laws, to purchase the Restricted Stock or shares of Stock subject to vested Stock Units from the Company at a Purchase Price equal to the greater of (i) the aggregate par value of the shares of Stock represented by such Restricted Stock or Stock Units or (ii) the Purchase Price, if any, specified in the Award Agreement relating to such Restricted Stock or Stock Units. The Purchase Price shall be payable in a form described in Section 12 or, in the discretion of the Committee, in consideration for past or future Services rendered to an Applicable Entity.
10.8 Delivery of Shares of Stock. Upon the expiration or termination of any restricted period and the satisfaction of any other conditions prescribed by the Committee, the restrictions applicable to Restricted Stock or Stock Units settled in shares of Stock shall lapse, and, unless otherwise provided in the applicable Award Agreement, a book-entry or direct registration or a stock certificate evidencing ownership of such shares of Stock shall, consistent with Section 3.7, be issued, free of all such restrictions, to the Participant or the Participant’s beneficiary or estate, as the case may be. Neither the Participant, nor the Participant’s beneficiary or estate, shall have any further rights with regard to a Stock Unit once the shares of Stock represented by the Stock Unit have been delivered.
11. TERMS AND CONDITIONS OF UNRESTRICTED STOCK AWARDS AND OTHER EQUITY-BASED AWARDS
The Committee may, in its sole discretion, grant (or sell at par value or such other higher purchase price determined by the Committee) an Unrestricted Stock Award to any Participant pursuant to which such Participant may receive shares of Stock free of any restrictions (“Unrestricted Stock”) under the Plan. Unrestricted Stock Awards may be granted or sold to any Participant as provided in the immediately preceding sentence in respect of past or, if so provided in the related Award Agreement or a separate agreement, the promise by the Participant to perform future Service to an Applicable Entity or other valid consideration, or in lieu of, or in addition to, any cash compensation due to such Participant.
The Committee may, in its sole discretion, grant Awards to Participants in the form of Other Equity-Based Awards, as deemed by the Committee to be consistent with the purposes of the Plan. Awards granted pursuant to this Section 11 may be granted with vesting, value and/or payment contingent upon the attainment of one or more performance goals. The Committee shall
 
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determine the terms and conditions of such Awards at the date of grant or thereafter. Unless the Committee otherwise provides in an Award Agreement or in writing after the Award Agreement is issued, upon the termination of a Participant’s Service, any Other Equity-Based Awards held by such Participant that have not vested, or with respect to which all applicable restrictions and conditions have not lapsed, shall immediately be deemed forfeited. Upon forfeiture of Other Equity-Based Awards, the Participant shall have no further rights with respect to such Award.
12. FORM OF PAYMENT FOR OPTIONS AND RESTRICTED STOCK
12.1 General Rule. Payment of the Option Price for the shares of Stock purchased pursuant to the exercise of an Option or the Purchase Price for Restricted Stock shall be made in cash or in cash equivalents acceptable to the Company
12.2 Surrender of Shares of Stock. To the extent the Award Agreement so provides and subject to any rules and procedures established by the Committee, payment of the Option Price for shares of Stock purchased pursuant to the exercise of an Option or the Purchase Price for Restricted Stock may be made all or in part through the tender or attestation to the Company of shares of Stock, which shall be valued, for purposes of determining the extent to which the Option Price or Purchase Price has been paid thereby, at their Fair Market Value on the date of exercise or surrender, as applicable.
12.3 Cashless Exercise. With respect to an Option only (and not with respect to Restricted Stock), to the extent permitted by law and to the extent the Award Agreement so provides and subject to any rules and procedures established by the Committee, payment of the Option Price for shares of Stock purchased pursuant to the exercise of an Option may be made all or in part (i) by delivery (on a form acceptable to the Committee) by Participant of an irrevocable direction to a licensed securities broker acceptable to the Company to sell shares of Stock and to deliver all or part of the sales proceeds to the Company in payment of the Option Price and any withholding taxes described in Section 19.3, or, (ii) with the consent of the Company, by the Participant electing to have the Company issue to Participant only that number of shares of Stock equal in value to the difference between the Option Price and the Fair Market Value of the shares of Stock subject to the portion of the Option being exercised.
13. TERMS AND CONDITIONS OF DIVIDEND EQUIVALENT RIGHTS
13.1 Dividend Equivalent Rights. A Dividend Equivalent Right is an Award entitling the recipient to receive credits based on cash distributions that would have been paid on the shares of Stock specified in the Dividend Equivalent Right (or other award to which it relates) if such shares of Stock had been issued to and held by the recipient. A Dividend Equivalent Right may be granted hereunder to any Participant, provided that no Dividend Equivalent Rights may be granted in connection with, or related to, an Award of Restricted Stock, Options or SARs. The terms and conditions of Dividend Equivalent Rights shall be specified in the grant. Dividend equivalents credited to the holder of a Dividend Equivalent Right may be paid currently or may be deemed to be reinvested in additional shares of Stock, which may thereafter accrue additional equivalents. Any such reinvestment shall be at Fair Market Value on the date of reinvestment. Dividend Equivalent Rights may be settled in cash or shares of Stock or a combination thereof, in a single installment or installments, all determined in the sole discretion of the Committee. A
 
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Dividend Equivalent Right granted as a component of another Award may provide that such Dividend Equivalent Right shall be settled upon settlement, or payment of, or lapse of restrictions on, such other award, and that such Dividend Equivalent Right shall expire or be forfeited or annulled under the same conditions as such other award. A Dividend Equivalent Right granted as a component of another Award may also contain terms and conditions different from the terms and conditions of such other Award. A cash amount credited pursuant to a Dividend Equivalent Right granted as a component of another Award which vests or is earned based upon the achievement of performance goals shall not vest unless such performance goals for such underlying Award are achieved, unless otherwise provided in the Award Agreement.
13.2 Termination of Service. Except as may otherwise be provided by the Committee either in the Award Agreement or in writing after the Award Agreement is issued, a Participant’s rights in all Dividend Equivalent Rights or interest equivalents shall automatically terminate upon the Participant’s termination of Service for any reason.
14. TERMS AND CONDITIONS OF PERFORMANCE AWARDS AND ANNUAL INCENTIVE AWARDS
14.1 Grant of Performance Awards and Annual Incentive Awards. Subject to the terms and provisions of the Plan, including the individual Award limits in Section 6, the Committee, at any time and from time to time, may grant Performance Awards and/or Annual Incentive Awards to a Service Provider in such amounts and upon such terms as the Committee shall determine.
14.2 Value of Performance Awards and Annual Incentive Awards. Each Performance Award and Annual Incentive Award shall have an initial value that is established by the Committee at the time of grant. The Committee shall set performance goals in its discretion which, depending on the extent to which they are met, will determine the value and/or number of Performance Awards that will be paid out to the Participant.
14.3 Earning of Performance Awards and Annual Incentive Awards. Subject to the terms of the Plan, after the applicable Performance Period has ended, the holder of Performance Awards or Annual Incentive Awards shall be entitled to receive payout on the value and number of the Performance Awards or Annual Incentive Awards earned by the Participant over the Performance Period, to be determined as a function of the extent to which the corresponding performance goals have been achieved.
14.4 Form and Timing of Payment of Performance Awards and Annual Incentive Awards. Payment of earned Performance Awards and Annual Incentive Awards shall be as determined by the Committee and as evidenced in the Award Agreement. Subject to the terms of the Plan, the Committee, in its sole discretion, may pay earned Performance Awards in the form of cash or in shares of Stock (or in a combination thereof) equal to the value of the earned Performance Awards at the close of the applicable Performance Period, or as soon as practicable after the end of the Performance Period; provided that, unless specifically provided in the Award Agreement pertaining to the grant of the Award, such payment shall occur no later than the 15th day of the third month following the end of the calendar year in which the Performance Period ends. Any shares of Stock may be granted subject to any restrictions deemed appropriate by the
 
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Committee. The determination of the Committee with respect to the form of payout of such Awards shall be set forth in the Award Agreement pertaining to the grant of the Award.
14.5 Performance Conditions. The right of a Participant to exercise or receive a grant or settlement of any Award, and the timing thereof, may be subject to such performance conditions as may be specified by the Committee. The Committee may use such business criteria and other measures of performance as it may deem appropriate in establishing any performance conditions. If and to the extent required under Code Section 162(m), any power or authority relating to an Award intended to qualify under Code Section 162(m), shall be exercised by the Committee.
14.6 Performance Awards or Annual Incentive Awards Granted to Designated Covered Employees. If and to the extent that the Committee determines that a Performance or Annual Incentive Award to be granted to a Participant who is designated by the Committee as likely to be a Covered Employee is intended to constitute “qualified performance-based compensation” for purposes of Code Section 162(m), the grant, exercise and/or settlement of such Award shall be contingent upon achievement of pre-established performance goals and other terms set forth in this Section 14.6.
(a) Performance Goals Generally. The performance goals for Performance or Annual Incentive Awards shall consist of one or more business criteria and a targeted level or levels of performance with respect to each of such criteria, as specified by the Committee consistent with this Section 14.6. Performance goals shall be objective and shall otherwise meet the requirements of Code Section 162(m) and regulations thereunder including the requirement that the level or levels of performance targeted by the Committee result in the achievement of performance goals being “substantially uncertain.” The Committee may determine that such Awards shall be granted, exercised and/or settled upon achievement of any one performance goal or that two (2) or more of the performance goals must be achieved as a condition to the grant, exercise and/or settlement of such Awards. Performance goals may differ for Awards granted to any one Participant or to different Participants.
(b) Timing For Establishing Performance Goals. Performance goals shall be established not later than the earlier of (i) 90 days after the beginning of any performance period applicable to such Awards and (ii) the day on which twenty-five percent (25%) of any performance period applicable to such Awards has expired, or at such other date as may be required or permitted for “qualified performance-based compensation” under Code Section 162(m).
(c) Settlement of Awards; Other Terms. Settlement of such Awards shall be in cash, shares of Stock, other Awards or other property, in the discretion of the Committee. The Committee may, in its discretion, reduce the amount of a settlement otherwise to be made in connection with such Awards. The Committee shall specify the circumstances in which such Performance or Annual Incentive Awards shall be paid or forfeited in the event of termination of Service by the Participant prior to the end of a performance period or settlement of Awards.
 
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(d) Performance Measures. The performance goals upon which the payment or vesting of a Performance or Annual Incentive Award to a Covered Employee that is intended to qualify as Performance-Based Compensation shall be limited to the following Performance Measures:
(i) net earnings or net income;
(ii) operating earnings or income, funds from operations or adjusted funds from operations;
(iii) pretax earnings;
(iv) earnings per share of stock;
(v) stock price, including growth measures and total stockholder return;
(vi) earnings before interest and taxes;
(vii) earnings before interest, taxes, depreciation and/or amortization;
(viii) return measures, including return on assets, capital, investment, equity, sales or revenue;
(ix) cash flow, including operating cash flow, free cash flow, cash flow return on equity and cash flow return on investment;
(x) expense targets;
(xi) market share;
(xii) financial ratios as provided in credit agreements of the Company and its subsidiaries;
(xiii) working capital targets;
(xiv) completion of acquisitions of assets;
(xv) completion of asset sales;
(xvi) revenues under management;
(xvii) funds from operations;
(xviii) distributions to stockholders or funds available for distribution; and
(xix) any combination of any of the foregoing business criteria.
 
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Business criteria may be (but are not required to be) measured on a basis consistent with U.S. Generally Accepted Accounting Principles.
Any Performance Measure(s) may be used to measure the performance of the Company, its Subsidiaries, and/or its Affiliates as a whole or any business unit of the Company, its Subsidiaries, and/or its Affiliates or any combination thereof, as the Committee may deem appropriate, or any of the above Performance Measures as compared to the performance of a group of comparable companies, or published or special index that the Committee, in its sole discretion, deems appropriate, or the Company may select Performance Measure (v) above as compared to various stock market indices. The Committee also has the authority to provide for accelerated vesting of any Award based on the achievement of performance goals pursuant to the Performance Measures specified in this Section 14.
(e) Evaluation of Performance. The Committee may provide in any such Award that any evaluation of performance may include or exclude any of the following events that occur during a Performance Period: (a) asset write-downs; (b) litigation or claim judgments or settlements; (c) the effect of changes in tax laws, accounting principles, or other laws or provisions affecting reported results; (d) any reorganization and restructuring programs; (e) extraordinary nonrecurring items as described in Accounting Principles Board Opinion No. 30 and/or in management’s discussion and analysis of financial condition and results of operations appearing in the Company’s annual report to stockholders for the applicable year; (f) acquisitions or divestitures; and (g) foreign exchange gains and losses. To the extent such inclusions or exclusions affect Awards to Covered Employees that are intended to qualify as Performance-Based Compensation, they shall be prescribed in a form that meets the requirements of Code Section 162(m) for deductibility.
(f) Adjustment of Performance-Based Compensation. Awards that are intended to qualify as Performance-Based Compensation may not be adjusted upward. The Committee shall retain the discretion to adjust such Awards downward, either on a formula or discretionary basis, or any combination as the Committee determines.
(g) Committee Discretion. In the event that applicable tax and/or securities laws change to permit Committee discretion to alter the governing Performance Measures without obtaining stockholder approval of such changes, the Committee shall have sole discretion to make such changes without obtaining stockholder approval provided the exercise of such discretion does not violate Code Sections 162(m) or 409A. In addition, in the event that the Committee determines that it is advisable to grant Awards that shall not qualify as Performance-Based Compensation, the Committee may make such grants without satisfying the requirements of Code Section 162(m) and base vesting on Performance Measures other than those set forth in Section 14.6.4.
14.7 Status of Awards Under Code Section 162(m). It is the intent of the Company that Awards under Section 14.6 granted to persons who are designated by the Committee as likely to be Covered Employees within the meaning of Code Section 162(m) and regulations promulgated thereunder shall, if so designated by the Committee, constitute “qualified
 
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performance-based compensation” within the meaning of Code Section 162(m) and regulations thereunder. Accordingly, the terms of Section 14.6, including the definitions of Covered Employee and other terms used therein, shall be interpreted in a manner consistent with Code Section 162(m). If any provision of the Plan or any agreement relating to such Awards does not comply or is inconsistent with the requirements of Code Section 162(m), such provision shall be construed or deemed amended to the extent necessary to conform to such requirements.
15. TERMS AND CONDITIONS OF LONG-TERM INCENTIVE UNITS
LTIP Units are intended to be profits interests in the Operating Partnership, the rights and features of which, if applicable, will be set forth in the agreement of limited partnership for the Operating Partnership (the “Operating Partnership Agreement”). Subject to the terms and provisions of the Plan and the Operating Partnership Agreement, the Board, at any time and from time to time, may grant LTIP Units to Participants in such amounts and upon such terms (including terms regarding vesting) as the Board shall determine and stated in the Award Agreement. LTIP Units must be granted for service to the Operating Partnership.
16. PARACHUTE LIMITATIONS
16.1 If the Participant is a “disqualified individual,” as defined in Code Section 280G(c), then, notwithstanding any other provision of the Plan or of any other agreement, contract, or understanding heretofore or hereafter entered into by a Participant with an Applicable Entity (including, but not limited to, an employment agreement), except an agreement, contract, or understanding that expressly addresses Code Section 280G or Code Section 4999 (an “Other Agreement”), and notwithstanding any formal or informal plan or other arrangement for the direct or indirect provision of compensation to the Participant (including groups or classes of Participants or beneficiaries of which the Participant is a member), whether or not such compensation is deferred, is in cash, or is in the form of a benefit to or for the Participant (a “Benefit Arrangement”), any right to exercise, vesting, payment or benefit to the Participant under the Plan shall be reduced or eliminated:
(a) to the extent that such right to exercise, vesting, payment, or benefit, taking into account all other rights, payments, or benefits to or for the Participant under the Plan, all Other Agreements, and all Benefit Arrangements, would cause any exercise, vesting, payment or benefit to the Participant under the Plan to be considered a “parachute payment” within the meaning of Code Section 280G(b)(2) as then in effect (a “Parachute Payment”) and
(b) if, as a result of receiving such Parachute Payment, the aggregate after-tax amounts received by the Participant from the Company under the Plan, all Other Agreements, and all Benefit Arrangements would be less than the maximum after-tax amount that could be received by the Participant without causing any such payment or benefit to be considered a Parachute Payment.
16.2 The Company shall accomplish such reduction described in Section 16.1 by first reducing or eliminating any cash payments (with the payments to be made furthest in the future being reduced first), then by reducing or eliminating any accelerated vesting of Performance
 
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Awards, then by reducing or eliminating any accelerated vesting of Options or SARs, then by reducing or eliminating any accelerated vesting of Restricted Stock or Stock Units, then by reducing or eliminating any other remaining Parachute Payments.
17. REQUIREMENTS OF LAW
17.1 General. No participant in the Plan will be permitted to acquire, or will have any right to acquire, shares of Stock thereunder if such acquisition would be prohibited by any share ownership limits contained in the Company’s charter or bylaws or would impair the Company’s status as a REIT. The Company shall not be required to offer, sell or issue any shares of Stock under any Award if the offer, sale or issuance of such shares of Stock would constitute a violation by the Participant, any other individual or entity exercising an Option, or any Applicable Entity of any provision of any law or regulation of any governmental authority, including without limitation any federal or state securities laws or regulations. If at any time the Company shall determine, in its discretion, that the offering, listing, registration or qualification of any shares of Stock subject to an Award upon any securities exchange or under any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the offering, issuance, sale or purchase of shares of Stock hereunder, no shares of Stock may be offered, issued or sold to the Participant or any other individual or entity exercising an Option pursuant to such Award unless such offering, listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company, and any delay caused thereby shall in no way affect the date of termination of the Award. Without limiting the generality of the foregoing, in connection with the Securities Act, upon the exercise of any Option or any SAR that may be settled in shares of Stock or the delivery of any shares of Stock underlying an Award, unless a registration statement under such Act is in effect with respect to the shares of Stock covered by such Award, the Company shall not be required to offer, sell or issue such shares of Stock unless the Committee has received evidence satisfactory to it that the Participant or any other individual or entity exercising an Option or SAR or accepting delivery of such shares may acquire such shares of Stock pursuant to an exemption from registration under the Securities Act. Any determination in this connection by the Committee shall be final, binding, and conclusive. The Company may, but shall in no event be obligated to, register any securities covered hereby pursuant to the Securities Act. The Company shall not be obligated to take any affirmative action in order to cause the exercise of an Option or a SAR or the issuance of shares of Stock pursuant to the Plan to comply with any Applicable Laws. As to any jurisdiction that expressly imposes the requirement that an Option (or SAR that may be settled in shares of Stock) shall not be exercisable until the shares of Stock covered by such Option (or SAR) are registered under the securities laws thereof or are exempt from such registration, the exercise of such Option (or SAR) under circumstances in which the laws of such jurisdiction apply shall be deemed conditioned upon the effectiveness of such registration or the availability of such an exemption.
17.2 Rule 16b-3. During any time when the Company has a class of equity security registered under Section 12 of the Exchange Act, it is the intent of the Company that Awards pursuant to the Plan and the exercise of Options and SARs granted hereunder that would otherwise be subject to Section 16(b) of the Exchange Act will qualify for the exemption provided by Rule 16b-3 under the Exchange Act. To the extent that any provision of the Plan or action by the Committee does not comply with the requirements of Rule 16b-3, it shall be
 
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deemed inoperative with respect to such Awards to the extent permitted by Applicable Laws and deemed advisable by the Committee, and shall not affect the validity of the Plan. In the event that Rule 16b-3 is revised or replaced, the Committee may exercise its discretion to modify the Plan in any respect necessary to satisfy the requirements of, or to take advantage of any features of, the revised exemption or its replacement.
18. EFFECT OF CHANGES IN CAPITALIZATION
18.1 Changes in Stock. If the number of outstanding shares of Stock is increased or decreased or the shares of Stock are changed into or exchanged for a different number or kind of stock or other securities of the Company on account of any recapitalization, reclassification, stock split, reverse stock split, spin-off, combination of stock, exchange of stock, stock dividend or other distribution payable in capital stock, or other increase or decrease in such stock effected without receipt of consideration by the Company occurring after the Effective Date, the number and kinds of shares of stock for which grants of Options and other Awards may be made under the Plan, including, without limitation, the limits set forth in Sections 4.1 and 6.2, shall be adjusted proportionately and accordingly by the Company in a manner deemed equitable by the Committee. In addition, the number and kind of shares for which Awards are outstanding shall be adjusted proportionately and accordingly so that the proportionate interest of the Participant immediately following such event shall, to the extent practicable, be the same as immediately before such event. Any such adjustment in outstanding Options or SARs shall not change the aggregate Option Price or SAR Exercise Price payable with respect to shares that are subject to the unexercised portion of an outstanding Option or SAR, as applicable, but shall include a corresponding proportionate adjustment in the Option Price or SAR Exercise Price per share. The conversion of any convertible securities of the Company shall not be treated as an increase in shares effected without receipt of consideration. Notwithstanding the foregoing, in the event of any distribution to the Company’s stockholders of securities of any other entity or other assets (including an extraordinary dividend but excluding a non-extraordinary dividend of the Company) without receipt of consideration by the Company, the Company shall, in such manner as the Company deems appropriate, adjust (i) the number and kind of shares subject to outstanding Awards and/or (ii) the exercise price of outstanding Options and Stock Appreciation Rights to reflect such distribution. For avoidance of doubt the share numbers included in Section 4.1 give effect to the reverse split described in the S-11 related to the Company’s initial public offering.
18.2 Reorganization in Which the Company Is the Surviving Entity Which Does not Constitute a Change in Control. Subject to Section 18.3, if the Company shall be the surviving entity in any reorganization, merger, or consolidation of the Company with one or more other entities which does not constitute a Change in Control, any Option or SAR theretofore granted pursuant to the Plan shall pertain to and apply to the securities to which a holder of the number of shares of Stock subject to such Option or SAR would have been entitled immediately following such reorganization, merger, or consolidation, with a corresponding proportionate adjustment of the Option Price or SAR Exercise Price per share so that the aggregate Option Price or SAR Exercise Price thereafter shall be the same as the aggregate Option Price or SAR Exercise Price of the shares of Stock remaining subject to the Option or SAR immediately prior to such reorganization, merger, or consolidation. Subject to any contrary language in an Award Agreement evidencing an Award, or in another agreement with the Participant, or otherwise set
 
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forth in writing, any restrictions applicable to such Award shall apply as well to any replacement shares received by the Participant as a result of the reorganization, merger or consolidation. In the event of a transaction described in this Section 18.2, Performance Awards shall be adjusted (including any adjustment to the Performance Measures applicable to such Awards deemed appropriate by the Committee) so as to apply to the securities that a holder of the number of shares of Stock subject to the Performance Awards would have been entitled to receive immediately following such transaction.
18.3 Change in Control in which Awards are not Assumed. Except as otherwise provided in the applicable Award Agreement or in another agreement with the Participant, or as otherwise set forth in writing, upon the occurrence of a Change in Control in which outstanding Options, SARs, Stock Units, Dividend Equivalent Rights, LTIP Units, Restricted Stock, or other Equity-Based Awards are not being assumed or continued:
(a) in each case with the exception of any Performance Award, all outstanding Restricted Stock and LTIP Units shall be deemed to have vested, all Stock Units shall be deemed to have vested and the shares of Stock subject thereto shall be delivered, and all Dividend Equivalent Rights shall be deemed to have vested and the shares of Stock subject thereto shall be delivered, immediately prior to the occurrence of such Change in Control, and
(b) either of the following two actions shall be taken:
(i) fifteen (15) days prior to the scheduled consummation of a Change in Control, all Options and SARs outstanding hereunder shall become immediately exercisable and shall remain exercisable for a period of fifteen (15) days (and shall otherwise expire if not exercised within such fifteen (15)-day period), or
(ii) the Committee may elect, in its sole discretion, to cancel any outstanding Awards of Options, Restricted Stock, Stock Units, and/or SARs and pay or deliver, or cause to be paid or delivered, to the holder thereof an amount in cash or securities having a value (as determined by the Committee acting in good faith), in the case of Restricted Stock or Stock Units, equal to the formula or fixed price per share paid to holders of shares of Stock and, in the case of Options or SARs, equal to the product of the number of shares of Stock subject to the Option or SAR (the “Award Stock”) multiplied by the amount, if any, by which (I) the formula or fixed price per share paid to holders of shares of Stock pursuant to such transaction exceeds (II) the Option Price or SAR Exercise Price applicable to such Award Stock.
(c) for Performance Awards denominated in Stock, Stock Units or LTIP Units, if less than half of the Performance Period has lapsed, the Awards shall be converted into Restricted Stock or Stock Units assuming target performance has been achieved (or Unrestricted Stock if no further restrictions apply). If more than half the Performance Period has lapsed, the Awards shall be converted into Restricted Stock or Stock Units based on actual performance to date (or Unrestricted Stock if no further restrictions apply). If actual performance is not determinable, then Performance Awards shall be converted into Restricted Stock or Stock Units assuming target performance has been achieved, based on the discretion of the Committee (or Unrestricted Stock if no further restrictions apply).
 
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(d) Other-Equity Based Awards shall be governed by the terms of the applicable Award Agreement.
With respect to the Company’s establishment of an exercise window, (i) any exercise of an Option or SAR during such fifteen (15)-day period shall be conditioned upon the consummation of the event and shall be effective only immediately before the consummation of the event, and (ii) upon consummation of any Change in Control, the Plan and all outstanding but unexercised Options and SARs shall terminate. The Committee shall send notice of an event that will result in such a termination to all individuals and entities who hold Options and SARs not later than the time at which the Company gives notice thereof to its stockholders.
18.4 Change in Control in which Awards are Assumed. Except as otherwise provided in the applicable Award Agreement or in another agreement with the Participant, or as otherwise set forth in writing, upon the occurrence of a Change in Control in which outstanding Awards are being assumed or continued, the following provisions shall apply to such Award, to the extent assumed or continued:
The Plan, Options, SARs, Stock Units, Restricted Stock and Other Equity-Based Awards theretofore granted shall continue in the manner and under the terms so provided in the event of any Change in Control to the extent that provision is made in writing in connection with such Change in Control for the assumption or continuation of the Options, SARs, Stock Units, Restricted Stock and Other Equity-Based Awards theretofore granted, or for the substitution for such Options, SARs, Stock Units, Restricted Stock and Other Equity-Based Awards for new common stock options and stock appreciation rights and new common stock units and restricted stock and other equity-based awards relating to the stock of a successor entity, or a parent or subsidiary thereof, with appropriate adjustments as to the number of shares (disregarding any consideration that is not common stock) and option and stock appreciation rights exercise prices.
18.5 Adjustments. Adjustments under this Section 18 related to shares of Stock or securities of the Company shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. No fractional shares or other securities shall be issued pursuant to any such adjustment, and any fractions resulting from any such adjustment shall be eliminated in each case by rounding downward to the nearest whole share. The Committee shall determine the effect of a Change in Control upon Awards other than Options, SARs, Stock Units and Restricted Stock, and such effect shall be set forth in the appropriate Award Agreement. The Committee may provide in the Award Agreements at the time of grant, or any time thereafter with the consent of the Participant, for different provisions to apply to an Award in place of those described in Sections 18.1, 18.2, 18.3 and 18.4. This Section 18 does not limit the Company’s ability to provide for alternative treatment of Awards outstanding under the Plan in the event of change in control events that do not constitute a Change in Control.
18.6 No Limitations on Company. The making of Awards pursuant to the Plan shall not affect or limit in any way the right or power of the Company to make adjustments, reclassifications, reorganizations, or changes of its capital or business structure or to merge, consolidate, dissolve, or liquidate, or to sell or transfer all or any part of its business or assets
 
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(including all or any part of the business or assets of any Subsidiary or other Affiliate) or engage in any other transaction or activity.
19. GENERAL PROVISIONS
19.1 Disclaimer of Rights. No provision in the Plan or in any Award or Award Agreement shall be construed to confer upon any individual or entity the right to remain in the employ or service of any Applicable Entity, or to interfere in any way with any contractual or other right or authority of the Applicable Entity either to increase or decrease the compensation or other payments to any individual or entity at any time, or to terminate any employment or other relationship between any individual or entity and the Applicable Entity. In addition, notwithstanding anything contained in the Plan to the contrary, unless otherwise stated in the applicable Award Agreement, in another agreement with the Participant, or otherwise in writing, no Award granted under the Plan shall be affected by any change of duties or position of the Participant, so long as such Participant continues to provide Service.
19.2 Nonexclusivity of the Plan. Neither the adoption of the Plan nor the submission of the Plan to the stockholders of the Company for approval shall be construed as creating any limitations upon the right and authority of the Company to adopt such other incentive compensation arrangements (which arrangements may be applicable either generally to a class or classes of individuals or specifically to a particular individual or particular individuals) as the Board in its discretion determines desirable.
19.3 Withholding Taxes. Any Applicable Entity, as the case may be, shall have the right to deduct from payments of any kind otherwise due to a Participant any federal, state, or local taxes of any kind required by law to be withheld with respect to the vesting of or other lapse of restrictions applicable to an Award or upon the issuance of any shares of Stock upon the exercise of an Option or pursuant to an Award. At the time of such vesting, lapse, or exercise, the Participant shall pay in cash to the Applicable Entity, as the case may be, any amount that the Applicable Entity may reasonably determine to be necessary to satisfy such withholding obligation; provided that if there is a same-day sale of shares of Stock subject to an Award, the Participant shall pay such withholding obligation on the day on which such same-day sale is completed. Subject to the prior approval of the Applicable Entity, which may be withheld by the Applicable Entity, as the case may be, in its sole discretion, the Participant may elect to satisfy such obligations, in whole or in part, (i) by causing the Applicable Entity to withhold shares of Stock otherwise issuable to the Participant, (ii) by delivering to the Applicable Entity shares of Stock already owned by the Participant or (iii) by selling to the Company shares of Stock delivered in connection with the applicable Award and instructing the Company to deliver the proceeds therefrom to the Applicable Entity. The shares of Stock so delivered or withheld shall have an aggregate Fair Market Value equal to such withholding obligations. The Fair Market Value of the shares of Stock used to satisfy such withholding obligation shall be determined by the Applicable Entity as of the date that the amount of tax to be withheld is to be determined. A Participant who has made an election pursuant to this Section 19.3 may satisfy his or her withholding obligation only with shares of Stock that are not subject to any repurchase, forfeiture, unfulfilled vesting, or other similar requirements. The maximum number of shares of Stock that may be withheld from any Award to satisfy any federal, state or local tax withholding requirements upon the exercise, vesting, lapse of restrictions applicable to such Award or
 
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payment of shares of Stock pursuant to such Award, as applicable, cannot exceed such number of shares of Stock having a Fair Market Value equal to the minimum statutory amount required by the Applicable Entity to be withheld and paid to any such federal, state or local taxing authority with respect to such exercise, vesting, lapse of restrictions or payment of shares of Stock. Notwithstanding Section 2.21 or this Section 19.3, for purposes of determining taxable income and the amount of the related tax withholding obligation pursuant to this Section 19.3, for any shares of Stock subject to an Award that are sold by or on behalf of a Participant on the same date on which such shares may first be sold pursuant to the terms of the related Award Agreement, the Fair Market Value of such shares shall be the sale price of such shares on such date (or if sales of such shares are effectuated at more than one sale price, the weighted average sale price of such shares on such date), so long as such Participant has provided the Applicable Entity, or its designee or agent, with advance written notice of such sale.
19.4 Captions. The use of captions in the Plan or any Award Agreement is for the convenience of reference only and shall not affect the meaning of any provision of the Plan or such Award Agreement.
19.5 Other Provisions. Each Award granted under the Plan may contain such other terms and conditions not inconsistent with the Plan as may be determined by the Committee, in its sole discretion.
19.6 Number and Gender. With respect to words used in the Plan, the singular form shall include the plural form, the masculine gender shall include the feminine gender, etc., as the context requires.
19.7 Severability. If any provision of the Plan or any Award Agreement shall be determined to be illegal or unenforceable by any court of law in any jurisdiction, the remaining provisions hereof and thereof shall be severable and enforceable in accordance with their terms, and all provisions shall remain enforceable in any other jurisdiction.
19.8 Governing Law. The validity and construction of the Plan and the instruments evidencing the Awards hereunder shall be governed by, and construed and interpreted in accordance with, the laws of the State of Maryland, other than any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of the Plan and the instruments evidencing the Awards granted hereunder to the substantive laws of any other jurisdiction.
19.9 No Fund Created. Any and all payments hereunder to any Participant under the Plan shall be made from the general funds of the Company (or, if applicable, an Applicable Entity), no special or separate fund shall be established or other segregation of assets made to assure such payments, and the Stock Units and any other similar devices issued hereunder to account for Plan obligations do not constitute Stock and shall not be treated as (or as giving rise to) property or as a trust fund of any kind; provided , however , that the Company (or an Applicable Entity) may establish a mere bookkeeping reserve to meet its obligations hereunder or a trust or other funding vehicle that would not cause the Plan to be deemed to be funded for tax purposes or for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended. The obligations of the Company (or, if applicable, an Applicable Entity) under the
 
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Plan are unsecured and constitute a mere promise by the Company (or, if applicable, an Applicable Entity) to make benefit payments in the future and, to the extent that any person acquires a right to receive payments under the Plan from the Company (or, if applicable, an Applicable Entity), such right shall be no greater than the right of a general unsecured creditor of the Company (or, if applicable, an Applicable Entity). Without limiting the foregoing, Stock Units and any other similar devices issued hereunder to account for Plan obligations are solely a device for the measurement and determination of the amounts to be paid to a Participant under the Plan, and each Participant’s right in the Stock Units and any such other devices is limited to the right to receive payment, if any, as may herein be provided.
19.10 No Fiduciary Relationship. Nothing contained in the Plan, and no action taken pursuant to the provisions of the Plan, shall create or shall be construed to create a trust of any kind, or a fiduciary relationship between any of the Applicable Entities, or their officers or the Committee, on the one hand, and the Participant, any of the Applicable Entities or any other person or entity, on the other.
19.11 Code Section 409A.
(a) The Company intends to comply with Code Section 409A, or an exemption to Code Section 409A, with regard to Awards hereunder that constitute nonqualified deferred compensation within the meaning of Code Section 409A. To the extent that the Company determines that a Participant would be subject to the additional twenty percent (20%) tax imposed on certain nonqualified deferred compensation plans pursuant to Code Section 409A as a result of any provision of any Award granted under the Plan, such provision shall be deemed amended to the minimum extent necessary to avoid application of such additional tax. The nature of any such amendment shall be determined by the Board.
(b) With respect to any Award issued under the Plan that is subject to Code Section 409A, and with respect to which a payment or distribution is to be made upon a termination of Service, if the Participant is determined by the Company to be a “specified employee” within the meaning of Code Section 409A(a)(2)(B)(i) and any of the Company’s Stock is publicly traded on an established securities market or otherwise, such payment or distribution, to the extent it would constitute a payment of nonqualified deferred compensation within the meaning of Code Section 409A that is ineligible for an exemption from treatment as such, may not be made before the date which is six months after the date of termination of Service (to the extent required under Code Section 409A). Any payments or distributions delayed in accordance with the prior sentence shall be paid to the Participant on the first day of the seventh month following the Participant’s termination of Service.
(c) The Company makes no representation or warranty and shall have no liability to any Participant or any other person if any provisions of this Plan or any Award Agreement issued pursuant hereto are determined to constitute deferred compensation subject to Code Section 409A but do not satisfy an exemption from, or the conditions of, such Section.
To record adoption of the Plan by the Board as of December 1, 2014, and approval of the Plan by the stockholders on December 1, 2014, the Company has caused its authorized officer to execute the Plan.
 
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INFRAREIT, INC.	
	
/s/ David Campbell	
By:	 	David Campbell	
Title:	 	President and Chief Executive Officer	
 
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Exhibit 21.1
Subsidiaries of Registrant

Entity	  	Jurisdiction	
InfraREIT Partners, LP	  	Delaware	
Sharyland Distribution and Transmission Services, L.L.C.	  	Texas	
Transmission and Distribution Company, L.L.C.	  	Texas	
Sharyland Projects, L.L.C.	  	Texas	
SDTS FERC, L.L.C.	  	Texas	

Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
InfraREIT, Inc.:
We consent to the use of our report dated December 5, 2014 with respect to the balance sheets of InfraREIT, Inc. as of December 31, 2013 and 2012 and the related statements of operations, stockholder’s equity, and cash flows for each of the years then ended, included herein and to the reference to our firm under the heading “Experts” in the prospectus.
/s/ KPMG LLP
Dallas, Texas
December 31, 2014

Exhibit 23.2
Consent of Independent Registered Public Accounting Firm
We consent to the reference to our firm under the caption “Experts” and to the use of our report dated March 5, 2014, with respect to the consolidated financial statements and schedule of InfraREIT, L.L.C. included in Amendment No. 1 to the Registration Statement (Form S-11) and related Prospectus of InfraREIT, Inc. dated December 31, 2014.
We consent to the reference to our firm under the caption “Experts” and to the use of our report dated April 15, 2014, with respect to the consolidated financial statements of Sharyland Utilities, L.P. included in Amendment No. 1 to the Registration Statement (Form S-11) and related Prospectus of InfraREIT, Inc. dated December 31, 2014.
/s/ Ernst & Young LLP
Dallas, Texas
December 31, 2014