• On 21 May 2013, Moody’s announced rating actions on MBIA Insurance Corp., National Public Finance Guarantee Corp., MBIA Inc. and other related entities. Because of the large number of credits across several asset classes affected by these rating actions, including Moody's-rated securities that are guaranteed or "wrapped" by these companies, ratings appearing on this website may not yet reflect current information. For current information on affected credits, please visit www.moodys.com/fig.
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Announcement:

Moody's changes Energy Future Holdings Corp's rating outlook to negative from stable

Global Credit Research - 30 Jan 2012

Approximately $37 billion of debt securities affected

New York, January 30, 2012 -- Moody's Investors Service changed the rating outlook for Energy Future Holdings Corp. (EFH) and its subsidiaries to negative from stable, including Texas Electric Competitive Holdings Company LLC (TCEH) which generates and markets electricity in the greater North-Texas region and is EFH's principal generator of cash flow. EFH's other subsidiary is Oncor Electric Delivery Company LLC (Oncor), an 80% owned electric transmission and distribution utility (T&D) regulated by the Public Utility Commission of Texas (PUCT). Oncor's rating outlook remains stable. The rating outlooks for Energy Future Intermediate Holding Corp (EFIH) and Energy Future Competitive Holdings (EFCH) were also changed to negative from stable.

We affirmed EFH's Caa2 Corporate Family Rating (CFR), Caa3 Probability of Default Rating (PDR), SGL-4 Speculative Grade Liquidity Rating and the Baa1 senior secured rating for Oncor.

RATINGS RATIONALE

EFH's Caa2 CFR and Caa3 PDR reflect a financially distressed company with limited flexibility. EFH's capital structure is complex and, in our opinion, untenable which calls into question the sustainability of the business model and expected duration of the liquidity reserves.

The change in rating outlook to negative from stable reflects a sustained period of low natural gas prices which will depress EFH's cash flow generating prospects and could result in further large goodwill impairments. We also see declining volumes and an increase in operating costs and capital investment needs. These higher costs and investments are influenced, in part, by increased regulatory requirements that apply primarily to EFH's coal generation assets.

We see a strong correlation between the default probability of EFH, EFIH, EFCH and its primary cash flow generating subsidiary, TCEH. As a result, the primary rating drivers for EFH, EFIH and EFCH are heavily influenced by TCEH.

EFH's SGL-4 Speculative Grade Liquidity rating reflects a liquidity profile which is slowly but steadily declining. In our opinion, the decline in liquidity sources will accelerate in 2012. We note that the (unused) collateral posting facility expires on December 31, 2012. The expiration of this facility exposes EFH to potential liquidity demands in a high natural gas price environment (ie., above $7.50 / mcf). In October 2013, a portion of TCEH's revolver expires and there are substantial credit facility and bond maturities in 2014, 2015, 2016 and 2017. Absent a sustained improvement to natural gas commodity prices or a material expansion in market heat rates, we believe EFH's liquidity will become exhausted, possibly as early as 2014.

Prospectively, ratings are unlikely to be upgraded over the near to intermediate term horizon, largely due to our expectations regarding cash flow and the complexity of the capital structure. Should natural gas commodity prices and market heat rates improve materially, and for a sustained period of time, there could be upward pressure on EFH's ratings. Over the near-term horizon, ratings are more likely to fall, and individual classes of securities have a reasonably high probability of experiencing a limited default, as Moody's defines it, based on our limited default / distressed exchange policies.

Notwithstanding the ring-fence type provisions structured at Oncor, additional debt incurrence at either EFH or EFIH, secured by EFIH's equity interest of Oncor Electric Delivery Holdings Company LLC (Oncor Holdings) will likely be viewed as a form of permanent leverage for Oncor, a material credit negative. As EFH continues to migrate debt onto the non-ring-fenced intermediate subsidiary holding company of Oncor, we believe Oncor will increasingly be pressured to make upstream dividend contributions to EFIH, in part to service the secured debt obligations of EFH and EFIH, and potentially to the detriment to its own credit quality, despite the ring-fence type provisions.

That said, on a stand-alone basis, today's Baa1 senior secured rating for Oncor reflects the revenue and cash flow stability associated with Oncor's T&D utility business activities. Oncor's rating and stable rating outlook are benefited by the ring-fence type provisions and the presence of the PUCT as its principal regulator. But we continue to highlight EFH's potential restructuring activities along with EFIH's and EFH's public disclosures associated with the risks of a potential breach of the ring fence under some scenarios. According to these public disclosures, only a bankruptcy judge can ultimately decide the effectiveness of the ring fence provisions. Should an event like this materialize, the ratings for Oncor could be negatively impacted. Nevertheless, we viewed Oncor's recent credit facility, expiring in 2016 as a strong, independent, third-party test of the ring fence provisions by its lenders.

Although these factors continue to indicate elevated levels of event risk at Oncor when compared to other comparable regulated T&D utility companies, due to its parent's weak credit profile, the elevated event risk is not sufficient to warrant a change to Oncor's rating or rating outlook at this time.

Oncor's rating outlook could be changed to negative if EFH continues to utilize EFIH's equity interest in Oncor Holdings, either directly or indirectly, as part of its ongoing restructuring activities or if EFH continues to transfer debt onto EFIH, Oncor's intermediate parent holding company. We view the leverage at EFIH, which utilizes Oncor's equity value as collateral, as a form of permanent leverage for Oncor.

The ratings for EFH, its subsidiaries and individual debt instruments are derived from the Caa2 CFR, with the exception of Oncor due to its ring fence type provisions.

The ratings for EFH, TCEH, EFCH and EFIH's individual securities were determined using Moody's Loss Given Default (LGD) methodology. Based on EFH's Caa2 CFR and Caa3 PDR, and based strictly on the priority of claims within those entities, the LGD model would suggest a rating of Ca for EFH's and EFIH's senior secured debt securities. EFIH's Caa3 first and second lien ratings reflect the fact that the holders of these securities also benefit from their security interests of Oncor Holdings equity in Oncor.

The principal methodology used in this rating was Unregulated Utilities and Power Companies published in August 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology

REGULATORY DISCLOSURES

Although this credit rating has been issued in a non-EU country which has not been recognized as endorsable at this date, this credit rating is deemed "EU qualified by extension" and may still be used by financial institutions for regulatory purposes until 30 April 2012. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

In addition to the information provided below please find on the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued each of the ratings.

James Hempstead
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

William L. Hess
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's changes Energy Future Holdings Corp's rating outlook to negative from stable
No Related Data.

 

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