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Rating Action:

Moody's Downgrades Energy Future Holdings Corp.'s PDR; Outlook Remains Negative

05 Oct 2009

Approximately $12 billion of securities affected

New York, October 05, 2009 -- Moody's Investors Service downgraded the probability of default rating (PDR) for Energy Future Holdings Corp. (EFH) to Ca from Caa1, downgraded the long-term debt ratings for selected securities of EFH and placed the ratings for selected securities of EFH's principal subsidiary, Texas Competitive Electric Holdings (TCEH), on review for possible downgrade. Simultaneously, Moody's affirmed EFH's Caa1 corporate family rating (CFR) and SGL-3 speculative grade liquidity rating. The rating outlook remains negative.

The downgrade of the PDR and the long-term ratings for the selected securities (listed below) reflect Moody's view that EFH's recent debt exchange offer is a distressed exchange. It also reflects our belief that the exchange transaction has a high likelihood of closing. During the exchange offer process, the Ca PDR will prevail. Upon closing of the exchange, the PDR will be repositioned to reflect the limited default that will have occurred and to consider our views that future restructuring activity is likely.

Moody's continues to believe EFH's longer-term fundamentals remain weak. Our concerns include: the magnitude of its consolidated debt (approximately $44 billion or $42 billion after the closing of the exchange offer); significant looming maturities in 2014 (approximately $23 billion); the prospective liquidity profile and continued availability under the revolver; the current and longer-term prospects for the financial and credit markets (due to the sizeable hedging program, which will need to be addressed prior to 2013); a noticeable acceleration of environmentally-sensitive legislative initiatives (including carbon and mercury) which threatens coal-fired margins and the risk of incremental market intervention in Texas.

Moody's views EFH's capitalization as relatively complex, which includes numerous, often inter-related, incurrence tests and other covenants. In addition, EFH's financial profile is considered weak, where the ratio of cash flow from operations to debt was roughly 2.5% for the latest twelve months ended June 2009 and for the year ended 2008. Moody's estimates that even under fairly optimistic assumptions, cash flow to debt is expected to be less than 5% for the next several years which we believe is more in line with a Caa1 CFR.

In light of our view that EFH's business model is unsustainable in its current form, that its capital structure is untenable over the longer-term and that investor losses will be crystallized with the closing of the transaction, and given our understanding of the term and conditions of the proposed exchange offer, we have taken rating actions on the following securities:

EFH's $0.75 billion 6.50% Series Q Senior Notes due 2024 have been downgraded to Ca, LGD4 (54%) from Caa3 LGD6 (92%) and the $0.75 billion 6.55% Series R Senior Notes due 2034 were also downgraded to Ca, LGD4 (56%) from Caa3, LGD6 (92%);

EFH's $2.65 billion 11.25% / 12.00% PIK senior Toggle Notes due 2017 was downgraded to Caa3, LGD3 (36%) from Caa2, LGD5 (83%) and the $2.00 billion 10.875% Senior Notes due 2017 was also downgraded to Caa3, LGD2 (27%) from Caa2 LGD5 (83%);

TCEH's $3.00 billion 10.25% Senior Notes due 2015 and the $2.00 billion 10.25% Senior Notes due 2015, Series B, which are currently rated Caa2 (LGD5 (72%)), have been placed on review for possible downgrade, reflecting some uncertainty as to whether they participate in the exchange offer.

EFH's $1.00 billion 5.55% Series P Senior Notes due 2014 are affirmed at Caa3, its LGD assessment has been revised to LGD3 (31%) from LGD6 (92%).

"Upon closing of the exchange transaction, EFH is expected to have reduced its total consolidated debt by approximately $2 billion" said Jim Hempstead, Senior Vice President, "but its cash interest expense obligations are also expected to increase, at least over the near-term. We incorporate a view that additional restructuring activity is likely over the near to intermediate term horizon"

The negative outlook reflects our concerns regarding the long-term sustainability of EFH's business model and its untenable capital structure. These concerns primarily reflect the approximately $44 billion of consolidated debt and roughly $20 billion of other gross liabilities currently on the balance sheet versus negative book equity of $3.2 billion.

EFH's rate-regulated electric transmission and distribution (T&D) utility, Oncor Electric Delivery Company's (Oncor), Baa1 senior secured ratings are affirmed. The rating outlook for Oncor remains stable.

Moody's last rating action for EFH occurred on August 3, 2009, when EFH's CFR was downgraded to Caa1 from B3. For more information, please refer to Moody's credit opinion under www.Moodys.com.

The principal methodology used in rating EFH was Rating Methodology: Unregulated Utilities and Power Companies. It can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors may have been considered in the process of the rating these issuers can also be found in the Credit Policy & Methodologies directory

EFH is a large merchant generation company and retail electric provider operating in Texas. EFH is headquartered in Dallas, Texas.

New York
James Hempstead
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
William L. Hess
Managing Director
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Downgrades Energy Future Holdings Corp.'s PDR; Outlook Remains Negative
No Related Data.
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