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Rating Action:

Moody's Downgrades Energy Future Holdings's PDR; Changes Speculative Grade Liquidity Assessment; Outlook Remains Negative; Oncor Outlook Remains Stable

19 Jul 2010

Approximately $45 billion of debt securities affected

New York, July 19, 2010 -- Moody's Investors Service downgraded the probability of default rating (PDR) for Energy Future Holdings Corp. (EFH) to Ca from Caa2 and changed the speculative grade liquidity assessment (SGL) to SGL-4 from SGL-3. EFH's Corporate family rating (CFR) is affirmed at Caa1 and its rating outlook remains negative. Separately, Moody's affirmed the Baa1 senior secured rating for Oncor Electric Delivery Company LLC (Oncor) and its stable rating outlook.

The downgrade of the PDR reflects 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 to continue.

"Upon closing of the exchange transaction, EFH is expected to have reduced its total consolidated debt by almost $1 billion" said Jim Hempstead, Senior Vice President "but we incorporate a view that additional restructuring activity is likely over the near to intermediate term horizon".

EFH's Caa1 CFR is affirmed. The CFR takes into consideration the very weak financial profile, untenable capital structure, questionable long-term business plan sustainability and material operating headwinds, especially with respect to steadily increasing environmental mandates. For the twelve months ended March 2010, the ratio of EFH's consolidated cash flow from operations (CFO), CFO before changes in working capital (CFO pre-w/c) and funds from operations (FFO) to total debt outstanding was approximately 5%, 3% and 2%, respectively. In our opinion, these credit metrics indicate that EFH has very little financial flexibility.

"EFH still presents as a financially weak and fundamentally distressed company" added Hempstead "and so its behaviors are driven with an eye towards maximizing the option value of the equity from a very short term perspective more heavily than comparable peer companies."

Moody's revised EFH's speculative grade liquidity rating (SGL) to an SGL-4 from an SGL-3. We view EFH's capitalization as being relatively complex, in part due to numerous, often inter-related, incurrence tests and other covenants. We observe that EFH's revised capitalization, which reflects the current exchange offer, does little to reduce this complexity.

The SGL-4 reflects a continuing weak cash flow generating forecast, a material reduction in cash on the balance sheet with the proposed exchange offer, an expectation for steady erosion of the headroom cushion associated with TCEH's secured revolver expiring in 2013 and little, if any, un-encumbered assets (with the exception of Oncor) as possible sources of additional liquidity.

The new senior secured notes are primarily viewed as senior unsecured obligations of TCEH, due to Oncor's ring-fence type provisions. However, the notes are secured by the stock of EFH's intermediate subsidiary holding company, Energy Future Intermediate Holding Company (EFIH, Caa3 senior secured notes / negative outlook) ownership of Oncor Electric Delivery Holdings Co. LLC (Oncor Holdings). Oncor Holdings owns approximately 80% of Oncor, the regulated T&D utility operations.

Approximately $20 billion of EFH's total consolidated debt is scheduled to mature in 2014. The magnitude of this refinancing risk represents a significant credit and liquidity issue, primarily due to our views of the current state of the bank credit markets. While we incorporate a view that bank credit capacity is readily available (albeit at a higher cost) for most regulated utility operations (a positive for Oncor, whose $2.0 billion senior secured credit facility expires in October 2013), it is unclear if capacity will be available (and at what cost) for an entity as highly levered as EFH. Oncor's access to the credit markets could be negatively impacted by this potential increase in event risk.

The negative outlook reflects our continuing concerns regarding the long-term sustainability of EFH's business model and its untenable capital structure. Moody's continues to believe EFH's longer-term fundamentals remain weak and that its business plan appears unsustainable, given current commodity price outlooks. Our concerns include: the magnitude of EFH's total consolidated debt (almost $45 billion); significant looming maturities in 2013 and 2014 (approximately $23 billion); a weakening liquidity profile; the longer-term prospects for the financial, credit and hedge counterparty markets (due to EFH's sizeable hedging program); a noticeable acceleration of environmentally-sensitive legislative initiatives (including carbon and mercury) which threatens coal-fired margins and capital investment expectations, and; the risk of incremental market intervention in Texas.

Oncor Electric Delivery Company's (Oncor) Baa1 senior secured rating and stable rating outlook are affirmed. However, we see a steady and measured increase in Oncor's event risk profile and we incorporate a view that the regulated side of EFH's organizational structure, which includes the intermediate subsidiary holding company, EFIH, has been permanently levered.

While we see little evidence of a direct assault on Oncor's regulated financials or its credit profile, we observe that EFH has been slowly pursuing a strategy to create incremental financial flexibility with respect to its indenture restrictions. These flexibilities address certain structural challenges related to any potential disposal of Oncor, among other provisions. We view these desired financial flexibilities as a credit positive for the EFH and TCEH credit profiles, and a credit negative for the credit profile of Oncor.

"Oncor's exposure to event risk continues to increase as the ultimate parent company restructures its debt and amends its indenture restrictions" said Hempstead. "The flexibility associated with executing some form of a disposal of Oncor has increased, and we incorporate a view that management will, eventually, avail themselves of this flexibility."

Moody's last rating action for EFH occurred on November 16, 2009, when we revised EFH's PDR to Caa2 from Ca and affirmed the Caa1 CFR and negative rating outlooks. 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 Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating these issuers can also be found in the Rating Methodologies sub-directory on Moody's website.

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
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Downgrades Energy Future Holdings's PDR; Changes Speculative Grade Liquidity Assessment; Outlook Remains Negative; Oncor Outlook Remains Stable
No Related Data.
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