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08 Jan 2010
New York, January 08, 2010 -- Moody's Investors Service said that Energy Future Holdings Corp's (EFH:
Caa1 Corporate Family Rating / negative rating outlook) $500 million
issuance of 10% senior secured notes, due January 2020,
has no credit implications at this time.
Proceeds, which initially bolster liquidity, are expected
to be used for general corporate purposes, but could also eventually
be used to repurchase debt, presumably at a steep discount to par
value. We incorporate a view that EFH will target its existing
EFH senior unsecured (guaranteed) LBO notes (Caa3 senior unsecured -
guaranteed) and its existing legacy TXU senior unsecured notes (Caa3 senior
unsecured). These securities were the primary securities targeted
in EFH's recent exchange transaction which launched in October and closed
in November 2009.
"The additional debt does not have a meaningful impact on EFH's overall
credit quality" said Jim Hempstead, Senior Vice President "but it
does incrementally bolster cash reserves, at least temporarily.
The fundamental credit issue with EFH continues to relate to its untenable
capital structure, which calls into question the sustainability
of the business model."
EFH's Caa1 Corporate Family Rating (CFR) and negative rating outlook primarily
reflect our concerns with the company's total debt outstanding (approximately
$43 billion) in relation to its ability to generate cash flow over
a sustainable period of time. For the twelve months ended September
2009, 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%, 2.5% and 2%, respectively.
In our opinion, these credit metrics indicate that EFH has very
little financial flexibility. Excluding the contributions of EFH's
rate regulated electric transmission and distribution business,
Oncor Electric Delivery Company LLC (Oncor: Baa1 senior secured
/ stable outlook), the adjusted ratio of EFH's CFO, CFO pre-w/c
and FFO to debt would fall to 3%, 0% and 0%,
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 at this time, 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 for an entity as highly levered as EFH. Nevertheless,
as of September 2009, EFH held roughly $0.9 billion
in cash, while its principal subsidiary, Texas Competitive
Electric Holdings (TCEH: B1 senior secured / negative outlook),
held roughly $0.8 billion. TCEH also had roughly
$1.7 billion available under its $2.7 billion
senior secured credit facility, scheduled to expire in October 2013.
From an operational perspective EFH, through TCEH, owns and
operates approximately 18,000 MW's of generation capacity the vast
majority of which is located in the north ERCOT market in Northern Texas.
Approximately 10,000 MW's represent base-load coal and nuclear
generation, a significant benefit to the credit from a collateral
perspective, given the market position and critical nature of these
assets to the region's infrastructure and economy. The vast
majority of EFH's cash flows are associated with the generation and sale
of electricity through TCEH's generation assets. Consequently,
as market conditions improve, evidenced by rising market heat rates,
TCEH's credit profile should also stabilize and possibly improve.
However, we remain concerned that the sheer size of EFH's debt load
will continue to weigh on the company over the next few years, which
keeps the liquidity issue as a high priority.
The new senior secured notes are primarily viewed as senior unsecured
obligations of TCEH, due to Oncor's ring-fence type provisions.
The notes are secured by the stock of EFH's intermediate subsidiary
holding companies, Energy Future Intermediate Holdings (EFIH,
Caa3 senior secured notes / negative outlook) and Energy Future Competitive
Holdings (EFCH, Caa3 senior unsecured / negative outlook).
The EFIH guarantee is secured by the stock of Oncor Electric Delivery
Holdings Co. LLC (Oncor Holdings). Oncor Holdings owns approximately
80% of Oncor, the regulated T&D utility operations.
The EFCH guarantee is unsecured. EFH's indenture associated
with the new senior secured notes provides flexibility to transfer such
notes to EFIH, should Oncor be divested in some fashion and if certain
conditions are met. This flexibility, given EFH's overall
credit profile, represents an increase in potential event risk for
Oncor, but is not sufficient to warrant a change in Oncor's ratings
at this time.
"Management has confirmed that it has no current plans to divest Oncor
before the original 5-year holding period expires" added
EFH is expected to file its 2009 SEC Form 10-K on February 19,
EFH's CFR is Caa1. EFH is a merchant generator head-quartered
in Dallas, Texas.
Moody's last rating action for EFH occurred on November 16, 2009,
when EFH's Probability of Default Rating (PDR) was upgraded to Caa2
from Ca. 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 this issuer can also be found in the
Rating Methodologies sub-directory on Moody's website.
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service
Moody's: EFH's $500 million issuance of New Senior Secured Notes has no impact on rating
William L. Hess
Infrastructure Finance Group
Moody's Investors Service
No Related Data.
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