Approximately $37 billion of debt securities affected
New York, April 14, 2011 -- Moody's Investors Service affirmed the ratings for Energy Future
Holdings Corp (EFH) and its subsidiaries. Rating affirmed include
EFH's Caa2 Corporate Family Rating (CFR), Caa3 Probability
of Default Rating (PDR) and SGL-4 Speculative Grade Liquidity Ratings.
In addition, Moody's assigned a B2 (LGD2 15%) rating
to Texas Competitive Electric Holdings Co. LLC (TCEH) $1.725
billion senior secured notes due 2020 as well as its amended and extended
first lien credit facilities. Moody's also downgraded a single
class of TCEH's senior secured second lien notes due April 2021 to Caa3
from Caa2. Moody's also affirmed the Baa1 senior secured
rating for Oncor Electric Delivery Company LLC (Oncor). The rating
outlooks for EFH and its subsidiaries, TCEH and Energy Future Intermediate
Holding Co. LLC (EFIH) are changed to stable from negative.
The rating outlook for Oncor remains stable.
Ratings affirmed include EFH's:
Caa2 Corporate family Rating
Caa3 Probability of Default Rating
Caa3 senior secured notes (LGD4, 62%)
Ca senior unsecured guaranteed (LBO) notes (LGD5, 81%)
Ca senior secured (legacy) notes (LGD5, 85%)
SGL-4 Speculative Grade Liquidity Rating
Texas Competitive Electric Holdings:
B2 senior secured first lien credit facility (LGD2, 15%)
Caa3 senior secured second lien (LGD3, 44%) changed from
Caa3 senior unsecured guaranteed (LBO) notes (LGD4, 54%)
changed from (LGD4, 52%)
Ca senior unsecured (legacy) PCRB notes (LGD4, 65%)
Energy Future Intermediate Holdings:
Caa3 senior secured notes (LGD4, 62%)
Energy Future Competitive Holdings:
Caa3 senior secured facilities notes (LGD4, 69%)
Oncor Electric Delivery Company:
Baa1 senior secured
Texas Competitive Electric Holdings
B2 senior secured first lien notes (LGD2, 15%)
The change in rating outlooks to stable from negative reflect two primary
benefits associated with a recently announced TCEH senior secured amend
and extend transaction, combined with its new senior secured note
offering. The most important benefit is near-term financial
covenant relief which eliminates a potential covenant violation in the
2nd half of 2011, in our opinion. This financial covenant
is associated with TCEH's approximately $22 billion of senior
secured first lien debt. The second benefit is a 3-year
maturity extension for the TCEH senior secured first lien notes which
are scheduled to mature in October 2014, including TCEH's
$2.7 billion revolver, which was scheduled to expire
in October 2013. The 3-year maturity extension for each
of these securities provides additional time for improving market conditions
and economic recovery which could translate into improved cash flows.
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. Individual instrument rating affirmations
and Loss Given Default (LGD) assessments are included at the end of this
EFH's Caa2 CFR and Caa3 PDR reflect a financially distressed company
with limited financial flexibility; its capital structure appears
to be untenable, calling into question the sustainability of the
business model; and there is no expectation for any meaningful debt
reduction over the next few years, beyond scheduled amortizations.
From a credit perspective, we incorporate a view that TCEH's
recently announced intention to amend certain indenture provisions and
extend the maturity dates associated with approximately $22 billion
of its senior secured First Lien Credit Facilities and Term Loans (B2
LGD2 15%) is positive. TCEH represents EFH's primary
source of cash flow generation, but these cash flows are highly
exposed to natural gas and power commodity prices. We incorporate
a view that natural gas commodity prices and market heat rates will remain
low over the next several years. In addition, we see little
evidence indicating an improvement for these market conditions.
In fact, we see increasing challenges with higher emission control
costs associated with the 8GW coal fleet and higher regulatory scrutiny
costs associated with the 2GW nuclear generating plant.
EFH's capital structure is complex, and Moody's sees a strong
correlation between the default probability of EFH and the default probability
of TCEH, despite several structural mechanisms designed to keep
the entities as separate legal vehicles. We believe the primary
rating drivers for EFH are heavily influenced by TCEH. For example,
numerous inter-relationships exists between both EFH and its subsidiaries
as well as among and between affiliate subsidiaries. These relationships
include up-stream and down-stream simple payment guarantees,
cross defaults, collateral arrangements and other support agreements.
In the event of a bankruptcy filing, we incorporate a view that
all of EFH's principal subsidiaries would similarly be included
in the bankruptcy proceeding, with the only exception being the
ring-fenced regulated transmission and distribution utility,
Prospectively, ratings are unlikely to be upgraded over the near
to intermediate term horizon, largely due to our expectation for
only modest cash flow generation due to an extended period of low commodity
prices and low market heat rates. However, 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 rating or outlook. Over the near-term horizon,
ratings are more likely to remain stable, but individual classes
of securities have a reasonably high probability of experiencing a limited
default, as we define it, based on our limited default / distressed
exchange policies. We continue to incorporate a view that EFH's
liability management strategies will include debt restructuring activity
across its capital structure, and will now focus on the remaining
debt at EFH as well as the senior unsecured (LBO) guaranteed notes at
Although we continue to incorporate a view that any future debt restructuring
activities will exclude activity related to Oncor, additional debt
incurrence on the regulated side of EFH's organization structure
will likely be viewed as a material credit negative for Oncor.
We incorporate a view that the approximately $3.5 billion
of debt obligations that have been loaded onto EFIH (which includes the
debt at EFH that can travel to EFIH under certain circumstances) represent
a form of permanent leverage on Oncor. These EFIH securities (which
include the securities at EFH that can travel to EFIH under certain circumstances)
are benefitted by the equity collateral of Oncor Electric Delivery Holdings
Co. LLC (Holdings), which owns approximately 80% of
EFH's SGL-4 Speculative Grade Liquidity rating reflects a
liquidity profile which is slowly but steadily declining, in our
opinion. Absent a sustained improvement to natural gas commodity
prices, we believe EFH's liquidity will eventually be exhausted.
As noted previously, we see little evidence to improve on EFH's
ability to produce approximately $1.0 billion of cash flow
from operations, and we expect rising operating costs to impact
projected levels of capital expenditures. The reduction of TECH's
revolving credit facility capacity is viewed negatively. We see
a significant near-term benefit related to the financial covenant
relief associated with the secured debt to adjusted EBITDA ratio.
Finally, we incorporate a view that the vast majority of EFH's
assets are encumbered, so we see little value in alternate sources
of liquidity. However, we continue to note a sizeable,
unrealized mark-to-market gain recorded on the balance sheet
as a potential source of alternate liquidity, and we continue to
view the LBO sponsors' ability to infuse more equity into the company
as a possibility. Nevertheless, we acknowledge that the sponsors
have not made any indication of their willingness to do so at this time.
The Baa1 senior secured rating for Oncor Electric Delivery Company LLC
(Oncor), reflects the revenue and cash flow stability associated
with being a regulated transmission and distribution (T&D) utility.
Oncor's rating and stable rating outlook benefit by certain ring-fence
type provisions and the presence of the Public Utility Commission of Texas
(PUCT) as its principal regulator. Nevertheless, we see elevated
event risk at Oncor when compared to 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.
We continue to view the ring-fence type provisions incorporated
into Oncor's legal structure as strong, and continue to view
the presence of both the independent directors and the PUCT as a credit
benefit. Nevertheless, we remain concerned that EFH may become
forced into more material restructuring activities in the future,
and we remain cautious with respect to Oncor's, EFIH's
and EFH's public disclosures associated with a potential breach
of the ring fence under some scenarios. According to the public
disclosure, only a bankruptcy judge can ultimately decide the effectiveness
of the ring fence. Should an event like this materialize,
the ratings for Oncor could be negatively impacted.
Oncor's rating outlook could be changed to negative if EFH continues
to utilize its equity interest in Oncor, 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, 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 rating assigned reflects the fact that the holders of
these securities also benefit from their security interests of Oncor Holdings
The principal methodology used in this rating was Global Unregulated Utilities
and Power Companies published in August 2009.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit 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 ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service 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 the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's affirms Energy Future Holdings Corp's Caa2 CFR; outlook changed to stable from negative
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