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Global Credit Research - 08 Sep 2010
Approximately $6.0 billion of debt securities affected
New York, September 08, 2010 -- Moody's Investors Service assigned a Baa1 rating to Oncor Electric
Delivery Company LLC's (Oncor) new $475 million senior secured
notes, and affirmed the Baa1 rating for all of the company's
senior secured debt. Oncor's rating outlook is stable.
Oncor's Baa1 senior secured rating primarily reflects its lower risk T&D
business activities, relatively stable financial metrics and the
regulatory authority associated with the Public Utilities Commission of
Texas (PUCT). Oncor's rating also relies heavily on our assessment
of the ring-fence type provisions that create credit separateness
from its more risky parent and affiliates.
On Friday, September 3, 2010, Oncor filed an 8-K
with the Securities and Exchange Commission related to an indenture modification.
Specifically, Oncor has eliminated the "fall-away"
provision associated with its secured collateral. Such action has
no rating implications for Oncor's secured debt. Moody's
notes that we do not maintain a senior unsecured or Issuer Rating for
Oncor. However, we incorporate a view that, based upon
our default study for secured utility debt published in May 2009,
the implied fundamental senior unsecured rating for Oncor would be established
at a level that maintains the two-notch rating differential between
secured and unsecured debt.
Separately, we view the announcement associated with a debt exchange
related to Oncor's $700 million 6.375% senior
secured notes due 2012 and the $650 million 5.95%
senior secured notes due 2013 as a neutral credit event. The effect
of the proposed debt exchange will reduce refinancing risks during that
time horizon. We would be concerned if the exchange actions were
to result in any regulatory pressure regarding cost of capital for rate
Oncor is an electric transmission and distribution utility serving the
greater Dallas / Ft. Worth and North Texas regions. Oncor's
revenues are primarily regulated by PUCT. Oncor is a majority-owned
subsidiary of Oncor Electric Delivery Holdings Company LLC (Oncor Holdings)
which is a wholly-owned subsidiary of Energy Future Intermediate
Holding Company (EFIH). EFIH, in turn, is a wholly-owned
subsidiary of Energy Future Holdings Corp. (EFH: Caa1 Corporate
Family Rating (CFR) / negative outlook).Moody's continues
to incorporate a view that Oncor's event risks are high, and
will continue to rise over the near to intermediate term horizon.
Our concerns relate to potential contagion effects associated with Oncor's
ultimate parent, EFH, which we consider financially distressed.
Moreover, we could become more concerned with potential contagion
effects related to Oncor's intermediate subsidiary parent,
EFIH and its ultimate parent, EFH and their near-term liability
management strategies. Specifically, our concerns over contagion
risks are related to EFH's and EFIH's issuance of approximately
$4.0 billion of debt securities which utilize the ownership
interests of Oncor Holdings, which in turn, owns 80%
of Oncor. We estimate that the value of Oncor Holdings' interest
in Oncor is approximately $3.5 billion.
We view the debt at EFH and EFIH which utilizes the Oncor Holdings equity
interests in Oncor as collateral as a permanent leveraging of the regulated
side of the EFH organization structure, which includes EFIH.
When this leveraged is assessed in the presence of recently implemented
EFH / EFIH indenture modifications that enhance certain divestiture flexibility
related to EFIH and Oncor, we conclude that Oncor could, potentially,
be left with a permanent layer of indirect holding company debt,
notwithstanding its current ring-fence type provisions.
For more information, please refer to Moody's credit opinion under
The principal methodology used in rating Oncor was Rating Methodology:
Regulated Electric and Gas Utilities. Other methodologies and factors
may have been considered in the process of the rating this issuer can
also be found on Moody's website.
Oncor is a regulated electric transmission and distribution utility headquartered
in Dallas, Texas.
Senior Vice President
Global Infrastructure Finance
Moody's Investors Service
Senior Vice President
Global Infrastructure Finance
Moody's Investors Service
Moody's Investors Service
Moody's assigns Baa1 senior secured rating for Oncor; affirms ratings
250 Greenwich Street
New York, NY 10007
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