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Rating Action:

Moody's downgrades Energy Future Holdings Corp's CFR to Caa2; assigns Caa2 rating to new TCEH second lien notes; outlook remains negative

Global Credit Research - 11 Oct 2010

Approximately $45 billion of debt securities affected

New York, October 11, 2010 -- Moody's Investors Service downgraded the Corporate Family Rating (CFR) for Energy Future Holdings Corp (EFH) to Caa2 from Caa1; downgraded EFH's Probability of Default Rating (PDR) to Caa3 from Caa2 and affirmed the SGL-4 Speculative Grade Liquidity assessment. EFH's rating outlook remains negative.

In addition to the downgrades of EFH's CFR and PDR, and utilizing our Loss Given Default methodology with respect to assigning individual security instrument ratings, Moody's also took the following rating actions:

• Affirmed EFH's senior secured 9.75% and 10% securities due 2019 and 2020, which are secured by EFIH's ownership interests in Oncor Holdings, at Caa3 (LGD5, 62%);

• Downgraded EFH's LBO senior unsecured guaranteed 10.875% cash pay and 11.25%/12% PIK Toggle notes, both due 2017, to Ca from Caa3 (LGD5, 81%);

• Affirmed EFH's legacy senior unsecured notes due 2014, 2024 and 2034, respectively, at Ca (LGD5, 85%);

• Affirmed EFIH's senior secured notes due 2019 and 2020, which are secured by the ownership interests in Oncor Holdings, at Caa3 (LGD5, 62%);

• Downgraded the EFCH unsecured notes to Ca from Caa3 (LGD5, 69%);

• Downgraded TCEH's senior secured first lien notes to B2 from B1 (LGD2, 15%);

• Assigned a Caa2 rating for TCEH's second lien notes due 2021 (LGD3, 41%);

• Downgraded TCEH's LBO 10.25% cash pay and 10.5%/11.25% PIK Toggle senior unsecured guaranteed notes due 2015 and 2016, respectively, to Caa3 from Caa2 (LGD4, 52%);

• Downgraded TCEH's legacy senior unsecured notes to Ca from Caa3 (LGD4, 65%)

RATINGS RATIONALE

The downgrade is triggered by the persistent environment of low natural gas and power commodity prices and low average heat rates, which collectively drag down EFH's current and expected cash flow generation. Today, there is little evidence indicating a significant improvement to natural gas commodity prices, and as a result, EFH is likely to remain in financial distress. In a recent 8-K filing, the company announced a sizeable impairment to goodwill, which we view as acknowledgement by the company of a prolonged period of weaker than previously anticipated cash flows.

EFH's weak cash flow generation prospects call into question the company's overall liquidity profile. EFH's liquidity profile is an important consideration towards the company's ability to address near-term debt service obligations and pending maturities. Our SGL-4 rating indicates a relatively weak liquidity profile. We are especially concerned with the financial maintenance covenant at TCEH's $2.7 billion secured revolver, which expires in October 2013.

The Baa1 senior secured rating for Oncor Electric Delivery Company LLC (Oncor), which is a regulated transmission and distribution utility that is 80% owned by EFH, is affirmed. Oncor's rating outlook remains stable. 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). Nevertheless, we see event risk at Oncor as being elevated when compared to comparable regulated utility companies due to its parent's deteriorating credit profile. The elevated event risk is not sufficient to warrant a change to Oncor's rating or rating outlook at this time.

Moody's continues to view EFH as being a financially distressed company. Its capital structure appears to be untenable, calling into question the sustainability of the business model. The company's cash flow generation is highly exposed to natural gas and power commodity prices, which are expected to remain low over the next several years. EFH's credit profile continues to remain in a state of decline, as evidenced by the company's near term strategy of repurchasing its debt at a discount or engaging in debt exchange activities.

Prospectively, ratings are unlikely to be upgraded over the intermediate term horizon, largely due to our expectations for only modest cash flow generation due to an extended period of low commodity prices. Should natural gas and power commodity prices and market heat rates improve materially, for a sustained period of time, EFH's rating and rating outlook could show some stabilization, and eventually, rating upgrades.

Over the near to intermediate-term horizon, ratings are more likely to fall further, especially if commodity prices fail to raise the around-the-clock price of power in north Texas. EFH's liquidity profile is slowly but steadily declining, and without a sustained improvement to natural gas commodity prices, eventually EFH's liquidity will be exhausted. We continue to incorporate a view that EFH's debt restructuring activity will intensify and become more material, and will continue to focus more on TCEH and the nearing maturities in October 2013 and October 2014. Today, we continue to incorporate a view that any future restructuring activities will exclude activity related to Oncor, Oncor Holdings and Energy Future Intermediate Holdings Company (EFIH). Additional activity on the regulated side of the organization structure will, most likely, be viewed negatively for Oncor given the material amount of debt obligations that have been loaded on EFIH. We view the EFIH debt (which includes the debt at EFH that can travel to EFIH under certain circumstances) as a form of permanent leverage residing at Oncor's intermediate subsidiary holding company.

The Baa1 senior secured rating and stable rating outlook for Oncor does not currently incorporate the full effects of the potential event risk related to EFH's financial distress. As mentioned, we continue to view the ring-fence type provisions incorporated into Oncor's structure as strong, and continue to view the presence of the PUCT as a credit benefit. Nevertheless, we remain concerned that EFH may become forced into more material restructuring activities, in part due to an extended period of low commodity prices. According to Oncor's public disclosures, the ring fence may not work as planned under some scenarios, with only a bankruptcy judge ultimately deciding the effectiveness of the ring fence. Should an event like this materialize, the ratings for Oncor could be 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 recent activity at both EFH and EFIH, where roughly $4.0 billion of debt has already been issued which utilizes the ownership interests in Oncor, as an indirect form of permanent leverage on Oncor.

The principal methodologies used in rating Energy Future Holdings Corp. were Global Unregulated Utilities and Power Companies published in August 2009, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

Energy Future Holdings Corp (EFH: Caa2 CFR) is a large, non-regulated merchant power company headquartered in Dallas, Texas. Oncor Electric Delivery Company LLC (Baa1 senior secured) is a regulated transmission and distribution utility regulated by the Public Utility Commission of Texas and is approximately 80% owned by EFH.

REGULATORY DISCLOSURES

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's information, confidential and proprietary Moody's Analytics' information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning/maintaining a credit rating.

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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.

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

New York
A.J. Sabatelle
Senior Vice President
Global Infrastructure Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
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Moody's downgrades Energy Future Holdings Corp's CFR to Caa2; assigns Caa2 rating to new TCEH second lien notes; outlook remains negative
No Related Data.
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