Moody's downgrades existing ratings of TXU Corp. and subsidiaries
Approximately $40 billion of debt securities affected
New York, October 09, 2007 -- As a result of the proposed capital structure presented in the recent
8K filing by TXU Corp (TXU) in connection with the leveraged buyout by
KKR and TPG, Moody's Investors Service has downgraded the
ratings for TXU and its subsidiaries and has assigned new Corporate Family
Ratings (CFR's), Probability of Default ratings (PDR's)
and Loss Given Default (LGD) assessments at both the TXU and Oncor Electric
Delivery Company LLC (Oncor) entities.
Moody's has assigned a B2 CFR to TXU and a Ba1 CFR to Oncor.
The CFR at TXU encompasses its wholly-owned intermediate subsidiary
holding company, TXU US Holdings (USH) as well as USH's wholly-owned
subsidiary, Texas Competitive Electric Holdings (TCEH). The
B2 CFR also reflects the positive benefits of TXU's ownership in
Oncor, the regulated electric transmission and distribution (T&D)
utility. Moody's ascribes a significant amount of credit
enhancement associated with Oncor's proposed ring fencing provisions,
which helped to support the rationale for assigning a separate CFR for
this lower-risk regulated utility. These actions conclude
the review for possible downgrade that was initiated on February 26th,
Utilizing Moody's LGD methodology and the assigned Ba1 CFR for Oncor,
the ratings for Oncor's existing senior unsecured notes have been
downgraded to Ba1 from Baa2. In addition, a Ba1 rating has
been assigned to Oncor's new $2.0 billion senior secured
revolver. It is our expectation that Oncor's existing senior
unsecured debt will be secured by the same collateral package securing
the new revolver. Once Oncor's senior unsecured debt conforms
as senior secured debt, the ratings on the conformed senior secured
debt will also be rated Ba1. Essentially, because Oncor has
a single class of debt, the ratings on the debt will match its CFR.
Using the LGD methodology and the assigned B2 CFR for TXU, the ratings
for TXU's existing senior unsecured debt have been downgraded to
Caa1 from Ba1. In addition, Moody's has assigned a
B3 rating to TXU's new senior unsecured (guaranteed) notes.
The B3 rating for TXU's new senior unsecured (guaranteed) notes
primarily reflects the value of an up-stream guarantee by Oncor.
This up-stream guarantee is being made by Energy Future Intermediate
Holding Company LLC, an intermediate, subsidiary holding company
that is wholly-owned by TXU. Although this entity is outside
of Oncor's proposed ring-fence structure, Moody's
ascribes a significant amount of benefit to the guarantee based on our
analysis of the likely value of Oncor in a default situation.
The Baa3 Issuer Rating for TXU US Holdings has been withdrawn.
Moody's has assigned a Caa1 rating to TXU US Holdings' senior secured
facility bonds and senior unsecured debt. The ratings for these
securities are the same at the Caa1 level because Moody's ascribes
limited value to the collateral associated with the $78 million
of secured facility bonds.
The ratings for Texas Competitive Electric Holdings' existing senior
unsecured PCRB's have been downgraded to Caa1 from Baa2.
In addition, Moody's has assigned a Ba3 rating to TCEH's
new $16.45 billion senior secured term loan B; $2.700
billion senior secured revolver; $1.250 billion senior
secured Special LC Facility and $4.1 billion senior secured
delayed draw term loan B. Moody's also assigned a B3 to TCEH's
new $6.75 billion of senior unsecured notes.
Moody's has also assigned speculative grade liquidity (SGL) ratings
of SGL-3 to TXU and SGL-2 to Oncor. These liquidity
ratings reflect the internal cash generation capabilities for the respective
entities, the availability of external credit capacity, the
headroom under the credit facilities' financial covenants and our
view of alternate sources of liquidity.
TXU's B2 CFR reflects our primary concern with the amount of debt being
incurred at the company in relation to its sustainable cash flow generation
over a long-term horizon. Moody's does not anticipate
any meaningful debt reduction over the next few years, which raises
concerns over the amount of cushion incorporated into the business plan.
Moody's notes that over the near-term, the majority
of TXU's holding company obligations will be serviced by the up-stream
contributions of Oncor, which we view positively, but the
relationship shifts more towards TCEH over the longer-term horizon.
As a result, Moody's sees a strong correlation between the
default probability of TCEH and the default probability of TXU,
despite several structural mechanisms designed to keep the entities separate.
The B2 CFR also reflects the attractive assets and businesses that TXU
owns, most notably the approximately 8GW's of base-load
coal and nuclear generation capacity. These assets are viewed as
being structurally advantageous within the Electric Reliability Council
of Texas (ERCOT), where power prices are predominately driven by
natural gas prices. As a result, TXU's base-load
generating facilities should be in a position to produce a significant
amount of cash flow over the near-to intermediate time horizon.
While we remain concerned with the asset concentration within ERCOT,
and the risks associated with an unexpected, lengthy outage at one
of these base-load facilities, Moody's believes that
TCEH has implemented reasonable mitigation efforts against many downside
commodity price scenarios through its sizeable hedging program and hedging
Moody's believes a majority of TXU's enterprise value is associated
with its TCEH operations, so distress to TCEH's financial
profile would represent a major rating driver behind our determination
of distress at TXU. In addition, we note that TCEH's
prospective key financial credit metrics are expected to converge with
TXU's consolidated metrics, evidence that the entities are
closely aligned. While Moody's acknowledges that there are
provisions in the loan documents that are designed to insulate TCEH from
adverse developments at TXU, we believe that these provisions do
little to reduce TXU's dependence on TCEH. TXU has produced,
on average, cash flow from operations (CFO) of approximately $2.8
billion per year over the past 5-years and $3.2 billion
per year over the past 3-years. These CFO amounts represented
approximately 19% and 23% of TXU's consolidated adjusted
total debt, respectively. Over the next 3-years,
Moody's believes TXU and TCEH are likely to produce CFO as a percentage
of adjusted total debt of approximately 4%, a roughly 80%
reduction of the past 5 and 3-year averages, respectively.
In our opinion, the extreme leveraging of these cash flows (primarily
derived by the more risky generation operations) severely reduces the
cushion and flexibility to avoid a potential default if an unexpected
or adverse event were to impact the company's businesses.
This leverage of the cash flows in the face of the operating, strategic,
financial and environmental challenges currently facing this industrial
sector only serves to exacerbate this concern.
Oncor's Ba1 CFR primarily reflects the significant value associated
with the proposed ring fencing provisions that have been announced by
TXU, our relatively constructive view of the Public Utility Commission
of Texas (PUCT) and the financial profile of the company. Moody's
observes that on a stand-alone basis, Oncor is arguably a
solid investment grade entity. In addition, Moody's
rating methodology for global regulated electric utilities (which is currently
being updated) produces a rating for Oncor well within the Baa-rating
category. Nevertheless, taking into consideration the upstream
guarantee and our view regarding how much value will be extracted from
Oncor for the benefit of its parent, lead us to conclude that a
Ba1 CFR is the most appropriate rating at this time. Essentially,
we believe that TXU and TCEH's business and operating risk profiles,
coupled with the new levels of leverage those businesses will incur,
create a sufficient level of potential contagion risk that Oncor's
otherwise investment grade status has been negatively impacted,
regardless of the technical and legal provisions associated with the proposed
With respect to Oncor's financial profile, we note that Oncor
has produced, on average, CFO of approximately $0.6
billion per year over the past 5-years and $0.7 billion
per year over the past 3-years which represented approximately
14% and 16% of Oncor's consolidated adjusted total
debt, respectively. The adjusted total debt balances include
the Aaa-rated securitization debt that was issued in 2004 as well
as the other standard adjustments Moody's applies to financial statements.
Over the next 3-years, Moody's believes Oncor will
likely produce CFO as a percentage of adjusted total debt of approximately
15%, which will continue to position the company for this
metric well within the investment grade Baa ratings category.
The rating outlooks for TXU, Oncor, TXU US Holdings and TCEH
are stable given our expectation that the companies will perform operationally
as well as financially within the assumption parameters provided by the
new equity investors, new management team and new boards of directors
throughout the TXU enterprise. These assumption parameters include
a financial strategy that will produce cash flow to adjusted total debt
ratios in the mid-teen's for Oncor and less than 5%
for both TXU and TCEH, no meaningful extractions of cash from any
TXU entity by the new equity investors, and a capital investment
strategy that is primarily designed to maintain the operating performances
and safety and reliability standards of the existing base-load
fleet and electric T&D system.
TXU Corp. is an energy company headquartered in Dallas, Texas.
Corporate Family Rating at B2
Probability of Default rating at B2
Speculative Grade Liquidity rating at SGL-3
Senior unsecured (guaranteed) notes at B3 (LGD4, 69%)
Senior unsecured (guaranteed) PIK notes at B3 (LGD4, 69%)
Oncor Electric Delivery Company LLC
Corporate Family rating at Ba1
Probability of Default rating at Ba2
Speculative Grade Liquidity rating at SGL-2
Senior secured revolver at Ba1 (LGD3, 34%)
Texas Competitive Electric Holdings
Senior secured revolver at Ba3 (LGD2, 29%)
Senior secured LC facility at Ba3 (LGD2, 29%)
Senior secured Term Loan B at Ba3 (LGD2, 29%)
Senior secured delayed draw term loan B at Ba3 (LGD2, 29%)
Senior unsecured (guaranteed) notes at B3 (LGD5, 76%)
William L. Hess
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service