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Rating Action:

Moody's downgrades existing ratings of TXU Corp. and subsidiaries

09 Oct 2007
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, 2007.

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 strategy.

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 ring-fencing.

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.

Ratings assigned:

TXU Corp.

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%)

New York
William L. Hess
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
James Hempstead
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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