Moody’s recently published a Credit Focus report on Oncor. Highlights include:
- A bankruptcy proceeding will slowly unfold at Oncor’s parent company, Energy Future Holdings Corp (EFH). The restructuring will be organized and precedent- based because the size and complexity of EFH’s capital structure will constrain the bankruptcy court from using any novel legal theories because the risk of overturning new ideas on appeal is higher.
- Oncor is likely to trade hands within the next 12-24 months. Today, Oncor is poised to trade into the hands of its existing creditors, primarily composed of sophisticated financial investors. But strategic investors might find Oncor too attractive an acquisition candidate to pass up. Possible strategic investors include American Electric Power Co. (Baa1 stable), CenterPoint Energy Inc. (Baa1 stable) and Berkshire Hathaway Energy Co (A3 stable). Already, we’ve seen NextEra Energy (Baa1 stable) and Sharyland Utilities (not rated) make overtures through the bankruptcy proceedings. A strategic owner, as opposed to a financial investor, will please the regulators, in Moody’s opinion.
- If Oncor’s new owners are the existing financial investors, the Public Utility Commission of Texas (PUCT) is more likely to maintain (and possibly even strengthen) Oncor’s suite of ring-fencing provisions. A stronger set of ring-fencing provisions would be credit positive for Oncor, as Moody’s increasingly views it as a standalone utility from a credit perspective. So far, the ring fence is holding, and even if EFH defaults again shortly after emerging from bankruptcy, Oncor’s credit profile likely will remain insulated from any future troubles at EFH.
- If a strategic peer winds up owning Oncor, we think the PUCT will have a more welcoming dialogue regarding dismantling the ring fence as parent company leverage is reduced. Moody’s does not think a strategic owner will be satisfied with owning, but not controlling, Oncor. Instead, a strategic investor will be more aggressive in looking to remove or weaken the ring-fence provisions, starting with the most insulating provisions at the corporate governance levels, by reducing debt at EFH.
- Regardless who ends up owning the company, Oncor’s credit profile is on a positive trajectory. Oncor’s senior secured rating is well-positioned in the Baa1 rating category, assuming a parent company debt level of some $5.5 billion. On July 8, Moody’s upgraded Oncor’s senior secured rating two notches to Baa1 from Baa3, reflecting Oncor’s consistent financial performance and the successful testing of the ring-fence provisions. Moody’s views the ring-fencing provisions as a credit positive because they provide extraordinary corporate governance rights and regulatory oversight.