NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Oncor Electric Delivery Company LLC's (Oncor) Long-term Issuer Default Rating (IDR) at 'BBB' and Short-term IDR at 'F3'. Fitch has also affirmed Oncor's security ratings. The Rating Outlook is Stable.
KEY RATING DRIVERS
Fitch considers the key rating factors for Oncor to be: 1) the stability of existing regulated utility cash flows; (2) relatively strong service territory; (3) robust financial measures relative to the rating level; (4) effective ring-fencing from highly leveraged Energy Future Holdings Corp. (EFH) and Energy Future Intermediate Holding Company LLC (EFIH); and (5) limited financial exposure in the event of bankruptcy filings of EFH/EFIH and/or Texas Competitive Electric Holdings Company LLC (TCEH), EFH's indirect, non-regulated subsidiary.
Oncor continues to deliver strong operational and financial performance; the latter being driven by a combination of sales growth and significant transmission investments backed with constructive recovery mechanisms. Oncor's electric sales continue to steadily increase driven by relatively stronger economic growth in Texas. Residential points of delivery continue to grow at or above 1% per annum. Demand from large commercial and industrial (C&I) customers has, however, slowed in 2012 and 1H2013 after robust growth in 2010 and 2011.
Oncor has been investing heavily in transmission infrastructure including spending for the Competitive Renewable Energy Zone (CREZ) projects. Various tracker mechanisms allow Oncor to earn a return on transmission related capital investment with minimal regulatory lag. Oncor is planning to spend more than $5 billion over 2013 to 2017 in capex, of which 55 - 57% will be transmission related. Fitch expects Oncor to earn close to its authorized return on equity (ROE) of 10.25% over this forecast period and has not assumed any distribution rate increases in its financial projections. Oncor does have the ability to file for recovery of distribution investments between rate reviews per Senate Bill 1693.
Fitch expects Oncor's Earnings Before Interest, Depreciation and Taxes (EBITDA) to Interest ratio to approach 5.7 times (x) and Debt to EBITDA to be in the 3.3x range, which is strong as compared to Fitch's guideline ratio for a low risk, regulated, 'BBB' issuer. Fitch expects Oncor's Funds Flow from Operations (FFO) metrics to be robust in 2013-14 driven by bonus depreciation and thereafter decline to 19 - 20% range for the balance of the forecast period.
Relative to its peers, Oncor's equity funding is limited by the financial health of its ultimate parent and the utility has replenished equity capital through reductions in dividend distributions. Oncor has been curtailing upstream dividends since 2011 in order to maintain equity to capital ratio within the 40% cap, as mandated by the Public Utility Commission of Texas (PUCT), given its large capital spending plans related to CREZ. As of June 30, 2013, Oncor's regulatory capital structure was 59% debt and 41% equity.
Fitch continues to believe that strong ring-fenced mechanisms isolate Oncor's credit profile from that of its ultimate parent supporting wide ratings differential between Oncor and rest of the EFH group. Last week, Fitch downgraded EFH's IDR to 'CC' from 'CCC' implying that default of some kind appears probable. Fitch rates TCEH's IDR at 'C' and considers a material restructuring of its capital structure highly likely over the next few months.
Fitch recognizes that Oncor's management has taken several steps to manage the contagion effect of potential bankruptcy filings by EFH/EFIH and/or TCEH. These include upsizing the corporate revolving facility and extending its maturity, elimination of notes receivable from TCEH, limiting Oncor's exposure to EFH's pension and other retiree benefits, and withholding dividend in order to create flexibility for additional debt issuances or cushion for any potential write-offs related to account receivables from TCEH. Oncor has no debt maturities until 2015 and there is adequate availability under the corporate revolver, which mitigates concerns regarding capital access should EFH/EFIH file for bankruptcy. Fitch forecasts internal cash generation at Oncor to be robust and sees only modest need for external debt over the next five years.
As of June 30, 2013, Oncor's corporate revolving facility, due October 2016, had borrowings of $960 million and letter of credits outstanding of $6 million. The drawn balances are large and reflect a heavy capex spend for 2013; Oncor typically draws on its corporate revolver to fund capital work in progress and subsequently replaces the drawn balances with permanent financing and/or internally generated funds. Oncor can request the lenders to increase the borrowing capacity of the revolver by $100 million and to extend the maturity in two one-year increments. Under the terms of the corporate revolver, the lenders' commitments are several and not joint.
--Positive rating actions: Positive rating actions for Oncor are not anticipated at this time.
--Texas Regulation: Fitch expects a balanced regulatory environment for Oncor. Any unexpected regulatory developments such as adverse outcomes in future rate cases could result in credit rating downgrades.
--Change in Ownership: Any potential change in ownership of Oncor would need to be evaluated in context of the potential new ring-fencing arrangements implemented to preserve the credit quality of the company.
--Potential Bankruptcy Filing by EFH/EFIH and/or TCEH: Negative rating actions by Fitch could result depending upon Oncor's financial exposure to TCEH at the time of the filing. Fitch continues to believe that the ring-fencing measures for Oncor are strong, and the assets of Oncor should not be consolidated in the event of bankruptcy of EFH. Any decision to the contrary during potential bankruptcy proceedings could lead to ratings downgrade for Oncor.
Fitch affirms the following ratings with a Stable Outlook:
--Long-term IDR at 'BBB';
--Senior secured debt at 'BBB+';
--Short-term IDR and commercial paper at 'F3'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (Nov. 13, 2012);
--'Short-Term Ratings Criteria for Non-Financial Corporates' (Aug. 5, 2013);
--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Short-Term Ratings Criteria for Non-Financial Corporates
Parent and Subsidiary Rating Linkage