NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to Oncor Electric Delivery Company LLC's (Oncor) $250 million 2.15% senior secured notes due June 1, 2019. The Rating Outlook is Stable. The net proceeds will be used by Oncor to repay borrowings under the revolving credit facility and for general corporate purposes.
Fitch recently affirmed Oncor's Long-term Issuer Default Rating (IDR) at 'BBB' and Short-term IDR at 'F3'. Oncor's indirect parent holding company, Energy Future Intermediate Holding Company LLC (EFIH), and the ultimate parent, Energy Future Holdings Corp. (EFH), along with other affiliated companies, filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code on April 29, 2014. Fitch downgraded the IDRs of EFH and EFIH to 'D' on the announcement of bankruptcy filings. Neither Oncor nor Oncor Electric Delivery Holdings Company LLC (Oncor Holdings), which holds 80% ownership in Oncor, is part of the Chapter 11 filings.
KEY RATING DRIVERS
Effective Ring-fencing: Fitch continues to believe that Oncor is effectively ring-fenced and sees little risk of substantive consolidation during the bankruptcy proceedings of its indirect parent and affiliated entities. Fitch further expects Oncor to continue to operate under the regulatory debt cap of 60% that limits the dividend that can be paid to the parent.
Likely Change in Ownership: EFH is seeking a consensual Chapter 11 reorganization after having reached a restructuring agreement with several of its key creditors. The agreement contemplates the senior unsecured creditors of EFH and EFIH becoming the equity owners in the reorganized EFH. The reorganized EFH would continue to own EFIH and EFIH would retain its ownership in Oncor. The restructuring agreement further contemplates approximately $5.25 billion of debt above the ring-fenced structure post reorganization that will be supported by the dividend and tax payments from Oncor. The ultimate capital structure of EFH and EFIH, ownership in Oncor Holdings, time to emergence from bankruptcy, and required approval by the Public Utility Commission of Texas (PUCT) remain the key unknowns. Oncor's Stable Rating Outlook reflects Fitch's expectation that the ring-fencing structure is likely to continue and will be an important component of PUCT's approval.
Limited Financial Contagion Risk: Fitch does not expect any material financial impact on Oncor as a result of bankruptcy filings of EFH and EFIH. The largest financial exposure to Oncor is the pre-petition account receivables and other contractual obligations from Texas Competitive Electric Holdings Company LLC (TCEH), which stood at $124 million as of April 29, 2014. A potential write-off of this amount will not cause Oncor to exceed the 60% debt cap. The board of Oncor had withheld dividend in the past in order to create flexibility for additional debt issuances and/or potential write-offs related to account receivables from TCEH. Several other steps taken by management in the past have significantly reduced Oncor's exposure to its distressed parent and affiliates, which include elimination of notes receivable from TCEH and limiting Oncor's exposure to EFH's pension and other retiree benefits.
Adequate Liquidity: Oncor has no debt maturities until 2015 and there is adequate availability under the corporate revolver, which mitigates concerns regarding capital access in midst of bankruptcy proceedings for EFH/EFIH. 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 March 31, 2014, Oncor's corporate revolving facility, due October 2016, had borrowings of $979 million and letter of credits outstanding of $7 million. The drawn balances are large and reflect a high capex spend; 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.
Strong Operational and financial Performance: 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 continues to be robust. 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 2014 to 2018 in capex, of which approximately 45% 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.
Robust Credit Metrics: Fitch expects Oncor's Earnings before Interest, Depreciation and Taxes (EBITDA) to Interest ratio to be consistently above 5.0x and Debt to EBITDA to be in the 3.3x - 3.7x range over 2014 - 2018, which is strong compared to a median financial profile for a low risk, regulated, 'BBB' issuer. Fitch expects Oncor's Funds Flow from Operations (FFO) metrics to moderate as benefits of bonus depreciation subside. Fitch expects FFO Adjusted Leverage to be in the 3.75x - 4.05x range, which is also robust for its rating category. Relative to its peers, Oncor's equity funding is limited 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 given its large capital spending plans related to CREZ. As of March 31, 2014, Oncor's regulatory capital structure was 58.4% debt and 41.6% equity.
--Positive rating actions: Positive rating actions for Oncor are not anticipated at this time.
--Change in Ownership: Any potential change in ownership of Oncor would need to be evaluated in context of any existing or new ring-fencing arrangements implemented to preserve the credit quality of the company.
--Negative Turn in the Bankruptcy Proceedings: Fitch continues to believe that the ring-fencing measures for Oncor are strong, and the assets and liabilities of Oncor should not be consolidated in the bankruptcy proceedings of EFH. Any decision to the contrary could lead to ratings downgrade for Oncor.
--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.
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 Utilities' (Nov. 13, 2013);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2013);
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis'
(Dec. 13, 2012);
--'Rating U.S. Utilities, Power and Gas Companies, (March 9, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Recovery Ratings and Notching Criteria for Utilities
Parent and Subsidiary Rating Linkage Fitch - Approach to Rating Entities within a Corporate Group Structure
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis - Effective Dec. 13, 2012 to Dec. 23, 2013
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)