Oncor's indirect parent holding company
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
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
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
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
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
--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.
Fitch affirms Oncor's ratings as follows:
--Long-term IDR at 'BBB';
--Senior secured debt at 'BBB+';
--Short-term IDR and commercial paper at 'F3'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
--'Corporate Rating Methodology' (
--'Recovery Ratings and Notching Criteria for Utilities' (
--'Parent and Subsidiary Rating Linkage' (
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' (
--'Rating U.S. Utilities, Power and Gas Companies' (
Corporate Rating Methodology - Effective
Recovery Ratings and Notching Criteria for Utilities
Parent and Subsidiary Rating Linkage
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis - Effective
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)
Source: Fitch Ratings
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