By Mike Norman
mnorman@star-telegram.com
This is not something to panic about, not even something to get real worried about just yet, but it is something that people in North Texas should be aware of.
It's about electricity and how it gets to your home.
Bloomberg reporter Richard Bravo posted a story this week about investors' concerns that Oncor Electric Delivery Co., the company that builds and maintains the power lines that bring power to you, could be dragged down by the looming threat of bankruptcy at Energy Future Holdings. EFH owns more than 80 percent of Oncor.
The companies have structured themselves in ways aimed at isolating Oncor, a procedure known as ring fencing. But Bloomberg's headline said there is still risk that the financial illness at EFH could be contagious.
"The Armageddon outcome is that Energy Future Holdings goes into bankruptcy and a judge says this ring fencing is nonsense," debt analyst Philip C. Adams of Gimme Credit Llc. told Bloomberg.
There are indications that investors already fear that outcome. Some of Oncor's first-lien notes are trading at prices that show investors want higher yields than they would accept four months ago, while yields have declined on similarly rated utility bonds during that period, Bloomberg said.
On Feb. 27, Moody's Investors Service changed its outlook on about $7 billion in Oncor debt to "negative" from "stable." Moody's maintained its rating on that debt at Baaa1, which it said "reflects a low-risk, rate-regulated transmission utility business."
You'll remember Energy Future Holdings. It's the Dallas-based company formed after KKR & Co. partnered with Fort Worth's TPG investment group for a $45 billion leveraged buyout of the former TXU Corp. in 2007.
To gain approval of the buyout from the Public Utility Commission of Texas, the buyers promised to separate TXU's power generation unit, now named Luminant, and its unregulated retail arm, TXU Energy, from its regulated transmission company, now Oncor.
The key to the current concern is that the ring fence -- the separation between regulated and unregulated companies -- be solid. The entities on opposite sides of the fence were supposed to pay their own bills.
But in its Feb. 27 report, Moody's said Energy Future Holdings has issued $5 billion in additional debt and pledged its interest in Oncor as collateral.
"We believe elements of the ring fence are beginning to show signs of pressure," wrote Jim Hempstead, Moody's senior vice president.
The 2007 leveraged buyout hasn't gone well for the buyers. When natural gas prices began to fall in 2008, the financial underpinnings of the deal crumbled. The prices that generating companies can demand from retail electric providers are ultimately linked to the cost of the cheapest fuel for their generators. In this case, that's natural gas.
Energy Future Holdings and its retail and generating arms can't hit the income targets necessary to pay off their debt. Moody's called them "financially distressed companies with untenable capital structures."
That means pressure on Oncor to help carry more weight. Oncor has issued assurances that its ring fencing means it has no obligation to pay Energy Futures Holdings debt.
Still, in its filings with the Securities and Exchange Commission the company is required to point out known risks. In a Feb. 21 filing, it said the ring fencing "may not work as planned."
Bankruptcy courts have broad powers, Oncor said, and "there can be no assurances that a court would not order an Oncor ring-fenced entity's assets and liabilities to be substantially consolidated" with those of other Energy Future Holdings companies.
What's the average homeowner to do if that happens? It won't mean the lights will go dark. It will mean that the courts and regulators will have to sort out a complicated financial mess.
If that's what happens, count on being confused for a while. What else is new, you ask?
Mike Norman is editorial director of the Star-Telegram/Arlington and Northeast Tarrant County.817-390-7830Twitter: @mnorman9
Looking for comments?
