Oncor Electric Delivery says expansion is limited by parent company’s debt

Posted Thursday, May. 16, 2013  comments  Print Reprints
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Oncor Electric Delivery may not be able to take full advantage of the nation’s fastest-growing electricity market because of capital constraints lingering from its parent’s 2007 leveraged buyout.

Oncor would have to cut dividend payments to Dallas-based Energy Future Holdings if the electricity distributor wanted to fund another major project in Texas, where it serves more than 3 million homes and businesses, said Bob Shapard, Oncor’s chief executive officer.

“The biggest challenge we have today is access to capital,” Shapard said during an interview with Bloomberg News on Wednesday. “If we wanted to go out and expand and do some things, the only source we would have for equity capital is to hold back dividends.”

Energy Future, which is teetering toward bankruptcy with about $40 billion in debt after the largest leveraged buyout in history, owns an 80 percent stake in Oncor, an independent regulated utility. The Energy Future unit that holds Oncor depends on the utility’s dividend payments to help meet about $807 million in annual interest expense.

Provisions set up at the time of the buyout in 2007 — led by KKR, TPG Capital and Goldman Sachs — will shield Oncor from any potential restructuring, Shapard said. Moody’s Investors Service expects a “material restructuring” at Energy Future within a year.

Oncor plans to spend about $1 billion a year on its Texas distribution network, Shapard said. About half will go toward building transmission lines, and the rest will be spent on serving new customers from Dallas to West Texas, upgrading and maintaining equipment, and investing in new gear that protects against power failures.

The utility reduced its dividend payments to Energy Future to about 20 percent of its earnings to finance its $2 billion share in a power line project connecting West Texas wind turbines to the state power grid. Oncor can boost its dividend after completing that project next year, Shapard said.

If the utility wanted to invest beyond its planned spending, it would have to continue to limit its dividend to Energy Future, he said. The company can’t raise much additional money by borrowing because it’s near the 60 percent debt cap set by regulators as part of the buyout, he said.

Oncor’s investment decisions are governed by a board independent of Energy Future.

Oncor is expected to pay its corporate parent about $248 million this year and $224 million next year, according to financial projections that Energy Future provided to creditors and detailed in an April 15 filing.

The annual payment to the corporate owners is expected to grow to $320 million in 2015 and $366 million by 2017, according to the filing. It noted that the distributions could be affected by Oncor’s capital spending and changes to its earnings before interest expense, income tax, depreciation and amortization.

Oncor is well-protected from the financial fallout at its parent by structural, legal and regulatory provisions that allow it to operate separately from its majority owner, Dimitri Nikas, a New York-based credit analyst with Standard & Poor’s, wrote in a report Tuesday.

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