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Energy Future’s Woes Stunt Oncor’s Power Growth Ambitions

By: Mark Chediak and Julie Johnsson |

Oncor Electric Delivery Co., Texas’ largest power utility, 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 Energy Future Holdings Corp. if the Texas electricity distributer wanted to fund another major project in the state where it serves more than 3 million homes and business, Chief Executive Officer and Chairman Bob Shapard said.

“The biggest challenge we have today is access to capital,” Shapard said yesterday in an interview with Bloomberg News in Dallas. “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 approximately $807 million in annual interest expense.

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

Annual Investment

Oncor plans to spend about $1 billion a year on its Texas distribution network, Shapard said. About half of that will go toward building new transmission lines, with the rest spent on serving new customers from Dallas to West Texas, upgrading and maintaining existing 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 in order to finance its $2 billion share in a power-line project connecting West Texas wind turbines to the state’s power grid. Oncor will be able to boost its dividend after completion of 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 up by regulators as part of the buyout, he said.

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

Dividend Payments

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 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 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 fall out 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 Financial Services LLC, wrote in a May 14 report.

Bankruptcy Rumblings

As bankruptcy rumblings grew louder for Energy Future over the past year, Oncor further separate itself from its parent by bringing under its sole control common business functions that the two had shared, such as accounting, payroll and insurance.

Even so, the issues at Energy Future continue to weigh on Oncor’s bonds, which “trade wide” with greater yields than peers such as Ameren Illinois, Dot Matthews and Scott Greenstein, analysts with CreditSights Inc., wrote in a May 7 report.

Oncor’s $299.6 million of 4.55 percent, first-lien bonds due 2041 traded at 106.27 cents on the dollar May 8 to yield 4.17 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

TXU Receivables

An Energy Future bankruptcy may squeeze Oncor’s liquidity, however, since it distributes power for Energy Future’s retail electricity unit, TXU Energy. That contract accounted for 29 percent of Oncor’s 2012 revenues, Nikas said.

“There’s no question that’s our single biggest liability in the case of their default,” Shapard said.

The company estimated that in its worst-case scenario — an Energy Future bankruptcy filing during the hottest days of summer — receivables at risk would total as much as $150 million from the retail marketer, company spokesman Chris Schein said. Oncor’s operations and investment plans wouldn’t be affected even if it couldn’t fully recoup that amount, Shapard said.

“We’ll take a hit from that,”he said. “Beyond that we should be fine.”