OREANDA-NEWS. Fitch Ratings has placed the Issuer Default Rating (IDR) of Oncor Electric Delivery Company LLC's (Oncor) on Rating Watch Positive following the announcement by NextEra Energy, Inc. (NextEra, IDR 'A-'/Outlook Stable) to acquire 100% of the equity of reorganized Energy Future Holdings Corp. (EFH), which indirectly owns an 80% equity interest in Oncor.

The acquisition, when completed, will finally resolve the drawn-out bankruptcy proceedings for Oncor's indirect parent holding companies as well as eliminate the significant amount of debt above Oncor. Fitch has been constraining Oncor's IDR by one-notch compared to its peer electric T&D utilities in Texas, and the notching of the senior secured debt at Oncor has been further constrained to reflect ownership by a distressed parent. Fitch sees lifting of these constraints under the ownership of NextEra. After the transaction is completed, Oncor will become a subsidiary of NextEra.

There could be additional bids, and Fitch will reassess its ratings for Oncor if EFH were to accept a superior bid. Otherwise, Fitch will likely resolve the Rating Watch at or close to the completion of the transaction. The transaction is subject to receiving approvals from the bankruptcy court of the EFH's amended plan of reorganization, the Public Utility Commission of Texas (PUCT) and the Private Letter Ruling from the IRS confirming the tax free nature of the transaction. Approvals are also needed from the Federal Energy Regulatory Commission and under Hart-Scott-Rodino Act.

KEY RATING DRIVERS

Regulatory Approval is Key: NextEra plans to apply for PUCT's approval for the change of control of Oncor shortly. The PUCT has statutorily 180 days to decide, which places the closing of the transaction toward the end of the first quarter of 2017. Fitch currently does not anticipate any significant customer concessions as part of the merger approval process; the ring fencing provisions and the governance structure at both Oncor and its direct parent, Oncor Electric Delivery Holdings Company LLC (Oncor Holdings), would likely occupy greater attention in the merger proceedings. Fitch believes Oncor's credit ratings will benefit from ownership by a higher rated parent even if the current ring fencing provisions are diluted to reflect traditional utility ring-fencing protections.

Strong Operational Performance: Oncor's operational performance continues to be robust. Weather-adjusted residential sales and large commercial and industrial (C&I) sales continue to be strong despite the slowdown in oil and gas related activity. Residential customer base grew 1.5%, and large C&I GWH sales increased 1.8% in 2015. Fitch believes this is driven by the diversity of the industrial base and the positive impact of falling oil and gas prices on energy intensive industries based in Texas. Another significant driver of Oncor's performance has been growth in transmission investments, which still remains a focus area for the PUCT.

Strong Credit Metrics: For year-end Dec. 31, 2015, Oncor reported EBITDA to interest ratio of 5.5x and adjusted debt to EBITDA of 3.6x. Oncor is planning to spend approximately $1.4 billion in capex in 2016 and could potentially spend more than $1.5 billion annually over 2017 - 2021. Various tracker mechanisms allow Oncor to earn a return on transmission related capital investment with minimal regulatory lag. However, Fitch believes the absence of distribution rate increases since 2012 may cause Oncor to trail its authorized ROE by the end of 2016. Timing of the next rate case remains uncertain. Oncor is likely to file a general rate case only after the change in ownership is effective. Fitch's financial projections for Oncor incorporate a rate increase in 2017 that would allow the company to earn an ROE closer to its currently authorized level. In such a scenario, Fitch estimates Oncor's EBITDA to interest ratio to remain above 5.0x over 2016 - 2018 and debt to EBITDA to approximate 3.8x over the same period.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Oncor include:

--No material customer concessions required as part of PUCT's approval;

--Volumetric sales growth of 1% p. a. in 2016 and 1.5% thereafter;

--O&M costs inflated at 3% annually;

--Rate increase in 2017 that allows Oncor to earn ROE close to its current authorized levels;

--Capex of $4.4 billion over 2016-2018;

--Dilution of the existing ring-fencing provisions.

RATING SENSITIVITIES

Positive: Fitch will likely upgrade Oncor's IDR by one-notch and its senior secured debt by two notches after EFH's acquisition by NextEra is complete. Oncor's current and forecasted credit metrics are comparable with those of its peer T&D utilities in Texas, which Fitch rates one-notch above Oncor's IDR. The notching of the senior secured debt at Oncor has been further constrained to reflect ownership by a distressed parent.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--Ownership by a weak ultimate parent that tops NextEra's bid as a superior bid;

--Weak ring-fencing provisions that lead to a close rating linkage between Oncor and a weak parent;

--Material amount of debt above Oncor Holdings with limited visibility on deleveraging;

--Adverse outcomes in future rate cases such as significant sharing of tax benefits or material reduction in authorized ROEs;

--Sustained weakness in total adjusted debt to EBITDAR measures above 4.5x.

LIQUIDITY

Oncor has adequate availability under the corporate revolver. As of March 31, 2016, Oncor's $2 billion corporate revolving facility, currently due October 2017, had borrowings of $1,054 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. Oncor exercised one of the two one-year extensions in October 2015. Under the terms of the corporate revolver, the lenders' commitments are several and not joint.

FULL LIST OF RATING ACTIONS

Fitch has placed the following ratings on Rating Watch Positive:

--Long-term IDR 'BBB';

--Senior secured debt 'BBB+';

--Short-term IDR and commercial paper 'F3'.