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Will the Firewall Protecting Oncor From Its Basketcase Parent Company Keep It From Getting Burned?

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Oncor, the transmission company that runs power lines and electricity meters, is just about the only good thing Dallas-based Energy Future Holdings has going for it. Energy Future's generation arm, Luminant, the largest unregulated power generator in Texas, has seen its coal-fired power plants precipitously lose value because of low electricity prices. And its retail arm, TXU Energy, is steadily hemorrhaging customers.

Oncor, meanwhile, keeps on truckin'. Part of its success is due to the fact that it remains a regulated monopoly. Oncor is guaranteed a certain level of revenue and return on investment. Its slice of the pie is included in your monthly electric bill. The rest of Energy Future's portfolio isn't so lucky, subject to the whims of the electricity spot market.

Back when private equity firms Kohlberg Kravis Roberts and Goldman Sachs courted the electric giant then known as TXU in what would become the biggest leveraged buyout in history, that was part of the deal. But an even bigger component was the so-called "ring fence," a kind of financial firewall designed to protect Oncor from whatever market forces might buffet the tottering parent company into bankruptcy court. Think of it as a credit shield. As the portfolio of Energy Future is downgraded to the lowest rating of any utility in the country, Oncor remains investment grade. For now.

Problem is, Energy Future is looking down the barrel at billions in merger debt maturing sooner rather than later, and it's increasingly leaning on profitable Oncor not just for cash, but for its implicit value. It's collateral, and the troubled parent company is using it to issue more debt. So who benefits? Not Oncor, which is why Moody's Investors Service lowered its ratings outlook from stable to negative. The ring fence, it believes, is "beginning to show signs of pressure" from Energy Future, calling into question just how independent Oncor really is.

And when one of Oncor's best attributes is its separation from Energy Future, that ain't good. If that "pressure" dings its credit rating, Oncor's borrowing costs will increase, and its pool of investors will shrink. That's the last thing Energy Future needs as it relies more and more on Oncor to help pay its debt.

What's more, even Energy Future isn't entirely certain that Oncor's ring fence will protect it in bankruptcy court. In an April regulatory filing, Energy Future says low wholesale electricity prices and environmental regulation might prevent it from paying, or even refinancing, its debt. Its assets, the company admits, are already worth less than its debt. If a default is declared and Energy Future heads into bankruptcy court, it warns there's no guarantee this huge company with a monopoly on power lines won't get lumped in with the rest of the ailing assets.

If even one of these scenarios happen, expect your utility bill to get higher.

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