DALLAS - The bankruptcy filing of Dallas-based Energy Future Holdings poses some risk to municipal bond issuers in parts of Texas where the company's coal-fired power plants operate, according to Moody's Investors Service.
EFH filed for Chapter 11 reorganization in U.S. Bankruptcy Court in Delaware on April 29, seeking to shed about $40 billion of debt. The bankruptcy is the largest in U.S. history.
EFH was created in 2007 through the $45 billion leveraged buyout of the former TXU Corp. led by KKR, Texas Pacific Group and Goldman Sachs.
Under a pre-bankruptcy agreement, EFH subsidiary Texas Competitive Electric Holdings, including the unregulated power company Luminant Generation and retail provider TXU Energy, would transfer to first-lien bondholders in exchange for eliminating about $23 billion of debt, the company said in a news release.
Luminant is the state's largest power generator, and TXU Energy is the state's top electricity retailer, with more than 1.5 million customers.
Oncor Electric Delivery, 80% owned by EFH, was not included in the bankruptcy, although creditors would gain an unspecified stake in the unit.
A report on the bankruptcy by Moody's analysts James Hempstead, Ryan T Wobbrock, and William L. Hess noted that municipal issuers in Texas run the risk of losing payments in the event that aging coal plants are shut down.
"If one or more of the at-risk plants became subject to early retirement, some local governments will be exposed, we believe, specifically those where the plant's assessed value as a percentage of the municipality's total AV is large," the analysts noted. "This matters to the local governments because property tax bills are based on an entity's assessed valuation."
Among the issuers that could be affected are Rusk County, rated Aa3 by Moody's, in East Texas, which has about 23% of its assessed value exposed to the Martin Lake coal plant. The Rusk Independent School District, rated A1, has about 6% exposure.
Another at-risk coal fired plant is Monticello, Texas, where Titus County, rated A1, is exposed at 38% and Mount Pleasant ISD, rated A1 at about 31% of AV, the analysts said.
The Franklin ISD, rated Aa2 with negative outlook, has about 50% of its AV exposed to the Oak Grove facility, but Moody's said that is a newer coal plant and less at risk for retirement.
"Near-term, we don't think these municipalities are materially exposed because EFH plans to continue to pay its assessments in a timely manner," the analysts wrote.
"In addition, the State of Texas (Aaa stable) is paying close attention through its Attorney General's office, so EFH's desire for a speedy restructuring makes the timely payments to these municipalities more likely and more critical," the analysts added. "Still, over time, with new ownership, we'd expect to see TCEH look to continue to lower its property tax burdens, which it's been doing for the past few years."
Emissions from coal-fired power plants also came to the forefront April 29 when the U.S. Supreme Court ruled in favor of the Environmental Protection Agency's authority to regulate cross-state pollution. The 6-2 vote went against Texas, which has fought the federal government over several environmental regulations.
Texas was one of several states, joined by industry and labor groups, that had sued the Environmental Protection Agency over the Cross-State Pollution Rule in 2011.
The Supreme Court ruling means that Texas and 26 other "upwind" states in the South, Midwest and Appalachia will have to reduce some of their emissions that contribute to air pollution in East Coast states.
