A Moody's report, Legal Disaggregation Threatens Bondholder Security, warns that bondholders (em previously secured by a blanket lien on substantially all of a utility's property (em may find themselves secured solely by generating assets, whose real market value may be less than the outstanding secured debt. Moody's identifies 14 companies that may spin off transmission and distribution (T&D) assets, retaining generating assets because of indenture restrictions. Another 29 companies have significant flexibility to pursue disaggregation with few restrictions, and could also opt to spin off T&D assets.
According to Susan Abbott, managing director of electric utilities ratings, investors have assumed utilities would remain vertically integrated, balancing the riskier generation business against the more stable T&D businesses. Now, however, regulators are calling for disaggregation in order to address asset concentration and market power issues, while management may demand it to maximize greater shareholder value.
Moody's believes disaggregation will most likely be effected through substitution or swap of properties. Although most of a utility's plant and equipment is pledged as collateral under the mortgage, only about 60 to 75 percent of property is usually used to issue secured debt under the terms of the indenture (i.e., bonded). Property under the lien of indenture may be substituted with unbonded property of equal or greater original cost than the property being replaced. Thus, whole categories of assets could be separated from the lien of indenture, allowing companies to sell specific functions to third parties or trade them among subsidiaries.