Fitch Ratings has placed Ameren Energy Generating Co.'s (Genco) ratings on Rating Watch Positive following the announcement by Ameren Corp. (AEE), Genco's ultimate parent company, that it has entered into a definitive agreement to divest its merchant generation business, Ameren Energy Resources Company (AER), to an affiliate of Dynegy Inc. (Dynegy). The transaction is expected to close in the fourth quarter of 2013. Fitch has also affirmed the ratings of AEE and its two regulated utility subsidiaries, Union Electric Co. (UE) and Ameren Illinois Co. (AIC). The Rating Outlook remains Stable.
The transaction bears no impact on the credit ratings of UE and AIC. Refer to Fitch's press release 'Fitch Downgrades Ameren Genco to 'CC'; Revises Ameren Illinois' Outlook to Stable' dated Jan. 28, 2013 for Fitch's rationale on the credit ratings and Outlook of UE and AIC.
AEE has estimated the net total value benefits associated with the announced divestiture to be approximately $900 million. It includes removal of the $825 million principal amount of Genco senior notes from AEE's consolidated balance sheet and an estimated $180 million, at present value, of tax benefits expected to be substantially realized in 2015. AEE expects to record an after-tax write-off in the range of $300 million in the first quarter of 2013 related to the divestiture.
KEY RATING DRIVERS
The Watch Positive on Genco's ratings reflects Fitch's view that, under Dynegy's ownership, the risk of significant loss from carrying Genco's debt has reduced for Genco's bond holders. AEE had stated in past announcements that it had considered restructuring of Genco's debt a possibility, which could have negatively impacted bond holders.
Fitch expects the transaction to provide incremental liquidity to Genco that should allow the firm to meet its business obligations in the near-term and minimize pressure on cash flows. Genco's expected liquidity at closing amounts to $203 million in cash, including $133 million from the exercise of the put option agreement between AEE and an affiliate, and approximately $60 million for general corporate purposes. Further supporting Genco's liquidity profile is net working capital at closing estimated at $160 million.
As additional financial support, AEE has committed to provide guarantees and collateral support for various Genco's financial contracts secured by AER assets for up to 24 months, and supported by a $25 million guarantee from Dynegy.
Genco's cash flows also stand to benefit from the expected sale of AEE's three natural-gas fired plants which AEE acquired upon execution of the put option agreement. Should the assets be sold within two years of the divestiture, the after-tax proceeds realized in excess of the $133 million initially paid will be due to Genco.
Fitch's rating concerns revolve around the capacity of Genco to fund capital expenditures related to the installation of pollution control equipment at the Newton plant, which is expected to ramp up in 2018 and 2019. Dynegy estimates the total cost of the project to be approximately $500 million. Approximately $240 million was spent as of Dec. 31, 2012.
Another rating concern relates to the ability of Genco to repay/refinance $300 million of long-term debt that matures in 2018. A significant recovery in power prices will be critical for Genco to successfully address its capex and debt obligations, in Fitch's view.
Successful closing of the transaction under the terms as currently stipulated would likely lead to a one-notch upgrade at Genco.
The transaction is subject to various regulatory approvals, including from the FERC, and the Illinois Pollution Control Board for the transfer of the variance to the Illinois Multi-Pollutant Standard that was granted to AER in September 2012. The variance delayed compliance with the Illinois standard from 2015 to 2020.
Fitch considers the divestiture from the merchant business to be credit positive to AEE as it significantly lowers the company's business risk and allows it to focus on growing its more stable and predictable regulated utility businesses.
Fitch notes that the merchant divestiture does not provide immediate cash benefits to AEE, and the firm retains some level of financial exposure in the near term to Genco, mainly due to various guarantees and other form of financial support AEE has committed to provide as part of the transaction. AEE will continue to retain existing pension obligations of AER, estimated at approximately $75 million pre-tax.
Fitch does expect the removal of the merchant business to strengthen
AEE's credit protection measures, and a successful closing of the
transaction could lead to a rating action at AEE. AEE's credit
protection measures are solid for the 'BBB' rating category, with
FFO-to-interest expense of 4.6x and FFO-to-debt, 24.2%, for the year
ended Dec. 31, 2012.
Positive Rating Actions:
AEE: Stronger credit protection measures resulting from the exit of the merchant business could result in a positive rating action.
UE: No positive rating action is contemplated at this time.
AIC: A constructive rate order in AIC's next FRP proceeding that indicates less regulatory uncertainty could lead to a one-notch upgrade.
Genco: successful completion of the transaction under the terms as
currently stipulated would likely lead to a one-notch upgrade
Negative Rating Actions:
AEE: Adverse rate orders at the utilities could pressure the ratings.
UE: Deterioration of the regulatory environment in Missouri could lead to a rating action. The inability to earn a return of and on capital investments or to recover capital costs on a timely basis.
AIC: Unfavorable rate outcomes in future annual FRP proceedings and the inability to recover operating costs and capital investments on a timely basis would have a negative effect on credit protection measures.
Genco: A negative rating action is unlikely given Genco's current rating levels and the placement of ratings on Watch Positive.
Fitch has taken the following ratings actions:
The following ratings were placed on Rating Watch Positive:
Ameren Energy Generating Company
--IDR at 'CC';
--Senior unsecured debt at 'CCC-/RR3'.
Fitch has affirmed the following ratings with a Stable Outlook:
--IDR at 'BBB';
--Senior unsecured at 'BBB';
--Commercial paper at 'F2';
--Short-term IDR at 'F2'.
Union Electric Company
--Long-term IDR at 'BBB+';
--Secured debt at 'A';
--Senior unsecured debt at 'A-';
--Preferred stock at 'BBB';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
Ameren Illinois Company
--Long-term IDR at 'BBB-';
--Secured debt at 'BBB+';
--Senior unsecured debt at 'BBB';
--Preferred stock at 'BB+';
--Short-term IDR at 'F3';
--Commercial Paper at 'F3';
--Senior secured pollution control revenue refunding bonds series 1998B issued by the Illinois Development Finance Authority at 'BBB+';
--Senior unsecured pollution control revenue refunding bonds series 1993C-1 issued by the Illinois Development Finance Authority at 'BBB'.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Utilities' (May 3, 2012);
--'Rating North American Utilities, Power, Gas, and Water Companies' (May 16, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Utilities
Rating North American Utilities, Power, Gas, and Water Companies
Philippe Beard, +1-212-908-0242
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Robert Hornick, +1-212-908-0523
Glen Grabelsky, +1-212-908-0577
Brian Bertsch, +1-212-908-0549
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