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Rating Action:

MOODY'S DOWNGRADES LONG TERM DEBT RATINGS OF AMEREN CORP (SR. UNSEC. TO Baa1) AND FOUR ILLINOIS SUBS, RATINGS REMAIN ON REVIEW; PLACES AMEREN'S SHORT TERM RATINGS AND UNION ELECTRIC'S RATINGS ON REVIEW FOR POSSIBLE DOWNGRADE

15 Dec 2005

Approximately $2.2 Billion of Debt Securities Downgraded

New York, December 15, 2005 -- Moody's Investors Service downgraded the long term debt ratings of Ameren Corporation (Ameren: senior unsecured to Baa1 from A3); Central Illinois Public Service Company (d/b/a AmerenCIPS: senior unsecured to Baa1 from A2); CILCORP Inc. (senior unsecured to Baa3 from Baa2); Central Illinois Light Company (d/b/a AmerenCILCO: senior unsecured to Baa1 from A3); and Illinois Power Company (d/b/a AmerenIP: Issuer Rating to Baa3 from Baa2). These ratings were initially placed under review on September 30, and remain under review for possible further downgrade. Moody's also placed under review for possible downgrade Ameren's Prime-2 short term rating for commercial paper and Union Electric Company's (d/b/a AmerenUE) long term debt ratings (A2 senior unsecured) and Prime-1 short term rating for commercial paper. The rating of AmerenEnergy Generating Company (Baa2 senior unsecured) is affirmed.

The rating downgrades reflect a difficult political and regulatory environment for electric utilities in Illinois during a period when Ameren's operating utilities in the state are attempting to implement plans for power procurement and are expecting electric rate increases of between 20% and 35% beginning in 2007. Both the Attorney General (AG) and the Governor of the State of Illinois have strongly opposed Ameren's power procurement plan for its Illinois utilities, with the AG filing suit against the Illinois Commerce Commission (ICC) to stop the procurement proceedings. Although the staff and an administrative law judge (ALJ) at the ICC have since endorsed Ameren's power procurement plan, Moody's believes that regulatory risk remains high with regard to the prospects for full and timely recovery of costs incurred by Ameren's Illinois utilities post-2006.

Under the terms of the current regulatory arrangement that is in place until December 31, 2006, rates for electric supply at Ameren's Illinois utilities are capped at below-market rates through contracts with both affiliated and unaffiliated generation companies. Under electric restructuring legislation passed in the state, electric generation rates are expected to change to market-based rates beginning on January 1, 2007. The average price for electricity is currently significantly higher than the generation component that is incorporated in the current rates. Although utilities are usually allowed to recover prudently incurred costs and an eventual settlement on rates is anticipated, Moody's believes that a settlement that results in immediate pass-through of power procurement costs is unlikely due to the large gap between current market prices for wholesale power and existing utility rates, along with strong opposition that has been signaled by several key state government officials.

Ameren has expressed a willingness to consider a rate increase phase-in plan for its Illinois utilities to mitigate rate shock for customers. A lengthy deferral would result in increased debt balances and raise concerns about the ultimate full recovery of costs. The downgrade reflects Moody's expectation that some material deferral of these costs is likely and that the utilities' credit quality will be negatively affected over the intermediate term. Moody's notes that Ameren management has continued to acknowledge the prospect of a potential bankruptcy of its Illinois utilities, most recently during its third quarter earnings call, and has indicated that it is evaluating all the legal and financial steps necessary to prepare for this possibility.

In addition to opposing the power procurement plan, the Governor also took the extraordinary step of removing the Chairman of the ICC in order to name a candidate who had previously filed testimony in opposition to the utilities' procurement plans while acting as the head of the largest state consumer advocate group. Although the Illinois state senate declined to approve this appointment, a new Chairman has not been nominated and there remains considerable uncertainty about the future direction of the commission.

The downgrade of parent company Ameren's ratings reflects the importance of the Illinois utility businesses to its consolidated financial profile, particularly since the acquisition of Illinois Power last year. The Illinois utilities now make up nearly half of Ameren's total utility business. The two notch downgrade of AmerenCIPS' ratings represents a narrowing of the notching among Ameren's Illinois utilities, reflecting Moody's view that Ameren is increasingly operating these utilities as a single system, which are likely to be further integrated following the expiration of their current supply contracts on December 31, 2006 and subsequent changes in the power procurement plan. It also reflects the increased importance of the difficult political and regulatory environment for electric utilities in Illinois as a credit and ratings driver relative to individual differences in each utility's financial ratios.

The review of Union Electric Company's ratings reflects the likelihood that if the operating cash flow of the Illinois utilities declines, Ameren would need to rely on its Missouri operations for a larger share of cash flow and upstreamed dividends to meet parent company obligations than had previously been envisioned. The affirmation of the rating of AmerenEnergy Generating Company considers its competitive, low cost generating portfolio; upside potential beyond January 1, 2007 when contracts to sell power expire and there is potential for the company to benefit from higher market prices; and the company's reduced leverage following the retirement of $225 million of long-term debt on November 1, 2005.

The ratings remain under review pending additional clarity on the eventual resolution of the dispute over rates and market structure. The review will focus on the prospects for a resolution of the on-going dispute, clarity regarding the amount and timing of any related rate increases, the mechanisms for ultimate recovery of the utilities' increased costs and investment outlays, and the regulatory climate for the utilities going forward. Further rating action could occur if the parties fail to make progress on a negotiated settlement over the next two to three months.

Ratings downgraded and remaining under review for possible downgrade include:

Ameren's senior unsecured debt and Issuer Rating, to Baa1 from A3;

Central Illinois Public Service Company's senior secured debt to A3 from A1, senior unsecured debt and Issuer Rating to Baa1 from A2, preferred stock to Baa3 from Baa2, and short-term rating to VMIG-2 from VMIG-1;

CILCORP, Inc.'s senior unsecured debt to Baa3 from Baa2;

Central Illinois Light Company's senior secured debt to A3 from A2; Issuer Rating, to Baa1 from A3; and preferred stock to Baa3 from Baa2;

Illinois Power Company's senior secured debt to Baa2 from Baa1; Issuer Rating to Baa3 from Baa2; and preferred stock to Ba2 from Ba1;

and the shelf rating for the trust preferred securities issued by Ameren Capital Trust I and II to (P)Baa2 from (P)Baa1.

Ratings placed under review for possible downgrade include:

Ameren's Prime-2 short-term rating for commercial paper;

Union Electric Company's A1 senior secured debt, A2 Issuer Rating, A3 subordinate, Baa1 preferred stock, and Prime-1 short-term rating for commercial paper;

and the (P)A3 rating for the shelf registration for trust preferred securities of Union Electric Capital Trust I.

Ameren Corporation is a public utility holding company headquartered in St. Louis, Missouri. It is the parent company of Union Electric Company (d/b/a AmerenUE), Central Illinois Public Service Company (d/b/a AmerenCIPS), CILCORP Inc., Central Illinois Light Company (d/b/a AmerenCILCO), Illinois Power Company (d/b/a AmerenIP), and AmerenEnergy Generating Company.

New York
Daniel Gates
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Michael G. Haggarty
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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