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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
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
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
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
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.
Corporate Finance Group
Moody's Investors Service
Michael G. Haggarty
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
No Related Data.
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