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04 Oct 1999
MOODY'S DOWNGRADES THE RATINGS OF CILCORP (TO Baa2 FROM A1) AND THE RATINGS OF CENTRAL ILLINOIS LIGHT COMPANY (TO A2 FROM Aa2) DUE TO PENDING ACQUISITION BY THE AES CORPORATION; ALSO ASSIGNS Baa2 SENIOR RATING TO THE ACQUISITION DEBT AT MIDWEST ENERGY, I
Moody's Investors Service has downgraded the security ratings of CILCORP Inc. (Senior Unsecured Debt to Baa2 from A1) and its principal subsidiary, Central Illinois Light Company (CILCO) (Senior Secured Debt to A2 from Aa2) due to the pending merger with The AES Corporation (AES) (Senior Unsecured Debt at Ba1; On Review for Possible Downgrade). This rating action completes a formal review of the securities of CILCORP and CILCO that was initiated on November 23, 1998, following the announcement that the boards of AES and CILCORP had approved a definitive merger agreement. AES' securities remain on review for possible downgrade for reasons unrelated to the CILCORP transaction. The outlook for the CILCORP and CILCO ratings is stable.
Ratings downgraded and removed from review are CILCORP's medium term notes, downgraded to Baa2 from A1; CILCO's first mortgage bonds, secured medium-term notes, and secured pollution control bonds, all downgraded to A2 from Aa2; CILCO's issuer rating downgraded to A3 from Aa3; and CILCO's preferred stock, downgraded to "a3" from "aa3". CILCO's commercial paper rating of Prime-1 is confirmed.
Separately, Moody's has assigned a rating of Baa2 to Midwest Energy, Inc.'s $475 million senior notes and bonds offering. Midwest Energy, Inc. (Midwest) is an intermediate holding company formed to finance a portion of AES' merger with CILCORP. At the time of the merger, Midwest will be merged into CILCORP and these securities will become obligations of CILCORP.
RATIONAL FOR CILCO AND CILCORP RATINGS
The rating downgrade of CILCO reflects the anticipated cash flow drain expected from the utility to service the acquisition debt assumed by CILCORP. CILCO's dividend stream is the principal source of cash flow required to service CILCORP's debt obligations as it is a holding company and has no other source of predictable cash flow. Although CILCO's standalone credit fundamentals remain extremely robust, CILCORP's increased reliance on CILCO's cash flow to service holding company debt obligations limits the utility's long-term financial flexibility and therefore influences its rating.
The rating downgrade of CILCORP reflects the significant debt burden placed on it by the merger financing, which, in turn, reduces interest coverage measures and financial flexibility. Specifically, AES intends to finance the acquisition with $475 million of senior notes and bonds issued by Midwest and at closing, assumed by CILCORP. The existing $65 million in CILCORP debt will rank pari-passu with the acquisition debt. After the merger, CILCORP's consolidated funds from operations interest coverage ratio is expected to be in the 3.0 times range and CILCORP's consolidated total debt is expected to represent approximately 60% of CILCORP's consolidated capitalization. CILCO's anticipated dividends to CILCORP are expected to cover CILCORP's debt service obligations by at least 2.0 times. Both the CILCO and the CILCORP rating are heavily dependent upon each other's activities.
MIDWEST ENERGY RATING ASSIGNMENT
Moody's assignment of a Baa2 to Midwest Energy, Inc.'s $475 million senior notes and bonds offering reflects the high degree of leverage at the holding company; the structural subordination of CILCORP's debt relative to obligations at CILCO; the reliance on CILCO's dividends for debt service; the very stable outlook for CILCO's business, given its low cost structure and its attractive competitive position relative to other midwestern utilities; the degree of ring fencing provisions which helps to insulate the credit quality of CILCORP from the credit quality of AES; and the structural enhancements within the indenture which enable the debt to be secured by the stock of CILCO.
Under the terms of the merger agreement, AES will pay shareholders of CILCORP $65.00/ share or approximately $886 million. Including financing costs and fees, the total consideration for the acquisition is expected to approximate $937 million. Proceeds from this offering will be used to provide approximately 51% of the total consideration. The remaining $462 million will be provided by AES in the form of equity. At the time of the merger, Midwest will be merged with CILCORP, a bankruptcy remote holding company, and CILCORP will survive as a wholly owned subsidiary of AES. Obligations under the senior notes and bonds offering, which are being sold in two tranches, will rank pari-passu to approximately $65 million of senior debt existing at CILCORP at financial closing.
The indenture will contain a number of conditions, which insulate the credit from the activities of its parent, AES and help to provide additional credit enhancement. Specifically, AES must appoint one independent director at CILCORP, whose vote must be obtained in advance for creditor rights issues. In addition, CILCORP must maintain an arms length relationship with AES, including paying its own liabilities from its own funds and not assuming any liability for obligations of AES. The indenture will also contain specific restrictions on CILCORP's ability to upstream dividends to AES including meeting either a rating agency test or a leverage and interest coverage test. In addition, there are restrictions placed on the incurrence of additional debt at CILCORP as well as restrictions on CILCORP's future business activities.
The indenture will also allow CILCORP creditors to become secured by the stock of the utility. Under the indenture, CILCORP's obligations will be secured by the stock of CILCO when all existing CILCORP notes and bonds are repaid on or prior to January 31, 2002, the last date in which CILCORP's existing notes and bonds are due. Collectively, these structural enhancements serve to further ring fence CILCORP and CILCO from the activities at AES and provide collateral protection for CILCORP's obligations.
The closing of the senior notes and bonds will occur simultaneously with the closing of the merger.
IMPACT ON AES RATINGS
Moody's views the CILCORP acquisition as being neutral to the ratings of AES. Although the acquisition will provide a predictable source of cash flow to the parent, the contribution is expected to be modest relative to the size of AES' other business ventures. AES' securities remain on review for possible downgrade where they were placed on August 18, 1999 following the company's agreement with National Power to acquire the Drax Power Station for GBP 1.875 billion or approximately US $3.0 billion.
CILCORP, formed in 1985 and headquartered in Peoria, Illinois, is an energy services company with assets of $1.3 billion whose largest subsidiary, CILCO, is a gas and electric utility serving approximately 200,000 retail customers in Central Illinois.
Headquartered in Arlington, Virginia, AES is a leading global power company that currently owns or has an interest in ninety power facilities totaling over 32,000 megawatts in the United States, Canada, Australia, Argentina, Brazil, Dominican Republic, Pakistan, the Netherlands, Hungary, Kazakhstan, Mexico, China, and the United Kingdom. AES also distributes electricity to nearly 13 million customers.
No Related Data.
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