MOODY'S PLACES CILCORP'S AND CILCO'S SECURITIES UNDER REVIEW FOR POSSIBLE DOWNGRADE; ALSO CONFIRMS RATINGS OF AES CORPORATION
Moody's Investors Service placed the credit ratings of CILCORP and its principal subsidiary, Central Illinois Light Company (CILCO) under review for possible downgrade following the announcement by The AES Corporation (AES) and CILCORP that their respective boards of directors approved a definitive agreement to merge.
Ratings under review for possible downgrade are CILCORP's medium term notes rated A1; CILCO's first mortgage bonds, secured medium-term notes, and secured pollution control bonds, all rated Aa2; CILCO's issuer rating of Aa3; and CILCO's preferred stock rated "aa3". CILCO's commercial paper rated P-1 is not under review for possible downgrade.
Separately, Moody's confirmed all of AES's ratings and retained the negative outlook on all of the ratings. Ratings confirmed include AES's senior unsecured bank credit facility rated Baa3; AES's senior subordinated bonds rated Ba1; AES junior subordinated bonds rated Ba2; and the preferred stock of AES Trust I, II and III all rated "ba1".
Under the terms of the transaction, AES will acquire all of CILCORP's 13,610,680 common shares at a price of $65 per share, or approximately $885 million, and CILCORP will become a wholly-owned subsidiary of AES. AES will finance through a holding company that will be financed with 50% debt and 50% equity. Approximately 50% of the equity will be raised by AES as debt and infused into the holding company as equity. CILCO, the utility, will be a indirect wholly owned subsidiary of the acquisition holding company.
The transaction requires the approval of CILCORP shareholders and is subject to regulatory approvals by the Federal Energy Regulatory Commission, the Illinois Commerce Commission and the Securities and Exchange Commission. The United States Department of Justice and the Federal Trade Commission will also review the acquisition. Approvals are expected to be completed by mid 1999.
Scope of CILCORP Review
In the review, Moody's will consider the risks and benefits that may accrue to CILCORP as a result of the proposed merger. The review will delve into the acquisition structure and how the additional acquisition debt affects cash flow coverages and the capital structure at CILCORP and at CILCO. Further, the review will focus on the extent to which cash flows, in the form of dividends from CILCO, will be affected by the additional level of holding company debt that will exist within the new organization, as well as the extent to which such dividends will be used to support the growth opportunities of the merged company, including international project development. The review will further address the regulatory environment in Illinois and the likely reaction of the regulatory bodies to the transaction.
Confirmation of AES's Rating
The rating confirmation of AES securities reflects the addition of approximately $40 million in higher quality stable net cash flow to AES and an opportunity to reap new customer growth within Illinois as the state opens for competition. Management does not view this investment as a fundamental shift in its investment philosophy but rather as an exceptional opportunity. Furthermore, they do not intend to change their capital structure, although there may be some short term lumpiness due to the confluence of this transaction, the acquisition of generating assets from NYSEG, ongoing refinancing and projects in development. The regulatory hurdles that AES will now face should be challenging but not insurmountable. One of the first issues they must tackle will be the Public Utilities Holding Company Act of 1935, under which AES could be deemed a holding company and be forced to divest a portion of its ownership in Qualifying Facilities.
The rating outlook for AES remains negative. While this transaction represents a positive and meaningful incremental addition to cash flow it is not significant enough to offset the lack of stability in cash flows derived from countries like Brazil and Argentina which combined represent roughly 35% of AES Corporations net cash flow.
CILCORP, formed in 1985 and headquartered in Peoria, IL, is an energy services company with assets of $1.3 billion whose largest subsidiary, CILCO, is a gas and electric utility serving approximately 250,000 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 27,000 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.
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