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21 May 2008
Approximately $3.5 Billion of Debt Securities Downgraded
New York, May 21, 2008 -- Moody's Investors Service downgraded the long-term debt ratings
of Union Electric Company (d/b/a AmerenUE; Issuer Rating to Baa2
from Baa1). The rating outlook is stable. Moody's
placed the ratings of Ameren Corp. (Ameren) and AmerenEnergy Generating
Company (AmerenGenco) on review for possible downgrade, including
Ameren's Baa2 Issuer Rating and Prime-2 rating for commercial
paper and AmerenGenco's Baa2 senior unsecured rating. Moody's
also placed Union Electric Company's Prime-2 rating for commercial
paper on review for possible downgrade. Moody's affirmed
the ratings of Central Illinois Public Service Company (d/b/a AmerenCIPS,
Ba1 Issuer Rating); CILCORP Inc. (Ba1 Corporate Family Rating);
Central Illinois Light Company's (d/b/a AmerenCILCO, Ba1 Issuer
Rating), and Illinois Power Company (d/b/a AmerenIP, Ba1 Issuer
Rating) and maintained a positive rating outlook on these four subsidiaries.
"The downgrade of Union Electric Company reflects declining cash
flow coverages; increased operating costs; growing capital expenditures
for environmental compliance, transmission and delivery system reliability;
and higher debt level being incurred to finance these investments",
said Michael G. Haggarty, Vice President and Senior Credit
Officer. Union Electric has experienced higher fuel, purchased
power, and labor costs over the last several years. As a
result, cash flow from operations before working capital adjustments
has fallen from the 30% range as recently as 2004 to slightly under
20% in 2007 and could decline further in coming years. The
utility's capital expenditures are projected to increase by 65%
in 2008 to $1.03 billion from $625 million in 2007
and are expected to remain at elevated levels for at least the next several
years. As a result, the utility's financial metrics
are more likely to remain at levels more in line with the middle range
of the Baa rating category than the high Baa range.
The downgrade also reflects the challenging regulatory environment for
electric utilities operating in the state of Missouri, as Union
Electric is one of the relatively few utilities in the country operating
without fuel, purchased power, and environmental cost recovery
mechanisms. The lack of such automatic cost recovery provisions
creates uncertainty regarding the timely recovery of the higher costs
and investments being incurred and leads to significant regulatory lag.
The utility has filed to implement a fuel and purchased power recovery
clause as part of its pending $251 million rate case, which
is not expected to be completed and implemented until March 2009.
The utility requested a similar fuel adjustment clause in its last rate
case and the request was denied. "Longer term challenges
facing the utility include uncertainties associated with pending climate
control legislation, which could have a significant effect on this
predominantly coal fired utility, as well as risks associated with
the construction of a potential second unit at its Callaway nuclear power
station, which is under consideration", said Haggarty.
The review of parent company Ameren's ratings is prompted by the
downgrade of Union Electric, its largest utility subsidiary;
declining consolidated cash flow coverage metrics; and capital expenditures
that are projected to increase substantially to $2.2 billion
in 2008 from $1.4 billion in 2007 and remain high going
forward. The review will focus on the parent company's plans
to finance these capital expenditures; the amount of long-term
debt to be issued at the parent, if any; the magnitude of planned
capital contributions to be made to support capital programs at its subsidiaries;
and the likely impact on coverage metrics, particularly considering
the company's relatively high dividend payout ratio. The
review will also consider Ameren's plans to reduce its reliance
on short-term borrowings under its bank credit facilities,
which have been heavily drawn for much of the last year; the outcome
of pending distribution rate cases at its Illinois utilities; as
well as any progress on the successful implementation of new power procurement
policies and procedures in Illinois. Moody's does not expect
the review to result in more than a one notch downgrade of Ameren's
The review of AmerenGenco's ratings is prompted by increased capital
spending for environmental compliance and an anticipated higher level
of debt issuance at the subsidiary to finance this capital spending over
the next several years. It also reflects the likelihood that controls
on carbon emissions will limit the upside potential of this relatively
small, undiversified, predominantly coal based unregulated
merchant generating subsidiary. The review will focus on the magnitude
of environmental compliance and other capital spending at the subsidiary,
the amount of debt financing that will be necessary to fund these expenditures;
the resulting pressure on the generating company's cash flow coverage
metrics over the long-term; and the liquidity profile and
hedging strategy of the subsidiary going forward. Moody's
does not expect the review to result in more than a one notch downgrade
of AmerenGenco's rating.
The review of Union Electric's Prime-2 rating for commercial
paper is prompted by the review of parent company Ameren's Prime-2
short-term rating and takes into consideration the shared bank
credit facility between the utility and the parent, as well as the
money pool arrangement in place between the two entities, which
allows Union Electric to borrow from Ameren. It also reflects the
close relationship and mutual interdependence between the utility and
the parent company in terms of liquidity and financial support,
as has been most recently demonstrated by a $380 million capital
contribution made by Ameren to Union Electric in 2007 and a $122
intercompany note payable from Union Electric to Ameren outstanding at
March 31, 2008.
The maintenance of a positive outlook on Ameren's Illinois utilities
reflects the potential for modest upward movement in their rating in the
event there is a supportive outcome of their pending distribution rate
cases, resulting in an improvement in some of their relatively low
cash flow coverage metrics; a reduction in high short-term
debt levels, increasing financial flexibility; and the successful
implementation of new power procurement policies and procedures in Illinois.
Ratings downgraded and assigned a stable outlook include:
Union Electric's senior secured debt, to Baa1 from A3;
Issuer Rating; to Baa2 from Baa1; subordinated debt, to
Baa3 from Baa2; and preferred stock, to Ba1 from Baa3.
Ratings placed under review for possible downgrade include:
Ameren's Baa2 Issuer Rating and Prime-2 short-term
rating for commercial paper;
AmerenGenco's Baa2 senior unsecured long-term debt rating;
Union Electric's Prime-2 short-term rating for commercial
Ratings affirmed with a positive outlook include:
Central Illinois Public Service Company's Baa3 senior secured debt,
Ba1 Issuer Rating, and Ba3 preferred stock;
Illinois Power Company's Baa3 senior secured debt, Ba1 Issuer Rating,
and Ba3 preferred stock;
CILCORP, Inc.'s Ba1 Corporate Family Rating;
CILCORP's Probability of Default Rating at Ba1.
Ratings affirmed with a positive outlook/LGD assessments revised include:
CILCORP's senior unsecured debt at Ba2 (LGD5, 82%)
from Ba2 (LGD5, 79%);
Central Illinois Light Company's senior secured debt at Baa2 (LGD2,
20%) from Baa2 (LGD2, 15%); and Ba1 Issuer Rating;
Central Illinois Light Company's preferred stock at Ba2 (LGD4,
59%) from Ba2 (LGD4 51%).
Ratings and Loss Given Default assessments for CILCORP and its subsidiary
Central Illinois Light Company have been determined in accordance with
Moody's Loss-Given Default Methodology. More information
on this methodology can be found at moodys.com/lgd.
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.
Michael G. Haggarty
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
William L. Hess
Corporate Finance Group
Moody's Investors Service
No Related Data.
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