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Dynegy's Illinois Power Sale to Reduce '04 Projected Losses
After faltering in earlier sales attempts, Dynegy Inc. on Tuesday reached agreement to sell its regulated utility Illinois Power Co. (IP) to St. Louis-based Ameren Corp. for $2.3 billion. Dynegy expects to increase its cash flow to $430-$480 million and to record a $65 million net gain on the sale. The sale of IP also will reduce Dynegy's projected 2004 losses by $45-$75 million (12-20 cents/share).
The deal includes all of IP's stock and Dynegy's 20% interest in a 1,086 MW coal-fired Joppa, IL power generation facility that Ameren now operates with a 60% stake.
IP, headquartered in Decatur, IL, owns approximately 40,000 miles of electric transmission and distribution lines, more than 750 miles of natural gas transmission pipe and 7,600 miles of natural gas distribution lines. It serves 590,000 electricity customers and 415,000 natural gas customers across northern, central and southern Illinois.
IP would become an Ameren subsidiary, operating as AmerenIP, and would continue to be headquartered in Decatur. Ameren currently serves more than 970,000 electric and natural gas customers; the IP transaction would give it 2 million Illinois customers. With the acquisition, more than 60% of Ameren's total customer base would reside in Illinois.
"With Ameren's and IP's service territories being contiguous -- even intertwined, this acquisition is an excellent strategic fit for our core electric and natural gas delivery businesses," said Ameren CEO Gary L. Rainwater. Dynegy CEO Bruce A. Williamson added that the arrangement would ensure "continued reliability" for IP's customers.
As part of the transaction, Dynegy also contracted to sell 2,800 MW of capacity and energy to IP for two years beginning in January 2005. The capacity would be provided by Dynegy's Illinois generation facilities and would be used by Ameren to meet IP's customer demand. The contract extends through 2006 and is expected to supply about 75% of IP electric customer requirements. Because bundled retail electric rates are frozen at current levels in Illinois through 2006, the transaction would not have an immediate impact on retail electric rates paid by customers of IP or other Ameren subsidiaries.
Pending approval by the Illinois Commerce Commission, the Federal Energy Regulatory Commission and the Securities and Exchange Commission, the acquisition is expected to close in the fourth quarter of 2004. No special legislation is required to complete the transaction. Credit Suisse First Boston acted as Dynegy's financial adviser.
In connection with Tuesday's announcement, Larry F. Altenbaumer, president of IP, announced his retirement, effective April 1, 2004. Altenbaumer, who has been with IP for more than 30 years, will serve in a consulting role and assist with the approval process over the next several months. Blake Young, who currently serves as chief administrative officer of Dynegy, will assume overall responsibility of IP and the transition to Ameren during the regulatory approval process.
Dynegy intends to use the net cash proceeds from the transaction to reduce debt. Assuming a fourth quarter 2004 closing, the sale is expected to improve Dynegy's liquidity position and be dilutive to earnings beginning in 2005. Based upon its current analysis, the company expects to record the following items in connection with the transaction:
- An impairment of goodwill associated with IP of approximately $90 million, which will be reflected in the fourth quarter 2003. The impairment will increase Dynegy's 2003 net loss to $454 million, up from the $364 million reported on January 29 (see Daily GPI, Jan. 30).
- An after-tax charge of approximately $10 million relating to transaction fees, as well as approximately $5 million in associated tax payments. This charge will be recognized in the first quarter 2004 as required by GAAP; and
- An after-tax gain of approximately $80 million relating to Dynegy's 20% minority interest in the Joppa facility. The gain will be recognized following the transaction's closing.
Standard & Poor's Ratings Service (S&P) affirmed its "B" corporate rating on Dynegy and said its outlook remains negative, following its sale of IP.
"The proposed transaction, if completed, is consistent with Dynegy's strategy to redefine its business because it provides for the elimination of an intercompany note and the transfer of Illinois Power debt to Ameren," said S&P analyst John Kennedy. "Still, even if Dynegy is able to dispose of its Illinois Power obligations, the firm will still be burdened with a massive amount of debt leverage retained from the prior failed business strategy. Notably, the firm's business model is dependent on increasing power prices as a source of improved cash flow needed for debt reduction."
Ameren expects the acquisition to be accretive by 5-10 cents/share in the first year after the transaction closes. Ameren's financing plan includes issuing new Ameren common stock, which in total, is expected to equal at least 50% of the transaction value. Proceeds will be used to pay the cash portion of the acquisition price to Dynegy, reduce some IP debt and pay related premiums after closing and/or reduce current and future debt at Ameren. Ameren also may issue some, or all, of the common stock for the acquisition before closing. Ameren was advised by Goldman, Sachs & Co.
Following the announcement, Ameren on Tuesday also reaffirmed its 2003 earnings guidance range of between $2.90-$3.00/share. The company expects to report 2003 earnings on Feb. 10.
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