In a deal worth $1.4 billion, Ameren Corp. signed a definitive agreement with AES Corp. last week to purchase Illinois-based Cilcorp Inc. for $540 million in cash and $860 million worth of debt and preferred stock. The transaction will make Ameren Illinois’ second largest electric utility, with a combined customer base of 600,000 electric and 400,000 natural gas customers in the state, including 1,200 MW of mostly coal-fired generating capacity.

Ameren, based in St. Louis, will assume Cilcorp debt at closing and pay the balance in cash to purchase the company, which is the parent company of Peoria-based Central Illinois Light Co. Cilco serves about 200,000 natural gas and 200,000 electric customers in Illinois.

The transaction also includes AES-Medina Valley Cogen LLC, a 40 MW gas-fired electric generation plant, which produces electricity, steam and chilled water to sell to Cilco. Cilco then resells plant output to Caterpillar — Cilco’s largest industrial customer. Electric rates will remain frozen at current levels at least until 2004, and existing generation and energy services contracts with non-residential customers will remain in force.

“This acquisition is a natural fit with our core energy growth strategy,” said Ameren CEO Charles W. Mueller. “Cilcorp’s operations are in a service territory and market where we already operate very effectively.” Subsidiary AmerenCIPS supplies electric service to about 325,000 customers and natural gas service to about 170,000 customers in central and southern Illinois. AmerenUE, also a first tier subsidiary, is the largest electric utility in the State of Missouri and supplies electric service to about 1.2 million customers and natural gas service to about 130,000 customers in territories in Missouri and Illinois, including the greater St. Louis area.

The sale by Arlington, VA-based AES is part of the company’s plan announced in February to clean up its balance sheet, which includes selling about $1.5 billion in assets (see Power Market Today, Feb. 20). The company’s overall plan includes restructuring its operations, including a 41% cut in capital expenditures and withdrawing from electricity trading. The company has also been hurt by its operations in Venezuela. AES purchased Cilcorp for $885 million in cash and $412 million in debt in 1999.

“This sale will significantly contribute to the long-term strength of AES’ balance sheet in keeping with our commitment to improve liquidity,” said AES CEO Dennis Bakke.

When the transaction is completed, Cilco would become an Ameren subsidiary, but would remain a separate utility company known as AmerenCILCO. The headquarters of AmerenCILCO will remain in Peoria, where Ameren anticipates maintaining the existing operations center, customer call center, business-to-business and retail marketing groups, plus other support functions.

The transaction, unanimously approved by both companies’ boards of directors, is subject to the approval of the Illinois Commerce Commission, the Securities and Exchange Commission, the Federal Energy Regulatory Commission and the expiration of the waiting period under the Hart-Scott- Rodino Act. No approval is required from shareholders of either company. Ameren was advised on the transaction by Goldman, Sachs & Co.

All three major credit ratings agencies, Moody’s Investor Services, Standard & Poor’s and Fitch Ratings, placed Ameren Corp. on a ratings watch following its announcement. Moody’s placed the company’s debt ratings under review for possible downgrade; S&P put the company on Credit Watch Negative; and Fitch placed the company on Rating Watch Negative.

Moody’s, which is reviewing Ameren’s A2 senior unsecured and issuer ratings and P-1 commercial paper rating, said it has “taken into consideration Cilcorp’s comparatively high leverage and low consolidated coverage ratios, which will weaken the quality of cash flow upstreamed to the parent company Ameren.”

Moody’s also is concerned about the Missouri Public Service Commission (MPSC) staff’s recent recommendation that would reduce subsidiary AmerenUE’s base revenues between $246 million and $285 million (also noted by Fitch). “Moody’s believes a rate reduction at or near the magnitude of the staff’s recommendation would significantly curtail the ability of AmerenUE, Ameren’s largest subsidiary, to upstream dividends to Ameren. Although the MPSC is under no obligation to accept the staff’s recommendation, because of the uncertainty surrounding the ultimate outcome of the rate case, the outlook for AmerenUE’s credit ratings remains negative.”

S&P placed the ratings of Ameren (A plus/A-1) and its subsidiaries Union Electric Co. and Central Illinois Public Service Co. on CreditWatch with negative implications. Ameren’s nonregulated generating subsidiary AmerenEnergy Generating Co. was placed on CreditWatch with positive implications. S&P also changed the CreditWatch implications on its ratings of AES’ subsidiary Cilcorp and CILCO to positive from developing.

Fitch wrote, “Ameren has indicated it plans to finance the roughly $500 million cash portion of the transaction with a significant amount of new equity, although the amount, type and timing is uncertain. Assuming 100% equity financing for the cash portion of the acquisition, the transaction finance structure equates to about 60% debt and 40% equity. The rating action also considers the substantial rate reduction recommended by the staff of MPSC.”

Fitch said that “from a strategic perspective, the acquisition is viewed favorably.” It also believes the approval process for the transaction will take 12 months. However, based on the MPSC staff’s recommended rate reduction in AmerenUE’s rate case, Fitch in January changed the rating outlook to negative pending the rate decision, expected by year’s end. The ratings of Cilcorp and CILCO remain on Rating Watch Evolving, said Fitch.

Also, regarding AES, Fitch wrote, “consummation of the transaction will provide some liquidity to AES, but it does not change AES’ credit profile significantly. The ratings outlook for AES remains negative, reflecting the significant refinancing risk faced by the company in 2003.”

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