Ameren to Divest Merchant Biz - Analyst Blog
Ameren Corporation ( AEE ) announced that it has entered into a definitive agreement to divest its merchant generation business, Ameren Energy Resources Company or AER, to an affiliate of Dynegy Inc. ( DYN ). AER consists primarily of Ameren Energy Generating Company or Genco, including Genco's 80% ownership interest in Electric Energy, Inc.; AmerenEnergy Resources Generating Company or AERG; and Ameren Energy Marketing Company.
Total value benefits associated with the divestiture are estimated to be approximately $900 million for Ameren. This includes removal of the $825 million principal amount of Genco senior notes from Ameren's consolidated balance sheet and an estimated $180 million, at present value, of tax benefits expected to be substantially realized in 2015. These benefits are partially offset by transaction-related costs and liabilities retained by Ameren. These liabilities include retention of certain employee retirement obligations.
In addition, Ameren said it will retain Genco's Meredosia and Hutsonville energy centers, which are no longer in operation, and related obligations. Further, Ameren will provide guarantees and collateral support, secured by AER assets and a $25 million Dynegy guarantee, for up to 24 months for certain existing contracts. Ameren will receive no cash proceeds as a result of this transaction.
Genco's existing senior notes will remain outstanding after the transaction closes and will continue to be solely obligations of Genco.
Before entering into the divestiture agreement, the existing Genco put option agreement was amended and exercised. As a result, an affiliate of Ameren that is not a member of the divested group will acquire the Elgin, Gibson City and Grand Tower gas-fired energy centers prior to completion of the divestiture transaction. The agreement also provides that the buyer will honor collective bargaining agreements for AER union employees and provide those AER management employees who continue to work for the buyer with competitive pay and benefits.
Ameren also expects to record an after-tax charge to earnings estimated to be in the vicinity of $300 million to write down the carrying value of the divested business and transaction-related costs. The transaction is expected to be completed in the fourth quarter of 2013.
The targeted synergies, along with the current forward market for natural gas prices and Dynegy's associated view on forward power and capacity prices, are expected to result in AER being accretive to Dynegy's adjusted EBITDA in 2014 and to free cash flow by 2015.
St. Louis-based Ameren Corporation is a holding company which operates in the generation and distribution of electricity and natural gas to residential, commercial, industrial and wholesale end markets in Missouri and Illinois. Through its utility subsidiaries the company distributes electricity to 2.4 million customers and natural gas to approximately 1 million customers in Missouri and Illinois.
Ameren's stable and regulated electric power operations in the Midwest market generate a relatively stable and growing earnings stream. Future growth will be guided by improved plant operations, higher rates in Missouri and Illinois, lower operations and maintenance expenses, and installation of emissions reduction equipment at its generation plants.
Our cautious stance on Ameren takes into account its significant fossil fuel based generating units and uncertainty about the rate of recovery of the economy. To comply with state and federal regulations, the company has to invest a significant chunk to reduce emissions from its generation assets, including installation of selective catalytic reduction and overfire air to control nitrogen oxide emissions and the use of activated carbon injection to control mercury emissions.
Given these headwinds, we believe that Ameren's current valuation adequately reflects its fairly balanced risk/reward profile. As such, we see limited upside from current levels. The company presently retains a short-term Zacks Rank #3 (Hold).
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