Ameren (NYSE: AEE) has become the latest company to reduce its exposure to the merchant coal generation market and concentrate more on its regulated utility business.
Days after Dominion (NYSE:D) announced a deal to three merchant fossil plants, including the Kincaid coal plant in Illinois, Ameren said March 14 that it has agreed to divest its merchant generation business, Ameren Energy Resources (AER), to an affiliate of Dynegy (NYSE: DYN). The other major merchant coal plant operator in Illinois, Edison Mission Energy, sought Chapter 11 bankruptcy protection last December and plans to turn its plants over to creditors.
The Ameren generation, marketing and retail business lines are being acquired chiefly by Illinois Power Holdings, a newly-formed non-recourse subsidiary.
Upon closing, Dynegy will own more than 8,000 MW of generating capacity in Illinois, and nearly 14,000 MW nationally. The AER retail and marketing businesses and the following plants are included in the transaction: Duck Creek, Coffeen, E.D. Edwards, Newton, and Joppa, Dynegy said.
All of those are coal plants in Illinois. Genco has a generating capacity of almost 3,300 MW while AERG has assets with a capacity of 1,060 MW.
Dynegy will not be acquiring a trio of Ameren gas-fired plants in Illinois currently owned by Ameren Genco. Ameren is retaining them, with an eye toward selling them soon on the open market.
The deal with Dynegy should close in the fourth quarter. Ameren said it no longer considers merchant power a core part of its business. The transaction should remove much volatility from Ameren’s balance sheet, the company said.
One analyst sees benefit for both companies
“We view the transaction positively for both Dynegy and Ameren, as it continues to wring savings out of the business, while achieving stated strategic objectives for both companies,” said UBS utility analyst Julien Dumoulin-Smith.
“We believe market power issues could prove a real issue” for regulatory approval, the UBS analyst added. The transaction could also be a blow to any chances for Ameren to join PJM, UBS said.
AER consists primarily of Ameren Energy Generating Co. (Genco), including Genco’s 80% ownership interest in Electric Energy; AmerenEnergy Resources Generating (AERG); and Ameren Energy Marketing.
“Divestiture of the merchant generation business will position Ameren as a company focused exclusively on its rate-regulated electric, natural gas and transmission operations, clarifying our strategic direction and value proposition to investors,” said Thomas Voss, chairman, president and CEO of Ameren. “We expect that this transaction will reduce business risk and improve the predictability of our future earnings and cash flows, which is expected to strengthen Ameren’s credit profile and support Ameren’s dividend.”
Dynegy builds scale through transaction
“The acquisition of AER is expected to create significant value for Dynegy shareholders by building upon our existing scale in one of our key markets with assets similar to our Illinois-based CoalCo portfolio,” said Dynegy President and CEO Robert Flexon.
Total value benefits associated with the divestiture are estimated to be approximately $900m for Ameren. This includes removal of the $825m principal amount of Genco senior notes from Ameren’s consolidated balance sheet and an estimated $180m, 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 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 $25m Dynegy Inc. guarantee, for up to 24 months for certain existing contracts. Ameren will receive no cash proceeds as a result of this transaction.
Prior to 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 divesture transaction, subject to approval by FERC.
Ameren’s Voss said Elgin and Gibson City are peakers whereas Grand Tower is a combined-cycle plant serving the Midwest ISO region.
This Ameren affiliate will initially pay Genco the greater of $133m or the appraised value of these assets. Should these assets be sold within two years of the divestiture, the after-tax proceeds realized in excess of the initial amount paid will be due to Genco. Ameren plans to put the three gas-fired energy centers up for sale as soon as reasonably practical.
Ameren said it plans to start actively marketing those three plants as soon as possible. Ameren had said in December that it wanted to exit merchant generation.
This buy will add to what is already a large coal position in Illinois for Dynegy. Its current coal plants in the state, with net summer ratings, are:
- Baldwin, 1,800 MW;
- Havana Unit 6 (Units 1-5 are retired), 441 MW;
- Hennepin, 293 MW; and
- Wood River Units 4-5 (Units 1-3 are retired), 446 MW.
The Dynegy Coal segment used to include the gas-fired Oglesby and Stallings facilities in Illinois, with a combined 150 MW of capacity, but they were retired as of Jan. 7.
The merchant coal-fired plants of Ameren are:
- Newton, 1,215 MW;
- Joppa, 1,002 MW (full plant output, Genco controls 80% of Joppa parent Electric Energy); and
- Coffeen, 895 MW.
- E.D. Edwards, 650 MW; and
- Duck Creek, 410 MW.