AES gets outside funding help for Indiana utility’s clean-air program

AES Corp. (NYSE: AES) has entered into an agreement with La Caisse de dépôt et placement du Québec (CDPQ), a long-term institutional investor headquartered in Quebec, Canada, to sell a piece of IPALCO Enterprises Inc., the parent of regulated utility Indianapolis Power & Light.

CDPQ will purchase 15% of AES US Investments Inc., a wholly-owned subsidiary of AES that owns 100% of IPALCO Enterprises, for US$244m. In addition, CDPQ will invest approximately US$349m in IPALCO through 2016, in exchange for a 17.65% equity stake, funding existing growth and environmental projects at Indianapolis Power & Light (IPL).

After completion of these transactions, CDPQ’s direct and indirect interests in IPALCO will total 30%, AES will own 85% of AES US Investments, and AES US Investments will own 82.35% of IPALCO. There will be no change in management or operational control of AES US Investments or IPALCO as a result of these transactions.

“We are pleased to announce this strategic partnership with CDPQ, which will support IPL’s strong investment program in gas-fired generation and environmental upgrades,” said Andrés Gluski, AES President and Chief Executive Officer, in a Dec. 15 statement. “These transactions are in line with our demonstrated ability to incorporate financial partners at the business- and project-level. We look forward to working with CDPQ on additional partnering opportunities in the United States and other select countries in the Americas.”

“This investment perfectly fits our profile as a long-term investor in the infrastructure sector,” said Macky Tall, CDPQ Senior Vice President, Private Equity and Infrastructure. “Moreover, this partnership opens new opportunities with AES across the Americas. AES is well established in markets such as Mexico, Colombia, Chile and Brazil and we look forward to working with AES on other key projects.”

IPL is completing a US$1.4bn capital expenditure program to comply with environmental regulations and meet the future needs of its customers, including retrofits to some coal-fired capacity, conversion to natural gas of other coal capacity and a new gas-fired power plant. This capital expenditure program will be funded with IPL’s existing capital structure of approximately 45% equity and 55% debt. As of Sept. 30, 2014, AES has already funded US$156m of the equity commitment.

The first US$349m of the remaining equity amount will be funded entirely by CDPQ, an additional US$62m is expected to be invested by AES and CDPQ proportionally, and the remainder is expected to be funded by cash from operations at IPL.

This program includes the previously approved projects to comply with the federal Mercury and Air Toxics Standards (MATS), construct the 671-MW Eagle Valley combined cycle gas turbine plant, and convert 200 MW from coal to natural gas. It also includes projects to comply with wastewater treatment requirements and convert an additional 410 MW from coal to natural gas, which are pending regulatory approval. After completion of this capital expenditure program, IPL’s coal capacity will decrease to approximately 44% in 2017, from 74% today.

Subject to customary regulatory approvals, including from the Federal Energy Regulatory Commission and the Committee on Foreign Investments in the United States, these transactions are expected to close in first half 2015.

La Caisse de dépôt et placement du Québec is a long-term institutional investor that manages funds primarily for public and parapublic pension and insurance plans. As at June 30, 2014, it held C$214.7bn in net assets. As one of Canada’s leading institutional fund managers, La Caisse invests in major financial markets, private equity, infrastructure and real estate, globally.

Fitch Ratings said Dec. 15 that it doesn’t view this move favorably, since it takes away a chunk of the future upside of the most stable business for AES, which is the regulated Indianapolis Power & Light subsidiary.

“Management’s decision to dilute its ownership in IPALCO was not expected by Fitch, as IPALCO is perceived as a core holding for AES,” said Fitch. “Equity investment in IPL to partially fund its large capex program, which is pre-approved by the regulator and will earn an attractive return on equity (ROE), would have increased AES’ regulated mix of earnings once the assets started earning a regulated return. Even if AES reduces holding company debt from the sale proceeds it receives from CDPQ, Fitch believes the deleveraging is not commensurate with the changing business mix of AES. This move also raises concerns about future cash flow forecasts falling below Fitch’s expectations and/or management’s plans to disproportionately increase investments in higher risk businesses or increase shareholder distributions.”

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.