Fitch Rates Union Electric Company's $485MM Sr. Secured Notes 'A'

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating to Union Electric Company's (UE) new $485 million issue of 3.90% senior secured notes due 2042. The Rating Outlook is Stable. The new notes will rank equally with UE's existing senior secured obligations. Net proceeds will be used to provide funding required to complete UE's previously announced cash tender offer to repurchase its outstanding 6.00% senior secured notes and 5.10% senior secured notes due in 2018, and 6.70% senior secured notes and 5.10% senior secured notes due in 2019. UE also expects to use net proceeds from the issuance to refinance its 5.25% $173 million senior secured notes that matured on Sept. 1, 2012.

Key Rating Drivers

Strong Financial Profile:

UE's credit protection measures are strong and expected by Fitch to continue the uptrend of the past two years. Over 2012-2014, Fitch estimates debt/EBITDA to approximate 3.0x, and both EBITDA/interest and funds from operations (FFO)/interest to be in excess of 5.0x. The expected improvement reflects a successful completion of the refinancing plan, which will enhance UE's debt maturity profile and generate interest expense savings, and assumes a tariff increase in 2013.

Missouri Regulation:

UE received a constructive rate order in July 2011 that bolsters earnings power and cash flow. The rate order continues a string of balanced rate decisions for UE. However, regulatory lag continues to be an issue and is likely to preclude UE from earning its allowed return on equity (ROE). Use of an historical test year, a prohibition on allowing construction work in progress in rate base, and an extended rate review period account for the regulatory lag.

Pending Rate Case:

UE filed for a $376 million electric rate increase on Feb. 3, 2012. The rate request is based on a 10.75% ROE and a 52% common equity ratio. The rate request includes a $103 million net fuel increase, 95% of which would otherwise be recoverable through the fuel adjustment clause. The rate request also includes $80 million for recovery of costs associated with UE's energy efficiency program. Fitch's cash flow projections assume a balanced rate outcome. A decision is expected in December 2012, with new rates to be effective in January 2013.

Moderate Capex:

Budgeted capex is moderate and expected by Fitch to be 80%-90% funded with operating cash flow (after dividends) through 2013, alleviating financial pressure on credit metrics during that period. Planned capex totals $3.2 billion over the next five years (2012-2016), with approximately $400 million allocated towards environmental expenditures and $2.8 billion towards infrastructure. Prudently incurred costs should be recoverable from ratepayers.

Ample Liquidity:

Fitch considers UE's liquidity to be adequate. Liquidity needs are supported through the issuance of commercial paper, drawings under UE's credit facility, a corporate money pool, and short-term intercompany borrowings. UE shares an $800 million credit facility with its parent, Ameren Corporation. The credit facility matures in September 2013. There were no credit facility borrowings as of June 30, 2012. Near-term debt maturities are considered manageable with $200 million due in 2013 and $104 million due in 2014.

WHAT COULD TRIGGER A RATING ACTION

Regulatory Risk: An unexpected adverse decision in UE's pending rate case or the inability to recover capital and operating costs on a timely basis could negatively affect the ratings.

Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 8, 2012);

--'Recovery Ratings and Notching Criteria for Utilities' (Aug. 12, 2011);

--'Rating North American Utilities, Power, Gas, and Water Companies' (May 16, 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Recovery Ratings and Notching Criteria for Utilities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=677735

Rating North American Utilities, Power, Gas, and Water Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=625129

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