NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded the long-term Issuer Default Rating (IDR) of Ameren Illinois Company (AIC) by one notch to 'BBB+' from 'BBB'. In addition, Fitch has affirmed the long-term IDRs of Ameren Corp. (AEE) and Union Electric Company (UE) at 'BBB+'. The Rating Outlook is Stable for all three entities. A full list of ratings is shown at the end of this release.
AIC's ratings upgrade reflects:
--An improved regulatory compact illustrated by the constructive outcome in the most recent Formula Rate Plan (FRP) proceeding;
--Growing investments in FERC-regulated investment projects that provide attractive returns and timely cost recovery;
--Sustained robust financial performance with credit metrics that are in line with the 'BBB+' rating level;
--Adequate Liquidity.
KEY RATING DRIVERS
AEE
Low-Risk Business Model: AEE's credit profile reflects the relatively stable and predictable operating cash flows of its two regulated utility subsidiaries, UE and AIC, and the financial support it receives from them in the form of dividends for the payment of corporate expenses and dividends to common shareholders. The utilities operate under regulatory frameworks that provide for recovery of fuel and purchased power expenses, minimizing commodity price exposure. The ownership of a FERC-regulated transmission business, Ameren Transmission Co. of Illinois (ATXI), provides further uplift to AEE's financial profile, as management projects healthy rate base growth in the business over the next five years. Although AEE currently has no direct parent long-term debt, Fitch expects a modest uptick in AEE's short-term debt to initially fund ATXI's investments. It is Fitch's assumption that parent short-term debt levels would then normalize once ATXI is of adequate size to fund its own operations.
While AEE will retain some cash flow exposure to the former merchant business (Genco) until the end of 2015 in the form of credit support and guarantees for various financial contracts, Fitch does not expect the company to incur any significant cash outflows associated with these guarantees and has not factored any related cash flow exposure in its analysis. AEE had approximately $114 million of guarantees outstanding associated with Genco at year-end 2014. AEE's Stable Outlook assumes a sustained strong financial profile, solid liquidity, and a conservative financing strategy to support projected rate base growth.
Rising but Manageable Capex: AEE's projected capex program is significantly higher than its historical norm over the next five years. Forecasted capex ranges between $8.55 billion and $9.25 billion over 2015-2019, compared with approximately $6.46 billion over the previous five years. Planned capex includes about $2.3 billion on FERC-regulated transmission investments, including $1 billion in AIC's transmission business and $1.3 billion at ATXI for the construction of the Illinois Rivers project and other projects. Fitch estimates ATXI's EBITDA will contribute 7% of consolidated EBITDA by 2017 up from 1% in 2014.
FERC's credit-supportive rate design provides for timely recovery of capital investments via annual rate reconciliations, permits inclusion of CWIP in rate base which supports cash flows during the construction phase, provides for a healthy 56% equity component in the capital structure and a currently attractive 12.38% ROE for MISO projects. The 12.38% MISO ROE is the subject of two FERC complaint proceedings with a decision expected in late 2015.
Fitch expects AEE to finance projected capex in a conservative manner, primarily using internally generated funds and debt financing to align to an approximate 50% debt to equity target capital structure. Fitch expects AEE to fund ATXI capex through equity contributions of approximately $485 million and via use of inter-company borrowings that Fitch estimates to amount to roughly $500 million over 2015-2017. Fitch anticipates management to consider issuing long-term debt at ATXI in the back end of the forecast.
Solid Credit Metrics: Tariff increases at the utilities, continued cost control, incremental earnings stemming from transmission investments that receive favorable FERC regulatory treatment, and moderate consolidated leverage should continue to support a sound credit profile, in Fitch's view. Fitch forecasts the ratios of adjusted debt/EBITDAR, FFO lease-adjusted leverage, and FFO fixed charge coverage to average 3.5x, 3.2x, and 5.5x, respectively, over 2015-2017. FFO-based metrics include the positive effect of sizeable tax benefits stemming from prior Genco ownership and previous capital investments.
Continued regulatory support for projected capital investments will be critical toward maintaining AEE's existing credit metrics and rating levels. AIC had a constructive outcome in its most recent FRP updated filing, receiving close to 100% of its original rate request, reflecting what Fitch believes to be an improved regulatory compact in Illinois under the FRP framework.
NOLs/Tax Benefits Provide Financial Flexibility: AEE plans to leverage its favorable cash flow position to support utility and ATXI's investments over the next few years. Robust cash flows rely on the availability of approximately $715 million of consolidated tax benefits at year-end 2014, including approximately $440 million at AEE, that management expects to realize into 2017, and the solid financial profile of AIC and UE, which provide steady dividend distributions to AEE and will not require any significant parent equity infusions over the 2015-2017 forecast period.
AIC
Constructive Regulatory Developments: Fitch's greater confidence level in the effectiveness and constructive nature of the FRP framework is the main catalyst for the ratings upgrade. The most recent electric rate order was supportive of credit quality as AIC received a $204 million electric rate increase effective January 2015, representing 99% of the amount initially requested by the utility. The order was based on a 9.25% ROE and a 51% common equity ratio. A constructive decision also was reached in the rate case of Commonwealth Edison Co., AIC's Illinois peer utility, where it received close to 95% of the initial rate request.
These favorable outcomes speak for a noticeable improvement in the Illinois regulatory compact under the FRP framework in Fitch's view, following some initial headwinds when the statute was first implemented in 2011. Sustained regulatory support will be key to maintaining AIC's solid credit profile as capex remains elevated. Fitch views the bill that was recently voted by the state assembly to extend the FRP rate design to 2019 from 2017 as providing further reassurance that the framework will be supportive of credit quality through long-term regulatory predictability. Fitch expects a balanced rate decision in AIC's pending gas rate case where the utility is requesting a $53 million base rate increase based on a 10.25% ROE, a 50% equity ratio, and a 2016 future test year. AIC received near 70% of its initial rate request in its most recent gas rate proceeding.
Elevated but Manageable Capex Program: AIC expects capex to range between $3.68 billion and $3.97 billion over 2015-2019, representing near 44% of consolidated capex over that time period. By contrast, AIC spent approximately $2.6 billion on capital investments over the historical period 2010-2014. Electric capex growth is earmarked towards investments in base infrastructure, including in the context of the formula-based regulatory framework. Between 2012 and 2021, AIC is required to invest $625 million in capital projects incremental to its average electric delivery service capital investments of $228 million for calendar years 2008 to 2010 to modernize its distribution system, including the installation of advanced electric meters and distribution system automation. The capital spending plan towards infrastructure is aligned with the Illinois Energy Infrastructure Modernization Act (IEIMA).
AIC is also projected to spend sizeable capex in the gas business, supported by the implementation of the QIP rider effective in 2015, mitigating the lag to recover spent capex on gas infrastructure. A $1 billion of capex also targets investments in base transmission (reliability) and in the context of the multi-value MISO projects developed by ATXI. AIC's transmission investments represent 11% of consolidated capex over the next five years.
Fitch expects AIC to fund capex using a balanced mix of internal cash flows, long-term debt issuances, and a relatively modest parent equity infusion in 2015. Internal cash flows are projected to fund about 75% of capex requirements over 2015-2017.
Sustained Robust Financial Performance: AIC's projected credit metrics continue to be in line with Fitch's target ratios for the 'BBB+' rating level. Fitch forecasts the ratios of adjusted-debt/EBITDAR, FFO lease-adjusted leverage, and FFO fixed charge coverage to average 3.3x, 3.4x, and 4.7x, respectively, over 2015-2017. Fitch's projections assume that AIC receives timely and adequate recovery of planned capital investments, and reflect increasing allowed ROEs over the forecast period, under the expectation of a rising interest rate environment. Under the Illinois FRP framework, the ROE computation is formulaic and is derived by adding 580bps to the annual average of the 30-year U.S. treasury yield.
Adequate Liquidity: Fitch considers liquidity to be adequate. AIC has access to a total of $800 million of credit capacity under a $1.1 billion bank credit facility that expires in Dec. 2019. AIC shares the credit facility with its parent AEE, which has a sub-borrowing limit of $500 million. At Dec. 31, 2014, AIC had $32 million of CP borrowings outstanding and $1 million of cash and cash equivalents. Additional liquidity is provided by an inter-company money pool that provides for short-term cash and working capital requirements. AEE is a lender only in the money pool. AIC had $15 million of borrowings outstanding under the pool at Dec. 31, 2014. There are no long-term debt maturities until $129 million due in 2016 and $250 million due in 2017.
UE
Pending Electric Rate Case: UE is requesting an electric base rate increase of approximately $180 million based on a 10.4% ROE and 51.8% common equity ratio. The request is composed of recovery of $100 million of net energy costs and about $80 million of other costs, including the inclusion in rate base of the Callaway new reactor vessel head project and environmental expenditures at the Labadie plant completed in 2014. In February 2015, the staff recommended a base rate increase of $89 million based on a 9.25% ROE. A final decision by the MPSC is expected by May 2015 with new rates effective on May 31, 2015. Although not anticipated by Fitch, a less than balanced rate decision would likely bear no impact on ratings, given the relative headroom in credit metrics.
Regulatory lag, due to the use of an historical test year in setting rates, the absence of CWIP in rate base, and an extended rate review period, continues to remain a credit concern. Fitch believes the Missouri compact has nonetheless improved in recent years, featuring various trackers for major operating expenses and a fuel adjustment clause that contributes to earnings predictability. Furthermore, UE's last two electric rate cases resulted in rate increases that were close to 80% of initial requests.
Manageable Capex Program: Management estimates capex to range between $3.58 billion and $3.89 billion over 2015-2019 (approx. 2% annual rate base growth), including $710 million projected in 2015. By contrast, UE spent $3.22 billion over the 2010-2014 time frame. Capital spending is earmarked primarily towards the maintenance and upgrade of UE's generation, transmission, and distribution systems. Capex also includes modest investments to comply with existing environmental regulations. Management estimates environmental capex to be between $350 million and $400 million through 2019. UE typically recovers environmental spending via rate case proceedings or the use of accounting authority orders. Fitch does not anticipate any cost disallowances associated with projected environmental capex.
Robust Credit Metrics: Fitch expects UE's credit metrics to remain robust for the current rating category over the forecast period, supported by a base rate increase in 2015 and efficient cost control of base O&M. Fitch forecasts adjusted debt/EBITDAR, FFO lease-adjusted leverage, and FFO fixed charge coverage to average 3.2x, 3.2x, and 5.2x, respectively, over 2015-2017. For the fiscal year ended Dec. 31, 2014, the ratios of adjusted debt/EBITDAR, FFO lease-adjusted leverage, and FFO fixed charge coverage were 3.0x, 2.9x, and 5.8x, respectively. The modest projected decline in cash flow measures primarily reflects the expiration of bonus depreciation in 2014.
Fitch expects UE to finance capex in a conservative manner with a balanced mix of internally generated cash flows and long-term debt issuances. Fitch estimates internal cash flows to fund near 95% of capex over the next three years.
Adequate Liquidity: UE has access to a total of $800 million of credit capacity under a $1 billion bank credit facility that expires in Dec. 2019. UE shares the credit facility with its parent AEE, which has a sub-borrowing limit of $700 million. At Dec. 31, 2014, UE had $97 million of CP borrowings outstanding and $1 million of cash and cash equivalents. Additional liquidity is provided by an inter-company money pool that provides for short-term cash and working capital requirements. AEE is a lender only in the money pool. UE had no borrowings outstanding under the pool at Dec. 31, 2014. Long-term debt maturities are considered manageable with $120 million due in 2015 and $266 million due in 2016.
KEY ASSUMPTIONS
--Flat sales growth through 2017;
--Base O&M escalated at 2% per annum;
--Balanced outcome in AIC's pending gas rate case;
--Rate decision in UE's pending rate case results in an electric base rate increase near $140 million, representing mid-point of UE's amended rate request and Staff recommendation;
--No external equity issuances through 2017;
--Capex as projected by management.
RATING SENSITIVITIES
AEE
Factors that could lead to a positive rating action:
No positive rating actions are anticipated in the near to intermediate term.
Factors that could lead to a negative rating action:
--Any negative rating actions at the utilities, such as due to a series of adverse rate decisions in rate cases, would likely lead to a negative rating action at AEE.
--Adjusted
debt/EBITDAR at or above 3.75x and FFO leverage at or above 4.25x on a sustained basis.
AIC
Factors that could lead to a positive rating action:
No positive rating actions are anticipated in the near to intermediate term.
Factors that could lead to a negative rating action:
--Any adverse regulatory developments that prevent AIC from earning an adequate and timely return on sizeable projected capex;
--Adjusted debt/EBITDAR at or above 3.75x and FFO leverage at or above 4.25x on a sustained basis.
UE
Factors that could lead to a positive rating action:
No positive rating actions are anticipated in the near to intermediate term.
Factors that could lead to a negative rating action:
--Given UE's current financial profile, a less than balanced outcome in the pending rate case would not impact the ratings, in Fitch's view. However, a series of less than constructive rate decisions that signal a more permanent deterioration in the regulatory compact would likely lead to negative rating actions.
--Adjusted debt/EBITDAR ranging between 3.5x and 3.75x or FFO leverage ranging between 4x and 4.25x on a sustained basis.
Fitch has upgraded the following ratings with a Stable Outlook:
Ameren Illinois Company
--IDR to 'BBB+' from 'BBB';
--Senior secured debt to 'A' from 'A-';
--Senior unsecured debt to 'A-' from 'BBB+';
--Preferred stock to 'BBB' from 'BBB-'.
Fitch has affirmed the following ratings:
Ameren Corporation
--IDR at 'BBB+';
--Short-term IDR and CP at 'F2'.
Ameren Illinois Company
--Short-term IDR and CP at 'F2'.
Union Electric Company
--Long-term IDR at 'BBB+';
--Secured debt at 'A';
--Senior unsecured debt at 'A-';
--Preferred stock at 'BBB';
--Short-term IDR and CP at 'F2'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (Aug. 5, 2013);
--'Rating U.S. Utilities, Power and Gas Companies' (March 11, 2014);
--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 19, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735155
Recovery Ratings and Notching Criteria for Utilities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863298
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=982234
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