Ameren to Exit Merchant Generation Business, UBS Sees Management Looking to Sell Marketing Subsidiary As Well

Ameren Corporation (Ameren) has determined that, "it intends to, and it is probable that it will," exit its Merchant Generation business segment before the end of the previously estimated useful lives of that business segment's long-lived assets.

"This determination resulted from Ameren's analysis of the current and projected future financial condition of its Merchant Generation business segment, including the need to fund Genco [Ameren Energy Generating Company] debt maturities beginning in 2018, and its conclusion that this business segment is no longer a core component of its future business strategy. In consideration of this determination, Ameren has begun planning to reduce, and ultimately eliminate over time, the Merchant Generation business segment's and Genco's reliance on Ameren's financial support and shared services support," Ameren said in an 8-K yesterday,

Julien Dumoulin-Smith, Director of Equity Research for the Electric Utilities & IPPs Group at UBS Securities, LLC, said in a research note that the 8-K, "also implies that mgmt will look to sell the two coal assets at AERG and its marketing subsidiary, unencumbered subsidiaries, w/proceeds reducing parent debt."

Dumoulin-Smith told Matters that this included Ameren Energy Marketing, which includes Ameren's competitive retail supply business.

"Ameren's Merchant Generation business segment and Genco have experienced decreasing earnings and cash flows from operating activities over the past few years, including the current year, as margins have declined principally as a result of weaker power prices," the company said.

"In addition, environmental regulations have resulted in significant investment requirements over the same timeframe," the company said.

"During this period, Ameren has increasingly focused on allocating its capital resources to those opportunities that it believes offer the most attractive risk-adjusted return potential, and specifically focused more on growing earnings from its regulated operations through investment under constructive regulatory frameworks," the company said.

"In December 2012, Ameren concluded that a change in circumstances had occurred regarding its expected duration of ownership of its Merchant Generation business segment's energy centers. As a result, Ameren determined that estimated undiscounted cash flows through the period in which Ameren expects to continue to have a significant economic interest in certain energy centers would be insufficient to recover the carrying value of those energy centers. In addition, based on power market conditions and cash flow requirements, Genco determined that it is more likely than not that it will sell one or more of its three gas-fired energy centers before the end of their previously estimated useful lives to improve its liquidity, including pursuant to the put option agreement between Genco and AmerenEnergy [sic] Resources Generating Company," Ameren said.

"Ameren and Genco will record fourth quarter 2012 non-cash impairment charges to reduce the carrying values of those energy centers to their estimated fair values. Ameren's expected consolidated charge is in the range of $1.5 billion to $2 billion, before taxes. Genco's expected charge is in the range of $50 million to $300 million, before taxes. The estimated size of the impairment at Genco is substantially less than at Ameren because most of the Merchant Generation business segment's assets are currently owned, and are likely to continue to be owned, by Genco and its subsidiaries, even though Ameren's economic interest in the Merchant Generation business segment and Genco is likely to terminate as described above. Ameren and Genco expect 2013 depreciation expense to be reduced by $60 million to $80 million, before taxes, and $3 million to $15 million, before taxes, respectively, as a result of these impairment charges. Ameren and Genco do not expect to incur material future cash expenditures as a result of these impairments," the company said.

"These impairment charges are not expected to result in a violation of any Ameren or Genco debt covenants or counterparty agreements. In addition, Ameren does not expect to require any debt or equity financings as a result of these impairment charges," the company said.