Ameren Genco Bonds Crushed

Feb. 07, 2013 7:16 AM ETAmeren Corporation (AEE)46 Comments
Charles Margolis profile picture
Charles Margolis

Ameren Corp. (NYSE:AEE) is an S&P 500 component, utility holding company based out of St. Louis. The company recently announced it plans to "reduce and eventually eliminate support" for Ameren Energy Generating Co. [GENCO.]

Last year bond writers on Seeking Alpha observed:

Ameren Energy Generating Company's (AEE) senior unsecured note (CUSIP: 02360XAL1) maturing 4/15/2018 has a coupon of 7.00% and is asking 104.375 cents on the dollar ...

Currently Genco's bonds have experienced a dramatic fall. Fitch recently lowered Ameren Genco's rating down to CCC-.

The ratings recognize that Genco's parent holding company, AEE, no longer intends to provide financial support to Genco, including funding for the 2018 debt maturity of $300 million, and the significant capital spending required at the Newton coal-fired plant to be compliant with Illinois environmental regulations.

Moody's downgraded Ameren Genco last month:

The downgrade follows the announcement on December 20, 2012 ... that Ameren Genco's parent company, Ameren Corp. (Ameren; Baa3/stable), will reduce and eventually eliminate support to Ameren Genco. Ameren Genco's ratings remain under review for further downgrade, pending additional clarity regarding the pace of the support withdraw.

Whereas last year the 2018 Ameren Genco bonds were priced over $100, they are now priced at $61. The yield has soared to 19.2%, check out the comparison to Ameren Union Electric (formed from a 1997 merger with Union Electric) mortgage bonds issued in 2004, and corporate bonds issued in 2005:

credit rating price yield
Amerenenergy Generating Co Sr Nt 7% 2018, Make Whole Call (cusip: 02360XAL1) B2/B 61.00 19.2%*
Amerenenergy Generating Co Sr Nt-I 6.3% 2020, Make Whole Call (cusip: 02360XAM9) B2/B 57.80 16.6%
Amerenenergy Generating Co Sr Nt-F 7.95% 2032, Make Whole Call (cusip: 02360XAJ6) B2/B 57.50 14.5%
Ameren Un Elec 1MTG Bd 5.1% 2019, Make Whole Call (cusip: 02360FAA4) A3/BBB+ 119.73 1.91%
Ameren Un Elec Sr Sec Nt 5.4% 2016, Make Whole Call (cusip: 02360FAC0) A3/BBB+ 111.70 1.36%

*These bonds are very questionable given recent downgrades and uncertainty about Genco's future.

Genco yields ten times as much as the mortgage bonds, of course they are junk bonds with an uncertain future. St. Louis local financial news reported:

Genco operates a collection of coal- and gas-fired plants in Illinois that produce electricity for the unregulated wholesale market...

Genco does face a short-term liquidity issue, but Ameren has given it a way out: Under a "put" agreement, Genco can sell three gas-fired plants to Ameren for a minimum of $100 million.

That cash should buy Genco time while Ameren decides how to extricate itself.

This article includes commentary from an analyst who considered these bonds to be a buy.

Adams said. "To have the bonds go from 96 to 60 seemed pretty silly to me."

However, investors should weigh the reality of Ameren Genco's current weaknesses very carefully. This table shows the outstanding Ameren Genco bonds:

outstanding size
Ameren Genco 2018 $300M
Ameren Genco 2020 $250M
Ameren Genco 2032 $275M

You can see $100M would not make a dent in $825M outstanding debt.

Ameren's 10-Q from August 2012 states:

The put option gives Genco the option to sell to AERG... the Grand Tower, the Gibson City, and the Elgin energy centers. If Genco exercises the put option, the purchase price for all three energy centers will be the greater of $100 million or the fair market value of the energy centers...

Genco may exercise the put option at any time from March 28, 2012 through March 28, 2014. The put option may be extended indefinitely for additional one−year periods by agreement of AERG...

... In exchange for entering into the put option agreement, Genco paid AERG a put option premium of $2.5 million.

With a spiraling credit rating the company would have a very difficult time refinancing, even if it could. Moody's explains:

Ameren Genco will be unable to incur additional borrowings from external sources by the end of first quarter 2013, due to an interest coverage ratio covenant in its bond indenture.

In their 10-Q Ameren projected Genco's compliance with the environmental regulations could cost up to $570M through 2021.

Ameren Collateral Worries

Buried in the company's 10-Q is a warning sign about substantial collateral necessary if market prices go up or down:

Changes in commodity prices could trigger additional collateral postings ... If market prices were 15% higher than June 30, 2012, levels in the next 12 months and 20% higher thereafter (Ameren or its subsidiaries) could be required to post additional collateral or other assurances for certain trade obligations up to approximately $183 million ... If market prices were 15% lower than June 30, 2012, levels in the next 12 months and 20% lower thereafter (Ameren or its subsidiaries) could be required to post additional collateral or other assurances for certain trade obligations up to approximately $199 million ...

Ameren Corp. does around $2B in revenue per quarter, and upwards of $423M in net income annually, on average for the past 3 years. So $183M or $199M in additional collateral would be significant.

AEE Net Income Quarterly Chart
(Click to enlarge)

AEE Net Income Quarterly data by YCharts

The Altman Z-Score attempts to measure risk of bankruptcy, a score under 1.81 is considered to be the distress zone. Ameren and its nearest competitors, CenterPoint (CNP), Great Plains (GXP) and Exelon (EXC) are all in the distress zone, according to their Altman Z-Score:

AEE Altman Z-Score Chart
(Click to enlarge)

AEE Altman Z-Score data by YCharts

While Ameren ranks higher than Great Plains and Centerpoint, its subsidiary, Genco, is just one component. On its own Genco is a much smaller fish.

Ameren's most recent annual report defines a 2010 Genco Credit Agreement:

Ameren's and Genco's $500 million multi-year senior unsecured revolving credit facility, which expires on September 10, 2013.

As of the annual report Genco had 618 employees, the report describes Genco's Merchant Generation:

Merchant Generation revenues are determined by market conditions and contractual arrangements. We expect the Merchant Generation fleet of assets to have 5,503 megawatts of capacity ... This capacity reflects the closure of the four units at Genco's Meredosia and Hutsonville energy centers and the sale of the Columbia CT during 2011, as well as the sale of the Medina Valley energy center in early 2012 ...

In this instance it would simply cost too much for Ameren to support the business.

Genco's Dinosaur Coal-Fired & Natural Gas-Fired Facilities

The filing mentions Genco's subsidiary Electric Energy Inc.:

Effective January 1, 2010, in an internal reorganization, AER contributed its 80% ownership interest in EEI to its subsidiary, Genco. The remaining 20% ownership interest is owned by Kentucky Utilities Company, a non-affiliated entity.

Last summer Electric Energy laid off 44 employees; 16% of its workforce. The company tried to delay environmental upgrades, however the state denied their request.

An Ameren fact sheet shows Electric Energy Inc. is comprised of a coal-fired energy center in Joppa, Illinois. The Joppa Generating Station began operation in 1953 and has a 1,002 MW capacity. Whereas Genco's primary coal-fired facilities in Montgomery County, IL began operation in 1965. The Newton Energy Center in Jasper County, IL began operation in 1977. Grand Tower Energy Center in Jackson County, IL began operation in 1951, was re-powered in 2001 and does 478 MW.

The Ameren annual report remarks in all bold:

Future limits on greenhouse gas emissions would likely require Ameren, Ameren Missouri and Genco to incur significant increases in capital expenditures and operating costs, which, if excessive, could result in the closures of coal-fired energy centers, impairment of assets, or otherwise materially adversely affect our results of operations, financial position, and liquidity.

This is Worrisome

Investors are hunting for yield, however it is very important to understand Genco is now in a very uncertain position. From 2007 to 2011 Genco's net income went from over $200M to under $50M.

Long-term debt went from $474M to over $800M in the same period; in 2010 Genco repaid $200M in maturing debt. Lower revenue, higher fuel prices and environmental compliance costs have taken their toll.

This will certainly be a tough period for Ameren Genco, and investors should be concerned. Things to watch for would be interested utility companies that might acquire Genco. The former subsidiary's operating revenue could be affected by Ameren's termination of support.

It would cost far more to make the mandated environmental upgrades than Genco can comfortably support within the Ameren business model. Ameren Corp. reports earnings on February 20th; Genco bond investors must pay close attention. For now the 2018 Genco bonds will certainly garner investors' attention; however, it seems wise to tread carefully.

If you have any thoughts on Ameren or Ameren Genco, please leave a comment below.

Disclosure: I am long AEE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. This article is not a recommendation to buy or sell. Please consult a financial adviser to determine proper allocations (if any) towards any fixed income investments, especially regarding companies that are experiencing changes in ownership structure.

This article was written by

Charles Margolis profile picture
Just an average investor... primarily in American equity and bonds. (Important Note: My articles, blogs, comments, reference links and messages are not intended to be investment advisements; or to value securities. Examples and considerations are hypothetical and educational. Please consult a financial advisor before making investments in any security. Thank you for reading!)

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