NOTE 16 – DIVESTITURE TRANSACTIONS AND DISCONTINUED OPERATIONS
Transaction Agreement with IPH
On December 2, 2013, Ameren completed the divestiture of New AER to IPH, in accordance with the transaction agreement between Ameren and IPH dated March 14, 2013, as amended by a letter agreement entered into by Ameren and IPH on December 2, 2013. IPH acquired all of the outstanding limited liability interests in New AER, which was a newly created, wholly owned subsidiary of AER. Prior to the closing, AER effected a reorganization that, among other things, transferred substantially all of its assets and liabilities to New AER, other than (i) any outstanding debt obligations of AER to Ameren or its other subsidiaries, except for certain intercompany balances discussed below; (ii) the assets and liabilities associated with Genco’s Meredosia and Hutsonville energy centers; (iii) the obligations relating to Ameren's single-employer pension and postretirement benefit plans; and (iv) the deferred income tax assets and liabilities associated with Ameren's ownership of these retained assets and liabilities.
Ameren retained certain pension and postretirement benefit obligations associated with current and former employees of AER, with the exception of the pension and postretirement benefit obligations associated with current and former employees of EEI, which were assumed by IPH. Ameren retained the Meredosia and Hutsonville energy centers, including their AROs, which totaled $31 million as of December 31, 2013. These energy centers were abandoned and had an immaterial property and plant asset balance as of December 31, 2013. All other AROs associated with AER were assumed by New AER or by Rockland Capital, the third-party buyer of the Grand Tower energy center, as discussed below.
Upon the IPH transaction agreement closing, all intercompany agreements and debt that existed between New AER and its subsidiaries, on the one hand, and Ameren and its non-New AER affiliates, on the other hand, with the exception of certain agreements, such as supply obligations to Ameren Illinois, a note from Marketing Company to Ameren relating to cash collateral that remained outstanding at closing, Genco money pool advances and certain New AER subsidiary money pool borrowings, were either retained or cancelled by Ameren, without any cost or obligation to IPH or New AER and its subsidiaries. Immediately prior to the closing of the divestiture, the money pool borrowings through which Ameren provided cash collateral to Marketing Company were converted to a note payable to Ameren, which is payable, with interest, 24 months after closing or sooner as cash collateral requirements are reduced. The balance of the note was $18 million at December 31, 2013, and is reflected on Ameren's consolidated balance sheet in "Other assets."
Pursuant to the transaction agreement, as amended by the December 2, 2013 letter agreement, Ameren caused $235 million of cash to be retained at New AER immediately prior to closing, which included amounts previously paid to Genco for the sale of the Elgin, Gibson City, and Grand Tower energy centers to Medina Valley as well as additional amounts retained at Genco, AERG, and Marketing Company. Within 120 days after the closing of the divestiture, a working capital adjustment will be finalized, which may result in a cash payment from Ameren to IPH or from IPH to Ameren. Ameren received no cash proceeds as a result of the divestiture of New AER. Pursuant to the transaction agreement, as amended, Ameren is obligated to pay up to $39 million for certain contingent liabilities. Of these liabilities, $29 million are included in "Other deferred credits and liabilities" and $10 million are included in "Accounts and wages payable" on Ameren's December 31, 2013 consolidated balance sheet.
As a condition to the transaction agreement, Genco exercised the amended put option agreement for the sale of the Elgin, Gibson City, and Grand Tower gas-fired energy centers to Medina Valley. In October 2013, Genco completed the sale of the Elgin, Gibson City, and Grand Tower gas-fired energy centers to Medina Valley, receiving total payments of $137.5 million. The third-party sale of these energy centers to Rockland Capital was completed on January 31, 2014 and is discussed below.
Sale of Gas-fired Energy Centers
Prior to entry into the transaction agreement with IPH, Genco entered into a put option agreement, as amended, with Medina Valley. This agreement gave Genco the option to sell to Medina Valley the Elgin, Gibson City, and Grand Tower gas-fired energy centers for the fair market value of the energy centers, as determined by three independent appraisers. Genco exercised its option, and in October 2013 completed its sale of the Elgin, Gibson City, and Grand Tower gas-fired energy centers to Medina Valley for $137.5 million, which was the fair value of the gas-fired energy centers as determined by the three independent appraisers.
The transaction agreement with IPH, as amended, provides that if the Elgin, Gibson City, and Grand Tower gas-fired energy centers are subsequently sold by Medina Valley and if Medina Valley receives additional proceeds from such sale, Medina Valley will pay Genco any proceeds from such sale, net of taxes and other expenses, in excess of the $137.5 million previously paid to Genco.
On January 31, 2014, Medina Valley completed the sale of the Elgin, Gibson City, and Grand Tower gas-fired energy centers to Rockland Capital for a total purchase price of $168 million, before consideration of a net working capital adjustment. The agreement with Rockland Capital required $17 million of the purchase price to be held in escrow until the two-year anniversary of the closing of the sale to fund certain indemnity obligations, if any, of Medina Valley. The net working capital adjustment will be finalized within 120 days after the January 31, 2014 closing date. As a result, pending final resolution of the net working capital adjustment, taxes, and other expenses, Medina Valley expects to pay Genco any remaining portion of the escrow balance on January 31, 2016. Ameren will not record a gain from its sale of the Elgin, Gibson City, and Grand Tower gas-fired energy centers.
Discontinued Operations Presentation
As of March 14, 2013, Ameren determined that New AER and the Elgin, Gibson City, and Grand Tower gas-fired energy centers qualified for discontinued operations presentation. In addition, effective December 2, 2013, coinciding with the completion of the divestiture of New AER to IPH, Ameren determined that the Meredosia and Hutsonville energy centers had been abandoned. Ameren is prohibited from operating these energy centers through December 31, 2020, as a provision of the Illinois Pollution Control Board's November 2013 order granting IPH a variance of the MPS. As a result, Ameren determined the Meredosia and Hutsonville energy centers qualified for discontinued operations presentation as of December 2, 2013.
New AER and the Elgin, Gibson City, Grand Tower, Meredosia, and Hutsonville energy centers have been classified collectively in Ameren’s consolidated financial statements as discontinued operations for all periods presented in this report. The disposal groups have been aggregated in the disclosures below. The following table presents the components of discontinued operations in Ameren's consolidated statement of income (loss) for the years ended December 31, 2013, 2012 and 2011:
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| | | | | | | | | | | |
| Year ended |
| 2013 | | 2012 | | 2011 |
Operating revenues | $ | 1,037 |
| | $ | 1,047 |
| | $ | 1,358 |
|
Operating expenses | (1,207 | ) | (a) | (3,474 | ) | (b) | (1,150 | ) |
Operating income (loss) | (170 | ) | | (2,427 | ) | | 208 |
|
Other income (loss) | (1 | ) | | — |
| | 1 |
|
Interest charges | (39 | ) | | (56 | ) | | (64 | ) |
Income (loss) before income taxes | (210 | ) | | (2,483 | ) | | 145 |
|
Income tax (expense) benefit | (13 | ) | | 987 |
| | (56 | ) |
Income (loss) from discontinued operations, net of taxes | $ | (223 | ) | | $ | (1,496 | ) | | $ | 89 |
|
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(a) | Includes a $201 million pretax loss on disposal relating to the New AER divestiture. |
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(b) | Includes a noncash pretax asset impairment charge of $628 million to reduce the carrying value of AERG’s Duck Creek energy center to its estimated fair value under held and used accounting guidance. In addition, includes a noncash pretax asset impairment charge of $1.95 billion to reduce the carrying values of all the AER coal and natural gas-fired energy centers, except the Joppa coal-fired energy center, to their estimated fair values, under held and used accounting guidance, as a result of the decision in December 2012 that Ameren intended to exit the Merchant Generation business. |
Upon completion of the divestiture of New AER, Ameren finalized its loss on disposal. Ameren received no cash proceeds from IPH for the divestiture of New AER. Ameren recorded a pretax charge to earnings related to the New AER divestiture of $201 million for the year ended December 31, 2013. The loss was recorded in “Operating expenses” within the components of the discontinued operations statement of income (loss). The ultimate loss on disposal may differ as a result of the finalization of the working capital adjustment within 120 days of close.
In 2013, Ameren adjusted the accumulated deferred income taxes on its consolidated balance sheet to reflect the excess of tax basis over financial reporting basis of its stock investment in AER. This change in basis resulted in a discontinued operations deferred tax expense of $99 million, which was partially offset by the expected tax benefits of $86 million related to the pretax loss from discontinued operations including the loss on disposal, during the year ended December 31, 2013. The final tax basis of the AER disposal group and the related tax benefit resulting from the transaction agreement with IPH are dependent upon the resolution of tax matters under IRS audit, including the adoption of recently issued guidance from the IRS related to tangible property repairs and other matters. As a result, tax expense and benefits ultimately realized in discontinued operations may differ materially from those recorded as of December 31, 2013.
As the Elgin, Gibson City, and Grand Tower gas-fired energy center disposal group continued to meet the discontinued operations criteria at December 31, 2013, Ameren evaluated whether any impairment existed by comparing the disposal group’s carrying value to the estimated fair value of the disposal group, less cost to sell. In December 2012, Ameren recorded a noncash long-lived asset impairment charge to reduce the carrying value of AER’s energy centers, including the Elgin, Gibson City, and Grand Tower gas-fired energy centers, to their estimated fair values under the accounting guidance for held and used assets. Ameren did not record any additional impairment relating to the Elgin, Gibson City, and Grand Tower energy centers for the year ended December 31, 2013. As discussed above, on January 31, 2014, Medina Valley completed the sale of the Elgin, Gibson City, and Grand Tower gas-fired energy centers to Rockland Capital for a total purchase price of $168 million, before consideration of a net working capital adjustment. Ameren will not recognize a gain from the third party sale to Rockland Capital for any value in excess of its $137.5 million carrying value for this disposal group since any excess amount that Medina Valley may receive, net of taxes and other expenses, over the carrying value, will ultimately be paid to Genco pursuant to the transaction agreement with IPH.
Long-lived Asset Impairments
New AER and the Elgin, Gibson City, and Grand Tower energy centers were impaired under held and used accounting guidance in 2012 and the Meredosia and Hutsonville energy centers were impaired under held and used accounting guidance in 2011. The 2012 and 2011 impairments are discussed below.
As a result of the December 2012 decision that Ameren intended to, and it was probable that it would, exit the Merchant Generation segment before the end of the Merchant Generation long-lived assets' previously estimated useful lives, Ameren determined that estimated undiscounted cash flows during the period in which it expected to continue to own certain energy centers would be insufficient to recover the carrying value of those energy centers. Accordingly, Ameren recorded a noncash pretax impairment charge of $1.95 billion in the fourth quarter of 2012 to reduce the carrying values of all of the Merchant Generation's coal and natural gas-fired energy centers, except the Joppa coal-fired energy center, to their estimated fair values. The estimated undiscounted cash flows of the Joppa coal-fired energy center exceeded its carrying value; therefore, the Joppa coal-fired energy center was unimpaired.
In early 2012, the observable market price for power for delivery in that year and in future years in the Midwest sharply declined below 2011 levels, primarily because of declining natural gas prices and the impact of the stay of the CSAPR. As a result of this sharp decline in the market price of power and the related impact on electric margins, Genco decelerated the construction of two scrubbers at its Newton energy center in February 2012. The sharp decline in the market price of power in early 2012 and the related impact on electric margins, as well as the deceleration of construction of Genco's Newton energy center scrubber project, caused Ameren to evaluate, during the first quarter of 2012, whether the carrying values of Merchant Generation coal-fired energy centers were recoverable. AERG's Duck Creek energy center's carrying value exceeded its estimated undiscounted future cash flows. As a result, Ameren recorded a noncash pretax asset impairment charge of $628 million to reduce the carrying value of that energy center to its estimated fair value during the first quarter of 2012.
In December 2011, Genco ceased operations at its Meredosia and Hutsonville energy centers. As a result, Ameren recorded a noncash pretax asset impairment charge of $26 million to reduce the carrying value of the Meredosia and Hutsonville energy centers to their estimated fair values and a $4 million impairment for materials and supplies.
Key assumptions used in the determination of estimated undiscounted cash flows for the 2012 and 2011 long-lived assets tested for impairment under held and used accounting guidance discussed above included forward price projections for energy and fuel costs, the expected life or duration of ownership of the long-lived assets, environmental compliance costs and strategies, and operating costs. Those same cash flow assumptions, along with a discount rate and terminal year earnings multiples, were used to estimate the fair value of each energy center. These assumptions are subject to a high degree of judgment and complexity. The fair value estimate of these long-lived assets was based on a combination of the income approach, which considers discounted cash flows, and the market approach, which considers market multiples for similar assets within the electric generation industry. The fair value estimate was determined using observable inputs and significant unobservable inputs, which are Level 3 inputs as defined by accounting guidance for fair value measurements.
The following table presents the carrying amounts of the components of assets and liabilities segregated on Ameren's consolidated balance sheets as discontinued operations at December 31, 2013, and 2012: |
| | | | | | | |
| December 31, 2013 | | December 31, 2012 |
Assets of discontinued operations | | | |
Cash and cash equivalents | $ | — |
| | $ | 25 |
|
Accounts receivable and unbilled revenue | 5 |
| | 102 |
|
Materials and supplies | 5 |
| | 135 |
|
Mark-to-market derivative assets | — |
| | 102 |
|
Property and plant, net | 142 |
| | 748 |
|
Accumulated deferred income taxes, net(a) | 13 |
| | 395 |
|
Other assets | — |
| | 104 |
|
Total assets of discontinued operations | $ | 165 |
| | $ | 1,611 |
|
Liabilities of discontinued operations | | | |
Accounts payable and other current obligations | $ | 5 |
| | $ | 141 |
|
Mark-to-market derivative liabilities | — |
| | 63 |
|
Long-term debt, net | — |
| | 824 |
|
Asset retirement obligations(b) | 40 |
| | 97 |
|
Pension and other postretirement benefits | — |
| | 40 |
|
Other liabilities | — |
| | 28 |
|
Total liabilities of discontinued operations | $ | 45 |
| | $ | 1,193 |
|
Accumulated other comprehensive income (c) | $ | — |
| | $ | 19 |
|
Noncontrolling interest(d) | $ | — |
| | $ | 8 |
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(a) | The December 31, 2013 balance primarily consists of deferred income tax assets related to the abandoned Meredosia and Hutsonville energy centers. |
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(b) | Includes AROs associated with the abandoned Meredosia and Hutsonville energy centers of $31 million and $26 million at December 31, 2013, and 2012, respectively. |
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(c) | Accumulated other comprehensive income related to discontinued operations included in “Accumulated other comprehensive loss” on Ameren’s December 31, 2012, consolidated balance sheet. This balance related to New AER assets and liabilities that were realized or removed from Ameren’s consolidated balance sheet either before or at the December 2, 2013 closing of the New AER divestiture. |
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(d) | The 20% ownership interest of EEI not owned by Ameren was included in “Noncontrolling interests” on Ameren’s December 31, 2012, consolidated balance sheet. This noncontrolling interest was removed from Ameren’s consolidated balance sheet at the December 2, 2013 closing of the New AER divestiture. |
Ameren has continuing transactions with New AER. Ameren Illinois has power supply agreements with Marketing Company, which are a result of the power procurement process in Illinois administered by the IPA, as required by the Illinois Public Utilities Act. Ameren Illinois continues to purchase power and to purchase trade receivables as required by Illinois law. Ameren Illinois and ATXI continue to sell transmission services to Marketing Company. Also, the transaction agreement requires Ameren (parent) to maintain certain guarantees discussed below. Immediately prior to the transaction agreement closing, the money pool borrowings through which Ameren provided cash collateral to Marketing Company were converted to a note payable to Ameren, which is payable, with interest, 24 months after closing or sooner as cash collateral requirements are reduced. Also, within 120 days after closing, a working capital adjustment will be finalized, which may result in a cash payment from Ameren to New AER or from New AER to Ameren. Ameren has determined that the continuing cash flows generated by these arrangements are not significant and, accordingly, are not deemed to be direct cash flows of the divested business. Additionally, these arrangements do not provide Ameren with the ability to significantly influence the operating results of New AER. Ameren will not have significant continuing involvement with or material cash flows from the Elgin, Gibson City, or Grand Tower energy centers after their sale.
Ameren Guarantees
Upon the divestiture of New AER, the transaction agreement between Ameren and IPH requires Ameren (parent) to maintain its financial obligations with respect to all credit support provided to New AER as of the closing date of such divestiture. Ameren must also provide such additional credit support as required by contracts entered into prior to the closing date, in each case for up to 24 months after the closing. IPH shall indemnify Ameren for any payments Ameren makes pursuant to these credit support obligations if the counterparty does not return the posted collateral to Ameren. IPH's indemnification obligation is secured by certain AERG and Genco assets. In addition, Dynegy has provided a limited guarantee of $25 million to Ameren (parent) pursuant to which Dynegy will, among other things, guarantee IPH's indemnification obligations for a period of up to 24 months after the closing.
At December 31, 2013, Ameren had a total of $190 million in guarantees outstanding, which included:
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• | $176 million related to guarantees supporting Marketing Company for physically and financially settled power transactions with its counterparties that were in place at the December 2, 2013 closing of the divestiture, as well as for Marketing Company's clearing broker and other service agreements. If Marketing Company did not fulfill its obligations to these counterparties who had active open positions as of December 31, 2013, Ameren would have been required under its guarantees to provide $6 million to the counterparties. |
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• | $14 million related to requirements for leasing agreements and potential environmental obligations. |
Additionally, at December 31, 2013, Ameren had issued letters of credit totaling $11 million as credit support on behalf of New AER.
Ameren has not recorded a reserve for these contingent obligations because it does not believe a payment for any of these guarantees is probable as of December 31, 2013.
