Business Context and Reporting Period
Ameren Corporation filed an unaudited combined Form 10-Q for the quarter and six months ended June 30, 2012. The registrants include Ameren Corporation, Union Electric Company (Ameren Missouri), Ameren Illinois Company, and Ameren Energy Generating Company. Operations comprise regulated electric and natural-gas utilities in Missouri and Illinois and merchant generation operations.
Financial Performance and Position
| Ameren Corporation | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenues | $1,660 million | $1,781 million | $3,318 million | $3,685 million |
| Operating income (loss) | $363 million | $316 million | $(59) million | $543 million |
| Net income (loss) attributable to Ameren | $211 million | $138 million | $(192) million | $209 million |
| Basic and diluted EPS | $0.87 | $0.57 | $(0.79) | $0.87 |
| Cash flow from operations | Not separately provided | Not separately provided | $805 million | $899 million |
- Q2 2012 operating margin was approximately 21.9%, compared with approximately 17.7% in Q2 2011. Six-month operating margin was negative because of the $628 million asset impairment charge.
- The Q2 earnings improvement reflected stronger regulated utility results, warmer weather, higher Missouri rates, lower storm costs, and a $31 million Entergy refund related to an expired power purchase agreement. Merchant Generation results declined because of lower power prices and generation volumes.
- At June 30, 2012, Ameren reported cash and cash equivalents of $117 million, total assets of $22.98 billion, current liabilities of $1.60 billion, long-term debt of $6.68 billion, and total equity of $7.70 billion.
- Six-month investing cash outflows were $638 million, including $565 million of capital expenditures and $52 million of nuclear fuel expenditures. Financing cash outflows were $305 million, including $187 million of common dividends.
- Credit facilities totaled $2.10 billion, with approximately $2.055 billion available after commercial paper and letters of credit. Ameren had $30 million of commercial paper outstanding at June 30, 2012.
- Debt-to-total-capitalization covenant ratios were 48% for Ameren and Ameren Missouri, 41% for Ameren Illinois, and 45% for Genco, all below the 65% limit. Management stated that the companies were in compliance with applicable covenants.
Material Changes Versus the Prior Comparable Period
- Q2 net income attributable to Ameren rose 53% to $211 million, while six-month results changed from $209 million of income to a $192 million loss.
- The six-month loss was driven primarily by the noncash $628 million pretax impairment of AERG’s Duck Creek energy center. Management stated that Merchant Generation and Genco’s estimated fair values remained more than $1 billion below carrying values, although additional impairment is not recognized unless undiscounted cash flows fail the applicable accounting test.
- Six-month revenue declined 10%, primarily from lower Merchant Generation and Ameren Illinois revenues, lower power prices, reduced generation, and mild first-quarter weather.
- Six-month operating cash flow declined $94 million to $805 million, reflecting lower FAC-related cash recovery, lower customer collections, collateral movements, and severance payments.
- Merchant Generation electric margin declined 29% in Q2 and 24% year to date. Genco’s capacity factor decreased to 58% in Q2 and 60% year to date, compared with 65% and 67%, respectively, in 2011.
- Ameren Missouri electric margin increased $84 million in Q2 and $67 million year to date, while Ameren Illinois electric margin decreased $12 million in Q2 and $2 million year to date.
Guidance, Outlook, Risks, and Unusual Items
- No consolidated earnings-per-share guidance was provided in the filing. Merchant Generation expected approximately 26.5 million megawatthours of 2012 generation, including approximately 19.5 million megawatthours for Genco.
- Ameren Missouri requested a $376 million annual electric revenue increase; Missouri staff recommended approximately $210 million. A decision was expected in December 2012. The company also received approval for an energy-efficiency program requiring approximately $147 million of investment over three years beginning in 2013.
- Ameren Illinois’ formula-ratemaking filings contemplated annual electric delivery revenue reductions, subject to ICC decisions. The company had recorded a $12 million regulatory asset for the estimated 2012 revenue-requirement reconciliation.
- Following a July 2012 FERC order, Ameren Illinois expected a pretax transmission-customer refund charge of $10 million to $15 million in Q3 2012 and planned to seek rehearing.
- Genco projected that its interest-coverage ratio could fall below the minimum required for new external borrowing by the end of Q1 2013. Genco was restricted from paying common dividends and expected to remain unable to do so through at least June 30, 2015. A put option provides a potential liquidity source through the sale of three energy centers, subject to approvals.
- Environmental compliance remains a major risk. Ameren estimated $1.8 billion to $2.2 billion of coal-plant pollution-control investment from 2012 through 2021. Failure to obtain an Illinois variance could require Merchant Generation to mothball two unscrubbed coal plants beginning in 2015.
- Other material exposures include regulatory rate cases, FAC refund proceedings, FERC litigation, Taum Sauk insurance recovery, Clean Air Act litigation, environmental remediation, asbestos claims, nuclear-plant obligations, commodity-price volatility, collateral requirements, and potential future asset impairments.
- Ameren’s estimated pension contributions were $80 million to $140 million annually for each of the next five years, with aggregate estimated contributions of $570 million.
- In July 2012, Ameren Illinois commenced a tender offer for up to $450 million of senior secured notes. Ameren Missouri also had $173 million of senior secured notes maturing in September 2012.
Important Facts for Investors to Verify
- Whether subsequent power prices, environmental requirements, and operating forecasts produce additional Merchant Generation or Genco impairments.
- The final outcomes of Ameren Missouri’s electric rate case, FAC prudence review, and related Entergy refund proceedings.
- The ICC’s decisions on Ameren Illinois’ formula rates and advanced-metering deployment plan, and the amount and timing of the FERC transmission refund.
- Genco’s future covenant compliance, access to external borrowing, dividend restrictions, and reliance on intercompany funding or asset sales.
- Actual environmental capital requirements, plant-retirement or mothballing decisions, and the recoverability of regulated versus merchant-generation investments.
- Liquidity after the September 2012 Ameren Missouri debt maturity, the Ameren Illinois tender offer, capital expenditures, collateral requirements, and dividend payments.