Business Context and Reporting Period
Ameren Corporation is a regulated electric and natural-gas utility holding company with operations in Missouri and Illinois, plus a merchant-generation business. This combined Form 10-Q covers Ameren Corporation, Union Electric Company, Ameren Illinois Company, and Ameren Energy Generating Company for the quarter and nine months ended September 30, 2012. Dollar amounts are in millions unless otherwise stated.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Operating revenues | $2,001 vs. $2,268 in 2011 | $5,319 vs. $5,953 |
| Operating income | $635 vs. $550 | $576 vs. $1,093 |
| Net income attributable to Ameren | $374 vs. $285 | $182 vs. $494 |
| Basic and diluted EPS | $1.54 vs. $1.18 | $0.75 vs. $2.05 |
| Net cash from operating activities | Not separately reported for the quarter | $1,361 vs. $1,565 |
| Capital expenditures | Not separately reported for the quarter | $905 vs. $758 |
| Cash and cash equivalents | $298 at September 30, 2012, vs. $255 at December 31, 2011 | |
| Long-term debt, net | $6,781 at September 30, 2012, vs. $6,677 at December 31, 2011 |
Third-quarter operating margin was approximately 31.7% of revenue, compared with 24.3% in the prior-year quarter. Nine-month operating margin was approximately 10.8%, compared with 18.4% in 2011; the decline reflects the $628 million Duck Creek impairment charge and weaker merchant-generation results.
- Ameren Missouri third-quarter net income was $236, compared with $190 in 2011; nine-month net income was $400, compared with $301.
- Ameren Illinois third-quarter net income was $71, compared with $98; nine-month net income was $130, compared with $168.
- Merchant Generation third-quarter net income attributable to Ameren was $20, compared with a $9 loss; the nine-month loss was $348, compared with $26 of income.
- Ameren's total equity was $8,026 at September 30, 2012, compared with $8,068 at year-end 2011.
- Common dividends were $0.40 per share for the quarter and $1.20 per share for the nine months, compared with $0.385 and $1.155, respectively, in 2011.
Material Changes Versus the Prior Comparable Period
- Third-quarter earnings increased primarily because 2011 included an $89 million Taum Sauk regulatory disallowance and a $35 million Merchant Generation closure charge. Results also benefited from higher utility rates, favorable mark-to-market activity, fewer outages, and a tax benefit reversal related to the Duck Creek impairment.
- Nine-month earnings declined sharply because of the $628 million noncash pretax impairment of AERG's Duck Creek energy center, lower Merchant Generation margins, milder winter weather, and weaker Ameren Illinois formula-ratemaking results.
- Consolidated revenue declined 12% in the quarter and 11% year to date, primarily reflecting lower electric revenue, lower power prices, lower Merchant Generation volumes, and reduced pass-through power supply revenue.
- Ameren's electric margin decreased $63 in the quarter and $79 year to date. Merchant Generation volume reductions were partly offset by lower production and purchased-power costs.
- Ameren Illinois electric margin fell $49 in the quarter and $51 year to date, largely because of the Illinois formula-ratemaking reconciliation and return-on-equity collar. Ameren Illinois recorded a $35 regulatory liability expected to be refunded to customers in 2014 with interest.
- Operating cash flow fell $204 year to date, while capital spending increased $147. The decline also reflected $138 of premiums paid to repurchase long-term debt and weaker cash collections.
Debt, Liquidity, Guidance, and Outlook
- Ameren Missouri issued $485 principal amount of 3.90% senior secured notes due 2042 and used the proceeds to refinance and repurchase debt. Ameren Illinois issued $400 of 2.70% senior secured notes due 2022 and refinanced existing debt.
- At September 30, 2012, the companies had $2.08 billion of aggregate credit capacity available under committed facilities. Ameren had $5 of commercial paper outstanding. Management stated that the companies were in compliance with debt covenants.
- Ameren Missouri's pending rate case sought a $323 annual revenue increase; Missouri staff recommended $210. A regulatory decision was expected in December 2012, with rates expected to take effect January 2, 2013.
- Ameren Missouri expects to invest approximately $147 over three years in energy-efficiency programs beginning in 2013. The program could generate an incentive award of approximately $19 if all stated goals are achieved.
- Ameren Illinois expected to reduce or defer approximately $30 of planned 2013 electric distribution capital expenditures because of uncertainty over implementation of the Illinois formula-ratemaking law.
- Merchant Generation expected approximately 26 million megawatthours of 2012 generation, versus available coal-fired capacity of approximately 32.5 million megawatthours. Management continued to reduce costs and defer capital spending in response to weak power prices.
- Genco projected that its interest-coverage ratio would fall below the threshold for new external borrowing by the end of the first quarter of 2013. Genco was restricted from paying common dividends and expected to remain unable to pay them through at least September 30, 2015.
- Ameren expected to invest $1.7 billion to $2.0 billion between 2012 and 2021 in coal-plant pollution controls. Total estimated environmental capital costs through 2021 were approximately $1.7 billion to $2.0 billion.
Risks, Contingencies, and Unusual Items
- Merchant Generation and Genco stated that the carrying values of their energy centers exceeded estimated fair values by significantly more than $1 billion after the Duck Creek impairment. Additional material impairments remain possible if power prices, fuel costs, environmental requirements, operating performance, or plant-retirement decisions worsen.
- Ameren Missouri's rate cases, fuel-adjustment-clause prudence review, and potential customer refunds remain unresolved. A further refund claim of approximately $26 million was under review, although management did not believe a refund was probable at the reporting date.
- Ameren Illinois was appealing the ICC's initial formula-ratemaking order and seeking rehearing of a FERC order concerning acquisition premiums in transmission rates. The filing does not provide a clear estimate of any potential FERC refund.
- Environmental regulations, including MATS, CCR, Clean Water Act cooling-water requirements, greenhouse-gas rules, and potential reinstatement or replacement of CSAPR, could require significant spending, increase operating costs, or force plant closures.
- EPA litigation and investigations concerning Clean Air Act permitting at Ameren Missouri, Genco, and AERG could result in penalties, injunctive relief, pollution-control spending, or asset impairments. The ultimate costs were not determinable.
- Ameren Missouri had a $68 insurance receivable related to Taum Sauk litigation. The ultimate recovery and total effect of the claims were uncertain.
- Estimated probable remediation obligations for former manufactured-gas plant sites were $133 to $207 for Ameren, with $133 recorded; Ameren Illinois accounted for most of this exposure.
- Ameren had $8,962 of total procurement and other obligations, including fuel, purchased power, equipment, and service commitments. Pension contributions were estimated at $75 to $150 annually over each of the next five years, with aggregate estimated contributions of $560.
- Commodity derivatives and contracts exposed Ameren to collateral requirements. At September 30, 2012, potential additional collateral from credit-rating deterioration was estimated at $244 for Ameren, $80 for Ameren Missouri, $72 for Ameren Illinois, and $38 for Genco.
Most Important Facts for Investors to Verify
- Whether subsequent Missouri and Illinois rate-case decisions support recovery of operating costs, environmental spending, and targeted returns.
- The sustainability of Merchant Generation cash flow under weak Midwest power prices and the likelihood of additional energy-center impairments.
- Genco's ability to fund operations and capital spending while external borrowing and dividend capacity are constrained.
- The size, timing, and recoverability of environmental compliance expenditures and related regulatory assets.
- The outcome of EPA, FERC, FAC, Taum Sauk, asbestos, remediation, and tax proceedings, including any required refunds or penalties.
- Actual operating cash flow relative to capital expenditures, debt maturities, dividends, collateral requirements, and planned refinancing.
- Whether Ameren's planned replacement of expiring credit facilities preserves approximately $2.1 billion of committed liquidity.