AMEREN CORP quarterly report, Q1 FY2010

Ameren Corporation 2010 Q1 Form 10-Q Summary

Business context and reporting period

Ameren Corporation is a Missouri-based utility holding company with regulated electric and natural-gas operations in Missouri and Illinois and merchant-generation operations. The combined Form 10-Q covers Ameren, Union Electric Company, Central Illinois Public Service Company, Ameren Energy Generating Company, Central Illinois Light Company, and Illinois Power Company. The reporting period is the three months ended March 31, 2010; financial statements are unaudited and amounts are generally in millions except per-share data.

Key financial metrics

Metric	Q1 2010	Q1 2009	Change
Operating revenues	$1,916	$1,916	Flat
Operating income	$298	$321	Down $23
Income before taxes	$181	$215	Down $34
Net income	$106	$145	Down $39
Net income attributable to Ameren	$102	$141	Down $39
Basic and diluted EPS	$0.43	$0.66	Down $0.23
Common dividend per share	$0.385	$0.385	Unchanged
Net cash from operating activities	$381	$516	Down $135
Capital expenditures	$289	$424	Down $135
Cash and cash equivalents at March 31	$360	$304	Up $56 year over year

Electric revenue increased to $1,440 from $1,395, while gas revenue declined to $476 from $521. Higher regulated utility sales, colder weather, the full-quarter benefit of the 2009 Missouri rate increase, and the recovery of Noranda smelter demand offset lower merchant-generation pricing and gas revenue.

Operating margin pressure was concentrated in Merchant Generation. Ameren’s electric margin decreased $12, or 1%, with Merchant Generation electric margin down $60, or 21%. Regulated electric margins improved, including increases of $28 at Union Electric, $10 at CIPS, $1 at CILCO’s regulated segment, and $13 at Illinois Power. Ameren’s natural-gas margin increased $5, or 4%.

Operating expenses increased to $1,618 from $1,595. Fuel expense rose to $293 from $274, purchased power to $271 from $233, depreciation and amortization to $187 from $174, and taxes other than income taxes to $118 from $110. Other operations and maintenance expense declined to $416 from $421.

Interest expense increased to $132 from $118. The effective income tax rate increased to 41% from 33%, principally because of a $13 million after-tax non-cash charge related to the 2010 federal health-care legislation and changes to the tax treatment of retiree health-care subsidies.

Liquidity, debt, and cash flow

Cash declined from $622 at December 31, 2009 to $360 at March 31, 2010. Ameren generated $381 of operating cash, used $317 in investing activities, and used $326 in financing activities.
Investing cash use included $289 of capital expenditures, $23 of nuclear-fuel expenditures, and net purchases of nuclear decommissioning trust securities.
Financing cash use included $91 of common dividends and $220 of net repayments of short-term and credit-facility borrowings. No long-term debt was issued in Q1 2010; Q1 2009 included $349 of long-term debt issuance.
Ameren reported $630 of credit-facility borrowings at March 31, 2010, consisting primarily of $557 under the $1.15 billion multiyear facility and $73 under the $150 million supplemental facility. Available amounts were $655 under the multiyear agreements and $800 under the Illinois credit agreement.
Consolidated long-term debt, including current maturities, was approximately $7,317, compared with $7,317 at year-end. Ameren’s defined credit-agreement debt-to-capitalization ratio was 50%, below the applicable 65% covenant; its funds-from-operations-to-interest ratio was 4.5 to 1 versus a 2.0 to 1 minimum.
Management stated that all credit-facility, indenture, and other relevant covenants were satisfied and that liquidity was adequate. Cash plus available credit facilities totaled approximately $1.8 billion at March 31, 2010.

Material changes versus the prior comparable period

Earnings attributable to Ameren fell 28%, from $141 to $102, and EPS fell from $0.66 to $0.43.
Merchant Generation earnings declined $49, primarily because of lower power prices, lower-margin sales, higher fuel and transportation costs, and reduced revenue allocations under power supply agreements.
Regulated-segment earnings improved: Missouri Regulated increased $6 and Illinois Regulated increased $8.
Utility demand benefited from colder winter weather and improving economic conditions. Weather-normalized retail sales at regulated utilities increased 4%; residential and commercial kilowatthour sales increased 7%, and industrial sales increased 10% including Noranda.
Operating cash flow declined despite lower capital spending, primarily because of lower collections from prior-year receivables, lower gas-cost over-recoveries, higher coal and transportation payments, higher property-tax payments, and increased interest payments.
Ameren’s Merchant Generation estimated 2010-2014 capital costs declined by $435, primarily from a $420 reduction in environmental-compliance estimates. Consolidated 2010-2014 capital expenditures were estimated at $5,865 to $7,665.
Effective January 1, 2010, EEI was transferred from Resources Company to Genco in an internal common-control reorganization; Genco’s comparative financial statements were retrospectively combined.

Guidance, outlook, risks, and unusual items

Management expects regulated earnings to improve over time through rate relief, disciplined spending, reliability investment, and reduced regulatory lag. Merchant Generation is being positioned for a potential recovery in power prices.
UE had a pending Missouri electric rate request for $287 annually, while Missouri commission staff recommended $165. A decision was expected by the end of June 2010; the ultimate rate outcome was uncertain.
The Illinois Commerce Commission approved, as amended, annual electric-delivery revenue increases totaling $35 and natural-gas revenue decreases totaling $20 for CIPS, CILCO, and IP. The companies sought a stay and rehearing and planned spending reductions, hiring restrictions, contractor reductions, and project delays.
Merchant Generation announced a staffing reduction of approximately 75 positions and expected 2010 other operations and maintenance expense of approximately $300, about 10% below 2009.
Taum Sauk resumed operations in April 2010. UE had recorded insurance receivables of $67 for incident-related liability claims and $58 for property and replacement-power claims. Insurance litigation remained unresolved, and $100 of capitalized rebuild costs was identified as potentially recoverable through future rates. Unrecovered amounts could materially affect earnings.
Callaway nuclear plant refueling and maintenance began April 17, 2010, and was expected to last 35 days, increasing maintenance and purchased-power costs during the outage.
Environmental risks include Clean Air Act New Source Review matters, a January 2010 EPA Notice of Violation concerning UE coal plants, potential mercury, greenhouse-gas, coal-ash, and cooling-water regulations, and significant future pollution-control spending. Management estimated Ameren environmental capital costs of $1,235 to $1,435 through 2017.
Ameren faced remediation obligations at former manufactured-gas-plant sites, including estimated ranges of $43 to $62 for CIPS and $111 to $174 for IP. Recorded liabilities generally represented the low end of the estimated ranges.
MISO and PJM disputed historical market-flow calculations. Potential resettlements included a $65 estimate for one period and contested claims of $130 from MISO and at least $25 from PJM; no prospective payment or refund was recorded.
CIPS, CILCO, and IP entered into an April 13, 2010 merger agreement under which CILCO and IP would merge into CIPS, followed by the transfer of AERG to Resources Company. Completion was targeted for on or before October 1, 2010, subject to approvals and other conditions.
Derivative and commodity exposure remained significant. Ameren’s potential additional collateral requirement under specified credit-related triggers was $257; adverse commodity-price movements could also require additional collateral. The filing identifies substantial Level 3 derivative valuations and counterparty exposure.
Ameren expected pension contributions of $75 to $225 annually over each of the next five years, with aggregate estimated contributions of $740, subject to market and regulatory changes.

Most important facts for an investor to verify

Whether the Missouri UE rate case produced sufficient revenue recovery and whether the Illinois rate-order rehearing, stay, or appeals changed the approved economics.
Whether merchant power prices, fuel and transportation costs, generation output, and hedge settlements support recovery from the sharp Q1 Merchant Generation margin decline.
The final insurance recovery and litigation outcome for Taum Sauk, including the treatment of potentially unrecovered rebuild costs.
Ameren’s ability to fund approximately $1.2 billion of 2010 capital expenditures and longer-term environmental and reliability investments while maintaining liquidity and credit compliance.
The final structure, timing, approvals, debt treatment, and tax consequences of the proposed Illinois corporate reorganization.
Potential costs from environmental enforcement, greenhouse-gas and coal-ash regulation, remediation, MISO/PJM settlements, and nuclear operations.
The effect of the $13 million health-care-related tax charge and any continuing annual tax expense increase from the legislation.