Ameren Corporation 10-Q Summary: Period Ended June 30, 2008
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2008, for Ameren Corporation and its principal subsidiaries: Union Electric Company (UE), Central Illinois Public Service Company (CIPS), Ameren Energy Generating Company (Genco), CILCORP Inc., Central Illinois Light Company (CILCO), and Illinois Power Company (IP). Ameren operates rate-regulated electric and natural gas transmission and distribution businesses in Missouri and Illinois, as well as non-rate-regulated electric generation businesses.
Key Financial Metrics (Six Months Ended June 30, 2008)
| Metric | 2008 (YTD) | 2007 (YTD) |
|---|---|---|
| Total Operating Revenues | $3,867 million | $3,752 million |
| Net Income | $344 million | $266 million |
| Earnings Per Share (Basic/Diluted) | $1.64 | $1.29 |
| Operating Cash Flow | $495 million | $543 million |
| Capital Expenditures | $798 million | $715 million |
| Total Assets | $21,645 million | $20,728 million |
| Total Debt (Short-term + Long-term) | $7,881 million | $7,384 million |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased by $115 million (3.1%) compared to the prior year, driven by higher electric and gas margins and increased interchange sales.
- Profitability: Net income increased by $78 million (29.3%). This increase was primarily driven by:
- Net unrealized mark-to-market gains on nonqualifying hedges ($58 million impact).
- A $60 million lump-sum coal contract settlement with a supplier for premature mine closure.
- Absence of a Callaway nuclear plant refueling outage in Q2 2008 (which occurred in Q2 2007).
- Cost Pressures: Higher fuel prices, increased distribution system reliability expenditures, and higher plant operations and maintenance costs offset some of the gains.
- Illinois Settlement: Costs associated with the Illinois electric settlement agreement reduced net income by $14 million for the six-month period.
- Cash Flow: Operating cash flow decreased by $48 million, largely due to higher payments related to the Taum Sauk hydroelectric facility incident and increased collateral postings.
Guidance, Outlook, and Risks
- Rate Cases: UE has requested a $251 million annual revenue increase from the Missouri Public Service Commission (MoPSC), with a decision expected by March 2009. The Ameren Illinois Utilities (CIPS, CILCO, IP) have revised their requests to the Illinois Commerce Commission (ICC) for a combined $207 million increase, with decisions expected by September 2008.
- Regulatory Lag: Management anticipates continued regulatory lag as they seek to recover rising fuel, labor, and capital costs through rate adjustments.
- Environmental Compliance: Significant capital expenditures ($4 billion to $5 billion estimated through 2017) are expected for pollution control equipment. However, recent court decisions vacating the federal Clean Air Interstate Rule and Clean Air Mercury Rule have created uncertainty regarding the timing and ultimate cost of these investments.
- Power Prices: Since July 2008, power prices have fallen sharply. Management notes that deep declines could materially impact financial results for the remainder of 2008 and beyond.
- Contingencies:
- Taum Sauk: UE is rebuilding the upper reservoir at an estimated cost of $450 million. While insurance is expected to cover most costs, litigation regarding the breach remains pending.
- Asbestos Litigation: Ameren and its subsidiaries face numerous asbestos-related lawsuits, though management believes reserves are adequate.
Key Facts for Investor Verification
- Credit Ratings: Verify current credit ratings, as Moody's placed UE's ratings under review for possible downgrade in May 2008 due to declining cash flow coverage and increased costs. Ameren's outlook was also changed to negative/review.
- Coal Contract Settlement: Confirm the timing of the $60 million settlement revenue recognition and the specific impact on 2009 earnings, as the full amount was recognized in 2008.
- Illinois Settlement Contributions: Monitor the remaining $48.8 million in contributions Ameren must make to the Illinois electric settlement agreement through 2010.
- Derivative Exposure: Review the fair value of derivative contracts, which showed significant mark-to-market gains in 2008 ($123 million net fair value at period end), as these are sensitive to commodity price volatility.
- Capital Expenditures: Track the execution of the $798 million capital expenditure plan for the first half of 2008, particularly regarding environmental compliance and reliability improvements.