AEE

Ameren Corporation 10-Q Summary: Quarter Ended March 31, 2007

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2007, for Ameren Corporation and its subsidiaries, including 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, alongside non-rate-regulated electric generation businesses. The filing highlights significant regulatory uncertainty in Illinois regarding electric rate rollbacks and freezes.

Key Financial Metrics

Margins: Electric margins increased by $136 million (20%) year-over-year, driven by higher market-based power sales in the non-rate-regulated segment and new delivery service tariffs in Illinois. Gas margins increased by $4 million (3%) due to favorable weather.

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 12% to $2,019 million, primarily due to higher electric revenues ($1,458 million vs. $1,211 million) resulting from the expiration of rate freezes in Illinois and the implementation of new power procurement tariffs.
• Profitability: Net income increased 76% to $123 million. This was driven by a $43 million increase in the Non-rate-regulated Generation segment and a $20 million increase in the Illinois Regulated segment, partially offset by a $12 million decline in the Missouri Regulated segment.
• Expense Increases: Operating expenses rose to $1,731 million. Notable increases included purchased power costs ($373 million vs. $273 million) and other operations and maintenance expenses ($396 million vs. $352 million), the latter driven by $29 million in storm repair costs from January ice storms.
• Debt Structure: Short-term debt increased significantly to $953 million from $612 million, reflecting higher working capital needs and increased reliance on credit facilities following credit rating downgrades.

Guidance, Outlook, Risks, and Unusual Items

Illinois Regulatory Crisis: The most critical risk factor is the potential enactment of Illinois legislation (Senate Bill 1592) to roll back electric rates to 2006 levels and freeze them. Management states that if enacted without injunction, this would render the Illinois utilities (CIPS, CILCO, IP) financially insolvent and bankrupt. The legislation would require refunds of approximately $107 million collected in Q1 2007.

Credit Rating Downgrades: Moody's, S&P, and Fitch downgraded Ameren and its Illinois subsidiaries in March and April 2007 due to the legislative threat. Moody's placed ratings on review for further downgrade. These actions have increased borrowing costs and triggered collateral posting requirements totaling $65 million in Q1 2007.

Unusual Items:

• Storm Costs: Severe ice storms in January 2007 reduced net income by $19 million (9 cents per share) due to restoration costs.
• Reversal of Accruals: Net income benefited by $10 million (5 cents per share) from the reversal of a 2006 accrual for customer assistance programs, which were terminated due to credit rating downgrades.
• Taum Sauk Incident: UE continues to manage the aftermath of the 2005 Taum Sauk reservoir breach. As of March 31, 2007, UE had accrued a $61 million liability and recorded a $107 million receivable from insurance, with $30 million received to date.

Outlook: Ameren expects coal and transportation costs to rise 15-20% in 2007. The company anticipates significant capital expenditures ($3.5 billion to $4.5 billion between 2007-2016) for environmental compliance (Clean Air Interstate Rule and Mercury Rule).

Investor Verification Checklist

• Illinois Legislative Status: Verify the current status of Senate Bill 1592 and any related House legislation regarding rate rollbacks and freezes.
• Credit Rating Trajectory: Monitor credit rating agency actions (Moody's, S&P, Fitch) for further downgrades or negative outlooks, which impact borrowing costs and collateral requirements.
• Insurance Recovery: Track the resolution of insurance claims related to the Taum Sauk breach and the final determination of rebuild costs.
• Missouri Rate Case: Follow the outcome of the Union Electric Company (UE) electric rate case with the Missouri Public Service Commission (MoPSC), expected by June 2007.
• Environmental Compliance Costs: Assess the capital expenditure requirements for retrofitting power plants to meet new federal and state emission standards.