Ameren Corporation 10-Q Summary: Period Ended September 30, 2007
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2007, and the nine-month period ended September 30, 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, as well as non-rate-regulated electric generation businesses.
Key Financial Metrics (Consolidated)
| Metric | Three Months Ended Sept 30, 2007 | Three Months Ended Sept 30, 2006 | Nine Months Ended Sept 30, 2007 | Nine Months Ended Sept 30, 2006 |
|---|---|---|---|---|
| Total Operating Revenues | $1,997 million | $1,910 million | $5,739 million | $5,260 million |
| Net Income | $244 million | $293 million | $510 million | $486 million |
| Earnings Per Share (Basic/Diluted) | $1.18 | $1.42 | $2.46 | $2.37 |
| Operating Income | $479 million | $547 million | $1,089 million | $1,019 million |
| Net Cash Provided by Operating Activities | N/A | N/A | $920 million | $1,069 million |
| Capital Expenditures | N/A | N/A | ($1,035 million) | ($693 million) |
| Total Assets (Sept 30, 2007) | $20,405 million | |||
| Total Liabilities (Sept 30, 2007) | $13,649 million | |||
| Stockholders' Equity (Sept 30, 2007) | $6,756 million |
Note: Operating cash flow and capital expenditures are presented for the nine-month period only as per the source text.
Material Changes vs. Prior Period
- Net Income Decline (Q3): Consolidated net income decreased by $49 million (17%) in the third quarter compared to the prior year, primarily driven by a $92 million decline in the Illinois Regulated segment.
- Illinois Settlement Agreement: A significant factor impacting earnings was the Illinois electric settlement agreement, which resulted in charges to earnings of $59 million in the third quarter (18 cents per share) to fund customer rate relief and assistance programs.
- Missouri Rate Order: UE benefited from a new electric rate order effective June 4, 2007, which increased electric margins by an estimated $15 million in the quarter.
- Non-Rate-Regulated Growth: The Non-rate-regulated Generation segment saw net income increase by $11 million in the quarter due to the replacement of below-market power sales contracts with higher-priced market-based contracts.
- Cost Increases: Earnings were negatively impacted by higher fuel and transportation costs (9 cents per share), higher labor and employee benefit costs (4 cents per share), and increased depreciation (4 cents per share).
- Weather Impact: Favorable weather conditions provided a positive impact on native load electric margins, estimated at $33 million for the quarter.
Guidance, Outlook, and Risks
- Illinois Rate Cases: In November 2007, the Ameren Illinois Utilities (CIPS, CILCO, IP) filed requests with the Illinois Commerce Commission (ICC) for a combined $247 million increase in electric and gas delivery service rates to recover costs and earn a reasonable return. The ICC has until October 2008 to decide.
- Missouri Rate Case: UE is actively considering the timing of its next electric rate case filing in Missouri following the expiration of the current rate order.
- Environmental Compliance: Ameren expects to invest between $3.5 billion and $4.5 billion between 2007 and 2016 to retrofit power plants with pollution control equipment to comply with federal and state regulations (Clean Air Interstate Rule, mercury rules). Approximately 50% of this investment is in regulated operations and expected to be recoverable from ratepayers.
- Taum Sauk Incident: UE continues to rebuild the upper reservoir at the Taum Sauk pumped-storage hydroelectric facility following a 2005 breach. The plant is expected to be out of service through at least fall 2009. UE believes substantially all damages and rebuilding costs will be covered by insurance, though litigation and regulatory reviews are ongoing.
- Credit Ratings: Several subsidiaries experienced credit rating downgrades in early 2007 due to Illinois legislative actions. However, following the Illinois settlement agreement, rating agencies (Moody's, S&P, Fitch) changed outlooks to "stable" or "positive" for most entities in August 2007.
- Power Procurement: The Illinois settlement agreement replaced the reverse auction process with a new power procurement process led by the Illinois Power Agency (IPA), beginning in 2009. Utilities will contract for power via request-for-proposal in 2008.
Key Facts for Investor Verification
- Illinois Settlement Funding: Verify the timeline and reimbursement status of the $150 million contribution Ameren subsidiaries are making over four years for the Illinois rate relief program, and the receivables recorded from non-affiliated generators ($108 million at Ameren consolidated level as of Sept 30, 2007).
- Rate Case Outcomes: Monitor the ICC's decision on the $247 million rate increase request filed in November 2007, as regulatory lag is currently impacting the Illinois Regulated segment's earnings.
- Environmental Capital Expenditures: Track the actual capital spending against the $3.5 billion to $4.5 billion estimate for environmental compliance and the recoverability of these costs in non-regulated segments.
- Taum Sauk Insurance Recovery: Confirm the final insurance recovery amounts for the Taum Sauk breach, as the company has recorded a $122 million receivable from insurers as of September 30, 2007, but claims are subject to review.
- Coal and Fuel Costs: Monitor coal and transportation costs, which are expected to increase 15% to 20% in 2007 over 2006 levels, and the effectiveness of hedging strategies.