Ameren Corporation 10-Q Summary: Period Ended June 30, 2006
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2006, 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 notes the repeal of the Public Utility Holding Company Act of 1935 (PUHCA 1935) effective February 8, 2006.
Key Financial Metrics (Six Months Ended June 30, 2006)
| Metric | 2006 (YTD) | 2005 (YTD) | Variance |
|---|---|---|---|
| Total Operating Revenues | $3,350 million | $3,203 million | +$147 million |
| Net Income | $193 million | $306 million | -$113 million |
| Earnings Per Share (Diluted) | $0.94 | $1.55 | -$0.61 |
| Operating Cash Flow | $570 million | $749 million | -$179 million |
| Capital Expenditures | $406 million | $442 million | -$36 million |
| Total Assets | $18,450 million | $18,162 million | +$288 million |
| Long-Term Debt | $5,705 million | $5,354 million | +$351 million |
| Cash and Cash Equivalents | $51 million | $96 million | -$45 million |
Material Changes vs. Prior Period
Decline in Earnings: Net income decreased by 37% year-over-year. The primary drivers for the decline included:
- Higher Fuel Costs: A 14% increase in coal and transportation costs due to global demand and supply constraints.
- Weather Conditions: Milder winter weather reduced heating demand (11% decrease in heating degree-days) and milder spring weather reduced cooling demand (8% decrease in cooling degree-days).
- Plant Outages: An unscheduled outage at UE's Callaway nuclear plant and the continued unavailability of the Taum Sauk pumped-storage hydroelectric plant following a December 2005 reservoir breach.
- Market Costs: Incremental costs associated with operating in the MISO Day Two Energy Market.
Revenue Growth: Despite margin compression, total operating revenues increased by 4.6%, driven by organic growth and increased interchange sales margins, particularly from EEI following the expiration of its cost-based sales contract in late 2005.
Investing Activities: Cash used in investing activities increased to $746 million (from $531 million in 2005), primarily due to UE's acquisition of three gas-fired combustion turbine (CT) facilities totaling $292 million.
Guidance, Outlook, and Risks
Regulatory Outlook:
- Missouri (UE): UE filed a request in July 2006 for a $361 million increase in electric base rates and an $11 million increase in gas rates. A decision is expected by June 2007.
- Illinois (CIPS, CILCO, IP): The Illinois electric rate freeze expires January 1, 2007. Utilities are facing significant uncertainty regarding the recovery of higher power procurement costs. The Illinois Commerce Commission (ICC) approved a power procurement auction framework, but it faces legal challenges from the Illinois Attorney General and Governor. Utilities have proposed a rate increase phase-in and revenue securitization plan to mitigate customer impact, pending legislative approval.
Joint Dispatch Agreement (JDA): UE, CIPS, and Genco agreed to terminate the JDA on December 31, 2006. This will alter margin allocations between UE and Genco, with UE expected to retain more margins from excess generation sales.
Credit Ratings: On July 26, 2006, Moody's downgraded the credit ratings of UE, CIPS, CILCORP, and CILCO, citing weaker financial metrics and the difficult regulatory environment in Illinois. Ameren and IP ratings were confirmed, but a negative outlook was assigned to Ameren, CIPS, CILCORP, CILCO, and IP.
Unusual Items and Contingencies:
- Taum Sauk Breach: UE expects total costs for the reservoir breach to range from $63 million to $83 million. As of June 30, $27 million was paid and $36 million accrued, with a $52 million receivable from insurance.
- Severe Storms: Severe storms in July 2006 impacted service territories, causing unanticipated costs and loss of margins, though the full financial impact was not yet determined at the time of filing.
- Environmental Compliance: Ameren expects to invest between $2.7 billion and $3.4 billion between 2006 and 2016 to retrofit power plants for compliance with EPA emission rules.
Key Facts for Investor Verification
- Rate Case Outcomes: Monitor the final decisions from the Missouri Public Service Commission (MoPSC) on UE's rate increase request and the Illinois Commerce Commission (ICC) on the Illinois utilities' delivery service rate cases and power procurement auction.
- Illinois Legislative Action: Verify the status of Illinois legislation regarding the extension of the rate freeze or the authorization of revenue securitization bonds, which is critical for the Illinois utilities' liquidity and credit ratings.
- Taum Sauk Rebuild Decision: Track the FERC and state authority reviews to determine if the Taum Sauk plant will be rebuilt, the associated costs, and the timeline for its return to service.
- Coal Supply Chain: Assess the stability of coal deliveries from the Powder River Basin and the impact of transportation costs on future margins.
- Credit Rating Impact: Evaluate the implications of the Moody's downgrades on borrowing costs and the potential requirement to post collateral for trade obligations.