AMEREN CORP quarterly report, Q2 FY2009

Business Context and Reporting Period

Ameren Corporation, a Missouri-based utility holding company, filed a combined unaudited Form 10-Q for the quarter and six months ended June 30, 2009. Operations include regulated electric and natural-gas utilities in Missouri and Illinois and non-rate-regulated generation in Missouri and Illinois. The filing also covers Union Electric, CIPS, Ameren Energy Generating Company, CILCORP, CILCO and Illinois Power.

Financial Performance and Position

Ameren consolidated metric	Three months ended June 30, 2009	Three months ended June 30, 2008	Six months ended June 30, 2009	Six months ended June 30, 2008
Operating revenues	$1,684 million	$1,790 million	$3,600 million	$3,871 million
Operating income	$365 million	$443 million	$686 million	$765 million
Net income attributable to Ameren	$165 million	$206 million	$306 million	$344 million
Basic and diluted EPS	$0.77	$0.98	$1.43	$1.64
Net cash from operating activities	Not separately presented	Not separately presented	$908 million	$501 million

Revenue declined 6% in the quarter and 7% year to date, primarily reflecting lower gas pass-through revenues, reduced off-system sales and weaker demand.
Operating margin was approximately 21.7% in the quarter and 19.1% year to date, compared with approximately 24.7% and 19.8%, respectively, in the comparable 2008 periods.
Quarterly net income attributable to Ameren decreased 20%; year-to-date net income decreased 11%. Management attributed the declines principally to higher net fuel costs, unfavorable mark-to-market derivative activity, the absence of a $60 million 2008 coal contract settlement benefit, higher financing costs and lower demand.
Cash and cash equivalents were $251 million at June 30, 2009, versus $92 million at December 31, 2008. Total assets were $23.2 billion and total equity was $7.4 billion.
Current liabilities were $2.5 billion, including $965 million of short-term debt. Long-term debt was $7.3 billion, compared with $6.6 billion at year-end 2008.
Capital expenditures were $846 million in the first six months, compared with $798 million in 2008. Net cash used in investing activities was $882 million.
Ameren issued $425 million of 8.875% senior unsecured notes due 2014. UE issued $350 million of 8.45% senior secured notes due 2039. IP repaid $250 million of mortgage bonds at maturity.
Ameren paid $164 million of common dividends in the first half, or $0.77 per share, versus $266 million, or $1.27 per share, in 2008.
At June 30, 2009, consolidated available liquidity was approximately $1.4 billion, consisting of cash and unused committed facilities. The filing states that $344 million was available under the 2009 multiyear revolving facility and $800 million under the 2009 Illinois Credit Agreement.
Ameren, UE and Genco were subject to a 65% consolidated debt-to-capitalization covenant and reported ratios of 54%, 54% and 52%, respectively. Management stated that all applicable covenants were satisfied.

Material Changes Versus the Prior Comparable Period

Missouri Regulated earnings declined by $40 million in the quarter and $71 million year to date, despite a Missouri electric rate increase effective March 1, 2009.
Illinois Regulated earnings improved by $29 million in the quarter and $38 million year to date, supported by Illinois delivery-rate increases effective October 1, 2008, and lower operating costs.
Non-rate-regulated Generation earnings declined by $23 million in the quarter and $8 million year to date. Lower demand, power prices, reduced plant utilization, higher fuel costs and reduced mark-to-market gains offset improved contracted pricing.
UE’s electric margin decreased $61 million in the quarter and $91 million year to date, mainly because of lower off-system sales, reduced derivative gains, the Noranda outage and weaker normalized demand.
Genco’s first-half net income decreased to $93 million from $120 million. The prior-year period included the $60 million coal contract settlement benefit.
CILCORP recorded a $462 million noncash goodwill impairment charge in the first quarter, reducing goodwill from $542 million to $80 million and producing a first-half net loss of $408 million. The impairment was not recognized at the consolidated Ameren level because of reporting-unit aggregation.
Ameren’s operating cash flow increased $407 million year to date, primarily because of lower collateral requirements, lower tax payments and reduced Taum Sauk-related cash payments; this improvement did not reflect stronger earnings.

Guidance, Outlook, Risks and Unusual Items

No specific consolidated EPS guidance is provided. Management expects continued pressure from weak economic conditions, lower power and commodity prices, regulatory lag, financing costs and customer demand.
Management identified approximately $2 billion of potential reductions in planned 2010-2013 capital expenditures, including approximately $1 billion already eliminated from non-rate-regulated generation plans. Planned 2009-2013 capital expenditures in the filing total approximately $7.4 billion to $9.3 billion.
Ameren planned to issue up to approximately $250 million of debt at regulated utilities and up to approximately $500 million at non-rate-regulated generation subsidiaries during the remainder of 2009, subject to market conditions.
UE requested a $402 million annual electric revenue increase, including approximately $227 million for normalized net fuel costs, and requested approximately $37 million of interim relief effective October 1, 2009, subject to refund. The Missouri decision was expected by June 2010.
CIPS, CILCO and IP revised their Illinois requests to aggregate annual increases of $176 million for electric delivery and $43 million for natural-gas delivery. ICC decisions were required by May 2010.
UE suspended efforts to build a potential 1,600-megawatt Callaway nuclear unit and asked the NRC to suspend review of its COLA. Approximately $65 million remained capitalized; abandonment could result in a future earnings charge. A related heavy-forgings contract was terminated, with a $5 million penalty recorded in June 2009.
Taum Sauk reconstruction was estimated at $480 million, with the facility expected to remain out of service through early 2010. Insurance recoveries were uncertain, and three insurers filed litigation challenging coverage for a portion of the reconstruction design. Uninsured amounts could materially affect earnings, liquidity or financial position.
Environmental compliance remains a major risk. Ameren estimated $4.0 billion to $5.0 billion of environmental capital expenditures through 2018, with future greenhouse-gas, mercury, air-quality, water and coal-ash rules potentially increasing costs or limiting coal generation.
Counterparty and collateral exposure is material. Ameren estimated potential additional collateral requirements of up to $386 million based on sub-investment-grade ratings and up to $418 million under specified lower-commodity-price scenarios.
Other risks include regulatory decisions, power and fuel prices, weather, plant outages, nuclear operations, pension funding, credit-market access, legal proceedings, environmental remediation and possible future goodwill impairments.

Investor Verification Checklist

Verify the sustainability of cash flow, liquidity and covenant compliance after debt maturities, capital spending, pension contributions and potential collateral postings.
Assess the outcome and timing of the Missouri and Illinois rate cases, including recovery of fuel, reliability, environmental and bad-debt costs.
Review the insurance coverage dispute and remaining Taum Sauk reconstruction and liability exposures.
Evaluate whether lower wholesale power prices, weak industrial demand and reduced generation utilization could trigger additional impairments or reduce non-rate-regulated earnings.
Reconcile the $462 million CILCORP goodwill impairment with Ameren’s consolidated reporting-unit disclosures and monitor the limited valuation cushions for Ameren and IP reporting units.
Review environmental capital requirements, coal-plant economics and potential greenhouse-gas regulation for effects on future rates, generation availability and financing needs.
Confirm the effect of the reduced dividend, planned debt and equity financing, and the company’s ability to fund its substantial capital program without weakening credit metrics.