AMEREN CORP quarterly report, Q2 FY2010

Business Context and Reporting Period

Ameren Corporation is a regulated electric and natural-gas utility holding company with Missouri Regulated, Illinois Regulated, and Merchant Generation segments. This combined unaudited Form 10-Q covers the quarter and six months ended June 30, 2010, compared with the corresponding 2009 periods. Registrants include Ameren, Union Electric, CIPS, Ameren Energy Generating Company, CILCO, and Illinois Power.

Financial Results and Key Metrics

Ameren consolidated	Q2 2010	Q2 2009	Six months 2010	Six months 2009
Operating revenues	$1,704 million	$1,684 million	$3,620 million	$3,600 million
Operating income	$331 million	$365 million	$629 million	$686 million
Net income attributable to Ameren	$152 million	$165 million	$254 million	$306 million
EPS, basic and diluted	$0.64	$0.77	$1.07	$1.43
Operating margin	19.4%	21.7%	17.4%	19.1%
Dividends per common share	$0.385	$0.385	$0.770	$0.770

Revenue increased modestly, but operating income declined 9% in the quarter and 8% year to date. Net income attributable to Ameren declined 8% in the quarter and 17% for the six months.
Missouri Regulated net income attributable to Ameren increased to $113 million in the quarter from $82 million and to $140 million for six months from $103 million. Illinois Regulated increased to $46 million from $15 million in the quarter and to $79 million from $40 million year to date.
Merchant Generation net income attributable to Ameren fell to a $2 million loss from $75 million of income in the quarter and to $42 million from $168 million for six months.
Cash provided by operating activities was $772 million for the six months, down from $871 million. Capital expenditures were $540 million, compared with $846 million, and investing cash use was $560 million versus $882 million.
Financing activities used $328 million, compared with $170 million provided in 2009. Ameren paid $183 million of common dividends and issued $43 million of common stock through DRPlus and its 401(k) plan.
Cash and cash equivalents were $506 million at June 30, 2010, versus $622 million at December 31, 2009. Total assets were $23.915 billion and total equity was $8.200 billion.
Ameren reported current maturities of long-term debt of $354 million, credit-facility borrowings of $690 million, and net long-term debt of $6.963 billion. Estimated fair value of long-term debt and capital lease obligations was $8.141 billion versus a $7.317 billion carrying amount.
At June 30, available committed credit capacity was $615 million under the multiyear facilities and $800 million under the Illinois credit agreement. Including cash, management estimated consolidated available liquidity at approximately $1.9 billion.
Ameren was in compliance with applicable credit covenants. Debt-to-capitalization ratios under the relevant facilities were 50% for Ameren, 48% for UE, and 52% for Genco; the Illinois agreement funds-from-operations-to-interest ratio was 4.7 to 1.

Material Changes Versus the Prior Comparable Period

Merchant Generation margins declined sharply because of lower wholesale power prices, expiration of higher-margin 2006 auction contracts on May 31, 2010, higher fuel and transportation costs, and unfavorable mark-to-market results. Segment electric margins declined $111 million in the quarter and $171 million year to date.
Regulated operations benefited from higher rates, warmer summer weather, improved weather-normalized sales, recovery mechanisms, and the return of Noranda’s aluminum smelter to full capacity.
UE’s electric margins increased $49 million in the quarter and $77 million year to date. Its May 2010 rate order authorized approximately $230 million of annual electric revenue increases effective June 21, 2010.
The Illinois utilities received a net annual electric delivery revenue increase of $35 million and a net natural-gas delivery revenue decrease of $20 million, effective May 2010. Rehearing could produce additional annual revenue of up to $55 million; Illinois ICC staff recommended $11 million.
The 56-day Callaway nuclear refueling and maintenance outage increased costs and reduced generation in 2010; no comparable outage occurred in 2009.
Operations and maintenance expense decreased $5 million in the quarter and $10 million year to date, reflecting cost controls, fewer storms, employee reductions, and new regulatory assets, partly offset by Callaway outage costs and reliability spending.
Depreciation and amortization increased $8 million in the quarter and $21 million year to date, primarily from capital additions, higher depreciation rates, and regulatory-asset amortization.
The 2010 first six months included a $13 million pretax charge related to changes in the tax treatment of retiree health-care subsidies under federal health-care legislation, reducing deferred tax assets.
Genco completed the sale of 25% of its Columbia, Missouri, combustion-turbine facility for $18 million and retained options relating to additional ownership interests.

Guidance, Outlook, Risks, Contingencies, and Unusual Items

Management expected 2010 other operations and maintenance expense of approximately $300 million, about 10% below 2009, following workforce and spending reductions.
Estimated 2010 capital expenditures were $1.130 billion; total 2010–2014 capital expenditures were estimated at $5.8 billion to $7.6 billion. These estimates excluded the potential effects of the proposed Clean Air Transport Rule.
Ameren expected up to $1.43 billion of coal-plant pollution-control investment from 2010 through 2017. Environmental rules could increase capital and operating costs, impair assets, or cause coal-fired plant closures.
Ameren planned to replace or extend existing credit facilities by the end of the third quarter of 2010. The 2009 Supplemental Credit Agreement expired in July 2010, with commitments consolidated into the multiyear facilities.
The company expected to complete the merger of CILCO and IP into CIPS and transfer AERG to Resources Company by October 1, 2010. FERC approvals had been received, but completion remained subject to conditions and timing risks.
UE filed for approximately $12 million of annual natural-gas delivery revenue increases, with a decision expected by May 2011, and expected to file another electric rate case in 2010 to recover its approximately $600 million Sioux scrubber investment.
Taum Sauk’s rebuilt facility became operational in April 2010. Rebuild costs were approximately $490 million, cumulative property-insurance recoveries were $422 million, and $97 million of Taum Sauk-related costs remained capitalized as potentially recoverable in future rates. Remaining insurance litigation and regulatory recovery were unresolved.
UE faced appeals concerning Missouri electric rate orders and the Noranda account. An adverse outcome could reduce pretax earnings by approximately $6 million plus subsequent contested payments.
Material unresolved matters included the MISO-PJM resettlement dispute, UE’s EPA Notice of Violation concerning coal-plant New Source Review matters, environmental remediation, ash-pond regulation, asbestos litigation, Callaway nuclear risks, and future greenhouse-gas and air-quality requirements.
Commodity and counterparty risk remained significant. A 1% decline in unhedged power prices was estimated to reduce cumulative net income by $27 million for Ameren through 2014. Potential additional collateral requirements associated with credit-rating deterioration were estimated at $323 million for Ameren consolidated.
Goodwill impairment risk was elevated because the Merchant Generation reporting unit’s estimated fair value exceeded carrying value by only a nominal amount at the October 31, 2009 test date.

Most Important Facts for Investors to Verify

Whether Merchant Generation margins and cash flow stabilize as power prices, fuel costs, hedging results, and auction-contract expirations affect earnings.
The final outcomes of UE’s Missouri rate appeals, UE’s pending gas rate case, and the Illinois ICC rehearing.
Replacement or extension of credit facilities before the 2011 expirations and the effect on liquidity and borrowing costs.
Completion, accounting treatment, and financing effects of the planned Ameren Illinois reorganization and AERG transfer.
Actual costs, rate recovery, and timing for Sioux, Merchant Generation, and other environmental compliance projects, including any final CATR or greenhouse-gas rules.
Insurance recoveries and rate treatment for remaining Taum Sauk costs, including the potential for material future charges.
Exposure from derivative valuation, counterparty collateral, MISO-PJM proceedings, environmental claims, asbestos litigation, and potential goodwill impairment.
Progress against the stated capital-expenditure plan, pension funding estimates of approximately $970 million over five years, and the ability to maintain dividends while funding investment and debt maturities.