Ameren Corporation 10-Q Summary: Quarter Ended March 31, 2006
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2006, for Ameren Corporation and its principal subsidiaries: 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, as well as non-rate-regulated electric generation businesses in Missouri and Illinois. The filing notes that the Public Utility Holding Company Act of 1935 (PUHCA 1935) was repealed effective February 8, 2006.
Key Financial Metrics
| Metric (in millions) | Q1 2006 | Q1 2005 |
|---|---|---|
| Total Operating Revenues | $1,800 | $1,626 |
| Operating Income | $196 | $263 |
| Net Income | $70 | $121 |
| Earnings Per Share (Basic/Diluted) | $0.34 | $0.62 |
| Operating Cash Flow | $287 | $357 |
| Capital Expenditures | $(179) | $(210) |
| Short-term Debt | $467 | $193 |
| Long-term Debt | $5,508 | $5,354 |
| Cash and Cash Equivalents | $29 | $96 |
Note: Operating margins were negatively impacted by higher fuel costs and mild weather. Net income decreased 42% year-over-year.
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 11% to $1.8 billion, driven by higher electric and gas volumes and organic growth, partially offset by mild weather.
- Profit Decline: Net income dropped to $70 million from $121 million. The decline was primarily due to:
- Extremely mild winter weather reducing heating demand (gas and electric margins).
- Higher fuel and purchased power costs, specifically increased coal and transportation costs.
- Incremental costs associated with the MISO Day Two Energy Market operations.
- Unavailability of UE's Taum Sauk pumped-storage hydroelectric plant due to a reservoir breach in December 2005.
- Investing Activities: Cash used in investing activities increased significantly to $494 million (from $202 million) due to the acquisition of three combustion turbine (CT) facilities totaling $292 million to meet generating capacity needs.
- Debt Levels: Short-term debt increased by $274 million, primarily to fund the CT acquisitions. Long-term debt increased by $154 million.
Guidance, Outlook, and Risks
Regulatory Environment:
- Illinois: Electric rate freezes for CIPS, CILCO, and IP expire January 1, 2007. The Illinois Commerce Commission (ICC) approved a power procurement auction framework for 2007, but this faces legal challenges from the Illinois Attorney General and Governor. Legislation is pending to potentially extend rate freezes or allow securitization of power costs.
- Missouri: UE is subject to a rate moratorium until July 1, 2006. UE expects to file for a rate adjustment in 2006.
Operational Risks:
- Taum Sauk Incident: UE expects total costs for the reservoir breach to range from $53 million to $73 million. The plant remains out of service pending FERC review; a rebuild could keep it offline through 2008.
- Environmental Compliance: Ameren anticipates investing between $2.1 billion and $2.9 billion between 2006 and 2016 to retrofit plants for new EPA emission rules (SO2, NOx, Mercury).
- Joint Dispatch Agreement: An amendment to the agreement between UE and Genco resulted in a $9 million transfer of margins from Genco to UE in Q1 2006. Future regulatory changes could materially impact this arrangement.
Outlook: Management expects coal and transportation costs to increase 10-15% in 2006 and an additional 15-20% in 2007. Most of Genco's power supply contracts expire in 2006 at prices below current market rates, which may impact future margins.
Investor Verification Checklist
- Taum Sauk Liability: Verify the final determination of costs and the decision on whether to rebuild the facility, as this impacts future generation capacity and insurance recoveries.
- Illinois Rate Freeze Legislation: Monitor the status of Illinois legislation regarding the extension of rate freezes or the approval of securitization bonds, as this directly impacts the ability to recover power costs.
- Joint Dispatch Agreement: Assess the long-term impact of the amended allocation methodology between UE and Genco on consolidated earnings and individual subsidiary performance.
- Environmental Capital Expenditures: Track the actual capital outlay required for EPA compliance against the estimated $2.1B-$2.9B range and the recoverability of these costs in regulated jurisdictions.
- Coal Supply Chain: Monitor railroad delivery issues from the Powder River Basin, which previously impacted coal inventory levels and forced the use of higher-cost fuels.