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| AEE > SEC Filings for AEE > Form 10-Q on 8-Aug-2008 | All Recent SEC Filings |
8-Aug-2008
Quarterly Report
OVERVIEW
Ameren Executive Summary
Ameren's earnings in the second quarter and first half of 2008 exceeded its earnings in the 2007 comparable periods principally because of the net impact of the following items:
· Net unrealized mark-to-market gains from nonqualifying hedges increased Ameren's net income in the second quarter and first six months of 2008 by $48 million and $58 million, respectively, as compared to gains of $5 million and $1 million in the second quarter and first six months of 2007, respectively.
· A lump-sum payment from a coal supplier for expected higher fuel costs for our Non-rate-regulated Generation segment in 2009 as a result of the premature closure of a mine in late 2007 and the resulting termination of a contract increased Ameren's second quarter and first half of 2008 net income by $16 million.
· The estimated minimum amount of storm costs that UE expects to recover, as a result of an accounting order issued by the MoPSC, which was recorded as a regulatory asset, increased Ameren's net income in the second quarter and first six months of 2008 by $8 million.
· Severe ice storms reduced Ameren's net income in the first half of 2007 by $18 million as compared to minor storm expenditures in the first half of 2008.
· A FERC order that resettled costs among market participants, retroactive to 2005, reduced Ameren's net income in the first six months of 2007 by $10 million.
· The net costs associated with the Illinois electric settlement agreement reduced Ameren's net income by $8 million and $14 million in the second quarter and first half of 2008, respectively, while the reversal of a 2006 charge related to funding commitments for the Illinois Customer Elect electric rate increase phase-in plan benefited net income in the first six months of 2007 by $10 million.
Excluding these items, Ameren's earnings in the second quarter of 2008 were comparable with the same period in 2007. Higher electric and gas margins and the benefit of not having a Callaway nuclear plant refueling and maintenance outage in the second quarter of 2008, as occurred in the second quarter of 2007, were largely offset by the following factors: higher fuel prices, increased spending on utility distribution system reliability, coal-fired plant operations and maintenance and other operating expenses, and the earnings impact of milder weather.
Excluding the items discussed above, Ameren's earnings in the first half of 2008 were below its earnings in the same period in 2007 principally because of higher fuel prices, increased spending on utility distribution system reliability and coal-fired plant operations and maintenance, higher other operating expenses and the impact of electric rate redesign in Illinois. In late 2007, the ICC authorized redesigned electric rates to reduce seasonal fluctuations for residential customers who use electricity to heat their homes. The effect of these redesigned rates will shift some revenues from winter to summer months with no impact on full-year earnings. The earnings impact of these unfavorable items was reduced by, among other things, higher electric and gas margins and the lack of a Callaway nuclear plant refueling and maintenance outage in the second quarter of 2008.
A great deal of activity took place in Ameren's business in the first half of 2008 from an operational and regulatory perspective. Ameren's coal procurement and management strategies allowed the coal plants to run at full available capacity despite meaningful delays in coal deliveries at some of the plants due to significant flooding in the Midwest. Additionally, Ameren successfully negotiated the coal contract settlement with a coal
supplier over higher fuel costs Ameren expects to incur in 2008 and 2009.
Increasing costs for the fuel to run Ameren's business are indicative of the rising cost environment that the entire industry is facing. Ameren is experiencing significant cost increases across the board during a period when substantial investments in infrastructure for improved reliability and cleaner air are needed. Ameren has proactively taken actions to manage these cost increases, especially as they relate to fuel costs. However, Ameren's hedging activities and other proactive cost control activities cannot entirely eliminate the rising costs, which are impacting all aspects of the business. These cost pressures, coupled with significant investments in utility infrastructure, have required Ameren to seek rate increases for both the Illinois Regulated and Missouri Regulated business segments. The current ICC-requested electric and natural gas delivery service annual revenue increase for the Ameren Illinois Utilities is approximately $207 million, in the aggregate, and the ICC staff has recommended an increase of approximately $87 million, in the aggregate. UE has requested the MoPSC for an annual electric revenue increase of approximately $251 million. These cases are progressing, and final decisions are expected by the end of September 2008 for the Illinois rate cases and by March 2009 for the Missouri rate case. Achieving constructive outcomes in these cases is critical to UE's, CIPS', CILCO's and IP's ability to continue to invest in their infrastructure in order to meet customers' expectations for safe and reliable service.
In July 2008, UE filed a COLA with the NRC for a potential new nuclear plant unit at its existing Callaway nuclear plant site. Ameren has not made a decision to build a second nuclear power plant at this time; however, seeking NRC approval and a license will preserve the nuclear generation option for the future. It will also position UE to seek nuclear-specific federal loan guarantees and production tax credits, made possible by the Energy Policy Act of 2005. It is estimated that the NRC review may require up to 42 months for completion.
On July 11, 2008, the U.S. Court of Appeals for the District of Columbia issued a decision that vacated the federal Clean Air Interstate Rule and earlier this year this court had vacated the federal Clean Air Mercury Rule. Ameren is currently evaluating the impact that these court decisions will have on its environmental compliance strategy. Included in the evaluation will be a review of other relevant environmental regulations. It is unclear how this matter will be resolved at this time. Ameren expects this uncertainty to persist until the matter of further court appeals has been exhausted or expired. It is also possible that the U.S. Congress may take legislation action in response to these court decisions.
General
Ameren, headquartered in St. Louis, Missouri, is a public utility holding company under PUHCA 2005 administered by FERC. Ameren's primary assets are the common stock of its subsidiaries. Ameren's subsidiaries are separate, independent legal entities with separate businesses, assets and liabilities. These subsidiaries operate rate-regulated electric generation, transmission and distribution businesses, rate-regulated natural gas transmission and distribution businesses, and non-rate-regulated electric generation businesses in Missouri and Illinois. Dividends on Ameren's common stock are dependent on distributions made to it by its subsidiaries. Ameren's principal subsidiaries are listed below.
· UE operates a rate-regulated electric generation, transmission and distribution business, and a rate-regulated natural gas transmission and distribution business in Missouri.
· CIPS operates a rate-regulated electric and natural gas transmission and distribution business in Illinois.
· Genco operates a non-rate-regulated electric generation business in Illinois and Missouri.
· CILCO, a subsidiary of CILCORP (a holding company), operates a rate-regulated electric and natural gas transmission and distribution business and a non-rate-regulated electric generation business (through its subsidiary, AERG) in Illinois.
· IP operates a rate-regulated electric and natural gas transmission and distribution business in Illinois.
In addition to presenting results of operations and earnings amounts in total, we present certain information in cents per share. These amounts reflect factors that directly affect Ameren's earnings. We believe this per share information helps readers to understand the impact of these factors on Ameren's earnings per share. All references in this report to earnings per share are based on average diluted common shares outstanding during the applicable period. All tabular dollar amounts are in millions, unless otherwise indicated.
RESULTS OF OPERATIONS
Earnings Summary
Our results of operations and financial position are affected by many factors. Weather, economic conditions, and the actions of key customers or competitors can significantly affect the demand for our services. Our results are also affected by seasonal fluctuations: winter heating and summer cooling demands. The vast majority of Ameren's revenues are
subject to state or federal regulation. This regulation has a material impact on the price we charge for our services. Non-rate-regulated Generation sales are also subject to market conditions for power. We principally use coal, nuclear fuel, natural gas, and oil in our operations. The prices for these commodities can fluctuate significantly due to the global economic and political environment, weather, supply and demand, and many other factors. We do not currently have a fuel and purchased power cost recovery mechanism in Missouri for our electric utility business. We do have natural gas cost recovery mechanisms for our Illinois and Missouri gas delivery businesses and purchased power cost recovery mechanisms for our Illinois electric delivery businesses. See Note 2 - Rate and Regulatory Matters to our financial statements under Part I, Item 1, for a discussion of pending rate cases and the Illinois electric settlement agreement. Fluctuations in interest rates affect our cost of borrowing and our pension and postretirement benefits costs. We employ various risk management strategies to reduce our exposure to commodity risk and other risks inherent in our business. The reliability of our power plants and transmission and distribution systems, the level of purchased power costs, operating and administrative costs, and capital investment are key factors that we seek to control to optimize our results of operations, financial position, and liquidity.
Ameren's net income increased to $206 million, or 98 cents per share, in the second quarter of 2008 from $143 million, or 69 cents per share, in the second quarter of 2007. Net income in the second quarter of 2008 increased in the Missouri Regulated and Non-rate-regulated Generation segments by $55 million and $42 million, respectively, from the prior-year period, while net income in the Illinois Regulated segment declined by $34 million from the same period in 2007.
Ameren's net income increased to $344 million, or $1.64 per share, in the first six months of 2008 from $266 million, or $1.29 per share, in the first six months of 2007. Net income increased in the Missouri Regulated and Non-rate-regulated Generation segments by $89 million and $50 million, respectively, in the first six months of 2008 compared to the prior-year period, while net income in the Illinois Regulated segment decreased by $51 million from the same period in 2007.
Earnings were favorably impacted in the second quarter and first six months of 2008 as compared with the same periods in 2007 by:
· increased margins on interchange sales in the Missouri Regulated segment;
· increased plant availability and higher realized electric margins in the Non-rate-regulated Generation segment;
· net mark-to-market gains on energy and fuel-related transactions (21 cents per share and 28 cents per share, respectively);
· a settlement agreement with a coal mine owner reached in June 2008 that reimbursed Genco, in the form of a lump-sum payment of $60 million, for increased costs for coal and transportation that it is incurring in 2008 and expects to incur in 2009 ($27 million) due to the premature closure of an Illinois mine at the end of 2007 (18 cents per share and 18 cents per share, respectively);
· the absence of costs in 2008 that were incurred in 2007 relating to a refueling and maintenance outage at UE's Callaway nuclear plant (16 cents per share and 16 cents per share, respectively);
· the minimum amount of storm costs that UE expects to recover, as a result of an accounting order issued by the MoPSC, which was recorded as a regulatory asset (4 cents per share and 4 cents per share, respectively); and
· higher electric rates, lower depreciation expense and decreased income tax expense in the Missouri Regulated segment pursuant to the MoPSC electric rate order for UE issued in May 2007 (2 cents per share and 8 cents per share, respectively).
Earnings were negatively impacted in the second quarter and first six months of 2008 as compared with the same periods in 2007 by:
· higher fuel and related transportation prices (8 cents per share and 17 cents per share, respectively);
· increased distribution system reliability expenditures (8 cents per share and 14 cents per share, respectively);
· higher plant operations and maintenance expense (6 cents per share and 8 cents per share, respectively);
· unfavorable weather conditions (estimated at 3 cents per share for the second quarter only);
· electric rate relief and customer assistance programs provided to certain Ameren Illinois Utilities electric customers under the Illinois electric settlement agreement (4 cents per share and 7 cents per share, respectively);
· higher labor and employee benefit costs (5 cents per share and 6 cents per share, respectively);
· higher financing costs (3 cents per share and 3 cents per share, respectively);
· higher bad debt expenses (2 cents per share and 3 cents per share, respectively); and
· the implementation of new seasonal delivery service tariffs at the Ameren Illinois Utilities, which will impact quarterly earnings comparisons in 2008 but are not expected to have any impact on annual margins (1 cent per share and 6 cents per share, respectively).
The cents per share information presented above is based on average shares outstanding in the second quarter and first six months of 2007.
Because it is a holding company, Ameren's net income and cash flows are primarily generated by its principal subsidiaries: UE, CIPS, Genco, CILCORP and IP. The following table presents the contribution by Ameren's principal subsidiaries to Ameren's consolidated net income for the three months and six months ended June 30, 2008 and 2007:
Three Months Six Months
2008 2007 2008 2007
Net income (loss):
UE(a) $ 122 $ 79 $ 185 $ 111
CIPS (3 ) 5 (1 ) 16
Genco 74 17 120 60
CILCORP 4 12 24 33
IP (10 ) 7 (8 ) 21
Other(b) 19 23 24 25
Ameren net income $ 206 $ 143 $ 344 $ 266
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(a) Includes earnings from a non-rate-regulated 40% interest in EEI through February 29, 2008.
(b) Includes earnings from non-rate-regulated operations and an 80% interest in EEI held by Resources Company since February 29, 2008, as well as corporate general and administrative expenses, and intercompany eliminations. Prior to February 29, 2008, included a 40% interest in EEI held by Development Company, as well as corporate general and administrative expenses and intercompany eliminations.
Below is a table of income statement components by segment for the three months and six months ended June 30, 2008 and 2007:
Non-rate- Other /
Missouri Illinois regulated Intersegment
Regulated Regulated Generation Eliminations Total
Three Months 2008:
Electric
margin $ 595 $ 188 $ 320 $ (4 ) $ 1,099
Gas margin 17 63 - (2 ) 78
Other operations and
maintenance (238 ) (154 ) (90 ) 13 (469 )
Depreciation and
amortization (82 ) (61 ) (29 ) (6 ) (178 )
Taxes other than income
taxes (60 ) (24 ) (6 ) 1 (89 )
Other income and
(expenses) 13 3 4 (7 ) 13
Interest
expense (50 ) (37 ) (29 ) (2 ) (118 )
Income taxes (71 ) 9 (64 ) 7 (119 )
Minority interest and preferred
dividends (2 ) (1 ) (8 ) - (11 )
Net income
(loss) $ 122 $ (14 ) $ 98 $ - $ 206
Three Months 2007:
Electric
margin $ 494 $ 207 $ 251 $ (10 ) $ 942
Gas margin 14 63 - (1 ) 76
Other operations and
maintenance (223 ) (124 ) (89 ) 16 (420 )
Depreciation and
amortization (84 ) (58 ) (30 ) (4 ) (176 )
Taxes other than income
taxes (60 ) (30 ) (6 ) - (96 )
Other income and
(expenses) 7 7 1 (3 ) 12
Interest
expense (49 ) (33 ) (28 ) 2 (108 )
Income taxes (30 ) (11 ) (37 ) - (78 )
Minority interest and preferred
dividends (2 ) (1 ) (6 ) - (9 )
Net income $ 67 $ 20 $ 56 $ - $ 143
Six Months 2008:
Electric
margin $ 1,036 $ 366 $ 592 $ (17 ) $ 1,977
Gas margin 45 189 - (3 ) 231
Other operations and
maintenance (455 ) (297 ) (168 ) 29 (891 )
Depreciation and
amortization (163 ) (121 ) (57 ) (13 ) (354 )
Taxes other than income
taxes (120 ) (67 ) (14 ) (1 ) (202 )
Other income and
(expenses) 25 7 5 (8 ) 29
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Non-rate- Other /
Missouri Illinois regulated Intersegment
Six Months 2008: Regulated Regulated Generation Eliminations Total
Interest
expense (91 ) (72 ) (50 ) (5 ) (218 )
Income taxes (100 ) - (116 ) 10 (206 )
Minority interest and preferred
dividends (3 ) (3 ) (16 ) - (22 )
Net income
(loss) $ 174 $ 2 $ 176 $ (8 ) $ 344
Six Months 2007:
Electric
margin $ 902 $ 386 $ 501 $ (20 ) $ 1,769
Gas margin 41 178 - (3 ) 216
Other
revenues 1 2 - (3 ) -
Other operations and
maintenance (446 ) (245 ) (157 ) 39 (809 )
Depreciation and
amortization (171 ) (118 ) (57 ) (13 ) (359 )
Taxes other than income
taxes (117 ) (66 ) (14 ) (1 ) (198 )
Other income and
(expenses) 16 10 2 (7 ) 21
Interest
expense (97 ) (62 ) (53 ) 6 (206 )
Income taxes (41 ) (29 ) (83 ) 4 (149 )
Minority interest and preferred
dividends (3 ) (3 ) (13 ) - (19 )
Net income $ 85 $ 53 $ 126 $ 2 $ 266
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Margins
The following table presents the favorable (unfavorable) variations in the registrants' electric and gas margins for the three months and six months ended June 30, 2008, compared with the same periods in 2007. Electric margins are defined as electric revenues less fuel and purchased power costs. Gas margins are defined as gas revenues less gas purchased for resale. We consider electric, interchange and gas margins useful measures to analyze the change in profitability of our electric and gas operations between periods. We have included the analysis below as a complement to the financial information we provide in accordance with GAAP. However, these margins may not be a presentation defined under GAAP and may not be comparable to other companies' presentations or more useful than the GAAP information we provide elsewhere in this report.
Three Months Ameren(a) UE CIPS Genco CILCORP CILCO IP
Electric revenue
change:
Effect of weather
(estimate) $ (28 ) $ (6 ) $ (8 ) $ - $ (4 ) $ (4 ) $ (10 )
UE electric rate
increase 7 7 - - - - -
Interchange revenues,
excluding estimated
weather impact of $13
million 42 42 - - - - -
Illinois electric
settlement agreement -
net
of reimbursement (8 ) - (1 ) (5 ) (3 ) (3 ) (2 )
Illinois rate redesign 8 - 4 - 1 1 3
Net mark-to-market
gains (losses) on
energy contracts (19 ) 14 - - - - -
Growth, Illinois
customer switching,
and
other 24 11 (19 ) 13 3 3 (13 )
Total electric revenue
change $ 26 $ 68 $ (24 ) $ 8 $ (3 ) $ (3 ) $ (22 )
Fuel and purchased
power change:
Fuel:
Generation and other $ 17 $ 12 $ - $ 16 $ (14 ) $ (14 ) $ -
Emission allowance
sales (costs) 3 3 - 1 (1 ) (1 ) -
Net mark-to-market
gains on fuel
contracts 88 48 - 23 7 7 -
Price (45 ) (24 ) - (15 ) (3 ) (3 ) -
Coal contract
settlement 60 - - 60 - - -
Purchased power 18 (8 ) 23 - 3 3 20
Illinois rate redesign (10 ) - (4 ) - (1 ) (1 ) (3 )
Total fuel and
purchased power change $ 131 $ 31 $ 19 $ 85 $ (9 ) $ (9 ) $ 17
Net change in electric
margins $ 157 $ 99 $ (5 ) $ 93 $ (12 ) $ (12 ) $ (5 )
Net change in gas
margins $ 2 $ 3 $ (1 ) $ - $ 1 $ 1 $ 1
Six Months
Electric revenue
change:
Effect of weather
(estimate) $ (24 ) $ (5 ) $ (7 ) $ - $ (3 ) $ (3 ) $ (9 )
UE electric rate
increase 16 16 - - - - -
Interchange revenues,
excluding estimated
weather impact of $10
million 74 74 - - - - -
Illinois electric
settlement agreement -
net
of reimbursement (19 ) - (3 ) (9 ) (6 ) (6 ) (4 )
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Six Months Ameren(a) UE CIPS Genco CILCORP CILCO IP
FERC-ordered MISO
resettlements -
March 2007 (13 ) - - (8 ) (4 ) (4 ) -
Illinois rate redesign (30 ) - (10 ) - (5 ) (5 ) (15 )
Net mark-to-market
gains (losses) on
energy contracts (7 ) 18 - - - - -
Growth, Illinois
customer switching,
and
other 33 33 (35 ) 13 29 29 (28 )
Total electric revenue
change $ 30 $ 136 $ (55 ) $ (4 ) $ 11 $ 11 $ (56 )
Fuel and purchased
power change:
Fuel:
Generation and other $ (2 ) $ 4 $ - $ 12 $ (19 ) $ (19 ) $ -
Emission allowance
sales 3 1 - 2 - - -
Net mark-to-market
gains on fuel
. . .
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