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| AEE > SEC Filings for AEE > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
The following discussion should be read in conjunction with the financial statements contained in this Form 10-Q as well as Management's Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors contained in the Form 10-K. We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements. The discussion also provides information about the financial results of the various segments of our business to provide a better understanding of how those segments and their results affect the financial condition and results of operations of Ameren as a whole.
OVERVIEW
Ameren Executive Summary
Ameren's earnings in the third quarter of 2009 were higher than its earnings in the 2008 comparable period, while Ameren's earnings were lower in the first nine months of 2009 than its earnings in the 2008 comparable period. Ameren's earnings in the three and nine months ended September 30, 2009, were reduced by lower electricity sales in Ameren's rate-regulated utilities and lower margins in the Merchant Generation segment, as a result of much cooler summer weather and weak economic conditions. Higher interest expense, employee separation programs, and the retirement of two generating units in the Merchant Generation segment, among other items, also decreased earnings in 2009. Offsetting factors in the three and nine months ended September 30, 2009, included utility rate adjustments in Illinois and Missouri, lower operations and maintenance expenses, and favorable unrealized MTM activity on derivatives, among other items.
In the third quarter of 2009, at Ameren's rate-regulated utilities, much cooler summer weather and the economic slowdown led to a 10% decrease in kilowatthour sales to residential customers and a 3% decrease in kilowatthour sales to commercial customers, compared with the year-ago quarter. These sales changes were more modest on a weather-normalized basis, with residential sales declining an estimated 2% and commercial sales declining an estimated 1%. Cooling degree-days in the third quarter of 2009 were 18% below those of the third quarter of 2008 and 23% below normal. The weak economy continued to affect kilowatthour sales by Ameren's rate-regulated businesses to their industrial customers. These sales declined 13% from the year-ago quarter, excluding the
impact of reduced sales to Noranda. Noranda's plant sustained damage because of a power interruption on non-Ameren-owned power lines during a severe January 2009 ice storm. Including Noranda, electric sales to industrial customers declined 18% in the third quarter of 2009, as compared to the year-ago quarter. Noranda announced in September 2009 that it had initiated steps to return operations to full effective capacity. These steps include restarting the third of its three production lines. Ameren expects it will take some time for the third production line to be repaired and returned to full capacity. Ameren expects full year 2009 electricity sales to industrial customers of Ameren's rate-regulated utilities will be down approximately 11%, excluding Noranda. Ameren currently believes sales declines associated with industrial customers are slowing and expects growth in 2010, though at a pace less than what is typical coming out of an economic recession. On a weather-normalized basis, Ameren expects full year 2009 sales to residential and commercial customers to be down approximately 1% to 2% as compared to 2008. In 2010, Ameren expects a resumption of growth in residential and commercial sales, assuming a moderate economic recovery.
Ameren has rate cases pending in its Illinois and Missouri jurisdictions seeking revenue levels that reflect the significant investments made in electric and gas utility infrastructure to improve reliability, increases in costs essential to generating and delivering electricity, higher financing costs and, in Missouri, rising net fuel costs. The Ameren Illinois Utilities filed requests with the ICC in June 2009 to increase their annual revenues for electric and natural gas delivery services. The currently pending requests, as amended, seek to increase annual revenues from electric and natural gas delivery service by $162 million in the aggregate. In addition, the Ameren Illinois Utilities have requested a rider mechanism that would permit recovery of ICC reliability audit expenditures. The Ameren Illinois Utilities estimate that they will incur distribution-related implementation costs of $15 million (CIPS - $5 million, CILCO - $3 million, and IP - $7 million) in 2010. If approved, the rider mechanism would recover future reliability audit expenditures as well. The ICC is expected to issue an order in time for new rates to be effective in early May 2010. UE filed with the MoPSC for an annual electric revenue increase of $402 million. More than half of the request is for anticipated increases in normalized net fuel costs. These increased net fuel costs would have been eligible for recovery through the FAC absent this filing. As part of its overall request, UE has asked for interim rate relief of $37 million, subject to refund with interest. The MoPSC established a schedule for considering the interim increase request, and a hearing is set for December 2009. In the overall rate case, new rates are expected to be effective in late June 2010.
Ameren is focused on delivering shareholder value in the years to come. In that regard, Ameren has taken several steps to position the Company for future success. Through the rate proceedings discussed above, Ameren is seeking to recover increased costs in Ameren's rate-regulated businesses to narrow the gap between their earned and allowed returns. Ameren has set operating cost targets for 2010 and has implemented several measures to control costs. Ameren expects its rate-regulated businesses' 2010 nonfuel operating and maintenance expenses to be at a level consistent with that of 2008. Further, Ameren's rate-regulated utilities have identified, and are carefully evaluating for possible elimination or deferral, approximately $1 billion of previously planned capital expenditures scheduled for the 2010 through 2013 period. Ameren expects that Merchant Generation's nonfuel operations and maintenance expenses will decline by 5% to 10% in 2010, as compared to the 2008 level. Merchant Generation also eliminated approximately $1 billion in capital expenditures from the 2010 through 2013 period, as compared to prior plans.
Liquidity
Ameren has taken actions in 2009 to maintain and enhance its liquidity position and credit profile. In June 2009, Ameren and certain of its subsidiaries entered into multiyear credit facility agreements that provide Ameren and its business segments with substantial borrowing capacity through the middle of 2011. These credit facilities cumulatively provide $2.1 billion of credit through July 14, 2010, thereafter reducing to $1.8795 billion through June 30, 2011, and thereafter reducing to $1.0795 billion through July 14, 2011. In September 2009, Ameren issued and sold 21.9 million shares of its common stock for net proceeds of $535 million. Ameren used the net offering proceeds to make investments in its rate-regulated utility subsidiaries in the form of capital contributions.
At September 30, 2009, Ameren, on a consolidated basis, had available liquidity, in the form of cash on hand and amounts available under its existing credit facilities, of approximately $2.2 billion, which was approximately $1 billion higher than the same time last year.
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 merchant electric generation businesses in Missouri and Illinois. Dividends on Ameren's common stock and the payment of other expenses by Ameren and CILCORP holding companies depend 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 merchant electric generation business in Illinois and Missouri.
• CILCO is a subsidiary of CILCORP (a holding company). It operates a rate-regulated electric transmission and distribution business, a merchant electric generation business (through its subsidiary, AERG) and a rate-regulated natural gas transmission and distribution business, all 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. Merchant Generation sales are also subject to market conditions for power. We principally use coal, nuclear fuel, natural gas, and oil for fuel 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 have natural gas cost recovery mechanisms for our Illinois and Missouri gas delivery service businesses, purchased power cost recovery mechanisms for our Illinois electric delivery service businesses, and a FAC for our Missouri electric utility business. See Note 2 - Rate and Regulatory Matters under Part I, Item 1, for a discussion of pending rate cases in Missouri and Illinois, including UE's request for approval to implement an environmental cost recovery mechanism and to continue its FAC. Fluctuations in interest rates and conditions in the capital and credit markets 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 and 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.
Net income attributable to Ameren Corporation increased to $227 million, or $1.04 per share, in the third quarter of 2009, from $204 million, or 97 cents per share, in the third quarter of 2008. Net income attributable to Ameren Corporation in the third quarter of 2009 increased in the Illinois Regulated and Missouri Regulated segments by $44 million and $43 million, respectively, from the prior-year period, while net income attributable to Ameren Corporation in the Merchant Generation segment decreased by $71 million from the same period in 2008.
Net income attributable to Ameren Corporation decreased to $533 million, or $2.48 per share, in the first nine months of 2009 from $548 million, or $2.61 per share, in the first nine months of 2008. Net income attributable to Ameren Corporation increased in the Illinois Regulated segment by $82 million in the first nine months of 2009 compared with the prior-year period, while net income attributable to Ameren Corporation in the Missouri Regulated and Merchant Generation segments decreased by $28 million and $79 million, respectively, from the same period in 2008.
Earnings were negatively impacted in the third quarter and first nine months of 2009 as compared with the same periods in 2008 by:
• the impact on electric and natural gas margins at our rate-regulated businesses of higher net fuel costs at UE and lower demand (exclusive of weather impacts), among other things (3 cents per share and 38 cents per share, respectively);
• higher dilution and financing costs (12 cents per share and 21 cents per share, respectively);
• unfavorable weather conditions (estimated at 12 cents per share and 10 cents per share, respectively);
• increased depreciation and amortization expense (3 cents per share and 9 cents per share, respectively);
• reduced sales to Noranda because of an extended storm-related outage (3 cents per share and 9 cents per share, respectively);
• increased expense related to workforce reductions through voluntary and involuntary separation programs as well as other charges (6 cents per share for each period); and
• increased taxes other than income taxes primarily because of higher property taxes (2 cents per share and 4 cents per share, respectively).
Earnings were favorably impacted in the third quarter and first nine months of 2009 as compared with the same period in 2008 by:
• higher electric and natural gas delivery service rates, effective October 1, 2008, in the Illinois Regulated segment pursuant to an ICC consolidated rate order for CIPS, CILCO and IP (14 cents per share and 40 cents per share, respectively);
• higher electric rates, effective March 1, 2009, in the Missouri Regulated segment pursuant to a MoPSC rate order (16 cents per share and 31 cents per share, respectively);
• decreased plant operations and maintenance expense (1 cent per share and 13 cents per share, respectively);
• favorable net unrealized MTM activity on derivatives (13 cents per share and 5 cents per share, respectively); and
• the reduced impact in 2009 of the electric rate relief and customer assistance programs provided to certain Ameren Illinois Utilities electric customers under the Illinois electric settlement agreement (1 cent per share and 4 cents per share, respectively).
In addition to the above items affecting both periods, earnings were negatively impacted in the third quarter of 2009 as compared with the third quarter of 2008 by lower electric margins in the Merchant Generation segment (7 cents per share).
In addition to the above items affecting both periods, earnings were favorably impacted in the third quarter of 2009 as compared with the third quarter of 2008 by the redesigned seasonal natural gas delivery service rates at the Ameren Illinois Utilities (4 cents per share). These redesigned delivery service rates impacted quarterly earnings but did not materially impact annual results.
In addition to the above items affecting both periods, earnings were negatively impacted in the first nine months of 2009 as compared with the first nine months of 2008 by:
• the absence in 2009 of a settlement agreement reached with a coal mine owner that reimbursed Genco, in the form of a lump-sum payment, for increased costs for coal and transportation incurred in 2008 and expected to be incurred in 2009 due to the premature closure of an Illinois mine at the end of 2007 (18 cents per share);
• the absence in 2009 of storm costs recorded as a regulatory asset as a result of an accounting order issued by the MoPSC (4 cents per share); and
• increased distribution system reliability expenditures (3 cents per share).
The cents per share information presented above is based on average shares outstanding in the third quarter and first nine months of 2008.
Because it is a holding company, net income and cash flows attributable to Ameren Corporation 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 net income attributable to Ameren Corporation for the three and nine months ended September 30, 2009 and 2008:
Three Months Nine Months
2009 2008 2009 2008
Net income (loss):
UE $ 141 $ 98 $ 244 $ 283 (a)
CIPS 17 6 24 5
Genco 27 20 120 140
CILCORP 28 18 (380 )(b) 42
IP 34 4 60 (4 )
Other (c) (20 ) 58 465 (b) 82
Net income attributable to Ameren
Corporation $ 227 $ 204 $ 533 $ 548
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(a) Includes earnings from a 40% interest in EEI through February 29, 2008.
(b) Includes goodwill impairment loss of $462 million offset by intercompany elimination in Other as no impairment was recognized at the consolidated Ameren level. See Note 14 - Goodwill Impairment under Part I, Item 1, of this report for additional information.
(c) Includes earnings from EEI, other merchant generation operations, as well as corporate general and administrative expenses, and intercompany eliminations. Includes a 40% interest in EEI through February 29, 2008, and an 80% interest in EEI since that date.
Below is a table of income statement components by segment for the three and nine months ended September 30, 2009 and 2008:
Other /
Missouri Illinois Merchant Intersegment
Regulated Regulated Generation Eliminations Total
Three Months 2009:
Electric margin $ 636 $ 260 $ 224 $ (3 ) $ 1,117
Gas margin 11 69 - (1 ) 79
Other revenues 1 - - (1 ) -
Other operations and
maintenance (229 ) (117 ) (86 ) 10 (422 )
Depreciation and amortization (90 ) (55 ) (34 ) (6 ) (185 )
Taxes other than income taxes (72 ) (26 ) (7 ) 1 (104 )
Other income and (expenses) 13 - 1 (1 ) 13
Interest expense (61 ) (37 ) (34 ) (2 ) (134 )
Income taxes (67 ) (36 ) (28 ) (4 ) (135 )
Net income (loss) 142 58 36 (7 ) 229
Noncontrolling interest and
preferred dividends (1 ) (1 ) 1 (1 ) (2 )
Net income (loss) attributable
to Ameren Corporation 141 57 37 (8 ) 227
Three Months 2008:
Electric margin $ 570 $ 234 $ 315 $ (23 ) $ 1,096
Gas margin 10 50 - (1 ) 59
Other revenues 1 - - (1 ) -
Other operations and
maintenance (234 ) (154 ) (79 ) 11 (456 )
Depreciation and amortization (83 ) (55 ) (27 ) (8 ) (173 )
Taxes other than income taxes (69 ) (24 ) (6 ) 1 (98 )
Other income and (expenses) 15 3 (1 ) (4 ) 13
Interest expense (51 ) (34 ) (24 ) (4 ) (113 )
Income taxes (60 ) (5 ) (61 ) 13 (113 )
Net income (loss) 99 15 117 (16 ) 215
Noncontrolling interest and
preferred dividends (1 ) (2 ) (9 ) 1 (11 )
Net income (loss) attributable
to Ameren Corporation 98 13 108 (15 ) 204
Nine Months 2009:
Electric margin $ 1,581 $ 676 $ 770 $ (13 ) $ 3,014
Gas margin 52 252 - (1 ) 303
Other revenues 3 4 - (7 ) -
Other operations and
maintenance (665 ) (406 ) (248 ) 25 (1,294 )
Depreciation and amortization (266 ) (162 ) (93 ) (20 ) (541 )
Taxes other than income taxes (200 ) (90 ) (21 ) - (311 )
Other income and (expenses) 37 3 1 (6 ) 35
Interest expense (171 ) (118 ) (82 ) (5 ) (376 )
Income taxes (123 ) (58 ) (121 ) 14 (288 )
Net income (loss) 248 101 206 (13 ) 542
Noncontrolling interest and
preferred dividends (4 ) (4 ) (1 ) - (9 )
Net income (loss) attributable
to Ameren Corporation 244 97 205 (13 ) 533
Nine Months 2008:
Electric margin $ 1,606 $ 600 $ 911 $ (40 ) $ 3,077
Gas margin 55 239 - (4 ) 290
Other revenues 1 - - (1 ) -
Other operations and
maintenance (689 ) (462 ) (250 ) 40 (1,361 )
Depreciation and amortization (246 ) (165 ) (81 ) (21 ) (513 )
Taxes other than income taxes (189 ) (91 ) (20 ) - (300 )
Other income and (expenses) 40 10 - (12 ) 38
Interest expense (142 ) (106 ) (74 ) (9 ) (331 )
Income taxes (160 ) (5 ) (177 ) 23 (319 )
Net income (loss) 276 20 309 (24 ) 581
Noncontrolling interest and
preferred dividends (4 ) (5 ) (25 ) 1 (33 )
Net income (loss) attributable
to Ameren Corporation 272 15 284 (23 ) 548
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Margins
The following table presents the favorable (unfavorable) variations in the registrants' electric and gas margins in the three and nine months ended September 30, 2009, compared with the same periods in 2008. Electric margins are defined as electric revenues less fuel and purchased power costs. Natural gas margins are defined as gas revenues less gas purchased for resale. We consider electric and natural gas margins useful measures to analyze the change in profitability of our electric and natural 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) $ (39 ) $ (25 ) $ (3 ) $ - $ (4 ) $ (4 ) $ (7 )
Regulated rates:
Changes in base rates 88 55 7 - (1 ) (1 ) 27
Noranda sales (15 ) (15 ) - - - - -
Illinois pass-through power costs (86 ) - (15 ) - (24 ) (24 ) (47 )
Merchant Generation sales price
changes 25 - - 40 13 13 -
Off-system revenues (36 ) (36 ) - - - - -
Illinois electric settlement
agreement, net of
reimbursement 3 - - 1 - - 1
Net MTM gains (losses) (91 ) 4 - - - - -
Generation output, load and other (98 ) (20 ) 1 (67 ) (11 ) (11 ) (11 )
Total electric revenue change $ (249 ) $ (37 ) $ (10 ) $ (26 ) $ (27 ) $ (27 ) $ (37 )
Fuel and purchased power change:
Fuel:
. . .
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