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AEE > SEC Filings for AEE > Form 10-Q on 8-Nov-2013All Recent SEC Filings

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Form 10-Q for AMEREN CORP


8-Nov-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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 contained in the Form 10-K, and also the Risk Factors contained in the Form 10-K and in the Form 10-Q for the quarterly period ended March 31, 2013. 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.
Ameren, headquartered in St. Louis, Missouri, is a public utility holding company under PUHCA 2005, administered by FERC. Ameren's primary assets are its equity interests in its subsidiaries. Ameren's subsidiaries are separate, independent legal entities with separate businesses, assets, and liabilities. These subsidiaries operate, as the case may be, rate-regulated electric generation, transmission and distribution businesses, rate-regulated natural gas transmission and distribution businesses, and merchant electric generation businesses. Dividends on Ameren's common stock and the payment of expenses by Ameren depend on distributions made to it by its subsidiaries. Ameren's principal subsidiaries are listed below.
Ameren Missouri operates a rate-regulated electric generation, transmission and distribution business, and a rate-regulated natural gas transmission and distribution business in Missouri.

Ameren Illinois operates a rate-regulated electric and natural gas transmission and distribution business in Illinois.

AER consists of non-rate-regulated operations, including Genco, AERG, and Marketing Company, and, through Genco, an 80% ownership interest in EEI, which Ameren consolidates for financial reporting purposes.

Ameren has various other subsidiaries responsible for activities such as the provision of shared services. Ameren also has a subsidiary, ATXI, that operates a FERC rate-regulated electric transmission business.
On March 14, 2013, Ameren entered into a transaction agreement to divest New AER to IPH, which Ameren expects will close during the fourth quarter of 2013. Immediately prior to Ameren's entry into the transaction agreement with IPH, on March 14, 2013, Genco exercised its option under the amended put option agreement with Medina Valley and received an initial payment of $100 million with respect to the sale of its Elgin, Gibson City, and Grand Tower gas-fired energy centers to Medina Valley. On October 11, 2013, Ameren received FERC approval for the divestiture of New AER to IPH and Genco's sale

of the Elgin, Gibson City, and Grand Tower gas-fired energy centers to Medina Valley. Immediately after receipt of FERC approval, Genco completed its sale of these gas-fired energy centers to Medina Valley and received additional cash proceeds of $37.5 million. Medina Valley has entered into an agreement to sell the Elgin, Gibson City, and Grand Tower gas-fired energy centers to Rockland Capital. Ameren expects this third-party sale of these gas-fired energy centers to close by the end of 2013, subject to FERC and other regulatory approvals. See Note 2 - Divestiture Transactions and Discontinued Operations under Part I, Item 1, of this report for additional information regarding these divestitures. As a result of the transaction agreement with IPH and Ameren's plan to sell its Elgin, Gibson City, and Grand Tower gas-fired energy centers, Ameren determined that New AER and the Elgin, Gibson City, and Grand Tower gas-fired energy centers qualified for discontinued operations presentation beginning March 14, 2013. Therefore, Ameren has segregated New AER's and the Elgin, Gibson City, and Grand Tower gas-fired energy centers' operating results, assets, and liabilities and presented them separately as discontinued operations for all periods disclosed in this report. Unless otherwise stated, the following sections of Management's Discussion and Analysis of Financial Condition and Results of Operations exclude discontinued operations for all periods presented. See Note 2
- Divestiture Transactions and Discontinued Operations under Part I, Item 1, for additional information regarding that presentation. The financial statements of Ameren are prepared on a consolidated basis. Ameren Missouri and Ameren Illinois have no subsidiaries, and therefore their financial statements are not prepared on a consolidated basis. All significant intercompany transactions have been eliminated. All tabular dollar amounts are in millions, unless otherwise indicated. 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.
OVERVIEW
Net income attributable to Ameren Corporation was $302 million in the third quarter of 2013, compared with net income of $374 million in the third quarter of 2012. Net income attributable to Ameren Corporation from continuing operations was $305 million in the third quarter of 2013, compared with net income of $309 million in the third quarter of 2012. Net income attributable to Ameren Corporation increased to $252 million in the first nine months of 2013, from $182 million in the first nine months of 2012. Net income attributable to Ameren Corporation from continuing operations decreased to $464 million in the first nine months of 2013, from $507 million in the first nine months of 2012. Net income from continuing operations at Ameren was unfavorably impacted in the third quarter and first nine months of


2013, compared with the same periods in 2012, by decreased electric demand resulting from summer temperatures that were cooler than last year's warmer-than-normal temperatures, partially offset in both periods by the absence of the collar adjustment impact on Ameren Illinois earnings which came into effect with the hot summer weather in 2012, and partially offset in the nine-month period by increased natural gas demand in the first quarter of 2013. Additionally, a reduction in revenues at Ameren Missouri, resulting from a Missouri Court of Appeals decision regarding the FAC, reduced earnings between periods. Net income from continuing operations at Ameren was also unfavorably impacted in the first nine months of 2013, compared with the same period in 2012, by costs associated with the Callaway energy center's 2013 scheduled refueling and maintenance outage and by the absence in 2013 of a 2012 FERC-ordered Entergy refund, not included in the FAC, that reduced Ameren Missouri's purchased power expense and increased interest income. Net income from continuing operations at Ameren was favorably impacted in the third quarter and first nine months of 2013, compared with the same periods in 2012, by rate increases for Ameren Missouri electric and Ameren Illinois transmission service, both effective in January 2013, as well as higher Ameren Illinois electric delivery earnings. The latter reflected the absence, in 2013, of a 2012 required contribution, as well as increased rate base and a higher allowed return on equity under formula ratemaking.

Ameren continues to expect to complete the divestiture of its Merchant Generation business by the end of 2013. Completion of the divestiture of New AER to IPH requires FERC and FCC approvals. In October 2013, Ameren received FERC approval for the divestiture of New AER to IPH. The FCC approval was received in August 2013. Separately, as a condition to IPH's obligation to complete the acquisition of New AER, the Illinois Pollution Control Board must approve the transfer to IPH of, or otherwise approve a variance in favor of IPH on the same material terms as, AER's variance of the Illinois MPS. In May 2013, AER and IPH filed a transfer request with the Illinois Pollution Control Board, which was subsequently denied by the board on procedural grounds. On July 22, 2013, IPH, AER and Medina Valley, as current and future owners of the coal-fired energy centers, filed a request for a variance with the Illinois Pollution Control Board seeking materially the same relief as the existing AER variance. The Illinois Pollution Control Board has until late November 2013 to issue a decision. Immediately following receipt of FERC approval in October 2013, Genco completed the sale of the Elgin, Gibson City, and Grand Tower gas-fired energy centers to Medina Valley. Medina Valley has entered into an agreement to sell the Elgin, Gibson City, and Grand Tower gas-fired energy centers to Rockland Capital. Ameren expects the sale of the Elgin, Gibson City, and Grand Tower gas-fired energy centers to Rockland Capital, which is also subject to FERC and other regulatory approvals, will be completed by the end of 2013. Once the Merchant Generation business is divested, the resulting shift to a fully rate-regulated business is expected to substantially improve the predictability of our future earnings and cash flows.

With regard to our rate-regulated operations, a key strategic objective is to invest in and operate our businesses in a manner consistent with existing regulatory frameworks. We do this because healthy financial performance is critical to our shareholders, just as it is to our ability to undertake the significant operating and capital spending needed to meet customers' energy needs and expectations. To meet this objective, we have been requesting and obtaining rate increases as needed, as well as aligning operating and capital spending consistent with regulatory outcomes and existing frameworks. As a result of these and other operational and cost containment initiatives, our electric rates have remained low, delivery system reliability has been enhanced, energy center availability has remained strong and our earned returns at our utilities have improved. To be positioned to invest so that we can meet our customers' future energy needs and expectations, we have also been aggressively working to enhance regulatory frameworks. Modern, constructive regulatory frameworks, such as those we have in place for our FERC-regulated transmission and Illinois-regulated energy delivery businesses, support investment in utility infrastructure, benefiting our utilities and the communities we serve. We also continue to focus on developing additional rate-regulated opportunities for investment and growing rate base. Over the last few years, we have identified and advanced several new opportunities, including our Modernization Action Plan, which is accelerating improvements to Ameren Illinois' electric and natural gas delivery systems, and new FERC-regulated transmission projects designed to improve reliability and efficiency. We expect successful execution of our strategy to result in meeting our customers' future energy needs and expectations, earning fair returns on our investments, and earnings per share and dividend growth driven primarily by projected increases in rate base investments.
Ameren plans to invest approximately $2.2 billion in FERC-regulated electric transmission projects over the five-year period ending in 2017. ATXI's Illinois Rivers project is a major component of that plan. In August 2013, the ICC granted a certificate of public convenience and necessity and approved seven of a total of nine sections of the route and three of the proposed nine substations for the Illinois Rivers project. The ICC order indicated the project is necessary to address transmission and reliability needs in an efficient and equitable manner and that the project will benefit the development of a competitive electricity market. The ICC also indicated that ATXI is capable of constructing and managing the project and capable of financing it. In October 2013, the ICC granted ATXI's request for rehearing to consider additional evidence regarding the two segments of the route and six substations that were not approved, as well as the requests for rehearing of certain other parties regarding two of the approved segments of the route. An order on rehearing is expected in March 2014.

RESULTS OF OPERATIONS
Our results of operations and financial position are affected by many factors. Weather, economic conditions, the impacts of energy efficiency programs, and the actions of key customers


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. 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 natural gas delivery service businesses, a purchased power cost recovery mechanism for our Illinois electric delivery service business, and a FAC for our Missouri electric utility business. Ameren Illinois' electric delivery service utility business, pursuant to the IEIMA, conducts an annual reconciliation of the revenue requirement necessary to reflect the actual costs incurred in a given year with the revenue requirement that was in effect for that year, with recoveries from or refunds to customers in a subsequent year. Included in Ameren Illinois' revenue requirement reconciliation is a formula for the return on equity, which is equal to the average for the applicable calendar year of the monthly average yields of 30-year United States Treasury bonds plus 580 basis points. Therefore, Ameren Illinois' annual return on equity is directly correlated to yields on United States Treasury bonds. Fluctuations in interest rates and conditions in the capital and credit markets also 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 energy centers and transmission and distribution systems and the level of purchased power costs, operations and maintenance costs, and capital investment are key factors that we seek to control to optimize our results of operations, financial position, and liquidity.
Earnings Summary
Net income attributable to Ameren Corporation was $302 million, or $1.24 per diluted share, in the third quarter of 2013, compared with net income of $374 million, or $1.54 per diluted share, in the third quarter of 2012. Net income attributable to Ameren Corporation from continuing operations was $305 million, or $1.25 per diluted share, in the third quarter of 2013, compared with net income of $309 million, or $1.28 per diluted share, in the third quarter of 2012. Net income attributable to Ameren Corporation from continuing operations increased in the third quarter of 2013 in the Ameren Illinois segment by $6 million from the prior-year period. Net income attributable to Ameren Corporation from continuing operations increased in the third quarter of 2013 in the Ameren Missouri segment by $2 million from the prior-year period. The net loss attributable to Ameren Corporation from discontinued operations was $3 million in the third quarter of 2013 as compared with net income of $65 million in the same period last year.
Net income attributable to Ameren Corporation increased to $252 million, or $1.03 per diluted share, in the first nine months of 2013, from $182 million, or $0.75 per diluted share, in the first nine months of 2012. Net income attributable to Ameren

Corporation from continuing operations decreased to $464 million, or $1.91 per diluted share, in the first nine months of 2013, from $507 million, or $2.09 per diluted share, in the first nine months of 2012. Net income attributable to Ameren Corporation from continuing operations decreased in the first nine months of 2013 in the Ameren Missouri segment by $38 million from the prior-year period. Net income attributable to Ameren Corporation from continuing operations increased in the first nine months of 2013 in the Ameren Illinois segment by $9 million from the prior-year period. The net loss attributable to Ameren Corporation from discontinued operations decreased to $212 million in the first nine months of 2013 from $325 million in the same period in 2012.
Net income from continuing operations at Ameren was unfavorably impacted in the third quarter and first nine months of 2013, compared with the same periods in 2012, by:
decreased electric demand resulting from summer temperatures that were cooler than last year's warmer-than-normal temperatures, partially offset in both periods by the absence of the collar adjustment impact on Ameren Illinois earnings which came into effect with the hot summer weather in 2012, and partially offset in the nine-month period by increased natural gas demand in the first quarter of 2013 (estimated at 15 cents per share and 10 cents per share, respectively); and

a reduction in revenues at Ameren Missouri resulting from the Missouri Court of Appeals' May 2013 decision, which upheld the MoPSC's April 2011 order, and a MoPSC order issued in July 2013 for the estimated obligation to refund to customers amounts associated with certain long-term partial requirements sales recognized for the period from October 1, 2009, to May 31, 2011 (1 cent per share and 7 cents per share, respectively).

In addition to these items unfavorably impacting both periods, net income from continuing operations at Ameren was unfavorably impacted in the first nine months of 2013, compared with the same period in 2012, by:
costs associated with the Callaway energy center's scheduled refueling and maintenance outage in the second quarter of 2013. There was no Callaway refueling and maintenance outage in 2012 (10 cents per share); and

the absence in 2013 of a 2012 Entergy refund not included in the FAC that reduced Ameren Missouri's purchased power expense and increased interest income. In June 2012, FERC ordered the refund from Entergy for a power purchase agreement that expired in 2009 (7 cents per share).

Net income from continuing operations at Ameren was favorably impacted in the third quarter and first nine months of 2013, compared with the same periods in 2012, by:
higher Ameren Missouri utility rates pursuant to an order issued by the MoPSC, which became effective in January 2013, partially offset by increased regulatory asset amortization directed by the rate order. This excludes


MEEIA impacts, which are discussed separately below (8 cents per share and 13 cents per share, respectively);
an increase in Ameren Illinois' electric delivery earnings under formula ratemaking. The third quarter was favorably impacted by timing differences, increased rate base and a higher allowed return on equity. The nine-month period was favorably impacted by increased rate base, a higher allowed return on equity, and lower required contributions pursuant to the IEIMA. (8 cents per share and 2 cents per share, respectively);

higher revenues associated with Ameren Missouri's MEEIA energy efficiency lost revenue recovery mechanism (3 cents per share and 5 cents per share, respectively), which are partially offset by lower revenues resulting from reduced demand due to energy efficiency programs; and

higher electric transmission rates at Ameren Illinois and ATXI (1 cent per share and 6 cents per share, respectively).

The cents per share information presented above is based on the diluted average shares outstanding in the third quarter and first nine months of 2012. There was no difference between basic and diluted shares in 2012. For further details regarding the Ameren Companies' results of operations for the third quarter and the first nine months of 2013, including explanations of Margins, Other Operations and Maintenance Expenses, Depreciation and Amortization, Taxes Other Than Income Taxes, Other Income and Expenses, Interest Charges, Income Taxes, and Loss from Discontinued Operations, Net of Tax, see the major headings below.


Below is a table of income statement components by segment for the three and nine months ended September 30, 2013, and 2012:

                                                                        Other /
                                        Ameren          Ameren        Intersegment
                                       Missouri        Illinois       Eliminations       Total
Three Months 2013:
Electric margin                      $       820     $       336     $         1      $    1,157
Natural gas margin                            13              77              (1 )            89
Other revenues                                 1               -              (1 )             -
Other operations and maintenance            (212 )          (166 )            (5 )          (383 )
Depreciation and amortization               (114 )           (59 )            (2 )          (175 )
Taxes other than income taxes                (91 )           (30 )             -            (121 )
Other income and (expenses)                   14               1               -              15
Interest charges                             (43 )           (31 )           (14 )           (88 )
Income (taxes) benefit                      (149 )           (51 )            13            (187 )
Income (loss) from continuing
operations                                   239              77              (9 )           307
Loss from discontinued operations,
net of tax                                     -               -              (3 )            (3 )
Net income (loss)                            239              77             (12 )           304
Noncontrolling interest and
preferred dividends                           (1 )             -              (1 )            (2 )
Net income (loss) attributable to
Ameren Corporation                   $       238     $        77     $       (13 )    $      302
Three Months 2012:
Electric margin                      $       817     $       312     $        (4 )    $    1,125
Natural gas margin                            13              77               -              90
Other revenues                                 -               -               -               -
Other operations and maintenance            (203 )          (159 )             -            (362 )
Depreciation and amortization               (111 )           (55 )             5            (161 )
Taxes other than income taxes                (87 )           (24 )            (3 )          (114 )
Other income and (expenses)                   11               -               -              11
Interest charges                             (55 )           (34 )           (10 )           (99 )
Income (taxes) benefit                      (148 )           (46 )            15            (179 )
Income (loss) from continuing
operations                                   237              71               3             311
Income from discontinued operations,
net of tax                                     -               -              63              63
Net income                                   237              71              66             374
Noncontrolling interest and
preferred dividends                           (1 )             -               1               -
Net income attributable to Ameren
Corporation                          $       236     $        71     $        67      $      374
Nine Months 2013:
Electric margin                      $     1,919     $       857     $        (1 )    $    2,775
Natural gas margin                            58             293              (2 )           349
Other revenues                                 1               2              (3 )             -
Other operations and maintenance            (686 )          (538 )            (5 )        (1,229 )
Depreciation and amortization               (338 )          (182 )            (8 )          (528 )
Taxes other than income taxes               (247 )          (102 )            (5 )          (354 )
Other income and (expenses)                   34               -              (1 )            33
Interest charges                            (159 )           (96 )           (34 )          (289 )
Income (taxes) benefit                      (217 )           (93 )            22            (288 )
Income (loss) from continuing
operations                                   365             141             (37 )           469
Loss from discontinued operations,
net of tax                                     -               -            (212 )          (212 )
Net income (loss)                            365             141            (249 )           257
Noncontrolling interest and
preferred dividends                           (3 )            (2 )             -              (5 )
Net income (loss) attributable to
Ameren Corporation                   $       362     $       139     $      (249 )    $      252
Nine Months 2012:
Electric margin                      $     1,898     $       828     $        (8 )    $    2,718
Natural gas margin                            52             270              (1 )           321
Other revenues                                 1               -              (1 )             -
Other operations and maintenance            (611 )          (513 )            (2 )        (1,126 )
Depreciation and amortization               (328 )          (165 )            (3 )          (496 )
Taxes other than income taxes               (236 )           (94 )            (7 )          (337 )
Other income and (expenses)                   37             (10 )            (2 )            25
Interest charges                            (167 )           (98 )           (30 )          (295 )
Income (taxes) benefit                      (243 )           (86 )            31            (298 )
Income (loss) from continuing
operations                                   403             132             (23 )           512
Loss from discontinued operations,
net of tax                                     -               -            (331 )          (331 )
Net income (loss)                            403             132            (354 )           181
Noncontrolling interest and
preferred dividends                           (3 )            (2 )             6               1
Net income (loss) attributable to
Ameren Corporation                   $       400     $       130     $      (348 )    $      182


Margins
The following table presents the favorable (unfavorable) variations by segment for electric and natural gas margins in the three and nine months ended September 30, 2013, compared with the same periods in 2012. 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.

                                                Ameren        Ameren
                Three Months                   Missouri      Illinois       Other(a)       Ameren
. . .
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