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AEE > SEC Filings for AEE > Form 10-Q on 11-Aug-2014All Recent SEC Filings

Show all filings for AMEREN CORP

Form 10-Q for AMEREN CORP


11-Aug-2014

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 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 our business segments 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. Also see the Glossary of Terms and Abbreviations at the front of this report and in the Form 10-K.
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. 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.
Union Electric Company, doing business as 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 Company, doing business as Ameren Illinois, operates a rate-regulated electric and natural gas transmission and distribution business in Illinois.

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 and is developing the Illinois Rivers project.
The operating results, assets, and liabilities for New AER and the Elgin, Gibson City, Grand Tower, Meredosia, and Hutsonville energy centers have been presented separately as discontinued operations for all periods presented 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. On January 31, 2014, Medina Valley completed its sale of the Elgin, Gibson City, and Grand Tower gas-fired energy centers to Rockland Capital. See Note 12 - Divestiture Transactions and Discontinued Operations under Part I, Item 1, of this report for additional information regarding the discontinued operations presentation. See Note 16 - Divestiture Transactions and Discontinued Operations under Part II, Item 8, of the Form 10-K for additional information regarding the divestiture transactions.

The financial statements of Ameren are prepared on a consolidated basis, and therefore include the accounts of its majority-owned subsidiaries. All significant intercompany transactions have been eliminated. Ameren Missouri and Ameren Illinois have no subsidiaries, and therefore their financial statements are not prepared on a consolidated basis. 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 effect of these factors on Ameren's earnings per share.
OVERVIEW
Net income attributable to Ameren Corporation was $149 million in the second quarter of 2014, compared with net income of $95 million in the second quarter of 2013. Net income attributable to Ameren Corporation from continuing operations was $150 million in the second quarter of 2014, compared with net income of $105 million in the second quarter of 2013. Net income attributable to Ameren Corporation was $245 million in the first six months of 2014, compared with a net loss of $50 million in the first six months of 2013. Net income attributable to Ameren Corporation from continuing operations was $247 million in the first six months of 2014, compared with net income of $159 million in the first six months of 2013.
Net income from continuing operations at Ameren was favorably affected in the second quarter and first six months of 2014, compared with the same periods in 2013, by colder winter temperatures and warmer early summer temperatures that drove higher electric and natural gas sales volumes. The increase in net income from continuing operations also reflected the absence in 2014 of the 2013 Callaway energy center refueling and maintenance outage as well as the absence in 2014 of a reduction in Ameren Missouri's 2013 revenues resulting from the FAC prudence review. In 2014, the Callaway refueling and maintenance outage is scheduled for the fourth quarter, whereas in 2013, the refueling and maintenance outage occurred in the second quarter. In addition, earnings increased as a result of higher rates for Ameren Illinois and ATXI transmission service under formula ratemaking, reflecting additional infrastructure investment, and for Ameren Illinois natural gas delivery service, each effective January 1, 2014. Additionally, net income from continuing operations was favorably affected by decreased interest expense and a substantial elimination of costs previously incurred in support of the divested merchant generation business. In July 2014, Ameren Missouri filed for an electric service rate increase to recover increased costs to provide its customers with more dependable energy from a cleaner and more diverse energy portfolio. Nearly half of the $264 million rate increase request provides for the recovery of additional net energy costs. The balance of the rate increase request relates to recovery of


and return on additional electric infrastructure investments, including investments for nuclear safety, environmental controls, new substations, and renewable generation. A MoPSC decision on this July 2014 filing is expected by May 2015, with rates effective by June 2015.
In February 2014, Ameren Missouri's largest customer, Noranda, and 37 residential customers filed an earnings complaint case and a rate shift complaint case with the MoPSC. In the earnings complaint case, Noranda and the residential customers asserted that Ameren Missouri's electric service business is earning more than its authorized return on common equity and requested a reduction to Ameren Missouri's annual revenue requirement. The MoPSC staff filed testimony in the earnings complaint case that recommended no reduction to Ameren Missouri's annual revenue requirement. Also, as discussed above, Ameren Missouri recently filed an electric service rate case with the MoPSC supporting an increase in electric rates. While the rate shift proposal is revenue neutral to Ameren Missouri, Ameren Missouri does not believe that the proposed reduction to Noranda's electric rates, which would result in rates that are significantly below Ameren Missouri's cost of service, is appropriate or in the best interests of Ameren Missouri's other electric customers. MoPSC decisions related to both complaint cases are expected during the third quarter of 2014. In June 2014, the EPA proposed the Clean Power Plan, which sets forth CO2 emissions standards that would be applicable to existing power plants. The EPA believes the Clean Power Plan, assuming it is adopted and implemented as proposed, would achieve a 30% decrease in CO2 emissions by 2030, with interim goals beginning in 2020, based on 2005 emission levels. If implemented as proposed, the rule could impose costly requirements on utilities. Ameren Missouri continues to evaluate its potential compliance plans for the Clean Power Plan. Based on preliminary studies, if the proposed rules were to be made final, Ameren Missouri anticipates new or accelerated capital expenditures and increased fuel costs would be required to achieve compliance. As proposed, the Clean Power Plan would require the states, including Missouri and Illinois, to submit compliance plans as early as 2016. The states' compliance plans may require Ameren Missouri to construct combined cycle and renewable energy centers, currently estimated to cost approximately $2 billion by 2020, that Ameren Missouri believes would otherwise not be necessary to meet the energy needs of its customers. Additionally, the proposed rule could result in the closure or alteration of the operation of some of its coal-fired energy centers. Ameren Missouri expects all of these increased costs, which could begin in 2017, would be recoverable, subject to MoPSC prudence review, through substantially higher electric rates charged to its customers. Ameren Missouri will file its Integrated Resource Plan with the MoPSC in October 2014, outlining its preferred plan for making the transition to a cleaner, more diverse energy portfolio over time. This plan is designed to achieve the total level of CO2 emissions reductions proposed by the EPA but to reach this reduction over a longer time period than currently proposed.

Ameren Illinois continues to make investments to improve electric and natural gas delivery service reliability, evidenced by the commencement of electric and natural gas smart meter installation in June 2014. The implementation of this technology is a key component of Ameren Illinois' plan to modernize its electric system and natural gas infrastructure. Investments to modernize the electric system are made possible by the IEIMA, which is designed to benefit customers by significantly enhancing the electric delivery system, growing Illinois' economy by generating jobs, and providing Ameren Illinois with timely cost recovery of and a fair return on infrastructure investments under formula ratemaking. Natural gas infrastructure investments are subject to the ICC's gas delivery ratemaking framework that allows rates to be established based on a future test year and provides an infrastructure rider for qualified investments. Ameren Illinois expects to begin including qualified investments under this infrastructure rider in 2015. Over time, the new electric smart meters, along with other system upgrades, will improve service reliability by helping Ameren Illinois detect and isolate outages faster. Additionally, electric and natural gas smart meters will provide customers more information and new tools and programs to better manage their energy costs.
In April 2014, Ameren Illinois filed with the ICC its annual electric delivery service formula rate update to establish the revenue requirement used to set rates for 2015. Pending ICC approval, Ameren Illinois' update filing, as revised in July 2014, will result in a $205 million increase in Ameren Illinois' electric delivery service revenue requirement beginning in January 2015. An ICC decision on this April 2014 filing is expected by December 2014.
ATXI's FERC-regulated electric transmission Illinois Rivers regional multi-value project, estimated at a total cost of $1.1 billion, is in the early stages of construction, with substation construction underway and line construction expected to begin later in 2014. The first sections of the Illinois Rivers project are expected to be completed in 2016 with the last section expected to be completed in 2019. ATXI is currently reviewing, and expects to update in early 2015, the estimated cost of the Illinois Rivers project incorporating the final route approved by the ICC, which is longer than originally proposed. ATXI plans to request a certificate of public convenience and necessity from the ICC for the MISO-approved Spoon River regional multi-value project in August 2014. The cost of the Spoon River project is estimated at $130 million to $150 million, depending on the route ultimately approved by the ICC. An ICC decision on this filing is expected in 2015.
In November 2013, a customer group filed a complaint case with FERC seeking a reduction in the allowed return on common equity, as well as a limit on the common equity ratio, under the MISO tariff. Currently, the FERC-allowed return on common equity for MISO transmission owners is 12.38%. In June 2014, FERC issued an order that reduced the base allowed return on common equity for New England transmission owners from 11.14% to 10.57% with rate incentives allowed up to 11.74%. Ameren believes some aspects of the FERC order in the New England transmission owners' case may establish precedent in


the pending MISO case, however, the Ameren Companies are unable to reasonably estimate the impact, if any, that a FERC ruling in the MISO complaint case could have on their allowed base return on common equity.
Ameren will continue to execute on its strategy of investing and operating its utilities in a manner consistent with existing regulatory frameworks, as well as working to enhance those frameworks and advocating for responsible energy policies at both the federal and state level. Ameren is focused on creating and capitalizing on opportunities to invest in its rate-regulated businesses for the benefit of its customers and shareholders. Consistent with previous plans, Ameren will continue to allocate significant and growing amounts of discretionary capital to Ameren Illinois energy delivery service and Ameren Illinois and ATXI electric transmission service projects because these investments will improve the safety, dependability, and sustainability of the services provided to customers and because these services operate under formulaic regulatory frameworks that are more supportive of infrastructure investment. Ameren Missouri will continue to actively work with legislators and other key stakeholders to build support for energy policies that reduce regulatory lag and support investment in aging energy infrastructure that will result in long-term benefits for its customers.
RESULTS OF OPERATIONS
Our results of operations and financial position are affected by many factors. Weather, economic conditions, the effects 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 prices we charge for our services. We principally use coal, enriched uranium, natural gas, methane 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 made 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 of the monthly 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 businesses. 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
The following table presents a summary of Ameren's earnings for the three and
six months ended June 30, 2014, and 2013:
                                                        Three Months                Six Months
                                                     2014           2013        2014         2013
Net income (loss) attributable to Ameren
Corporation                                      $    149        $     95     $   245     $    (50 )
Earnings (loss) per common share - basic             0.61            0.39        1.01        (0.21 )
Net income attributable to Ameren Corporation -
continuing operations                                 150             105         247          159
Earnings per common share - basic - continuing
operations                                           0.62            0.44        1.02         0.66

Net income attributable to Ameren Corporation from continuing operations increased $45 million, or 18 cents per share, in the second quarter of 2014 compared to the second quarter of 2013. The increase in net income attributable to Ameren Corporation from continuing operations between periods was due to a $42 million increase in net income from the Ameren Missouri segment and a $6 million decrease in net loss from Ameren (parent) and nonregistrant subsidiaries offset by a $3 million decrease in net income from the Ameren Illinois segment. Net income attributable to Ameren Corporation from continuing operations increased $88 million, or 36 cents per share, in the first six months of 2014 compared to the same period in 2013. The increase in net income attributable to Ameren

Corporation from continuing operations between periods was caused by a $49 million increase in net income from the Ameren Missouri segment, a $19 million increase in net income from the Ameren Illinois segment, and a $20 million decrease in net loss from Ameren (parent) and nonregistrant subsidiaries. Net income from continuing operations at Ameren was favorably affected in the second quarter and the first six months of 2014, compared with the same periods in 2013, by:
increased electric and natural gas demand resulting from colder winter temperatures primarily in the first quarter and warmer early summer temperatures in the second quarter


(estimated at 3 cents per share and 10 cents per share, respectively);
the absence in 2014 of costs associated with the Callaway energy center's 2013 refueling and maintenance outage. The next Callaway energy center refueling and maintenance outage is scheduled for the fourth quarter of 2014 (8 cents per share and 9 cents per share, respectively);

the absence in 2014 of a reduction in 2013 revenues at Ameren Missouri resulting from the FAC prudence review charge for the estimated obligation to refund to customers amounts associated with sales recognized for the period from October 1, 2009, to May 31, 2011 (6 cents per share in both periods);

decreased interest expense, primarily due to long-term debt redemptions and maturities at Ameren Missouri, Ameren Illinois and Ameren (parent) (2 cents per share and 5 cents per share, respectively);

higher electric transmission rates at Ameren Illinois and ATXI because of additional rate base (1 cent per share and 4 cents per share, respectively);

higher natural gas rates at Ameren Illinois pursuant to a December 2013 order (1 cent per share and 4 cents per share, respectively); and

decreased other operations and maintenance expenses at Ameren (parent) and nonregistrant subsidiaries, primarily resulting from the substantial elimination of costs previously incurred in support of the divested merchant generation business (1 cent per share and 3 cents per share, respectively).

In addition to these items, net income from continuing operations at Ameren was favorably affected in the first six months of 2014, compared with the same period in 2013, by an increase in Ameren Illinois' electric delivery service earnings under formula ratemaking due to increased rate base and a higher allowed return on equity as a result of increased yields on

30-year United States Treasury bonds (estimated at 1 cent per share). Net income from continuing operations at Ameren was unfavorably affected in the second quarter and the first six months of 2014, compared with the same periods in 2013 (except where a specific period is referenced), by:
a decrease in Ameren Illinois' electric delivery service earnings for the second quarter of 2014, compared with the same period in 2013, due to timing of revenue recognition during the year under formula ratemaking that more than offset favorable effects resulting from increased rate base and a higher allowed return on equity as a result of increased yields on 30-year United States Treasury bonds (estimated at 1 cent per share);

the reduction in revenue recorded at Ameren Illinois for an estimated electric transmission rate refund related to a case at FERC (1 cent per share in both periods); and

an increase in the effective tax rate (1 cent per share in both periods).

The cents per share information presented above is based on the average shares outstanding in the second quarter and first six months of 2013. There were no material differences between the basic and diluted average shares outstanding for either the second quarter or first six months of 2014 or 2013. For additional details regarding the Ameren Companies' results of operations, 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 Income (Loss) from Discontinued Operations, Net of Taxes, see the major headings below.


Below is a table of income statement components by segment for the three and six months ended June 30, 2014, and 2013:

                                                                        Other /
                                        Ameren          Ameren        Intersegment
                                       Missouri        Illinois       Eliminations       Ameren
Three Months 2014:
Electric margins                     $       645     $       278     $         3      $      926
Natural gas margins                           17              88               -             105
Other revenues                                 1               -              (1 )             -
Other operations and maintenance            (222 )          (195 )             5            (412 )
Depreciation and amortization               (117 )           (64 )            (2 )          (183 )
Taxes other than income taxes                (81 )           (32 )            (1 )          (114 )
Other income (expenses)                       14               4              (1 )            17
Interest charges                             (54 )           (29 )            (6 )           (89 )
Income taxes                                 (76 )           (21 )            (2 )           (99 )
Income (loss) from continuing
operations                                   127              29              (5 )           151
Loss from discontinued operations,
net of tax                                     -               -              (1 )            (1 )
Net income (loss)                            127              29              (6 )           150
Preferred dividends                           (1 )            (1 )             1              (1 )
Net income (loss) attributable to
Ameren Corporation                   $       126     $        28     $        (5 )    $      149
Three Months 2013:
Electric margins                     $       606     $       288     $         -      $      894
Natural gas margins                           18              85               -             103
Other revenues                                 -               2              (2 )             -
Other operations and maintenance            (253 )          (196 )             2            (447 )
Depreciation and amortization               (113 )           (62 )            (3 )          (178 )
Taxes other than income taxes                (79 )           (30 )            (2 )          (111 )
Other income (expenses)                       11               1              (1 )            11
Interest charges                             (56 )           (34 )           (10 )          (100 )
Income (taxes) benefit                       (49 )           (22 )             5             (66 )
Income (loss) from continuing
operations                                    85              32             (11 )           106
Loss from discontinued operations,
net of tax                                     -               -             (10 )           (10 )
Net income (loss)                             85              32             (21 )            96
Noncontrolling interests and
preferred dividends                           (1 )            (1 )             1              (1 )
Net income (loss) attributable to
Ameren Corporation                   $        84     $        31     $       (20 )    $       95
Six Months 2014:
Electric margins                     $     1,157     $       550     $         9      $    1,716
Natural gas margins                           45             245              (1 )           289
Other revenues                                 1               -              (1 )             -
Other operations and maintenance            (449 )          (395 )            12            (832 )
Depreciation and amortization               (233 )          (127 )            (4 )          (364 )
Taxes other than income taxes               (159 )           (78 )            (4 )          (241 )
Other income and (expenses)                   24               3              (1 )            26
Interest charges                            (106 )           (59 )           (16 )          (181 )
Income (taxes) benefit                      (105 )           (56 )            (2 )          (163 )
Income (loss) from continuing
operations                                   175              83              (8 )           250
Loss from discontinued operations,
net of tax                                     -               -              (2 )            (2 )
Net income (loss)                            175              83             (10 )           248
Noncontrolling interests and
preferred dividends                           (2 )            (2 )             1              (3 )
Net income (loss) attributable to
Ameren Corporation                   $       173     $        81     $        (9 )    $      245
Six Months 2013:
Electric margins                     $     1,099     $       521     $        (2 )    $    1,618
Natural gas margins                           45             216              (1 )           260
Other revenues                                 -               2              (2 )             -
Other operations and maintenance            (474 )          (372 )             -            (846 )
Depreciation and amortization               (224 )          (123 )            (6 )          (353 )
Taxes other than income taxes               (156 )           (72 )            (5 )          (233 )
Other income and (expenses)                   20              (1 )            (1 )            18
Interest charges                            (116 )           (65 )           (20 )          (201 )
Income (taxes) benefit                       (68 )           (42 )             9            (101 )
Income (loss) from continuing
operations                                   126              64             (28 )           162
Loss from discontinued operations,
. . .
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