10-QPeriod: Q3 FY2006

AMEREN CORP Quarterly Report for Q3 Ended Sep 30, 2006

Filed November 9, 2006For Securities:AEE

Summary

Ameren Corporation's third quarter 2006 filing indicates a mixed financial performance, with a slight increase in net income for the quarter but a noticeable decrease for the nine-month period compared to the prior year. This was primarily driven by higher fuel and purchased power costs, storm-related expenses, and operational issues like the Taum Sauk hydroelectric plant breach. While the company benefited from increased interchange revenues and organic growth, these were offset by various cost pressures. The company is navigating significant regulatory uncertainty in Illinois, with potential rate freezes and the aftermath of a power procurement auction creating considerable financial risk. In Missouri, Ameren is seeking rate increases to recover substantial infrastructure investments and higher operating expenses. The company's liquidity remains supported by committed credit facilities, but credit rating agencies have expressed concerns, particularly regarding the Illinois regulatory environment, leading to downgrades and negative outlooks. Investors should pay close attention to the resolution of regulatory proceedings in both Illinois and Missouri, as these will significantly impact future earnings and financial stability. The potential extension of the Illinois rate freeze poses a particularly acute risk, with management warning of potential insolvency for key Illinois subsidiaries. Ameren is also managing various environmental compliance costs and litigation, including those related to asbestos and the Taum Sauk incident. The company's outlook is heavily influenced by these regulatory and operational challenges.

Key Highlights

  • 1Net income for the third quarter of 2006 was $293 million ($1.42 per share), up from $280 million ($1.37 per share) in the same quarter of 2005. However, net income for the nine months ended September 30, 2006, decreased to $486 million ($2.37 per share) from $586 million ($2.94 per share) in the comparable 2005 period.
  • 2Ameren faced increased operating expenses due to higher fuel and purchased power costs, storm-related outages, and costs associated with the December 2005 breach of the Taum Sauk hydroelectric plant.
  • 3Significant regulatory uncertainty exists in Illinois regarding the expiration of electric rate freezes and power supply contracts at year-end 2006, with proposed legislation to extend the rate freeze posing a material financial risk and potential insolvency for key Illinois subsidiaries.
  • 4Ameren's Missouri subsidiary, Union Electric (UE), filed requests for rate increases totaling $361 million for electric service and $11 million for gas service to recover infrastructure investments and higher operating expenses.
  • 5Credit rating agencies, including S&P, Moody's, and Fitch, have expressed concerns about the Illinois regulatory environment, leading to rating downgrades and negative outlooks for several Ameren subsidiaries, increasing borrowing costs and potentially impacting liquidity.
  • 6The company completed a power procurement auction in Illinois for post-2006 power requirements, with awarded contracts at prices expected to be higher than current customer rates, creating further regulatory challenges.
  • 7Ameren's liquidity is supported by committed credit facilities totaling $1.65 billion, though the availability and cost of capital could be impacted by ongoing regulatory and credit rating concerns.

Frequently Asked Questions

Ameren's net income for the nine months ended September 30, 2006, decreased to $486 million ($2.37 per share) from $586 million ($2.94 per share) in the same period of 2005. This decline was primarily due to higher fuel and purchased power costs, storm-related expenses, and costs associated with the Taum Sauk hydroelectric plant breach.

Ameren is facing significant regulatory uncertainty in Illinois due to the upcoming expiration of electric rate freezes and power supply contracts at the end of 2006. Proposed legislation to extend the electric rate freeze poses a substantial financial risk, with the company warning of potential insolvency for its Illinois subsidiaries if enacted. Additionally, a recently completed power procurement auction resulted in prices higher than current rates, which is facing political and legal challenges.

Ameren is seeking rate increases in Missouri to recover infrastructure investments and higher operating costs. In Illinois, the company is working with stakeholders to develop rate increase phase-in plans to mitigate the impact on residential customers while ensuring cost recovery. Ameren is also managing its liquidity through committed credit facilities and is reviewing its generation portfolio. The company also continues to assess and manage its environmental compliance costs and litigation.

Credit rating agencies have expressed concerns, particularly regarding the regulatory uncertainty in Illinois. S&P, Moody's, and Fitch have either downgraded or placed the credit ratings of several Ameren subsidiaries on negative watch. The potential extension of the Illinois rate freeze could lead to further significant downgrades, potentially impacting Ameren's access to capital and increasing borrowing costs.