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Changes to Lessees’ Financial Statements Under the New Lease Accounting Standard

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By Ralph Petta, President and CEO, Equipment Leasing and Finance Association

With the approval of new rules for lease accounting by the Financial Accounting Standards Board in 2016, lessees are considering how the new standard will affect them. Many of the lease accounting changes are relatively neutral and should not impact the ability of companies to acquire productive equipment to operate and grow their businesses. The primary reasons to lease equipment will remain intact under the new standard, which is known as Accounting Standards Codification Topic 842 (ASC 842) and will generally take effect in 2019. One of the key changes is that leases previously classified as operating leases under current accounting standards will now be capitalized and thus reported on corporate balance sheets. With the changes in balance sheet reporting, some financial statement ratios may be affected.  

Financial Statement Ratios

A financial statement and its corresponding ratios are a key indicator of a company’s financial health and are relied on by lenders and reviewed by potential investors, so it is important to understand any changes to financial statement ratios under the new standard.

Under ASC 842, operating leases will no longer appear simply as a table of future payments in the footnotes; they will appear as a “right-of-use” asset and an offsetting lease liability on the balance sheet. We understand from credit agencies that the lease liability should be considered a non-debt type of liability; that is, an “other” operating liability. As a result, the return on assets (ROA) financial ratio is likely the only ratio that will change, although total liabilities will increase. Other financial ratios should remain unchanged. It is expected that there should be minimal impact on debt covenants and no impact on debt limit covenants. Overall, the new rules should have no impact on the profit and loss (P&L), or income statement because the lease-related costs should remain the same.

To illustrate the changes in the key financial ratios, let’s examine the difference between leasing a $50,000 piece of equipment under the current standard, ASC 840 (formerly known as FAS 13), and the new standard, ASC 842. Looking at the methods for calculating typical financial ratios, you can see that some ratios are unchanged (blue sideways arrows), while some decline (red downward arrow) and some increase (green upward arrow).

[EDITOR’S NOTE: Insert accompanying graphic here]

•   ROE – Return on Equity – No change. ROE is calculated as Net Income divided by Equity. This ratio is unchanged because there’s no change in the lessee’s lease expense for an operating lease from ASC 840 to ASC 842. Both are straight lined, and there should be no change in equity as a result of the accounting change.


•   ROA – Decline. ROA is calculated as Net Income divided by Assets. While there is no change in Net Income because the lessee’s lease expense is straight lined under both guidelines, the amount of Assets reported do increase under ASC 842 since the operating lease will be capitalized on the balance sheet. An increase in the denominator (Assets) will thus reduce the ROA ratio.


•   Debt-to-Equity – No change. While the lease liability is on balance sheet under ASC 842, the lease obligation is considered an “other” liability but is not classified as debt. Since there should be no increase in debt, there should be no change to the ratio.


•   Total Liabilities – Increase. The lease liability is now on balance sheet under ASC 842 resulting in an increase in liabilities.


•   EBITDA and EBITDA margin – No change. EBITDA is calculated as Earnings Before Interest, Taxes, Depreciation and Amortization. The EBITDA margin is calculated as EBITDA divided by revenue. There is no change to the EBITDA or the EBITDA margin because the lessee’s rent in an Operating lease is recorded as lease expense under both the current and future guidance.


•   Net Worth – No change. Net worth is unchanged since equity is unchanged.

Additional resources

There are many reasons to lease equipment—managing cash flow, preserving capital and available traditional lines of credit, obtaining flexible financing solutions, managing tax liabilities and avoiding equipment technological obsolescence, just to name a few—that businesses will continue to enjoy with reporting leases on balance sheet. For more information and resources on ASC 842, including FAQs, 8 Steps to Help Transition and infographics, visit http://EquipmentFinanceAdvantage.org/newLAR.cfm.  

Disclaimer: The information in this document is a summary only and does not constitute financial advice. Readers should obtain their own independent accounting advice that takes into account all relevant aspects of a particular lessor’s or lessee’s business and products.

About the author
Ralph Petta is the President and CEO of the Equipment Leasing and Finance Association (ELFA), the trade association that represents companies in the $1 trillion equipment finance sector, which includes financial services companies and manufacturers engaged in financing capital goods. ELFA has been equipping business for success for more than 50 years. For more information on equipment financing, please visit www.EquipmentFinanceAdvantage.org and follow ELFA on Twitter @ELFAonline.

©Equipment Leasing and Finance Association 2017. Reprinted with permission.

Low Bid Joint Venture Team Files Lawsuit Against MSD in Deer Creek Tunneling Project

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The low bid joint venture team originally awarded a $145.3 million Metropolitan Sewer District (MSD) tunneling project is suing the sewer district for rescinding the award of the project and inexplicably awarding it to the second lowest bidder.  The civil lawsuit was filed May 8, 2017 in St. Louis City Circuit Court by Jay Dee/Frontier-Kemper (JDFK) Joint Venture and by two taxpayers, Eugenia Jones and Peter Pfeifer.

MSD’s professional staff awarded the Deer Creek tunneling project to JDFK as the lowest, responsive, responsible bidder on two separate occasions.  During this process, MSD’s staff, including its executive director, denied multiple protests by the second lowest bidder, SAK Construction, LLC (SAK), and repeatedly concluded that the award of the project to JDFK was proper.  Among other things, MSD concluded: “SAK did not submit the lowest and best bid, but rather it was Jay Dee that submitted the lowest and best bid and met all bid requirements, and therefore, the award in Jay Dee’s favor was appropriate and will stand.”

But, in a series of unexplained decisions, MSD’s board of trustees refused to confirm the contract with JDFK for the project.   As a result, MSD rescinded the award to JDFK and on April 19, 2017 awarded the project to SAK, whose bid was $2.5 million higher than JDFK’s bidJDFK’s protest and appeal were unsuccessful and MSD refused to provide any reason for the board of trustees’ refusal to confirm the contract with JDFK for the Project.

“MSD still hasn’t explained why it rescinded our contract which was based on a thoroughly vetted and validated bid by MSD’s professional staff,” said John DiPonio, vice president of Livonia, Mich.-based Jay Dee Contractors, Inc., one of the joint venture partners.  “We build all over the country and the lack of accountability by MSD in its bidding process is astounding.” The other partner in the JDFK joint venture is Evansville, Ind.-based Frontier-Kemper Constructors, Inc.

The lawsuit alleges that MSD acted in an arbitrary and capricious manner in refusing to confirm the contract with JDFK and asks the court to rescind the notice of award to SAK and instead award the project to JDFK.  The lawsuit also seeks injunctive relief to prevent MSD from taking any steps in furtherance of the award of the project to SAK, including but not limited to precluding MSD from voting to confirm the contract with SAK at a May 11, 2017 MSD meeting.

The JDFK joint venture was one of several contractor teams that invested countless hours to get pre-qualified with MSD and subsequently bid on the Deer Creek Tunnel project.  JDFK was awarded the contract last September after presenting a highly detailed bid that met all of MSD’s specifications including business and workforce diversity, use of a highly skilled and safe workforce, pricing, technical skills and more.  JDFK’s bid was $145.3 million or $60 million below the MSD engineer estimate and $2.5 million less than SAK’s bid.

The Deer Project is one of eight tunneling projects in MSD’s $4.7 billion Project Clear.

Jay Dee Contractors, Inc. (www.jaydee.us) has more than 50 years of experience in proficiently delivering heavy underground tunneling work.  Frontier-Kemper Constructors, Inc. (www.frontierkemper.com) traces its roots to 1907 and is equally proficient in national infrastructure projects.

The civil lawsuit filed in St. Louis City Circuit Court is Case No. 1722-CC01259.

McCarthy Begins Construction of Transformative Project at Washington University in St. Louis

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Multi-building assignment will transform the east end of Washington University’s Danforth Campus.

McCarthy Building Companies, Inc. has started construction of a multi-building project that will transform the east end of Washington University’s Danforth Campus into a hub for state-of-the-art research and teaching, as well as a vibrant green space.

As construction manager, McCarthy will implement a comprehensive plan that includes the construction of three new academic buildings, two multi-use pavilions, an underground parking facility and a new expansive landscape. It also includes an expansion of the Mildred Lane Kemper Art Museum.

“These enhancements will expand the university’s capacity for academic programs, create opportunities for greater interdisciplinary interaction and transform the campus entrance,” says JD Long, associate vice chancellor for facilities planning & management at Washington University in St. Louis. “The project will advance the university’s academic mission while creating a more collaborative, welcoming campus environment.”

Major components of the east end transformation include:

  • Anabeth and John Weil Hall, an 82,100-sq.-ft. interdisciplinary building, will serve as the new front door to the Sam Fox School of Design & Visual Arts.
  • The 25,500-sq.ft. Gary M. Sumers Welcome Center will house Undergraduate Admissions and Student Financial Services.
  • Henry A. and Elvira H. Jubel Hall is a 80,600-sq.-ft. building that will house the School of Engineering & Applied Science’s Department of Mechanical Engineering & Materials Science.
  • The School of Engineering & Applied Science’s Department of Computer Science & Engineering will be located in the new James M. McKelvey, Sr. Hall.
  • The new Ann and Andrew Tisch Park will provide a campus gathering place and expanded green space.
  • A 5,600-sq.-ft. addition to Mildred Lane Kemper Art Museum will enable the museum to showcase a larger portion of its world-class collection and expand its exhibition program.
  • The Craig and Nancy Schnuck Pavilion, an 18,000-sq.-ft. multi-use facility, will bring together a range of dining options, academic programs, the Office of Sustainability, and resources for pedestrian and bicycle commuters.
  • A new 790-space underground parking facility will provide convenient, safe and accessible parking.

“McCarthy is honored to partner with Washington University on this transformative project that will reshape the eastern end of the Danforth campus,” says McCarthy Project Director Ryan Moss. “Our team is uniquely skilled in coordinating the complex details and phasing to maximize quality, efficiency, safety and value for the university and broader St. Louis community.”

Reflecting Washington University’s strong commitment to the development of workforce diversity, the project team includes extensive participation of local certified minority and women-owned business enterprises (M/WBE).

Sustainability is a high priority as well, with all new buildings targeting LEED Gold certification. Solar photovoltaic arrays located on many of the roofs will generate renewable electricity. High-efficiency heat recovery chillers will harvest waste heat for much of the heating needs, and the underground garage will be capped with a green roof to create a dynamic, car-free park above. The park’s landscape design features rain gardens with bio-retention, native plantings and a diverse tree canopy. Low-carbon transportation will be encouraged with a new bike commuter facility that includes showers and lockers, electric vehicle charging stations, and a network of bicycle and pedestrian pathways to link the campus to Forest Park and regional greenways.

The majority of the construction is anticipated to be completed prior to spring 2019 commencement.

Ongoing project updates and related resources are accessible at campusnext.wustl.edu.

McCarthy Building Companies, Inc. is the oldest privately held national construction company in the country – with more than 150 years spent collaborating with partners to solve complex building challenges on behalf of its clients. 

Electrical Connection Saves the Season

in Associations/News

Services Donated to Repair Lighting for Little League in Festus, Mo.

For a time, it appeared that the joys of summer with the crack of the bat and kids playing baseball might be silenced at the Twin City Little League in Festus, Mo.  That’s because the lighting for the field was in bad need of repair and would not pass inspection for the 2017 season.  But the Electrical Connection stepped to the plate and saved the season!

Matt Copland & Chris Bank

The IBEW/NECA partnership agreed to donate services to repair the lighting.  NECA contractor Schaeffer Electric Company, Inc. teamed with IBEW Local 1 electricians Matt Copland and Chris Bank to repair field lights and bring them up to code.  A full slate of baseball games for the summer is now underway.

“The Electrical Connection really came through in our time of need,” said Scott White, Twin cities director of fields.  “Schaeffer Electric and IBEW made sufficient improvements to the field lighting so we could kick off a busy 2017 schedule of games.”

Since 1939, Twin City Little League has been an anchor of the Festus and Crystal City communities.  The non-profit Little League sanctioned program serves more than 400 boys and girls, ages three to 16 years old, in 12 different divisions of baseball and softball programs.

The Electrical Connection is a partnership of the International Brotherhood of Electrical Workers (IBEW) Local One and the St. Louis Chapter, National Electrical Contractors Association (NECA).  Members provide safe and reliable electrical construction, maintenance, repair and replacement services across Missouri, the nation and the world.  Find a contractor near you in the Electrical Connection contractor database.

MC Industrial & Ameren Missouri Launch Phase One of Bagnell Dam Anchoring Project

in Companies/News
Warren Witt & Mike Hartwig

MC Industrial, Inc. a McCarthy Holdings company, and Ameren Missouri recently announced the official launch of phase one in reconstruction work of the Bagnell Dam, located in Lake of the Ozarks, Mo.

MC Industrial was selected by Ameren Missouri as the general contractor for the Bagnell Dam Anchoring project, a $52 million investment in major structural and anchoring upgrades on the dam. The project team mobilized on site in March for the 18-month project, and began construction work in April with the first of three work phases:

  • Installation of 68 new post-tension anchors to help hold the dam to the underlying bedrock.
  • New concrete added between the highway piers to add weight to the dam.
  • New concrete overlay to replace worn and cracked concrete on the east and west sections.

“We have worked with Ameren on multiple power projects and are honored to be leading construction on this significant and exciting hydropower project for Ameren,” said Mike Hartwig, MC Industrial project manager. “The MC Industrial team’s expertise in heavy civil and major dam rehabilitation ensures a safe and high quality project outcome, as well as the long term sustainability of Bagnell Dam, which provides clean energy to the surrounding community.”

Construction work will go by section of the dam, with most of this year’s activity taking place on the west side of the dam.  Construction work has been scheduled for weekdays during daylight hours to maximize convenience to lake-area residents and vacationers.

“This project is about keeping this vital asset providing clean energy in the long-term, using the best possible engineering available today,” said Warren Witt, director of hydro operations at Ameren Missouri. “Osage Energy Center just marked its 85th year in service. Completing this project will ensure it operates reliably and safely, affording the quality of life for hundreds of thousands who enjoy all that the Lake of the Ozarks has to offer each year.”

Ameren Missouri has been providing electric and gas service for more than 100 years, and the company’s electric rates are among the lowest in the nation. 

MC Industrial is a national construction firm, dedicated to the highly-specialized needs of the industrial marketplace. 

New Tool Helps People Buy Local, Healthy Energy-Efficient Building Products

in Associations

Architects, Multi-Family Home Building Owners, Consumers and Others Can Use New Database to Find Locally Made Building Products That Minimize Harmful Toxins

The BlueGreen Alliance Foundation today released a new tool to help everyone from building professionals to consumers find energy-efficient housing products that are healthy and made locally. Building Clean—found at http://www.buildingclean.org—offers an easy-to-use interface to access its one-of-a-kind database. Products and manufacturers of products available on the database include appliances, heating and air conditioning equipment, insulation, lighting, plumbing, roofing, sealants, and water filtration.

Housing consumes more than 20 percent of U.S. energy. Building Clean is designed to make it easier for architects and designers, consumers, contractors and developers, and manufacturers to find American-made, healthy products so they can capture the benefits of energy efficiency retrofits—including lower utility bills, improved occupant health and increased economic development.

“Building Clean will supercharge efforts to find healthy, American-made products in a wide range of sectors,” said Kim Glas, president of the BlueGreen Alliance Foundation. “Building Clean should be in the toolbox of anyone updating multi-family homes, designing new affordable housing or just looking for the safest products to use when upgrading their own home.”

The site allows both searches for products and manufacturers in energy efficient building sectors and includes information about toxic chemicals commonly found in some product categories. In addition, you can search for products certified with third-party health certifications and that promote transparency by listing the chemicals they contain.

The site can also be a resource for businesses looking to break into the energy-efficient product supply chain. “We wanted to make sure we were making it easy for manufacturers looking to grow their businesses to find and get into contact with other business with needs they can fulfill, providing an opportunity to grow their market and business,” added Glas.

Building Clean is an initiative of the BlueGreen Alliance Foundation and is a companion piece to the broader Energy Efficiency for All initiative, which is dedicated to linking the energy, housing and health sectors to tap the benefits of energy efficiency for millions of low-income families.

Building Clean is an initiative of the BlueGreen Alliance Foundation, a non-profit, 501(c)(3) organization that conducts research and educates the public and media about solutions to environmental challenges that create economic opportunities for the American people. Visit https://www.bgafoundation.org.

St. Louis Lambert International Wins Industry Diversity Award

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Airport Award is STL’s Second This Year Recognizing Diversity Programs 

Airports Council International-North America (ACI-NA) recognized St. Louis Lambert International Airport (STL) as its Medium Hub Inclusion Champion. STL was one of three North American airports to win the award which was presented at the annual ACI-NA Business of Airports Conference.

“Each year, the Inclusion Champion Awards celebrate exceptional achievement in promoting and sustaining diversity throughout the airport industry,” said Kevin M. Burke, ACI-NA President and CEO. “Airports are committed to ambitious goals that serve their local communities and strengthen the businesses that support airport operations.”

St. Louis was honored as the Medium Hub Inclusion Champion for its longstanding commitment to promoting diversity and inclusion through innovative programs and practices that are incorporated into every aspect of the airport’s overall business development model. STL has been successful in reflecting the growing multi-ethnic and cultural diversity of the region.  More than 40 percent of departmental leadership staff are female or minorities. Externally, the success of STL’s programs is defined by its proven ability to nurture businesses for future growth.  STL has increased the number of pre-bid opportunities and informational meetings to ensure more minority and women-owned companies participate in airport contracts.

The Airport recently achieved a 27 percent participation rate (vs 17 percent goal) in 2016 for design and construction contracts, which is part of a federally recognized and monitored Disadvantaged Business Enterprise (DBE) program. In another federal program, participation in the Airport Concessions diversity program (ACDBE) reached nearly 39 percent, well surpassing a 23 percent goal. The Airport’s local diversity programs are expanding too. STL currently has 55 contracts for general services ranging from janitorial and snow removal to public relations, marketing consulting, and security guard services. The Airport had a 26 percent Minority Business Enterprise (MBE) participation rate and a six percent Woman Business Enterprise (WBE) participation rate in 2016. Goals for local diversity participation are 25 percent MBE and 5 percent WBE.

St. Louis was also recognized last month as a winner of the Organizational Excellence Inclusion Award by the St. Louis Council of Construction Consumers (SLCCC). The Airport was honored for positive growth in minority business participation rates and its outreach efforts that included a new online certification process and a new website which have led to a dramatic increase in the number of companies the Airport certifies.

Photo Above: Deputy Director of Finance & Administration Antonio Strong (2nd from L) and Amber Gooding, Ass’t Director of Business Diversity Development, represented the Airport in receiving the ACI-NA Inclusion Champion Award on April 26, 2017.

 

Home Builders Association Donates $10,000 to Rebuilding Together-St. Louis

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On behalf of the Home Builders Charitable Foundation (HBCF), 2017 HBA President Ken Kruse of Payne Family Homes (left) and HBCF President John Eilermann of McBride & Son Companies (right) presented a $10,000 donation to Dave Ervin, executive director of Rebuilding Together-St. Louis (second from left), and Mark Jansen, Rebuilding Together Board Member.

The donation will be used toward Rebuilding Together-St. Louis’ Rebuilding Day program. Rebuilding Together revitalizes neighborhoods in partnership with the community by rehabilitating the houses of low-income home owners, particularly the elderly and the disabled, so that they may continue to live independently in comfort and safety. Rebuilding Day is the organization’s annual one-day blitz where volunteers make home repairs for low-income, elderly and disabled home owners in the St. Louis Metro area.

The HBA is a local trade association of more than 600 member firms representing the residential construction industry. The Home Builders Charitable Foundation, the HBA’s charitable arm, is a non-profit organization dedicated to providing housing assistance to people or organizations with special shelter needs.

Integrated Facility Services at work on $7.1 million The Ranch Retirement Community in Stillwater, OK

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Integrated Facility Services (IFS) has begun work on a $7.1 million design-build HVAC and plumbing project for The Ranch, a new $58 million Epworth Living retirement community in Stillwater, OK. The 325,000-square-foot facility, currently under construction, is located on 55 acres near Oklahoma State University. The construction manager is the Weitz Company. Spellman Brady is the interior design firm.

IFS conducted an extensive Virtual Design and Construction (VDC) process using state-of-the-art BIM technology and robotic layout. The entire facility is being built simultaneously so that residents can move from assisted living to memory care or skilled nursing.  The project is scheduled for completion in March 2018.

The Ranch, Stillwater’s only Continuing Care Retirement Community (CCRC) facility, features 114 one- and two-bedroom independent living apartments, 40 assisted living apartments, 23 cottage homes and 20 memory care apartments for residents with Alzheimer’s or dementia. The facility will have under-building parking and 35,000 square feet of common areas including a fitness room, arts and crafts studio, library, and coffee shop.

ABOUT INTEGRATED FACILITY SERVICES (IFS)

Integrated Facility Services (IFS) is a full-service HVAC, plumbing, piping, fire protection and building automation firm with more than 270 professional and trade employees. Established in 1966, IFS delivers integrated mechanical engineering and construction, installation, service and planned maintenance, and energy conservation solutions to ensure occupant comfort, improve efficiency and reduce operational costs. Named a 2016 Midwest Top 50 Specialty Contractor by Engineering News Record and and ranked as the sixth largest mechanical contractor in the St. Louis region, IFS serves clients in Missouri and Illinois, with offices in St. Louis and Columbia. For more information, call (636) 680-2100 or (573) 442-6100 and visit www.intfs.com.

Ameren Missouri Proposes Plan for Solar Panels at Lambert Airport

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Energy produced will benefit customers

 

Ameren Missouri is taking off on a forward-thinking plan to increase the amount of solar energy available to customers. Today, the company announced plans for a new solar generation facility to be built at St. Louis Lambert International Airport. Energy produced there would be available for its customers through the Community Solar Program.

“What better way to showcase that we’re a progressive region committed to finding innovative solutions to energy generation than by placing a large solar field at the airport,” said Mike Mueller, vice president of economic and technology development at Ameren. “Ameren Missouri continues to lead the way by investing in more clean energy delivered reliably and affordably to our customers.”

Customer Choice
The plan calls for Ameren Missouri, a subsidiary of Ameren Corporation (NYSE: AEE), to build up to a one megawatt facility at Lambert. Once the plan is approved by city officials and state regulators, Ameren Missouri customers can sign-up for blocks of solar generated energy.

“This is a simple solution for customers to take part in solar generation,” said Dan Lidisky, director of technology and renewable development at Ameren. “Nothing is installed on a customer’s roof, and the experts at Ameren Missouri take care of maintaining the solar panels.”

The airport is an ideal location for solar panels. There is an abundance of open land that would otherwise go unused. Panels would be positioned away from runways and out of the line-of-sight of pilots taking off or coming in for a landing.

“We’re proud to be a part of this proposed project because St. Louis Lambert International Airport is heavily focused on impactful, environmentally sustainable projects and this is another positive piece that aligns with our mission,” said Rhonda Hamm-Niebruegge, airport director.

How it Works
The program will be open to all Ameren Missouri residential and small business customers. Once the subscription period opens later this year, interested customers can sign up for 100 kilo-watt-hour blocks of solar generation capacity. Customers can subscribe for the equivalent of up to half of their average electric usage based on the previous 12 months’ usage. A limited number of blocks will be made available, at a price yet to be determined. Once the program is fully subscribed, construction will begin. Solar generation could start as soon as next spring. Customers interested in the program can go to AmerenMissouri.com/communitysolar for more information.

“Based on what our customers are telling us, we believe there is a strong interest,” Lidisky said. “Only those who sign up for the program will pay the cost related to installation of this new solar generation facility.”

Long-Term Plan
Ameren Missouri is focused on adding 500 megawatts of new renewable energy generation. In addition to this solar project, Ameren Missouri recently launched a second solar program targeted at businesses interested in hosting solar generation on their property. The company currently operates the 5.7 megawatt O’Fallon Renewable Energy Center, which is capable of producing nearly 8 million kilowatt-hours of energy from the sun’s rays each year.

Ameren Missouri has been providing electric and gas service for more than 100 years, and the company’s electric rates are among the lowest in the nation. Ameren Missouri’s mission is to power the quality of life for its 1.2 million electric and 127,000 natural gas customers in central and eastern Missouri. The company’s service area covers 64 counties and more than 500 communities, including the greater St. Louis area. For more information, visit Ameren.com/Missouri or follow us at @AmerenMissouri or Facebook.com/AmerenMissouri.

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