Ameren Corporation 2018 Second-Quarter Form 10-Q Summary
Business context and reporting period
Ameren Corporation is a regulated utility holding company with electric generation, transmission and distribution operations and natural gas distribution operations through Ameren Missouri, Ameren Illinois and transmission subsidiaries. This combined Form 10-Q covers the quarter and six months ended June 30, 2018, compared with the corresponding 2017 periods. All dollar amounts are in millions unless otherwise stated.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 | ||
|---|---|---|---|---|
| 2018 | 2017 | 2018 | 2017 | |
| Operating revenues | $1,563 | $1,537 | $3,148 | $3,052 |
| Operating income | $385 | $387 | $658 | $629 |
| Net income attributable to Ameren common shareholders | $239 | $193 | $390 | $295 |
| Diluted EPS | $0.97 | $0.79 | $1.59 | $1.21 |
| Operating margin | 24.6% | 25.2% | 20.9% | 20.6% |
| Operating cash flow | Not separately provided for the quarter | $820 | $863 | |
| Capital expenditures | $533 | $494 | $1,112 | $998 |
Net income attributable to common shareholders increased 24% in the quarter and 32% year to date. The effective income tax rate declined to 24% from 37% for the quarter and to 23% from approximately 36% for the six-month period, primarily reflecting the Tax Cuts and Jobs Act. Common dividends were $0.4575 per share for the quarter and $0.915 per share year to date.
At June 30, 2018, Ameren reported cash and cash equivalents of $29, total cash, cash equivalents and restricted cash of $96, consolidated short-term debt of $506, and long-term debt including current maturities of approximately $8,460. Total assets were $26,639 and total equity was $7,528. Credit-agreement liquidity was $1.593 billion, or $1.622 billion including cash, and the consolidated indebtedness-to-capitalization ratio was 54%.
Material changes versus the prior comparable period
- Revenue increased 2% in the quarter and 3% for the first six months. Natural gas revenue growth was stronger than electric revenue growth.
- Ameren Missouri drove the earnings improvement: common-shareholder earnings increased to $168 from $120 in the quarter and to $206 from $125 year to date. Favorable weather, higher base rates, lower base-level expenses and a $5 million MEEIA performance incentive supported results.
- Ameren Illinois common-shareholder earnings increased to $62 from $57 in the quarter and to $157 from $136 year to date. Natural gas and transmission earnings improved, while electric-distribution margins declined.
- Electric margins increased $25 million in the quarter and $76 million year to date, while natural gas margins increased $2 million and $15 million, respectively. Ameren Missouri benefited from estimated weather effects of $58 million for the quarter and $94 million year to date.
- Other operations and maintenance expense increased $8 million in the quarter and $21 million year to date, primarily because of Ameren Missouri energy-center maintenance, labor and benefit costs, and energy-efficiency program costs.
- Depreciation and amortization increased $16 million in the quarter and $29 million year to date, reflecting the growing asset base.
- Operating cash flow decreased $43 million year to date, while capital expenditures increased $114 million. Financing cash flow increased to $337 million from $197 million.
- Ameren Missouri issued $425 million of 4.00% first mortgage bonds due 2048, and Ameren Illinois issued $430 million of 3.80% first mortgage bonds due 2028. Proceeds were principally used to refinance maturing or short-term debt.
Guidance, outlook, risks and unusual items
- Missouri Senate Bill 564 authorized a framework supporting approximately $1 billion of incremental Ameren Missouri grid-modernization investment during 2019–2023. Ameren Missouri expected to elect PISA, which would defer and recover 85% of qualifying depreciation and return on rate base, subject to regulatory approval and rate limitations.
- The MoPSC authorized a $167 million annual Ameren Missouri revenue-requirement reduction effective August 1, 2018, including $74 million related to excess deferred taxes. Ameren Missouri recorded a $47 million regulatory liability for excess TCJA-related collections through June 30, with an additional July amount expected.
- Ameren expects capital expenditures of up to $11.4 billion during 2018–2022, excluding certain potential incremental Missouri investments. Management expects planned capital expenditures and dividends to exceed operating cash flow over the next several years and may issue additional debt or equity.
- Ameren Missouri agreed to acquire a 400-megawatt wind facility expected to be completed in 2020 and is pursuing additional wind generation. Required approvals include MoPSC, FERC and transmission-interconnection approvals. A RESRAM proposal and the wind certificate proceeding were expected to receive decisions by January 2019.
- Pending Illinois matters included a proposed $72 million annual increase in electric-distribution rates beginning in January 2019, a proposed $34 million 2019 energy-efficiency revenue requirement, and a proposed $37 million annual natural-gas rate increase. These amounts remained subject to ICC approval.
- The pending FERC MISO transmission-return complaint could reduce allowed returns and require refunds. Ameren and Ameren Illinois had recorded regulatory liabilities of $43 million and $25 million, respectively, for expected refunds and interest. A 50-basis-point reduction in the FERC return was estimated to reduce annual earnings by approximately $8 million for Ameren and $4 million for Ameren Illinois.
- Environmental risks include Clean Air Act litigation concerning the Rush Island energy center, CCR compliance, cooling-water and emissions requirements, and estimated Ameren Missouri environmental compliance capital expenditures of $325 million to $425 million from 2018–2022. CCR-related capital expenditures were estimated at $300 million to $350 million.
- Ameren Illinois estimated remediation obligations for former manufactured-gas-plant sites at $165 million to $236 million and recorded a $165 million liability. Other risks include regulatory cost recovery, weather, commodity prices, capital-market access, interest rates, cybersecurity, nuclear operations, insurance and fuel supply.
- The Callaway nuclear facility relies on Westinghouse as its only NRC-licensed fuel-assembly supplier. Westinghouse’s bankruptcy plan assumed its Ameren contracts, and management did not expect a material operating impact, although supplier disruption could require lengthy licensing and analysis.
Important facts for investors to verify
- Whether Ameren Missouri’s expected PISA election and associated grid-investment recovery proceed as planned, including the 2.85% customer-rate growth cap and base-rate freeze.
- Final MoPSC and ICC decisions on Missouri rate reductions, the RESRAM and MEEIA filings, and Illinois electric and natural-gas rate proceedings.
- The ultimate FERC resolution of the MISO return-on-equity complaint, including potential refunds and prospective earnings effects.
- Actual weather-normalized demand and the sustainability of the 2018 earnings benefit from unusually favorable temperatures.
- Ameren’s ability to fund capital expenditures, dividends and tax-related cash-flow pressure while maintaining targeted credit metrics and approximately 50% equity capitalization.
- Progress, cost and regulatory recovery for transmission, grid modernization, renewable-generation and environmental-compliance projects.
- Developments in Rush Island litigation, CCR remediation, former manufactured-gas-plant remediation and Callaway fuel-supply risks.