Ameren Corporation 2016 Second-Quarter Form 10-Q Summary
Business context and reporting period
Combined unaudited quarterly report for Ameren Corporation, Union Electric Company (Ameren Missouri), and Ameren Illinois Company for the quarter and six months ended June 30, 2016. Ameren is a regulated utility holding company with electric and natural gas operations in Missouri and Illinois, plus FERC-regulated transmission investments through ATXI. All dollar amounts are in millions unless otherwise stated.
Key financial metrics
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Operating revenues | $1,427 | $1,401 | $2,861 | $2,957 |
| Operating income | $325 | $237 | $545 | $493 |
| Income from continuing operations | $148 | $99 | $255 | $209 |
| Net income attributable to Ameren common shareholders | $147 | $150 | $252 | $258 |
| Continuing-operations EPS | $0.61 | $0.40 | $1.04 | $0.85 |
| Operating cash flow | Not separately provided | Not separately provided | $763 | $781 |
| Capital expenditures | Not separately provided | Not separately provided | $1,000 | $846 |
Calculated consolidated operating margins were approximately 22.8% for the second quarter and 19.1% for the first six months. Continuing-operations net margins attributable to common shareholders were approximately 10.3% and 8.8%, respectively.
- Ameren Missouri net income was $93 in the second quarter and $108 for the six months, compared with $62 and $104 in the prior-year periods.
- Ameren Illinois net income was $46 in the second quarter and $106 for the six months, compared with $32 and $86.
- Cash and cash equivalents declined to $13 at June 30, 2016, from $292 at December 31, 2015.
- Consolidated short-term debt was $778 at June 30, 2016, compared with $301 at year-end 2015. Total reported debt, including current maturities and long-term debt, was approximately $7,814.
- Total liquidity was $1,331, consisting of $1,318 of available credit and $13 of cash. The companies were in compliance with credit covenants.
- Common dividends were $0.425 per share for the quarter and $0.85 per share for the six months, compared with $0.41 and $0.82, respectively.
Material changes versus the prior comparable period
- Continuing-operations earnings attributable to common shareholders increased $49 in the second quarter and $46 for the first six months. The principal benefit was the absence of the $69 noncash pretax Callaway construction and operating license provision recorded in 2015.
- Ameren Illinois and ATXI benefited from higher transmission and electric distribution earnings associated with rate-base investment and formula ratemaking.
- Ameren Missouri earnings were pressured by Noranda’s idling of its aluminum smelter, the expiration of MEEIA 2013 shared benefits, the scheduled Callaway refueling outage, and the exclusion of most transmission charges and revenues from the fuel adjustment clause.
- Second-quarter results benefited from warmer early-summer weather, estimated to increase earnings by approximately $0.07 per share.
- Interest expense increased $6 in the quarter and $13 for the six months, primarily because average debt increased by approximately $500.
- Operating cash flow declined $18, or approximately 2%, to $763 for the six months, while capital expenditures increased $154 to $1,000. Free cash flow before financing activities remained materially negative.
- The first six months of 2015 included a $52 tax benefit from discontinued operations related to the IRS audit of the divested merchant generation business; no comparable benefit was recorded in 2016.
- Ameren adopted new share-based compensation accounting guidance and recognized a $21 income tax benefit, increasing continuing-operations earnings by approximately $0.09 per diluted share.
Guidance, outlook, commentary, risks, and unusual items
- Management expects capital expenditures of up to $11.5 billion from 2016 through 2020, excluding potential Clean Power Plan impacts: up to $4.3 billion for Ameren Missouri, $6.2 billion for Ameren Illinois, and $1.0 billion for ATXI.
- Ameren expects cash used for capital expenditures and dividends to exceed operating cash flow over the next several years and expects to use debt to fund the shortfall. Management does not currently expect to issue equity over that period.
- Ameren expects its common-dividend payout ratio to be between 55% and 70% of earnings over the next few years.
- Ameren Missouri filed a July 2016 electric rate case requesting a $206 annual revenue increase, based on a 9.9% return on equity and a $7.2 billion rate base. A decision was expected by late April 2017, with rates potentially effective in late May 2017.
- Noranda’s bankruptcy and idled smelter reduced Ameren Missouri’s 2016 earnings relative to 2015; management estimated an approximately $38 earnings reduction for 2016 and requested recovery of estimated lost fixed-cost recovery in the rate case.
- Ameren Missouri expected to recognize at least $19 of MEEIA 2013 performance-incentive revenue in 2016, subject to regulatory and appellate developments. No related revenue had been recorded through June 30.
- FERC complaint cases could reduce the allowed MISO transmission return on equity from 12.38% to amounts reflected in administrative law judge recommendations of 10.32% and 9.70%. Ameren and Ameren Illinois recorded regulatory liabilities of $58 and $39, respectively, for potential customer refunds.
- Environmental compliance remains a significant risk. Ameren Missouri estimated $600 to $700 of environmental capital expenditures from 2016 through 2020, excluding potential Clean Power Plan costs. The Clean Power Plan was stayed by the Supreme Court and remained subject to litigation.
- Ameren Missouri faced Clean Air Act litigation concerning the Rush Island energy center. An adverse resolution could require material pollution-control capital expenditures and operating costs.
- Ameren Illinois estimated obligations for remediation of 44 former manufactured-gas-plant sites at $217 to $306; a $217 liability was recorded.
- Other material risks include regulatory lag, rate disallowances, weather, commodity prices, fuel availability, nuclear operations and decommissioning, capital-market access, credit ratings, cyberattacks, and counterparty or environmental liabilities.
Most important facts for investors to verify
- Progress and final outcomes of the Ameren Missouri $206 rate case, including recovery of Noranda-related lost fixed costs.
- FERC decisions on the two MISO transmission return-on-equity complaint cases and the ultimate customer-refund amounts.
- Whether Ameren Missouri records the expected MEEIA 2013 performance incentive and the outcome of its appeal.
- Actual capital spending, debt issuance, liquidity utilization, and credit metrics as the company funds an expected cash-flow shortfall.
- Results and potential costs of Rush Island Clean Air Act litigation and evolving environmental regulations.
- Noranda’s restructuring, continued sales-volume effects, and any resulting changes to Ameren Missouri’s revenue recovery.
- Exposure to Callaway nuclear outage, insurance, decommissioning, spent-fuel, and environmental obligations.