Ameren Corporation 2018 First-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 businesses in Missouri and Illinois. The filing also covers Union Electric Company, doing business as Ameren Missouri, and Ameren Illinois Company. The report covers the three months ended March 31, 2018; amounts are generally in millions unless otherwise stated.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Operating revenues | $1,585 | $1,515 | +$70 |
| Operating income | $273 | $242 | +$31 |
| Net income | $153 | $104 | +$49 |
| Net income attributable to common shareholders | $151 | $102 | +$49 |
| Basic and diluted EPS | $0.62 | $0.42 | +$0.20 |
| Operating margin | Approximately 17.2% | Approximately 16.0% | Improved |
| Net margin | Approximately 9.7% | Approximately 6.9% | Improved |
| Cash flow from operations | $258 | $331 | -$73 |
| Capital expenditures | $579 | $504 | +$75 |
| Net cash used in investing activities | $597 | $539 | -$58 |
| Net cash provided by financing activities | $360 | $207 | +$153 |
Ameren reported $30 of cash and cash equivalents at March 31, 2018, and $89 including restricted cash. Consolidated short-term debt was $960, compared with $484 at December 31, 2017. Long-term debt, including current maturities, was $7,936 based on carrying value. Credit agreements provided approximately $1.2 billion of aggregate available capacity, and reported total liquidity was approximately $1.17 billion including cash.
Common dividends paid were $111, or $0.4575 per share for the quarter. Management stated that it expects a long-term dividend payout ratio of 55% to 70% of annual earnings.
Material changes versus the prior comparable period
- Revenue increased 4.6%, led by higher natural gas revenue, colder winter weather and increased regulated infrastructure investment.
- Ameren Missouri common earnings increased to $38 from $5. Benefits included higher base rates, colder weather, a $5 MEEIA energy-efficiency performance incentive and recovery of power-restoration costs. These benefits were partly offset by lower off-system sales and higher operating and maintenance costs.
- Ameren Illinois common earnings increased to $95 from $79. Natural gas earnings rose to $42 from $33, while electric distribution earnings rose to $33 from $30 and transmission earnings rose to $20 from $16.
- Income tax expense declined to $42 from $57, and Ameren’s effective tax rate declined to approximately 22% from 35%, primarily due to the Tax Cuts and Jobs Act and related deferred-tax effects.
- Operating cash flow declined primarily because of zero-emission-credit purchases, customer energy-efficiency program spending, lower Missouri fuel-cost recoveries and timing of regulatory recoveries.
- Capital expenditures increased 15% to $579, reflecting continued investment in transmission, electric distribution, natural gas infrastructure, reliability and energy-center projects.
- Commercial paper outstanding increased to $960 from $484, primarily to fund capital expenditures and other cash needs.
Guidance, outlook and management commentary
- Ameren expects capital expenditures of up to $11.4 billion from 2018 through 2022: up to $4.5 billion at Ameren Missouri, $6.6 billion at Ameren Illinois and $0.3 billion at ATXI. Potential renewable investments could add approximately $1 billion through 2020, subject to approval.
- Ameren expects the TCJA to reduce operating cash flow by approximately $1 billion from 2018 through 2022, while increasing rate base by approximately $1 billion over the same period. Management does not expect the TCJA to materially affect earnings over the longer term because of regulatory rate adjustments.
- Ameren Illinois filed for an estimated $72 million increase in electric distribution rates beginning in January 2019, subject to ICC approval. It also sought a natural gas delivery rate increase, estimated at approximately $44 million after adjustments discussed with ICC staff.
- Ameren Missouri is pursuing at least 700 megawatts of wind generation and expected to seek approval for at least 400 megawatts by June 30, 2018. It also planned to request a renewable energy standard rate adjustment mechanism to reduce regulatory lag.
- ATXI’s Spoon River transmission project entered service in February 2018. The Illinois Rivers and Mark Twain projects were expected to be completed by the end of 2019.
- In April 2018, Ameren Missouri issued $425 of 4.00% first mortgage bonds due 2048 and used the proceeds primarily to repay short-term debt and $179 of maturing notes. Ameren Illinois repaid $144 of notes maturing April 1, 2018.
Risks, contingencies and unusual items
- A FERC complaint case could reduce the allowed return on equity for MISO transmission assets. Ameren had recorded $42 of regulatory liabilities for expected refunds, including interest. A 50-basis-point reduction could reduce annual Ameren earnings by an estimated $8.
- Ameren Missouri faces Clean Air Act litigation concerning the Rush Island energy center. The remedy phase remains unresolved, and the ultimate resolution could require significant capital expenditures or operating costs.
- Environmental compliance remains a material exposure. Ameren Missouri estimated $325 to $425 of environmental compliance capital expenditures from 2018 through 2022, including approximately $300 to $350 for coal-combustion-residual compliance.
- Ameren Illinois estimated remediation obligations for 44 former manufactured-gas-plant sites at $168 to $240 and recorded a $168 liability. The ultimate cost and timing remain uncertain.
- Ameren has substantial contractual commitments for fuel, purchased power, natural gas, equipment and related services: $2,154 consolidated, including $1,509 for Ameren Missouri and $627 for Ameren Illinois.
- Commodity derivatives generated a net liability position of approximately $216 at March 31, 2018, substantially attributable to Ameren Illinois power contracts. A credit-rating downgrade could require up to $88 of additional collateral across the Ameren Companies.
- Callaway nuclear operations remain exposed to outage, insurance, decommissioning, spent-fuel and supplier risks. Westinghouse’s bankruptcy restructuring plan assumed Ameren Missouri’s fuel-assembly contracts, and management did not expect a material operational impact.
- Management identified weather, regulatory recovery, interest rates, commodity costs, capital-market access, environmental rules, cyberattacks, equipment failures and legal proceedings as significant risks. No material change to previously disclosed risk factors was reported.
Most important facts for investors to verify
- Whether the FERC MISO return-on-equity complaint results in refunds or lower prospective transmission returns.
- ICC decisions on Ameren Illinois’ electric formula-rate update and natural gas rate case.
- The pace and funding of the planned $11.4 billion capital program and the resulting debt and equity issuance.
- The actual cash-flow impact of the TCJA and the timing of related regulatory rate adjustments.
- Costs, timing and rate recovery for CCR compliance, environmental remediation and Rush Island litigation.
- Ameren Missouri’s approvals, economics and rate-recovery mechanism for planned wind investments.
- Liquidity, refinancing requirements and commercial-paper usage as capital spending and debt maturities increase.