AMEREN CORP quarterly report, Q3 FY2017

Ameren Corporation 2017 Q3 Form 10-Q Summary

Business Context and Reporting Period

Combined quarterly filing for Ameren Corporation, Union Electric Company doing business as Ameren Missouri, and Ameren Illinois Company for the three and nine months ended September 30, 2017. Ameren is a rate-regulated utility holding company with electric generation, transmission and distribution, natural gas distribution, and transmission operations in Missouri and Illinois.

Key Financial Metrics

Ameren consolidated	Three months ended September 30, 2017	Three months ended September 30, 2016	Nine months ended September 30, 2017	Nine months ended September 30, 2016
Operating revenues	$1,723 million	$1,859 million	$4,775 million	$4,720 million
Operating income	$581 million	$691 million	$1,233 million	$1,236 million
Net income attributable to Ameren common shareholders	$288 million	$369 million	$583 million	$621 million
Diluted EPS	$1.18	$1.52	$2.39	$2.56
Dividends per common share	$0.44	$0.425	$1.32	$1.275

Operating margin, calculated as operating income divided by operating revenues, was approximately 33.7% in the third quarter and 25.8% for the first nine months, compared with approximately 37.2% and 26.2%, respectively, in the comparable 2016 periods.
Nine-month cash provided by operating activities was $1,643 million, compared with $1,559 million in 2016. Capital expenditures were $1,523 million, compared with $1,496 million.
At September 30, 2017, cash and cash equivalents were $9 million. Consolidated long-term debt, including current maturities, was $7,699 million, and commercial paper outstanding was $446 million.
Total liquidity was approximately $1,662 million, consisting of $1,653 million of available credit capacity and $9 million of cash. The companies were in compliance with credit agreement covenants.
Consolidated indebtedness-to-total-capitalization ratios under the credit agreements were 51% for Ameren, 47% for Ameren Missouri, and 46% for Ameren Illinois.

Material Changes Versus the Prior Comparable Period

Third-quarter common-shareholder earnings declined $81 million, or 22%, and diluted EPS declined $0.34. Nine-month earnings declined $38 million, or 6%, and diluted EPS declined $0.17.
Third-quarter revenue decreased primarily because of lower Ameren Illinois electric distribution revenue recognition and milder weather. Nine-month revenue increased modestly, reflecting rate-base growth and higher transmission revenue.
Ameren Illinois Electric Distribution earnings declined to $31 million from $93 million in the third quarter and to $94 million from $122 million for the first nine months. The principal driver was the FEJA-related change in interim revenue recognition, which reduced third-quarter margins by $94 million and nine-month margins by $47 million. Management stated that the change does not affect annual 2017 earnings.
Ameren Missouri earnings declined $7 million in the third quarter but increased $12 million for the first nine months. Higher rates effective April 1, 2017, and lower tracked expense levels were partly offset by milder weather, the absence of the 2016 MEEIA performance incentive, and lower benefits from off-system sales.
Ameren Transmission earnings increased $8 million for the first nine months, supported by additional rate base investment, although the current allowed return was lower than the temporary 2016 level.
The Illinois corporate income tax rate increased from 7.75% to 9.5% effective July 1, 2017. Ameren recorded a $14 million expense for deferred-tax revaluation and reported a higher consolidated effective tax rate.
Ameren issued $400 million of Ameren Missouri senior secured notes at 2.95% due 2027 and $450 million of ATXI senior unsecured notes at 3.43% due 2050. Ameren Missouri repaid $425 million of 6.40% notes at maturity.

Outlook, Commentary, Risks, and Unusual Items

Management expects capital expenditures of up to $11.2 billion from 2017 through 2021: up to $4.2 billion at Ameren Missouri, $6.4 billion at Ameren Illinois, and $0.6 billion at ATXI. Potential additional renewable investments under Ameren Missouri's integrated resource plan could add approximately $1 billion.
Ameren Missouri's plan contemplates at least 700 megawatts of wind generation by 2020 and 100 megawatts of solar generation over the following decade. The plan targets an 80% reduction in CO₂ emissions by 2050 from 2005 levels.
Ameren expects its dividend payout ratio to be 55% to 70% of annual earnings over the next several years. The October 2017 dividend declaration increased the annualized rate to $1.83 per share.
Ameren Missouri's Callaway nuclear refueling and maintenance outage began in October 2017. Management expects approximately $32 million of maintenance expense; related purchased-power and excess-generation effects are substantially subject to the fuel adjustment clause.
The February 2015 FERC complaint case could reduce the allowed MISO transmission return on equity and require refunds. Ameren and Ameren Illinois recorded regulatory liabilities of $41 million and $24 million, respectively, for estimated refunds. The ultimate outcome and timing remain uncertain.
ATXI's Mark Twain transmission project requires Missouri regulatory approval and could be delayed. Litigation and an appeal also affect a segment of the Illinois Rivers project.
Ameren Missouri faces potential material exposure from Clean Air Act litigation involving the Rush Island energy center. Environmental compliance, coal-ash management, cooling-water rules, and emissions requirements could require significant additional capital spending; estimated 2017-2021 environmental compliance spending is $425 million to $525 million.
Ameren Illinois estimated obligations for remediation of 44 former manufactured-gas-plant sites at $184 million to $255 million and recorded the $184 million minimum estimate as a liability.
Westinghouse, the sole NRC-licensed supplier of Callaway fuel assemblies, is in Chapter 11 proceedings. Ameren does not currently expect a material operating impact, but replacement fuel or replacement-power costs could be material if contracts are rejected or future fuel assemblies are unavailable.
Other principal risks include regulatory recovery and rate lag, interest rates, commodity prices, weather, credit-market access, cyberattacks, operational outages, environmental rules, tax reform, and counterparty performance.

Investor Verification Checklist

Verify the final ICC decision on Ameren Illinois's 2018 electric distribution revenue requirement, including the proposed $17 million decrease.
Monitor the FERC decision and any refund requirements in the February 2015 MISO return-on-equity complaint case.
Assess progress, cost recovery, and regulatory approvals for the Illinois Rivers, Spoon River, and Mark Twain transmission projects.
Reconcile the timing effects of FEJA revenue recognition with full-year Ameren Illinois earnings and cash collections.
Review Callaway outage performance, Westinghouse bankruptcy developments, and nuclear fuel availability.
Evaluate environmental litigation and compliance costs, especially Rush Island, CCR, cooling-water, and emissions requirements.
Compare planned capital spending and debt financing with operating cash flow, liquidity, and the targeted approximately 50% equity ratio.
Confirm the sustainability of the increased dividend and management's stated 55% to 70% payout-ratio range.