Ameren Corporation 2018 Q3 Form 10-Q Summary
Business context and reporting period
This combined unaudited Form 10-Q covers Ameren Corporation, Union Electric Company (d/b/a Ameren Missouri), and Ameren Illinois Company for the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods. Ameren is a regulated utility holding company with electric generation, transmission and distribution, natural gas distribution, and transmission businesses in Missouri and Illinois.
Key financial metrics
| Ameren consolidated | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Operating revenues | $1,724 million | $1,723 million | $4,872 million | $4,775 million |
| Operating income | $533 million | $569 million | $1,191 million | $1,198 million |
| Net income attributable to common shareholders | $357 million | $288 million | $747 million | $583 million |
| Diluted EPS | $1.45 | $1.18 | $3.04 | $2.39 |
| Dividends per common share | $0.4575 | $0.4400 | $1.3725 | $1.3200 |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $1,686 million | $1,647 million |
| Capital expenditures | Not separately provided | Not separately provided | $1,689 million | $1,523 million |
Consolidated operating margin was approximately 30.9% in the third quarter and 24.4% for the first nine months, compared with approximately 33.1% and 25.1%, respectively, in the prior-year periods. The lower operating income reflected higher operations and maintenance and depreciation expenses despite broadly flat revenue.
- At September 30, 2018, Ameren had $11 million of cash and cash equivalents, $521 million of short-term debt, $649 million of current maturities of long-term debt, and $7.614 billion of long-term debt, net.
- Total assets were $26.959 billion and total equity was $7.798 billion, compared with $25.945 billion and $7.326 billion, respectively, at December 31, 2017.
- Credit agreements provided $1.578 billion of available capacity; including cash, total reported liquidity was $1.589 billion. The companies were in compliance with applicable credit-agreement covenants.
- Consolidated indebtedness to total capitalization under credit-agreement definitions was 52% for Ameren, 46% for Ameren Missouri, and 48% for Ameren Illinois.
- Ameren issued $853 million of long-term debt and $56 million of common stock during the first nine months. Capital expenditures exceeded operating cash flow by approximately $3 million before other investing items.
Material changes versus the prior comparable period
- Net income attributable to Ameren common shareholders increased 24% in the third quarter and 28% for the first nine months. Diluted EPS increased 23% and 27%, respectively.
- The improvement was primarily driven by lower effective income tax rates following the Tax Cuts and Jobs Act, favorable weather and higher Ameren Missouri sales, higher Ameren Missouri base-rate earnings, and increased infrastructure investment in Ameren Transmission and Ameren Illinois.
- Ameren Missouri’s nine-month electric margins increased $100 million, primarily from colder winter and warmer summer weather, higher sales, rate-order effects, and a MEEIA performance incentive. Third-quarter electric margins decreased $11 million because of the TCJA-related rate reduction and lower power-restoration revenue.
- Ameren Illinois Electric Distribution margins decreased $30 million for the nine months, mainly because of lower recoverable energy-efficiency and formula-ratemaking revenues, partly offset by rate-base growth and higher recognized returns. Ameren Illinois Natural Gas margins increased $11 million.
- Operations and maintenance expense increased $37 million for the nine months, including higher Ameren Missouri energy-center maintenance, coal-handling, energy-efficiency, and distribution-maintenance costs. Depreciation and amortization increased $45 million.
- The effective consolidated income tax rate fell to 23% from 39% for the nine months, while income tax expense declined to $221 million from $376 million. The filing states that some of the 2018 benefit reflects interim-period timing and is not expected to materially affect year-over-year earnings.
- Operating cash flow increased $39 million, but capital expenditures increased $166 million. Ameren Illinois operating cash flow declined $116 million, while Ameren Missouri operating cash flow increased $142 million.
Guidance, outlook, risks, contingencies, and unusual items
- Missouri Senate Bill 564 reduced Ameren Missouri’s annual revenue requirement by $167 million beginning August 1, 2018, including $74 million related to excess deferred taxes. Ameren Missouri also recorded a $60 million regulatory liability for excess TCJA-related amounts collected through July 31.
- Ameren Missouri elected PISA effective September 1, 2018. PISA permits deferral and future recovery of 85% of depreciation and a weighted-average cost-of-capital return on qualifying post-election plant, but includes a 2.85% customer-rate growth cap and a base-rate freeze until April 2020. Management expects the framework to support approximately $1 billion of incremental grid-modernization capital from 2019 through 2023.
- Ameren Missouri expects to develop or acquire wind facilities of approximately 400 megawatts and up to 157 megawatts, subject to regulatory, transmission, FERC, and other approvals. Completion is expected in 2020.
- Ameren expects up to $11.4 billion of capital expenditures from 2018 through 2022, excluding potential incremental investments associated with the Missouri integrated resource plan, Senate Bill 564, and additional renewable generation.
- Ameren Illinois received subsequent November 2018 orders approving a $72 million annual electric distribution rate increase beginning January 2019 and a $32 million annual natural-gas rate increase beginning November 2018. These orders occurred after the quarter-end but are discussed in the filing.
- The FERC MISO transmission return-on-equity complaint remains unresolved. Ameren and Ameren Illinois had recorded regulatory liabilities of $43 million and $25 million, respectively, for expected refunds based on the pending proceeding. A 50-basis-point reduction in the FERC-allowed base return could reduce annual Ameren earnings by an estimated $8 million.
- Ameren Missouri faces Clean Air Act litigation involving the Rush Island energy center. The ultimate remedy could require additional pollution-control capital expenditures and operating costs and could materially affect results, financial position, or liquidity.
- Environmental compliance remains a significant exposure. Ameren Missouri estimates $325 million to $425 million of environmental capital expenditures from 2018 through 2022, including $300 million to $350 million for coal-combustion-residual compliance.
- Ameren Illinois estimated remediation obligations for 44 former manufactured-gas-plant sites at $162 million to $226 million and recorded the $162 million minimum estimate. Actual costs and timing may vary materially.
- The next scheduled Callaway nuclear refueling and maintenance outage is expected in spring 2019. Nuclear fuel supply, outage performance, decommissioning, insurance coverage, and spent-fuel storage remain continuing risks.
- Management expects the TCJA to reduce operating cash flow by approximately $1 billion from 2018 through 2022 while increasing rate base by approximately $1 billion. Ameren expects planned capital expenditures and dividends to exceed operating cash flow over the next several years, potentially requiring additional debt or equity financing.
- Other principal risks include regulatory recovery and rate decisions, commodity prices, weather, interest rates, credit ratings, capital-market access, cybersecurity, equipment failures, environmental rules, legal proceedings, and counterparty performance.
Most important facts an investor should verify
- Whether PISA and the Missouri rate cap produce the expected recovery and investment economics as capital spending accelerates.
- The final outcome and financial impact of the FERC MISO return-on-equity complaints and related refunds.
- The scope, timing, and recoverability of Rush Island environmental remedies and coal-ash compliance expenditures.
- Whether Ameren can fund its projected capital program and dividends without materially increasing leverage or issuing significant equity.
- The final regulatory approvals, transmission interconnections, costs, and rate recovery for the planned Missouri wind projects and RESRAM.
- The effect of the 2019 Callaway outage, weather normalization, commodity costs, and subsequent regulatory decisions on earnings and cash flow.
- The accuracy of recorded and estimated remediation, decommissioning, pension, environmental, and other contingent liabilities.