Ameren Corporation 2017 Q2 Form 10-Q Summary
Business Context and Reporting Period
Combined unaudited quarterly filing for Ameren Corporation, Union Electric Company (d/b/a Ameren Missouri), and Ameren Illinois Company for the three and six months ended June 30, 2017. Ameren operates rate-regulated electric generation, transmission, and distribution businesses and natural-gas distribution businesses in Missouri and Illinois, plus FERC-regulated transmission operations through ATXI.
Key Financial Metrics
| Ameren consolidated | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Six months ended June 30, 2017 | Six months ended June 30, 2016 |
|---|---|---|---|---|
| Operating revenues | $1,538 million | $1,427 million | $3,052 million | $2,861 million |
| Operating income | $398 million | $325 million | $652 million | $545 million |
| Net income attributable to common shareholders | $193 million | $147 million | $295 million | $252 million |
| Basic and diluted EPS | $0.79 | $0.61 | $1.21 | $1.04 |
| Operating margin | 25.9% | 22.8% | 21.4% | 19.1% |
| Dividends per common share | $0.44 | $0.425 | $0.88 | $0.85 |
Revenue increased 7.8% for the quarter and 6.7% year to date. Net income attributable to common shareholders increased 31.3% for the quarter and 17.1% year to date. The filing attributes the improvement primarily to higher regulated rates and investment returns, the absence of 2016 Callaway refueling-outage costs, higher transmission and Illinois distribution investment, and the FEJA-related change in interim revenue recognition.
- Electric margins: $1,045 million in the second quarter and $1,865 million year to date, up 7% and 8%, respectively.
- Natural-gas margins: $114 million in the second quarter and $292 million year to date, broadly comparable with the prior-year periods.
- Cash flow: Net cash provided by operating activities was $863 million year to date, versus $763 million in 2016. Investing cash outflow was $1.059 billion, including $998 million of capital expenditures and $50 million of nuclear-fuel expenditures.
- Capital investment: Capital expenditures totaled $998 million year to date, compared with $1.000 billion in 2016. Ameren invested more than $640 million in FERC-regulated transmission and Illinois electric and natural-gas distribution businesses.
- Liquidity: Cash and cash equivalents were $10 million at June 30, 2017. Available credit under the consolidated credit agreements was $1.204 billion, producing total reported liquidity of approximately $1.214 billion.
- Debt: Consolidated short-term debt was $892 million and long-term debt, net, was $6.821 billion at June 30, 2017. Consolidated indebtedness to total capitalization was 53%, compared with 48% for Ameren Missouri and 47% for Ameren Illinois.
Material Changes Versus the Prior Comparable Period
- Ameren Missouri’s March 2017 electric rate order increased annual electric revenue requirement by $92 million, effective April 1, 2017. The order also reduced the base level of net energy costs by $54 million and certain tracked expenses by $26 million.
- Ameren Illinois’ FEJA-related decoupling change increased recognized electric-distribution revenue by $15 million in the second quarter and $47 million year to date. Management states that the timing change will not affect 2017 annual earnings.
- Ameren Missouri’s Callaway refueling and maintenance costs were lower because the prior-year outage occurred in the second quarter; the next outage is scheduled for fall 2017.
- Ameren Transmission margins increased $13 million in the quarter and $32 million year to date, primarily from additional rate base and formula-ratemaking recovery.
- Ameren Illinois Electric Distribution margins increased $31 million in the quarter and $72 million year to date, primarily from FEJA timing, rate-base investment, recoverable costs, and the higher recognized return on equity.
- Other operations and maintenance expense decreased $13 million in the quarter and $8 million year to date. Depreciation and amortization increased $12 million and $26 million, respectively, reflecting completed capital projects.
- Ameren Missouri issued $400 million of 2.95% senior secured notes due 2027 and used the proceeds with other funds to repay $425 million of 6.40% notes. ATXI issued $150 million of planned $450 million 3.43% senior unsecured notes due 2050, with the remaining $300 million expected in August 2017 subject to conditions.
- Consolidated commercial paper increased to $892 million from $558 million at December 31, 2016, while cash remained minimal.
Guidance, Outlook, Risks, and Unusual Items
- Management expects up to $11.2 billion of capital expenditures from 2017 through 2021, including up to $4.2 billion for Ameren Missouri, $6.4 billion for Ameren Illinois, and $0.6 billion for ATXI. Ameren expects capital spending and dividends to exceed operating cash flow for the next several years and plans to use debt rather than issue equity.
- Ameren expects its dividend payout ratio to be between 55% and 70% of annual earnings over the next few years.
- The fall 2017 Callaway outage is expected to involve approximately $32 million of maintenance expense. Management also expects approximately $15 million of annual interest savings from refinancing higher-cost Ameren Missouri debt.
- Pending ICC approval, Ameren Illinois’ 2018 electric-distribution revenue requirement is expected to decrease by $17 million beginning in January 2018. The company expects a $57 million unfavorable earnings effect in the third quarter of 2017 and a $28 million favorable effect in the fourth quarter from FEJA-related revenue timing, with no annual earnings impact.
- In July 2017, Illinois increased its corporate income tax rate from 7.75% to 9.5%. Ameren expects a $15 million reduction in consolidated 2017 net income, including a $14 million parent-level expense, and expects third-quarter deferred-tax liability revaluations of approximately $97 million for Ameren and $79 million for Ameren Illinois, offset by regulatory assets and tax expense.
- The FERC February 2015 MISO complaint case could reduce the allowed transmission return and require refunds. Ameren and Ameren Illinois recorded regulatory liabilities of $41 million and $24 million, respectively. A 50-basis-point return reduction is estimated to reduce annual earnings by approximately $7 million for Ameren and $4 million for Ameren Illinois.
- ATXI’s Mark Twain transmission project faces county-assent and regulatory approval delays. The alternative route is expected to require new county approvals and could delay the planned late-2019 completion.
- Ameren Missouri faces material environmental compliance uncertainties, including coal-ash, cooling-water, effluent, emissions, and Clean Air Act matters. Estimated environmental compliance capital expenditures are $425 million to $525 million from 2017 through 2021.
- Ameren Missouri’s sole NRC-licensed supplier of Callaway fuel assemblies, Westinghouse, is in Chapter 11 proceedings. Fuel for the fall 2017 outage has been received, but future disruptions could cause replacement-power costs or other material expenses.
- Ameren Illinois estimated former manufactured-gas-plant remediation obligations of $188 million to $256 million and recorded a $188 million liability. Ameren Missouri also faces unresolved Rush Island Clean Air Act litigation and municipal-tax litigation.
- Key continuing risks include regulatory recovery and rate lag, interest rates and Treasury yields, commodity and purchased-power costs, weather, capital-market access, credit ratings, environmental compliance, nuclear operations, cybersecurity, and potential collateral requirements. A downgrade to below investment grade could require up to $96 million of additional collateral or other assurances on certain trade obligations.
Most Important Facts for Investors to Verify
- Whether the FERC February 2015 complaint case changes transmission returns, refund obligations, and future earnings.
- The final ICC decision on Ameren Illinois’ 2018 electric-distribution revenue requirement and the effect of FEJA revenue timing on third-quarter results.
- Execution, financing, and regulatory recovery of the planned $11.2 billion 2017–2021 capital program.
- Actual cost and operational effect of the fall 2017 Callaway outage and developments in the Westinghouse bankruptcy.
- Final tax effects of Illinois’ corporate tax-rate increase and the related deferred-tax revaluation.
- Progress and potential liabilities associated with Rush Island, environmental compliance, coal-ash remediation, former manufactured-gas plants, and the Mark Twain project.
- Liquidity, commercial-paper balances, upcoming debt maturities, credit ratings, and the ability to fund capital expenditures and dividends without equity issuance.