Business Context and Reporting Period
Ameren Corporation, together with Union Electric Company (Ameren Missouri) and Ameren Illinois Company, filed a combined unaudited Form 10-Q for the three months ended March 31, 2017. Ameren operates regulated electric generation, transmission, distribution, and natural gas distribution businesses in Missouri and Illinois, with additional FERC-regulated transmission operations through ATXI. Dollar amounts are in millions unless otherwise stated.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Operating revenues | $1,514 | $1,434 | +$80 |
| Operating income | $254 | $220 | +$34 |
| Net income | $104 | $107 | -$3 |
| Net income attributable to Ameren common shareholders | $102 | $105 | -$3 |
| Basic and diluted EPS | $0.42 | $0.43 | -$0.01 |
| Dividends per common share | $0.44 | $0.425 | +$0.015 |
| Cash flow from operating activities | $331 | $349 | -$18 |
| Capital expenditures | $504 | $496 | +$8 |
Operating margin was approximately 16.8% in Q1 2017 versus 15.3% in Q1 2016. Net income attributable to common shareholders represented approximately 6.7% of revenue versus 7.3% in the prior-year quarter.
- Electric revenue increased to $1,206 from $1,102, while gas revenue declined to $308 from $332.
- Electric margins increased $59, or 8%, primarily from Ameren Illinois Electric Distribution and Ameren Transmission. Natural gas margins were broadly comparable.
- Ameren Illinois Electric Distribution common earnings increased to $30 from $11; Ameren Transmission increased to $34 from $27. Ameren Missouri declined to $5 from $14, and Ameren Illinois Natural Gas declined to $33 from $35.
- March 31, 2017 total assets were $24,811, compared with $24,699 at December 31, 2016. Cash and cash equivalents were $8.
- Consolidated long-term debt, including current maturities, was approximately $7,278, and commercial paper was $914, versus $558 at year-end 2016.
- Total liquidity was approximately $1,190, consisting of $1,182 of available credit capacity and $8 of cash. The companies were in compliance with applicable credit and indenture covenants.
Material Changes Versus the Prior Comparable Period
- Revenue increased primarily because of higher electric margins, including a $32 million favorable effect from Ameren Illinois’ change in interim-period revenue recognition under FEJA decoupling. Management stated that this change does not affect full-year 2017 earnings.
- Ameren Transmission benefited from additional rate base and formula-ratemaking recovery; Ameren Illinois Electric Distribution benefited from increased investment, a higher recognized return on equity, and decoupling.
- Ameren Missouri’s results were pressured by milder winter weather, lower retail sales volumes, higher depreciation, and lower allowance for equity funds used during construction. Higher off-system sales and MEEIA-related revenues partially offset these effects.
- The consolidated effective tax rate increased to approximately 35% from 22%, primarily because of lower tax benefits associated with share-based compensation.
- Cash from operations decreased because the prior-year period included a $42 million Taum Sauk insurance receipt, and Q1 2017 included $21 million of FERC complaint-case refunds at Ameren and $17 million at Ameren Illinois.
- Financing activities provided $207 million in Q1 2017 versus using $118 million in Q1 2016, primarily because of increased short-term debt issuance and the absence of a $260 million long-term debt maturity paid in 2016.
Guidance, Outlook, 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.
- Ameren expects cash used for capital expenditures and dividends to exceed operating cash flow over the next several years and expects to fund the shortfall primarily with debt. Management does not currently expect to issue equity over the next several years.
- Ameren expects its dividend payout ratio to be between 55% and 70% of earnings over the next few years. The board declared a quarterly dividend of $0.44 per share payable June 30, 2017.
- Ameren Missouri’s March 2017 rate order increased annual electric revenue requirements by $92 million; new rates became effective April 1, 2017.
- Ameren Illinois’ April 2017 formula-rate update, subject to ICC approval, would reduce the electric distribution revenue requirement beginning in January 2018 by $16 million. An ICC decision was expected by December 2017.
- The FERC February 2015 complaint case could reduce the allowed transmission return on equity and require additional customer refunds. The filing states that a 50-basis-point reduction could reduce annual earnings by approximately $7 million for Ameren and $4 million for Ameren Illinois.
- The Mark Twain transmission project faces county-assent and regulatory uncertainties after a Missouri appellate court vacated the prior certificate order. Delays could affect the planned 2019 completion.
- Westinghouse, the only NRC-licensed supplier of fuel assemblies for the Callaway energy center, filed for Chapter 11 restructuring. Management did not expect a material operating impact but identified potential replacement-power, fuel-inventory, and fabrication costs if performance is disrupted. The next Callaway refueling outage is scheduled for fall 2017, with expected maintenance expense of approximately $32 million.
- Ameren Missouri expects environmental compliance capital expenditures of $425 million to $525 million from 2017 through 2021. Clean Air Act litigation related to the Rush Island energy center could require additional capital and operating expenditures and could materially affect results, financial position, or liquidity.
- Ameren Illinois’ estimated obligation for remediation of 44 former manufactured-gas-plant sites was $193 million to $258 million; a $193 million liability was recorded.
- Other key risks include regulatory recovery and lag, interest rates and Treasury yields, commodity and purchased-power costs, environmental rules, weather, capital-market access, credit ratings, nuclear operations, cybersecurity, legal proceedings, and counterparty performance.
Important Facts for Investors to Verify
- Whether the FERC complaint proceedings ultimately reduce transmission returns and increase refund obligations.
- ICC approval and final economics of Ameren Illinois’ 2018 formula-rate update.
- Progress, approvals, costs, and completion timing for the Mark Twain, Illinois Rivers, and Spoon River transmission projects.
- Westinghouse’s ability to supply Callaway fuel assemblies for the fall 2017 outage and any related replacement costs.
- Actual capital expenditures, debt funding needs, refinancing requirements, and continued access to approximately $1.2 billion of credit capacity.
- The ultimate costs and rate recovery associated with environmental compliance, Rush Island litigation, coal-ash obligations, and manufactured-gas-plant remediation.
- The effect of FEJA revenue-recognition changes on quarterly comparisons and the absence of an impact on full-year 2017 earnings as stated by management.