Ameren Corporation 2015 Q3 Form 10-Q Summary
Business context and reporting period
Ameren Corporation is a regulated utility holding company with two principal operating segments: Ameren Missouri, which operates regulated electric generation, transmission, distribution, and natural gas businesses; and Ameren Illinois, which operates regulated electric and natural gas transmission and distribution businesses. The combined Form 10-Q also covers Union Electric Company and Ameren Illinois Company as separate registrants.
The filing covers the quarter and nine months ended September 30, 2015. Unless stated otherwise, dollar amounts are in millions. Results exclude the divested merchant-generation businesses presented as discontinued operations.
Key financial metrics
| Ameren consolidated | Three months 2015 | Three months 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Operating revenues | $1,833 | $1,670 | $4,790 | $4,683 |
| Operating income | $626 | $561 | $1,119 | $1,129 |
| Income from continuing operations | $345 | $296 | $554 | $546 |
| Net income attributable to Ameren common stockholders | $343 | $293 | $601 | $538 |
| Diluted EPS | $1.41 | $1.20 | $2.47 | $2.20 |
| Diluted EPS from continuing operations | $1.41 | $1.20 | $2.26 | $2.21 |
| Dividends per common share | $0.41 | $0.40 | $1.23 | $1.20 |
- Third-quarter revenue increased approximately 10%, while nine-month revenue increased approximately 2%.
- Third-quarter net income attributable to common stockholders increased $50 million, or approximately 17%; continuing-operations income increased $49 million, or approximately 17%.
- Nine-month continuing-operations income attributable to common stockholders increased $8 million, or approximately 1%; nine-month total net income benefited from a $52 million discontinued-operations tax benefit.
- Third-quarter electric margins increased $115 million, or 10%, and nine-month electric margins increased $144 million, or 5%. Natural gas margins declined $3 million and $10 million, respectively.
- Net cash provided by operating activities was $1,528 million for the first nine months, compared with $1,203 million in 2014. Continuing-operations operating cash flow was $1,533 million versus $1,208 million.
- Capital expenditures were $1,332 million, compared with $1,310 million in the prior-year period. Cash used in investing activities was $1,362 million.
- Cash and cash equivalents increased to $72 million at September 30, 2015, from $5 million at December 31, 2014.
- Total current and long-term debt, including current maturities and short-term debt, was approximately $7.2 billion at September 30, 2015. Consolidated commercial paper outstanding was $783 million.
- Ameren reported $1.304 billion of available credit capacity and $1.376 billion of total liquidity, including cash. The credit agreements provide aggregate capacity of approximately $2.1 billion and expire in December 2019.
Material changes versus the prior comparable period
- Improved quarterly earnings: Ameren Missouri earnings increased $17 million and Ameren Illinois earnings increased $23 million in the third quarter. Warmer summer temperatures, higher regulated rates, increased rate-base investment, formula-ratemaking earnings, and lower effective income taxes were key contributors.
- Mixed nine-month segment performance: Ameren Illinois net income increased $26 million, while Ameren Missouri net income declined $54 million. Ameren parent and other businesses improved from a $10 million loss to $26 million of income, primarily reflecting stronger ATXI transmission results.
- Callaway licensing write-off: Ameren Missouri discontinued efforts to license and build a second nuclear unit at Callaway and recorded a $69 million noncash pretax provision in the second quarter for previously capitalized costs.
- Tax benefit from discontinued operations: Resolution of the IRS audit of the 2013 tax year reduced unrecognized tax benefits by $53 million and increased discontinued-operations income.
- Regulatory rate changes: Missouri’s April 2015 electric rate order authorized a $122 million annual revenue increase effective May 30, 2015, but changed the fuel adjustment clause and removed or limited certain tracking mechanisms, potentially increasing regulatory lag.
- Capital deployment: Ameren invested $886 million of first-nine-month capital expenditures in FERC-regulated transmission and Ameren Illinois delivery infrastructure. Ameren Illinois invested approximately $410 million in electric and natural gas delivery infrastructure.
- Debt and funding: Ameren Missouri issued $250 million of 3.65% senior secured notes due 2045 and received $224 million of parent capital contributions. Parent commercial paper increased substantially, while subsidiary short-term debt balances declined.
Guidance, outlook, commentary, and risks
- Ameren estimates 2015–2019 capital expenditures of $8.6 billion to $9.3 billion, including up to $3.9 billion at Ameren Missouri, $4.0 billion at Ameren Illinois, and $1.4 billion at ATXI. It is separately evaluating an additional $500 million to $1 billion of Ameren Illinois investment after 2016.
- Management expects cash used for capital expenditures and dividends to exceed operating cash flow over the next several years and expects to use debt to fund the shortfall. It did not expect to issue equity over the next several years.
- Ameren parent and Ameren Illinois expected to issue long-term debt in the fourth quarter of 2015 to repay a substantial portion of short-term debt.
- In October 2015, the board increased the quarterly common dividend to $0.425 per share, implying an annualized rate of $1.70, up from $1.64. Management expects a dividend payout ratio of 55% to 70% of earnings over the next several years.
- Ameren Illinois regulatory proceedings could affect 2016 revenue: the electric delivery formula update as filed sought a $109 million increase, while ICC staff recommended a $107 million increase. The natural gas rate case sought an annual increase of approximately $45 million, with a decision expected by December 2015.
- Ameren Missouri expects to recognize at least $19 million of MEEIA performance-incentive revenue in 2016 if it exceeds 100% of the applicable efficiency goals, but the MoPSC was reviewing the calculation methodology. The MoPSC rejected Ameren Missouri’s proposed 2016–2018 efficiency plan in October 2015.
- FERC proceedings challenge the 12.38% allowed base return on equity for MISO transmission owners. Ameren and Ameren Illinois recorded regulatory liabilities for estimated customer refunds. A 50-basis-point reduction was estimated to reduce annual earnings by approximately $4 million for Ameren and $2 million for Ameren Illinois based on 2015 rate base.
- Environmental compliance remains a significant uncertainty. The Clean Power Plan, coal-combustion residuals rules, MATS, cooling-water requirements, and wastewater rules could require substantial capital expenditures, higher operating costs, facility modifications, or retirements. Ameren Missouri estimated $350 million to $400 million of 2015–2019 spending for existing environmental requirements, excluding potential Clean Power Plan and new effluent-rule impacts.
- Other material risks include the EPA Clean Air Act litigation involving the Rush Island energy center, remediation obligations, asbestos litigation, nuclear-plant operating and decommissioning risks, commodity-price and counterparty exposure, regulatory recovery delays, lower Noranda aluminum-smelter sales, and the unresolved $41 million Taum Sauk insurance receivable.
- Ameren estimated potential additional collateral requirements of up to $150 million if credit-related triggers were met, although its investment-grade ratings and current market assumptions did not require additional collateral under the disclosed scenarios.
Most important facts for investors to verify
- Confirm the final outcomes of the pending Ameren Illinois electric and natural gas rate proceedings and the FERC MISO return-on-equity complaints.
- Track whether Ameren Missouri’s MEEIA performance incentive is recognized in 2016 and whether a replacement 2016–2018 efficiency plan is approved.
- Assess the capital and operating-cost implications of the Clean Power Plan and other environmental regulations, including possible coal-plant modifications or retirements.
- Monitor planned fourth-quarter debt issuance, commercial paper reduction, leverage, liquidity, and compliance with credit covenants.
- Evaluate the sustainability of the increased dividend against projected capital spending, operating cash flow, and expected debt funding.
- Review the resolution and collectability of the $41 million Taum Sauk insurance receivable and the potential exposure from environmental, legal, nuclear, and asbestos matters.
- Separate recurring utility earnings from the $53 million tax benefit recorded in discontinued operations and the $69 million noncash Callaway licensing charge.