AMEREN CORP annual report, FY2018

Ameren Corporation 2018 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2018. The filing is a combined Form 10-K for Ameren Corporation, Union Electric Company doing business as Ameren Missouri, and Ameren Illinois Company. The requested “2018 Q4” period is covered in the annual filing, including unaudited fourth-quarter information.

Business Context

Ameren is a regulated utility holding company serving Missouri and Illinois. Its principal businesses are electric generation, transmission and distribution, natural gas distribution, and FERC-regulated electric transmission. Reporting segments are Ameren Missouri, Ameren Illinois Electric Distribution, Ameren Illinois Natural Gas, and Ameren Transmission.

Ameren served approximately 1.2 million electric customers in Missouri and 1.2 million in Illinois, plus approximately 0.1 million Missouri natural gas customers and 0.8 million Illinois natural gas customers.
Rate base increased to $15.5 billion at year-end 2018 from $14.4 billion in 2017.
Ameren had 8,838 employees at December 31, 2018; approximately 51% were represented by labor unions.

Key Financial Metrics

Metric	2018	2017	Change
Operating revenues	$6.291 billion	$6.174 billion	Up $117 million
Operating income	$1.357 billion	$1.410 billion	Down $53 million
Net income	$821 million	$529 million	Up $292 million
Net income attributable to common shareholders	$815 million	$523 million	Up $292 million
Diluted EPS	$3.32	$2.14	Up $1.18
Cash from operating activities	$2.170 billion	$2.118 billion	Up $52 million
Capital expenditures	$2.286 billion	$2.132 billion	Up $154 million
Long-term debt, excluding current maturities	$7.859 billion	$7.094 billion	Up $765 million
Ameren shareholders’ equity	$7.631 billion	$7.184 billion	Up $447 million

Operating margin was approximately 21.6% in 2018 versus 22.8% in 2017, based on operating income divided by operating revenues. The effective income tax rate declined to 22% from 52%, primarily because of the 2017 Tax Cuts and Jobs Act deferred-tax revaluation and the lower federal corporate tax rate.

Electric margins increased $57 million, or 1%, to $3.989 billion.
Natural gas margins increased $22 million, or 4%, to $578 million.
Ameren Missouri common-shareholder income increased to $478 million from $323 million.
Ameren Illinois common-shareholder income increased to $304 million from $268 million.
Ameren Transmission common-shareholder income increased to $164 million from $140 million.

Liquidity, Debt and Cash Flow

Net available liquidity was $1.510 billion at December 31, 2018, including $16 million of cash and $1.494 billion of unused credit capacity.
The Missouri and Illinois credit agreements provide $2.1 billion of cumulative commitments and were extended to December 2022.
Commercial paper outstanding at year-end was $597 million; consolidated short-term debt was $597 million.
Ameren issued $1.352 billion of long-term debt and redeemed or matured $841 million during 2018.
Debt-to-total-capitalization ratios under the credit agreements were 53% for Ameren, 47% for Ameren Missouri, and 48% for Ameren Illinois, below the 65% covenant limit.
Common dividends paid were $451 million, or $1.8475 per share. Management expected a future payout ratio of 55% to 70% of earnings.
Operating cash flow exceeded capital expenditures by $116 million before dividends, but management stated that planned capital expenditures and dividends are expected to exceed operating cash flow over the next several years, requiring debt and equity financing.

Material Changes Versus 2017

Net income benefited from the absence of the large 2017 noncash deferred-tax revaluation charge associated with the TCJA, warmer summer and colder winter weather, higher Ameren Missouri base rates, the absence of a Callaway refueling outage, and continued transmission and distribution investment.
Operating income declined despite higher revenue because of higher operations and maintenance expense, depreciation and amortization, and other non-pass-through costs.
Ameren Missouri electric margins rose $89 million, helped by weather and customer demand, but were partly offset by lower rates reflecting tax savings and lower off-system sales and capacity revenues.
Ameren Illinois Electric Distribution margins fell $44 million, primarily because of lower recoverable expenses and the impact of the federal tax-rate reduction, partly offset by rate-base growth and energy-efficiency investments.
Capital expenditures increased to $2.286 billion from $2.132 billion, while long-term debt increased substantially to fund infrastructure investment and refinance maturities.
Ameren began using newly issued shares rather than market-purchased shares for its dividend reinvestment and employee benefit plans and expected to continue doing so through at least 2023.

Guidance, Outlook and Management Commentary

Ameren projected 2019-2023 capital expenditures of approximately $12.8 billion to $13.9 billion, including up to $7.1 billion for Ameren Missouri, $6.6 billion for Ameren Illinois, and $0.2 billion for ATXI.
Ameren Missouri’s Smart Energy Plan contemplated approximately $6.3 billion of investment from 2019 through 2023 for grid modernization, reliability, renewable integration, and related infrastructure.
Ameren Missouri entered into agreements to acquire up to 557 megawatts of wind generation, representing approximately $1 billion of expected 2020 capital expenditures, subject to regulatory and transmission approvals.
Ameren Missouri elected plant-in-service accounting under Missouri Senate Bill 564. PISA permits recovery of specified depreciation and return on qualifying post-September 1, 2018 investments, but Missouri electric customer rates are subject to a 2.85% compound annual growth cap and base rates are frozen until April 2020.
Ameren Missouri expected operating cash flow to decline by approximately $100 million in 2019 versus 2018 because of TCJA-related rate reductions and the timing of tax payments.
Ameren expects lower fuel costs through 2023, although most of the benefit is expected to flow through to customers under the fuel adjustment clause.
Ameren Illinois received approval for a $72 million electric distribution rate increase effective January 2019 and a $32 million annual natural gas rate increase effective November 2018.
Ameren Missouri’s Callaway nuclear facility had a scheduled refueling and maintenance outage in spring 2019. The filing states that outage-related costs and purchased-power effects could increase relative to 2018, although many purchased-power effects are subject to recovery mechanisms.

Risks, Contingencies and Unusual Items

FERC transmission returns: A pending FERC complaint could reduce the allowed return on equity for MISO transmission owners and require customer refunds. A 50-basis-point reduction was estimated to reduce Ameren net income by approximately $9 million and Ameren Illinois net income by approximately $5 million, based on projected 2019 rate base.
Rush Island litigation: The EPA and Department of Justice alleged Clean Air Act and Missouri law violations relating to projects at Ameren Missouri’s Rush Island plant. The liability phase was decided against Ameren Missouri; remedy proceedings were scheduled for April 2019. Potential costs include pollution-control capital expenditures and higher operating expenses, and the ultimate impact was not clear.
Environmental obligations: Ameren estimated $300 million to $400 million of 2019-2023 environmental capital expenditures. CCR compliance alone was estimated at $150 million to $200 million, and Ameren recorded $135 million of AROs associated with CCR facilities.
Remediation: Ameren Illinois estimated $150 million to $212 million of obligations for former manufactured-gas-plant sites and recorded a $150 million liability. Actual costs may vary materially.
Regulatory recovery: The business depends on timely recovery of capital expenditures and operating costs through regulated rates. Prudence reviews, rate caps, regulatory lag, appeals, and changes in ratemaking frameworks could reduce or delay recovery.
Tax reform cash-flow impact: Customer rates were reduced for lower tax rates and the return of excess deferred taxes before corresponding tax payments fully declined, creating near-term operating cash-flow pressure. Net regulatory liabilities related to excess deferred taxes totaled $2.349 billion.
Commodity and derivative exposure: Ameren had net derivative liabilities of approximately $204 million, largely at Ameren Illinois, although regulatory mechanisms are expected to recover or refund most related gains and losses through customer rates.
Pension and other postretirement benefits: The unfunded obligation was $481 million at year-end 2018. Ameren expected aggregate pension contributions of approximately $200 million over the following five years.
Operational risks: Key exposures include severe weather, aging infrastructure, nuclear operations, fuel availability, cybersecurity, natural-gas incidents, labor negotiations, credit-market access, and changes in interest rates and Treasury yields.

Most Important Facts for Investors to Verify

Whether Ameren can execute the projected $12.8 billion to $13.9 billion capital program while maintaining credit metrics, dividend growth, and adequate liquidity.
The final FERC decision on MISO transmission returns, including any required refunds or prospective reduction in allowed equity returns.
The outcome and remedy costs of the Rush Island environmental litigation.
Whether Missouri’s PISA, RESRAM, fuel adjustment clause, and energy-efficiency mechanisms provide timely recovery within the applicable rate caps.
The status, cost, and regulatory approvals for the up-to-557-megawatt wind projects and Smart Energy Plan.
The magnitude and timing of TCJA-related reductions in customer rates, excess deferred-tax amortization, and resulting operating cash-flow pressure.
Actual 2019 Callaway outage costs, generation availability, purchased-power requirements, and fuel costs.
Changes in Ameren’s debt balances, refinancing requirements, credit ratings, pension funding, and access to commercial paper and committed credit facilities.