How did Ameren's 1998 earnings compare with 1997, and what affected them?

Net income rose to $386 million ($2.82 per share) from $335 million ($2.44 per share). The 1997 figure included a $52 million (38 cents per share) extraordinary charge tied to writing off Illinois generation-related regulatory assets. Excluding that charge, 1998 earnings were essentially flat, as warm weather and sales growth were offset by Missouri customer credits, a $15 million after-tax employee separation charge, and Callaway refueling costs.

What are the main regulatory risks to Ameren's business?

The main risk is electric industry restructuring. In Illinois, the Customer Choice Law brings retail competition from October 1999 and could force write-downs of about $841 million in generation assets. Missouri, which accounts for about 72% of retail electric revenue, has not settled its restructuring plan, and its generation investment of about $2.5 billion is similarly exposed. The Law also requires refunds of half of excess earnings for 1998–2004.

Is the dividend secure, and what limits it?

The quarterly dividend is 63.5 cents, and 1998 earnings covered it with a 90% payout ratio. As a holding company, Ameren depends on dividends and distributions from UE and CIPS, so the dividend depends on subsidiary earnings and cash flow. Operating cash flow was $803 million in 1998, well above dividends paid of about $349 million.

What major capital spending and environmental costs lie ahead?

Capital spending is planned at about $495 million in 1999 and $2.4 billion over 1999–2003. This includes six new combustion turbines (about $260 million), and compliance with EPA NOx rules could add $250–350 million over 1999–2002. Potential particulate matter and ozone standards and Kyoto Protocol measures could add further costs that the company cannot yet quantify. Long-term debt maturities total $202 million in 1999, with $520 million due through 2003.

What labor and legal issues could affect investors?

About 70% of employees are union members, and collective bargaining agreements covering 98% of represented employees expire in July 1999, so negotiations are a near-term risk. A 1993 CIPS lockout dispute was ruled lawful by the NLRB in August 1998, but the unions are pursuing further appeals; the company estimated back pay at about $17 million if the unions prevail. Management believes the outcome will not be materially adverse.

AEE 10-K FY1998 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 30, 1999. Cited figures are marked; the original filing is the authoritative source.

Ameren Corporation (NYSE: AEE), formed in December 1997 by the merger of Union Electric (UE) and CIPSCO, reported 1998 net income of $386 million^a, or $2.82 per share, up from $335 million ($2.44) in 1997, which included a $52 million extraordinary charge.

Excluding the 1998 targeted separation plan charge ($15 million^b after tax, or $0.11 per share), results were roughly flat year over year. Revenue was essentially flat at $3.32 billion, with 93% from electric operations. Growth in weather-sensitive residential and commercial sales offset lower gas revenue, which fell $33 million on mild winter weather, and lower EEI sales to the USEC.

The company is a PUHCA-registered holding company whose dividends depend on distributions from its two utility subsidiaries, UE (Missouri) and CIPS (Illinois). The main investor issues are regulatory and capital-intensive. Illinois electric restructuring (the Customer Choice Law) ended fuel adjustment clauses and phases in retail direct access from October 1999, and it may cause write-downs of Illinois generation assets (about $841 million^c net investment).

Missouri restructuring remains unresolved, and a Missouri generation investment of about $2.5 billion^d carries similar risk. The company plans about $2.4 billion of construction spending over 1999–2003, including six new combustion turbines (about $260 million), and faces an estimated $250–350 million in NOx compliance capital costs.

Dividends were $0.635 per quarter, a 90% payout of 1998 earnings. Other items to watch include the Callaway nuclear plant, a 1993 CIPS lockout dispute with unions (the NLRB ruled in the company's favor in August 1998, but the unions are pursuing further appeals), collective bargaining agreements covering about 70% of employees that expire in July 1999, and Year 2000 remediation (about 45% complete at year-end 1998, with external costs estimated at $10–15 million).

02—Key points

Key Highlights

1998 net income of $386 million ($2.82 per share), up 15% from $335 million ($2.44) in 1997, which was depressed by a $52 million extraordinary charge
Revenue of $3.32 billion, roughly flat year over year; electric revenue rose $30 million on warm summer weather and economic growth, while gas revenue fell $33 million
Capital program of about $495 million in 1999 and $2.4 billion over 1999–2003, including six new combustion turbines (about $260 million)
Illinois electric restructuring removed the fuel adjustment clause and begins retail direct access in October 1999; the Missouri restructuring outcome remains uncertain
Potential EPA NOx and ozone rules could require $250–350 million in additional capital spending over 1999–2002
Quarterly dividend of 63.5 cents per share, a 90% payout ratio on 1998 earnings; return on average common equity of 12.82%
Year 2000 remediation about 45% complete at year-end 1998, with external costs estimated at $10–15 million and remediation of significant systems targeted for Q3 1999

03—Questions

Frequently Asked Questions

How did Ameren's 1998 earnings compare with 1997, and what affected them?
Net income rose to $386 million ($2.82 per share) from $335 million ($2.44 per share). The 1997 figure included a $52 million (38 cents per share) extraordinary charge tied to writing off Illinois generation-related regulatory assets. Excluding that charge, 1998 earnings were essentially flat, as warm weather and sales growth were offset by Missouri customer credits, a $15 million after-tax employee separation charge, and Callaway refueling costs.
What are the main regulatory risks to Ameren's business?
The main risk is electric industry restructuring. In Illinois, the Customer Choice Law brings retail competition from October 1999 and could force write-downs of about $841 million in generation assets. Missouri, which accounts for about 72% of retail electric revenue, has not settled its restructuring plan, and its generation investment of about $2.5 billion is similarly exposed. The Law also requires refunds of half of excess earnings for 1998–2004.
Is the dividend secure, and what limits it?
The quarterly dividend is 63.5 cents, and 1998 earnings covered it with a 90% payout ratio. As a holding company, Ameren depends on dividends and distributions from UE and CIPS, so the dividend depends on subsidiary earnings and cash flow. Operating cash flow was $803 million in 1998, well above dividends paid of about $349 million.
What major capital spending and environmental costs lie ahead?
Capital spending is planned at about $495 million in 1999 and $2.4 billion over 1999–2003. This includes six new combustion turbines (about $260 million), and compliance with EPA NOx rules could add $250–350 million over 1999–2002. Potential particulate matter and ozone standards and Kyoto Protocol measures could add further costs that the company cannot yet quantify. Long-term debt maturities total $202 million in 1999, with $520 million due through 2003.
What labor and legal issues could affect investors?
About 70% of employees are union members, and collective bargaining agreements covering 98% of represented employees expire in July 1999, so negotiations are a near-term risk. A 1993 CIPS lockout dispute was ruled lawful by the NLRB in August 1998, but the unions are pursuing further appeals; the company estimated back pay at about $17 million if the unions prevail. Management believes the outcome will not be materially adverse.

04—Continue

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