Why did Ameren's 2002 earnings decline compared with 2001?

Net income fell $87 million, or about $1.10 per share on a reported basis, from 2001. Excluding the $0.40 per share restructuring charge and the 2001 SFAS 133 adoption effect, earnings dropped about $0.45 per share. Main causes were the Missouri electric rate settlement (about $0.26 per share), higher employee benefit costs (about $0.15), higher depreciation (about $0.17), and increased share count and financing costs (about $0.29). Favorable weather and emission-credit sales partly offset these.

How significant is the CILCORP acquisition for Ameren's future earnings?

The roughly $1.4 billion purchase adds Central Illinois Light Company's regulated electric and gas utility businesses and about 1,200 MW of mostly coal-fired generation. CILCORP had 2002 revenue of $782 million and net income from continuing operations of $31 million, so results will rise meaningfully once consolidated. The acquisition also brings debt and preferred stock of about $900 million, and it required equity issuance that increased dilution.

Is Ameren's dividend at risk?

The quarterly dividend was 63.5 cents per share, or $2.54 annualized, and was declared again in February 2003. The 2002 payout ratio was 98% of reported earnings (85% excluding charges), which is high relative to earnings. The Board does not set fixed payout targets. Operating cash flow of $833 million covered the dividend, but investors should watch whether earnings growth keeps pace with the payout.

What are the main risks to Ameren's credit and capital access?

After the CILCORP deal, S&P lowered ratings on the Ameren companies, though it set outlooks to stable. Covenants require debt-to-capital at or below 60%, which Ameren met at 50% at year-end 2002. A pension-related provision in some committed credit facilities could be triggered if the unfunded liability exceeds $300 million. Management estimated it could exceed that level after 2002 market declines, which could force renegotiation, replacement or funding of the facilities. Required pension contributions of $150 to $175 million annually are expected in 2005 through 2007.

What capital spending and environmental costs should investors expect?

Management estimates five-year (2003-2007) construction expenditures of $3.0 to $3.3 billion, including about $675 million in 2003, covering combustion turbines, Callaway steam generator replacement, and transmission and distribution. Compliance with new NOx rules could cost $200 to $250 million, and further mercury, regional haze, cooling-water and multi-pollutant requirements could add significant costs. Many of these costs are recoverable in Missouri rates only through the rate-case framework, and Missouri lacks a fuel cost recovery mechanism for electric operations.

AEE 10-K FY2002 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K/A filed April 1, 2003. Cited figures are marked; the original filing is the authoritative source.

Ameren Corporation's FY2002 Form 10-K (filed April 1, 2003) shows a year shaped by one-time charges and a major acquisition.

Net income fell to $382 million^a ($2.61 basic EPS) from $469 million in 2001. Excluding a $92 million pretax voluntary retirement and restructuring charge ($0.40 per share), earnings were $440 million ($3.01 per share), down from $3.46 in 2001. The decline reflects the 2002 Missouri electric rate settlement, higher employee benefit and depreciation costs, soft industrial demand, and dilution from new equity.

Favorable weather and emission-credit sales partly offset these pressures. The most significant post-period event was the January 31, 2003 closing of the CILCORP acquisition from AES for roughly $1.4 billion^b, including about $900 million of assumed debt and preferred stock and about $500 million of cash. Ameren funded the cash portion with equity issued in September 2002 and early 2003, and its shares outstanding rose from 138.0 million to 154.1 million at year-end 2002.

The deal adds Central Illinois Light Company (AmerenCILCO) and about 1,200 MW of largely coal-fired generation, most expected to become non rate-regulated in 2003. Investors should note that Ameren's credit profile was affected: S&P lowered ratings on Ameren, AmerenUE and AmerenCIPS after the deal, and the outlook was set to stable. The outlook is cautious.

Management cites weak economic conditions, soft Midwest power prices, scheduled rate reductions, rising benefit and insurance costs, incremental dilution, and an assumed return to normal weather. Management has taken cost actions including a voluntary retirement program accepted by about 550 employees, a 2003 wage freeze for management, and suspension of two Meredosia coal units.

Additional risks include a pension-related covenant that may need renegotiation, environmental NOx and mercury compliance capital, and a five-year construction program of roughly $3.0 to $3.3 billion^c. Operating cash flow was $833 million, and the dividend held at $2.54 annualized (63.5 cents per quarter), though the 2002 payout ratio reached 98% of reported earnings.

02—Key points

Key Highlights

Reported 2002 net income of $382 million ($2.61 basic EPS), down from $469 million ($3.41) in 2001; excluding restructuring charges, EPS was $3.01.
Recorded $92 million pretax ($58 million after tax, $0.40/share) in voluntary retirement and restructuring charges, with about 550 employees accepting the retirement program.
Closed the approximately $1.4 billion CILCORP acquisition on January 31, 2003, adding roughly 200,000 electric and 205,000 gas customers in Illinois plus about 1,200 MW of generation.
Issued 6.325 million shares at $40.50 in early 2003 for net proceeds of $248 million; shares outstanding rose to 154.1 million at year-end 2002 from 138.0 million.
S&P lowered Ameren, AmerenUE and AmerenCIPS ratings after the CILCORP closing; Ameren Corp. is rated A3/A- (Moody's/S&P) at the senior level with a stable outlook.
Missouri rate settlement phases in $110 million of electric rate reductions through April 2004, with a rate moratorium through June 30, 2006 and a $2.25 to $2.75 billion infrastructure investment commitment.
Operating cash flow of $833 million in 2002; the 2002 dividend payout ratio was 98% of reported net income (85% excluding charges).

03—Questions

Frequently Asked Questions

Why did Ameren's 2002 earnings decline compared with 2001?
Net income fell $87 million, or about $1.10 per share on a reported basis, from 2001. Excluding the $0.40 per share restructuring charge and the 2001 SFAS 133 adoption effect, earnings dropped about $0.45 per share. Main causes were the Missouri electric rate settlement (about $0.26 per share), higher employee benefit costs (about $0.15), higher depreciation (about $0.17), and increased share count and financing costs (about $0.29). Favorable weather and emission-credit sales partly offset these.
How significant is the CILCORP acquisition for Ameren's future earnings?
The roughly $1.4 billion purchase adds Central Illinois Light Company's regulated electric and gas utility businesses and about 1,200 MW of mostly coal-fired generation. CILCORP had 2002 revenue of $782 million and net income from continuing operations of $31 million, so results will rise meaningfully once consolidated. The acquisition also brings debt and preferred stock of about $900 million, and it required equity issuance that increased dilution.
Is Ameren's dividend at risk?
The quarterly dividend was 63.5 cents per share, or $2.54 annualized, and was declared again in February 2003. The 2002 payout ratio was 98% of reported earnings (85% excluding charges), which is high relative to earnings. The Board does not set fixed payout targets. Operating cash flow of $833 million covered the dividend, but investors should watch whether earnings growth keeps pace with the payout.
What are the main risks to Ameren's credit and capital access?
After the CILCORP deal, S&P lowered ratings on the Ameren companies, though it set outlooks to stable. Covenants require debt-to-capital at or below 60%, which Ameren met at 50% at year-end 2002. A pension-related provision in some committed credit facilities could be triggered if the unfunded liability exceeds $300 million. Management estimated it could exceed that level after 2002 market declines, which could force renegotiation, replacement or funding of the facilities. Required pension contributions of $150 to $175 million annually are expected in 2005 through 2007.
What capital spending and environmental costs should investors expect?
Management estimates five-year (2003-2007) construction expenditures of $3.0 to $3.3 billion, including about $675 million in 2003, covering combustion turbines, Callaway steam generator replacement, and transmission and distribution. Compliance with new NOx rules could cost $200 to $250 million, and further mercury, regional haze, cooling-water and multi-pollutant requirements could add significant costs. Many of these costs are recoverable in Missouri rates only through the rate-case framework, and Missouri lacks a fuel cost recovery mechanism for electric operations.

04—Continue

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