How did Ameren perform in 2003 compared with 2002?

Reported net income rose to $524 million ($3.25 per diluted share) from $382 million ($2.60). The increase is mostly due to a $31 million after-tax coal contract settlement gain and an $18 million SFAS 143 gain, plus the CILCORP acquisition. Excluding these items, earnings were $475 million ($2.95 per share), down from $440 million ($3.01), mainly due to cooler weather, a Missouri rate reduction and higher employee benefit costs.

What is the Illinois Power acquisition and how will it be financed?

Ameren agreed on February 2, 2004 to buy Illinois Power's stock and Dynegy's 20% interest in EEI for about $2.3 billion, including about $1.8 billion of assumed debt and preferred stock. Ameren expects new common stock to fund at least 50% of the transaction value; it issued 19.1 million shares in February 2004 raising $853 million, with the balance in cash at closing. Illinois Power serves about 590,000 electric and 415,000 gas customers and is expected to close by year-end 2004 subject to regulatory approvals.

Will the Illinois Power deal dilute or help earnings per share?

Management expects dilution before closing because the February 2004 shares are issued ahead of the acquisition's earnings contribution. Once completed, Ameren expects the acquisition to be accretive to earnings per share in the first full year of operation, though that expectation depends on assumptions about interest rates and power market prices that may prove incorrect.

What are the main regulatory constraints on Ameren's earnings?

Illinois electric rates are legislatively frozen through January 1, 2007, and Illinois earnings above set levels must be shared with customers through 2006. In Missouri, UE is under a rate moratorium through July 1, 2006, with a $30 million electric rate reduction effective April 1, 2004. Ameren's electric operations have no fuel or purchased power cost-recovery mechanism in either state, so commodity cost increases fall to shareholders unless hedged. Recovery of UE's 2002-2006 infrastructure investments is also deferred until after the moratorium ends.

What are the key risks to investors from the filing?

Key risks include: possible ratings downgrades after the Illinois Power announcement (credit ratings agencies placed Ameren's debt under review); large environmental capital requirements; weak long-term Midwest power prices affecting non-rate-regulated Genco and AERG; uncertainty over FERC transmission and Midwest ISO/GridAmerica participation; rising pension and retiree healthcare costs (including the Barnett retiree medical lawsuit); and the risk that the Illinois Power acquisition is not completed or integrated as planned.

AEE 10-K FY2003 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 9, 2004. Cited figures are marked; the original filing is the authoritative source.

Ameren Corporation (NYSE: AEE), a St. Louis-based PUHCA-registered holding company, reported 2003 net income of $524 million^a ($3.25 per diluted share), up from $382 million ($2.60) in 2002.

Excluding a $31 million^b after-tax coal contract settlement gain and an $18 million SFAS 143 cumulative-effect gain, earnings were $475 million ($2.95 per share), down from $3.01 in 2002. The decline reflects cooler summer weather, a Missouri rate reduction and higher employee benefit costs, partly offset by the CILCORP acquisition (completed January 31, 2003), stronger interchange margins and a 2003 voluntary retirement program that cut labor costs. Operating revenues rose to $4.59 billion from $3.84 billion, largely from the CILCORP addition.

The filing's dominant forward-looking item is the February 2004 agreement to buy Illinois Power from Dynegy plus a 20% interest in EEI, for a total transaction value of about $2.3 billion^c including roughly $1.8 billion of assumed debt and preferred stock. Ameren issued 19.1 million shares in February 2004 raising $853 million net, which management says is intended to fund the cash portion. Management expects the deal to be accretive in the first full year after closing, but dilutive to 2004 earnings before closing, and it is targeted for completion by year-end 2004 subject to ICC, SEC, FERC and other approvals.

Key risks for investors include rate freezes in Illinois through January 2007 and a Missouri rate moratorium through mid-2006 that limit recovery of rising costs; no fuel or purchased power pass-through for electric operations; pending EPA SO2, NOx and mercury rules estimated to require $400^d-600 million (2010) of Ameren-wide capital spending; soft long-term Midwest power prices; and ratings agencies placing Ameren's debt under review for possible downgrade after the Illinois Power announcement. Ameren's year-end 2003 credit ratings were A3/A-/A- at the parent level.

02—Key points

Key Highlights

Net income rose to $524 million ($3.25 per diluted share) in 2003 from $382 million ($2.60) in 2002, but excluding one-time gains of $49 million after tax, earnings were $475 million ($2.95 per share) versus $440 million ($3.01) in 2002.
Pending acquisition of Illinois Power and Dynegy's 20% EEI stake for about $2.3 billion total transaction value, including roughly $1.8 billion of assumed debt and preferred stock, targeted to close by end of 2004.
Raised $853 million net from issuing 19.1 million common shares in February 2004 at $45.90 per share to finance the cash portion of the Illinois Power deal and reduce acquired debt.
CILCORP acquisition (closed January 31, 2003, roughly $1.4 billion total cost) added about 205,000 Illinois electric and 210,000 gas customers and roughly 1,200 MW of mostly coal generation.
Rate freezes limit near-term pricing: Illinois electric rates frozen through January 1, 2007; Missouri electric rate moratorium through July 1, 2006, with a further $30 million annual reduction effective April 1, 2004.
Significant environmental capital needs: estimated $400-600 million by 2010 (and $500-800 million by 2015) to comply with proposed SO2 and NOx rules, plus up to $100 million for mercury rules; remaining NOx capex of $210-250 million for 2004-2008.
Dividend held at $2.54 per share ($0.635 quarterly) for 2003 and 2004 declared; dividend payout was 78% of 2003 net income, and a 2004 dividend of 63.5 cents was declared in February.

03—Questions

Frequently Asked Questions

How did Ameren perform in 2003 compared with 2002?
Reported net income rose to $524 million ($3.25 per diluted share) from $382 million ($2.60). The increase is mostly due to a $31 million after-tax coal contract settlement gain and an $18 million SFAS 143 gain, plus the CILCORP acquisition. Excluding these items, earnings were $475 million ($2.95 per share), down from $440 million ($3.01), mainly due to cooler weather, a Missouri rate reduction and higher employee benefit costs.
What is the Illinois Power acquisition and how will it be financed?
Ameren agreed on February 2, 2004 to buy Illinois Power's stock and Dynegy's 20% interest in EEI for about $2.3 billion, including about $1.8 billion of assumed debt and preferred stock. Ameren expects new common stock to fund at least 50% of the transaction value; it issued 19.1 million shares in February 2004 raising $853 million, with the balance in cash at closing. Illinois Power serves about 590,000 electric and 415,000 gas customers and is expected to close by year-end 2004 subject to regulatory approvals.
Will the Illinois Power deal dilute or help earnings per share?
Management expects dilution before closing because the February 2004 shares are issued ahead of the acquisition's earnings contribution. Once completed, Ameren expects the acquisition to be accretive to earnings per share in the first full year of operation, though that expectation depends on assumptions about interest rates and power market prices that may prove incorrect.
What are the main regulatory constraints on Ameren's earnings?
Illinois electric rates are legislatively frozen through January 1, 2007, and Illinois earnings above set levels must be shared with customers through 2006. In Missouri, UE is under a rate moratorium through July 1, 2006, with a $30 million electric rate reduction effective April 1, 2004. Ameren's electric operations have no fuel or purchased power cost-recovery mechanism in either state, so commodity cost increases fall to shareholders unless hedged. Recovery of UE's 2002-2006 infrastructure investments is also deferred until after the moratorium ends.
What are the key risks to investors from the filing?
Key risks include: possible ratings downgrades after the Illinois Power announcement (credit ratings agencies placed Ameren's debt under review); large environmental capital requirements; weak long-term Midwest power prices affecting non-rate-regulated Genco and AERG; uncertainty over FERC transmission and Midwest ISO/GridAmerica participation; rising pension and retiree healthcare costs (including the Barnett retiree medical lawsuit); and the risk that the Illinois Power acquisition is not completed or integrated as planned.

04—Continue

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