Why did Ameren's reported EPS decline in 2004 even though net income rose?

Reported EPS fell from $3.25 to $2.84 because 2003 included about 30 cents of one-time gains from the SFAS 143 adoption and a coal contract settlement, and because roughly 30 million new shares were issued in 2004 to fund the Illinois Power acquisition. Net income rose modestly to $530 million from $524 million, but the larger share count spread that income across 186.4 million average shares, versus 161.1 million in 2003.

What happens to Ameren's earnings when the Illinois rate freeze and supply contracts expire?

The Illinois rate freeze ends January 1, 2007, and intercompany power supply contracts for CIPS, CILCO, and IP expire at the same time. Management says contract prices (about $34.00 per MWh for AERG and $38.50 for Genco) are below current market levels, so Genco and AERG may earn higher margins after 2006. However, Illinois utility rates could rise 10% to 20% in 2007, with 50% to 70% of that increase from higher power costs. The ICC approval process is still ongoing, so the net earnings effect remains uncertain.

How much capital will Ameren need to spend, and can it be recovered from customers?

Ameren's 2005 to 2009 capital expenditure estimate is $4.1 billion to $5.4 billion, and the 2005 to 2009 total rises to roughly $5.0 to $6.3 billion including environmental spending. Environmental compliance alone could cost $1.4 to $1.9 billion through 2015. About two-thirds of the environmental spend is in regulated Missouri operations and is expected to be recoverable over time through rates. Non-rate-regulated Genco and AERG investments depend on whether market power prices rise enough to support them.

What risks does the IP acquisition create for Ameren?

Key risks include integration execution (targeted synergies of about $33 million per year by 2007), dependence on a fixed-price 2,800 MW power supply agreement with Dynegy's DYPM for 2005 and 2006 that covers about 70% of IP's load, and ICC conditions that include a $750 million debt-reduction commitment and dividend limits. IP can pay only $80 million of dividends in 2005 and $160 million cumulatively through 2006. The acquisition is expected to be accretive to earnings in its first two years, but that depends on power price, interest rate, and synergy assumptions.

Is Ameren's dividend secure, and how does its balance sheet look after the acquisition?

The dividend was maintained at $2.54 per share in 2004 and was declared at $0.635 per quarter in February 2005. The payout ratio was 90% of 2004 net income, which leaves limited room for growth without higher earnings. Common equity rose to $5.8 billion from $4.4 billion after the share issuances. Total long-term debt increased to $5.0 billion from $4.1 billion. Leverage remains within covenant limits, with the ratio of total indebtedness to total capitalization at 50% for Ameren, and the company was in compliance with its credit agreements at year-end 2004.

AEE 10-K FY2004 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 9, 2005. Cited figures are marked; the original filing is the authoritative source.

Ameren Corporation's 2004 annual report (filed March 9, 2005) describes a year defined by the $2.3 billion^a acquisition of Illinois Power (IP) and an additional 20% interest in Electric Energy, Inc., completed September 30, 2004.

Ameren reported 2004 net income of $530 million^b, or $2.84 per diluted share, versus $524 million ($3.25) in 2003. Excluding 2003 one-time gains (SFAS 143 adoption and a coal contract settlement, worth roughly 30 cents per share), EPS was essentially flat to modestly lower, as strong interchange (wholesale) margins, organic demand growth, and gas delivery rate increases offset a very mild summer, a 64-day Callaway nuclear refueling outage, higher employee benefit costs, and rate reductions. Revenues rose 12% to $5.16 billion, helped by $484 million from the CILCORP and IP acquisitions.

Ameren issued roughly 30 million shares in 2004 to fund the deal, which diluted per-share results and lifted total assets to $17.4 billion^c from $14.2 billion. The central investor issue is the regulatory calendar. Missouri electric rates for UE are frozen through June 2006, and Illinois rates for CIPS, CILCO, and IP are frozen through January 1, 2007.

Intercompany power supply contracts that price Genco and AERG output below estimated market levels also expire at the end of 2006. Management expects Illinois generation procurement and rate increases of 10% to 20% in 2007, but outcomes depend on the Illinois Commerce Commission and legislature. Environmental capital needs are a second major overhang, with estimated spending of $1.4 to $1.9 billion^d through 2015 to meet proposed EPA SO2, NOx, and mercury rules, roughly two-thirds of it in regulated Missouri operations.

Credit metrics and balance sheet capacity are adequate but more leveraged after the deal. Ameren's senior unsecured rating is A3/BBB+/A-, and the S&P outlook is negative. Common dividends of $2.54 per share consumed 90% of net income.

The 2004 pension contribution of $295 million reduced operating cash flow, and the company expects $400 million in required pension funding during 2005 to 2009. Investors should weigh solid organic growth and an expanded Illinois footprint against the 2006-2007 rate reset risk, merchant exposure at Genco and AERG after contracts expire, and environmental compliance costs.

02—Key points

Key Highlights

2004 net income of $530 million ($2.84 per diluted share), versus $524 million ($3.25) in 2003. The 2003 figure included about 30 cents per share of one-time gains, so underlying EPS was roughly flat to slightly lower.
Revenue rose 12% to $5.16 billion, with $484 million contributed by the CILCORP and IP acquisitions. Weather-adjusted demand growth and higher interchange margins (about $34 per MWh realized in 2004 versus about $32 in 2003) supported results.
The $2.3 billion IP acquisition, closed September 30, 2004, was funded with about $1.3 billion of common equity from share issuances in February and July 2004, and it assumed $1.8 billion of IP debt and preferred stock.
Rate freezes and moratoriums run through mid-2006 in Missouri and January 2007 in Illinois. Power supply contracts priced at $34.00 to $38.50 per MWh are below estimated market prices and expire at the end of 2006, creating a major earnings reset risk.
Environmental capex estimated at $1.4 to $1.9 billion through 2015 to comply with proposed EPA SO2, NOx, and mercury rules. Approximately two-thirds is expected to be recoverable from Missouri ratepayers.
The 2004 dividend was $2.54 per share, a 90% payout of net income. The quarterly dividend was raised to $0.635 in February 2005, and the company recorded a $295 million pension contribution in 2004 that weighed on operating cash flow.
Credit ratings are A3 (Moody's), A- (S&P, negative outlook), and A- (Fitch) at the parent level. Several subsidiary ratings are lower, and at year-end the company had $375 million of commercial paper outstanding.

03—Questions

Frequently Asked Questions

Why did Ameren's reported EPS decline in 2004 even though net income rose?
Reported EPS fell from $3.25 to $2.84 because 2003 included about 30 cents of one-time gains from the SFAS 143 adoption and a coal contract settlement, and because roughly 30 million new shares were issued in 2004 to fund the Illinois Power acquisition. Net income rose modestly to $530 million from $524 million, but the larger share count spread that income across 186.4 million average shares, versus 161.1 million in 2003.
What happens to Ameren's earnings when the Illinois rate freeze and supply contracts expire?
The Illinois rate freeze ends January 1, 2007, and intercompany power supply contracts for CIPS, CILCO, and IP expire at the same time. Management says contract prices (about $34.00 per MWh for AERG and $38.50 for Genco) are below current market levels, so Genco and AERG may earn higher margins after 2006. However, Illinois utility rates could rise 10% to 20% in 2007, with 50% to 70% of that increase from higher power costs. The ICC approval process is still ongoing, so the net earnings effect remains uncertain.
How much capital will Ameren need to spend, and can it be recovered from customers?
Ameren's 2005 to 2009 capital expenditure estimate is $4.1 billion to $5.4 billion, and the 2005 to 2009 total rises to roughly $5.0 to $6.3 billion including environmental spending. Environmental compliance alone could cost $1.4 to $1.9 billion through 2015. About two-thirds of the environmental spend is in regulated Missouri operations and is expected to be recoverable over time through rates. Non-rate-regulated Genco and AERG investments depend on whether market power prices rise enough to support them.
What risks does the IP acquisition create for Ameren?
Key risks include integration execution (targeted synergies of about $33 million per year by 2007), dependence on a fixed-price 2,800 MW power supply agreement with Dynegy's DYPM for 2005 and 2006 that covers about 70% of IP's load, and ICC conditions that include a $750 million debt-reduction commitment and dividend limits. IP can pay only $80 million of dividends in 2005 and $160 million cumulatively through 2006. The acquisition is expected to be accretive to earnings in its first two years, but that depends on power price, interest rate, and synergy assumptions.
Is Ameren's dividend secure, and how does its balance sheet look after the acquisition?
The dividend was maintained at $2.54 per share in 2004 and was declared at $0.635 per quarter in February 2005. The payout ratio was 90% of 2004 net income, which leaves limited room for growth without higher earnings. Common equity rose to $5.8 billion from $4.4 billion after the share issuances. Total long-term debt increased to $5.0 billion from $4.1 billion. Leverage remains within covenant limits, with the ratio of total indebtedness to total capitalization at 50% for Ameren, and the company was in compliance with its credit agreements at year-end 2004.

04—Continue

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