Why did Ameren's earnings decline in 2006?

EPS fell to $2.66 from $3.02. Major drivers were severe summer and winter storms (about 26 cents), milder weather (about 17 cents), the Taum Sauk breach costs (about 20 cents), higher depreciation (11 cents), and higher taxes other than income taxes and financing costs. Higher interchange sales margins (33 cents) and a Callaway outage-free year (18 cents) partly offset these.

What is the biggest risk to Ameren's earnings and credit profile in 2007?

The Illinois rate outcome. If the legislature freezes electric rates at 2006 levels or otherwise impairs cost recovery, management believes CIPS, CILCORP, CILCO and IP would become insolvent, with ratings downgraded to speculative grade. Ameren could also face goodwill impairment and the write-off of regulatory assets. Legislation was pending in the new General Assembly, and court appeals of the ICC's power procurement order were still open.

Is the dividend at risk?

The board declared $2.54 per share for 2006, unchanged from prior years, and a 63.5-cent quarterly dividend for Q1 2007. However, the payout ratio reached 95% of net income in 2006. The filing notes that if the Illinois utilities become insolvent or fall below investment grade, their dividends to Ameren would be restricted and the board might reduce or eliminate the common dividend.

How much capital will Ameren need, and how will it be funded?

Capital expenditures are estimated at $1.3 billion in 2007 and $5.8 billion to $7.3 billion over 2007 to 2011, including $3.5 billion to $4.5 billion for environmental retrofits through 2016. Operating cash flow was $1.3 billion in 2006. Funding relies on operating cash, short-term borrowings under committed credit facilities (about $1.65 billion at year-end 2006), and long-term debt and equity issuances, all subject to credit rating conditions.

What is the status of UE's Taum Sauk plant and related costs?

The upper reservoir breached in December 2005. UE has agreed to a $10M FERC civil penalty and a $5M escrow for project enhancements. UE expects cleanup and liability costs of $131M to $151M, which it believes are largely insured, and has submitted plans to FERC to rebuild, which would keep the plant out of service through at least mid-2009. Missouri's attorney general and business owners have filed suits seeking unspecified punitive damages.

AEE 10-K FY2006 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 1, 2007. Cited figures are marked; the original filing is the authoritative source.

Ameren's 2006 10-K describes a year of heavy operational and political pressure.

Reported net income fell to $547 million^a ($2.66 per diluted share) from $606 million ($3.02) in 2005. The decline was driven by severe storms (about 26 cents per share), milder weather (about 17 cents), the December 2005 Taum Sauk reservoir breach (about 20 cents), higher depreciation and financing costs, and the expiration of below-market power contracts. Interchange sales margins partly offset these pressures.

Ameren's dividend of $2.54^b per share was maintained, but the payout ratio rose to 95% of net income, which leaves limited earnings cushion. The dominant investor issue is Illinois. Electric rate freezes ended January 2, 2007, and the Ameren Illinois Utilities (CIPS, CILCO, IP) began passing through market-based power costs, with average residential rates expected to rise roughly 40% for CIPS and IP and 55% for CILCO in 2007.

Pending legislation to re-freeze rates at 2006 levels would, in management's view, drive the Illinois utilities toward insolvency. Credit agencies responded in October 2006: S&P downgraded Ameren's ratings and placed them on watch negative, Moody's placed them under review, and Fitch placed them on rating watch negative. Management also flagged that goodwill (about $830 million^c at Ameren) and regulatory assets could be impaired if rates are frozen.

Missouri's UE filed a $361 million^d electric rate request, with a MoPSC decision expected by June 2007. Environmental compliance is a large capital item, estimated at $3.5 to $4.5 billion through 2016. On the balance sheet, total assets were $19.6 billion and stockholders' equity $6.6 billion.

Operating cash flow was $1.3 billion against capital expenditures of $992 million plus $292 million for combustion turbine acquisitions. The 2007 capex plan is $1.3 billion, rising to $5.8 to $7.3 billion over 2007 to 2011. Ameren's balance sheet also carries working capital deficits and reliance on short-term borrowings, and the company's liquidity depends on continued access to credit facilities and capital markets.

02—Key points

Key Highlights

Net income fell 10% to $547 million ($2.66 per diluted share) from $606 million ($3.02) in 2005, driven by storms, mild weather, the Taum Sauk breach, and higher depreciation and financing costs.
Illinois rate freeze ended January 2, 2007; the Ameren Illinois Utilities began full pass-through of market-based power costs, with CIPS and IP residential rates expected to rise about 40% and CILCO about 55% in 2007.
Legislative proposals to freeze Illinois electric rates at 2006 levels were described by management as likely to cause financial insolvency of CIPS, CILCORP, CILCO and IP, with goodwill (Ameren $830M) and regulatory asset write-off risk.
Credit ratings under pressure: S&P downgraded Ameren's ratings in October 2006 (watch negative), Moody's placed ratings under review, and Fitch placed them on rating watch negative; Ameren and UE are limited in commercial paper access.
UE's first electric rate increase in about 20 years ($361 million requested) is pending before the MoPSC, with the staff recommending a $136M to $168M reduction; a decision is expected by June 2007.
Taum Sauk pumped-storage breach (December 2005) continues to weigh on results: $131M to $151M cleanup and liability costs, a $10M FERC penalty, state lawsuits, and a 2007 earnings hit of $15M to $20M.
Dividend maintained at $2.54 per share ($522 million total), but the payout ratio reached 95% of net income; Ameren's 2007 to 2011 capex plan is $5.8 billion to $7.3 billion, with $3.5 billion to $4.5 billion of environmental retrofits through 2016.

03—Questions

Frequently Asked Questions

Why did Ameren's earnings decline in 2006?
EPS fell to $2.66 from $3.02. Major drivers were severe summer and winter storms (about 26 cents), milder weather (about 17 cents), the Taum Sauk breach costs (about 20 cents), higher depreciation (11 cents), and higher taxes other than income taxes and financing costs. Higher interchange sales margins (33 cents) and a Callaway outage-free year (18 cents) partly offset these.
What is the biggest risk to Ameren's earnings and credit profile in 2007?
The Illinois rate outcome. If the legislature freezes electric rates at 2006 levels or otherwise impairs cost recovery, management believes CIPS, CILCORP, CILCO and IP would become insolvent, with ratings downgraded to speculative grade. Ameren could also face goodwill impairment and the write-off of regulatory assets. Legislation was pending in the new General Assembly, and court appeals of the ICC's power procurement order were still open.
Is the dividend at risk?
The board declared $2.54 per share for 2006, unchanged from prior years, and a 63.5-cent quarterly dividend for Q1 2007. However, the payout ratio reached 95% of net income in 2006. The filing notes that if the Illinois utilities become insolvent or fall below investment grade, their dividends to Ameren would be restricted and the board might reduce or eliminate the common dividend.
How much capital will Ameren need, and how will it be funded?
Capital expenditures are estimated at $1.3 billion in 2007 and $5.8 billion to $7.3 billion over 2007 to 2011, including $3.5 billion to $4.5 billion for environmental retrofits through 2016. Operating cash flow was $1.3 billion in 2006. Funding relies on operating cash, short-term borrowings under committed credit facilities (about $1.65 billion at year-end 2006), and long-term debt and equity issuances, all subject to credit rating conditions.
What is the status of UE's Taum Sauk plant and related costs?
The upper reservoir breached in December 2005. UE has agreed to a $10M FERC civil penalty and a $5M escrow for project enhancements. UE expects cleanup and liability costs of $131M to $151M, which it believes are largely insured, and has submitted plans to FERC to rebuild, which would keep the plant out of service through at least mid-2009. Missouri's attorney general and business owners have filed suits seeking unspecified punitive damages.

04—Continue

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