01—Abstract
Summary
Summary of the 10-K filed February 29, 2008. Cited figures are marked; the original filing is the authoritative source.
Ameren Corporation's 2007 Form 10-K reports net income of $618 milliona, or $2.98 per diluted share, up from $547 million ($2.66) in 2006, driven mainly by higher-priced power sales contracts in the Non-rate-regulated Generation segment, a June 2007 Missouri electric rate increase at UE, and milder-than-prior-year weather, partly offset by the net cost of the Illinois electric settlement agreement (21 cents per share), higher fuel prices, and rising labor, financing, and depreciation costs.
Operating revenues rose to $7.546 billionb from $6.880 billion. Cash from operations was $1.1 billion, against $1.4 billion of capital expenditures, with the shortfall funded primarily by debt and short-term borrowings. Short-term debt rose to $1.47 billion.
The filing's central investor concern is regulatory lag. UE and the Ameren Illinois Utilities are earning below their allowed returns because rates are based on historical costs, and management plans to file more frequent rate cases. Pending Illinois delivery service requests total $180 millionc for electric and $67 million for gas, with an ICC decision due by September 2008.
UE also plans a Missouri electric rate request in 2Q 2008. Management projects $10.6 billiond of capital spending from 2008 through 2012, including $4 billion to $5 billion for EPA-driven scrubber and emissions retrofits through 2017. Credit and environmental risks are elevated.
Moody's changed its outlook on Ameren and Genco to negative in February 2008 and placed UE on review for possible downgrade. Collateral postings would rise if ratings fell below investment grade. Carbon regulation could force coal plant closures, since coal provides about 84% of Ameren's generation.
The Taum Sauk reservoir breach is being rebuilt at an estimated $450 million, with insurance expected to cover most costs. Investors should weigh the sizable capital program, lagging recovery, and ratings pressure against the stable regulated earnings base and the dividend, which was held at $2.54 per share.
02—Key points
Key Highlights
- Net income rose 13% to $618 million ($2.98 per diluted share) in 2007, versus $547 million ($2.66) in 2006, benefiting from higher-priced Non-rate-regulated Generation contracts and a June 2007 UE electric rate increase of $43 million.
- Operating revenues increased to $7.546 billion from $6.880 billion; electric margin rose $296 million, while gas margin rose $15 million.
- The Illinois electric settlement agreement cut 2007 earnings by about $0.21 per share, with approximately $1 billion of rate relief funded by generators and utilities, including $488 million for Ameren Illinois Utilities customers.
- Pending Illinois electric and gas delivery rate requests total $247 million, with an ICC decision due by September 2008; UE plans a Missouri electric rate filing in 2Q 2008.
- Management expects $10.6 billion of capital expenditures in 2008-2012, including $4-5 billion of EPA-driven environmental retrofits through 2017, with about 45% of the environmental spend in regulated UE.
- Moody's moved Ameren and Genco to negative outlook and placed UE under review for possible downgrade in February 2008; ratings downgrades would raise collateral requirements.
- The annual dividend remained at $2.54 per share, with a quarterly payout of 63.5 cents declared February 8, 2008; the payout ratio was 85% of 2007 net income.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 29, 2008Financial Statements
| Revenue | $7.56B |
| Operating Expenses | $6.20B |
| Operating Income | $1.36B |
| Interest Expense | $423.00M |
| Net Income | $618.00M |
| Shares Outstanding (Basic) | 207.40M |
05—Questions
Frequently Asked Questions
Why did Ameren's earnings increase in 2007?
Earnings rose mainly because Non-rate-regulated Generation sold power at market-based prices in place of below-market contracts that expired at the end of 2006, and because of a June 2007 UE electric rate increase, favorable weather, and the absence of 2006 Taum Sauk costs. These gains were partly offset by the Illinois settlement agreement, higher fuel costs, and higher labor, financing, and bad debt expenses.
What is regulatory lag and why does it matter to investors?
Regulatory lag means utility rates are set on historical costs, so they trail current spending. Management says UE and the Ameren Illinois Utilities are earning below their allowed returns in 2007 and 2008 and will need frequent rate cases and cost-recovery mechanisms. Until new rates take effect, earnings growth in the regulated businesses is constrained.
How large is Ameren's capital spending program and how will it be funded?
Ameren expects to spend up to $10.6 billion from 2008 through 2012, largely on environmental compliance and grid reliability. Spending not covered by operating cash flow is expected to be funded primarily with debt, which could pressure credit ratings and raise interest costs.
What are the main risks to Ameren's credit ratings?
Moody's changed its outlook on Ameren and Genco to negative in February 2008 and placed UE's ratings under review for possible downgrade, citing cash flow coverage, rising costs, and regulatory lag. A downgrade to below investment grade could require additional collateral postings of about $176 million at Ameren, and would also raise borrowing costs.
What is the Taum Sauk situation and what does it cost?
A December 2005 breach of the upper reservoir at UE's Taum Sauk pumped-storage plant damaged a state park. Rebuilding the reservoir is estimated at about $450 million, and the plant is expected to be out of service through at least fall 2009. UE believes insurance will cover substantially all damages and liabilities, except lost margins and FERC penalties, but litigation and insurance reviews remain open.
06—Continue