Management Looks to Missouri and Transmission to Offset Illinois Headwinds

Strategist

Andrew Bischof

Ameren is a regulated utility that operates in Illinois and Missouri, two historically challenging regulatory environments. Improving regulation in Missouri has created significant investment opportunities. However, Illinois has continued to be challenging, with the unfavorable first ruling under traditional ratemaking.

We expect the company to reach the low end of management's 6%-8% annual earnings growth outlook. Our outlook is based on continued lower allowed returns in Illinois and expectations for reduced capital investment opportunities there. Long term, Ameren has its sights set on more than $55 billion of additional investment opportunities over the next 10 years, providing a potential long runway of growth. 

Management is to be applauded for attaining constructive utility legislation in Missouri. Its patient yet persistent yearslong efforts resulted in increased investment opportunities across the territory, a stark change from the past.

With an improved regulatory framework in Missouri, management is keeping its promise to invest in jurisdictions that support investment. Ameren is allocating over half of its investment plan to Missouri. Projects will focus on renewable energy, upgrading aging and underperforming assets, transmission, and employing smart grids and connected grid services.

While the regulatory in Missouri improved, Illinois has proved challenging. Performance-based ratemaking, in which allowed returns on equity were tied to the average 30-year U.S. Treasury yield, was constructive. However, low interest rates led to some of the lowest allowed returns in the sector. New legislation allows Illinois utilities to opt in for a four-year rate plan beginning in 2024.

Ameren's first multiyear rate plan highlights the contentious regulatory environment in Illinois. Regulators in the state granted Ameren's Illinois subsidiary just an 8.72% allowed return on equity, well below the initial 10.5% request and below recommendations from the administrative law judge (9.24%) and the commission's staff (8.9%). Regulators also questioned Ameren's capital investment plan, which we viewed as appropriate and supporting the state's policy objectives.

Business Strategy & Outlook

We don't believe Ameren has an economic moat.

Recent improvements in the regulatory environment are changing our view of Missouri. Shareholders have benefited under new legislation in Missouri where numerous trackers are in place for fuel adjustments, pension, and tax positions. We consider these mechanisms attributes of a constructive regulatory environment. We would like Missouri to adopt a forward-looking test year, and allowed returns are slightly below regulated peer returns. Additional riders would help further reduce regulatory lag. 

While regulation in Missouri has improved, regulation for Ameren's Illinois utilities is challenging. Performance-based ratemaking in Illinois for Ameren's electric utility expired in 2023. Utilities may opt in for a four-year rate plan beginning in 2024. Under the multiyear plan, utilities are allowed to true up differences between earned returns and allowed returns. Revenue will continue to be decoupled from usage. 

While we view the new ratemaking as constructive, regulators have granted returns on equity that are well below the sector average and challenged what the utilities consider prudent investments. We expect Illinois utility regulation to remain challenging, given recent rate case outcomes. This supports our no-moat rating.

We believe Ameren’s transmission assets are moaty. Competitors have little incentive to build competing transmission lines if one that Ameren owns already is serving a market's full capacity. Capital costs for new transmission lines are too high and incremental benefits too low to offer sufficient returns on invested capital for two competing transmission owners. In addition, Ameren benefits from regulatory protection. The Federal Energy Regulatory Commission approves new transmission lines only if there is a demonstrated need for new capacity.

None

Economic Moat

Ameren

Ameren Corp. is a public utility holding company, which engages in the provision of electric and natural gas services. It operates through the following segments: Ameren Missouri, Ameren Illinois Electric Distribution, Ameren Illinois Natural Gas, Ameren Transmission, and Other. The Ameren Transmission segment consists of the aggregated electric transmission businesses of Ameren Illinois and Ameren Transmission Company of Illinois (ATXI). The company was founded in 1902 and is headquartered in St. Louis, MO.

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