We are reaffirming our $77 per share fair value estimate, no-moat rating, and stable moat trend after Ameren reported first-quarter EPS of $0.91 compared with $0.59 in the same year-ago period. The company reaffirmed 2021 earnings guidance range of $3.65 to $3.85, in line with our estimates.

Ameren Missouri is seeking a $299 million annual revenue increase in its recent electric rate case filing with a 9.9% allowed return on equity with a 51.9% equity layer on an estimated $10 billion rate base. The rate increase is primarily due to infrastructure investments, including significant renewable energy investments, and the planned retirements of coal generation facilities consistent with its recently filed integrated resource plan. Ameren is seeking a $9 million annualized rate increase at its much smaller gas unit with a 9.8% allowed ROE and a 51.9% equity layer on an estimated $310 million rate base. Both rate case filings align with our forecast, including a 9.8% allowed return across both units.

Ameren continues to advocate for the Illinois Downstate Clean Energy Affordability Act introduced earlier this year. The legislation would allow for utility-owned battery and solar facilities and investment in electric vehicle infrastructure and expand the state's renewable energy portfolio standard to 32.5% by 2030. It would also extend performance-based rate-making through 2032 and reform the allowed ROE methodology, which has been a headwind for Ameren's Illinois utility given low interest rates. Ameren has increased spending and reduced customer bills, but we think it will be tough to pass the bill before the legislative session ends this month.

Management reaffirmed its 6% to 8% annual growth target through 2025. We expect earnings growth to be in the top half of this range, giving Ameren one of the industry's top growth profiles. Management's five-year $17.1 billion capital investment program is on track and supports 8% rate base growth over this time period.

Ameren is a regulated utility that operates in Illinois and Missouri, two historically challenging regulatory jurisdictions that are rapidly improving. With improving regulatory environments come significant investment opportunities, as seen with the company's most recent $17.1 billion five-year plan. Ameren has its sights set on $23 billion of opportunities during the next decade, providing a long runway of growth for the company.

Management is to be applauded for attaining constructive utility legislation in Missouri. Its patient yet persistent years-long efforts resulted in increased investment opportunities across the territory, a stark change from the past. Numerous trackers are in place for fuel adjustments, pension, and tax positions. We consider these mechanisms attributes of a constructive regulatory environment. Usage-based rates and no guaranteed recovery of bad-debt expense are headwinds during economic downturns.

With an improved regulatory framework in Missouri, management is keeping its promise to invest in jurisdictions that support investment. Ameren is allocating $8.5 billion of its investment plan to Missouri, long the recipient of minimal investment. Projects will focus on renewable energy, upgrading aging and underperforming assets, and employing smart grids and connected grid services.

Ameren has build-to-transfer agreements for 700 megawatts of wind generation in Missouri. The $1.2 billion investment complies with Missouri's renewable energy standard. Ameren is also looking to install 100 MW of solar by 2027. Ameren will close roughly 3 gigawatts of coal generation by 2036 and expects to have no coal generation by 2045.

Regulation for Ameren in Illinois is constructive. Allowed returns on equity are 580 basis points above the average 30-year U.S. Treasury yield. This presents a headwind in the current low-interest-rate environment. Ameren continues to advocate for the Illinois Downstate Clean Energy Affordability Act, which would improve allowed returns and extend performance ratemaking. The legislation would allow for utility-owned battery and solar facilities and investment in electric vehicle infrastructure.

We don't believe Ameren has an economic moat. What separates Ameren from its peers is a regulatory environment in Missouri that historically made it difficult for the company to earn a sustainable spread between earned returns and costs of capital. However, recent improvements in the regulatory environment are changing our view.

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. Continued execution by management under the new legislation and support from regulators could lead us to upgrade our moat rating to narrow.

Regulation for Ameren's Illinois utility is supportive. Performance-based formula ratemaking almost eliminates regulatory lag by using year-end rate base and cost reconciliation. Allowed return on equity adjusts annually based on the 30-year U.S. Treasury plus 580 basis points. This framework mitigates regulatory discretion in determining Ameren’s Illinois earned return, allowing for a positive spread between earned returns and cost of capital. We were disappointed that legislators failed to renew performance-based ratemaking, with the outcome of pending legislation uncertain in Illinois.

We also 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.

We are maintaining our $77 fair value estimate after incorporating year-to-date results and operating updates that are in line with our full-year expectations.

Given the regulatory shift in Missouri, we expect management will execute its capital plan and earn a fair return on that investment. This effectively removes the discount for capital investment and earned returns that we previously incorporated.

Our annual average earnings growth is at the top end of management's 6%-8% guidance. Our earnings estimates and fair value estimate incorporate recent regulatory decisions and 0.5% weather-normalized demand growth.

We forecast nearly $17.1 billion of capital investment during the next five years. We expect this investment to lead to approximately 8% rate base growth through 2025.

In our discounted cash flow valuation, we use a 6.3% cost of capital based on a 7.5% cost of equity. This is lower than the 9% rate of return we expect investors will demand for a diversified equity portfolio, reflecting Ameren's lower sensitivity to the economic cycle and lower degree of leverage. We incorporate $7 per share of incremental value to better recognize the benefits accruing to Ameren from having issued debt at coupon rates far below our cost of debt.

The primary risk that Ameren faces is regulatory, since most of its revenue and earnings are generated by its regulated utilities. The possibility of lower allowed returns and disallowed investments in rate base are threats to the company's earnings prospects. Recent regulatory reforms lower this risk.

Ameren has a significant ongoing development program that is subject to potential cost overruns and political and regulatory risk. Tightening environmental regulations could require significant capital investment or added operating costs, which could have uncertain cost recovery through traditional regulated rates.

Ameren operates natural gas distribution utilities. While we think natural gas will remain the primary source for heating in the Midwest for the foreseeable future, there is risk that policymakers will expedite the shift away from retail natural gas use.

Ameren faces ESG risk, particularly given its relatively large coal generation fleet. Missouri is embracing tighter policies on carbon emissions and greater restrictions on coal generation. Ameren is addressing this risk through its base capital investment program, planned coal retirements, and the addition of renewable generation. Ameren's goal of net zero carbon emissions by 2050, with interim targets of 50% reduction by 2030 and 85% by 2040, is in line with its utility peers. Regulators in Missouri are supporting this transition.

As with all regulated utilities we cover, Ameren faces the risk of an inflationary environment that would raise borrowing costs and make other investments more attractive for income-seeking investors.

We assign Ameren a Standard capital allocation rating. The rating reflects our assessment of Ameren's balance sheet strength, management's investment decisions, and plans to return capital to shareholders.

Ameren's dividend policy to pay out 55%-70% of earnings is appropriate, given the high-quality and relatively stable nature of the company's regulated assets. We expect the balance sheet to remain sound with the company maintaining its balance sheet in line with its regulatory requirements, supported by low revenue cyclicality and operating leverage. We expect Ameren's investment strategy to focus on growing assets through regulated investments, which we think is a reasonable approach.

Management has impressively worked to improve the regulatory environment in Missouri, historically one of the most difficult regulatory environments for utilities. Management's patient yet persistent years-long efforts resulted in an improved regulatory environment allowing for significant investment opportunities across the territory, a stark change from when management wisely directed growth capital away from the region. Management continues to operate well under Illinois' performance base ratemaking structure and to advocate for the legislation that would extend and enhance previous legislation.

Ameren veteran Warner Baxter, who had been president and CEO of Ameren Missouri since 2009, became CEO of Ameren in 2014, bringing in a renewed focus on improving Missouri's regulatory environment by building relationships with regulators and politicians. Baxter has built trust across key constituents, to shareholders' benefit. Baxter has prior experience as CFO and numerous leadership roles throughout Ameren. He has proved to be among the best CEOs in the utilities industry.

Ameren recently rotated two key executives' responsibilities. Former CFO Marty Lyons is now president of Ameren Missouri, while former Ameren Missouri president Michael Moehn is now CFO. We think either would be a strong candidate to succeed Baxter when he decides to retire.