阿莫林 (AEE) 2002 Q2 法說會逐字稿

As a reminder, this conference is being recorded, Thursday, July 25, 2000. I would now like to turn the conference over to Mr. Bruce Steinke, Manager of Investor Relations. Please go ahead, sir.

Thank you, Robert and good afternoon. I am Bruce Steinke, Manager of Investor Relations at Ameren Corporation. Here with me today is our President and Chief Operating Officer Gary Rainwater, our Senior Vice President of Finance, CFO of Warner Baxter, our treasurer, Jerry Birdsong and our controller and Chief Accounting Officer, Marty Lions.

Before we begin, let me cover a few housekeeping details. This hour long call is available to anyone who wishes to hear it for one week by dialing a playback number. The announcement you received carries instructions on replay of the call by telephone.

In addition, we would like to welcome everybody listening to this call on the Internet, the web cast will be available through August 1 on www.Ameren.Com, our website.

This call contains time sensitive data that is accurate as of the date of today?s live broadcast. Redistribution of this broadcast is prohibited.

I also need to let you know that comments made on this conference call may contain statements that are commonly referred to as forward looking statements. Such statements include those of our future expectations relief, plans, strategies, objectives and financial performance.

I am cautioning you that there are various factors that could cause actual results that differ materially from those projected in the forward looking statement. For additional information concerning these factors, we ask you to read the safe harbor statement in the release we issued today in our filings with the SEC.

Again, let me thank you for joining us, we will be brief in our remarks today to give you an opportunity to ask questions.

Gary will begin this call with an update on some of our operating and regulatory matters and Warner will follow with a more detailed financial review. Here is Gary.

Thanks, Bruce. Good afternoon and thank you for joining us.

This morning we reported earnings for the second quarter of 2002 of 94 cents per share compared to earnings of 69 cents per share last year. A solid earning growth was driven by higher electric revenues resulting from warmer weather, increased wholesale revenues and higher revenues from our 60% investment in Electric Energy, Inc.

Earnings also grew due to lower operation and maintenance costs. These costs decreased, due to the lack of Callaway Nuclear Plant refueling outage this quarter and lower fuel costs, offset I part by higher employee and benefit expenses.

Warner will discuss earnings in greater detail later in the call, so I will turn to other matters.

The first issue I would like to address is the unanimous joint settlement we reached with all parties in the Missouri Electric rate case. As many of you know, this is the case in which the Missouri Public Service Commission staff had initially proposed a reduction in our annual electric revenues ranging from $246 to $285 million.

Other parties to the case also added issues and additional reductions on top of the staff?s recommendations. By July 16, all parties in the case submitted a joint settlement for approval to the Missouri Public Service Commission.

He provided details of the settlement in a press release that morning. The hearing on the settlement was conducted by the commission yesterday where we are pleased to report that late this morning the commission unanimously approved the settlement at their scheduled agenda meeting. The final order is no available on the PFC?s website

Among other things the settlement includes a rate moratorium through June 30, 2006. A there year phase in of $100 million in electric revenue reductions, the funding of 26 million for several programs, the lowering of Ameren depreciation rates and over $2 billion in energy infrastructure commitments.

The company firmly believes that this settlement very effective balances the interest of all stakeholders in this case. From an investor?s perspective the settlement will provide the company with financial flexibility and strength going forward. We will also give the company meaningful incentives to manage its business effectively in order to continue to provide solid returns to our investors.

And, as important, the settlement gives our investors greater clarity with respect to the company?s future earnings and cash flows that are so critical in the marketplace today.

The next major initiative that our company is focused on is the completion of the Cil Corp. acquisition. WE continue to move forward with regulatory filings for Cil Corp. We made our required filing with the Illinois Commerce Commission in mid June and just last week made our filing with the FERC.

Our filing under Primco with the SEC and our Hart Scott Radino filing should follow in the next several weeks. We are currently targeting a close of this transaction by March of 2003.

Another regulatory matter that we have been addressing relates to issues associated with the implementation of a regional transmission operation for our business.

Since we lat spoke there has been quite a bit of movement on transmission issues and related RTO design with the FERC.

We joined with subsidiaries of First Energy and NiSource to propose an independent for profit transmission organization called Grid America to operate a similar business model to the proposed Alliance RTO model, but under the Midwest Independent System Operator or Myso.

The FERC has mandated that all utilities join an independent transmission organization and we believe this structure provides the best goods for Ameren.

The FERC has preliminarily approved this structure and is expected to issue a final ruling in the next several months. We have proposed to have Grid America operational by the end of the year.

Should the FERC approve this structure, Ameren could receive back from the NYSO certain monies we paid to that organization in 2000 for start up costs, amounts that we have invested in the alliance. In total these two items would approximate up to $25 million.

Before I turn the discussion over to Warner, I want to provide you a brief update on our generation additions for the year. The first half to eh hear we placed 240 megawatts of regulated generation into service as planned.

Further, our only remaining unregulated project is the addition of 470 megawatts of heating capacity near Chicago. This generation project is expected to be on line by the end of the year and remains on schedule and on budget.

With that I would like to turn the discussion over to Warner.

Thanks, Gary. Now into a more detailed discussion of earnings results and related financial matters.

As Gary mentioned today we reported second quarter 2002 earnings of 94 cents per share compared to earnings of 69 cents per share last year. Earnings for the first half of 2002 were $1.36 per share versus $1.12 per share in the year ago period.

Our earnings growth was driven by higher operating revenues and lower operations and maintenance expenses. The company experienced a 4% increase in electric revenues during the quarter despite higher than normal 2001 revenues resulting from the reduction and the accrual for expected customer credits and the Amerenuese, Missouri alternative electric rate regulation plan. That reduction increased electric revenues by $25 million or 10 cents per share last year.

Higher electric revenues were realized during the quarter as warm weather drove residential and commercial sales up by 11% and 2% respectively.

And while industrial sales fell 8%, due to the soft economy, these decreases were more than offset by strong increases in sales to our wholesale customers of 46%.

Our Interchange sales also rose during the quarter and we achieved comparable total margins on these sales form Ameren Energy compared to the prior year, despite lower energy prices.

Ameren Energy?s performance continues to be in line with our previously stated expected earnings contribution of approximately 18 cents per share in 2002.

We also realized higher operating revenue this quarter, due to increased sales at EVI, driven by demand from their largest customer, the Department of Energy.

During the quarter, EEI also sold emission credits, which contributed 10 cents per share to earnings. Earnings growth was also realized due to lower operations and maintenance expenses this quarter compared to last year. Operations and maintenance expenses fell $31 million compared to the prior quarter.

These expenses fell largely due to lower fuel costs and the lack of a Callaway refueling in the current quarter. Last year the refueling reduced our earnings per share by 12 cents in the quarter and 14 cents for the year to date.

These decreases were offset in part by higher employee benefit costs associated with the increasing medical costs and the impact of the poor stock market performance on the company?s benefit plan assets.

Earnings are also unfavorably impacted by higher depreciation expenses and related financing costs for new plan additions, as well as due to the equity financings we completed this past spring.

We also announced today that we have completed the financing of $400 million in unsecured revolving credit facilities with the syndicated banks. With these new credit facilities, total consolidated commitments are over $1 billion. We are very pleased with the results of this financing, which was over subscribed and ultimately allowed us to increase the size of our credit facilities. This financing is consistent with our strategy to maintain financial flexibility.

These facilities expand our liquidity and complement our already strong solid financial position.

In June, we completed a $275 million 7.95% 30 year note offering at Ameren Energy Generating Company. The proceeds of this offering were used to reduce short term borrowings.

Looking ahead, with the approval by the Missouri Public Service Commission of the joint settlement this morning, the company?s 2002 earnings and beyond will be affected. The settlement includes a rate moratorium through June 30, 2006. In contrast, the company operated under an earnings sharing plan for the past six years.

Further, the settlement calls for the phase in of $110 million on electric rate reductions through April, 2004, beginning with an annualized $50 million rate reduction retroactive to April 1, 2002.

An additional $30 million annual rate reduction will take effect on April 1, 2003, and another annual electric rate reduction of $30 million will take effect on April 1, 2004.

The settlement also includes a $40 million credit to be paid to customers to resolve the issues associated with the final sharing period under Ameren UE?s alternative rate regulation plan which expired on June 30, 2001. this credit is equal to the amount the company had accrued for this matter in its financial statements, and therefore has no earnings impact on the company.

In addition, we committed to make payments totaling $26 million for programs related to low income energy assistance and weatherization, residential and commercial energy efficiency and economic developments over the term of the plan.

We also reduced depreciation expense at $20 million annually during the settlement period. As a result, in 2002 the reduction in rates will reduce earnings per share by about 18 cents. The Pomar commitments will reduce earnings by 10 cents, both of which will be offset by the benefit of reduced depreciation expense of 6 cents. Consequently, the company expects 2002 earnings per share to be reduced by 22 cents.

The impact of the joint settlement is consistent with the range of outcomes we incorporated into our 2002 earnings guidance we provided earlier this year. As a result we are now reaffirming our 2002 ongoing earnings per share guidance in narrowing such range to between $3.05 and $3.25 per share. Of course, this estimate is subject to, among other things, potential future financing activities, successful completion of the Callaway refueling, weather conditions, changing energy markets and economic conditions.

The joint settlement also includes a commitment by the company to make commercially reasonable efforts to invest $2.25 billion to $2.75 billion in energy infrastructure. These expenditures include the addition of 700 megawatts of new regulated generation capacity ram in UE during the settlement period and replacing the steam turbine generators at the Callaway

Let me assure you that these capital expenditures are consistent with the previous guidance we have provided for Ameren as a whole and Ameren UE. It should also be noted that the requirement of the 700 megawatts of new generation capacity includes the 240 megawatts of regulated capacity that Ameren UE already added earlier this year.

In addition, the company may meet this capacity requirement due to transfer of that net book value of unregulated generation plans from our subsidiary, Ameren NG Generating Company to Ameren UE.

To reiterate what Gary said, we are very pleased with this case behind us. This settlement will provide the company with the continued financial strength and flexibility.

The settlement will also provide the company with a clearer vision of its cash flows through 2006 due to the rate moratorium in Missouri and the rate freeze through 2006 in Illinois. And most importantly, a lot of the companies are focusing on it operations and closing the Cil Corp acquisition on a timely basis for the benefit of our shareholders, our customers and our employees.

This concludes our opening remarks. Now we will open up the session for questions.

+++q & a

Our first question will come from Douglas Fisher from A. G. Edwards. Please go ahead.

Thank you. First of all, congratulations on your constructive rate settlement and the approval of that today.

Thanks, we appreciate that.

There have been rumors circulating about whether Illinois Power is up for sale. I know you don?t comment on specific acquisitions, but were that to be something that you would consider as a T&D company, as a matter of strategy would you want to make sure that you had generation from Illinois ? from Synergy as well, ownership of that in order to match off, to balance the portfolio? From a strategic standpoint maybe you could comment on your strategy on only companies that retail and having the generation to offset that?

Sure, Doug. I think you pointed out very well that we don?t comment on specific opportunities. And as we stated before, when we look at opportunities in general, we focus on a number of different things, including the geographic location of those companies, including the fact whether they would bring certain, not only earnings levels, but certainly with regard to the opportunity itself, the jurisdiction that we are operating in and the regulatory strategies and the like.

With regard to just in general with regard to a T&D company, I think clearly we would want to know what our ability would be to be able to provide for the main load and the needs of those customers. So, certainly that would be a factor to the extent we would look at any companies like that, we would like to know just exactly how secure those power commitments could be down the road.

And so similarly we would have to look at, in those types of situations, what kind of contracts they have, whether they have internal generation or whether they have long term contracts with either a previous affiliate of that company or other third parties.

Remind as to the Illinois de-reg law, a T&D company, how does it have the obligation to be provider of last resort? Is that indefinite?

I think that ties into the rate freeze initially and you may recall that rates were frozen through 2004. Recently legislation has been passed to the extent that through 2006. So, clearly we have the responsibility to be provider of last resort through that period.

The Commission now is considering methods to cover the provider of last resort requirement beyond that. It is clear though that the distribution company has the guilt and responsibility, it is unclear how exactly we would go about providing that.

It is clear that they have that responsibility even beyond 2006?

Even beyond 2006.

Okay, but the rules of how that would be priced and done are not established?

That?s correct.

Okay And then one other question. The emissions credits that EEI sold that added to earnings, is that some ? remind us as to whether we have had those in recent years and if so, how much and whether that is something to expect in 03 and beyond?

Well, with regard to EEI, you?ve got non seen emission credits sold from them. I believe with regard to EEI those emission credits were sold this year after they took a hard look at their overall compliance strategy and determined that they did not need those emission credits going forward. So, they looked at operating market conditions and chose to enter into the market and make those sales at this time.

Historically, what you have seen with regard to Ameren is that we have had emission credit sales in the past, in part by not only Ameren?s sales out to the market but also each year as credits are provided to the company, there is an auction, a typical auction which is done that basically we have the proceeds from those sales, just to continue to have a market for those emission credits.

So, there have been sales, not in EEI, but in other units of Ameren in the past?

That?s? correct, and I think going forward, Doug, I think that would be an opportunity with regard to not only EEI, because they still have a bank of allowances that they could choose to sell to the extent that they would need those for our compliance strategy, but Ameren would also have the ability to look at its existing emission credits and have the opportunity to modify those to the extent they didn?t know those for environmental compliance.

And then lastly, can you give a little color on the industrial sales being down 8%? Is that particular customers and do you expect those to come back with the economy or is here anything going on that is a permanent concern there?

Well, I think, obviously, the economy has had a significant effect on our industrial sales, although our industrial sales are down 8%, when I think you look across the nation those sales are down even greater that, number one.

Two, you know, the industrial sales that we see are down are the capital intensive industries and so clearly as we would see recovery from the economy, we would see again, we would expect to see a recovery from those capital intensive industries come back.

And, I guess, finally, from our perspective, from an Ameren prospective our customer base is very diversified. Our lines on the industrial customer base are not as significant. Basically they represent about 25% of our total sales. With the residential and commercial sector, where we continue to see solid growth be in the vast majority of our sales.

Okay, thank you.

Our next question will come from Gregory Gordon from Goldman Sachs, please go ahead.

Hi, guys, can you hear me?

Yes.

Looking at the quarter, I just want to, it is 94% versus 69 cents. You had 10 cents from the sale of the credits, right, and then you had 12 cents from the weather boosting residential and commercial. So, if we were to adjust those out, as sort of non recurring events, you are about a penny ahead of last year, but then again, that also incorporates a significant drop off in industrial.

So, net net you are modestly up, even given the impacts of the economic slow down, if we were to sort of weather adjust that and take out one time items. Is that a fair assessment of the quarter?

No, I don?t think it is an unfair assessment. I think you ought to be mindful too of the fact that we reversed that credit in the first quarter of last year, which was 10 cents a chair; excuse me, at the first quarter, the second quarter of last year associated with our all term rate regulation plan, which I think it is not unfair to suggest that is ongoing. But, nonetheless, it is a bit unusual when you look at the regulatory framework we have going forward.

Right, okay. And you also said in your official comments that despite the softness in the wholesale markets, you still expect Ameren Energy to hit your earnings goal for the year, which were, correct me if I am wrong 18 cents?

That?s correct, and that is what we said.

Can you just give us some color in qualifying statements around what you are seeing in your business? I mean, most every other company, whether it is as large exposure or a small exposure, yours is small relative to the size of your company, has had to guide down significantly. I am wondering if you can maybe qualify what you are seeing that is allowing you to continue to be on target?

Well, I think a couple of things. I think, one you stated very clearly that, you know, Ameren Energy is an asset optimizer for us. So it isn?t a matter if it is a huge strategy that genders those results, it is simply optimizing our existing assets. And so essentially you run a hedge book.

We have been able to capitalize on, you know, obviously just only energy prices in the markets, but what few opportunities they have been able to obtain, they have been able to capitalize on those.

So, despite the fact we have seen lower energy prices, which we clearly are seeing, they still have been able to hold their own.

Of course as we went into the year, we went in with some very modest expectations, you know, which is typical for that business. We don?t try and hit home runs and the singles and the doubles play very well for us, and that?s exactly what we went in with our estimate.

So, I think putting those factors together, Greg, probably suggests why we are where we are at compared to the others in the industry.

Great, thanks a lot, take care.

Sure, thanks, Greg.

The next question will come from Zachary Schreiber from Silcat, Inc. Please go ahead.

Warner, how are you? Zach Schreiber from Silcat.

It has been a while, Zach, thanks, how are you?

Good. Congratulations again. We are just wondering actually if you could sort of us update us a little bit more in depth as to where you are with the regulatory approval process for Cil Corp., you know, what the key milestones are along the way, number.

And number two, from a generic issue, you alluded to a sort of PLR proceeding that is going on at the ICC. I thought that was more of a company specific proceeding. I just wonder if you could sort of talk about what is going on there generically for the PLR in Illinois.

Okay, I will handle the regulatory approval process for Cil Corp. and I will let Gary talk a little bit more about the PLR.

With regard to Cil Corp. we have filed with the Illinois Commerce Commission and the FDRC. We have filings still ? and we have done that within the last 30 to 45 days on those.

With regard to the ICC and the Hart Scott Radino, those filings are going to be pending and will probably be coming very soon.

With regard to the approval process we have stated that we expect to have the overall regulatory approval process done by March of 2003.

We have been working very closely, while our filings have, in many respects, just been made relatively recently, we have working very closely with all the parties to not only give them sort of an update and sort of an insight pre-filing as to what the issues might be, but also to try and facilitate the questions and discussions they may have going forward.

We would expect some time in August for a specific schedule to be set by the Illinois Commerce Commission for their filings and in many respects that will gage ultimately how rapidly that the process will move.

We have been, as I said, we have worked very closely with FERC and the SEC. We would expect the SEC once we get all these other approvals in place to then ultimately do their part once they have the Illinois Commerce Commission and FERC behind it. Although the SEC will continue to work currently along the way.

With regard to Missouri, they do not have jurisdiction over this particular transaction and the Commission specifically rendered a decision on that within the last 30 days and stated it did not have jurisdiction, so we did not have to get regulatory approval in Missouri.

Other than that, Zach, I don?t think there are any specific milestones to look at it, it is just that once these procedural schedules come forward, we will make those known to the public and then that will give you a better gauge.

That?s the staff recommendation that both the FERC and the ICC --I mean, when do you think, if the schedule is not going to get set I guess until next month, do you think we will see staff recommendations in August, September, October, year end?

It is practically premature to say what the schedule would be if, you know, we would like to believe that we were pricey, since the staff has been working on these things, we would likely see price staff proposals within 30 or 60 days after the pre- hearing conference.

It would not surprise me, although, you know, it is impossible to say, one of the things you have to be mindful of too is working into the commissioner?s agenda schedules among other things. So, it is not clear exactly, but I think that wouldn?t be an unreasonable thing to believe, at least at this point.

Okay.

And I will let Gary discuss your PLR question.

Zach, a far as the Polar responsibility, that is a generic proceeding. The Illinois Commerce Commission asked all companies in Illinois to submit to them their plans for covering the Polar responsibility after the rate freeze.

And you may know that the way that that works now is that all the companies in Illinois, or virtually all of them, I think all except, with the exception of Cil Corp, have established generating companies that sell power back under full requirements contracts to the distribution companies, and through those contracts the generators really cover the Polar responsibility until the end of the rate freeze.

While it is a generic proceeding, each company can submit its own plan and I am not sure what the schedule is, the Commerce Commission ultimately makes some rulemaking. The plan that we submitted called for really a market based approach, where we would go to the market and ask power suppliers to give us bids on power contracts that would include the Polar responsibility in those power contracts. Essentially the same kind of contract that we have now with our own generating company.

Other companies submitted other methods to do that and that?s? about as much detail as I know.

I do know also that there was a lot of nervousness about this issue when the rate freeze was only through 2004, but now that it has been extended through 2006, it is not really an immediate issue for anyone

Okay. And then just a follow up as far as operations and maintenance expense being down $31 million for the Callaway outage not meeting the quarter. How much of a hurdle from higher pension expense and benefited cost did you have to overcome to still have the O&M down. I.E. just looking at sort of core, the trend rate is sort of core non O&M.

I think with regard to employee benefits, in particular, which is what you referred to.

Yes.

Impact in the quarter was an unfavorable variance of about 40 cents per share. And, obviously, the Callaway refueling, as we stated was 12% per share pick up on a quarter to quarter basis.

But, you know obviously while we had pressure in employee benefits, we were able to contain lower fuel costs, successful in doing that and this quarter is no different, just a lowering of our fuel costs, in part due to the fact that Callaway was up and operating during this entire quarter, that more than offset the employee benefit expenses.

Okay, and then final set of questions just on the balance sheet and Illinois Power, I am just wondering if you could just tell us where the balance sheet is at quarter end and on a gap basis and also when you roll the into a conversion, given the 80% equity credit, number one.

And number two, could you just sort of clarify a little but more as far as if we are now in digest mode with Cil Corp. or if, you know, we are still willing to entertain other opportunities, but I assume you need to go through a higher hurdle or higher screen.

Let me see if I can address your question. I think when you talk about the balance sheet my sense is that you are looking at various equity ratios at the balance sheet, and I think we have provided some of that stuff with regard to our statistics.

But, by and large, we are covering right around that 50% mark, almost 51% equity as we sit here today. And that assumes that those convertibles are 100% debt. And so you can make whatever assumption you want to make with regard to those, you know, convergences to what kind of equity content you want to give. A couple of percent would not be unreasonable, two to three percent in our view, but then again everyone has their views of those things.

With regard to the sort of Cil Corp. obviously we are very focused. I think in our last conference call we said there are several things that we are very focused on. One was clearly focusing on our operations, which we continue to do all the time. Two was very focused on the rate case, which as of today is now successfully behind us. And, three was the closure of the Cil Corp. acquisition and clearly that is another key component of our strategy and focus going forward.

As regards to other opportunities I think Mr. Fisher posed a question earlier, and I think as you stated was probably done unfair, stated that certainly we continue to look at market driven opportunities, but, of course, when you have these other significant issues as well as an acquisition we are looking to close, I think it would be fair to say that, you know, our hurdle rate in moving forward in some of those opportunities is certainly higher. But then again, as we said, we continue to move forward with market opportunities, if it makes sense. But I think it is fair that the hurdle rate is a little bit higher from our perspective.

Okay, could you agree that your plate is a little bit more clearer, now that you got your inventory stuff behind you?

Well, I think more clearly, I think our plate is not only clearer but I think a great deal of uncertainty associated with our company from a regulatory perspective has been cleared up, from an investor?s perspective and certainly from the company. So, I think in that context I think that?s a fair statement.

Thanks so much for your time, guys.

The next question will come from David Frank from Zimmer Lucas Partners. Please go ahead.

Yes, hi, good afternoon, Warner.

Hi, David, how are you?

I am doing well, I just wanted to congratulate you guys again on what was an outstanding achievement in your regulatory settlement there and I know you guys kind of downplayed the severity of the situation, which may have done you a disservice now, because I don?t know if people can fully appreciate the guys that you guys did, but my hat is off to you.

Well, thank you, Dave. We are pleased with the balance result that we got.

And I did want to ask you about how I should view your company. You know, I view you as either a company with a very strong balance sheet or a company with an extremely strong balance sheet and I guess you are an extremely strong balance sheet if you take out all of the Cil Corp. acquisition with the equity offering you had planned and you are just a very strong balance if you kind of pare back some of that equity you had talked about doing.

I realize the ink is probably not even dry on the settlement yet, but is there a chance that you maybe don?t issue quite as much equity as you talked about in the past?

I think, David, whether you call it very strong, mildly strong or incredibly strong, I will leave that to your judgment. We have said all along that one of our key strategies is maintaining that financial flexibility and maintaining a very strong balance sheet and credit rating. So that will continue going forward.

With regard to Cil Corp. and the overall financing plan for that, yes, I think the ink is not totally dry as a result of the settlement.

As we said before, the numbers that we discussed with regard to Cil Corp. accretion as well as the financing assumed a 100% financing with equity, new equity for the cash portion of that deal, which was approximately $500 million.

And as we said, as time would pass we would take a closer look as to ultimately what our appropriate financing would be and I think that?s really where we are at now. We are taking a look as to what the appropriate level would be. Inn talking about that particular financing as well as that deal, we took the most conservative view in relaying what we thought the operating results would be.

So, we over the next several weeks, the next period of time we will be taking a close look at that, now that there is more clarity around our cash flow.