阿莫林 (AEE) 2004 Q1 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the first quarter 2004 earnings conference call for Ameren Corporation. [OPERATOR INSTRUCTIONS] I'll now turn the conference over to Mr. Bruce Steinke. Please go ahead, sir.

That you Vicky and good morning everyone, I am Bruce Steinke, Manager of Investor Relations here at Ameren Corporation. Here with me today is our Chairman, Chief Executive Officer and President, Gary Rainwater, our Executive Vice President and CFO Warner Baxter, our Vice President and Treasurer Jerry Birdsong and our Vice President and Controller Marty Lyons.

Before we begin, let me cover a few housekeeping details. This hour-long call is available for one week to anyone to wishes to hear it by dialing the playback number. The announcement you received carries instructions on replaying the call by telephone. In addition, we would like to welcome everyone listening to this call on the Internet. The web cast will be available for one year on our Web site www.Ameren.com. This call contains time sensitive data that is accurate only 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 about future expectations, beliefs, plans, strategies, objectives and financial performance. We caution you that there are various factors that could cause actual results to differ materially from those anticipated in the forward-looking statements. For additional information, concerning these factors, we ask you to read the forward-looking statements section in the release we issued today and in our filings with the SEC.

To assist in our call this morning we have made a slide presentation available on our web site that reconciles our earnings per share between the first quarter of 2003 and the first quarter of 2004. To access this presentation, simply follow the links for the web cast and then click on the link for the presentation, which is provided in a PDF format. Gary will begin this call with an overview of our first quarter 2004 results and some operating matters and Warner will follow with a more detailed financial review. We will then open it up for questions. Here is Gary.

Thanks, Bruce. Good morning and thank you for joining us. This morning we reported net income of 55 cents per share for the first quarter of 2004. As compared to 63 cents per share for last year's first quarter. Net income in the first three months of last year included an after tax gain of 11 cents per share due to the adoption of the Accounting standard related to the asset retirement obligations. Excluding last year's unusual gain 2004 first quarter earnings of 55 cents per share were up over first quarter 2003 adjusted earnings of 52 cents per share despite milder weather in 2004. The increased earnings in the first quarter of 2004 principally resulted from the CILCORP acquisition, higher addition credit sales, sales growth due to a recovering economy and our focus on cost control.

These benefits allowed us to more than offset the negative effects of milder winter weather, higher fuel and purchased power costs, weaker energy markets, and earnings per share dilution resulting from increased common shares outstanding. While there were many positive aspects to this quarter, one encouraging sign I saw was the continued improvement in our local economy. As we have discussed with you in the past, our local economy is usually slow to enter into a recession and slow to exit one. Recently the unemployment rate in St. Louis hit a 17-month low and it seems there are similar signs of economic recovery throughout our service territory. And as noted in our press release, our industrial sales rose 4% in our weather sensitive commercial sales rose 1% during the quarter. Excluding the additional month of sales from CILCORP in 2004. These increases were driven by improving economic conditions and higher sales to customers in the deregulated Illinois marketplace. I'm also pleased to note that the CILCORP acquisition was a positive in the quarter. Not only did we have another month of CILCORP operations relative to last year, but we also continued to realize synergies from this acquisition. As a result, the acquisition was accretive by approximately 4 cents per share in the first quarter of 2004. Simply put, this acquisition has been very successful for Ameren.

Of course, in early February, we announced the signing of a definitive agreement with Dynegy to purchase Illinois power and an increased interest in electric energy incorporated in a transaction valued at approximately $2.3 billion. This acquisition is a natural strategic fit and one that we expect to be just as successful as the CILCORP acquisition has been to date. In late March we completed the initial filings required for regulatory approval and the acquisition remains on target to close by the end of this year. On the regulatory front, we have two asset transfer requests pending approval. The proposed transfer of Ameren UE’s, Illinois Gas and Electric service territory to our Ameren CIPS subsidiary is pending approval by the Missouri Public Service Commission and SEC. We have also received the required approval from the federal energy regulatory commission.

In addition, the Illinois Commerce Commission has approved the transfer of Ameren UE’s Illinois electric service territory to Ameren CIPS and we have reached agreement with the ICC staff on the proposed order for the transfer of the gas service territory. Hearings were held in Missouri in March and April and legal briefs are due by late May. We expect a decision by the Missouri public service commission sometime this summer. The other asset transfer is the proposed movement of 550 megawatts of unregulated generating assets into our regulated Ameren UE subsidiary. As we reported in our year-end conference call, the administrative law judge hearing the generation transfer case at the FERC issued a preliminary order recommending that the transfer be approved.

We're awaiting a final decision by the full energy regulatory commission as well as approval by the SEC, which we expect to happen sometime this summer. Because electric rates are frozen in our Missouri and Illinois jurisdictions through 2006 the timing of these approvals has no immediate financial impact on Ameren. Over the next few months, we also expect to seek extensions of the electric supply contracts between our CIPS and CILCO distribution businesses and our non-rate regulated generation and marketing subsidiaries.

These extensions have already been ordered by the Illinois Commerce Commission, On another topic, we've received all approvals necessary for our entry into the Midwest Independent System Operator or MISO through our participation in good America. As a result, we are currently working through final technical integration issues and expect to enter MISO in the near future. One final operating note our Callaway nuclear plant is currently down for its scheduled spring refueling outage, which began on April 10th. This outage is scheduled to last approximately 40 to 45 days. Before I hand things over to Warner for a more detailed financial review, I just want to say that I'm very pleased with our start to 2004.

We announced the acquisition of Illinois power and immediately secured a major portion of the equity financing that we planned to issue to fund that acquisition. We also delivered higher year-over-year first quarter ongoing earnings despite milder weather and weaker energy markets. And finally, our CILCORP acquisition continues to meet our expectations and our local economy is showing signs of improvement. We're focused on delivering these same solid results for the remainder of the year. And with that, I'd like to turn the discussion over to Warner.

Thanks, Gary. At this point, I will refer you to our web site as I provide a more detailed discussion of earnings results and other financial matters. As Bruce mentioned earlier, we have posted a slide on our web site reconciling our first quarter 2003 earnings per share to our first quarter 2004 earnings per share. In the first quarter of 2004 we reported net income of $97 million or 55 cents per share compared to first quarter 2003 net income of $101 million or 63 cents per share. Net income in the first quarter of last year included an after tax gain of $18 million or 11 cents per share due to the adoption of a new accounting standard related to asset retirement obligations.

Excluding this gain, net income in the first quarter of 2003 was $83 million or 52 cents per share. As a result, first quarter ongoing earnings per share increased from 52 cents per share in 2003 to 55 cents per share in 2004. During the quarter, we realized increased electric and gas margins due to our acquisition of CILCORP, organic sales growth and higher sales of emission credits. Electric and gas margins rose 14 cents per share due to the additional month of CILCORP sales in 2004. As you may recall, the CILCORP acquisition was completed on January 31st, 2003.

In addition, improving economic conditions and new customers in Illinois fueled growth in industrial and commercial sales as Gary indicated earlier. Higher than expected fuel and purchase power costs partially offset these sales gains in the first quarter of 2004, primarily due to an unplanned outage at our Callaway nuclear plant and an extended outage at one of our fossil power plants. As a result sales growth when combined with increases in fuel and purchased power costs increased earnings by 4 cents per share. Electric margins also benefited from higher emission sales, which were $15 million in the quarter versus approximately $1 million in last year's first quarter. Market prices for emission credits have risen over 50% in the quarter of 2004 compared to the same time a year ago. Greater revenues from emission credit sales increased earnings 6 cents per share during the quarter. The net impact of gas and electric rate cases resulted in a 1 cent per share increase in earnings.

Our Illinois Missouri gas rate increases boosted earnings by 4 cents per share, while our Missouri electric rate decrease reduced earnings by 3 cents per share. Increases in electric and gas margins were offset in part by milder winter weather, which reduced earnings by approximately 6 cents per share during the quarter. Heating degree-days in Ameren’s service territory during the first three months of 2004 were approximately 9% below the same period a year ago. The contribution to earnings from Ameren Energy, on behalf of Ameren UE and Ameren Energy generating company produced first quarter 2004 earnings of 17 cents per share which is 4 cents per share lower than the first quarter of 2003.

While energy market conditions were solid in the first quarter of 2004, they were below the exceptionally strong first quarter of 2003. During the quarter, power prices were 17% lower in 2004 than in 2003, which was in line with our expectations. On the expense side of the equation, we continue to focus on managing our operating costs. We realized further benefits from a voluntary retirement program that resulted in approximately 550 employees leaving the company in 2003. Most of these employees did not leave the company until the end of last year's first quarter. This reduced labor costs and improved earnings by approximately 4 cents per share in the first quarter of 2004. During the quarter, we did, however, incur higher employee benefit costs as a result of continued rising medical costs and the impact of low interest rates on our pension costs. Our employee benefit costs reduced earnings by 4 cents per share during the quarter.

Of course, and as we discussed previously the additional month of CILCORP operations in 2004 also resulted in higher operations and maintenance expenses, depreciation, and financing costs. In our slide, we have broken out the operations and maintenance expenses for CILCORP for January 2004. Earnings per share were reduced by about 2 cents during the quarter as a result of increased depreciation costs again primarily due to the CILCORP acquisition. Increased common shares outstanding also reduced earnings per share during the first quarter of 2004. As Gary mentioned, following our announcement of the Illinois power acquisition we quickly moved to sell common stock, generating proceeds of approximately $850 million. We viewed this offering as a conservative and prudent move to secure a significant portion of the equity-financing plan for the Illinois power transaction, which in total is expected to equal at least 50% of the transaction value.

The additional shares issued in this offering reduced earnings by an estimated 3 cents per share in the first quarter of 2004. Since these shares were issued prior to the close of the Illinois Power transaction. However we expect this acquisition to be accretive to earnings by 5 to 10 cents per share in each of the first two years after closing, and to provide significant long-term value for all of our stockholders. As I noted in our year-end conference call, our February 2004 common stock offering utilized virtually all of our authorized shelf registration statement capacity at Ameren. We have already initiated the SEC processes necessary to enable us to sell additional securities in connection with the Illinois power transaction and for other general corporate purposes. We also announced today that we are reaffirming our 2004 guidance for earnings per share of between $2.75 and $2.95 per share.

The 2004 estimate includes the impact of common shares already issued to partially fund the Illinois Power acquisition but excludes any potential earnings impact resulting from the Illinois power acquisition or potential further common stock issuances for this transaction. Our guidance is subject to among other things plant operations, weather conditions, energy market and economic conditions, unusual or otherwise unexpected gains or losses and other risks and uncertainties outlined in the forward-looking statement section of our release. This completes our prepared remarks. We will now be happy to take your questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question comes from Doug Fischer from AG Edwards. Please state your question.

Thank you and congratulations on a solid quarter. Couple of questions. What do you expect or what is your typical plan in terms of emission sales over the balance of the year and remind us how much you earned in emission sales credits in '03?

I'll be happy to do that, Doug. A couple of - This is Warner Baxter. With regard to 2003, we earned 11 cents per share in emission credit sales. And that 11 cents per share included some emission credit sales at EEI, which was $10 million. Remember we only owned a 60% interest in that. UE which really owns the majority of our bank emission credits if not really virtually all of them from Ameren sold $20 million of emission credits last year -- how that broke down in terms of sales during the quarter last year was, as you saw in the first quarter we sold $1 million of sales and the second quarter it was $5 million in the third quarter we sold $4 million and in the fourth quarter we sold $11 million. Again that was at UE. EEI in the second quarter of last year sold $10 million of their emission credit sales.

Basically, Doug, what we have historically seen in terms of emission credit sales are about $20 million worth of sales for UE, which is consistent with what we've seen last year. Of course, with the run up in prices that we've seen the first quarter, we have seen at least a 50% increase and we continue to see the spot market prices meaningfully up from where they had been year ago levels, we'd expect our emission credit sales to be up between $20 and $30 million this year, simply due to the increases in prices. And that's consistent with the guidance that we really provided to you all earlier in the year.

Rephrase that you expect the total emissions credit revenues to be 20 to 30 million, or you expect an increase in 20 to 30 million over the 30 you had last year?

No. It is in total, $20 to $30 million.

OK. That's what I thought. And then secondly, your negotiations with CILCO for extending the power sale contracts to CILCO, remind me of the terms expected terms of that i.e. price and volumes versus what you have right now?

Sure, Doug. There are really two contracts. One is with CILCORP and the other one is with CIPS. We would expect to extend those contracts through the end of the rate freeze, which has been approved by the Illinois Commerce Commission, which is through 2006 in Illinois. For CIPS, that price is at $38.50, and for CILCORP that’s at $34.

Which is what price again?

CIPS is 38.50, and CILCORP is $34.

So it's going to be just extension at the same prices?

Yes. That would be correct.

And the volumes, how would they change?

The volumes are not changed at all. It's basically -

It's in all requirements?

Yeah. So, just be rolling over the existing contracts, Doug.

Thank you.

We have the Illinois Commerce Commission approval and we would seek out the other appropriate approvals as well.

Thanks.

You are welcome.

Thank you. Our next question comes from Zachary Schreiber from Duquense Capital. Please state your question.

Hi, how are you?

Good morning.

I just wanted to see if you could walk us through your coal hedging again and specifically with respect to -- I know you use a lot of PRB. Maybe you could kind of break that out from the eastern coal. And then how it looks over time, overall coal hedging.

Sure, happy to do that. With regard to our breakdown of coal, we have no eastern coal. Our coal is about 85% PRB, and the remainder being Illinois, which is right around 15%. So we have no exposure to some of the run up in eastern coal prices. Where we stand today in terms of 2004, we are 100% hedged for our coal needs. In 2005 we're over 90% hedged for our coal needs. And basically, if you look at a period from 2004 to 2008 we have over 70% of our coal needs hedged today.

Great. And then I think in Missouri in '06 when the rate freeze runs out in mid '06 any rate case – any rate increase would that be retroactive, it would be decided at some point after that I would assume, would it be retroactive to the date where the freeze runs out or is there a gap period where you'd be kind of still under the rates under the rate freeze, but without a rate case?

Sure, what will happen with Missouri or what our stipulation agreement said is that we cannot file with the Missouri public service commission really for any new rates to be effective before July 1st 2006. What we will do is at the end of December 31st, 2005; we will file a new cost of service study with the Commission. And so, that will be the initiation of whatever process will take place thereafter in terms of rates. But rates will not change before July 1st, 2006. Whether those rates would be effective exactly on that date or sometime thereafter, that still will be part of the overall regulatory process.

Thank you very much.

Thank you. Our next question comes from Ted Hind from Smith Barney, please state your question.

Hello. Congratulations on a good quarter, guys.

Thanks, Ted.

I just had a quick question on it seems like you guys did pretty well this quarter and wanted to know where that came out with your expectations. You kept your guidance in the same range. And I just wanted to know if there was any – if you felt that you were leaning to the higher side of that or if, you know, the incremental things that are going to affect it in the rest of the year.

Sure. I would say by and large our quarterly results were in line with our expectations. Of course, weather we can never predict that, that was a negative of 6 cents. So that would be the -- sort of the one thing, which would not have been in line with our expectations. But if you really look back at the slide that we presented at the end of the year which reconciled the 2003 earnings to our 2004 guidance, by and large, when you go down all those line items, we're pretty much right in line with the expectations including our emission credit sales which were embedded in the sales growth line item there. So I would suggest we're still in line with the expectations. In terms of our overall guidance, what we typically do is we move forward through the year, especially as we go through the more important summer cooling season, we will refine that guidance as appropriate. But here in the first quarter, we're still comfortable in maintaining the same guidance as to where we started.

OK. Fair enough. Thank you very much.

Thank you. Our next question comes from Danielle Sykes from Maxburg Capital.

Good morning. Just wanted to know, are you participating in the discussions taking place in Illinois and could you give us sort of a sketch of what could happen, I mean, as far as you are concerned, as far as – your rates are concerned?

Sure. In terms of the discussions in Illinois, I assume that you are referring to is really what the regulatory environment will look like after the rate freeze ends in 2006. And we are absolutely participating in those discussions. As we've said before, what we believe will happen and consistent with the commitment we made in our CILCORP case, is that all the native load needs for all the transmission and distribution companies in Illinois will be put out to a bidding process, RFP process in post 2006. We have been working with the ICC staff and others in developing an appropriate RFP process. In a similar vein the Illinois Commerce Commission has initiated workshops to talk about these and other issues as to what will happen post 2006. The biggest issue being how the native load supplies will be provided for all the customers. So we are right in the middle of that. In terms of concerns, you know, I think that not only will the RFP process be taking place, we don't have any particular concerns other than making sure it's a fair and equitable process, but we don't have any particular concerns about that. But secondly, what we think will also happen is that there will be the potential for companies to file rate cases, transmission and distribution companies to file rate cases for the post 2006 period, since there have been a rate freeze for virtually a decade now in the state of Illinois. And as part of those rate cases, it's my expectation that transmission and distribution companies will not only recover some of the capital expenditures they've made over time but also try to attempt to recover the incremental operating costs which have taken place. Similarly the fuel costs that were part of this RFP process we expect will be incorporated either into base rates for T&D companies or potentially consideration could be given to a fuel adjustment clause on the electric side of the business which does not generally exist in Illinois at this point in time.

All right. Do you anticipate that there will be a one rule for all companies? Or do you feel that you have a possibility of catching some sort of a settlement agreement that will cover just your company?

You know, Danielle, I think it's probably too early to say. I think in general, there will be a lot of consistency among all the companies that are going to be in Illinois. But we have not gotten to that level of discussion with the ICC staff or the other interested parties in the case at this point, so that's a little premature.

OK. Too early. Thank you.

[Operators Instruction]. Next question comes from David Frank from Zimmer Lucas Partners. State your question.

Yes. Hello, good morning, Warner.

Hello David.

I just want to follow up on that last question about Illinois post 2006. Can we just assume that whatever price you sell power at, if it's above the current price that just falls through as incremental margin to the company?

Warner Baxter I think certainly if you look at for instance the two contracts that we discussed a little bit earlier with Doug at 38.50 and 34, to the extent that the margins that the power prices are indeed above that, and you have the ability to contract with those native load entities or the transmission and distribution entities in Illinois, absolutely I think those would fall to the bottom line because those are unregulated entities that we have at least from Ameren's perspective, for our generation supply. So, yes, that would be the case.

And then you think you may be entitled to it sounds like rate hikes on the T&D system for incremental investment and higher operating costs?

Well, I think that in terms of that, I will tell you that there clearly have been incremental investments made in the system and that would include investments at potential Illinois Power acquisition and clearly we have seen rising costs from employee benefits. Of course, the other piece of the regulatory framework relates to appropriate ROE’s and other factors – so, it would be premature to say exactly which way it would go. Certainly some of the pressures would be pointed in that direction.

Thanks a lot.

Thank you our next question comes from Paul Ridzon from Key McDonald. Please state your question.

Good morning, Warner, how are you?

Hi Paul how are you doing?

I am OK. How much flexibility do you have to increase the emissions credits that you can sell?

You know, I think Paul, in terms of our emission credits, what we do first is make sure that we maintain our overall compliance strategy from an environmental standpoint. So that's sort of the first thing we look at. And then secondly when we actually access the market we look at market conditions among other things so to suggest that we would do anything significantly different from what we've done historically would probably not be appropriate because we have to make sure that we meet our overall compliance standards. Because otherwise that could result in increased costs for us.

You just don't have that much flexibility around what you are doing already?

We're very comfortable. Let me just say we're very comfortable with the approach that we've taken historically in terms of our emission credit sales.

I am sorry I joined the call late. I didn't catch with the emission credits for the quarter were or Ameren Energy was for the quarter.

Emission credit sales for the quarter were $15 million versus 1 million in the prior year. And they contributed 6 cents per share. Ameren Energy's earnings for the quarter were 17 cents per share, compared to the prior year of 21 cents per share and that was in line with our expectations due to the strong first quarter in the energy markets last year.

Paul, this is Bruce. We put up our reconciliation up on our web site that you might want to go take a look at also.

Thank you very much.

Thank you. We have follow-up question from Zachary Shreiber, please state your question.

Hi, I just wanted to bring up the two pieces of legislation in Missouri. I think were just introduced in the Senate maybe a few weeks ago and I was wondering what your thoughts were. One deals with building approval coming quicker to build generation plants and there's another one related to a pass through on fuel and purchased power costs.

Jeff, this is Gary Rainwater. I guess my first thought is that neither one are very likely to be passed this year.

OK.

Although conceptually, we support certainly the fuel adjustment concept and pre-approval of investments. We support both of those.

Great. Thank you.

Our next question comes from Greg Oral from Lehman Brothers.

Thanks. Good morning. Warner, I was just wondering if you could update us on what you're seeing on off peak pricing.

Sure, happy to do so. In terms of on peak prices basically what we saw during the first quarter were prices that ranged generally between 40 and $45. Looking ahead we see the second quarter ranging probably somewhere between $35 and $45 and I'm talking about the synergy hub by the way. The third quarter, probably those costs or those prices will range between 40 and $55 and in the fourth quarter those same prices will range between $35 and $40.

I'm sorry those are on peak or off peak.

Those are on peak. (multiple speakers) Let me then tell you about the off-peak. Basically off-peak is pretty straightforward. We're seeing off-peak prices virtually from the first quarter and holding fairly steady throughout the rest of the year ranging between 20 and $25.

That's pretty much in line with expectations?

You know, they are. They may be slightly better than what you may have seen in January, but generally in line. They continue to be pretty solid, even though, again, as we said they were down from the first quarter last year. The first quarter last year was very strong in terms of the power prices. But generally speaking, I would suggest that they are at least in line, if not slightly a bit better than the power forward prices we saw last year.

Thanks.

If you have a question press star 1 on your push button telephone at this time. We have a follow-up question again from Danielle Sykes, please state your question.

Just a couple quickly. (Indiscernible) The Callaway unit is back in service, is there a date or approximately or is there going to be some (indiscernible) in the second quarter as well?

Danielle, this is Gary Rainwater. No, Callaway is not in service right now. We are down for our scheduled refueling outage. It went down on April 10th and it's scheduled to be in 40 to 45 days. It's a little longer than normal because we're replacing condenser tubes.

Yeah, yeah, and yeah.

Which is a major undertaking.

So the cost of the outage will be slightly larger?

Danielle the cost of the outage, if you look at the reconciliation it's not the reconciliation. If you look back at a slide we had last year, that at the end of the year, the outage is expected to be between 11 and 16 cents per share in terms much how that compared to the 2003 earnings. Keep in mind the 2003 did not have a refueling outage. So it may be a little bit north of where it has been historically but I wouldn’t suggest it’s significantly north of that.

Great. And I don't think I caught if you said -- did you have a date for the conclusion of these -- of your acquisition of Illinois power, a tentative date as to when you feel the authorization will be obtained?

At this point, we believe we're still on target to have the acquisition completed by the end of this year, of 2004.

Thanks a lot.

[OPERATOR INSTRUCTIONS] I will now turn the conference back to Mr. Baxter. Please go ahead, sir.

Thank you all for participating in this call. Let me remind you again this call is available through May 6th or playback for one year through the Internet. The announcement carries instructions on listening to the playback. You can also call the contacts listed on our news release. Those on the call who are financial analysts please call Bruce Steinke. Media should call Tim Fox. Numbers for both are on the news release. Again, thanks for dialing in.

Ladies and gentlemen, if you wish to access the replay for this call you may do so by dialing 1-800-428-6051 or 973-709-2089 with an ID number 350682. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.