阿莫林 (AEE) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Ameren Corporation 2007 second quarter earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS) This conference is being recorded Thursday, August 2, 2007. I would now like to turn the conference over to Bruce Steinke, Manager of Investor Relations. Please go ahead, sir.

Thank you, Eric, and good morning, everyone. I am Bruce Steinke, Manager of Investor Relations at Ameren Corporation. On the call with me today is our Chairman, President and Chief Executive Officer, Gary Rainwater; our Chief Financial Officer, Warner Baxter; the President and Chief Executive Officer of our Illinois Utilities, Scott Cisel; our Vice President and Controller, Marty Lyons; and other members of the Ameren management team.

Before we begin, let me cover a few administrative details. First, due to the expected length of our prepared remarks this morning, we will extend this call by up to 30 minutes beyond our usual one-hour limit in order to allow adequate time for questions. This call will be available by telephone for one week to anyone who wishes to hear it by dialing a playback number. The announcement you received and our news release carry instructions on replaying the call by telephone. This call is also being broadcast live on the Internet and the webcast will be available for one year on our website, www.ameren.com. This call contains time sensitive data that is accurate only as 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 various factors could cause actual results to differ materially from those anticipated in the forward-looking statements. For additional information concerning these factors, we ask to you read the Forward-Looking Statement section in the news release we issued today and the Forward-Looking Statements and Risk Factors sections in our periodic filings with the SEC. To assist in our call this morning, we have made a slide presentation available on our website that provides a summary of recent regulatory and legislative matters in Illinois and Missouri. In addition, this presentation includes a slide that reconciles our earnings per share for the second quarter and first six months of 2007 to earnings per share for the second quarter and first six months of 2006 on a comparable share basis and a slide that compares our full-year 2007 earnings per share guidance to full-year 2006 earnings per share on a comparable share basis. To access this presentation, you may look in the Investors section of our website under presentations or follow the link for the webcast.

Gary will begin this call with an overview of some recent regulatory and legislative matters. Scott will cover the basic terms of the recent Illinois settlement agreement, and Warner will discuss the financial impact and the benefits to shareholders of the settlement. Marty will provide a summary of the Missouri electric and gas rate cases, and then Warner will follow with a discussion of our second quarter 2007 results and 2007 earnings guidance. Then Gary will wrap it up before we open the call for questions. Here's Gary.

Thanks, Bruce. Good morning and thank you for joining us. As Bruce said, this morning I want to start with an overview of some important regulatory and legislative matters. For well over a year we've been managing three significant regulatory and legislative uncertainties: major rate cases in both Missouri and Illinois and legislative issues over the transition to higher electric rates in Illinois. We believe all of those uncertainties have now been resolved. In March and June, AmerenUE received final orders from the Missouri Public Service Commission for pending gas and electric rate cases. As many of you know, our electric rates involved many complex and important issues, including the termination of our joint dispatch agreement, the elimination of our EEI power supply contract, depreciation method changes and our request to implement a fuel and purchased power cost recovery mechanism. Unfortunately, these complex issues were litigated during a time when our company faced a very challenging environment due to unprecedented storms in 2006 and early 2007 as well as the Taum Sauk incident. Consequently, the results of our Missouri electric case were mixed. We were successful on some major issues, such as the treatment of the expiration of the cost based EEI power supply contract and the full inclusion of hundreds of millions of dollars of investment in peaking generation assets in rate base. In addition, from an earnings per share standpoint, the results of our Missouri electric and gas rate cases were generally in line with our earnings guidance at the beginning of this year.

However, the Missouri Public Service Commission denied a request to implement a fuel and purchased power cost recovery mechanism, extended the period over which we will recover investments in our generation fleet and provided us a below normal return on equity. Consequently, the cash flows and returns in our Missouri regulated segment, at least in the interim, will be below where we would like them to be. To be more successful in Missouri, we need to do several things. We need to get the Taum Sauk incident behind us, we need to continue to invest in our system to improve reliability, and most important, we need to meet customers' rising expectations about quality of service. And finally, we need to seek recovery of rising costs and investments on a more regular and routine basis. This is not a new formula for success. It's the same basic approach that successful companies use throughout our industry. While this approach to business is straightforward, execution can be challenging due to events like severe storms. That's why I'm convinced that we need to redouble our efforts to improve service quality -- not just to meet our customers' expectations, but also to reduce regulators' concerns about our system reliability. We have programs in place to move forward on this strategy, and I firmly believe that will result in a better system for our customers and ultimately better returns for our shareholders.

Moving now to Illinois. Last fall, we received an electric delivery service rate order from the Illinois Commerce Commission and related hearing process was completed this spring. As you know, the results of these cases were disappointing, as those orders do not provide us the ability to recover our current level of operating expenses. Consequently, we will continue to experience the negative impact of regulatory lag in our Illinois operations. Again, the environment in which these cases were litigated was extremely challenging due to the issues with the transition to market-based power pricing. Over the last two weeks, we took a significant step towards resolving these issues with our constructive settlement of electric rate issues with key stake holders in Illinois. Legislation necessary to implement the settlement agreement was passed by the Illinois General Assembly last week, and we're hopeful the governor will sign it soon.

While Scott and Warner will discuss the details of the Illinois settlement in a moment, I'd like to first share some of my thoughts. The Illinois settlement is a solution that provides significant benefits to our electric customers and addresses key stakeholders' concerns about how power is to be procured in Illinois in the future. The solution also provides legislative, regulatory and legal stability, and is a viable competitive market in Illinois, all of which are critically important to our customers and our investors. The bottom line isthat the settlement was a costly but critical first step in allowing our operations to get back to normal again -- investing in our energy infrastructure, meeting customers' expectations and seeking fair returns on our investments through the regulatory framework. I'd like to now turn the discussion over to Scott -- Scott Cisel. Scott will give you the details of the Illinois settlement.

Thanks, Gary. Good morning to everyone. Our recent settlement in Illinois is great news for our electric customers. It will help trim the bills of residential and small to medium sized businesses and not for profit electricity customers hardest hit by last winter's rate increase, and provide across the board relief to all of the Ameren Illinois utilities residential customers in 2007. Turning now to page 5 of our presentation, the settlement on rate relief and a new long-term power procurement process is the result of many months of negotiations among leaders of both the House and Senate in Illinois, the office of the Illinois Attorney General, Ameren, Exelon, and generators of electricity in Illinois. Terms of the settlement agreement are set forth in legislation, which was House Amendment number 5 to Senate Bill 1592, in letters to the leaders of the Illinois general assembly and the Illinois Attorney General in a release and settlement agreement with the Illinois Attorney General and in funding agreements among the contributing parties.

As a result of the settlement, electricity customers of the Ameren Illinois utilities -- AmerenCILCO, AmerenIP, and AmerenCIPS -- will receive $488 million in bill credits and refunds and other relief through 2010 as part of an approximately $1 billion statewide relief package. Under the rate relief package, residential customers with all electric homes and those who used large amounts of electricity last winter will receive the greatest benefits. There will also be assistance programs that will target the special needs of eligible low income customers, senior citizens, small businesses and not for profit organizations among others. In addition, all accrued outstanding customer late payment fees will be forgiven. The Ameren companies will be funding $150 million of the approximate $1 billion statewide customer relief program. The Ameren Illinois utilities will provide $60 million of the funding, while $90 million will come from Ameren's non rate regulated generation companies. Should legislation be enacted prior to August 1, 2011, freezing or reducing electric rates or imposing a new tax special assessment or fee on the generation of electricity, then the remaining commitments will expire, and any funds set aside in support of those commitments will be refunded to the contributing utilities and generators.

Another part of the settlement creates a new Illinois power agency or IPA that will have the responsibility for designing a system that procures power for the Ameren Illinois utilities and Commonwealth Edison beginning in June 2009. As part of the changes to the process of procuring power, the existing reverse auction format will be discontinued immediately. The process for 2009 and beyond will be based on acquiring separate base load, intermediate and peaking power products through a request for proposal based process. An independent third party administrator will be hired by the IPA and will use benchmarks as guidelines in evaluating the procurement results for reasonableness. The determination of the utilities' power supply needs, procurement process and procurement results will be subject to review and approval by the ICC, and the utilities will be allowed to fully recover the cost of that power from the electricity customers. Under the terms of the settlement, Illinois utilities may lease or invest in generation assets in the future subject to ICC approval. In 2008, utilities will acquire necessary power requirements for June 2008 through May 2009 subject to ICC review and approval. Existing supply contracts will be honored.

As part of the Illinois settlement, the Ameren Illinois utilities also entered in a financial swap agreements with Ameren Energy Marketing to lock in price for a portion of their baseload power requirements from 2008 through 2012 at relevant market prices. If the legislation is enacted into law after August 3rd, then the new market prices will be set when the legislation is enacted. The Illinois attorney general's office has also agreed to withdraw all pending litigation and regulatory actions relating to the reverse auction power procurement process and electric space heating marketing activities of the Ameren Illinois utilities.

Other terms of the settlement include a renewable portfolio standard, a schedule for certain customer classes being declared competitive, regional transmission organization membership allowed through at least 2022, and requirements for energy efficiency and demand response programs. In addition, the settlement includes the re-establishment of the accelerated review of utility restructurings by the ICC, including the ability to merge our three Illinois utilities and restrictions on cutting off service to residential customers. We believe this settlement agreement provides much-needed stability for Illinois utility industry, and through the active participation of the Illinois General Assembly and the Illinois Attorney General, has created a new public policy direction for electricity procurement in the state of Illinois. I will now turn it over to Warner, who will go through the earnings impact of the settlement and the key benefits to shareholders.

Thanks, Scott. I will first return to page 6 of our presentation. As you can see on the slide, the total rate relief and customer assistance program benefits to Ameren Illinois Utilities customers, Ameren subsidiaries' funding of the program and the earnings per share impact of this settlement is spread across four years. Financial impact of the settlement will show up largely as a reduction in revenues, with cost increase in expenses. The total impact to Ameren's earnings per share is expected to be about $0.45 per share spread across four years, including $0.26 per share in 2007.

I'd like to now highlight some key benefits of this settlement to Ameren shareholders. First, the comprehensive settlement was hammered out between virtually all key stake holders, and it not only addresses short-term rate relief but it also addresses future power procurement -- critical long-term issue. In addition, the settlement resolves significant legislative, regulatory and legal uncertainties. We were fully prepared to aggressively litigate any adverse legislation that may have been enacted. We felt strongly about our arguments on the legal merits. The simple fact of the matter is that even if rate freeze legislation was overturned by the courts, the operating environment would remain very challenging in Illinois from a variety of perspectives. We intend to be an operator in this state for a long time and operating in that type of challenging environment was not in our best interest.

The settlement also eliminates the risks associated with the bankruptcy filings that could have occurred assuming the courts did not provide timely or adequate relief from imposed rate rollbacks and freeze legislation. Needless to say, the operational and financial risks associated with bankruptcy filings would have been very significant. Of course, in the long run, the biggest losers under this scenario would have been our customers and the state of Illinois. Electric and gas supplies could have been disrupted and ultimately rate payer bills would have risen dramatically, as they did in California. Under a litigated scenario, we would have also incurred significant incremental costs. Most obvious was the potential cost of refunds to customers resulting from a rate rollback as well as the inability to recover on a going forward basis our power procurement costs. A generation tax could have also cost our non rate regulated generation subsidiaries up to $350 million annually based on certain legislative proposals. In addition, while challenging these legislative initiatives as well as the Attorney General's lawsuits and regulatory actions, Ameren would have incurred significant additional litigation costs and professional fees. In fact, we already have. Additional incremental costs will now be avoided. Under a litigated scenario, we also expected that our credit ratings would have fallen dramatically, ultimately resulting in higher financing costs. Without rate relief for our customers under a litigated scenario, we also believe our bad debt expenses would have increased meaningfully as well.

Other benefits of the settlement include the fact that the agreement does not include any rate caps or revenue deferrals, which will improve our cash flow relative to deferral plans that were considered. In addition, there is no prohibition on filing new electric delivery services cases in Illinois. As Gary alluded to earlier, last year we sought a $200 million electric rate increase for our Illinois electric delivery service businesses. The Illinois Commerce Commission granted the Ameren Illinois utilities only $97 million of electric rate increases, which included the disallowance of about $50 million of costs and a 10% return on equity. With the cost disallowances and the cost of service in those cases, basically based on a 2004 test year, returns for the Ameren Illinois utilities are expected to be less than 5% in 2007 -- which doesn't include the cost of the settlement, which will not be recoverable from rate payers. As a result of these lower terms, we plan to file additional delivery service rate cases at the end of this year, and this settlement facilitates that.

As I stated earlier, another benefit of this comprehensive settlement is that it addresses not just short-term rate relief, but also the longer term power procurement process. As a result, we now have the buy-in of legislative leadership, Illinois General Assembly and the Illinois Attorney General's office for the future road map for power procurement in the state.

In addition, it is important to note that the ICC's regulatory powers are not diminished by this legislation. In fact, the ICC will continue to play a significant role in this process, including ultimately approving the power procurement proposals. This should create stability for the Illinois energy market, which benefits our non rate regulated generation subsidiaries' ability to sell power in an open, transparent and competitive marketplace. Further, our Illinois utilities should be able to procure that power for a price that reflects a much less risky marketplace. As part of the settlement agreement, Ameren's non rate regulated generation subsidiaries -- through our marketing subsidiary -- have entered into financial price swap agreements with the Ameren Illinois utilities -- to lock in prices for a portion of the baseload power requirements 2008 through 2012. These price swap agreements will provide some additional price certainty for our customers and the company. The annual megawatt hours sold under these price swap agreements will range from 2.1 million megawatt hours in 2008 up to 8.8 million megawatt hours in 2012. These price swaps were done at relevant forward market prices, which are subject to renegotiation if legislation is not enacted by August 3. It fit nicely with our desire to hedge our open generation positions. We also intend to actively participate in the future power procurement processes.

Finally, today's settlement allows management to continue to focus on implementing Ameren's strategy to be a performance leader in the safe and reliable delivery of natural gas and electricity. We believe this benefits all stakeholders. I would now like to turn it over to Marty to provide an overview of the Missouri Public Service Commission rate orders we received in the second quarter.

Thanks, Warner. In June, we received a final electric rate order from the Missouri Public Service Commission which granted an increase in annual revenues of $43 million. This is in addition to a $6 million annual revenue increase that was granted in March in our gas rate case. As Gary mentioned earlier, the earnings impact of the Missouri electric and gas rate cases was generally in line with previous earnings guidance. The net 2007 earnings impact of the orders is slightly better than the $103 million annual increase that was embedded in our 2007 earnings guidance. Our original guidance assumed this rate order would become effective at the beginning of June and that about 60% of the annual impact would be recorded in 2007, which was consistent with the timing of the order. That $103 million annual increase represented the arbitrary midpoint between AmerenUE's and the Missouri Public Service Commission staff's rate recommendations. Our original guidance also assumed no other earnings impacts would result from the order. In fact, the order will result in an approximate $58 million annual reduction in depreciation and income tax expense in addition to the $43 million revenue increase. The decrease in depreciation expense results from extension of the time periods over which capital investments in our Callaway nuclear plant and other generating plants will be recovered. This was a driver of the lower than requested rate increase in our electric case. Similarly, a change in the manner in which income taxes are reflected in rates over time lowered the rate increase awarded and will also result in similar reductions for financial reporting purposes. While these reductions benefit net income, they did, as noted, decrease the awarded rate increase and negatively impact our cash flows. The order also allowed for sale of up to $5 million of emission allowances which was not included in our original guidance. In addition, the order established tracking mechanisms for pension and post retirement medical costs and emission allowance sales margins above $5 million annually.

A reconciliation of the total net income effect of the Missouri rate order is shown on slide 14 of our presentation. We as well as other parties in the case have appealed certain aspects of the order to the Circuit Court. Of course we cannot predict the outcome of those appeals. As Gary mentioned, with increasing fuel and purchase power costs and lacking a passthrough mechanism coupled with increased capital and operations and maintenance expenditures targeted at enhanced distribution system reliability, we do expect to be entering a period where more frequent rate cases will be necessary.

Another important matter currently being addressed in Missouri relates to the environmental cost recovery mechanism that was enabled by Senate Bill 179. Rulemaking workshops are currently being conducted by the Missouri Public Service Commissions staff, aimed at development of rules governing application for and use of environmental cost recovery mechanisms. We are hopeful that we could apply for use of an environmental cost recovery mechanism enabled by Senate Bill 179 by the time of our next rate case. Separately, the Missouri Public Service Commission has proposed vegetation management, infrastructure inspection and reliability rules. The proposed rules could significantly add to the cost of maintaining our Missouri energy delivery system. The ultimate cost to the rules is subject to their final terms, and of course we would anticipate that most of such costs would be recoverable in rates. Finally in Missouri, we continue to pursue the settlement of all liability-related matters related to the Taum Sauk Plant incident. We remain committed to working with Missouri authorities involved with this incident to resolve this matter as soon as possible and begin the rebuilding of the Taum Sauk plant.

That completes my discussion of Missouri matters. I will now turn it back to Warner for his review of our second quarter earnings and revised 2007 guidance.

Thanks, Marty. I would now like to refer you to page 16 of the slide presentation on our website as I provide a more detailed discussion of our earnings for the second quarter of 2007. This presentation reconciles our earnings per share for the second quarter and first six months of 2007, our earnings per share for the second quarter and first six months of 2006 on a comparable share basis. In addition, this presentation includes a slide that compares our 2007 GAAP and non-GAAP earnings per share guidance to full year 2006 earnings per share on a comparable share basis.

For the second quarter of 2007, we reported net income of $143 million or $0.69 per share compared to net income for the second quarter of 2006 of $123 million or $0.60 per share. Net income for the first six months of 2007 was $266 million or $1.29 per share compared to $193 million or $0.94 per share in the first half of 2006. Second quarter and first half 2007 earnings were not impacted by the recently announced Illinois rate relief and customer assistance settlement. Costs associated with this settlement will be recorded in the company's 2007 third quarter and future periods should recently passed legislation be enacted by the Governor of Illinois. Our second quarter's earnings benefited principally from higher power prices for sales from our non rate regulated generation business segment and warmer summer weather. These benefits were reduced by a planned maintenance and refueling outage in AmerenUE's Callaway nuclear plant, and the regulatory lag associated with higher fuel costs and increased costs of operating and investing in our utility businesses.

Electric margins improved by $0.26 per share, primarily due to higher electric margins in our non rate regulated generation business segment due to the replacement of below market power sales contracts that expired in 2006. Those contracts were replaced with higher priced market-based contracts in 2007. Electric margins in Ameren's rate regulated business segments benefited by $0.05 per share primarily because of greater cooling demand caused by warmer summer weather. Cooling degree days increased 12% in the second quarter of 2007, compared to the same period of 2006, and were 30% above normal. Higher costs for fuel and related transportation, primarily in our Missouri regulated operations, reduced electric margins by approximately $0.05 per share in the second quarter of 2007 compared to the year-ago period. Planned maintenance and refueling outage in AmerenUE's Callaway nuclear plant reduced Ameren's second quarter net income by $0.16 per share. Second quarter 2006 included an unplanned outage, which reduced that period's earnings by $0.07 per share. So the total incremental cost of outages at the Callaway nuclear plant was approximately $0.09 per share.

Labor and benefit costs increased $0.02 per share in the second quarter of 2007 from the second quarter 2006, primarily due to higher levels of maintenance work in our non rate regulated generation operations. Bad debt expenses increased $0.03 per share in the second quarter of 2007 from the same period in 2006, almost entirely in our Illinois regulated operations as a result of higher electric rates. Due to the higher rates and discussion of potential rate freezes and settlements, we are experiencing very high levels of past-due balances in our Illinois regulated business segment. With last week's settlement and the end of the moratorium on disconnections this fall, we expect those balances to be significantly reduced over the next few months.

Depreciation and amortization expenses increased $0.02 per share, primarily because of capital additions in 2006 and the start of amortization of a regulatory asset associated with acquisition integration costs at AmerenIP in 2007, as required by an ICC order. Second quarter 2007 dilution and financing costs increased $0.04 per share as a result of continued investments in power generation and delivery systems and higher borrowing costs resulting from the recent credit rating downgrades largely associated with the legislative uncertainties in Illinois. Reduced costs in the second quarter of 2007 associated with the Taum Sauk Plant's upper reservoir breach improved earnings by $0.05 per share relative to last year. Finally, other items netted to a negative $0.02 per share.

Turning now to our updated 2007 earnings guidance in slide 17 in our presentation, this morning we announced that we have updated our 2007 nonGAAP earnings guidance. We now expect nonGAAP 2007 earnings to range between $3.15 and $3.40 per share, and GAAP earnings to range between $2.80 and $3.05 per share. The 2007 nonGAAP earnings per share guidance excludes the $0.09 per share negative impact of the severe January 2007 storms; the estimated $0.26 per share negative impact in 2007 of the recent agreement among parties in Illinois to provide comprehensive rate relief and customer assistance; $0.05 per share positive impact resulting from the reversal of accruals made in 2006 for low-income energy assistance and energy efficiency program funding commitments in Illinois; and the $0.05 per share negative impact of a Federal Energy Regulatory Commission order retroactively adjusting prior years' regional transmission organization costs. Our updated earnings guidance includes the impact of actual results for the first half of 2007 and our expectations for the balance of the year.

In summary, we have lowered the upper end of our original guidance as the major rate cases in Missouri and Illinois have been decided by regulatory agencies, and due to lower than expected power plant output and other increases in operations expenses, including reliability spending. I'll highlight some of the more meaningful changes in our forecasted operating results from our original expectations at the beginning of the year. Missouri and Illinois rate regulated margins have been adjusted to reflect the rate case decisions in those states in the second quarter. As Marty indicated, the outcomes of the Missouri rate cases were slightly better than we had included in our guidance. On the other hand, in May, on rehearing, the Illinois Commerce Commission denied the recovery of $50 million of costs that were initially disallowed during last year's electric delivery service rate cases. Our guidance included the arbitrary midpoint between our $50 million request and the staff's recommendation of no increase on rehearing, or a $25 million annual increase effective June 1. As a result, Illinois regulated margins are expected to be $0.05 per share lower than our original guidance. Other electric margins are expected to be $0.06 per share lower than our previous guidance. This decrease is principally because of a recent FERC order that will increase future purchased power costs for AmerenUE under a cost-based contract.

In addition, we have experienced higher MISO Day-2 costs and longer than expected maintenance outages in our non rate regulated generation operations, resulting in lower than expected power plant output and related electric margins. Offsetting the lower other electric margins, we now expect fuel costs to be about $0.06 per share better than our original guidance. In addition, weather to date has tracked better than normal, adding $0.05 per share to our expected earnings guidance. As I mentioned earlier, the AmerenUE's Callaway nuclear plant had a planned refueling and maintenance outage in the second quarter. Earnings impact of this outage was about $0.02 per share higher than we had included in our previous guidance. Reduced coal plant availability, I mentioned earlier, has also contributed to an expected $0.04 per share increase in maintenance expenses over our original estimate. As many of you may have seen, in July we announced an initiative to improve the reliability of AmerenUE's electric distribution system. This initiative is expected to contribute to a $0.03 per share increase in expected distribution system reliability costs in 2007. Dilution and financing costs are projected to be $0.06 higher than our previous guidance, due primarily to credit rating downgrades because of the legislative uncertainties in Illinois. Those downgrades resulted in increased borrowing costs and higher levels of borrowings for our operations. Finally, other items netted to a positive $0.05. As usual, our guidance assumes normal weather and is subject to, among other things, regulatory and legislative decisions, plant operations, energy market and economic conditions, severe storms, unusual or otherwise unexpected gains or losses and other risks and uncertainties outlined in the forward-looking statements section, our news release and our filings with the SEC. This completes my comments. I will now turn it back to Gary to wrap up.

Thanks, Warner. As I mentioned in my opening comments, we believe we've now resolved three major uncertainties we've been working on for well over a year. While the solution in Illinois was costly, it allows to us return to serving customers and creating value for shareholders. Our goal is to be the performance leader in our industry, with a focus on our core business of safely and efficiently generating and delivering electricity and natural gas to our customers. During the last year, we've not been a performance leader in all aspects of our business. Unprecedented storms, the Taum Sauk Plant incident and the final implementation of deregulation in Illinois have all presented challenges, fair or otherwise.

If we've learned anything over the last year, it is that we need to maintain our focus on meeting our customers' expectations. Our strategic plan includes hardening our distribution system in order to meet these increasing customer expectations. Over the next few years, we'll also make significant investments to address various environmental rules and regulations. All these plans will result in increases in operating expenses and capital expenditures. As a result, we expect to file more frequent rate cases in order to increase our cash flows that are so critical for making timely investments in energy infrastructure and for improving returns in our regulated businesses. While many of our comments this morning have focused on our regulated businesses, we've not lost our focus on our non rate regulated generation business. We will continue to invest in this segment to improve our power plants' productivity. In addition, we look forward to continuing to participate in the competitive marketplace in Illinois and elsewhere, in order to grow our earnings in this segment of our business. We will remain focused on all these key regulatory, legislative, and operating matters in order to provide solid returns to you, our shareholders. We'll now be happy to take your questions.

Ladies and gentlemen, we will now begin the question and answer session. (OPERATOR INSTRUCTIONS) Our first question comes from Paul Patterson with Glenrock Associates. Please go ahead.

Paul?

We appear to have lost Mr. Patterson's line. Our next question comes from Ashar Khan with SAC Capital. Please go ahead.

Good morning.

Good morning, Ashar.

With the rate case, how should we look at the fuel cost going forward after 2007? Is it going to increase at this large rate of $0.28 or that was a function of the Missouri case, some in the revenue line? Could you provide us a little bit hint how we should model the fuel costs going forward?

Sure, Ashar. I think with regard to fuel costs going forward in 2008, we do expect fuel costs in general across our system to rise about 5 to 10%. When you look at the Missouri regulated operations, we expect them to contribute about 7 to 10% in general, probably closer to 9%, something like that in terms of their overall rate increase. So obviously then to the extent as you want to model that, we do not have a fuel adjustment clause as we stated. That obviously will put some pressure on overall costs in regulatory life.

So is it safe to say that could be like $0.28 next year as well?

I think what we saw year-over-year -- the increase this year was perhaps a little bit more sizable than what we had seen in the past, especially in our Missouri-regulated operations. In fact this year, the costs went up approximately 15 to 20% compared to the prior year. Depends on what you're comparing it to. $0.28 was compared to last year. You won't see that same level of trajectory at least in 2008.

Okay. Warner, if I heard correctly, we should expect a filing in Illinois at the end of the year and that would mean that new rates would be effective really at the end of 2008 and helping 2009 earnings. If I heard you right, you won't file a Missouri case until the laws on the environmental rider have been finalized, which would imply that a case might be more filed in the 2008 timeframe for rates becoming effective in 2009. Am I timing these regulatory developments in the right ballpark?

Sure. Let me comment first on Illinois. With regard to Illinois, we said that we would file a rate case -- we expect to file a rate case by the end of this year. So we didn't say specifically it would be at the end of the year. Sometime between now and December 31, we expect to file an electric delivery rate case as well as a gas rate case. With regard to Missouri, we have not made a final decision as to when we will file our next Missouri electric rate case. There's several factors that will go into that, including the expenditure levels that we're incurring related to reliability as well as capital investments. We'll be mindful of what goes on with the environmental rulemaking process, but I would not say that would prohibit us from filing our rate case in advance of those rules being finalized.

Just finish off with how are you -- have the CapEx budgets changed any significantly from what you presented to us at the beginning of the year, and how are you looking at the funding needs? Any change in the CapEx and in the funding needs from your analysis which you presented at the beginning of the year?

Sure. Ashar, as you know, we always continued to take a look at our overall capital expenditure. But one thing we have announced very clearly was our Power On! project in Missouri. There we've been very clear in terms of investing incremental $300 million over the next three years for undergrounding as well as some other incremental investments from a capital standpoint for environmental purposes, some of which was already incorporated into that guidance. You look at our overall capital expenditure guidance that we provided, we provide a fairly wide range of expenditures for each of our entities. And so at this point in time, the expenditures that I discussed for Missouri fall within that range. We continue to look at overall capital expenditure budget for environmental expenditures, for reliability spending and the like. And when we finalize our plans, we will update our capital expenditure budgets accordingly. But at this point in time, we have no further update.

No further update. And similarly, on financing, you have not contemplated any equity offering. Is that still the case?

At this point in time, until we have finalized our financing, we would not have completed any specific equity offerings. At this point in time, we have no equity offerings specifically on the table, but as we continue to move forward, we'll continue to weigh our overall capital structure for all of our entities.

Thank you, sir. You're welcome, Ashar.

Our next question comes from Paul Patterson of Glenrock Associates. Please go ahead.

Can you hear me?

We can hear you now.

Sorry about that. I'm sorry, but I got disconnected. Did you guys give an idea about what ROE were expected to be in 2007?

As we said in our call just a few moments ago, we expected our Illinois GAAP ROEs will be below 5% this year, and that excludes the impact of the settlement which obviously will lower that ROE. On a GAAP basis, those numbers are very low. With regard to Missouri, I don't know if we have any specifics. I think if you look at our overall guidance that we have reflected on the nonGAAP basis in our call, which is $305 million -- if you look at the overall capital structure there, that would put us somewhere between 9 and 10% would be my guess on a nonGAAP basis. Of course, if you looked at it on a GAAP basis, it would back out the impact of the storms, the impact of the FERC order -- it would be even lower than that.

When we think about your filings, we're going to be thinking about known and measurable differences, which would pretty much exclude a lot of these GAAP items, correct?

It certainly could to the extent that it did the test year. And other factors that you'll need to consider -- that we will need to consider will be potentially increased spending associated with our reliability programs which aren't necessarily reflected in our six-month numbers and certainly fully in our guidance today. As Marty mentioned, there are certain reliability rules that are being contemplated in the state of Missouri which could impact future periods. So all those things will weigh into the overall ROEs to be earned in Missouri and what the ultimate rate increase request would be going forward.

Okay. Then the FERC MISO Day-2 and the other costs that you elaborated on the call as different than your previous guidance -- when would you expect to be able to recover those from retail rate payers? What's your thought with respect to those?

With regard to both of those items, the first item related to our Missouri regulated operations. That was a cost-based contract where a recent FERC order basically allows the counterparty to charge us more costs under that contract. In a future rate case, we would contemplate recovering those costs in Missouri. The other piece relates to the MISO Day-2 costs. Those Day-2 costs or those incremental costs are incurred throughout all of our operations, including our non rate regulated generations segment. A portion would have to be born in the marketplace. Some of those would be reflected in future rate cases in both Missouri and potentially Illinois. But primarily Missouri.

When we're talking about the higher plant operation maintenance costs, are a lot of these things sort of temporary in nature, or do you see longer term costs associated with the plant? Has there something changed in the long-term operational -- the O&M expense going forward in the generation, the non rate regulated generation business that you guys highlighted in the quarterly earnings report?

Certainly as we said in the past, one of the things we're very focused on in our non rate regulated generation segment is the improvement of those plants' operations and their output. And so we are investing more in those plants both on a capital perspective as well as from an operations maintenance perspective, with those plants hopefully improving those plants' output in the long run. So we do expect to continue to have investments -- whether they're incremental year-over-year, that's too difficult to say right now. And this other issue that we'll will be encountering there in the non rate regulated generation segment will be the incremental expenditures that we'll have to incur to meet the existing environmental rules in the state of Illinois that would pass a little bit earlier.

Okay. Thank you.

You're welcome.

Our next question comes from Greg Gordon with Citigroup. Please go ahead.

Thanks. I have just a clarifying question on the rate settlement. Just to be sure I heard it correctly -- if the Illinois state government were to violate the terms of the settlement, not only would you not have to disburse future rebates but you would also be able to terminate the power contracts you've signed. Is that a correct interpretation?

Hi, Greg. This is Warner. That is correct. Basically, the way the power supply agreement works is that should that law, rate freeze or generation tax be enacted, then we would then go back with the counterparty to try and renegotiate a new deal. And should a new deal not be successfully negotiated within 60 to 90 days, then that contract can't be terminated.

Okay. Thank you.

You're welcome.

Our next question comes from Paul Ridzon with KeyBanc Securities. Please go ahead.

Warner, are you going to talk about the pricing on the swaps? I know you indicated it was market based, but are we going to see a quantitative number there?

Paul, at this point in time, we're not disclosing the prices because the law has not been enacted nor have those contracts been finalized. Later in the year, once those things have been done, we would expect to give some guidance around the pricing of those contracts similar to some of the guidance that had to be provided after the auction was consummated at the end of last year. So you should expect to hear some pricing guidance once it is ultimately done and the governor enacts the legislation into law.

Thank you.

Our next question comes from Scott Engstrom with Blenheim Capital Management.

Please go ahead.

Good morning. The more things change, the more they stay the same. I was just wondering if you could take off earnings by the reporting subs for me.

Sure. We're always ready for you, Scott. You ask the same question -- even though we're ready, we always have to scramble a little to try and find the actual case number. Let me go through the -- I'll give them to you for the second quarter.

Fine.

For the operating segments, UE was $79 million, CIPS is $5 million, GenCo is $17 million, CILCORP is $12 million, and IP is $7 million.

Great. Thanks. Then if I could follow up with just a broader question. Just wondering -- when you bring the new forecast to the board, can you talk about their reaction? Can you give us a sense of I guess -- I hate to ask a personal question, but what is kind of their accountability -- your accountability to them when you bring this? Have you reached any formulaic things which impact your personal salaries or just give us a sense of one way the board might look at it is -- gee, you've had a lot of challenges. You came up with a positive resolution -- congratulations, let's move forward. I can see the other way, sort of another -- lowering your business forecast, let's get it together. Can you give us a sense of what that relationship's been like?

Scott, we have a board meeting next Friday, so we'll face those kinds of questions again next Friday. We have kept in very close communications with our board, particularly on the Illinois issues for months now. We've had almost weekly board meetings. So the board has suffered through the politics in Illinois along with us. Our view is the settlement in Illinois is the best settlement that we could get. While it is painful, it is costly -- it is far better than going to war with the state. And the results for shareholders would be far worse if we chose that path. So I think our board supports the settlement. Now with that said, the board also looks at the results, and the board will be disappointed with the results as we are. And we do believe the solution is in the regulatory arena and more regular, more routine rate cases as I said, and getting better results in rate cases. You can't get good results in rate cases when you're facing the kind of political contentious issues that we have, particularly in Illinois but even in Missouri. Again, as I said a few minutes ago, we have put most of those issues behind us and should get better results the next time around.

Thanks.

Our next question comes from Daniele Seitz with Dahlman Rose. Please go ahead.

Yes. Do you have any plans as to the procedures for this Taum Sauk situation and how long it would take to rebuild a plant and how much it would cost?

Hi, Daniele. This is Warner.

Hi.

With regard to the Taum Sauk matter as a whole, we continue to work very closely with all of the Missouri authorities to try and get resolution of that matter. We've been doing that obviously for a long period of time and we're hopeful to find resolution of that as soon as possible so we can move forward with the rebuild of the plant. The overall time period for the rebuild of the plant frankly can't start in many respects until those issues are ultimately resolved. But that time period for the rebuild of the plant, if I'm not mistaken, is a couple year time period. So this is not something that's going to be back up online any time soon. But we're anxious to move forward on that as quickly as possible. As we've said in the past with regard to the rebuild of the plant and certainly with regard to the liability issues, we do have insurance. We believe the vast majority of the costs associated with both the rebuild as well as the liability that we have incurred for Taum Sauk are covered by that insurance policies. So to that extent, that will certainly help whatever cash flows we have associated with the overall rebuild of the Taum Sauk Plant.

In terms of rate increases, since the rules seem to be that you should be recovering all of your costs et cetera on the regulated side in Illinois, and is there a reason why you are waiting to file again?

Well, frankly, Daniele, one of the things that we had to make sure was get past this settlement. We're been in active negotiations for months. It would not have been prudent for to us pursue another rate case in the middle of the settlement discussions --

No, I understand, but you said that you might be filing at the end of the year?

Yes. Here we are on August 1. We are simply a few months away from the end of the year. Of course whenever we want to file a rate case, we want to make sure that we have everything in order and that's exactly what we're doing. We're getting our management team focused on putting everything in order, if you will, to proceed with that rate case.

And your best estimate as to when you will get a decision is roughly?

Typically, Daniele, that's an 11-month time period.

Okay. Thank you.

You're welcome.

Next question comes from Doug Fischer with A.G. Edwards. Please go ahead.

Good morning.

Good morning, Doug.

Good morning, Warner. Couple of questions. Number one, as you look forward with hopefully soon this Illinois settlement finalized, what are you thinking in terms of credit rating goals across the units and at a consolidated basis and capital targets as you move into increased CapEx environmental across the company?

Sure. I guess with regard to the credit ratings targets in part a little bit of that is out of our hands because rating agencies, we believe, will be a little bit slow to move our credit ratings back up due to the legislative uncertainties which took place in Illinois. As you've seen -- some of the reports, I believe Fitch came out yesterday. We expect the negative outlooks generally to be lifted either to be stable or potentially positive outlooks ultimately for the Illinois subsidiaries. We do not expect that the rating agencies will quickly move those ratings up. We'll wait and see how things settle out in Illinois here over the next several months and then we'll make some of our decisions. They have not indicated to us any specific time period, so in part that will be dictated by that. Of course the other piece which will impact our ratings will be our cash flows. And as Gary and I alluded to and Scott as well, very significant spending with regard to capital expenditures reliability both from a capital as well as an O&M perspective. So our goal at the end of the day obviously is to get the existing ratings up from where they are at because they are obviously costing in particular Illinois entities money due to the downgrades. Secondarily, when you look at the long-term goals, we've obviously been hovering towards a triple B plus and A minus type of credit rating that we would -- as we move forward, whether we will be able to maintain Triple b plus type of credit ratings remains to be seen, given the level of capital expenditures and whether we'll be able to get timely rate relief from the various state agencies. So I'm not prepared to say exactly what our specific target will be. Obviously strength in terms of our overall balance sheet is important because it gives you flexibility, but at the same time we have to be mindful of the significant cash flows we're going to be addressing here in the future, especially in our regulated businesses.

So you're not prepared to give us capital structure or ratio targets that you might be targeting versus -- as opposed to the ratings?

I think with regards, we have said in the past -- we have hovered around that 50% metric to equity. And of course that's generally where we would like to be going forward, especially on our regulated businesses. Whether that makes sense for our nonregulated businesses, which are generally in the 45 to 50% cap equity content of their capital structure, we'll have to take another look at that.

And then as you -- for the baseload non rate regulated, as you add a significant environment equipment, make some comment about what the impact might be on the level of output in megawatt hours and also O&M as we look out over the next few years? And when might we face some material changes there?

With regard to the environmental capital expenditure programs, obviously, we've documented the size of that environmental capital expenditures here over the next several years. Much of that will begin in part in '08. We expect to see more of the O&M components related to our environmental CapEx starting to occur in 2009. In terms of overall output, we're making other improvements to the plants. It would be premature for me to say just exactly what we expect the output to be from our non rate regulated generation plants. This year, it's been somewhere between 30 to 32 million megawatt hours. As we give our guidance for 2008 and beyond, we'll be a little bit more specific in terms of what we think that output will be, going forward when we finalize all of our environmental plans.

Doug, one other comment on output. We wouldn't expect to see a major change there. Environmental equipment will use some power. On the other hand, we will be able to make improvements that we couldn't make before because of concerns about new source reviews. As those concerns go away, we can make efficiency improvements that roughly balance the load losses due to environmental stuff equipment.

Thank you, Gary. That concludes my questions.

Our next question comes from Dan Jenkins with State of Wisconsin Investment Board. Please go ahead.

Good morning.

Good morning, Dan.

I had a couple questions about the Missouri rate order and process -- you mentioned you litigate certain issues. I was wondering if you could run down what those are.

Sure, Dan. This is Marty Lyon. In terms of the litigation that's before the Circuit Court in Cole County, primarily the issue that we've taken there is the ROE issue. As you know, we asked for 12% ROE in our electric case and were awarded a 10.2% ROE. Net 10.2% ROE is lower than what we've seen awarded recently in Missouri to other electric companies doing business in the state. So we've taken that issue to the Circuit Court as well as one other matter dealing with a requirement imposed on us to fund some social programs without reimbursement rates. Those are the issues we've taken. You should know the Attorney General and the Office of Public Counsel have also filed appeals at the Circuit Court and they have continued to argue some of the other issues that were debated in the rate case, including the status of that EEI power contract, ROE, the level of off system sales embedded in rates, the values of some of the peaking generation assets that were put into rate base as well as other issues. So there are a host of issues before the Circuit Court, and at this time, we really don't have any specific timeframe where we would expect a resolution in the Circuit Court.

Okay. Also, I was wondering given the order on the plant lives, extending the plant lives particularly at Callaway, is that -- does that impact any timing for asking for a license extension with NRC? As far as, you know, would you file that sooner?

I'm sorry, this is Warner. With regard to the license extension, I don't think that necessarily impacts any of our timing with regard to that. We still have several years before we would have to ultimately go in for relicensing on that. But I don't think it meaningfully impacts what we would do in that regard.

I'm wondering if you could just give me some clarification on the fuel clause issue. It seems kind of counterintuitive that they would reject the fuel clause given the legislation was just passed and they just implemented rules to enact the fuel clause but they would then turn around and say that they didn't see a need for a fuel clause, seems kind of --

Well, Dan, I guess obviously, we felt very strongly that a fuel adjustment clause was warranted in our facts and circumstances, and we believe we felt we would put together a very strong case showing not just the significance but also the volatility of our fuel cost. We're obviously experiencing and seeing that in our operations -- as we discussed. The Commission viewed a number of different factors and ultimately made a decision that they did. It's important to note that the Commission fairly explicitly in the orders said we're not precluded in any future rate cases to seek another fuel adjustment clause. You should expect as we go forward that that would be another component of our next rate case in the Missouri regulated operations.

Did you get any sort of feedback on what maybe you didn't provide this time that they wouldn't want to see next time to be in a position to enact that?

When obviously as you sift through the case and you read through the order and you listen to the Commission's comments along the way, I think that they look frankly at our overall hedging strategy as being pretty effective. Two, they looked at our overall coal fleet being not -- pricing not being as volatile as the gas fleet. And I think in part they deemed it wasn't as volatile, so therefore we may be able to manage the increases in fuel cost along the way. Another factor is that they looked at overall off-systems sales margins and what amount they ultimately put in base rates and whether we could achieve not only that level but also amounts in excess of that, thinking that it may indeed offset some of the increases in fuel costs. So I think all of those issues -- and I can't speak for the Commission --- but just in participating in the hearings, listening to their sessions, those were at least three of the factors that went into their thinking. Whether those issues were still valid the next time we go in remains to be seen, at least from their perspective.

The last thing I was wondering is given the settlement of Illinois and the swaps agreement, you mentioned that once the legislation's enacted, you'd give us some price guidance. Was also wondering if you'd be able to update just how much the nonregulated generation is hedged given the swap agreement and the settlement?

Sure. I certainly can give you some insight on that. Assuming that the swap agreement would move forward with the megawatt hours that I cited -- for 2008, our non rate regulated generation segment would be hedged approximately 70%. In 2009 our segment -- that operation will be hedged approximately 50%. And then in 2010, it would be closer to 40%. Basically, it falls off about 5% thereafter in both '11 and '12. So as we've said, this gives us the ability, should this agreement continue to move forward, to hedge some meaningful megawatt hours that were out there in the future (inaudible). And at the same time, have an adequate amount of generation available to actively participate in any future procurement process in the state of Illinois.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Our next question comes from Ben Sun with Luminous Management. Please go ahead.

Just a quick question on the settlement. On the contract termination, is it your option or is it tied to the termination of the refund payment?

I'm sorry, Ben. I'm not quite sure I understood the question.

The contract termination on the hedge?

Oh, talking about the swap contract some.

On the swap contract.

Could you ask your question again then, please?

Is the termination of that contract at your option or is the termination of that hedge tied to the termination of the payments to the payment or refund to the customers?

You're talking about if future legislation is ultimately enacted, it's either rate increase or generation tax?

Right.

I think terms of the agreement basically say that we would negotiate in good faith with the parties and try and reach a new agreement to address the potential incremental costs that would be incurred as a result of whatever the change in legislation would be. Should those negotiations not be fruitful, then we have the option then to ultimately terminate that contract.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) At this time, I am showing no additional questions in the queue. I'd like to turn the call back over to management for any concluding remarks they might have.

Great. Once again, thank you, everyone, for participating in this call. Let me remind you again that this call's available through August 9 on playback and for one year on our website. The announcement carries instructions on listening to the playback. You can also call the contacts listed on our news release. For those on the call, who are financial analysts please call Bruce Steinke or Theresa Nistendirk. Missouri and national media should call Tim Fox and Illinois media should call Shelley Epstein. Contact numbers are on the news release. Again, thanks for dialing in.

Ladies and gentlemen, this does conclude the Ameren Corporation 2007 second quarter earnings conference call. You may now disconnect. We thank you for using AT&T teleconferencing.