阿莫林 (AEE) 2010 Q2 法說會逐字稿

Greetings and welcome to the Ameren Corporation second quarter earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Douglas Fischer, Director of IR for Ameren Corporation. You may begin.

Thank you and good morning. I'm Doug Fischer, Director of Investor Relations for Ameren Corporation. On the call with me today are our Chairman, President, and Chief Executive Officer, Tom Voss; our Senior Vice President and Chief Financial Officer, Marty Lyons; and other members of the Ameren management team.

Before we begin, let me cover a few administrative details. 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 in our news release included instructions for 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 at 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. To assist with our call this morning, we have posted presentation slides on our website to which we will refer during this call. To access this presentation, please look in the investor section of our website under Webcasts and Presentations, and follow the appropriate link.

Turning to slide two of the presentation, I need to inform you that comments made on this call may contain statements that are commonly referred to as forward-looking statements. Such statements include those about future expectations, beliefs, plans, strategies, objectives, events, conditions, and financial performance. We caution you that various factors could cause actual results to differ materially from those anticipated and described in the forward-looking statements. For additional information concerning these factors, we ask you to read the Forward-Looking Statements section in the news release we issued today, and the Forward-Looking Statements and Risk Factors section in our periodic filings with the SEC.

Tom will begin this call with an overview of second quarter earnings and our increased 2010 earnings guidance, followed by a discussion of recent business developments. Marty will follow with a more detailed discussion of our second quarter financial results, our 2010 earnings guidance, and regulatory and financial matters. We will then open the call for questions. Here's Tom, who will start on slide three of the presentation.

Thanks, Doug. Good morning, and thank you for joining us. Second quarter 2010 non-GAAP or core earnings were $0.73 per share, compared to second quarter 2009 core earnings of $0.75 per share. These results exceeded our expectations and reflect strong electricity sales and disciplined management of our costs. Key positive earning drivers included a 9% increase in sales electricity to native load utility customers in the second quarter of 2010 compared to the second quarter of 2009.

The higher sales partly reflected a recovering economy. This was evident in the 26% increase in kilowatt hour sales to industrial customers. A significant portion of this 26% increase was due to the return to full capacity in March 2010 of the Noranda aluminum smelter plant, our Missouri utility's largest customer. Even after excluding Noranda's contribution, industrial sales rose 17% at our regulated utilities, driven by strong growth in Illinois. Sales to residential customers rose 4% and sales to commercial customers rose 1%. These increases were driven in large part by early summer weather that was both warmer than that experienced in the second quarter of 2009, and warmer than normal.

In addition to strong sales, our year-over-year results benefited from disciplined cost management across all of our business segments. These cost containment efforts more than offset additional expenses from this spring's refueling and maintenance outage at the Callaway Nuclear Plant. You will recall that the Callaway plant did not have a refueling outage in 2009. The impact of these positive factors on the second quarter earnings comparison was offset by the expected reduction in margins at our Merchant Generation segment. That reduction was a result of lower realized power prices, and higher fuel and related transportation costs.

Turning to slide four. I am very pleased to report that we have raised our 2010 GAAP and core earnings guidance to reflect strong year-to-date earnings and continued expected disciplined cost management. We now expect GAAP and core earnings to be in the range of $2.50 to $2.80 per share, an increase from our prior guidance range of $2.20 to $2.60 per share. Marty will provide further details on our second quarter earnings and our 2010 guidance. However, before moving on, I would like to emphasize that our year-to-date performance and ability to raise our 2010 guidance reflects our management team's commitment to improving earned returns in our regulated businesses. Further, we continue to aggressively manage the costs of our Merchant Generation business so that it remains well positioned to weather current low power prices and benefit from an expected power price recovery. We will not lose focus on these objectives. At the same time, we will not lose focus on operating safely and reliably.

Moving to slide five, I would like to update you on several recent regulatory developments in Missouri, in Illinois, and at the Federal Energy Regulatory Commission. In late May, the Missouri Public Service Commission issued its order for our retail electric rate increase request. The Missouri PSC authorized a $230 million increase in rates effective June 21st, 2010. We were able to settle many of the issues in this case. However, several key issues were decided by the Missouri Commission after hearings, including return on equity, fuel adjustment clause, our reliability tracking mechanisms and depreciation. While we were disappointed with the 10.1% authorized return on equity, we believe the balance of the Commission's order was fair.

In addition to providing electric service to 1.2 million customers in Missouri, we also provide natural gas delivery service to approximately 126,000 customers in the state. In a 2007 settlement, we agreed not to file a new natural gas delivery rate case in Missouri before March of 2010. As a result, this part of our business is currently earning significantly less than its allowed return on investment. Therefore, in June, we filed for a $12 million annual rate increase, and new rates are expected to be effective in May of 2011. Further, we plan to file a retail electric rate case in Missouri by the end of September 2010. Primary driver of this electric rate filing is the need to begin recovering our approximately $600 million investment in the nearly complete Sioux plant scrubbers. This environmental control equipment is key to our Missouri utility's ability to meet increasingly strict air emission standards, including the transport rule recently proposed by the US EPA.

We have also had significant recent regulatory developments in Illinois. This past spring, the Illinois Commerce Commission issued a disappointing rate order for our Illinois electric and natural gas delivery businesses. The ICC authorized a corrected $15 million annual increase in delivery rates. In response, we significantly reduced planned spending levels at our Illinois utilities to align our spending with the revenues and related cash flows provided by the Illinois Commission's rate order while still maintaining safe and reliable service. We are encouraged that in June the ICC agreed to rehear several key issues in the case, and we stand ready to restore important reliability enhancements we have cut from our plans if we receive additional revenues as a result of the rehearing process. Marty will provide further details on the recent Missouri Electric rate order and the Illinois delivery case rehearing in a few minutes.

Moving now to the FERC jurisdiction, on June 1st we implemented updated electric transmission rates that are expected to provide approximately $29 million of additional annual revenue. This rate adjustment reflects infrastructure investment and updated costs and capital structures through the end of 2009.

Turning to slide six, I would like to continue discussion of electric transmission and update you on new transmission investment opportunities we announced this week. We are excited about the benefits we see from growing our investment in the electric transmission business. Customers should benefit from improved reliability and a more efficient regional electric system. Our investors should benefit because we expect to be able to earn attractive returns. We have identified more than $3 billion of transmission investment opportunities in Illinois and Missouri over the next 10 to 15 years, and we are working aggressively but prudently to pursue these opportunities.

We announced this week the formation of a new subsidiary, Ameren Transmission Company, or ATX, dedicated to building regional greenfield electric transmission infrastructure under FERC regulation. Our investment is contingent upon preapproval of supported rate treatment of the projects by FERC. In addition, for us to move forward, the projects would need to be approved by the Midwest independent transmission system operator. We expect to seek appropriate state approvals for the projects as well. Our initial ATX investments are expected to be the Grand Rivers project, the first of which involves building a 345 KV line across the state of Illinois from the Missouri border to the Indiana border. Our investment in the Grand Rivers projects could total more than $1.3 billion through 2021, with a potential investment of $125 million over the 2011 to 2014 period.

I would now like to briefly update you on the reorganization of our Illinois businesses and comment on the US EPA's recently proposed transport rule. Regarding our Illinois reorganization, I am pleased to report that we are close to realizing our long held desire to combine our three Illinois delivery utilities into a single entity to be called Ameren Illinois Company. Further, we will combine the generation subsidiary currently held under AmerenCILCO facility with our other merchant generation assets under Ameren Energy Resources Company. We have now obtained all the necessary regulatory approvals and expect to complete the reorganization on October 1st of this year. As we have previously discussed, this reorganization will bring our legal structure in line with the way we operate our business. We believe consolidation of our Illinois utilities will over time lower costs and increase our efficiency, provide greater convenience to our customers, and improve financial reporting transparency for our investors.

Moving to the transport rule. On July 6th, the US EPA released the proposed new transport rule. The rule is complex, contains alternatives, and is not expected to be finalized until the spring of 2011. As a result, we are still studying the rule and its potential impacts on our business segments. That said, we have a solid history of taking action to reduce emissions. More than 95% of Ameren's coal fired generation is produced using low sulfur Powder River Basin coal. In addition, our merchant generation segment has been executing on a plan to install scrubbers to comply with the Illinois Multi Pollutant Standard or MPS. As a result, we believe our Merchant Generation business is better positioned for compliance with the transport rule than many of its MISO peers. Under the MPS, our merchant generation fleet is required to significantly reduce by 2015 its emissions of sulfur dioxide and nitrogen oxide to levels comparable to those required by the EPA's original Clean Air Interstate rule. Mercury emissions from our larger units in Illinois must be reduced by 90% by 2015.

To comply with state and federal regulations, we have taken a number of actions over the years to reduce emissions from our plants, including installation of selective catalytic reduction and overfire air to control nitrogen oxide emissions and the use of activated carbon injection to control mercury emissions. In addition, we placed new scrubbers into service at the Duck Creek and Coffeen plants in 2009 and 2010. Further, we have plans in place to install scrubbers at our Newton plant and equipment necessary to support dry sorbent injection at our Joppa plant. At our Missouri regulated utility, the Sioux plant scrubbers are expected to go into service later this year. We believe that installing the Sioux scrubbers is the right thing to do for the environment and will also significantly improve our Missouri utility's ability to comply with whatever form the transport rule ultimately takes.

Now I will turn the call over to Marty. He will walk you through the details of our second quarter earnings and our increased 2010 earnings guidance. He will also provide details on recent regulatory and merchant generation developments, and other financial matters.

Thanks, Tom. Turning to slide seven. Second quarter 2010 net income in accordance with Generally Accepted Accounting Principles or GAAP was $152 million or $0.64 per share, compared to second quarter 2009 GAAP net income of $165 million or $0.77 per share. Excluding certain items in each year, Ameren reported second quarter 2010 core net income of $173 million or $0.73 per share, compared with second quarter 2009 core net income of $161 million or $0.75 per share. We excluded one item from our second quarter 2010 core earnings, the net effect of unrealized mark-to-market activities. As a result, GAAP earnings were $0.09 per share lower than core earnings per share. The net unrealized mark-to-market activity was primarily related to nonqualified power and fuel hedges for our merchant generation segment.

Now I would like to discuss the key factors driving the change in core earnings per share between this year's second quarter and last year's second quarter. Regulated electric and gas margins increased $0.21 per share, reflecting a 9% increase in electricity sales to native load customers. The strong increase in sales was driven by the return to full capacity in late March 2010 of Noranda Aluminum's smelter plant, a recovering economy, and warmer early summer weather. We estimate that weather increased second quarter 2010 earnings by $0.05 per share compared to the warm year-ago quarter, and by $0.11 per share compared to normal weather. In addition, operations and maintenance or O&M expenses declined in the second quarter of 2010 compared to the second quarter of 2009, reflecting disciplined cost management. This decrease in O&M was accomplished even though the scheduled Callaway refueling and maintenance outage reduced second quarter 2010 earnings by $0.11 per share, compared to the year-ago period when there was no Callaway refueling outage.

Financing costs declined $0.05 per share in the second quarter of 2010 compared to the year-ago quarter, reflecting greater capitalization of such costs, partly as a result of the recently concluded Missouri rate case and partly because of greater construction work in progress increasing the accrual of allowance for funds used during construction. Key factors negatively impacting the comparison of the second quarter 2010 earnings to second quarter 2009 earnings included a decline in merchant generation margins of $0.22 per share. This margin decline reflected lower realized power prices and higher fuel and related transportation costs compared to the second quarter of 2009. An increased average number of common shares outstanding, primarily due to our September 2009 stock offering, reduced second quarter results by $0.08 per share compared to the second quarter of 2009. Depreciation and amortization expenses rose, reducing second quarter 2010 earnings by $0.02 per share compared to the year-ago quarter.

Moving to slide eight, and a discussion of our increased 2010 earnings guidance. We now expect 2010 GAAP and core earnings from our Missouri and Illinois regulated utility businesses to be in the range of $2.15 to $2.30 per share. This new range is higher than our prior range of $1.85 to $2.10 per share, for reasons previously mentioned by Tom. Key drivers and assumptions behind our updated earnings guidance are listed on this slide. We now expect to achieve a 2010 weather normalized return on equity of approximately 8% to 8.5%. This is still well below our allowed returns in both states, but is an improvement over our 2009 earned return on common equity of approximately 7%.

Turning to slide nine, we continue to expect our merchant generation business segment to post GAAP and core earnings of $0.35 to $0.50 per share in 2010. You will recall that we raised earnings guidance for this segment by $0.05 per share when we released first quarter 2010 earnings. This first quarter increase was due to cost reductions. This slide lists the key drivers and assumptions behind our 2010 merchant generation earnings guidance. For the most part, the assumptions are unchanged from our first quarter 2010 earnings call. After funding expected capital expenditures of $120 million in 2010, we continue to anticipate that free cash flow from our merchant generation segment will be positive in 2010, allowing us to reduce outstanding merchant generation borrowings.

As I close our discussion of earnings guidance, I'll remind you that any net unrealized mark-to-market gains or losses will affect our GAAP earnings, but are excluded from our GAAP and core earnings guidance because the Company is unable to reasonably estimate the impact of any such gains or losses. Also, our earnings guidance for 2010 assumes normal weather for the second half of the year, and is subject to the assumptions, risks and uncertainties outlined or referred to in today's press release.

As Tom mentioned, and as detailed on slide 10, on May 28th we received a rate order from the Missouri Public Service Commission for the retail electric rate case we initiated in July of 2009. The order authorized $230 million or 10% increase in annual electric revenues. Of this amount, $119 million was an increase in annual revenues to recover higher net based fuel costs, including lower off-system sales revenues due to declining power prices, and the remaining $111 million was to recover other costs of service. The rate increase amount was based on a 10.1% return on equity, a capital structure composed of 51.3% common equity, and a rate base of approximately $6 billion. The order approved the continued use of the fuel adjustment clause. In addition, the order called for continuation of trackers for pension and other post retirement benefit costs, and vegetation management, and infrastructure inspection costs.

Post construction accounting deferrals were authorized for the Sioux plant scrubbers. This means that for regulatory purposes, we will defer depreciation expense and both debt and equity carrying costs associated with the Sioux plant scrubbers after the in service date of such equipment. For external reporting purposes, we will defer only the depreciation and debt carrying costs associated with the scrubbers. This post construction accounting will end on the earlier of the dates the cost of the equipment is reflected in customer rates, or January 1st of 2012.

The rate order also includes a provision that mitigates the impact of an unexpected significant decline in electricity sales to the Noranda smelter plant. If a significant loss of service occurs at Noranda, we will be allowed to sell the power not taken by Noranda, and use the proceeds to offset revenues lost up to the amount necessary to be held harmless. Any excess revenues will be refunded to customers through the fuel adjustment clause. The Missouri order also approved an increase in our annual depreciation rate by $14 million annually. Further, the order provided for recovery of previously incurred credit facility and voluntary employee separation costs. The new rates went into effect on June 21st.

Moving now to slide 11. As mentioned by Tom, Ameren [UE] filed for an increase in gas delivery revenues. The requested increase is approximately $12 million annually or 7%. It is based on a 10.5% return on equity, a capital structure including 51.3% common equity, and a rate base of $245 million. The filing uses a test year ended December 31st, 2009, with certain pro forma adjustments through the anticipated true-up date of November 30th, 2010. Key drivers of the request for increased revenues include higher rate base and higher operations and maintenance costs. Given the 11 month statutory deadline, the Missouri Commission must rule on the gas rate case by the end of May 2011.

Turning now to slide 12. I would like to provide more details on the ICC's rehearing of certain issues in the recently decided electric and natural gas delivery case for the Ameren Illinois utilities. We asked the ICC to reconsider its decision on six issues in the order, and on June 14th the commission agreed to rehear three of these issues as well as one issue raised by the ICC itself. One of these issues is the adjustment that was made to the accumulated depreciation reserve. As you know, we believe the adjustment made in the order was a departure from past ICC precedent and is a violation of the Commission's rules. A reversal on this issue could add up to $35 million of annual revenue. The ICC also agreed to rehear its decision on the level of pension and other post retirement benefit expenses that we may recover in rates. In its order, the ICC used 2008 engine and OPEB cost levels, arguing that the 2009 cost levels were not known and measurable. Our position is that the 2009 costs, which were significantly greater than the 2008 costs, were indeed known and measurable, and therefore should be factored into the rate order. A reversal on this issue could add up to $16 million of annual revenue. There are also two smaller dollar item issues under consideration in the rehearing, and these are mentioned on the slide. Schedule for the rehearing process has been established with an ICC decision expected close to November 12th, 2010, the statutory deadline.

Moving from regulatory matters to a discussion of our merchant generation segment, please turn to slide 13. Here we provide an update on our forward power sales hedges as of June 30th. As you can see, we have significant hedges in place for 2011 through 2012 at power prices above current market prices. For 2011, we have now hedged approximately 23 million megawatt hours at an average price of $46 per megawatt hour, and for 2012 we have hedged approximately 14 million megawatt hours at an average price of $52. Our capacity sales are approximately 83% hedged in 2010, approximately 63% hedged in 2011, and approximately 37% hedged in 2012. Our ownership of iron in the ground, low cost coal fired base load, and coal and gas fired intermediate peaking generation gives us a solid position from which to work to achieve premiums above visible forward power prices through negotiated customized contracts. As we move forward to hedge open positions in 2011 and beyond, we are targeting wholesale and large retail opportunities, with customized and value added load shaped products that allow us to enhance margin by leveraging our capabilities.

On slide 14, we update our merchant generation segment's fuel and related transportation hedges. For 2011, we have now hedged approximately 21 million megawatt hours, at about $25 per megawatt hour. For 2012, we have hedged approximately 13 million megawatt hours, at about $26 per megawatt hour.

Moving to slide 15, we provide an update on our 2010 cash flow outlook. As you can see, we now expect positive consolidated free cash flow of approximately $330 million, a significant improvement from our prior 2010 cash flow guidance provided in February. At that time, we expected consolidated free cash flow to be just slightly negative by $25 million. This significant improvement in our expected free cash flow is the result of the previously discussed increase in earnings expectations, expected cash tax savings, and reduced capital spending plans. As I said earlier, we continue to anticipate that our merchant generation segment will produce positive free cash flow, allowing us to reduce outstanding merchant generation borrowings. Specifically, this includes the expectation of reducing Genco's long term borrowings by utilizing available cash to fund Genco's $200 million maturity later this year.

This concludes our prepared remarks. We will now be happy to take your questions.

(Operator Instructions).

Our first question comes from the line of Julien Dumoulin-Smith. Please proceed with your question.

Hi, good morning.

Good morning.

Good morning.

So just a very quick question, then a more involved question. The first is -- in the quarter, what was the impact of weather, if you don't mind breaking that out explicitly?

Sure. It's provided -- we could go back and listen to the prepared remarks, but in the quarter it was $0.05 improvement versus 2009, because we had a warm second quarter last year, and about $0.11 versus normal.

Okay. Great. Sorry, I missed that. Would you mind discussing a little bit about the sustainability of the cost reductions we've seen in the quarter? They seem rather impressive. Talking about it through the balance of the year what we might be able to expect and looking forward to 2011 and beyond?

I think when you -- good question. I think when you take a look at especially the guidance that we provided and the increase in the guidance and then you look at the weather contribution we just discussed for the first half, I think what you would conclude is that the guidance that we raised, it's about half attributable to the weather and half attributable to cost control measures we put in place as we really do seek, as we talked about, to improve earned returns in our utility businesses to closer to those that are allowed as well as to really manage costs aggressively in our merchant generation business, to position that well. So we really are looking to control cost and about half of that improvement in guidance is related to the expectation of being able to sustain some of the cuts we made, the controls we put in place in the first half, sustain those through the end of this year.

Great. Well, thank you. Actually, do you mind just providing a year-to-date number on that weather as well in terms of versus normal or last year?

Yes, we will -- Doug, do you have that?

Yes. Versus the prior year, it's plus $0.08, and plus $0.13 versus normal.

All right. Thanks, Doug. That's it.

Thank you.

Thank you, ladies and gentlemen. Our next question comes from the line of Neil Kalton with Wells Fargo Securities. Please proceed with your question.

Just a quick question on the transmission filing with the FERC. What was the requested ROE and capital structure?

Yes, my recollection is that the requested ROE is consistent with the ROE that we're currently earning which is around 12.38%. And the capital structure there is consistent with the capital structures of the Illinois utilities today and the filings we've made under the transmission rate filings we've made, which I think is about 56% equity.

Okay. Thank you.

Thank you. Ladies and gentlemen, our next question comes from the line of Gregg Orrill with Barclays Capital. Please proceed with your question.

Thanks a lot. I was wondering if you could talk a little bit more about the Grand Rivers projects, the process ahead of you there and maybe to elaborate a little more on just the case for that project?

Sure. In fact, we have with us here this morning Maureen Borkowski, who is going to be the -- or who is the President and CEO of that organization. And in terms of some of that process, maybe Maureen, you would want to comment on that?

The process with regard to the FERC rate incentive application -- at this point in time we filed our case and we would expect a decision from FERC probably within 60 days. Once we would get a positive decision from FERC, the next step in the process is to await Midwest ISO Board of Director approval for the projects themselves. Midwest ISO had made its own filing on July 15th of this year for regional cost allocation, and it had included one of the major projects in the Grand Rivers projects, the project called the Illinois Rivers project which has an estimated cost of $739 million. It included that project as one of its starter set of multi-valued projects that it was recommending to FERC. So the next step in the process would be getting that project approved by the Midwest ISO, at which point in time we could begin moving forward with that project.

Okay.

At that point in time, to actually begin the construction of the project, we would seek whatever appropriate state approvals were needed for citing and certification.

Okay. And then Marty, I didn't quite catch the end of your prepared comments there on cash at which subsidiary being used for the Genco.

I think if you look at the slides we had, we're now forecasting to be free cash flow positive for the year, $330 million when you look across Amren. We talked earlier in the year, talked on this call about the fact that we have really throughout the year expected the merchant generation segment to be free cash flow positive this year, and we are using Genco cash to pay down and fund the Genco maturity that's coming up this fall.

Got it. There wasn't any change in the accounting treatment to the Sioux scrubbers -- you were clarifying the capitalization there?

No, no change in the accounting for it. I think the important thing, Greg, about that is that as part of the Missouri rate order, we did get approval once the Sioux scrubbers go into service to be able for regulatory purposes to defer depreciation as well as debt and equity financing costs associated with that Sioux scrubber after it goes into service. So that is an accounting practice that's I'd say different than has historically been the case for our other assets.

Got it. Okay. That clears it up.

Thank you.

Thank you. (Operator Instructions).

Operator, if there are no further calls, I'll close the call.

Thank you, sir. We appear to have no further questions at this time.

This is Doug Fischer. Thank you for participating in this call. Let me remind you again that this call is available through August 12th on playback and for one year on our website. Today's press release includes instructions on listening to the playback. You may also call the contacts listed on the release. Financial analysts should call me, Doug Fischer. Media should call Susan Gallagher. Susan and my contact numbers are on the news release. Again, thank you for your interest in Ameren.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.