Ameren’s CEO discusses Q1 2012 results – earnings call transcript


Greetings and welcome to the Ameren Corporation’s First Quarter 2012 Earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star, zero on your telephone keypad. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Doug Fischer, Director of Investor Relations for Ameren Corporation. Thank you, Mr. Fischer. You may begin.

Doug Fischer

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 is being broadcast live on the Internet and the webcast will be available for one year on our website at Further, 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 a presentation on our website that will be referenced 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 Page 2 of the presentation, I need to inform you that comments made during 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, 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, please read the forward-looking statement section in the news release we issued today and the forward-looking statements and risk factors section in our filings with the SEC.

Tom will begin this call with an overview of first quarter 2012 earnings and 2012 guidance, followed by a discussion of recent regulatory and business developments. Marty will follow with more detailed discussions of first quarter 2012 financial results as well as regulatory and other financial matters. We will then open the call for questions.

Here is Tom, who will start on Page 3 of the presentation.

Thomas Voss

Thanks, Doug. Good morning and thank you for joining us. Today we announced a first quarter 2012 net loss in accordance with generally accepted accounting principles, or GAAP, of $1.66 per share compared to first quarter 2011 GAAP net income of $0.29 per share. This first quarter 2012 GAAP net loss included a non-cash pre-tax asset impairment charge of $628 million related to the write-down of our Duck Creek merchant generation energy center which was triggered by the first quarter 2012 sharp decline in forward prices for electricity. Excluding the impacts of this charge, a related tax adjustment and mark-to-market activity, first quarter 2012 core results were positive with earnings of $0.22 per share compared to first quarter 2011 core earnings of $0.25 per share. The decrease in first quarter 2012 core earnings compared to first quarter 2011 core earnings primarily reflected the impact of warm winter weather on our regulated utility electric and natural gas sales.

First quarter 2012 winter temperatures were among the warmest on record with heating degree days approximately 30% fewer than those experienced in the year-ago quarter. As a result, kilowatt hour sales of electricity to weather-sensitive residential and commercial utility customers declined 9%. Natural gas sales were also negatively impacted by the much warmer weather with first quarter 2012 volumes down 21% compared to the first quarter of 2011. In total, we estimate that warmer temperatures reduced first quarter 2012 earnings by $0.13 per share compared to the first quarter of 2011, and by $0.10 per share compared to normal.

On a positive note, kilowatt hour sales to industrial customers rose 5% compared to the first quarter of 2011, a sign of economic improvement in our region. A second key driver of lower first quarter 2012 core earnings compared to the year-ago quarter was reduced margins in the merchant generation segment. The decreased margins reflected reduced generation to the merchant segment due to lower market prices for electricity.

The effects of the warm weather and lower merchant margins were partially offset by increased electric utility rates in Missouri, increased natural gas delivery rates in Illinois, and lower non-fuel operations and maintenance expenses, including reduced storm-related costs.

Turning now to Page 4, today we are affirming our core earnings guidance range of $2.20 to $2.50 per share for this year. The much warmer than normal weather led us to reduce core guidance for our regulated utility business by $0.05 per share at both the high and low ends of the range to $2.15 to $2.35 per share. This reduction in earnings guidance for the utilities is offset by an increase in the core guidance range for our merchant generation business segment of $0.05 per share at both the high and low ends of the range to $0.05 to $0.15 per share. The increase in merchant generation guidance primarily reflects lower expected depreciation expense due to the write-down of the Duck Creek energy center.

I would now like review some of our business plans and some recent business developments at our regulated and merchant generation businesses. Moving to Page 5 and our strategy for regulated businesses, we continue to believe that modern, constructive regulatory frameworks which provide timely cash flows and a reasonable opportunity to earn fair returns on investments are clearly in the best long-term interest of our customers in the states in which we operate. These frameworks support our ability to attract capital on terms which facilitate timely investment in order to modernize our regulated companies’ aging infrastructure. Such investments enhance reliability and the quality of service we can deliver to our customers and also help create good paying jobs.

Further, these investments help us meet our customers’ and states’ energy needs and expectations which ultimately drive higher levels of customer satisfaction. Constructive formula ratemaking is in place for both our Ameren Illinois electric delivery service and our FERC-regulated electric transmission business. As a result, we are able to move forward with plans to invest meaningful incremental capital in these businesses.

Over the next 10 years, our Illinois electric delivery business plans to invest $625 million over and above levels we have been spending in recent years and create 450 jobs during the peak program year. The improved infrastructure resulting from this investment will enhance reliability and provide customers with the energy usage options made possible by smart meters.

At our electric transmission businesses, the need to replace aging infrastructure and improve the capacity of the high-voltage highway in our region, coupled with the constructive formula ratemaking utilized by the FERC, are driving our plans to invest approximately $1.7 billion in transmission projects over a five-year period ending in 2016. I am pleased to report two recent positive developments related to these transmission growth plans. The Federal Energy Regulatory Commission approved forward test year rate treatment for Ameren Transmission Company, or ATX, effective March 1, 2012; and on May 1, we began our public participation process on route design for ATX’s $800 million-plus Illinois Rivers project, a MISO multi-value regional line. This process is required prior to our filing for a certificate of public convenience and necessity for the project with the ICC, a filing we plan to make in the fourth quarter of this year.

In Missouri, however, we continue to see the need to enhance the existing regulatory framework to support investments in our aging infrastructure and to meet our customers’ rising expectations, as well as to provide our company timely cash flows and a reasonable opportunity to earn a fair return on those investments. One approach we are pursuing is through the regulatory process. In particular, we’ve made several proposals in our pending electric rate case designed to enhance the existing framework. First, we are seeking approval of a storm cost tracking mechanism that would provide the opportunity to recover costs to restore service after major storms in a manner that is fair to both our customers and our investors. Second, we are seeking approval of a new plant-in-service accounting proposal. This proposal is designed to reduce the impact of regulatory lag on earnings and future cash flows related to assets placed in service between cases. And finally, in January we made a filing under the Missouri Energy Efficiency Investment Act, or MEEIA, and requested an enhancement to the existing regulatory framework for energy efficiency programs and the related throughput disincentives that result from these programs. In the interim, we continue to better align the level of our spending with the monies provided through the existing regulatory process as well as with economic conditions.

In summary, if our utilities have modern, constructive regulatory frameworks in place, we will be able to increase investment to modernize aging infrastructure, allowing us to better meet customers’ expectations for higher quality service and create good paying jobs for our local economy. That is why we are allocating increasing amounts of capital to Illinois electric delivery service and FERC-regulated transmission projects. On Page 6, we illustrate our plans to allocate increasing amounts of investment dollars to these two businesses in the five-year period ending in 2016, compared to the prior five-year period ending in 2015. As you can see, we have increased our spending plans for the Illinois regulated electric and gas delivery services by approximately $400 million from the prior five-year period, primarily reflecting the increased spending on electric delivery service that I mentioned a few moments ago. We have increased our spending plans for transmission by approximately $500 million from the prior five-year period; meanwhile, our spending plans for the Missouri electric utility business for the five years ending in 2016 are essentially flat.

I want to be clear that I recognize that in all circumstances, it is our obligation to provide safe and adequate service to our customers, and we have certain minimum expenditures we must make. Those investments have been and will continue to be made.

Turning to Page 7, here we translate the capital spending plans we just discussed into regulated rate base. We expect growth of approximately 6% annually over the 2012 to 2016 period. Further, this growth is skewed toward regulatory jurisdictions with constructive formula ratemaking. We believe this will enhance our ability to earn fair returns on our utility investments.

Moving to Page 8, as we are taking steps today to address our aging infrastructure, keep our service reliable and our rates competitive, we are also looking to the future to be sure that our company is well positioned to meet our customers’ and our states’ long-term energy needs. In light of our aging coal fleet along with continued uncertainties with environmental regulations and commodity prices, we believe it is prudent to maintain effective resource options for the future. As a result, we announced just a couple weeks ago that Ameren Missouri has entered into agreement with Westinghouse Electric Company, a world leader in nuclear technology and development. Under our agreement, we will exclusively support Westinghouse’s application to the Department of Energy for funds to support the design and commercialization of American-made small modular reactors for the United States and for the rest of the world. This agreement is consistent with our commitment to maintain nuclear energy as an important option to meet Missouri’s future energy needs.

In addition, it presents Missouri with significant economic development and job creation opportunities. In essence, Missouri could ultimately become the hub for the design, development and manufacture of American-made small modular nuclear reactors. Our alliance with Westinghouse has broad statewide support, including every electric utility provider in the state, Governor Nixon, a bipartisan group of federal and state legislative leaders, labor, businesses, universities, and others. The potential DOE funding when combined with our investment to date in new nuclear development and our agreement with Westinghouse provides Ameren Missouri with the opportunity to obtain a nuclear combined construction and operating license, or COL, from the Nuclear Regulatory Commission for a small modular reactor at the Callaway site with minimal incremental investment. Obtaining a COL would preserve an important energy option for Ameren Missouri and its customers and be a viable long-term asset.

Pursuing and obtaining a COL does not obligate our company to build a nuclear plant, but it does preserve an important energy option and positions Missouri to move forward in a timely fashion should conditions be right to build a small modular reactor in the future. The grant application will be submitted this month and we expect the Department of Energy to make their decision later this summer.

Turning to Page 9, I will conclude my prepared remarks with an update on our merchant generation business. We have sold forward or hedged all of our expected 2012 merchant generation output at prices above current market levels. As a result, we continue to expect our merchant generation segment to be free cash flow positive this year and for Ameren Energy Generating Company, or Genco, to provide for its own cash needs with the benefit of existing money pool receivables. However, as we look beyond 2012, we cannot ignore the potential negative impact of low energy and capacity prices on our cash flows. As you are aware, in early 2012 there was a sharp decline in forward power prices. In response, in February we announced an approximately $270 million reduction in capital spending plans for our merchant generation business for the years 2012 through 2014. In the first quarter, decline in power prices also led to the write-down of our Duck Creek energy center, which I mentioned earlier. More recently, we have taken several additional actions to better position our merchant generation business to weather the current period of very low power prices.

In late March, Genco entered into a put option agreement with an affiliate. The agreement provides Genco with an additional source of liquidity if such liquidity is needed in the future. It remains our goal for the merchant generation business segment and Genco to provide for their own cash needs.

In a second recent action, just yesterday, our merchant generation business filed a request for a variance from the Illinois Multi-Pollutant Standard, or MPS, with the Illinois Pollution Control Board. In our petition, we are seeking additional time to comply with sulfur dioxide emission levels, currently set to become effective January 1, 2015. In exchange for delaying compliance with these levels through 2020, we have proposed a plan that restricts our sulfur dioxide emissions through 2014 to levels lower than those required by the existing MPS, offsetting any environmental impact from the variance. We have indicated to the Pollution Control Board that if we are not granted the variance, or power prices do not materially increase, there is a significant risk that we’ll have to mothball some of our unscrubbed merchant generation coal-fired energy centers beginning in 2015. The Pollution Control Board is expected to rule on our request by late summer 2012.

Now I will turn the call over to Marty.

Martin Lyons

Thanks, Tom. Turning to Page 10 of the presentation, today we reported a first quarter 2012 GAAP loss of $1.66 per share compared to first quarter 2011 GAAP earnings of $0.29 per share. Excluding certain items in each year, Ameren recorded first quarter 2012 core earnings of $0.22 per share compared with first quarter 2011 core earnings of $0.25 per share.

First quarter 2012 core earnings excluded three items that are included in GAAP earnings. The largest of these non-core items was the non-cash asset impairment charge in our merchant generation business that Tom mentioned earlier. The triggering event for this impairment was the sharp decline in power prices which occurred during the first quarter of 2012. Specifically, we recognized a $628 million pre-tax non-cash impairment charge to reduce the carrying value of our Duck Creek energy center to its estimated fair value. This reduced earnings by $1.55 per share.

The second non-core item was a non-cash quarterly reduction in the income tax benefit recognized in conjunction with the Duck Creek asset impairment. This reduction in income tax benefit was the result of a combination of seasonally low first quarter earnings with the GAAP requirement to recognize income tax expense using the annual estimated effective income tax rate. This item decreased net income by $0.36 per share in the first quarter of 2012 and is projected to fully reverse over the balance of this year. I note that the effective tax rate for the quarter was approximately 24% on a GAAP basis while on a core basis we continue to expect a 2012 rate of approximately 36%.

The last non-core item is a $0.03 per share gain from the net effect of unrealized mark-to-market activity. On Page 11, we highlight key factors driving the variance between core earnings per share for the first quarter of 2012 compared to the first quarter of 2011. Key factors adversely affecting the comparison included a decline in margins at our regulated utilities of $0.14 per share after excluding rate changes. We estimate that $0.13 of this $0.14 decline in utility margins was due to lower retail sales as a result of the near-record warm winter temperatures. The decline in margins at the merchant generation business reduced earnings by $0.05 per share, reflecting reduced generation levels due to low spot market prices for energy and higher per megawatt hour fuel and transportation-related expenses.

The reduction in first quarter 2012 earnings compared to the first quarter of 2011 also reflected a one-time contribution to the Illinois Science and Energy Innovation Trust related to Ameren Illinois Company’s participation in the state’s electric delivery formula ratemaking framework. This $7.5 million pre-tax contribution, which is not recoverable in rates, reduced earnings by $0.02 per share.

Key factors favorably impacting the comparison of first quarter 2012 core earnings to the first quarter 2011 core earnings included changes in electric and gas rates net of certain related expenses, which increased earnings by $0.06 per share. These rates changes included an electric rate increase in Missouri effective in late July 2011 and a gas delivery rate increase in Illinois effective in January 2012. A second factor favorably impacting the earnings comparison was the recognition of revenue related to the Illinois electric delivery formula ratemaking. In the first quarter of 2012, Ameren Illinois recorded a regulatory asset of $12 million with a corresponding increase in electric revenues. The revenue recognized represents our estimate of future cash flows expected to be collected in order to recover first quarter operating costs and in formulaic returns on Illinois electric delivery investments.

We will continue to adjust revenues in the associated regulatory asset over the remainder of the year such that at the end of the year, these amounts represent Ameren Illinois’ estimate of future cash flows expected to be approved by the Illinois Commerce Commission through the annual formula rate update process. I’ll discuss this process more in a moment.

The final positive factor I would like to mention is lower core non-fuel operations and maintenance expenses which benefited the earnings comparison by $0.09 per share with $0.05 of this due to lower storm-related costs.

Turning now to Page 12, today we are also affirming our 2012 cash flow guidance. As shown on this page, we calculate free cash flow by starting with our projected cash flows from operating activities and subtracting from it expected capital expenditures, other cash flows from investing activities, dividends, and net advances for construction. For 2012, we continue to anticipate that free cash flow will be negative by approximately $230 million; however, as Tom stated, we are also continuing to expect that our merchant generation business will be free cash flow positive.

Turning now to Page 13 and back to a discussion of Illinois formula ratemaking – since January of this year, we have made a series of regulatory filings required by law based on Ameren Illinois’ election to participate in Illinois’ new performance-based formula ratemaking process for electric delivery service. While the results of certain of these filings, which I will discuss in a minute, will establish the level of rates charged to customers in late 2012 and 2013, I want to emphasize that full-year 2012 Illinois electric delivery earnings will reflect a true-up for 2012 rate base and actual cost of service, and include historical ICC ratemaking adjustments. The same will be true in 2013.

The return on equity recognized in 2012 will be based on the 2012 12-month average of 30-year treasury yields plus 590 basis points, with a plus or minus 50 basis point collar. To the extent that revenues and regulatory assets are recognized in 2012 in accordance with our formula ratemaking expectations, they will be subject to ICC review and recovery will occur in 2014, as shown on the timeline.

Moving now to Page 14, Ameren Illinois’ January initial filing under the performance-based formula ratemaking framework for electric delivery service was based on 2010 actual costs and 2011 and 2012 expected net plant additions. The filing called for a $19 million annual rate decrease. In April, the ICC staff and other intervenors filed their direct testimony in this case. The ICC staff has recommended that rates be decreased by $6 million annually more than Ameren Illinois has proposed. This variance between our request and the staff’s recommendation primarily reflects a lower calculation of 2010 capitalization, primarily lower 2010 average common equity.

On Page 15, we have summarized the positions of the other major intervenors in the case. The revenue requirement recommended by these parties range from 24 to $37 million lower than our filing with 14 to $22 million of this difference reflecting the incorporation of estimated 2011 and 2012 accumulated deferred income taxes, which are direct reductions to rate base Since rates and earnings will be trued up for actual rate base, these adjustments for accumulated deferred income taxes are not expected to impact our reported earnings; however, we and the intervenors in this case do have different views on another issue related to the rate base amount to be used in the eventual true-up calculation. We argue that the legislation specifies that the true-up for a given year should be based on actual rate base at the end of the year. The ICC staff and other intervenors recommend that the ICC use average rate base for that year for the true-up.

In an unrelated matter, the Attorney General has recommended an additional $7 million revenue reduction by crediting Ameren Illinois’ electric delivery cost to service with the benefit of the full amount of electric late payment revenue, including the over 50% related to power supply, rather than just the portion related to delivery service.

Finally, the Illinois industrial energy customers are recommending limiting the common equity ratio to 50% rather than the amount in our filing. We strongly believe that the rate formula does not permit such a limitation of the equity ratio and thus consider this proposed adjustment unjustified. The ICC administrative law judge are expected to issue their proposed order in this case in August with an ICC decision expected in late September and new rates to be effective in late October, 2012.

Turning to Page 16, in April Ameren Illinois made its initial annual electric delivery formula rate update filing. This filing calls for an incremental $15 million annual rate decrease compared to the rates filed in January and is based on 2011 actual costs and 2012 expected net plant additions. The rate filing calls for a reduction in rates beyond those filed in January primarily because of lower rate base and return on equity. The $128 million lower rate base in this filing compared to the January filing reflects the incorporation of 2011 accumulated deferred income taxes, including bonus depreciation.

Under the formula rate template, accumulated deferred income taxes for the prior year – in this case, 2011 – are not incorporated into rate base estimate until the spring update rate filing each year. However, once again it is important to understand that the earnings for a given year will be trued up to that year’s actual rate base, which will include the deduction for actual accumulated deferred income taxes for that given year. The electric delivery rates established in this case will be effective in January 2013.

On these next two pages, 17 and 18, we remind you of the highlights of the pending Missouri electric rate case. At the bottom of Page 18 are the key dates in the rate case schedule. The Missouri Public Service Commission staff and other intervenors are required to file direct testimony on revenue requirements by July 6 and a PSC order is expected in December 2012, with new rates expected to be effective in January 2013.

Moving now to Page 19, here we provide an update of our 2012 through 2014 forward power sales and hedges for our merchant generation business. Before we move to the updated hedge numbers, at the top of the page we indicate that expected 2012 merchant generation is approximately 25.5 million megawatt hours as of the end of the first quarter. This is down approximately 1.5 million megawatt hours from the estimate we shared with you on our February call and reflects our expectation that we will more aggressively cycle our base load generation stations in order to improve overall margins in this weak power price environment.

You will also note that for 2012, we have hedged an amount greater than our expected generation – approximately 27.5 million megawatt hours. This amount is hedged at an average price of $43 per megawatt hour. The approximately 2 million megawatt hours of hedging in excess of expected generation is expected to be settled on a profitable basis using financial instruments or additional generation to the extent power prices improve. Moving to 2013, we have now hedged approximately 19 million megawatt hours at an average price of $37 per megawatt hour. Further, for 2014 we have hedged approximately 11 million megawatt hours at an average price of $38 per megawatt hour. To assist you in understanding our merchant generation business segment’s margin drivers, we have provided a pie chart that breaks down our 2012 expected revenue by type.

Finally turning to Page 20, here we update our merchant generation segment’s fuel and related transportation hedges. For 2012, we have hedged approximately 25 million megawatt hours at about $24 per megawatt hour. For 2013, we have hedged approximately 18 million megawatt hours at about $24.50 per megawatt hour, approximately $1 per megawatt hour less than the number we provided in February. For 2014, we’ve now hedged approximately 9 million megawatt hours at about $24.50 per megawatt hour, again approximately $1 per megawatt hour less than the number we shared with you in February.

Similar to our previous slide detailing merchant generation revenues, we have included a pie chart that breaks down forecasted 2012 all-in fuel costs to provide perspective on how each component contributes to our overall cost. This completes our prepared remarks.