Ameren files CPCN application for Illinois Rivers project amid lower earnings

Ameren (NYSE: AEE) on Nov. 7 filed its application for a certificate of public convenience and necessity (CPCN) with the Illinois Commerce Commission (ICC) for the proposed Illinois Rivers transmission project, a $1.1bn, 345-kV line planned to stretch approximately 400 miles across Illinois (Docket No. 12-0598).

The company’s chairman, president and CEO Thomas Voss made the announcement on the company’s 3Q12 earnings call Nov. 9.

Calling the Illinois Rivers project, “our single, largest planned investment [and] a key driver of our expected future growth,” Voss said the Midwest ISO (MISO) multi-value project (MVP) “will enhance reliability and create new construction jobs in the state.”

The project will benefit from FERC’s constructive rate treatment, “which provides for annual formula-based updating of rates and a competitive return on investment,” he added

The company expects an order on the CPCN application filing by July 2013. The project is slated to be in service in 2016, according to TransmissionHub data.

With regard to 3Q12, Voss said core earnings of $1.33 per share marked a decline from core earnings of $1.57 in 3Q11. He said the drop “reflected lower results from both our regulated utility and merchant generation businesses.”

Despite what he called “a challenging Illinois electric delivery rate order,” Voss said overall earnings were in line with expectations and reflected operational excellence.

“The third quarter was solid from an operations perspective, with our system and people performing very well under extended, severe weather conditions,” Voss said.

All business units affected

Ameren Illinois’ earnings were negatively affected by what Voss called a “disappointing order” from the ICC in September. The ICC had misapplied a portion of the Illinois Energy Infrastructure Modernization Act, Voss said, and that resulted in a lower allowed return on equity (ROE) for electric delivery service.

“Unfortunately, this order jeopardizes Ameren Illinois’ ability to implement advanced metering and other infrastructure improvements,” Voss said.

Ameren appealed the decision to the state’s 4th district appellate court after the ICC declined a rehearing on several key points, he said.  

Until the uncertainty surrounding how the Illinois law will be implemented is removed, Ameren Illinois will reduce or defer $30m of its previously planned capital spending, “with corresponding negative effects on job creation that the legislature sought to achieve with the law,” Voss said.

A change in the quarterly distribution of revenues and earnings resulting from formula ratemaking also put downward pressure on earnings in Illinois.

Ameren Missouri’s core earnings declined due to lower electric sales and a higher effective income tax rate. The decline was partially offset by the benefit of a 2011 electric rate adjustment.

Matters before Missouri regulators could boost the unit’s earnings.

A pending rate case is nearing its conclusion before the Missouri Public Service Commission (PSC) and the company’s updated filings now support a $323m annual rate increase, Voss said, noting that the company is seeking recovery of costs and investments it has already made.

As part of that pending rate case, PSC staff has recommended that transmission costs should no longer be recovered through the fuel adjustment clause (FAC) but instead should be recovered in base rates. Ameren opposes this potential change because it believes it appropriate to recover transmission costs through the FAC.

“These costs are volatile, unavoidable, and outside of management’s control,” Martin Lyons, Ameren’s CFO, said on the call. “Further, recovery through the FAC better matches the costs of being a member of MISO with the benefits the customers receive through off-system sales, which are included in the FAC.”

Should the PSC approve the changes, Lyons hinted that the company would push for a full cost tracker mechanism, without any limiting conditions, to avoid regulatory lag resulting from under-recovery of cost increases between rate cases.

Ameren is also asking Missouri regulators to approve a storm cost-tracking mechanism that will provide cost recovery following major storms “in a manner that is fair to both our customers and investors,” he said.

The company is also requesting approval of a new plant in-service accounting proposal designed to reduce the effect of regulatory lag on earnings and cash flows related to assets placed in service between rate cases.

“Approval of this proposal would encourage prudent, incremental discretionary investments in our energy infrastructure and help meet our customers’ number one priority: reliability,” Voss continued.

The Missouri PSC’s order is expected in December, with new rates expected to be effective in early January 2013.

Core earnings from Ameren’s merchant generation business also declined from 3Q11, with Voss citing lower power prices, an uncertain timeline for their recovery, and higher fuel costs as the major contributing factors.

The business unit continued to be strong operationally, however, with the company’s Callaway nuclear energy center in Missouri running continuously since its fall 2011 refueling outage and two of its coal-fired energy centers in Missouri earning national honors from the Electric Utility Cost Group, Voss said.

Regulatory concessions will help relieve pressure on earnings

Ameren’s request for a variance from Illinois’ multi-pollutant standard (MPS) was unanimously approved by the Illinois Pollution Control Board in September. The variance allows the company additional time to comply with sulfur dioxide emission standards that were to become effective Jan. 1, 2015.

In exchange for delaying compliance with the standards until 2020, the company will restrict its sulfur dioxide emissions from 2014 forward to levels lower than those required by the existing MPS, thereby offsetting the environmental impact of granting the variance relief, Voss said.

“As a result, through 2019 we do not expect to have to de-rate or shut down any of our currently operating energy centers in order to comply with state’s sulfur dioxide emission limits,” he added.

In addition, the company has reduced its 2012 through 2016 merchant generation environmental capital spending plans by approximately $35m compared to prior plans, with $20m of the reduction occurring this year.

“The reduction is primarily due to the vacated cross-state air pollution rule and the impacts of the MPS variance,” Voss said.

Company officials offered only a slight revision to its earnings guidance, narrowing its 2012 core earnings range from $2.35 to $2.45 a share from its previous range of $2.25 to $2.55 a share.

Finally, officials offered a pragmatic view of future challenges.

“Low power and capacity prices are impacting Ameren’s earnings outlook,” Voss said. “We continue to look for every opportunity to reduce operating costs and enhance margins.”