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Ameren Corporation (NYSE:AEE)

Q3 2009 Earnings Call

October 30, 2009 10:00 am ET

Executives

Tom Voss - President and Chief Executive Officer

Marty Lyons - Senior Vice President & Chief Financial Officer

Doug Fischer - Director of Investor Relations

Analysts

Michael Lapides - Goldman Sachs

Dan Jenkins - State of Wisconsin Investment Board

Operator

Greetings and welcome to the Ameren Corporation’s third quarter earnings conference call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions)

It is now my pleasure to introduce your host Doug Fischer, Director of IR 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 is our 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 contain 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 of the date of today’s live broadcast. Redistribution of this broadcast is prohibited. To assist in our call this morning we have posted presentation slides ton website that we will refer to during this call. To access this presentation you may look in the investor section of our website under presentations and follow the appropriate link.

Turning to slide two of our presentation, I 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, belief, plans, strategies, objective, events, conditions 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 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 with an overview of third quarter 2009 earnings guidance followed by a brief business update. Marty will follow with more detail discussion of our third quarter 2009 financial results, our 2009 earnings guidance and a financial update.

We will then open the call for questions. Here’s Tom.

Tom Voss

Thanks Doug. Good morning and thank you for joining us. Moving to slide three of the presentation on our website I am pleased to report that this morning we released third quarter 2009 non-GAAP or core earnings per share of $1.16. That is just $0.01 less than our core earnings in the third quarter of 2008, despite much cooler summer weather and the weak economy.

Factors favorably effecting core third quarter 2009 earnings per share verses year ago results included utility rate adjustments in Illinois and Missouri, lower operations and maintenance expenses and the revenue leveling effect of natural gas rate redesign in Illinois.

Offsetting factors included lower electricity sales at regulated utilities and lower margins in the merchant generation segment due to much cooler summer weather and economic conditions. Higher interest expense and an increase in average common shares outstanding also impacted comparative results.

Turning now to slide four, with our most significant earnings quarters behind us, we are narrowing our 2009 core earnings per share guidance range to $2.70 to $2.90 from our prior range of $2.70 to $3.05. Our new core guidance reflects reduced sales due to much cooler than normal third quarter weather and continued weak economic conditions as well as dilution from our September 2009 common equity offering.

The impact to these factors is partially offset by reduced operating and interest expenses as compared to our prior guidance. Marty will provide more details in third quarter earnings in our updated 2009 guidance in his remarks, but before I turn the call over to him I would like to provide a brief business update.

Looking now at slide five, you will note a breakdown of regulated electricity sales and revenue levels. This is a topic of great interest in the current economic environment. In the third quarter of 2009, at our regulated utilities, much cooler summer weather and the economic slow down led to a 10% decrease in kilowatt hour sales to residential customers and a 3% decrease in kilowatt hour sales to commercial customers compared to the year ago quarter.

These sales changes were more modest on a weather normalized basis with residential sales declining an estimated 2% and commercial sales declining an estimated 1%. Cooling degree days in the 2009 third quarter were 18% below the 2008 third quarter, and 23% below normal. The weak economy continued to affect the level of electric sales of our regulated utilities to industrial customers.

These sales declined 13% from the year ago quarter, excluding the impact of reduced demand from AmerenUE largest customer Noranda Aluminum Inc. smelter plant in New Madrid in Missouri. You will recall that Noranda’s plant sustained damage because of a power interruption on non-Ameren-owned power lines during a severe January 2009 ice storm. Including Noranda, electric sales by our regulated utilities to industrial customers declined 18% in the third quarter of 2009, as compared to the year ago quarter.

We were pleased that Noranda announced that they’ve recently initiated steps to return operations to full effective capacity. These steps include restarting the third of its three production lines. We expect it will take some time for the third production line to be repaired and return to full capacity. The improved Noranda outlook is a good launching point for comments on our overall outlook for electricity sales at our regulated utilities for the balance of 2009 and 2010.

In Illinois, we are seeing signs of a potential recovery in industrial sales including increased load associated with an oil refinery a new ethanol plant, which began operation the middle of this year and several other projects expected in the future. We expect full year 2009 electricity sales to industrial customers of our regulated utilities to be down approximately 11% excluding Noranda. We currently think sales declines associated with industrial customers are slowing, and expect growth in 2010, though at a pace-less than what is typical coming out of a recession.

On a weather normalized basis, we expect full year 2009 sales to residential and commercial customers to be down approximately 1% to 2% as compared to 2008. In to 2010, we currently expect a resumption of growth in residential and commercial sales. This expectation assumes a moderate economic recovering.

On the plant operation’s front, our AmerenUE base load generating units, posted strong third quarter 2009 equivalent availability of 94%, up from an also strong 92% in the same period in 208. Our Merchant Generation base load fleet had solid equivalent availability of 85% for the 2009 third quarter. This was down from 89% in the year ago period, reflecting plant outages including our September transformer fire at Newton Unit I that resulted in both Units I and II being out of service for a period of time.

Due to the hard work of our plant personnel and availability of a spare transformer at our Coffeen Plant both Newton Units are back online. The outages however, contributing to a reduction in our expected 2009 Merchant Generation output. We now estimate that, output will be approximately 27 million megawatt hours, down from our prior estimate of 28 million megawatt hours.

On the regulatory front, we have rate cases pending in both our Illinois and Missouri Jurisdiction. We are seeking revenue levels that reflect significant investments we have made in electric and gas utility infrastructure to improve reliability, increases in cost essential to generating and delivering electricity, higher financing cost and in Missouri rising net fuel costs.

At our Ameren Illinois utilities, we originally requested a $226 million annual increase in electric and natural gas delivery rates. On October 23, we filed, Rebuttal Testimony with the Illinois Commerce Commission updating our requests. On a comparable basis, our revised request is for our revenue increase of $181 million annually.

This includes a $162 million base rate increase request, and $19 million related to 2009 and 2010 Illinois Commerce Commission reliability audit expenditures that we proposed be recovered via a rider. If proved the rider would cover post 2010 reliability audit expenditures as well.

The change in the revenue request primarily reflects updated cost of capital and expense numbers, our requested returns on equity now range from 10.8% to 11.7% versus a prior range of 11.25% to 12.25%. The Illinois Commerce Commission is expected to issue an order in time for new rates to be effective in early May 2010.

At AmerenUE, we have filed with the Missouri Public Service Commission for an annual electric rate increase of $402 million, more than half of the request is for anticipated increases in normalized net fuel costs. These increased net fuel costs would have within eligible for recovery through the fuel adjustment clause absents this filing.

As part of its overall request, AmerenUE has asked for interim rate relief of $37 million, subject to refund with interest. The amount of this interim request reflects the revenue requirement for rate base additions, made between October 2008 and May 2009. The Commission recently established a schedule for considering the interim increase request and a hearing is set for December 7.

In the overall rate case, new rates are expected to be effective in late June 2010. As we have previously stated, we’re very aware that the prospect of higher utility rates is difficult for our customers in this tough economy. We are very focused on controlling cost, to moderate our need for higher rates. Our entire management team is also keenly focused on laying a foundation on which we can build and deliver shareholder value in the years to come.

In that regard we have taken several steps over the past months to position the company for future success. In early August, we communicated that at our regulated businesses, we expect 2010 non-fuel operating and maintenance or O&M to be at a level close of that of 2008. Further at our regulated utilities, we identified and are carefully evaluating for possible elimination or deferral approximately $1 billion of previously claim capital expenditures schedule for the 2010 through 2013 period.

In August we stated that we expect merchant generation non-fuel O&M expenses will decline by 5% to 10% in 2010 as compared to the 2008 level. We also reported that we have eliminated approximately $1 billion in merchant generation capital expenditures from the 2010 through 2013 as compared to prior plans.

In our merchant generation business we have taken action to align both our staffing and generating fleet with the current commodity market environment. We have eliminated a total of 145 positions including management support and plant staffing. These alignment efforts include retiring the Meredosia one and two coal-fired generating units which had a combined capacity of 105 megawatts and limiting operation of the grand tower gas fired combustion turbines to the profitable summer months.

Meredosia one and two net generation was only about 255,000 megawatts in 2008 and only about 7,000 megawatts over the first nine months of 2009. To achieve the operating cost target to outlined in August for both our regulated utility and merchant generation business we initiated a voluntary employees separation program in September and we will follow it with an involuntary separation program in early November across our organization.

As I discussed we are seeking to recover increased costs in our regulated businesses to narrow the gap between our earned and allowed returns. I believe Ameren common shares provide investors with an attractive and sustainable dividend supported by our rate regulated utility earnings.

In addition we expect our earnings per share to grow over the long term as a result of narrowing the gap between our earned and allowed returns, investing in our regulated utilities and benefiting from recovery and power prices from our merchant generation business. We are laying a solid foundation for future success.

I will now turn the call over to Marty to walk you through the details of our third quarter 2009 earnings, review our narrowed full year 2009 earnings guidance and provide a financial update.

Marty Lyons

Thank, Tom. Turning to slide six, I would like to direct you to the Q3 column, which reconciles third quarter 2008 earnings to third quarter 2009 earnings. Third quarter 2009 net income in accordance with Generally Accepted Accounting Principles was 227 million or $1.04 per share compared to third quarter 2008 GAAP net income of $204 million or $0.97 per share.

Excluding certain items in each year, Ameren recorded third quarter 2009 core net income of $255 million or $1.16 per share compared with third quarter 2008 core net income of $246 million or $1.17 per share. There are three items in the third quarter of 2009 that we have excluded from our core earns. These items of the net costs associated with the Illinois comprehensive electric rate relief and customer assistance settlement agreement reached in 2007, which reduced third quarter 2009 GAAP earnings by $0.02 per share.

The net effects of mark-to-market activities, which decreased third quarter 2009 GAAP earnings by $0.04 per share and the cost of employee separation programs and the retirement of two generating units at Meredosia Power Plant, which reduced third quarter 2009 GAAP earnings by $0.06 per share. Cost of the Illinois electric rate relief settlement agreement and the net effects of mark-to-market were also excluded from core earnings in the year ago quarter.

Continuing with the third quarter reconciliation on slide six, the Missouri electric rate increase, which took effect March 1, 2009 raised third quarter 2009 earnings we $0.16 per share net of amortization compared to the third quarter of 2008. The net increase in Illinois electric and natural gas delivery service rates effective October 1, 2008 boosted third quarter 2009 earnings by $0.14 per share compared to the year ago quarter.

The effect of seasonally redesigned gas distribution rates in Illinois, which we have discussed with you in previous quarters increased earnings by $0.04 per share compared to the prior year period. The redesign which was effective October 1, 2008, reduces the sensitivity of our Ameren Illinois utilities gas margins to volume metric changes.

It is expected to have no net impact on full year 2009 results, with the first quarter 2009 earnings decline offset by higher earnings in the second exam third quarters of 2009. We estimate cooler summer weather reduced earnings by $0.12 per share, compare to the year ago quarter and by $0.16 versus to normal.

Moving on to the next line in our third quarters earnings reconciliation, reduced sales to Noranda Aluminum lowered third quarter 2009 earnings by $0.03 per share versus the year ago quarter. Other electric and gas margins for regulated utility operations, excluding the impact of rate adjustments, weather and the lost Noranda sales, decreased earnings by $0.03 per share.

Other electric margins for the Merchant Generation business, decreased by $0.07 per share in the third quarter of 2009, this decline was the result of weaker power prices and higher fuel and related transportation prig prices. The next three lines on our reconciliation combined to reduce third quarter 2009 earnings by $0.02 per share, primarily reflecting higher depreciation and amortization as a result of net additions to plant.

Financing costs and dilution reduced third quarter 2009 earnings by a combined $0.12 per share as compared to the third quarter of 2008. Of the $0.12, $0.08 of the reduction was due to higher financing costs and $0.04 was the result of an increased average number of common shares outstanding.

Shifting now the other taxes line on the reconciliation, higher property taxes reduced third quarter 2009 earnings per share by $0.02 versus the year ago period. Finally, the net impact of other items including lower bad debt expenses and lowers other operations in maintenance expenses, increased third quarter 2009 earnings per share by $0.06 per share as compared to the third quarter of 2008.

Moving onto our 2009 earnings guidance reconciliation on slide 7, as Tom stated, we are narrowing our 2009 core earnings guidance range to $2.70 to $2.90 from our prior range of $2.70 to $3.05 per share. Our new core earnings guidance reflects the effects of much cooler than normal third quarter weather, reduced sales expectations due to continued weak economic conditions, reduced merchant generation margins, and dilution from our September 2009 common equity offering.

The impact of these factors is partially offset by reduced operating and interest expenses as compared to our prior guidance. As we have said previously, the earnings guidance reconciliation line items are not meant to be pinpoint estimates of the noted earnings drivers. Instead, actual results are expected to be in a range around these estimates.

Our 2009 GAAP earnings guidance includes an estimated $0.07 per share negative impact of the Illinois comprehensive electric rate relief and customer assistance settlement agreement and an estimated $0.06 per share negative impact from the cost of employee separation programs and generating unit retirements, which were recorded in the third quarter.

Any net unrealized mark-to-market gains or losses will affect GAAP earnings, but are excluded from 2009 GAAP and core earnings guidance, because the company is unable to reasonably estimate the impact of any such gains or losses. We expect our 2009 GAAP earnings will be in the range of $2.57 to $2.77 per share as compared to the prior range of $2.63 to $2.98.

Ameren’s earnings guidance for 2009, assumes normal weather for the balance of the year and is subject to among other things regulatory decisions and legislative actions, plant operation, energy and capital and credit market conditions, economic conditions, severe storms, unusual or otherwise unexpected gains or losses, and other risks and uncertainties outlined or referred today in the forward-looking statements section of our press release.

At Ameren, we have demonstrated our commitment to maintaining and enhancing our financial strength, liquidity position and earnings with the series of specific and proactive actions. A recent action on this front is the September public issuance of common shares, raising net proceeds of $535 million.

The entire proceeds from this equity issuance were invested in our regulated utilities in late September, with $436 million going into AmerenUE, $13 million into AmerenCIPS, $25 million going into AmerenCILCO and $61 million going into AmerenIP. These equity infusions support our credit metrics, rating objectives and operational goals. The funds are expected to earn regulated returns as they are recognized in rates.

As Tom stated, our management team is focused on narrowing the gap between our earned and allowed returns at regulated utilities and positioning our merchant generation business to weather current power market and benefit from an expected eventual recovery. We look forward to meeting with many of you at DEI financial conference in Florida next week. This completes our prepared remarks.

We will now be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions)Your first question comes from Michael Lapides - Goldman Sachs

Michael Lapides - Goldman Sachs

Can you talk about come in the fourth quarter, I mean if hedges back in year fourth quarter guidance, can you talk about the rate, how the rate redesign items impact fourth quarter of ‘09 versus fourth quarter of ‘08?

Marty Lyons

I think if you take a look at our year-to-date results as well as the guidance that we have provided and take a look at the balance of the year, I think you will find that as compared to last year’s say core earnings we expect to be down about $0.10 versus the prior year core net.

This is driven we positive impacts of the Missouri rate case of course which happened in March as well as the lack of a Callaway refueling outage which is having a positive impact year-over-year in the fourth quarter, both in terms of O&M costs which are reduced as well as the net fuel costs, you will recall last year we cannot have a fuel adjustment cost in Missouri, which meant that when the Callaway plant went down we had fewer megawatt hours to sale, and therefore higher fuel costs and less off system sales.

This year we will recognize in our cost of fuel will be the net base fuel cost that are reflected in the fuel adjustment cost we received earlier this year. So, that’s expected to have a net positive in the fourth quarter. We think those positives will be offset by higher distribution system expenses, higher taxes in the fourth quarter, as well as lower merchant margins and higher financing costs including dilution. So, that’s sort of a summary of what we’re expecting in the fourth quarter versus last year.

Michael Lapides - Goldman Sachs

One thick, what are you seeing and what kind of changes on the merchant side of you seen between basis differentials between your plants and kind of the hub.

Tom Voss

I think what we saw earlier this year was that, we were seeing basis differentials that were sort of, I would say 4% to 7% range between our generation and hub. We saw sort of those trends higher in the summer and then kind of drop off a little bit as we got into July and August.

In September, they rose a bit again and frankly as a result of that, we reflected a little bit higher basis differential in our forecast for the remainder of the year, but it really as you think about that, the basis differential only really impacts us in a bit of a limited way.

Depending upon which of our plants you are looking at for example our EEI job a plant, the basis differential there between there and synergy is a little bit lower than you see with respect to some of our other generation and then our other generation depending upon how it is hedged we may not see as much basis differential.

For example, if the hedge has a settlement at a node that’s on top of our generation, then you’re not going to see a basis differential. It’s only if you get a hedge for that generation that that’s in hub. So, I keep that in mind as you think about the basis differentials.

Operator

Your final question comes from Dan Jenkins - State of Wisconsin Investment Board.

Dan Jenkins - State of Wisconsin Investment Board

Just wondering, have you gotten the staff positions yet on Illinois and Missouri cases?

Marty Lyons

We have received a staff position in Illinois, but staff position in the Missouri case is not due until December.

Dan Jenkins - State of Wisconsin Investment Board

So what’s in Illinois, what’s their position and what are the primary drivers of the difference between your request and what they’re recommending?

Marty Lyons

The staff position in Illinois came in at $45 million, and there are a number of drivers to that. One of which is, return on equity where they recommended lower returns on equity. They’ve also normalized a number of expense items and lowered those as well as suggested that certain of the pro forma additions in costs that we recommended be included in rates, be excluded from the overall rate increase.

Dan Jenkins - State of Wisconsin Investment Board

How much is due to the lower ROE?

Marty Lyons

The lower ROE versus our Rebuttal case is about $35 million of the overall difference.

Dan Jenkins - State of Wisconsin Investment Board

I was curious on the voluntary and involuntary separations, how many positions are you looking for in total and how is that versus what you’re seeing so far in the voluntary program?

Marty Lyons

In terms of the voluntary program, that the program has been completed. We offered it to over 300 employees, and we had about 100 employees except that program. As Tom mentioned, we’ve also reduced positions in our merchant business between 140 and 150 positions. As Tom mentioned in the early November timeframe, we’ll be also implementing some involuntary reduction measures as well.

Dan Jenkins - State of Wisconsin Investment Board

What’s the total amount you’re looking to save through those programs?

Marty Lyons

The target is really is more about the involuntary about making our organization better and more effective. It will be probably somewhere between 50 and 100 reductions.

Operator

Ladies and gentlemen, there are no further questions at this time. I will turn the conference back to management for closing comments. Thank you.

Doug Fischer

Thank you for participating in this call. Let me remind you again, that this call will be available through November 6, on playback, and for one year on our website. The announcement carries instructions on listening to the playback. You may also call the contacts listed on our news release. Financial analysts, enquiry should be directed to me, Dough Fischer, media should contact Susan Gallagher. My number and Susan’s contact numbers are on the news release. Again thanks for your interest in Ameren.

Operator

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

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