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Ameren (NYSE:AEE)

Q2 2014 Earnings Call

August 05, 2014 10:00 am ET

Executives

Douglas Fischer -

Warner L. Baxter - Executive Chairman, Chief Executive Officer and President

Martin J. Lyons - Chief Financial Officer and Executive Vice President

Maureen A. Borkowski - Chairman of ATX, Chief Executive Officer of ATX and President of ATX

Michael L. Moehn - Senior Vice President of Customer Operations of Ameren Missouri

Analysts

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Stephen Byrd - Morgan Stanley, Research Division

Paul Patterson - Glenrock Associates LLC

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Andrew Bischof - Morningstar Inc., Research Division

Operator

Greetings, and welcome to the Ameren Corporation Second Quarter 2014 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Douglas Fischer. Thank you. You may begin.

Douglas Fischer

Thank you, and good morning. I'm Doug Fischer, Senior Director of Investor Relations for Ameren Corporation. On the call with me today are: Warner Baxter, our Chairman, President and Chief Executive Officer; and Marty Lyons, our Executive Vice President and Chief Financial Officer, as well as 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 1 year on our website at ameren.com. 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 on our website a presentation that will be referenced by our speakers. To access this presentation, please look in the Investors section of our website under Webcast 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. For additional information concerning these factors, please read the Forward-looking Statements section in the news release we issued today and the Forward-looking Statements and Risk Factors sections in our filings with the SEC. Warner will begin this call with a review of second quarter earnings and full year guidance. He will then provide an update on regulatory and business matters. Marty will follow with more detailed discussions of second quarter results, as well as 2014 earnings and cash flow guidance. He will also provide details related to pending rate cases. We will then open the call for questions. Before Warner begins, I would like to mention that all per share amounts discussed during today's presentation, including earnings guidance, are presented on a continuing operations basis, unless otherwise noted. Now here's Warner, who will start on Page 4 of the presentation.

Warner L. Baxter

Thanks, Doug, and good morning, everyone, and thank you for joining us. Today, we announced second quarter 2014 earnings of $0.62 per share, compared to second quarter 2013 earnings of $0.44 per share. This increase reflected the absence of Callaway Energy Center nuclear refueling outage expenses in the second quarter of this year, as well as the absence of last year's second quarter charge related to the Missouri fuel adjustment clause. This year, the Callaway refueling outage is scheduled for the fourth quarter, while last year the refueling outage occurred in the second quarter. The earnings comparison also benefited from this year's warmer early summer temperatures, which drove Missouri native load electric sales volumes higher. Other positive factors included increased rates effective the beginning of this year for FERC-regulated electric transmission and Illinois natural gas delivery services, as well as decreased interest expense. These positives were partially offset by a higher effective income tax rate. Today, we also affirmed our earnings guidance for this year. We continue to expect 2014 earnings to be in the range of $2.30 to $2.50 per share. Marty will provide further details on the second quarter earnings and other financial matters in a few minutes. Before he does so, I would like to update you on recent regulatory and business developments at our Missouri and Illinois utilities, as well as our FERC-regulated electric transmission activities.

Turning now to Page 5, I will begin with a discussion of Missouri operations. At Ameren Missouri early last month, we filed a request with the Missouri PSC for an electric service rate increase to recover higher costs for providing our customers with more dependable energy from a cleaner and more diverse energy portfolio. Nearly 1/2 of the $264 million annual request is for recovery of increased net energy costs that would otherwise be recovered through the Missouri fuel adjustment clause. The balance of the request provides for a recovery of and a return on important new electric infrastructure investments to benefit our customers, including investments for nuclear safety, environmental controls, new substations and renewable generation. It also provides for recovery of the increased income and property taxes, as well as rebates paid for customer-installed solar generation. Ameren Missouri has worked aggressively to manage those costs that are under its control. Our success in this area has led to electric rates that are the lowest of any investor-owned utility in Missouri, and are well below the Midwest and national averages. This disciplined cost management benefits our customers and is evident in this rate filing. In particular, our current request incorporates $67 million of annual reductions in operating costs, since we're passing those savings on to our customers. We expect the Missouri PSC to issue a decision in this case by May of next year.

Turning now to Page 6. In addition to our pending electric rate case, our Missouri regulatory team has also been busy addressing the electric rate shift and earnings complaint cases filed by Ameren Missouri's largest industrial customer, Noranda, which operates an aluminum smelter in the southeastern portion of the state. In both of these cases, the burden of proof is squarely on Noranda. While Noranda's electric rate shift proposal is revenue-neutral to Ameren Missouri, we believe Noranda's proposed rate reduction would lower its rates significantly below its cost of service. This proposal is not justified, would result in poor public policy, and therefore, is not in the best long-term interest of our other 1.2 million collective customers. The Missouri PSC staff has agreed with this view and filed testimony stating that Noranda's proposed rate shift should not be approved. Missouri PSC is scheduled to issue a decision this month.

Moving to the earnings complaint case, Noranda has argued that Ameren Missouri's electric service rates should be reduced because we are earning a return on equity that Noranda alleges to be above the level it believes is appropriate. The Missouri PSC staff has filed a testimony that clearly opposes Noranda's proposal that our rates be reduced. And of course, we strongly disagree with Noranda's claim, and our recently filed electric rate case, which I just discussed, clearly demonstrates why our rates should be increased, not reduced. Hearings in the earnings complaint case were completed early last week, and the Missouri PSC is scheduled to issue a decision in September. I will conclude my Missouri update by discussing 4 key infrastructure projects that we expect to complete by the end of this year, and which are included in the rate base amount used to compute our requested revenue requirement in the pending electric rate case. To begin, we will be replacing the reactor vessel head at our Callaway Nuclear Energy Center during our scheduled fourth quarter refueling and maintenance outage. I am pleased to report that the new reactor vessel head arrived at the Callaway site in June, and our team is in the final stages of preparing to complete this important safety project. A second key project, upgrading the electrostatic precipitators at our coal-fired Labadie Energy Center is scheduled for completion by year-end. This added environmental equipment is being installed to ensure compliance with the U.S. EPA's Mercury and Air Toxics Standards. Third, to enhance reliability in downtown St. Louis, we are scheduled to complete construction of a new substation, also by year-end. Finally, construction of the O'Fallon Renewable Energy Center, Missouri's largest investor-owned utility solar facility, is underway and is expected to be completed in the fourth quarter.

Moving now to Page 7 and an update on our Illinois activities. I will begin with electric and natural gas delivery services. In June, we installed our first AMI electric meters as part of our plan to deploy over 750,000 such smart meters through 2019. The installation of these meters is a key component of our Illinois Modernization Action Plan or MAP. This plan is made possible by the Illinois Energy Infrastructure Modernization Act and resulting formula ratemaking for electric delivery service. It is designed to benefit customers by significantly enhancing our Illinois electric delivery system, growing Illinois' economy by creating well-paying jobs and providing our shareholders timely cost recovery of and a fair return on infrastructure investments we make to benefit our customers. Along with the installation of AMI electric meters, we are also installing approximately 450,000 automated natural gas smart meters. The concurrent installation of electric and gas meters saves our customers money compared to their separate installation. Over time, the new electric meters, along with other MAP upgrades, will improve service by helping Ameren Illinois detect and isolate outages faster. Further, the new electric and gas meters will provide customers with more information and new tools and new programs to better manage their energy costs. The gas meter installations, like other gas delivery infrastructure investments, are being made under our ratemaking framework, which permits rates to be established using a future test year and provides an infrastructure rider for qualified investments. We plan to begin using this rider next year. Moving on to our Illinois electric delivery business, we filed for a $205 million formula rate update. This case is pending at the ICC. The new rates will be effective in January of next year. Marty will discuss this matter further a little bit later. Finally, I will provide you with an update on our FERC-regulated electric transmission operations. We're in the early stages of construction of our largest single project, the approximately $1.1 billion Illinois Rivers regional Multi-Value Project. This 345-kilovolt transmission line will stretch from Eastern Missouri across the state of Illinois to Western Indiana. Substation construction from right-of-way acquisition are underway, and line construction is expected to begin later this year. The first sections are expected to be completed in 2016, with the last section slated for completion by 2019. Next, I would like to update you on our Spoon River project, another MISO-approved regional multi-value transmission line that will extend between Peoria and Galesburg, Illinois. This line is expected to be in service by 2018. We have completed a series of open house meetings designed to inform area residents about the project, and to receive input. And we plan to request a certificate of public convenience and necessity from the ICC this month. We expect a decision on this request in mid-2015. Spoon River's cost is estimated at approximately $130 million to $150 million, depending on the route approved by the ICC. On the transmission rate front, in November of last year, a customer group filed a complaint case with FERC, seeking a reduction in the allowed ROE for MISO transmission owners. This complaint case could result in a reduction to Ameren Illinois' and ATXI's allowed ROE retroactive to November of last year. Our allowed ROE is currently 12.38%. In June 2014, in a separate proceeding, FERC issued an order that reduced the base-allowed ROEs for New England transmission owners from 11.14% to 10.57%. The order used market data from October 2012 to March 2013 to determine this new allowed ROE. Although we believe some of the FERC's reasoning in the New England case may establish precedents for other cases, it is not clear at this time to what extent, if any, the MISO ROE will be reduced. In fact, FERC has taken no action regarding the MISO case. Turning to Page 8. I would now like to discuss an important energy policy matter for our company and our country. In early June, the U.S. EPA issued its Clean Power Plan, a proposed rule governing carbon dioxide emissions from existing power plants. This proposal targets a 30% reduction in carbon dioxide emissions from the power sector by 2030 based on 2005 emission levels, and includes aggressive interim goals beginning in 2020. Ameren believes the EPA's proposed rule is currently unworkable in many respects and will result in significant cost increases to our customers, raise system reliability risks, cost job losses and damage the economy. We also believe that if this rule was finalized in its proposed form, it would certainly be challenged in the courts. To be clear, at Ameren, we are committed to transitioning to a cleaner, more diverse energy portfolio, but that must be done in a responsible fashion. Indeed, we have developed and are executing on a plan that will achieve the EPA's goals of reducing carbon emissions by 30%, but we intend to complete that plan by 2035 as opposed to EPA's proposed 2030 date for its aggressive interim targets. We will formally outline our plan in a Missouri Integrated Resource Plan filing this October. Importantly, our plan can be achieved at a cost that is significantly less than that of the EPA's proposal, and will better protect jobs and the overall economic competitiveness of our region. Looking ahead, we will work in a constructive fashion with key stakeholders, including the EPA, to implement energy policies that will allow us to execute our transition plan for the long-term benefit of our customers, our communities, the environment and our shareholders.

Turning now to Page 9. I would like to conclude my prepared remarks by discussing why I'm so firmly convinced that Ameren's positioned to deliver superior value to our shareholders and customers as we execute our well-defined strategic plan. That plan calls for investing in and operating our utilities in a manner consistent with existing regulatory frameworks, as well as working to enhance those frameworks and advocating for responsible energy policies at both the federal and state levels. Further, we are focused on creating and capitalizing on opportunities to invest in our rate-regulated businesses for the benefit of our customers and shareholders.

On Page 10, we outline our plan to execute a key component of this strategy. As shown at the top of this page, we are allocating significant and growing amounts of discretionary capital to Ameren Illinois' energy delivery and our FERC-related electric transmission businesses so that we can improve the safety, dependability and sustainability of the services we provide to our customers, and because these businesses operate under modern constructive regulatory frameworks. Our solid list of transmission projects is expected to increase our FERC-regulated transmission rate base by approximately 28% compounded annually for the 2013 to 2018 period. In addition, our Ameren Illinois investments are expected to contribute to projected Illinois electric and gas delivery rate base growth of 5% and 7%, respectively, on a compound annual basis over this period. Our 5-year outlook in corporate's expected Missouri rate base growth at only a 2% compound annual rate, reflecting the current state regulatory framework that is less constructive than those for our Illinois energy delivery and FERC-regulated electric transmission businesses. Pulling all of this together, we expect our overall rate base to grow at approximately 6% compounded annually from year-end 2013 through 2018, as shown at the bottom of this page. Combining this rate base growth with strategic capital allocation and disciplined cost management, including reductions in parent company and other costs, we expect earnings per share to grow 7% to 10% compounded annually from 2013 through 2018. Again, thank you, all, for joining us. And I will now turn the call over to Marty. Marty?

Martin J. Lyons

Thank you, Warner. Turning now to Page 12 of our presentation. As Warner noted, today, we reported earnings for the second quarter of 2014 of $0.62 per share compared to $0.44 per share for the second quarter of 2013. Key drivers of the earnings improvement are listed on this page. The absence of a refueling and maintenance outage at our Callaway Nuclear Energy Center in this year's second quarter increased earnings by $0.08 per share. The absence of another item, the second quarter 2013 charge related to Missouri FAC treatment of certain prior period wholesale sales had a $0.06 per share positive impact on the comparison. A third driver of the earnings improvement was this year's warmer early summer temperatures. This warmer weather drove higher Missouri native load electric sales volumes and benefited earnings by an estimated $0.03 per share compared to the year-ago quarter, and by an estimated $0.04 per share compared to normal temperatures. On a weather-normalized basis, we estimate that second quarter 2014 electric sales volumes to residential and commercial customers were essentially flat compared to the second quarter of 2013. We estimate that these weather-normalized sales volumes would've grown, but for energy efficiency programs. And you will recall that the energy -- the earnings effect of Missouri's energy efficiency programs are offset by revenue recovery provided for under our Missouri PSC approved energy efficiency plan. Electric sales volumes to industrial customers declined about 1.5%, which was entirely due to lower Illinois electric delivery volumes, which were down about 3%. Our Illinois industrial customers are subject to formula ratemaking, and margins on sales to these customers are relatively low. Missouri industrial sales increased about 0.5% compared to the second quarter of last year and on a year-to-date basis. Other factors contributing to the increase in the second quarter 2014 earnings compared to the second quarter of 2013 included decreased interest expense, as well as increased rates. Each January, new rates are implemented for our FERC-regulated electric transmission services. Under FERC's forward-looking formula-based ratemaking, rates are adjusted to provide a recovery of and a return on that year's infrastructure investments, as well as to reflect changes in operating cost. Our Illinois natural gas delivery service rates were also increased, effective January of this year. This increase was based on a 2014 test year, reflecting recovery of and a return on estimated 2014 rate base and changes in operating cost. These positives were partially offset by a higher effective income tax rate.

Moving to Page 13. As Warner mentioned, we have affirmed our full year 2014 earnings guidance range of $2.30 to $2.50 per share. Here, we highlight select second half 2014 earnings per share considerations incorporated into our guidance range. Let me begin with a discussion of weather. Our 2014 earnings guidance assumes normal temperatures for the second half of this year, but we do note that July 2014 temperatures were cooler than normal, with cooling degree days down about 35% compared to normal conditions. We still have 5 months of the year remaining, including the balance of the summer and the winter weather we experience in the fourth quarter, but we preliminary estimate July temperatures will reduce earnings by $0.05 to $0.10 per share compared to normal conditions. While July temperatures are not incorporated in our guidance, their effect would be accommodated by our guidance range. Moving to other considerations, we expect second half 2014 earnings to benefit from the previously discussed 2014 increases in rates for FERC-regulated electric transmission and Illinois gas delivery services. Further, Illinois electric delivery earnings are expected to increase by approximately $0.05 per share in the second half of this year, compared to the second half of last year. This reflects higher revenues recognized under formula ratemaking due to higher rate base and a higher allowed ROE this year compared to last year. The allowed ROE for our Illinois electric delivery service is established by adding 580 basis points to the year's average 30-year treasury bond yield. Our 2014 guidance now assumes a formula midpoint allowed ROE of 9.4% for Illinois electric delivery service, a 50-basis-point reduction from the level incorporated into our initial guidance issued in February. In addition, we expect second half earnings to benefit compared to the second half of last year from lower interest expense, largely due to the May maturity of $425 million of parent company senior notes with an 8.875% coupon. We funded this maturity with low-cost short-term debt. The final positive I would like to note is the absence of a fourth quarter 2013 Illinois debt redemption cost disallowance. Factors that we expect to negatively affect the second half earnings comparison include expenses associated with the 2014 Callaway Energy Center nuclear refueling outage, which will take place in the fourth quarter. Further, we expect increases in other operations and maintenance, depreciation and property tax expenses for Missouri electric and gas service and Illinois gas delivery service in the second half of this year, as compared to the second half of last year. Finally, we expect the full year 2014 effective income tax rate to be approximately 39.5%, which is higher than last year's full year rate of 37.5%, and also higher than the approximately 38.5%, which was incorporated into our initial earnings guidance issued in February. Looking ahead to 2015, we expect that our effective income tax rate will be more in line with the level incorporated into this year's initial guidance range, assuming no change in federal and state law. Of course, these are only some of the factors that will have an effect on our second half earnings comparison.

Turning to Page 14. I will move from earnings to our updated 2014 free cash flow guidance. We now anticipate 2014 negative free cash flow will be approximately $700 million compared to our guidance back in May of negative $775 million. This change reflects improved cash flows provided by operating activities. Our capital expenditure plans, which are driving our earnings expectations, are unchanged. Regarding the Illinois Rivers project, we plan to provide you with an updated cost on our fourth quarter call when we routinely update our 5-year capital spending plan. The new estimate will incorporate the final ICC approved route, which is somewhat longer than the originally proposed, and accommodates certain property owner environmental concerns. As I stated on our first quarter call, we expect this new cost estimate to be modestly higher than the current estimate.

Moving now to Page 15. Warner discussed our recently filed request for increased Missouri electric service rates. We provide more details on this page. As you can see, the request is primarily driven by increased net energy costs, which include fuel and purchased power costs, net of off-system sales, and our need to recover and earn a return on important new infrastructure investments made for the benefit of our customers. Further, we have significantly reduced operating costs and will pass these cost reductions on to our customers. Schedule for the case has not yet been established, but we expect the Missouri PSC to decide the case by May of next year, and a new rate is expected to be effective in June 2015. Turning to Page 16, a more detailed update on our pending Illinois electric delivery rate case. I remind you that each year's Illinois electric delivery earnings are a function of that year's ending rate base, the formula determined allowed return on equity and the ICC authorized equity ratio. Illinois' formula ratemaking requires Ameren Illinois to file for annual rate updates, to systematically update cash flows over time for changes in cost of service and to true up any prior period over- or under-recovery of such cost. In April of this year, Ameren Illinois filed an update case, seeking an increase on electric rates to reflect 2013 actual cost, expected 2014 infrastructure investments and changes in prior period over and under recovery balances. The requested increase was updated in our rebuttal testimony filed Friday and is now $205 million, a decrease of just $1 million from our initial request. While the filing with the ICC would result in an increase in 2015 electric delivery service rates, total electric bills in 2015 are still expected to remain below 2011 levels for most customers. Because the parties have gained experience with Illinois' formula ratemaking, and because we reached agreement with the ICC staff on key issues that were disputed in our prior formula rate cases, the positions of the parties are closer to one another in this case than they have been in the past. This is reflected in the testimony filed by the ICC staff and intervenors. They have recommended annual revenue requirements that range from $3 million to $7 million less than our updated request. An ICC order is expected by December of this year, and new rates will be effective in January of next year.

Turning finally then to Page 17, I will summarize. We are executing on a well-defined strategy, as outlined by Warner. Our second quarter 2014 earnings results were solid, and we affirmed our earnings guidance range for this year. Further, we continue to expect earnings per share to grow at a 7% to 10% compound annual rate from 2013 through 2018. This above peer group average growth rate is driven by our investment plan, including our strong rate base growth, strategic allocation of capital and disciplined cost management. Further, Ameren's $1.60 per share annualized dividend rate provides investors with a yield of approximately 4%. We believe this expected earnings growth, coupled with our current dividend yield, add up to a very attractive total return proposition for investors. Finally, we aspire to grow our dividend as earnings grow and expect our dividend payout to be between 55% and 70% of annual earnings. That concludes our prepared remarks. We now invite your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Julien Dumoulin-Smith with UBS.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Well, I wonder, first off -- obviously, you made an announcement about Meramec. I wondered if, first, with respect to your current contemplated CapEx budget, how does that change anything? Obviously, it's pretty long-dated. And then secondly, obviously, your IRP is still coming up here, but with respect to the balance of your portfolio, I'm thinking Rush Island or others, how could that eventually shift here as well? How are you thinking about compliance for those plants?

Martin J. Lyons

Sure, Julien. This is Marty. I'll start, and see if anybody else or Warner wants to add anything. But with respect to our overall capital expenditure plan that we've laid out for the 5 years that was in the slide Warner covered and we've shared previously, really, we don't see any change there resulting from the Meramec decision. Really, there, the Meramec decision in the context of certainly the rate case filing is probably where the biggest impact is, where we're looking to shorten up the depreciable life of Meramec to coincide with the expected retirement date of that plant. And that's driving, I guess, about $17 million of the overall increase we're requesting as part of the Missouri rate case. But overall, no change in our capital expenditure plans. And I'd say that in terms of how Meramec will impact our future generation resources and plans, as well as other considerations regarding the rest of our fleet, as you point out, will really be laid out as part of our October Integrated Resource Plan filing.

Warner L. Baxter

And Julien, this is Warner. I think you asked a good question about Rush Island. As Marty said, we'll talk about the specifics of our Integrated Resource Plan in October. But in general, our objective is to take our existing coal-fired facilities and utilize them towards the end of their useful lives, which is what we're doing with Meramec. And that's how we would think about Rush Island as well. And so we'll be able to spell that with out more specificity, but we're not contemplating accelerating the retirement of our coal-fired units as part of our Integrated Resource Plan because we think that's in the long-term interest of our customers and the State of Missouri.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Great. And then secondly, on FERC, obviously, a lot of activity in the quarter. First, could you comment on potentially filing for incentives to the extent to which that the ROE itself gets adjusted here? And then secondly, from your point of view, what do you perceive the timeline is being for the MISO 206 at this point in time?

Maureen A. Borkowski

This is Maureen Borkowski. It's -- obviously, we can't speculate on either a timeline or any results at FERC. With regard to the question about incentives, we obviously already have certain incentives like Quip for the Illinois River, Spoon River and Mark Twain projects. We are also, we believe, entitled to an extra 50-basis-point adder that's not included in the 12.38% MISO-based rate today. We, in our answer to the complaint that was filed in November, asked FERC to affirm that we were entitled to that 50 basis points. So obviously, to the extent FERC chose to take some action at some point, we believe we're entitled to that adder.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

But just to be clear, when would you file for that adder? Would that be subsequent to any resolution?

Maureen A. Borkowski

I really can't speculate on that at this point. As I said, we actually did already request FERC to affirm that when we filed our answer. So to the extent FERC took any action, they may address it at that point.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Great, excellent. And then lastly, on financing, just at the parent, any updated thoughts on timeline in terms of getting that done? And perhaps, just more broadly, I'm not sure I heard it, how are you thinking about taking down the parent expense? Any updated thoughts there, just post-Genco, et cetera?

Martin J. Lyons

No, a fair question, Julien, but I wouldn't say any updated considerations. I think as we pointed out in our talking points, we were able to utilize commercial paper borrowings in order to handle the maturity of the $425 million parent company debt; obviously very low cost there associated with those commercial paper borrowings, less than 50 basis points of ongoing cost. We'll evaluate the need for and the amount of parent company financing, long-term parent company financing, over time, both in terms of considering how much short-term debt we would ideally keep outstanding and then how much long-term funding we would need. Longer -- certainly, some of that parent company financing right now is really going to support the transmission build-out that is occurring. And so longer term, we'll be considering whether to issue the more permanent financing at the parent company or at the transmission company level. And that's something that will play out over the next couple of years, as we build out that transmission business. So may or may not do some parent company long-term financing later this year or into next. We'll be evaluating that through time. In terms of other financing activities later this year, we do still plan to issue additional long-term debt at our Ameren Illinois utility company; again, there because of the capital expenditures for our electric and gas distribution businesses, but also for some of the transmission growth that we're seeing there as well.

Operator

Our next question is from Stephen Byrd with Morgan Stanley.

Stephen Byrd - Morgan Stanley, Research Division

I wonder if you could just give us an update on expected timing for your transmission plans relating to the integration of Entergy into MISO? And just more broadly, milestones or other steps we should be on the lookout as you think further about growth in transmission?

Maureen A. Borkowski

Obviously that -- this is Maureen again. The -- any integration with regard to Entergy has to go through the MISO transmission expansion planning process. We are actively engaged in that with the intent of identifying future projects that might both provide better reliability and integrate Entergy fully into the marketplace. But that has to go through the timeline that MISO has established.

Warner L. Baxter

And I would add -- Steve, this is Warner. I would just add that Maureen and her team have been working actively on this, not just for the last several months, but frankly, for the last year and will continue to do so. As we even said in our last conference call, we see real opportunities in MISO, but also beyond MISO in PJM and SPP, those transmission growth opportunities.

Stephen Byrd - Morgan Stanley, Research Division

Is there anything specific in regards to upcoming MISO events or timelines that we should be focused on?

Maureen A. Borkowski

I would say at this point in time, the MISO planning process is like a 15-month process. So the one that we're beginning now that we'll be actively studying, the transmission opportunities for -- between Entergy and the rest of MISO would ultimately come to fruition at the end of 2015.

Stephen Byrd - Morgan Stanley, Research Division

Okay, understood. And shifting gears just over to the proposed EPA carbon regulation. Warner, you've mentioned that as you looked at it, it appeared to be a fairly unworkable rule, as presented. Can you talk a little bit more to the key issues that you see with the proposed EPA regulation?

Warner L. Baxter

Yes, sure, Steven. And I would probably put them in probably 2 or 3 buckets. I think the most important bucket we should talk about is, it's unworkable from a customer standpoint and in terms of the overall significant cost increases that they would result in. We have a baseline plan that we have put together as part of our integrated resource planning effort. So our team has been able to really compare what it would take to execute the greenhouse gas proposal compared to our baseline plan. And as we identified, it would be a significant cost increase to our customers. And that's really driven by some of the -- what I will consider some of the more operational challenges associated with the overall proposal. And you probably have heard, and many of my colleagues who've been out there talking to the same thing about building blocks, and some of the challenges that we -- that you have with those. From our perspective, you look at the plant efficiency building block looking for plant efficiencies of approximately 6%. Simply put, those aren't achievable. Those aren't achievable. We've taken a lot of efficiencies out of the plant. We've already done a lot of those works. To try and get an additional 6% is, from our perspective, just simply not achievable. When you think about the uneconomic dispatch of natural gas, which is another key driver of the increase, look, I think you have to think about the gas infrastructure first to support that, but then the uneconomic dispatch and whether, frankly, states have the ability to dispatch in that way. As you know, the RTLs control that. That's a tough nut to crack. I'm not sure if that is ultimately going to be fact-based, and whether we can execute that. You look at energy efficiency, which we have the largest energy efficiency program in the State of Missouri today. To be able to get an incremental 1.5% out of that not only would drive higher cost, but would certainly be no guarantee the customers ultimately would participate in that level. And I would say, lastly, looking even at the renewable piece associated with the building block. And, again, in Missouri in particular, our ability to do renewables is, under State law, capped by the amount of renewables we can do in terms of impact on customer rates and ultimately, the participants. So when you look at those things, all those factors really drive the operational issues that we have that drive the significant cost increases to our customers, which as I said before, not only causes us concerns there, but also in terms of the economic competitiveness of our region and certainly, the State of Missouri. And lastly, but not the least, I think when you -- there's certainly been, as I said, we expect there to be legal challenges to the rule. There are already. And so we, too, share some of those concerns. And so we put all those things together, we have a rule, when we put it all together, that we believe is simply unworkable in its current form. Now as I said, too, we -- our objective going forward is to continue to work constructively with key stakeholders, both at the federal and state level, including consumer groups and others to make sure, and as well as the EPA, to try and put in place energy policies that ultimately that will allow us to execute our transition plan, which we believe is in the best long-term interest of our customers, but also to ensure that we do the right things in the broadest economic sense, for both the state and the region.

Operator

Our next question comes from Paul Patterson with Glenrock Associates.

Paul Patterson - Glenrock Associates LLC

Just back on the FERC ROE case, could you give us a little bit of a flavor of some of the differences you guys see in your situation versus New England that might not lead to the same outcome that we saw in New England?

Martin J. Lyons

Paul, I -- we laid all those out in testimony. So I certainly would refer you to there. I mean, I think right now, certainly, there's more uncertainty because the FERC really hasn't established any kind of a timeline for the MISO case. And therefore, it's really uncertain when they'll take the case up, assuming that they do take the case up, and then what the data will look like at the time that, that data is collected to determine the appropriate range of ROEs to consider. So I think the biggest difference that I would point to is just timing and the uncertainty about when the FERC would potentially take the case up and how that might affect the data that underlies the ROE determination. So I'd say that's the biggest factor.

Paul Patterson - Glenrock Associates LLC

Okay. Just to make sure I understand, though, have you guys filed anything in response to the -- because there's a lot of stuff going on. Have you guys filed anything in response to what FERC decided in the New England case? Or are you just referring to stuff that you filed previously in the back and forth?

Martin J. Lyons

I was just referring to things we filed previously in the back and forth. Hands on that specifically, we could certainly you help offline. But, no, we did not file anything specifically as a response or in reaction to the New England case.

Paul Patterson - Glenrock Associates LLC

Okay, I appreciate that. The second thing is with respect to the Noranda case, what I'm a little bit confused by is why -- and I'm talking about the rate design case, why the OPC and these other customer groups seem to be supporting the subsidy, which I would assume will be coming from the customers that they're representing. Do I understand that correctly or am I missing something? Or could you maybe fill me in on what's going on there?

Michael L. Moehn

Yes, this is Michael Moehn. Yes, it's hard to speculate. Honestly, it -- they are certainly representing consumers. As we've argued all along in this case, we don't think it's good policy. It's not good for our customers, because of the way it shifts the cost. And it's hard to speculate why they're doing it, but it absolutely is -- it doesn't seem to make sense, and that's why we are absolutely so opposed against it.

Paul Patterson - Glenrock Associates LLC

Okay. And then just 2 really quick ones. I'm sorry I missed this, but what was the weather normalized sales growth for Q2? And then with respect to Noranda tricks [ph], it looks like, if the smelter closes, does that change any way your CapEx plans with respect to load and what have you? Because your smelter sometimes use a lot of electricity. I'm wondering, if it closes, does that make -- I don't know, does that change what you might need to do with respect to certain plans and stuff?

Martin J. Lyons

Sure, I'll -- Paul, it's Marty. I'll try to take those in reverse order. Certainly, not speculating on Noranda's operations and any risk or potential for closure there, but the -- your underlying -- I guess, the bottom line question there is, would it affect any of our CapEx plans? And the answer to that is no, that there wouldn't be any change in our -- the CapEx plans that we've outlined over this 5-year period as a result of that. Going back to your original question then, which was about the sales and the economy. I took the question out of order because I'll probably give a little more sort of lengthy explanation about what we're seeing in terms of sales and the economy. When we started off the year, you may recall that we expected sales to be down, the residential and commercial, about 1%, and industrial overall down about 0.7%. Year-to-date, what we're actually seeing on a weather-normalized basis is that our residential and commercial customers are up about 0.5%, and the industrial customers are actually down about 1.5%. And again, that's Ameren-wide. And so as we think about the remainder of the year, we've seen, like I said, a little bit more a positive in terms of residential and commercial through middle of the year. We're factoring that in, but still expecting that due to energy efficiency programs, as well as federal lighting standards, et cetera, that the remainder of the year, we would still expect to see sales lag the prior year. So overall, we're now expecting about residential and commercial to decline about 0.5% versus our initial beginning year guidance of negative 1%. On the industrial front, we still seem to see really manufacturing weakness, particularly in Illinois. And so we're expecting there for the full year to see industrial sales down about 1.4%. So those are some of the factors that are going on. Like I said, the -- we're spending quite a bit on energy efficiency. In Illinois, we're spending about $85 million this year; Missouri, about $50 million this year on energy efficiency. And that is impacting sales. The programs in Missouri have been ramped up here just in the past couple of years as a result of our energy efficiency program that was approved by the commission. So we're seeing a pretty material impact there. I mentioned that we saw residential commercial sales year-to-date up about 0.5%. In Missouri, we're actually seeing the residential and commercial sales down about 0.9%. It's almost a full 1%. But if you back out the effects of the energy efficiency programs, that's probably equivalent to about 1% of actual sales growth. So I guess, what I'm trying to communicate there is, absent the energy efficiency spending that we've got, we're actually seeing pretty good growth in residential and commercial sales, both in Missouri and Illinois. And of course, we are compensated for the energy efficiency impacts in Missouri. On the industrial front, I mentioned that the Illinois sales were down year-to-date. They're down, as we just talked about in the call, almost 3%. In Missouri, we're actually seeing some continued expansion in terms of industrial sales. What we're seeing in those sales up about 0.5%, and there is some impact there, again, from energy efficiency. They're probably up about a full 1%, backing out the impacts of energy efficiency. So we're continuing to see some good expansion of our industrial sales in Missouri. And I guess, my last point on all this is, I do think that sort of reflects what we're seeing in the overall economy in the 2 states. We're seeing an uptick in, I'd say, services jobs, manufacturing jobs in Missouri, seeing about a flat kind of trend in services jobs in Illinois, a little bit of a decline in manufacturing jobs. And that's kind of what we're seeing in the 2 states in both -- in terms of sales and in terms of jobs.

Operator

Our next question is from Michael Lapides with Goldman Sachs.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

A couple of easy ones, and then one on the Missouri rate case. Marty, you made some comments about O&M in the second half for the year. Outside of the Callaway outage that sends an impact in the fourth quarter, and that's more of just a timing issue, what else is impacting O&M? And is it up more than 1% or 2%?

Martin J. Lyons

Paul, it's -- or not Paul; I apologize. Michael, I apologize. Yes, just in terms of the O&M, we did comment on that, just general growth across the business in terms of our distribution business, our generation portfolio, as well as just other areas like an increasing property taxes and the like. So we're kind of seeing growth across those areas this year. I don't have anything in terms of overall percentages for you, but as we think about the rate case and the rate case that we filed in Missouri, certainly, those costs are picked up. So the test year has an update period after December 31. And as it relates to significant drivers, let's say fuel cost or other elements of O&M, actually we'll reach out and pick up, say, January 1, kinds of cost increases. So those things are built in. And I pointed out in our discussion of our rate case filing that overall, we're actually seeing a sort of -- while there's a rate increase being requested, that's net of about a $67 million reduction in operations and maintenance costs. So in that 2.5 years period from the last rate case to this rate case, while there've been some elements of cost increase, net, we've been able to use continuous improvement efforts to drive costs out of the business, and that's reflected in the rate case.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Okay. And I wanted to ask a little bit about the rate case, only because I've thumbed through some of the detail earlier. So I kind of think about the Missouri business, and please correct me if I'm using wrong data here, kind of a $7.6 billion, $7.7 billion of total rate base for next year. If you use kind of the authorized equity layers in the very low 50% range and kind of the ROEs that the commission has given over the last 1 or 2 cases, kind of around 10% or so, you kind of get close to about $400 million of authorized net income. And if I look backwards a little bit, like at 2012 or 2013, your UE segment kind of reported net income in that level. So I just -- I wanted to kind of think about what's driving the actual need for the case. Just kind of back of the envelope rate base math would imply you're not too far off from actually earning your authorized, and may have been you had abnormal weather in some of those years or abnormally low costs that are now creeping up. I just -- I wasn't really kind of sure I understood the puts and takes.

Martin J. Lyons

Well, Michael, I would say, without knowing exactly what years you're looking at, certainly, the prior years' earnings, when you pick them up on an as reported basis, certainly do reflect fluctuations for things like weather, for the timing of Callaway outages. So certainly, you can't really look at a calendar year earnings and assume those are sort of normalized and apples-to-apples for what might be achievable in a different year. As it relates to the rate case itself and your earnings drivers, I mean, I think you were picking up the right things overall. If you refer to Slide 15 in our slide deck, we've outlined the drivers of our current rate case, and we've shown there what we expect rate base to be at the end of this year, around $7.3 billion. We talked about the equity ratio we expect for the end of this year, 51.6%. And those are the real drivers, of course, of the earnings levels. And then in part of the rate case process, you normalize cost levels and sales levels and things of that sort. But the real driver over time in terms of earnings, of course, is your rate base and the amount of rate base supported by your equity and your capital structure. And as part of this rate case, just going from the last rate case to this rate case, as a result of $1.5 billion or so spending, a rate base has actually increased about $500 million from the last rate case to this rate case. That's the real driver of increased earnings in Missouri over time.

Operator

Our next question comes from Andy Bischof with Morningstar Research.

Andrew Bischof - Morningstar Inc., Research Division

Any update on the Missouri legislative front in terms of reform on reducing regulatory lag, among other things?

Martin J. Lyons

No real update for you. I'd again refer back to our last quarter's call and the transcript there, where we were sort of right at the end of the legislative session, and I think provided pretty fulsome comments about the situation there. I think as we go through time, I think as we've talked about, we will continue to work to educate all stakeholders in the state about the need for and the importance of investment in our aging infrastructure in Missouri. And in months like this, like any other time of the year, but particularly between active legislative sessions, we're certainly doing our best to continue to make sure that we are doing the right outreach for stakeholders and education about the importance of good, strong energy policy for the state of Missouri.

Andrew Bischof - Morningstar Inc., Research Division

And I appreciate the, what I understood are sales discussion. Any -- how are customer account numbers looking in the quarter?

Martin J. Lyons

Yes, we continue to look at those. Our residential and commercial accounts in Missouri were actually up. I talked about it last time, they're up slightly. So less than 0.5%. But nonetheless, residential and commercial counts were up, and I think that's a positive. Over in Illinois, residential accounts were down a little bit. Though again, just a small amount, less than 0.5%, but we did see commercial customer accounts actually grow by about 0.7%. So overall, I think those are good trends. They're positive. If you want, I'll talk a little bit about the industrial sales. I mentioned in Missouri that they're up in terms of industrial sales. I mentioned about 0.5%. And we are seeing good, robust growth in areas like cement, automotive, food and agriculture, those kinds of industrial customers. And so that -- it's encouraging to see that industrial sales growth, it's encouraging to see jobs grow, and it's encouraging to see the customer accounts go up. I think all those things seem to be moving in a positive direction. In Illinois, like I mentioned, industrial sales have been down. It's more there in steel and metals, heavy equipment manufacturing. Those are some of the industries that have seen declines in sales, but as I mentioned, not much of an impact right now on residential customer accounts, down just a little. And it's certainly encouraging to see commercial accounts still continue to grow.

Operator

There are no further questions at this time. Would you like to make any closing remarks?

Douglas Fischer

Yes, Warner does have one remark.

Warner L. Baxter

Yes, thanks, Doug. A little bit earlier, Stephen Byrd had asked me a question about the greenhouse gas proposal and elements that were unworkable, and I outlined the concerns that we had in the building blocks. And I just want to make sure I add one other important aspect, and that relates to the target dates. Now the headline is that it desires to have carbon emissions 30% below 2005 levels by 2030. I think it's important to recognize that their interim, aggressive interim target dates, begin as early as 2020. And so when you look at some of the challenges and the cost drivers, it is indeed these interim target dates and the overall target date, which really drives our costs up. So I just want to make sure I added that to Stephen to your question. And so we appreciate that. Doug, I'll turn it back over to you to wrap it up.

Douglas Fischer

Okay. Thank you, Warner. Thank you, all, for participating in this call. Let me remind you again that a replay of the call will be available for 1 year on our website. If you have questions, you may call the contacts listed on today's release. Financial analyst inquiries should be directed to me, Doug Fischer. Media should call Joe Muehlenkamp. And our contact numbers are on today's news release. Again, thank you for your interest in Ameren, and have a great day.

Operator

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.

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