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Executives

Douglas Fischer – Director, IR

Thomas Voss – Chairman and CEO

Martin Lyons – SVP and CFO

Scott Cisel – President and CEO, Ameren Illinois

Warner Baxter – President and CEO, AmerenUE

Analysts

Scott Senchak – Decade Capital

Michael Lapides – Goldman Sachs

Erica Piserchia – Wunderlich Securities

Paul Patterson – Glenrock Associates

David Paz – Bank of America Merrill Lynch

Julien Dumoulin-Smith – UBS

Greg Gordon – ISI Group

Ashar Khan – Visium

Ameren Corporation (AEE) Q3 2011 Earnings Call November 4, 2011 10:00 AM ET

Operator

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

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

Douglas 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 Ameren’s 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 include instructions for replaying the call by telephone. This call is also being broadcast live on the internet, and the webcast will be available for one year on our webcast – website at www.ameren.com. This call contains time-sensitive data that is accurate only as of the date of today’s live call. Redistribution of this broadcast is prohibited.

To assist with our call this morning, we have posted a presentation on our website to which we will refer during this call. To access this presentation, please look in the Investors section of our website under Webcasts and Presentations, and follow the appropriate link.

Turning to page two 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 a brief overview of third quarter 2011 earnings and updated 2011 guidance, followed by discussion of recent business and regulatory developments. Marty will follow with more detailed discussions of third quarter 2011 financial results and guidance, as well as updates on regulatory and other financial matters. We will then open the call for questions.

Here is Tom, who will start on page three of the presentation.

Thomas Voss

Thanks, Doug. Good morning, and thank you for joining us. Today we announced strong third quarter 2011 core earnings of $1.57 per share, compared to third quarter 2010 core earnings of $1.40 per share. The increase in three quarter 2011 core earnings compared to third quarter 2010 core earnings reflected Illinois and Missouri electric rate increases and lower non-fuel operations and maintenance expenses as a result of continued cost discipline. Improvement in earnings was also due to lower interest expense driven by debt reduction and also weather that was slightly warmer than that of the year ago quarter. These positive factors were partially offset by reduced margins in the merchant generation segment due to lower realized power prices and higher fuel and transportation related expenses.

While temperate in the third quarter of 2011 were not significantly different than those experienced in the third quarter of 2010, they were much warmer than normal. Before I move on to discussion of earnings guidance, I would like to comment on our operating performance during the third quarter of 2011. I’m proud to report that our energy centers performed exceptionally well during the summer months.

Equivalent availability at our base load energy centers was a strong 94% and the net capacity factor was a strong 84% in the third quarter of 2011. This performance included our Callaway nuclear energy center which operated continuously from its last refueling which ended in June of 2010 until the beginning of its current refueling in mid October 2011, a period of 489 days. This was the facility’s second longest breaker-to-breaker run since it began operating in 1984.

Turning to page 4, reflecting our strong third quarter earnings, today we’re raising our 2011 core earnings guidance range to $2.50 to $2.60 per share up from our prior range of $2.30 to $2.55 per share.

Martin will provide further details regarding our third quarter 2011 earnings and 2011 guidance later in this call.

Moving to page five, we now expect 2011 positive free cash flow to reach approximately $325 million, an increase of $100 billion from the estimate we provided on our second quarter conference call. We have been using our free cash flow to reduce outstanding borrowings. This has included not only the June 2011 maturity of $150 million of Ameren Illinois Company long-term debt but also a significant amount of short-term debt. In fact at September 30, 2011, cash and equivalents exceeded short-term debt and we expect this also be the case at year end. These reductions in debt contributed to a common equity ratio that stood at a solid 53.9% of total capitalization at the end of the third quarter.

Reflecting the steps we have taken over the last few years to strengthen our financial performance and position, on October 14, 2011, Ameren’s Board of Directors declared a quarterly dividend payment to common shareholders of $0.40 per share, a 3.9% increase over the prior quarterly dividend rate. This new annualized equivalent rate of $1.60 per share is at level that is well covered by earnings and cash flows from our regulated business segments. This new annualized rate represents a 7% payout of 2011 core earnings from our regulated business segments based on the midpoint of our guidance range.

Turning to page six. In addition to the positive news I’ve shared with you regarding earnings, cash flows and dividends, I’m also able to report significant progress on important strategic initiatives. This progress is the result of our focused and sustained efforts to improve the performance of our company for the mutual benefit of our investors and customers.

On several occasions, I have stated that we’re committed to seeking and obtaining constructive regulatory frameworks that allow us to recover our costs in a timely fashion and then provide a reasonable opportunity to earn a fair return on our investments. As important constructive regulatory frameworks provide us with a – as important constructive regulatory frameworks provide us with the necessary cash flows to invest in our energy infrastructure so we can meet our customer’s expectation and create good paying jobs in our communities.

I’m very pleased that just last week, the Illinois General Assembly approved a new constructive regulatory framework that provides electric delivery utilities in that state with the opportunity to choose performance-based formula rate making. The legislature enacted into law Senate Bill 1652, the Energy Infrastructure Monetization Act and approved a trailer bill that will amend Senate Bill 1652. Governor Quinn has 60 days to act on the trailer bill. If he does nothing by the end of the 60-day period, the trailer bill becomes law. If he vetoes the trailer bill we sent back to the house and senate for further consideration.

This legislation is a win for the economy of the State of Illinois, a win for our Illinois Electric delivery customers and a win for our Ameren Illinois Utility.

Utilities will have the opportunity to benefit from more predictable rate making that will allow them to invest in their businesses, receive timely cash flows from these investments and have greater confidence that they will be able to earn close to their allowed return on such investments.

This law is designed to create nearly 2,500 additional good paying jobs throughout the state. And further, the additional investments required of participating utilities should provide customers with improved service quality and reliability as well as long-term savings. The legislation includes a number of customer protections and other benefits many of which are listed on this page. These protections include regulatory oversight by the Illinois Commerce Commission to ensure that the investments made and costs incurred are prudent.

Page seven provides highlights of the new regulatory framework. Ameren Illinois plans to withdraw its pending electric delivery rate case and is developing plans for filing for performance-based formula electric delivery rates under Senate Bill 1652.

However, our pending gas delivery rate case will continue to move forward and Senate Bill 1652 does not apply to the gas utility business

Moving to page eight of, of course, our commitment to earnings fair returns on our investments also extends to Missouri. Ameren Missouri expects to make significant progress towards closing the gap between its earned and allowed return on equity in 2012.

On October 21, we announced a voluntary retirement offer as part of Ameren Missouri’s efforts to tighten its belt during this challenging economic period. This action should lower overall costs to our customers as well as allowing spending with regulatory outcomes in economic conditions and improve earned returns at our Missouri utility. The voluntary retirement offer has been made to approximately 715 management and union employees of Ameren Missouri and Ameren Services. Ameren Services provides support services to Ameren and all of its subsidiaries.

Those accepting the offer are expected to retire by year-end 2011. While we do not know how many employees will accept this offer, a similar offer in 2009 had an acceptance rate of approximately 30%. In connection with this program, there’s one thing I want to be clear about. We will not reduce our workforce to allow all that will impact our employee’s ability to deliver safe and reliable service to our customers.

Looking ahead, Missouri will continue to explore options to reduce regulatory lag, to enhance our cash flows and earn returns and thereby facilitate more timely investments in our energy infrastructure. Facilitating such investments will improve reliability and create jobs to the benefit of all our stakeholders in the entire state of Missouri.

In addition to these developments that are regulated utilities, our merchant generation business recently took steps that are expected to further reduce operating costs and capital spending plans. These steps are part of our ongoing efforts to ensure that this business is well-positioned to weather the current period of low power prices and benefit from the expected improvement in such prices.

In early October, our merchant generation business announced that it will cease operating in the Meredosia and Hutsonville energy centers in Illinois by the end of 2011. These two smaller, older energy centers provided approximately 4% of our merchant generation segments total generation over the last two years. The closures are primarily the result of complying with a Cross-State Air Pollution Rule or CSAPR issued by the U.S. Environmental Protection Agency in July of 2011. CSAPR tightens sulfur dioxide and nitrogen oxide emission levels – emission limits to point their continued operations of these facilities is not economic.

Closure of Meredosia and Hutsonville will reduce our merchant generation fleet emission levels. However, we will retain the emission credits for SO2 and NOx associated with these plans through 2015. As a result, we no longer plan to use dry sorbent injection at our Edwards plant to comply with the SO2 limitations of the Illinois multi-polluting standard and CSAPR. Moving to dry sorbent injection from our complying strategy, Edwards eliminated one of the reasons for planned bag houses at that energy center.

The other reason for bag houses was of course for a particular control and anticipation of the half macros. However, as a result of further testing, we now expect that upgrading the existing electrostatic precipitators at Edwards will allow us to achieve the anticipated particular compliance requirements without the need for bag houses at a reduced net capital cost. As a result, we’ve further reduced our expected 2011 through 2015 merchant generation segment capital expenditures by approximately $70 million. These reductions are in addition to the approximately $200 million of lower planned merchant generation capital expenditures for the 2011 to 2015 period, which we announced on the second quarter conference call.

In summary, we believe that the following recent developments approval of a new constructive, regulatory framework for Illinois electric delivery businesses, receipt of new electric rates in Missouri this past July, disciplined cost reductions at our Missouri utility to align our spending with business conditions, reduced environmental capital spending plans for our merchant generation business along with plans that we have discussed in detail in prior presentations for significantly growing our investments in Federal, Energy Regulatory Commission regulated electric transmission projects together place Ameren in an improved position for future success.

Finally, we believe that to be successful we must and we will remain dedicated to operating in a safe both in environmentally responsible manner.

Now I’ll turn the call over to Martin.

Martin Lyons

Thanks, Tom. Turning to the page nine of the presentation, today we reported third quarter 2011 earnings in accordance with general accepted accounting principles or GAAP of $1.18 per share compared to a third quarter 2010 GAAP loss of $0.70 per share.

Third quarter 2011 core earnings improved to a $1.57 per share compared with third quarter 2010 quarter earnings of $1.40 per share. The following items were excluded from third quarter 2011 and 2010 core earnings. A charge for the Missouri Public Service Commission’s July 2011 disallowance of costs of enhancements related to the rebuilding of the Taum Sauk energy center, which reduced third quarter 2011 earnings by $0.23 per share, this disallowance was appealed to the courts. Impairment and other charges related to Ameren’s merchant generation segment reduced earnings by $0.09 per share in the third quarter of 2011. Goodwill, impairment and other charges also related to the merchant segment reduced earnings by $2.19 per share in the third quarter of 2010. The 2011 charges were related to the decision to cease operations at the Meredosia and Hutsonville energy centers by the end of 2011.

And finally the net effect of unrealized mark to market activity primarily related to non-qualified power and fuel related hedges reduce third quarter 2011 earnings by $0.07 per share an increase third quarter 2010 earnings by $0.09 per share.

Moving to page 10, here we highlight key drivers of the variance between core earnings per share for the third quarters of 2011 and 2010. Key factors driving the earnings improvement included rate changes, net of certain related expenses. This factor increased third quarter 2011 earnings by $0.10 per share compared to the third quarter of 2010 reflecting an electric rate increase in Illinois effective in November of 2010 and an electric rate increase in Missouri effective in late July 2011.

A second key driver was lower core non-fuel operations and maintenance expenses, which increased third quarter 2011 earnings by $0.09 per share compared to the third quarter of 2010. The lower O&M reflected discipline cost management across all of our business segments.

Lower interest expense was also a factor behind the improvement in third quarter 2011 earnings compared to the third quarter of 2010. This increased earnings by $0.03 per share.

Weather was significantly warmer than normal in the third quarter of 2011 and slightly warmer than that of the year ago quarter. This boosted earnings by an estimated $0.02 per share compared to the third quarter of 2010 and by an estimated $0.14 per share compared to normal.

The primary factor negatively affecting the comparison between third quarter 2011 earnings and third quarter 2010 earnings was lower margins at our Merchant Generation segment, which reduced earnings by $0.05 per share. These lower margins reflected lower realized power prices and higher fuel and transportation related expenses.

While margins were down, Merchant Generation Energy Center operations were strong. Equivalent availability was 92% and the net capacity factor was 80% at this segment’s base load energy centers in the third quarter of 2011.

As Tom mentioned, we have raised our 2011 core earnings guidance range to $2.50 to $2.60 per share, up from our prior range of $2.30 to $2.55 per share. This increase in guidance reflects strong third quarter core earnings driven by warmer than normal weather and continued disciplined cost management.

The core earnings guidance for our combined Ameren Missouri and Ameren Illinois segments was raised to a range of $2.25 to $2.30, up from our prior range of $2.10 to $2.25. The core guidance range for our Merchant Generation segment was narrowed to a range of $0.25 per share to $0.30 per share in the upper half of our prior range. Before I leave our discussion of 2011 earnings guidance, I would like to remind you that fourth quarter earnings results will be impacted by cost related scheduled 2011 Callaway nuclear energy center with fueling and maintenance average which is currently in progress. In addition I would like to discuss a pending regulatory matter in Missouri that could impact fourth quarter GAAP and core earnings. In Missouri the staff of the Public Service Commission is required to initiate a prudence review of costs subject to the fuel adjustment clause at least every 18 months. The staff recently initiated its second such review since implementation of Ameren Missouri’s fuel adjustment clause.

This second review covers the period from October 1, 2009 through May 31, 2011. In its first review the staff of the Missouri Public Service Commission recommended at the – and the PSC ruled in April of 2011 by a three-two vote that Ameren Missouri flow through the FAC and credit to customers all margins associated with certain long-term partial requirement sales, they were made by Ameren Missouri due to the loss of load from Noranda Aluminum’s, Missouri smelter plan. You’ll recall this loss of load was caused by a severe ice-storm in January of 2009. As a result of this order we recorded a second quarter of 2011 pretax charge of $18 million to core earnings or about $0.05 per share.

We continue to disagree with PSCs order in its classification of these sales, and believe that the terms of the FAC tariff did not provide for margins from these sales to be flowed through the FAC. Therefore, we have appealed this decision to the courts.

As we have previously disclosed Ameren Missouri recognized additional margin associated with the same long-term partial requirement sales contracts subsequent to September 30, 2009. The recently initiated second FAC prudence review covers the subsequent period. On October 28, the staff of the Missouri Public Service Commission recommended that the PSC required these additional margins which it calculates to be $26 million also be flowed through the FAC and therefore credited the customers.

The staffs report dealt only with this issue and it plans to file a report on the balance of its FAC review by the end of February 2012. The PSC has not indicated whether we will rule on the treatment of this $26 million before it receives the staffs report from the balance of its review. If the PSC rules that this $26 million should be flowed through the FAC and the courts have not overturned the PSCs prior FAC prudence review decision, we would expect to take a charge to core earnings of approximately $0.07 per share in the period when such a decision is issued. Such a potential charge has not been assumed in our 2011 earnings guidance.

As I close our discussion of 2011 earnings guidance, I need to remind you that our guidance assumes normal weather for the fourth quarter of this year. Further any charge that may result from the recently announced voluntary retirement offer to certain employees as well as any net unrealized mark-to-market gains or losses will impact GAAP earnings that are excluded from GAAP earnings guidance because the company is unable to reasonably estimate the impact of any such gains or losses for the full year.

Core earnings and guidance exclude any charge resulting from the voluntary retirement offer and any net unrealized mark-to-market gains or losses. Further, our earnings guidance for 2011 is subject to the risks and uncertainties outlined or referred to in today’s press release including the forward-looking statement section of that release.

Turning to page 11, I would now like to provide updated 2011 projected cash flow information. We now expect to achieve free cash flow of approximately $325 million up from our prior guidance of approximately $225 million. The improved cash flow outlook reflects increased 2011 earnings expectations, lower capital expenditures and updated working capital expectations.

Turning now to page 12 in a discussion of our pending delivery rate cases in Illinois, in October the parties filed initial and reply briefs in these cases. Our rate increased request continued to total $89 million annually with $39 million of this related to electric delivery service and $50 million related to gas delivery service.

We planned to withdraw our electric delivery case as permitted by the recently passed trailer bill and move to the newly authorized performance based formula rate making. However, the gas rate case will still proceed to completion. On this page and the next, we have provided a breakdown of the electric and gas service numbers included in our and other party’s positions.

The ICC staff is now recommending a combined revenue increase of $33 million with $29.5 million of this related to the gas rate case. By far the most material difference between our position and that of the staff is related to return on equity.

On page 13, we outlined key points of the attorney general’s and Citizen Utility Board’s for vital positions as well as those of the Illinois industrial energy customers. The administrative law judges are expected to issue their proposed order on November 15 of this year and the deadline for Illinois Commerce Commission decision is January 12, of 2012 with new rates expected to be effective shortly thereafter.

Moving now to page 14, in our Merchant Generation business, I would like to provide additional details on the financial impact of shutting down Meredosia and Hutsonville by year-end 2011. Combined these energy centers are expected to be about breakeven in 2011 from a cash flow perspective. Going forward we expect to closure of these facilities in the resulting 2011 impairments will improve perspective earnings by about $0.01 to $0.02 per share annually.

Tom already mentioned the ceasing operations at these two energy centers enable us in part to reduce our planned Merchant Segment capital expenditures due primarily to the elimination of the previously planned baghouses at Edwards. On this page, we provided you with our revised lower Merchant Generation plant capital expenditures for 2011 through 2015 by year.

On page 15, we provide an update on our four power sales and hedged data as of September 30, 2011. We continue to expect our Merchant Generation business to generate approximately 29.5 million megawatt hours in 2011 with approximately 27.5 million of this coming from our five largest coal-fired energy centers, the Coffeen, Duck Creek, Edwards, Joppa, and Newton facilities. These 29.5 million megawatt hours due include 100% of the expected generation of the Electric Energy, Inc. or Joppa Energy Center, a facility in which Ameren owns an 80% interest.

As you can see our projected 2011 power sales are very close to fully hedged. For 2012 we have now hedged approximately 21.5 million megawatt hours at an average price of $46 per megawatt hour. Further for 2013 we’ve hedged approximately 11 million megawatt hours at an average price of $41 per megawatt hour. Our capacity sales are approximately 63% hedged for 2012 and approximately 42% hedged in 2013.

Turning to the last page of our formal presentation, page 16, here we provide an update of our Merchant Generation’s segments fuel and transportation related hedges. For 2011 we have hedged essentially all of our expected generation. For 2012 we have now hedged approximately 25 million megawatt hours at about $24 per megawatt hour. For 2013, we have now hedged approximately 9 million megawatt hours at about 26.50 per megawatt hour. This is hedging information then completes our prepared remarks.

And we will now be happy to take your questions.

Question-and-Answer Session

Operator

Thank you. We’ll now be conducting a question-and-answer session. (Operator Instructions). Our first question comes from Scott Senchak from Decade Capital Management.

Scott Senchak – Decade Capital

Hi. Thank you. Just a question on slide 15, your 2013 hedged price, how should we think about that, is that a full requirement’s hedge, is it block power or...

Martin Lyons

Sure Scott. This is Martin. So on slide 15, 2013 you’re looking at the $41 per megawatt I guess for the 11 million or so megawatt hours that we sold. The way you ought to think about ‘13 in terms of what’s in there is and round-the-clock kind of product usually has about 47% to 48% on peak.

Our generation profile is typically more about 52% on peak and basically what you see in there is megawatt hours that have been sold more like our generation profile, more like that 52% on peak, 48% off peak and that does include any kind of hedges or forward sales we’ve made. So whether they be financial products or physical products most of that I would say in that period of time does represent physical contracts that we have with counterparties and would include then some energy, some capacity and some other services.

Scott Senchak – Decade Capital

Got you. Thanks. And then just turning to Illinois, with this new Illinois legislation how should we think about the ROEs there now with this legislation? Is the – I know it’s matched to the 30-year treasury yield, in 2012 will your ROE be within the band of the average treasury yield in ‘12 or is it off of the treasury yield in ‘11?

Martin Lyons

Yeah, Scott this is Martin again. Good question, it’s my understanding that that would be based on the 2012 treasuries and the spread over the average 2012 treasuries.

Scott Senchak – Decade Capital

Got you, got you. And then also I’m not sure if I missed this, the impact of weather versus normal for the year at Ameren, Illinois and Ameren Missouri this year?

Martin Lyons

I don’t know that I gave it out necessarily by legal entity, but basically the effect of temperate for this year, in the third quarter we talked about it being about $0.02 positive versus last year we estimate that it was about $0.14 positive versus normal. And then for the full year on a year-to-date basis, it was probably a positive $0.21 versus normal conditions year-to-date, actually down about $0.05 versus last year based on strong weather we had primarily in the second quarter of last year.

Scott Senchak – Decade Capital

Okay, great. Thank you very much.

Operator

Thank you. Our next question comes from Michael Lapides from Goldman Sachs.

Michael Lapides – Goldman Sachs

Hey guys, congrats on a great quarter and a good update, real quick two questions. One, can you walk us through of the rate increases that you received in both Missouri and Illinois? How much you’ve already taken and what’s left to be taken in the coming quarters?

Martin Lyons

Yeah, I don’t know when you say, what’s left to be taken or to be taken. I can tell you this when you look at slide 10, we talked about on the quarter that the impact of rate changes was about $0.10. And that broke down in the quarter, Michael, about $0.08 for Missouri and about $0.02 for Illinois. So, as you know, the Missouri rate case didn’t go into effect until very last part of July. So maybe that information is helpful to you.

Michael Lapides – Goldman Sachs

Okay. And do you – just quickly on that one. Do you have the year-to-date for that as well? What the electric and gas rate changes mean on a year-to-date basis?

Martin Lyons

We do – maybe somebody can – can dig that out and provide that information. I don’t have it here in front of me.

Michael Lapides – Goldman Sachs

That sounds fine. One last one, non-fuel O&M, you guys have done a great job in managing O&M and the $0.09 benefit in this quarter that does not reflect the impact of the voluntary severance plan you just announced, this is kind of before that goes into effect as well?

Martin Lyons

Yeah, I guess you’re asking in terms of, I think you’re asking the overall benefit of voluntary plan when we recognize that Michael or?

Michael Lapides – Goldman Sachs

No, I’m trying to think about the – did you – are you already receiving some of the benefits of the cost reduction related to that voluntary severance plan? Or is that in addition to the $0.09 of O&M savings that ….

Martin Lyons

Oh yeah.

Michael Lapides – Goldman Sachs

That you got this quarter?

Martin Lyons

Yeah, yeah, I think we are on the same page. No, I mean the voluntary severance offer/retirement offer that’s been made is really outstanding. So employees have until around the end of the year to decide whether they are going to accept that or not.

Our historical experience with this kind of a program is to have gotten about a 30% type opt-in-rate, hard to tell whether you get that or not, but to say 30% to 40% kind of opt-in-rate, might be expected. But the benefits of that in terms of cost savings would actually be realized next year. We are not realizing any of that right now, because none of those employees have yet retired.

Michael Lapides – Goldman Sachs

Got it. Okay, thanks guys. And once again congrats on a great quarter.

Martin Lyons

Thanks, Michael.

Operator

Thank you. Our next question comes from Erica Piserchia from Wunderlich Securities.

Erica Piserchia – Wunderlich Securities

Hi, just following up a little on the operating cost savings here. Just more broadly when you think about the business as far as the cost structure, I mean is your cost structure now sort of optimally configured or there are more opportunities for this, did you feel like where you are now is sort of where you’d like the business to be from that perspective?

Thomas Voss

Yeah, Erica, thanks for the question. I think that what – we’re certainly committed to doing as you know is improving our earned returns. And so we’re going to stay focused on disciplined cost control disciplined investment as we seek to improve those earned returns. You’ve asked a question on the past couple of calls about sales levels. As you know the economy has in part caused our sales level to be fairly sluggish. In fact as you know we’ve seen some declines in residential and commercial sales this year when you strip out the impacts of weather. And so, as a result of that we’ve certainly been looking to tighten our belt, keep costs under control and importantly that also helps to – help contain costs for our customers as we recently have been going in for rate cases and of course the benefits of those costs savings eventually accretive to customer in terms of lower rate increases.

So that’s what we are doing. I’d say looking forward given Senate Bill 1652, certainly in Illinois, we’re going to be looking to add employees as we look to make investments in that state to improve service reliability, service quality and roll out some of the smart grid plant so that we laid out, and are laid out in the legislation. So just those are some of the thoughts I guess on how we’re trying to manage the business.

Erica Piserchia – Wunderlich Securities

Okay. And just, I guess a follow up to that, I mean does that – does where you stand now given some of these sort of optimization efforts that you’ve put through on the cost side. Does that change your view as far as just where you think you can be, I mean in the past you’ve talked about obviously reducing that regulatory lag and obviously in the Illinois side we have this legislation, but I’m thinking on the Missouri side as well, does that increase your confidence in your ability going forward or was this kind of optimization is something that you had contemplated when you sort off initially – sort of that – maybe not initially, but earlier this year when you were talking about that, did you kind of have this more optimal cost structure in mind, I guess?

Thomas Voss

Well, good questions Erica. And I think with respect to – we’ll start with Illinois, I think one of the benefits of Senate Bill 62 is we talked about with the formulaic rates, is it does give you more confidence to be able to make investments to be able to add your workforce and feel confident that you’re going to be able to earn something close to your allowed returns. So certainly that does give us a greater confidence. And then in Missouri, we talked about last quarter making significant progress in terms of closing the gap between our weather normalized earned returns this year and our allowed returns as we look to go from 2011 into 2012. And what we’re doing is executing on plans that we believe will allow us to achieve that goal.

Erica Piserchia – Wunderlich Securities

Okay. Thanks.

Operator

Thank your next. Our question comes from Paul Patterson from Glenrock Associates.

Paul Patterson – Glenrock Associates

Hey, how are you doing?

Martin Lyons

Great. Thanks.

Thomas Voss

Well, how are you?

Paul Patterson – Glenrock Associates

All right. Let’s just go over the Illinois thing, I’m afraid that I’ve been distracted slightly when you were going over with the few other people. What was your ROE – given your guidance that you’ve had here, we’re in the fourth quarter. What should we think about as your ROE that you guys are going to earned roughly speaking in 2011 in Illinois on the electric side?

Thomas Voss

Yeah, we really haven’t broken that down Paul. I mean, I can tell you that overall based on the guidance we’ve given for the regulated segments, the implied ROE there is about 9%, 9.2%, but of that – of course that includes the impacts of weather. And if you strip that out the weather you’re probably talking about an implied ROE of around an 8.2-ish kind of percent.

Paul Patterson – Glenrock Associates

Okay. Well, that helps me though. So, we’re at 9.2 right now, now you’re going to be opting for this legislation and withdrawing your rate case et cetera. So that means that – I mean, I guess what it sounds like to me though is, I mean, I guess, we should assume that there is not going to be – you don’t expect much of a lag I guess beginning in 2012. The ROE and given the fact that it’s now lower, the kind of with the mechanism and stuff. We really should expect all that much out off – in terms of growth at least 2012 does that make sense?

Thomas Voss

I don’t know, if that exactly makes sense or not. I mean, I think with the questions that came up earlier is, ultimately I think what we are earned in Illinois in 2012 will be somewhat – well not somewhat, but will be – and somewhat in part dictated by what the treasuries are in 2012. So, the question came earlier ultimately when you go through the formulae a great making in 2012, what is the formulaic rate tide to and it’s going to be based on an average of treasuries…

Martin Lyons

2012 plus the (inaudible).

Paul Patterson – Glenrock Associates

Yeah. And just we don’t know what they’re going to be obviously. But I mean I’m just looking at where they are now, I guess is what I’m sort of saying. I mean looking at – just assuming that like interest rates stay flat which obviously is a little bit – obviously quite a leap. But just assuming that though we wouldn’t necessarily expect, I mean depending on what interest rates do, you wouldn’t be making that much more if interest rates stayed flat and regardless of whether whatever would seem to be that you guys would pretty much be in the same category or am I missing something?

Thomas Voss

Well again I think the thing is that, when you look at it, I guess we haven’t said exactly what our earned ROE is going to be in Illinois this year. But I mean I guess what I’m trying to say is ultimately what it is next year, you’re right, we don’t know what treasuries it will be, it will be based on whatever the average of the 30-year treasuries are next year plus the adder. If you took a 12-month history of treasuries today you’d get a different answer than what the treasuries are today at this point in time.

Paul, in complete answer to your question when you look at Ameren Illinois, I’d also not forget that the gas rates will be reset based on the forecasted test year we filed. And so that will have an impact on the earned ROE and it’s also important to remember that we have a decent size transmission rate base in Ameren Illinois as well.

Paul Patterson – Glenrock Associates

Okay, no. I was just trying to isolate the electric, I’m sorry. Just was trying to get the – I don’t want to belabored either. I think I’ve got a pretty good sense here. The other thing I want to ask you about is the write-off. What was behind that the Merchant Generation write-down?

Thomas Voss

Sure. The Merchant Generation write-down really as you know had to do with the closure of Meredosia and Hutsonville. You know when we had our last quarterly call we talked about the fact that we thought like we are getting pretty good clarity on getting our arms around our environmental capital expenditures and what was necessary to comply with the various rules that were out there. And the one I known really was and how we’re going to comply with respect to the tighten NOx submission standards. And so as we look at specifically that the tighten NOx submission standards ultimately it was decided that we were forced to really shutdown Meredosia and Hutsonville to be able to comply with those CSAPR rules the NOx component of CSAPR rules, so that was the big driver there.

But then Paul as we talked about on the call what that allowed us to do is once that decision is made you look at your overall SO2 and NOx allowances given that those plans are no longer in the mix. And then that allows you to kind of relook at your overall compliance strategy for SO2, for your fleet that led us to the conclusion that we could actually reduce our capital expenditures or excuse me eliminate the use of DSI I would say at Edwards. And then that triggered basically our ability to relook at the baghouses in the need for those versus upgrades to our precipitator. So the CSAPR rules were certainly the cause of the decision to shut down Meredosia and Hutsonville, but that lead to sort of a chain of decisions that led to reduced capital costs at our Edwards facility.

Paul Patterson – Glenrock Associates

Okay. And then with the PGM portability of the capacity that seems an issue that you guys were obviously looking at and given the big disparity in capacity pricing, any more thought I know I asked this last quarter and I know it’s little early, but just wondering if you guys have anymore thoughts about what might be happening there?

Thomas Voss

No. I don’t think there is any meaningful update. We’ve certainly filed our positions with FERC that are in line with the positions that – we articulated on our second quarter call. So I wouldn’t say at this point there is any meaningful update to report?

Paul Patterson – Glenrock Associates

Okay, great. Thanks a lot.

Thomas Voss

Thanks, Paul.

Operator

Thank you. Our next question comes from David Paz from Bank of America Merrill Lynch.

David Paz – Bank of America Merrill Lynch

Good morning.

Thomas Voss

Good morning, David.

David Paz – Bank of America Merrill Lynch

Question – my question on the dividend. Can you give us a flavor on what your target payout ratio on regulated earnings will be going forward? Clearly, are you comfortable with the current 70% based on the mid-point of 2011 guidance, but I guess just – what that range could be, is that 70% on the high-end or low-end? Anything you can see there?

Douglas Fischer

At this time, I think generally there would be a little bit on the high-end of the regulated earnings, but our goal was to try and get somewhere between 55% and 70% of the regulated earnings as a payout range. The important thing about this particular time was that, we thought it was good to reaffirm that the dividend is solid, it’s not at risk. We think it’s in good shape. We’ve had very positive cash flows and we thought it was a good time to raise dividend.

David Paz – Bank of America Merrill Lynch

Okay. And those regulated earnings includes transmission earnings as well, right?

Thomas Voss

Yeah, David. It includes all of our regulated earnings in the Missouri and Illinois transmission.

David Paz – Bank of America Merrill Lynch

And as we look forward, any earnings from Ameren Transmission Company?

Douglas Fischer

Yes, correct.

David Paz – Bank of America Merrill Lynch

Okay. And then on Illinois, can you actually – two things, what is the baseline electric distribution spend that you’re looking at per the law, I believe it was average of 2008, 2010. We are just not clear on whether that includes transmission, excludes transmission, just what is that base line to which you can add to $625 million over a ten year period?

Thomas Voss

Yeah. David, I do believe that it does include the transmission Doug you have the base line number or no.

Douglas Fischer

The base line number for electric delivery only. Scot, why don’t you…

Scott Cisel

This is Scott Cisel, the base line on the electric side is $275 million.

David Paz – Bank of America Merrill Lynch

Okay. So that doesn’t include transmission line?

Douglas Fischer

That’s right you’re correct about that David, I’m….

David Paz – Bank of America Merrill Lynch

That’s fine. And then so then in your 2011 CapEx for Ameren Illinois we don’t provide any further breakout but on your 2011 plan CapEx what percentage is fine, what is the breakout for electric distribution or sorry electric delivery, transmission and gas?

Douglas Fischer

David, I don’t have that here in front of me in terms of that breakout, I mean are you trying to get a sense for how much of that 625 is going to be incremental or invested…

David Paz – Bank of America Merrill Lynch

Yes.

Douglas Fischer

I mean – look we’re going to blend a filing with the ICC. We’ve got some work to do to put together our exact spending plans but I think it’s safe to assume that out of that 625 over the next five years, you’d see about half of that invested over the next five years I think is a safe assumption. And when I say invested, I think that would be incremental to what has been disclosed in terms of our capital spending plans.

David Paz – Bank of America Merrill Lynch

Okay. All right. And then are there any similar efforts whether it’s on legislative or on the regulatory front in Missouri and maybe not a bill similar to this but any other efforts to reduce regulatory lag there in Missouri such as reducing the time between filing a rate case and actual rate case decisions?

Warner Baxter

Hello David. This is Warner Baxter, how are doing?

David Paz – Bank of America Merrill Lynch

Good. How are you Warn?

Warner Baxter

I’m terrific, thanks. It’s time it stayed little bit earlier. At Missouri, we’re going to continue to explore several options to reduce regulatory lag and certainly one of those options could be a legislative route and potentially one like SP1652 which I believe in Missouri would yield many of the same benefits as they really are in Illinois.

Now because importantly as Tom said, reducing regulatory lag if that enhanced our cash flows and returns, but most importantly facilitate greater investments in energy infrastructure to improve the liability great, good paying jobs and ultimately benefit our customers in the state. But I think well that’s a legislative. I think we are not supporting them. We also consider other alternatives to reduce lag including speaking ways to reduce lag potentially through the regulatory process. So we will look at both of those but in the interim as Martin said, what we are doing, we are taking steps to better align our spending to be consistent with the regulatory outcomes in the economic conditions in order to reduce lag and make significant progress towards closing that gap. So, we are looking at both regulatory approach, a legislative approach and then really an operational approach. We are very focused on it.

David Paz – Bank of America Merrill Lynch

Great. Thank you so much guys.

Warner Baxter

It’s all right David. Thank you.

Operator

Thank you. Our next question comes from Julien Dumoulin-Smith from UBS.

Julien Dumoulin-Smith – UBS

Hi good morning.

Warner Baxter

Hi Julien, good morning.

Douglas Fischer

Good morning.

Julien Dumoulin-Smith – UBS

First question on the timing of the implementation with the comment bill. I wanted to get a sense there I mean what month’s should we assume our – these “new rates” going to effect?

Warner Baxter

Yeah, new rates. You wouldn’t expect new rates to go into effect until sometime in the second half of 2012.

Julien Dumoulin-Smith – UBS

All right, great. And then secondly I understand there is an energy procurement element of the bill, just wanted to get your senses to your participation and kind of what you see that product kind of coming out as initially?

Douglas Fischer

Yeah, I don’t know, but “product”, but as we look ahead obviously one of the things we have to do with respect to that business is manage our overall plans, whether it be for capital expenditures or procurement of power to be mindful of the 2.5% capital on increase in rates. We feel pretty good about our ability to achieve that through the 2014 markets that’s in the legislation, based upon lot of the hedges that we already have in place, power procurement hedges for Ameren Illinois. So as we move forward, we’re in pretty good shape with those, but will be very mindful of that 2.5% cap as we put together our plans for the future.

Julien Dumoulin-Smith – UBS

Great. Also I’ve seen some comments recently talking about energy efficiency in reduction and your plants spending on that front in Missouri just kind of wanted to get a sense, why pull back on that, what kind of load reduction was it leading and then what are the financial ramifications if you will?

Douglas Fischer

Julien this is Warner Baxter, really from the outside one thing I want to make clear we have supported and continue to support statewide efforts to increase synergy efficiency of our customers, but we’ve also stated that we need to make progress on the regulatory framework, not only recover our energy efficiency program costs, but really the fixed cost that we lose due to these power sales. And so in our last rate case we saw at the putting our framework that would have addressed that, the commission reviewed that and rejected our proposal. And so we’re really we’re left with no reasonable choice, but to reduce those level of expenditures in the interim until we really get a framework that’s in place. And we continue to explore that. And we do expect to propose yet another framework that will address some of our concerns to really continue to move forward with energy efficiency in Missouri. But today we are still spending millions of dollars on energy efficiency in Missouri, both when you combine both the electric and gas side and we’re going to continue to stay focused on trying to find a solution to this issue.

Julien Dumoulin-Smith – UBS

Great. And then lastly more on the merchant side, with regards to retail switching in your service territory in Illinois, it seems like that sort of started to take off somewhat. Do you anticipate sort of broadening your retail ambitions in any senses as that opportunity is in front of you?

Douglas Fischer

Julien, I would say that and remind everybody we have had a marketing effort overtime associated with our generation, it’s not a new thing. We’ve also had a retail marketing effort as well. I think you’re right, we are seeing some increases in switching within the state and we’re staying active in the State.

I think if you look back at some of our sales overtime, like if you look at this year, I’d say that about 45% of the sales we’re making this year from our generation are going to sort of physical delivery, physical end use. So as far as our merchant business that’s something we’re going to continue to focused on and we’re going to target something greater than 50% of our generation to go to physical delivery customers as we move forward.

Julien Dumoulin-Smith – UBS

Great. Thank you for the time.

Douglas Fischer

Thank you.

Operator

Thank you. Our next question comes from Greg Gordon from ISI Group.

Greg Gordon – ISI Group

Thanks. Good morning guys.

Douglas Fischer

Hi Greg, good morning, how’ve you been?

Greg Gordon – ISI Group

Good, good. Looking forward to seeing you in paradise. So just think of some high level sort of question, as I look at how you guys have positioned your company over the last 12 months, I mean you have addressed the cost side in Missouri and through legislation, you’ll hopefully be addressing the revenue side and there were no way on the utilities and so you’ve gotten some visibility on an earnings trajectory to get you the authorized return and thus the signal with the dividend which is great? And on the power generation side, you can control the denominator, you can’t really – you have a limited control over the numerator, but you do in your regardless to reduce the cost, so you don’t want have to add investment at leverage, right. So I mean what’s the current leverage that’s allocated to the Genco, is it about 1.5 billion is that right if I take a look at the parent debt and the Genco debt?

Douglas Fischer

Yeah, we talked about –we broke down I think last quarter similar debt levels by segment and I think it was about 1.5, 1.6 to the merchant segment overall, but you know I would say as you look Greg at the balance sheet at the end of this quarter when we put out our queue you look at year end, we have been generating as we mentioned positive free cash flows overall for the company projected to be 325 this year of that free cash flow nearly 200 of that coming from the merchant business, about 150 from Genco itself. So that segment has been producing positive free cash flow and we have been using that to pay down parent company borrowing so.

Martin Lyons

So I guess my point of that is.

Greg Gordon – ISI Group

Well, I guess that’s the rub, I mean if you can – if people got comfortable that this was a $200 million cash flow business then it’s more than covering the debt and there’s equity value, if they are not comfortable that it’s a $200 million cash flow business than it doesn’t. Just using 7 to 8 times EBITDA, these are rough multiples. So, I guess the last leg of the stool here from a strategic perspective is you’ve done a fantastic job addressing the utility side of things and hopefully you will execute and get to the earned returns. You are really doing a great job controlling the investment on the cost side, but – and just of all the other questions I’ve heard on the Genco is when are we going to see the – when are we going to see the offsetting revenues notwithstanding how bad the forward curve looks?

Martin Lyons

Yeah. Well, yeah, I here you Greg, I mean we’re dealing to your point, we’re doing what we can to take the positive free cash flows we have, reduce our outstanding leverage, we’ve taken nearly – actually more than $250 million of cost out of our projected capital expenditures. We are keeping a lid on O&M costs in that segment. So, we’re doing what we can to control the costs. We’re paying down debt, decreasing leverage. And we’ll see what happens in terms of the market recovery. We certainly think that the impact of some of the environmental regulations that are out are going to have an impact on reserve margins in our regions. And we think we’ve gotten our arms around our environmental compliance plans.

Greg Gordon – ISI Group

Great. And one last question, just onto follow up on another question, that 9.2% ROE was that on book equity or rate base equity?

Martin Lyons

That was based on rate – it will be based on book equity actually the 9.2%.

Douglas Fischer

It’s tangible book at the utilities.

Greg Gordon – ISI Group

Great. Thanks guys. See you soon.

Martin Lyons

Thanks.

Operator

Thank you. Our next question comes from Ashar Khan from Visium.

Ashar Khan – Visium

Good morning.

Martin Lyons

Good morning Ashar.

Ashar Khan – Visium

Martin, can I just go so the rate case you’re going to withdraw and you said the new rates are going to get implemented what like June or something under this plan?

Martin Lyons

Yeah, we were saying the rate impacts would really be in the second half of 2012.

Ashar Khan – Visium

So August 2 have, so like what our July 1.

Martin Lyons

No, not to say of July 1, I should have committed that to memory, but I don’t have the exact day just and I think it will be based on when we are ready to file. Frankly I think that there is a lot of work that goes into actually making the filing for the formulary grades and whether it be the capital spending plans, the hiring plans, the smart grid rollout plans, the plans to measure the improvements in our service, et cetera. So a lot that goes into the filing, when we are ready to make that filing, we will make it but ultimately the date that the rates we have changed will be somewhat dependent upon filing.

Ashar Khan – Visium

And then if I read correctly, you said they are going to base the numbers from the Form 1 is that correct?

Martin Lyons

Yes.

Ashar Khan – Visium

So what – like we have the FERC form, so can you just guide us what numbers are they going to take, they are going to take your net plant from the FERC Form 1 and then apply the ROE from there, is that what they are going to do?

Douglas Fischer

Ashar, this is Doug. I think that’s a discussion maybe we can offline as we go through the process. I don’t think we – I think we will get bogged down if we get into all the details here.

Ashar Khan – Visium

Okay. And then if I can just follow-up, as I look into next year rate, the Missouri rate case is going to, is still not fully right, we got a decision late, so that should help earnings going forward because the full impact is not in there next year is that correct?

Douglas Fischer

That is correct. The new Missouri rates went into effect at the end of July of this year. So we will get the benefit of a full-year of rate. I think – On last one, please.

Ashar Khan – Visium

Yeah and if I’m right there’s going to be no Callaway outage next year, am I correct?

Thomas Voss

That is correct.

Ashar Khan – Visium

And that is how much in earnings benefit?

Douglas Fischer

Well this – one we had last year was about $0.11 impact the cost of the outage back in the 2010.

Ashar Khan – Visium

Okay. So there’s an $0.11 gain. Okay, thank you so much.

Douglas Fischer

Thank you, Ashar.

Martin Lyons

Thank you Ashar.

Douglas Fischer

I want to just bring the call to a close and thank everyone for participating. We’re looking forward to seeing many of you at the EEI Financial Conference next week. Let me remind you again that this call was available through November 11 on playback and for one year on our webcast. Today’s press release includes instructions on listening to the playback. You may also call or e-mail the contacts listed on the release. Financial analysts inquires should be directed to me – Doug Fischer. Media should call, Brian Bretsch, our contact information is on the news release. Again, thank you for your interest in Ameren.

Operator

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

This call has completed.

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