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Ameren Corporation (NYSE:AEE)

Q2 FY08 Earnings Call

August 1, 2008, 10:00 AM ET

Executives

Bruce Steinke - IR

Gary L. Rainwater - President, Chairman and CEO

Warner L. Baxter - EVP and CFO of Ameren Corporation; Chairman, CEO and President of Ameren Services Company

Jerre E. Birdsong - VP and Treasurer

Martin J. Lyons - Sr. VP and Chief Accounting Officer

Andrew M. Serri - President of Ameren Energy Marketing

Analysts

Greg Gordon - Citigroup

Dan Jenkins - State of Wisconsin Investment

Paul Ridzon - KeyBanc Capital Markets

Yiktak Fung - Zimmer Lucas Partners

Steven Gambuzza - Longbow Capital

David Grumhaus - Copia Capital Partners

Michael Lapides - Goldman Sachs

Alex Kania - Merrill Lynch

Operator

Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Ameren Corporation Second Quarter 2008 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. [Operator Instructions]. As a reminder, this conference call is being recorded, today, Friday, August 1, 2008.

I would now like to turn the conference over to Bruce Steinke, Vice President and Controller. Please go ahead sir.

Bruce Steinke - Investor Relations

Thank you, Metchen. Good morning, everyone. I'm Bruce Steinke, Vice President and Controller of Ameren Corporation. On the call with me today is our Chairman, President and Chief Executive Officer, Gary Rainwater; our Executive Vice President and Chief Financial Officer, Warner Baxter; our Senior Vice President and Chief Accounting Officer, Marty Lyons and other members of the Ameren management team.

Before we begin, let me cover a few administrative details. This call will be available by telephone for one week to anyone who wishes to hear it by dialing a playback number. The announcement you received and our news release carry instructions on replaying the call by telephone. This call is also being broadcast live on the Internet and the webcast will be available for one year on our website www.amn.com.

This call contains time sensitive data that is accurate only as of the date of today's live broadcast. Redistribution of this broadcast is prohibited. I also need to let you know the comments made on this conference call may contain statements that are commonly referred to as forward-looking statements. Such statements include those about future expectations, beliefs, plans, strategies, objectives, and financial performance. We caution you that various factors could cause actual results to differ materially from those anticipated in the forward-looking statements.

For additional information concerning these factors, we ask you to read the forward-looking statements section in the news release we issued today and the forward-looking statements and risk factors sections in our periodic filings with the SEC.

To assist in our call this morning, we have posted a presentation on our website that includes a slide that reconciles our earnings per share for the second quarter and first six months of 2008 to our earnings per share for the second quarter and first six months of 2007 on a comparable share basis. And a slide that compares our full year 2008 earnings per share guidance to full year 2007 earnings per share, again on a comparable share basis. To access this presentation, you may look in the Investors section of our website under Presentations or follow the link for the webcast.

Gary will begin this call with an overview of key second quarter 2008 activities and Warner will follow with a discussion of our second quarter 2008 financial results and 2008 earnings guidance. We will then open it up for questions. Here is Gary.

Gary L. Rainwater - President, Chairman and Chief Executive Officer

Thanks, Bruce. Good morning and thank you for joining us. This morning, we reported core earnings per share of $0.67 in the second quarter of 2008, which were comparable to the same period in 2007, and in line with our expectations. However, our GAAP earning improves significantly, as there were some unusual items related to unrealized mark-to-market gains, a coal contract settlement and a Missouri Public Service Commission order. Warner will go through these items in more detail in his remarks.

From an operational and regulatory perspective, a great deal of activity took place in our business in the first half of this year. Compared to the first six months of 2007, the equivalent availability of our coal-fired units rose nearly 2% to 84% through June 2008. Importantly, our effective coal procurement and management strategies allowed us to run our coal plants at full available capacity, despite meaningful delays in coal deliveries at some of our plants due to significant flooding in the Midwest.

In addition, we successfully negotiated a coal contract settlement with a coal supplier over a higher fuel cost we expect to incur in 2008 and 2009 due to the coal supplier's premature closing of a mine in termination of a contract. The settlement compensates us in total for the incremental fuel cost we expect to incur. Warner will also discuss this in greater detail a bit later.

Increasing cost of the fuel we need to run our business, are indicative of the rising cost environment that our entire industry is facing. In particular, like our customers are seeing for every day items, our business is experiencing significant cost increases across the board. This is occurring during the period when we also need to make substantial investments in our infrastructure for improved reliability and cleaner air.

We've proactively taken actions to manage these cost increases, especially as they relate to our fuel cost. To-date, our actions have been very effective and this is reflected in parts in the larger unrealized mark-to-market gains we recorded in the second quarter related to the hedging of our diesel fuel cost exposure on coal transportation contracts. However, our hedging activities and other proactive cost control activities cannot entirely eliminate the rising cost, which are impacting all aspects of our business. These cost pressures coupled with significant investments in our utility infrastructure have required us to seek rate increases for both our Illinois and Missouri regulated operations.

In Illinois, the situation is particularly acute with our utility operations recording a loss in the second quarter of 2008 and projecting returns on equity of less than 4% for the year. Simply put, these results are not sustainable. The current requested electric and gas annual revenue increase for Ameren's Illinois utilities is approximately $207 million and the Illinois Commerce Commission staff has recommended an increase of approximately $87 million. The major differences are related to costs and plant additions that the Illinois Commerce Commission staff has recommended be disallowed from recovery for a variety of reasons. We clearly disagree with the staff's recommendations on these allowances and we put forward a solid case to address these issues.

The Ameren Illinois Utilities have also requested gas revenue decoupling and electric distribution plant infrastructure rate adjustment mechanisms. We expect recommended orders from the administrative law judges in mid-August and final orders from the Illinois Commerce Commission in September, with new rates expected to be effective in October.

In Missouri, AmerenUE has requested an annual electric revenue increase of approximately $251 million. AmerenUE has also requested implementation of a fuel and purchased power cost recovery mechanism in this case. We expect to see the Missouri Public Service Commission staff's and other intervener's initial recommendations at the end of August. And order is expected from the Missouri Public Service Commission in February 2009.

The bottom line is that achieving constructive outcomes in these cases is critical to our ability to continue to invest in our infrastructure, so that we are able to meet our customers' expectations for safe and reliable service as well as provide solid returns for our shareholders.

On other regulatory matters, earlier this week, we filed a combined construction and operating license application with the Nuclear Regulatory Commission for a potential new unit at AmerenUE's Callaway Nuclear Plant site. Although we've not made a decision to build a second nuclear power plant at this time, seeking NRC approval and a license this week will preserve the nuclear generation option for the future. It also will position our company to seek nuclear specific federal loan guarantees and production tax credits, made possible by the Energy Policy Act of 2005.

It's estimated that NRC review may require up to 42 months for completion. The company's decision on whether to build the second nuclear power plant depends on a number of factors, including state and federal regulatory, and legislative actions, the forecasted demand for power, the effectiveness of energy efficiency initiatives and the projected cost and financing challenges of building an advanced nuclear plant compared to building facilities powered by other fuels or developing renewable resources.

On the environmental front, on July 11, 2008 the U.S. Court of Appeals for the District of Columbia issued a decision that effectively vacated the federal Clean Air Interstate Rule or CAIR and earlier this year, a court had vacated the federal Clean Air Mercury Rule, or CAMR. USCPA has 45 days from the date of the court's decision to file a petition for rehearing. After this, the remaining court appeal is to file a petition for review with the U.S. Supreme Court.

This decision surprised many in the industry and we are currently evaluating the impact that these court decisions will have on our environmental compliance strategy. Included in the evaluation will be a review of other relevant environmental regulations. Under Illinois regulations, Illinois generators may defer until 2015, the requirement to reduce mercury emissions by 90% in exchange for accelerated installation of NOx and SO2 controls.

In addition, Illinois and Missouri must also comply with the existing federal ozone ambient standard and federal fine particulate ambient standard and the Clean Air Visibility rule. Both Missouri and Illinois were effectively relying on the implementation of CAIR and CAMR for a compliance with all these other regulations.

The bottom line is that it's now very unclear how this matter will be resolved. We expect this uncertainty to persist until the matter of further court appeals are played out. And it's also quite possible that Congress now will get involved. As I said a moment ago, this uncertainty has let us to review our environmental compliance strategies as well as the amount and timing of related costs.

In addition, this uncertainty has affected the NOx and SO2 admission allowance trading markets, where market prices have decreased dramatically. Forward off-peak power prices have also been negatively affected by the July court ruling. Warner will discuss the potential financial implications of these matters in a moment, but we believe that some form of NOx and SO2 regulation will ultimately be enacted through legislation or some form of EPA regulatory proceeding.

Despite these uncertainties, we remain focused on our plan to generate meaningful shareholder value. Our plan includes making regular levels of investments in our regulated businesses in response to customer needs and expectations, seeking rate increases and cost recovery mechanisms to reduce the impact of regulatory lag and optimizing our non-rate regulated generation business. I strongly believe we can successfully execute this plan and that we'll be able to deliver strong long-term shareholder value in the years ahead.

I will now turn it over to Warner to walk you through our second quarter 2008 earnings and 2008 earnings guidance.

Warner L. Baxter - Executive Vice President and Chief Financial Officer of Ameren Corporation; Chairman, Chief Executive Officer and President of Ameren Services Company

Great. Thanks, Gary. I would now like to refer you to the slide presentation on our website, as I provide a more detailed discussion of our second quarter 2008 earnings.

Turning first to page three of our slide presentation, today we announced second quarter 2008 net income, in accordance with Generally Accepted Accounting Principles, of $206 million or $0.98 per share, compared to second quarter 2007 GAAP net income of $143 million or $0.69 per share. Excluding certain items in each year, Ameren recorded second quarter 2008 core net income of $142 million or $0.67 per share compared with second quarter 2007 core net income of $138 million or $0.67 per share.

We reported several significant unusual items in the second quarter of 2008 that we have excluded from our core earnings. Net unrealized mark-to-market gains from non-qualifying hedges boosted second quarter 2008 net income by $0.23 per share as compared to net unrealized gains of $0.02 per share in the second quarter of 2007.

These unrealized gains primarily related to financial instruments that were acquired to mitigate the risk of rising diesel fuel price adjustments embedded in coal cost transportation contracts for the period 2008 through 2012. These financial instruments effectively warped [ph] in diesel fuel transportation prices at the time we entered into the contracts. Large unrealized mark-to-market gain was driven by the skyrocketing value of the heating oil option contracts utilized to hedge this risk. Of course, the value of these non-qualifying hedges will vary over time based on current market prices.

Another significant item excluded from core earnings in the second quarter was a lump sum payment from a coal supplier for expected higher fuel costs for our unregulated generation operations in 2009 as a result of the premature closure of a mine in May 2007 and the resulting termination of the contract.

We had mentioned this issue in our analyst day, and our 2008 earnings guidance and 2009 fuel cost guidance assumed we would be made whole by the supplier, in deed this was the case. However, based on the terms of the settlement, the entire $60 million we received was recorded in the second quarter. We estimate that approximately $27 million or $0.08 per share of the settlement relates to 2009 costs, and we have excluded that portion of the settlement from our 2008 core earnings.

While we have not yet provided earnings guidance for 2009, you should note that whatever you were assuming for earnings in our non-regulated generation segment, those earnings will now be an estimated $0.08 per share lower because of the lump sum settlement benefit we received this quarter. Again we've been fully compensated for the impact of the mine closure, and the 2009 earnings impact has been fully offset by funds received in 2008.

In our first quarter call, we also highlighted the storm-related order we had received from the Missouri Public Service Commission and the possible earnings impact. This order gave AmerenUE the ability to seek direct recovery in its pending electric rate case of, and record as a regulatory asset, all or a portion of the AmerenUE's 2007 severe storm costs, of about $25 million or $0.09 per share.

In the second quarter of 2008, AmerenUE recorded the minimum amount it expected to receive in the current May proceeds [ph]. This is $13 million or $0.04 per share. We strongly believe that full recovery of these storm costs is appropriate and are seeking recovery of the entire $25 million of costs in our pending May case. Since we originally carved out the severe storm costs as an unusual item in 2007, we've similarly carved out the expected recovery of these costs this year.

Finally, the net cost associated with the Illinois comprehensive electric rate relief and customer assistance settlement agreement reached in 2007, reduced GAAP earnings by $0.04 per share in the second quarter of 2008. As Gary said earlier, our second quarter 2008 core earnings were comparable with the same period in 2007. Net earnings for both the second quarter and first half of 2008 were consistent with our expectations.

To summarize our results, high electric and gas margins and the benefit of not having the Callaway Nuclear Plant refilling and maintenance outage in the second quarter of 2008, as occurred in the second quarter of 2007, largely offset by higher fuel prices, increased spending on utility distribution system reliability and coal-fired plant operations and maintenance as well as higher other operating expenses.

Continuing with slide three of our presentation, results of the 2007 Missouri electric and gas rate cases added $0.02 per share to earnings in the second quarter compared to the year ago period. The effective seasonally redesigned rates in Illinois do not have much impact on earnings in the second quarter. You may recall that in May 2007, the Illinois Commerce Commission authorized redesigned electric rates, to reduce seasonal fluctuations for residential customers who use electricity to heat their homes. The impact of this rate redesign is expected to be revenue neutral for the year.

Other electric and gas margins increased $0.18 per share in the second quarter of 2008, primarily as a result of higher power sales and higher realized electric margins.

Weather was a modest negative in the second quarter, reducing earnings by $0.03 per share compared to the prior year period. Cooling degree days were 26% below 2007 and 2% below normal in the second quarter. However, the milder weather resulted in greater excess generation being available for our system sales. Consequently, higher power prices for our system sales significantly reduced the impact of weather.

We continue to experience higher cost for fuel and related transportation, which reduced second quarter 2008 earnings by $0.08 per share. This increase was split evenly between our Missouri regulated and our non-regulated generation segments.

As previously discussed, the coal contract lump sum settlements associated with our increased 2008 cost, favorably impacted second quarter core earnings by $0.10 per share. The lump sum settlement effectively offsets the fuel price increases we're experiencing and expect to experience for the balance of the year as a result of the premature contract termination.

Earnings were also favorably impacted by the fact that there was no refueling and maintenance outage at the AmerenUE's Callaway Nuclear Plant in the second quarter of 2008 as occurred last year. This increased earnings by $0.16 per share. The Callaway plant is schedule for 25 to 30-day outrage in the fourth quarter of this year.

Plant operations and maintenance expenses increased by $0.06 per share in the second quarter of 2008 as compared to the same period in 2007, as a result of increased maintenance activity. Distribution system reliability and maintenance expenditures reduced earnings by $0.08 per share in the second quarter of 2008 compared to the year ago period as we continue to make significant incremental investments to improve reliability and customer satisfaction.

Financing costs increased $0.03 per share in the second quarter of 2008 over the prior year period, as a result of the refinancing of auction rate securities and other long-term debt financings.

Labor and employee benefits, bad debt, depreciation and amortization and other expenses also increased year-over-year in the quarter.

Moving on to our 2008 guidance in slide four, as we stated in our news release this morning, we reaffirmed that we expect our core or non-GAAP earnings to be in the range of $2.80 to $3.20 per share. We also increased our expectation for 2008 GAAP earnings to be in the range of $2.80 to $3.20 per share, up from the previous estimate of $2.68 to $3.08 per share.

The increase in our GAAP earnings guidance was driven by the $0.08 per share benefit from the coal contact settlement related to expected 2009 costs, and the $0.04 per share positive impact for the Missouri storm accounting order as previously discussed.

The estimated $0.12 per share negative impact from the Illinois comprehensive electric rate relief and customer assistance settlement agreement has been excluded from core earning guidance since the beginning of the year, and offsets the new items I just mentioned, resulting in a current GAAP and core earning guidance being the same.

Ameren's consolidated and segment guidance for 2008 assumes normal weather and is subject to, among other things, regulatory decisions and legislative actions, plant operations, energy market and economic conditions, severe storms, unusual or otherwise unexpected gains or losses and other risks and uncertainties outlined or referred to in the forward-looking statements section of our press release.

I'll also note that any net unrealized mark-to-market gains or losses from non-qualifying hedges will impact GAAP earnings are excluded from our GAAP and core earnings guidance, as the company is unable to reasonably estimate the impact of any gains or losses due to the volatility of markets.

We've adjusted a few line items on our reconciliation of 2008 earnings guidance to 2007 actual earnings. Most noteworthy is an increase in estimated bad expenses and other expenses, which are reflective of the rising cost environment and economic conditions we are facing in our businesses, as Gary described earlier. These were offset by the expected improvements in several other areas.

Again, as we've stated in the past, there is a range of outcomes that could occur around any of these points [ph]. As Gary noted earlier, we have recently seen some very volatile markets for power and NOx and SO2 emission allowances.

This July 1st, power and emission allowance prices have fallen sharply. Several factors appear to be driving this volatility including the recent CAIR ruling, oil and natural gas and crude oil prices, and the economy among other things. Due to the potential for these types of volatile market conditions, our risk management practices have historically required that we proactively sell-forward our excess generation to mitigate the impact of these market uncertainties. Such a policy is intended to mitigate deep declines in the markets as we have recently seen. It also accepts the fact that sales may not be made at market peaks as well.

To illustrate, entering 2008 we had hedged approximately 85% of our system wide generation. And currently, we have hedged approximately 95% of our expected total 2008 generation.

Looking ahead, now focusing only on our non-rate-regulated generation business, we currently have hedged approximately 80% of this expected generation for 2009. This is up from 60% at the beginning of the year. And while we have hedged most of exposure to declining market prices, we still have approximately 5 million megawatt hours of our total generation unhedged for the balance of 2008, and about 6 million megawatt hours unhedged in our non-rate-regulated generation business for 2009. Consequently, the deep declines in power prices that we recently witnessed, should they persist, would still have meaningful impacts on our financial results for 2008 and beyond.

Having said that, and as we have stated before, we remain bullish on long-term power prices. In addition, we believe that short-term power prices will see modest strengthening from product levels as we move through the rest of the summer cooling and tropical storm seasons. Of course, we can't predict with certainty what power prices and for that matter, what other commodity prices will be in the future. Market conditions are unpredictable and that is why we employee the risk management practices that we do.

We will provide greater levels of specificity around our view of future power, fuel and other commodity prices, when we update our long-term guidance later this year.

Turning now to the recent significant market decline for emission allowance credits, we are certainly aware these declines have resulted in other companies announcing potential large impairments of their emission allowances. As a result of the recent market declines, we have also evaluated our emission allowance bank for possible impairment. The bottom line is that we do not foresee any impairment of our allowances, based on our intension to use our bank allowances as part of our generation emission compliance strategy.

One final thing before we turn it over to questions. I would like to announce that Doug Fisher has joined Ameren to head up our Investor Relations Group as Bruce focuses on his new Controller responsibilities. I expect many of you know Doug very well from his years of experience as one of the leading sell-side analyst in the utility sector for A.G. Edwards and most recently, Wachovia. And we are excited to have Doug join our team.

Bruce and Doug will be working over the weeks ahead to transition responsibilities. In the mean time, continue to call Bruce with any questions. We would send out a note to our distribution list when it is the right time to begin communicating directly with Doug.

This concludes my prepared remarks and we'll now be happy to answer your questions.

Question And Answer

Operator

Thank you, sir. [Operator Instructions]. Okay, and our first question comes from Greg Gordon with Citi. Go ahead please.

Greg Gordon - Citigroup

Good morning, gentlemen.

Gary L. Rainwater - President, Chairman and Chief Executive Officer

Good morning, Greg. How are you doing?

Greg Gordon - Citigroup

I'm hanging in there.

Gary L. Rainwater - President, Chairman and Chief Executive Officer

Good.

Greg Gordon - Citigroup

How about you guys?

Gary L. Rainwater - President, Chairman and Chief Executive Officer

Well, great. Thank you.

Greg Gordon - Citigroup

I was just looking at the forward power curves in relation to the commentary you made about your incremental hedging. And it doesn't... I know markets have been extremely volatile, but it doesn't look like 2009 around the clock, prices in Illinois or the Midwest are meaningfully different today and they were January... first couple of weeks of January, which you know right before you gave your analyst presentation. So we had a huge run up in prices, we know prices have come back down, but as you look at the guidance you gave for short and long-term earnings, based on the markets at that time, are you seeing something different than I'm seeing or prices materially lower and is that why you thought you have to disclose it.

Warner L. Baxter - Executive Vice President and Chief Financial Officer of Ameren Corporation; Chairman, Chief Executive Officer and President of Ameren Services Company

Yeah, Greg thanks. This is Warner. And... now your observation I think is accurate. On analyst day, we gave ranges for the future ranging between $48 and $54 per megawatt hour. That included 2008. If you look today, you'd see a range approximating 50 to $52 per megawatt hour. And as we said even then and as we even said just few moments ago, we think that the fundamentals of the marketplace will continue to drive those prices upward. But by a large, we're very consistent with what we have said before.

Greg Gordon - Citigroup

So if anything, incremental hedges that you did, if you're putting them in sort of on a ratable basis over the course of the year, there were several prolonged trading periods where you could have gone out higher prices in that range?

Warner L. Baxter - Executive Vice President and Chief Financial Officer of Ameren Corporation; Chairman, Chief Executive Officer and President of Ameren Services Company

Yeah, that's certainly... we will give more specificity around it. But certainly, earlier in the year, our hedge strategy was to try and take some of that risk off and certainly as you pointed out, the power prices were stronger in the first half of the year. So we had those opportunities, absolutely.

Greg Gordon - Citigroup

Alright, thank you.

Warner L. Baxter - Executive Vice President and Chief Financial Officer of Ameren Corporation; Chairman, Chief Executive Officer and President of Ameren Services Company

Sure.

Operator

Thank you and our next question comers from Dan Jenkins with the State of Wisconsin Investment. Go ahead please.

Dan Jenkins - State of Wisconsin Investment

Good morning.

Warner L. Baxter - Executive Vice President and Chief Financial Officer of Ameren Corporation; Chairman, Chief Executive Officer and President of Ameren Services Company

Good morning, Dan.

Dan Jenkins - State of Wisconsin Investment

First of all, I was wondering, could you give a little more color on what the issues were in with regard to the court decision on the environmental laws or regulations and...

Gary L. Rainwater - President, Chairman and Chief Executive Officer

Dan, this is Gary Rainwater. I won't profess to be an expert on environmental rules. But my take on it is that the courts decided the rule making was fundamentally flawed because it didn't address emission reductions on a state-by-state basis. And the court's interpretation was that it should have addressed those reductions state-by-state rather than over a broad region. So for that reason, the court send it back to EPA was, somewhat with guidance that it needed to take an entirely different approach, which then raises a whole lot of questions about where we are because it took years to develop the CAIR ruling.

Our industry felt it was in general a pretty good ruling. We really didn't expect it to be thrown out in the way it was, and now it's... we have no idea how long it will take to develop another rule making. Ultimately though, we have to do something to reduce SO2 and NOx, there is no question about that, just the question about how long does it take for the EPA or for the legislature to decide what the final requirements are going to be.

Dan Jenkins - State of Wisconsin Investment

Okay. Does that change your environmental CapEx plans in any way?

Gary L. Rainwater - President, Chairman and Chief Executive Officer

we are evaluating our environmental CapEx plans and the question there is well, what do we evaluate them based on. There is a possibility that some of our scrubber projects could slip. And of course we would like to be able to defer those CapEx requirements if it is at all possible. There's probably a greater possibility that it could slip in... those requirements could slip in Missouri because Missouri adopted the federal Clean Air and Mercury standards pretty much straight in line with the federal requirements, while Illinois set requirements that were somewhat more stringent and developed its own multi-pollutant rulemaking.

Now the online rule making though, was also based on CAIR and CAMR in the assumption that those rulemakings would stand, so we are uncertain where the Illinois requirement leaves us as well. But, you know we are certainly focused on deferring any capital expenditures here that we can.

Dan Jenkins - State of Wisconsin Investment

Okay. The other thing I was curious about is your Illinois rate request and you mentioned U.S. for 207 and the staff was at 87 I think. And so I was curious, if you could break down the main items that are behind that difference?

Gary L. Rainwater - President, Chairman and Chief Executive Officer

Yeah. Warner can probably fill you in on the detail there. There are a couple of big ticket items. One is allocation of A&G cost and one is the inclusion of additional planned investment in the rates. But Warner?

Warner L. Baxter - Executive Vice President and Chief Financial Officer of Ameren Corporation; Chairman, Chief Executive Officer and President of Ameren Services Company

I think Gary, you hit on really the two main items that are out there and so indeed we have put our case before the administrative law judge now on those particular issues and we expect to hear from the Ministry of Law judge here in August, what the final decision come from the ICC in September. And those are really the two big ticket items among other small or less, but those are the main drivers.

Dan Jenkins - State of Wisconsin Investment

So what were the plant disallowance... what was kind of the idea behind that? Was it just...

Warner L. Baxter - Executive Vice President and Chief Financial Officer of Ameren Corporation; Chairman, Chief Executive Officer and President of Ameren Services Company

Yes, part of the issue related to the plant disallowances related to a documentation issue, for lack of a better term in terms of some of the invoices that were reviewed by the staff and were I guess in dispute. We believe we have satisfactorily provided that documentation to show that the investments that we've made that were indeed put into the ground, if you will. And so, we feel strongly that that documentation is going to be satisfactory, but of course it's ultimately up to the Illinois Commerce Commission to review those facts and circumstances.

Dan Jenkins - State of Wisconsin Investment

Okay. And then on... I know there's... the industrial sales were down, is that... do you think that's impact from the economy or is there a specific factors going on in...?

Unidentified Company Representative

I am sorry, Dan, you are breaking up. Could you repeat that question?

Dan Jenkins - State of Wisconsin Investment

Yeah, the industrial sales, I noticed were down and I just wondered, do you think that's impact from the economy or are there specific factors going on in your service territory which caused the industrial to be down?

Gary L. Rainwater - President, Chairman and Chief Executive Officer

Again we really haven't seen much decline, and when we look at sales in general, we see pretty solid growth in the residential commercial sector with just a moderate downturn in industrial and net-net some positive growth. So I wouldn't say that our economy has been in recession, but it's just sluggish. And your guess is as good as mine, where the economy will go over the next year. Speculation is all over the map on that.

Dan Jenkins - State of Wisconsin Investment

Okay. And the last thing I was wondering is your short-term debt is well over 1 billion. Do you have any plans to term that out or how you're going address that?

Gary L. Rainwater - President, Chairman and Chief Executive Officer

We'll let Jerre Birdsong address that one, who is our VP and Treasurer.

Jerre E. Birdsong - Vice President and Treasurer

Yes, we do have plans on terming that out. On our analyst day presentation, we gave the information on what the expected negative free cash flow was for the year and we have termed out approximately half of that amount that was just over $1 billion in total. And we will continue to term that out and complete the rest of it during the remainder of the year.

Dan Jenkins - State of Wisconsin Investment

Okay. Thank you.

Unidentified Company Representative

Welcome Dan.

Operator

Okay, thank you. And our next question comes from Paul Ridzon with KeyBanc. Go ahead please.

Paul Ridzon - KeyBanc Capital Markets

What level of EA sales were kind of in this year's budget or guidance?

Warner L. Baxter - Executive Vice President and Chief Financial Officer of Ameren Corporation; Chairman, Chief Executive Officer and President of Ameren Services Company

I am sorry, Paul repeat it again?

Jerre E. Birdsong - Vice President and Treasurer

Paul, we had included just the 5 million that we are allowed to sell in Missouri under the last rate order.

Warner L. Baxter - Executive Vice President and Chief Financial Officer of Ameren Corporation; Chairman, Chief Executive Officer and President of Ameren Services Company

I am sorry, I disallowance as of site [ph], yes, that's correct.

Paul Ridzon - KeyBanc Capital Markets

And then how much of the mine settlement did you book in this quarter?

Jerre E. Birdsong - Vice President and Treasurer

$0.10 per share.

Paul Ridzon - KeyBanc Capital Markets

And you're calling that ongoing?

Jerre E. Birdsong - Vice President and Treasurer

Yeah. There was two parts to it, Paul. There was the $0.08 that we carved out that relates to '09 and the $0.10 that is related to higher costs we expect in current 2008. We're calling that current year piece ongoing and then 2009 piece non-ongoing.

Warner L. Baxter - Executive Vice President and Chief Financial Officer of Ameren Corporation; Chairman, Chief Executive Officer and President of Ameren Services Company

As simply as I said, Paul, this is Warner. As you know, we are incurring incremental costs in both 2008 and 2009. And so the piece that we are really, that we are paid for in the second quarter for 2008, and those monies well go to offset the incremental costs we'll incur throughout this year. And then for those that we were paid in advance for 2009 that's what we've carved our of core earnings for 2008.

Paul Ridzon - KeyBanc Capital Markets

But you have put that back in '09.

Warner L. Baxter - Executive Vice President and Chief Financial Officer of Ameren Corporation; Chairman, Chief Executive Officer and President of Ameren Services Company

At this point in time, what we simply do, we just carved it out as an item. Certainly, we've identified it as a difference compared to where we were in analyst day, whether we'll end up carving it out or not, I guess that remains to be seen. I think the most important thing is that people are aware that the fuel cost information that we've given you at the beginning of the year had already factored that Exxon settlement out. But on a GAAP basis that will not show up that way next year.

Paul Ridzon - KeyBanc Capital Markets

Okay, I understand. So that could be a [indiscernible] sense that disappears from earnings if you don't... you had to factor next year?

Warner L. Baxter - Executive Vice President and Chief Financial Officer of Ameren Corporation; Chairman, Chief Executive Officer and President of Ameren Services Company

I mean, if you had factored that into your non-rate-regulated generation that's what we said, you had that in there on the GAAP basis that will go away.

Paul Ridzon - KeyBanc Capital Markets

Okay, thank you very much.

Warner L. Baxter - Executive Vice President and Chief Financial Officer of Ameren Corporation; Chairman, Chief Executive Officer and President of Ameren Services Company

Sure.

Operator

And thank you. And our next question comes from Yiktak Fung with Zimmer Lucas Partners. Go ahead please.

Yiktak Fung - Zimmer Lucas Partners

Good morning

Unidentified Company Representative

Good morning

Yiktak Fung - Zimmer Lucas Partners

I just have a couple of quick questions with regards to the Missouri rate case filing. I think Union Electric updated their filing in the middle of June. I was wondering if there is another opportunity for an update as when your case progresses because of the test year?

Warner L. Baxter - Executive Vice President and Chief Financial Officer of Ameren Corporation; Chairman, Chief Executive Officer and President of Ameren Services Company

I am sorry, you are breaking up little bit. You're asking the question whether there was an opportunity to update further existing rate case in Missouri and maybe Marty, you can address, I was a little...

Martin J. Lyons - Senior Vice President and Chief Accounting Officer

Sure. Right now as we mentioned earlier on the call, the rate request stands at around 250 million, and there will be pro forma adjustments made to the test year through September of 2008.

Yiktak Fung - Zimmer Lucas Partners

Okay. And those pro forma adjustments, those have already been made in the update that was filed in the middle of the June of this year, right?

Unidentified Company Representative

I am sorry, you were breaking up. Could you mind repeating that question?

Yiktak Fung - Zimmer Lucas Partners

The June filing, sorry. Does the June filing already include these pro forma adjustments through September '08?

Martin J. Lyons - Senior Vice President and Chief Accounting Officer

No, I don't believe it does.

Yiktak Fung - Zimmer Lucas Partners

Okay.

Warner L. Baxter - Executive Vice President and Chief Financial Officer of Ameren Corporation; Chairman, Chief Executive Officer and President of Ameren Services Company

The June filing Yiktak was basically when we make the file and used nine months of actual and three months of budget. And for the June filing, we're replacing that three months of budget with three months of actual essentially through March 31st?

Yiktak Fung - Zimmer Lucas Partners

I see. So there will be yet another update that updates that performance with September '08?

Warner L. Baxter - Executive Vice President and Chief Financial Officer of Ameren Corporation; Chairman, Chief Executive Officer and President of Ameren Services Company

Yes, there will be.

Yiktak Fung - Zimmer Lucas Partners

Okay, thank you. And just one clarification question, before you were talking to Greg about power pricing and you gave some sort of range of 52 to $62 per megawatt hour. Can you just remind me what years is that for?

Warner L. Baxter - Executive Vice President and Chief Financial Officer of Ameren Corporation; Chairman, Chief Executive Officer and President of Ameren Services Company

That was really for 2009 and 10.

Yiktak Fung - Zimmer Lucas Partners

2009 and '10.

Warner L. Baxter - Executive Vice President and Chief Financial Officer of Ameren Corporation; Chairman, Chief Executive Officer and President of Ameren Services Company

That we're talking about there.

Yiktak Fung - Zimmer Lucas Partners

Thank you. That's all.

Warner L. Baxter - Executive Vice President and Chief Financial Officer of Ameren Corporation; Chairman, Chief Executive Officer and President of Ameren Services Company

Sure.

Operator

Okay, thank you. And our next question comes from Steve Gambuzza with Longbow Capital. Go ahead please.

Steven Gambuzza - Longbow Capital

Good morning.

Unidentified Company Representative

Hi Steve, how are you?

Steven Gambuzza - Longbow Capital

Good, thanks. Just you've actually you're going to update your longer term earnings guidance later this year. You usually provide full guidance with the first quarter earnings release is that... or with the fourth quarter earnings release, is that correct?

Warner L. Baxter - Executive Vice President and Chief Financial Officer of Ameren Corporation; Chairman, Chief Executive Officer and President of Ameren Services Company

Yeah, with regard to this year, as you know we did it in January. And we've provide that in advance of our year-end conference call, about a couple or three weeks. Our expectation would be that we would come in either late this year or early next to in a manner similar to where we provide 2009 and beyond earnings guidance. And then of course if there is a meaningful update to 2008, we'd do that as well.

Steven Gambuzza - Longbow Capital

Okay, great. And then just to make I understood some of the commentary regarding the CAIR changes and its impact on your CapEx budget. Is it fair to say that it's unlikely to have a significant impact on your Illinois spending, but may have more of an impact on your Missouri spending long term?

Warner L. Baxter - Executive Vice President and Chief Financial Officer of Ameren Corporation; Chairman, Chief Executive Officer and President of Ameren Services Company

Steve, I wouldn't characterize that at all, I think we are looking at both Missouri and Illinois. I think Gary said that this is likely it could be more Missouri, we don't disagree with that. But I think that is re-step back, we are looking at all of our alternatives, we have to think about the changes in laws. So it would be premature to speculate in terms of magnitude, but I wouldn't say that it would not have... it couldn't potentially have a material impact on Illinois, just too early to say.

Steven Gambuzza - Longbow Capital

But does this impact the settlement agreement that you signed with the Governor?

Warner L. Baxter - Executive Vice President and Chief Financial Officer of Ameren Corporation; Chairman, Chief Executive Officer and President of Ameren Services Company

You know certainly that agreement is out there, and it is part of law or regulations if you will. And so, but having said that, there still may be some opportunities for us to manage our capital expenditures within that framework.

Steven Gambuzza - Longbow Capital

Thank you.

Warner L. Baxter - Executive Vice President and Chief Financial Officer of Ameren Corporation; Chairman, Chief Executive Officer and President of Ameren Services Company

Sure.

Operator

Thank you. [Operator Instructions]. And our next question comes from David Grumhaus with Copia Capital Partners. Go ahead please.

David Grumhaus - Copia Capital Partners

Good morning, guys.

Unidentified Company Representative

Hi, David. How are you?

David Grumhaus - Copia Capital Partners

Good, how are you?

Unidentified Company Representative

Good, thanks.

David Grumhaus - Copia Capital Partners

A couple of questions on the rate case. You've touched a little bit on Illinois, obviously you have got these two large items. Do you see where the... with the staff coming on these things or is the staff just missed some thing? I mean I know you talked a little bit about giving them some receipts on the plans and that type of thing, but what's your confidence level that you are going to be able to get the commission...?

Warner L. Baxter - Executive Vice President and Chief Financial Officer of Ameren Corporation; Chairman, Chief Executive Officer and President of Ameren Services Company

Well, I am sorry to interrupt you. I think the bottom line is that we strongly disagree with the views ever expressed. We've put forth what we believe is very good evidence to address the A&G cost issue as well as the capital rate based addition issue. And so we've... so in terms of confidence, we feel confident in the position that we think and that ultimately will be up to the Illinois Commerce Commission to assess that. But you know when we look at the positions taken, we think that our view is the correct one.

David Grumhaus - Copia Capital Partners

Okay. Overall Missouri, I saw that Empire got their fuel cost this week. Does that give you more confidence that you are going to be a little get something like that as yours had done after that? I mean do you have any reactions to it?

Warner L. Baxter - Executive Vice President and Chief Financial Officer of Ameren Corporation; Chairman, Chief Executive Officer and President of Ameren Services Company

So. As you know, Empire just received their order the other day and we are still on the process of reviewing the details. But, from what I have seen in terms of the fuel adjustment clause, their order looks very close to the request that we've made in our pending rate case. And similarly, the ROE that they receive, which is 10.8% is very similar to the ROE that we requested in that rate case. So, while we don't know the details, it certainly appears that they received a constructive regulatory order and that's certainly what we are seeking in Missouri as well, as a constructive regulatory order so we can continue to do the things we are doing in terms of making investments in the infrastructure and improving customer service and satisfaction.

So always precedent I believe is a good thing and as we've said before as Tom Voss has said at our analyst day and we've said it consistently through out that we feel confident that we will have fair treatment in the Missouri rate case as well as the opportunity to receive a fuel adjustment clause.

David Grumhaus - Copia Capital Partners

Are settlements possible in either of these two cases, what is your expectation that they will go through this?

Warner L. Baxter - Executive Vice President and Chief Financial Officer of Ameren Corporation; Chairman, Chief Executive Officer and President of Ameren Services Company

I would say with regard to Illinois, settlement is really past that stage at this point in time. I think we are at the stage where it's going to be put ALJ in the Illinois Commerce Commission here very shortly, and Missouri certainly. I mean I think there is always the opportunity to settle certain aspects of the case as well as potentially the entire case. But I'll tell you where we sit today is very early in that process, as you know. We are still going through the data request process and we expect to see the staff's position and others a little bit later in the summer.

But if you recall in Missouri, they actually put on their agenda, settlement dates where the parties actually do get together to try and talk about the issues, to try and minimize the level of... that ultimately go before the commission and potentially settle the entire case.

David Grumhaus - Copia Capital Partners

Okay, that's very helpful. Thanks guys.

Operator

Thank you. Our next question comes from Michael Lapides with Goldman Sachs. Go ahead please.

Michael Lapides - Goldman Sachs

Hi guys. Quick question on your non-rate-regulated generation. Can you give an update or you may have it, I just missed it, on coal hedging increment to what you talked about in January, coal and rail I am sorry, all in?

Warner L. Baxter - Executive Vice President and Chief Financial Officer of Ameren Corporation; Chairman, Chief Executive Officer and President of Ameren Services Company

Yeah. You didn't miss it, but we can give you an update on some of that in terms of what we've done on the coal and transportation side. As you know, we've historically, have a historical approach to where we try and layer in our hedges for coal and transportation over time and consistent with that approach, we've done more since the beginning of the year

Now going into 2008 and focusing on unregulated generation which is what I think your question was, basically for 2008 in the analyst day we are 100% hedging and of course that's we are basically at now. During analyst day, we're out there for coal and transportation, for 2009 net range in around 70%, it is around 72%. We have done... we have increased our hedge percent closer to 85, approximately 85% today. And then in 2010, we're... for the non-regulated, we had hedged 16% of our total coal and transportation costs. That number has now moved up to in excess of 25%. Now, that seems like the low number, let me tell you why that seems like a low number. It's because out in 2010, we have not locked up our transportation contracts yet for our unregulated generations, which as you know is a meaningful portion of our costs.

Having said that, we have on the coal commodity side, hedged up to 70% of our coal commodity for 2010. So we have made meaningful progress and we are currently in good faith negotiations with our rail suppliers to try and secure our needs for a little bit of 2009 and than for 2010 and beyond.

Michael Lapides - Goldman Sachs

Got it. And can you just give roughly what the break out, PRB coal right now is around 15 or 16 bucks with the break out how much of the total cost is coal versus rail?

Warner L. Baxter - Executive Vice President and Chief Financial Officer of Ameren Corporation; Chairman, Chief Executive Officer and President of Ameren Services Company

Generally speaking, a rule of thumb in the past has been about two-thirds of our costs has been rail and a third coal.

Michael Lapides - Goldman Sachs

Okay, got it. Thank you, guys.

Warner L. Baxter - Executive Vice President and Chief Financial Officer of Ameren Corporation; Chairman, Chief Executive Officer and President of Ameren Services Company

Welcome Michael.

Operator

Thank you. And our next question comes from Alex Kania with Merrill Lynch. Go ahead please.

Alex Kania - Merrill Lynch

Hey, good morning.

Unidentified Company Representative

Good morning.

Alex Kania - Merrill Lynch

A quick question just on the 2008 guidance and how things were shaping up year-to-date. Just one that kind of stood up for me and I was just wondering if you could give a little more detail on it was just the dilution and financing. You're running about $0.03 down for the year-to-date period and I think the full year balance is still about $0.12. And I was just wondering what are the pieces of that we should be looking at in the second half of the year?

Warner L. Baxter - Executive Vice President and Chief Financial Officer of Ameren Corporation; Chairman, Chief Executive Officer and President of Ameren Services Company

Sure. I'll tell you the principal driver that change related to the refinancing of auction rate debt. If you remember obviously the credit markets would happen to them earlier in the year, we had a fair amount of that auction rate debt primarily in both our Missouri regulated and Illinois regulated businesses. And we very quickly went out and refinanced that debt during the first half of the year. And obviously at rates that were higher than what were probably very low rates historically run, 3 to 4% if not then refinanced it, 5 to 6% type of rates. So that incremental piece is what's driving it.

And then... so therefore those increases are primarily in the Missouri regulated and Illinois regulated businesses, that's what it's been driven by.

Alex Kania - Merrill Lynch

Okay. Great. And just another question was just on the just any updates on the development of capacity in kind of the ancillary markets and how you see it right now?

Warner L. Baxter - Executive Vice President and Chief Financial Officer of Ameren Corporation; Chairman, Chief Executive Officer and President of Ameren Services Company

Okay. Andy Serri, who you met at analyst day, who is the President of our AmerenEnergy Marketing Company can frankly give the best update in terms of what's going on in the ancillary services market, a little bit of an update on capacity as well.

Andrew M. Serri - President of Ameren Energy Marketing

Yeah Alex, good to hear from you. MISO did certify, John Bear, their Chief Operating Officer did certify that they are ready for a September 9 start of the ancillary services market in MISO. And so, we are as other market because has been and the whole industry is preparing for that start on September 9. MISO is probably talking of a year, year and a half, two years before a formal capacity markets develops in MISO. Right now there is a capacity market, it is fairly robust but it is strictly bilateral at this time.

Alex Kania - Merrill Lynch

Great. And just the last follow-up question would be... so have you seen any strengths in those bilateral capacity prices recently over the past quarter or two?

Andrew M. Serri - President of Ameren Energy Marketing

Yeah, the bilateral capacity market for say, in 2009, 2010 is in that 60 to $70 per megawatt day range and for '10, '11 we are seeing that range in the 70 to $80. And as we said back on our analyst day, we are shooting for that 75 to 80% edge on our capacity.

Alex Kania - Merrill Lynch

Great, thanks guys.

Andrew M. Serri - President of Ameren Energy Marketing

No problem.

Operator

Thank you. [Operator Instructions]. And we have no further audio questions at this time. I would like to turn the conference back over to management for any closing statements.

Warner L. Baxter - Executive Vice President and Chief Financial Officer of Ameren Corporation; Chairman, Chief Executive Officer and President of Ameren Services Company

Right, and thank you all for participating in this call. Let me remind you again that this call is available till August 8 on playback and for one year on our website. Announcement carries instructions on listening to the playback. You can also call the contacts listed on our news release.

For those on the call who are financial analysts, please call Bruce Steinke, media should call Susan Gallagher. Contact numbers are on the news release. Again, thanks for dialing in.

Operator

Ladies and gentlemen, this concludes the Ameren Corporation second quarter 2008 earnings conference call. If you would like to listen to a replay of today's conference please dial 800-405-2236 or 303-590-3000 with the passcode 11117661. ACT would like to thank you for your participation and you may now disconnect.

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Source: Ameren Corp. Q2 2008 Earnings Call
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