Ameren Earnings Call Insights: Missouri Legislation and Industrial Customers

Ameren Corp (NYSE:AEE) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Missouri Legislation

Paul Patterson – Glenrock Associates: Sort of the Missouri legislation, given that we got the May 17th deadline sort of showing up here and so the lack of movement over the last several weeks, how should we think about the potential for its passage and if it doesn’t pass, given the substantial amount of CapEx and rate-based growth that you guys have, how should we think about your ability to manage regulatory lag, if in its absence?

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Martin J. Lyons, Jr. – SVP and CFO: Paul, this is Marty. I think I’ll let Warner Baxter, who is here with us President of Missouri operations go ahead and answer that question.

Warner L. Baxter – Chairman, President and CEO, Ameren Missouri: So, a couple of things. First, your first question related to the prospects for the passage of legislation and any you are right. As certainly as we sit here today, it’s difficult to predict really whether the legislation will be passed at this time, and as we’ve talked about in the past, and it’s always a challenge to try and pass legislation and certainly with only two weeks left in the legislative session, and that challenge is going to be greater, especially in light of the continued opposition from certain consumer groups and certain large customers. Having said that, our team is going to continue to work closely with legislative leaders and other key stakeholders to see if we can move this legislation forward, and should we not get that legislation passed this session, we will continue to work tirelessly to get constructive legislation passed in the future to address as you said some of the additional capital expenditures that we may be making in the future and to address regulatory lag in Missouri. And the bottom-line, we think this legislation and this path represents good long-term energy policy for Missouri and is going to help us address the aging infrastructure and certainly meet our customer’s long term needs and expectations and the legislation we had before the, legislature certainly has robust consumer protections. So we are continue to advocate for that policy because we think it’s simply the right thing to do. With regard to the questions in terms of how we handle regulatory lag. We are going to continue to do what we’ve done in the past and that we are going to continue to be very disciplined in our cost control and how we allocate capital in our business and certainly among all the Ameren businesses and we are going to do what we’ve done also in the past and that’s aligning our spend with the regulatory policies, outcomes and economic conditions. When the need arises we will continue to file frequent rate cases to recover those investments and as I said before we are going to continue to pursue changes in the regulatory framework that will support investment. Because we are convinced that is the absolute best policy for the State of Missouri in the future.

Paul Patterson – Glenrock Associates: But just in general, I guess there is a lot of opposition and I mean in the absence of a change in regulatory policy. Should we be thinking about sort of ROE lag as we go forward. If there is no improvement or I mean I’m sure you guys are working hard or whatever, but just in general I mean how, if you could just. I don’t know if you can address that or not, but just how should we think about that and then just also sort of related SB 9 sailed through the Legislature in Illinois very, very well. But the gas stuff, the gas legislation seems to be sort of held up. I just wonder if you could compare and contrast that?

Martin J. Lyons, Jr. – SVP and CFO: It’s Marty; I’ll maybe try to tack on to what Warner said. I think as you look at what we’ve been able to accomplish over the past number of years in terms of Missouri regulation and Missouri earnings. Certainly, over a series of rate cases, we’ve been able to achieve use of various riders and trackers for fuel or for energy efficiency or things of that nature, which have provided us a better opportunity to earn our allowed returns and we have meaningfully closed the gap between earned allowed returns. Clearly in the absence of some better framework for capital investment, it’s hard to be able to earn those allowed on a regular basis if you are deploying significant amounts of capital. When you look over all at our plan going forward and you look at our 7% rate base growth plans across the enterprise, heavy focus on those jurisdictions with formulaic ratemaking with the kinds of frameworks that allow us to make the investment for the benefit of our customers to grow jobs and to grow that rate base. If you look at the trends we put out in the past while we’re investing – planning to still invest substantially in Missouri, the growth is at a much lower pace again providing ourselves the opportunity to earn something closer to our allowed, and as Warner said, making sure that we continue to control our spending in order to position ourselves for success there. Now, transitioning over to Illinois, you’re right, the formulae – the changes of the modifications to the formulaic rates for electric did pass both chambers with very strong majority votes there and that’s not before the governor. And then as it relates to the gas legislation, you know things have I’d say stalled a little bit there. I think legislative interest has moved somewhat away from the gas formula ratemaking and is focusing maybe on something more like and infrastructure rider or something of that nature. I’ll remind you that with respect to gas in Illinois, we do have use of for test, we’ve got a gas rate case pending right now and incorporates those four test years and it’s where things kind of stand in Illinois.

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Industrial Customers

Michael Lapides – Goldman Sachs: I understand this week that the Missouri legislation actually hit a little bit of a speed bump. Just curious, are there specific concerns the industrial customers have and is there ways the legislation could be tailored to alleviate some of those concerns?

Warner L. Baxter – Chairman, President and CEO, Ameren Missouri: Michael, this is Warner again. The bill was debated last evening as Tom said, and they ultimately did not come to a vote. Certainly there have been concerns cited by some of the industrial customers in terms of impact on rates and those types of things. And there have been efforts made to try and address that in the legislation, and we will continue to have those discussions with those customers and other stakeholders to see if we can get something across the finish line. So, we’re going to continue to push to see if we can get something constructive done during these last two weeks.

Michael Lapides – Goldman Sachs: Turning to Illinois, assuming that as SB9 is eventually made into law and assuming the litigation around the prior rate case, kind of turns in your favor and upholds the law passed in 2011. Is there still any remaining structural lag that exists for your Illinois distribution businesses, meaning are there still some level of cost that simply aren’t recoverable in rates and if so could you kind of quantify that level. Lots of state commissions don’t allow things like incentive compensation or regional or local marketing costs donations that type of things. Just trying to think about kind of what are the remaining drivers of lag if any, once the whole legislative and litigation process plays out and assuming it plays out in your favor…

Thomas R. Voss – Chairman, President and Chief Executive Officer: There are some of those cost and if can look back to our slides from our year-end call. We did outline some of those sort of structural things if you will that were there. When the law was passed in Illinois, well it did provide for formulaic ratemaking for, the vast majority of costs that are incurred. Historical ICC ratemaking adjustments were preserved by that legislation. So we outlined some of those non-recoverable costs I think was on Slide 13 of our year-end slide. Some of those non-recoverable cost did include about $8 million of historical ratemaking adjustments. Those are the kinds of things that you know would be impactful going forward. This year we identified some other things like $7 million of certain electrical system rework cost. Those we expect to be they’ve occurred over a couple of years, last year and this year, but we do expect those to diminish and to go away. So there are a little bit of things that they continue to be there and then we have the opportunity and we’ll continue to focus on those costs and make efforts to control and reduce those to the extent possible. But for the most part, Michael, the costs we incur in serving our customers, improving our service and reliability are recovered through the formulaic process.

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Michael Lapides – Goldman Sachs: Got it. And then a broader transmission question. We’ve seen in some regions of the country, in New England and Colorado and California interveners coming and file at the FERC to dramatically lower the base ROE in some of the RTOs. We haven’t seen that type of Section 205 or – I think it’s 206 litigation, yet in MISO or in the SPP, I don’t think, but just curious if it did play out and if you saw lower authorized base ROEs for transmission, how would that impact your views in terms of dedicating as much capital as you are planning two interstate transmission projects?

Martin J. Lyons, Jr. – SVP and CFO: Sure, Michael. You are right in terms of we haven’t seen that type of push here. I think as you know, our FERC authorized ROEs aren’t really incentive ROEs like you might see in some jurisdictions. But to your question, I mean to the extent that the ratemaking treatment or the ROEs were changed, it detracts from the incentive that exists today in investing in these large regional projects. They are significant amounts of capital deployment. They do have risks associated with them. We believe that the ROEs that we’ve got are appropriate and to the extent that the ROEs were reduced. It certainly would affect ours and I think other companies thought process is about the investment opportunity. Whether they were banned or not I certainly won’t speculate, I’m just saying that it certainly becomes less attractive and there is less incentive there to take on the big projects.

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