Ameren Executive Insights: Merchant, Tax Adjustment
Paul Ridzon – KeyBanc Capital Markets: Can you just given the drivers behind the revised guidance, kind of what drove Merchant up? I guess it was weather that took the regulator down.
Martin J. Lyons, Jr. – SVP and CFO: Sure Paul. This is Marty. In terms of the overall guidance, obviously the guidance is affirmed and unchanged, but within the guidance, the regulated upper and lower ends came down about $0.05 and Merchant lower and upper ends went up by about $0.05, and they netted out obviously. The big driver for the quarter really in the year Regulated business was weather as you heard on the call. Weather impacted our earnings negatively versus last year by about an estimated $0.13, and versus normal about $0.10, and we had very warm winter weather. With that $0.10 weather variance versus normal that caused us to move our guidance down for the regulated businesses by about $0.05. On the Merchant side, our guidance had been zero to $0.10 of earnings. We moved up to $0.05 to $0.15. As a result of the impairment of our Duck Creek Energy Center, depreciation expense will actually be lowered going forward, and so the increase in our guidance for Merchant reflects that reduction and depreciation expense.
A Closer Look: Ameren Earnings Cheat Sheet>>
Paul Ridzon – KeyBanc Capital Markets: Is there any precedent for kind of delaying the environmental that you proposed?
Martin J. Lyons, Jr. – SVP and CFO: This is Marty again. The Illinois Pollution Control Board who we filed with has a history of weighing a number of things, impacts of a proposed variance to the environment, as well as the cost of coming to compliance and economic impacts of the compliance plan that is either planned or the alternatives to that plan. So, they have a history of sort of balancing environmental issues with economic issues, and there has been precedents in the state for variances to be granted. In fact, there are some precedents even here with us where variances in the past have been granted by the Pollution Control Board. So, we’re optimistic that our proposed plan will be received favorably by the Board.
Paul Ridzon – KeyBanc Capital Markets: How does that interplay with EPA rigs?
Martin J. Lyons, Jr. – SVP and CFO: As you know, some of those EPA rigs are bid influx as we saw the appeal of the CSAPR rules and then the MATS rules come into play later down the line. You may recall, as a result of our compliance with the Illinois multi-pollutant standard, we’ve made significant investments in environmental controls. We burn low sulfur Powder River Basin coal. We control mercury through the use of activated carbon. So, we’ve got a lot of controls in our plants and those controls, those investments are positioning us well in our Merchant business for compliance with MATS and then we’ll see how CSAPR evolve. Although we feel like we were positioned well for compliance with the CSAPR rules that existed before as a result again of our use of Powder River Basin coal, the scrubbers we have on some of our plants as well as the decision last year to shut down a couple of our older uncontrolled plants.
Paul Patterson – Glenrock Associates: With respect to the $0.36 of tax adjustment that gets fully reversed, is that going to be showing up in operating earnings going forward for the rest of the year?
Martin J. Lyons, Jr. – SVP and CFO: No. I mean, let me describe what that is. I mean, basically what it is from a GAAP accounting standard we’re required to book to the estimated end of the year effective tax rate, which given the impairment charge that we took and projecting out to the end of year, we’re forecasting about a 24.5% effective tax rate. So, we’re required to book to that in the first quarter. Because our earnings excluding the impairment charge are seasonal and heavily weighted towards the third quarter, the earnings in the first quarter excluding the impairment charge are pretty low. So, when you take that impairment charge and you tax-effect it at say a 40% kind of effective tax rate. It has the effective really pushing the effective tax rate down for the quarter, down to a very low level. So, we had to – the way we described a decrease to benefit of the Duck Creek impairment tax effect, basically increase the effective tax rate up to that 24.5% level in the first quarter, but between now and the end of the year and likely between now and the end of the third quarter that will reverse out.
Paul Patterson – Glenrock Associates: Will that show up in earning?
Martin J. Lyons, Jr. – SVP and CFO: Yes. It would show up in GAAP earnings, but not core.
Paul Patterson – Glenrock Associates: But it won’t be showing up in core earnings. The $0.05, that is for the three quarters ended – the last three quarters of this year and I guess the full year impact will just be if we just annualize that impact of that, how we should think about it?
Martin J. Lyons, Jr. – SVP and CFO: Are you talking about the depreciation from…
Paul Patterson – Glenrock Associates: Yes, the depreciation of Duck Creek?
Martin J. Lyons, Jr. – SVP and CFO: Yeah. Paul, it’s about $25 million, so I think that’s probably about $0.06 per share, so the $0.05 per share is really this current year expected impact.
Paul Patterson – Glenrock Associates: Why only Duck Creek? Was that the only one that was that impaired, is that because it’s pollution control equipment or how should we think of that?
Martin J. Lyons, Jr. – SVP and CFO: Well, you are right Paul. That’s exactly right. It’s a part of the answer anyway. So when you do an impairment test from an accounting perspective, first you look at the expected gross cash flows undiscounted over the remaining lives of the generating assets and then compare it to the carrying values. The Duck Creek facility did have a high book value or carrying value per megawatt and that was really a function as you mentioned of the environmental equipment that is on that plant and that we invested in. But also you might recall Paul that that generating unit was actually acquired when Ameren acquired CILCORP years ago. As a result at that time in purchase accounting that plant was written up to its then fair value. So, it had a higher book value as a result of that purchase accounting and then on top of that the investments were made for environmental controls. So it had a fairly high book value compared to our other plants.