Ameren Corp (AEE) — Q3 2016 Earnings Call Transcript

Thank you and good morning. I am Doug Fischer, Senior Director of Investor Relations for Ameren Corporation. On the call with me today are Warner Baxter, our Chairman, President & Chief Executive Officer; and Marty Lyons, our Executive Vice President & Chief Financial Officer, as well as other members of the Ameren management team. Before we begin, let me cover a few administrative details. This call is being broadcast live on the Internet and the webcast will be available for one year at our website at ameren.com. Further, this call contains time-sensitive data that is accurate only as of the date of today's live broadcast and redistribution of this broadcast is prohibited. To assist with our call this morning, we have posted on our website a presentation that will be referenced by our speakers. Acronyms used in the presentation are defined in the glossary on the last page. To access this, please look in the Investors section of our website under Webcasts and Presentations and follow the appropriate link. Turning to Page 2 of the presentation, I need to inform you that comments made during this conference call may contain statements that are commonly referred to as forward-looking statements. Such statements include those about future expectations, beliefs, plans, strategies, objectives, events, conditions, and financial performance. We caution you that various factors could cause actual results to differ materially from those anticipated. For additional information concerning these factors, please read the forward-looking statement section in the news release we issued today and the forward-looking statements and risk factor sections in our filings with the SEC. Warner will begin this call with comments on third-quarter financial results, full-year 2016 earnings guidance, and a business update. Marty will follow with a more detailed discussion of third-quarter results and an update on financial and regulatory matters including 2017 earnings considerations. We will then open the call for questions. Before Warner begins, I would like to mention that all per share amounts discussed during today's presentation, including earnings guidance, are presented on a diluted basis unless otherwise noted. Now here is Warner who will start on Page 4 of the presentation.

Thanks, Doug. Good morning everyone, and thank you for joining us. Today we announced third quarter 2016 earnings of $1.52 per share compared to earnings of $1.41 per share in last year's third quarter. This increase was due to higher electric sales to residential, loan, and commercial customers from warmer summer temperatures. The earnings comparison also benefited from increased investments in transmission and distribution infrastructure under favorable regulatory frameworks to better serve our customers. However, this was partially offset by lower electric sales to the New Madrid Aluminum smelter, which has been shut down since earlier this year. Overall, our third quarter results were strong as our team executed our strategy effectively. I'm pleased to report that, for the second time this year, we have raised our 2016 earnings guidance. The new range is $2.65 to $2.75 per share, up from our previous range of $2.45 to $2.65 per share, reflecting our strong year-to-date performance. On Page 5, we reiterate our strategic plan. We are confident that it will deliver superior long-term value to both our customers and shareholders. I want to highlight some of our achievements this year. We have strategically allocated significant capital to businesses supported by regulatory frameworks that ensure fair and timely cost recovery, providing long-term benefits to our customers. We've invested nearly $1 billion in areas with supportive regulation so far this year, which is about two-thirds of our capital spending, including approximately $510 million in transmission projects regulated by FERC. The Illinois Rivers Transmission Project remains the largest, with nine segments energized and eight substations now operational. For the Spoon River project, construction is nearing completion on two substations, and we've begun clearing land for the rest of the project. In Northeast Missouri, the Mark Twain project recently entered core proceedings for road crossings. When completed, these three major projects will enhance reliability and access to cleaner energy, including wind power, while creating jobs. We are also investing significantly in Ameren, Illinois's Transmission System to create a smarter and more reliable energy grid. Moving to Page 6, I want to update you on our strategic plan execution in Ameren, Illinois. We invested roughly $480 million in infrastructure projects during the first nine months of the year under our modernization action plan, supported by the state's Energy Infrastructure Modernization Act. In September, the ICC approved our request to expand the installation of smart electric meters to cover 100% of customers, taking advantage of existing processes and teams. This expansion will also apply to smart gas meter modules. The planned deployment will install about 1.25 million advanced electric meters and upgrade around 830,000 gas meter modules by the end of 2019. So far, we have installed around 352,000 electric and 178,000 gas meters, significantly reducing estimated meter reads and service visits. Our peak time rewards program has allowed over 8,000 customers to save energy, demonstrating how our smart grid investments are benefiting users. The frequency and duration of power outages in Ameren, Illinois have decreased by an average of 17% and 18% respectively. Thus, our electric distribution initiatives are on track to meet their reliability and investment goals established in the modernization act. Furthermore, our improved framework for natural gas distribution is encouraging more investment in energy infrastructure. These modern policies in Illinois have fostered substantial investments in electric and natural gas infrastructure, providing long-term benefits to customers while creating numerous jobs. Turning to Page 7, regarding Missouri, in July we filed for a $206 million annual electric service revenue increase with the Missouri Public Service Commission to recover investments not accounted for in rates and to address lower sales due to the New Madrid smelter shutdown. We anticipate a decision in this review by April, with new rates to take effect in May. Recently, two separate efforts to examine Missouri's regulatory framework for infrastructure investment were initiated, one by the Missouri PSC and one by an interim committee. We appreciate the work being done on this essential topic. Over recent months, the PSC has collected extensive feedback from stakeholders to aid in its policy considerations. Our filings highlighted the need for regulatory changes to support investment in Missouri's aging energy infrastructure and suggested successful approaches from other states, including performance-based formula rate making and forward test years. Correspondingly, we filed a plan with the PSC suggesting potential infrastructure investments of $1 billion over five years, with an additional $4 billion identified for the next decade. On October 17, the PSC staff issued a report positively mentioning several approaches to support investments with adequate oversight. We welcome their consideration of tools used effectively in other states. Additionally, in August and October, an interim committee conducted hearings on today's regulation, yielding valuable insights on potential modernization to encourage investment. We expect reports from both parties by early next year. Meanwhile, we've proposed pilot programs to enhance Missouri's future, including subscription-based solar power, which has PSC approval. Moving to Page 8, our long-term growth outlook indicates a 6.5% annual rate base growth through 2020, aligned with our strategic plan. Our focus remains on our capital allocation in regulated electric transmission and distribution services, which deliver significant long-term benefits. Page 9 highlights our disciplined capital allocation strategy to modernize the grid for future energy needs. Transmission and electric and gas distribution investments are expected to represent about 75% of our rate base by the end of 2020, while our reliance on coal power generation will decrease to 15%. Our operational plan will be further refined with our next integrated resource plan slated for submission in October 2017. Moving to Page 10, beyond the current growth phase, we aim to capitalize on further opportunities after 2020. With constructive rate-making in Illinois, we anticipate significant investment in electric and gas distribution systems to comply with new regulations. We will also continue local electric transmission projects to enhance reliability and address aging infrastructure while exploring regional transmission upgrades. In Missouri, viable investment opportunities will continue to be explored as regulations improve. We plan to invest in smart meters, renewable initiatives, and cybersecurity, anticipating substantial benefits for our customers and shareholders moving forward. Lastly, on Page 11, I want to reaffirm that we are executing our strategy and achieving robust earnings. Our long-term growth outlook is favorable, driven by strong rate base growth and investment in customer-focused areas. Our board recently raised the quarterly dividend by 3.5% to $0.44 per share, reflecting confidence in our long-term strategy. We expect our dividend payout ratio to be between 55% and 70% of annual earnings. Future increases will depend on various factors, but a strong growth profile paired with our solid dividend creates an attractive total return for shareholders. In summary, we are committed to our strategy and believe it will provide superior value to all stakeholders. Thank you for joining us today. Now, I will hand it over to Marty.

Thanks, Warner. Good morning everyone and turning now to Page 13 of our presentation. As Warner mentioned we reported third quarter 2016 earnings of $1.52 per share compared with earnings of $1.41 per share for last year's third quarter. Here we highlight factors that drove the $0.11 year-over-year increase. Warmer temperatures increased earnings by an estimated $0.11 per share versus 2015 and $0.10 per share versus normal conditions as we experienced the fourth hottest third quarter including the hottest September since 1970. Increased investments in electric transmission and distribution infrastructure in our ATXI and Ameren Illinois businesses lifted earnings by $0.09 per share including changes in allowed returns on equity compared to the year ago period. With regard to returns on equity, third quarter 2016 results from our first regulated transmission businesses benefited from a temporarily higher ROE as compared to the prior period reflecting the expiration in May of the fifteen month refund period for the second MISO ROE complaint kit. The first order in the first complaint case then lowered the ROE in late September, the 10.82% including our 50 basis point adder. Turning to our Illinois electric distribution business, third quarter results reflected a ROE under formulaic rate making of 8.29% compared to 8.7% for the year ago period. The third quarter 2016 allowed ROE was based on an assumed average 30 year Treasury rate of 2.49% for the full year 2016. Factors that had an unfavorable effect on third quarter earnings comparisons included the loss of sales to the New Madrid smelter and increased Ameren Missouri depreciation expense which reduced earnings by $0.05 per share and $0.02 per share respectively. And finally, the year-over-year third quarter impacts of Ameren Missouri's 2015 energy efficiency plan were earnings neutral as the carry-over effect of lower sales resulting from this plan were matched by recognition of $19 million or $0.05 per share for a portion of our performance incentive award associated with energy efficiency results achieved over the 2013 through 2015 period. In total based on the elation and agreement approved by the Missouri P.S.C. earlier this week, Ameren Missouri will recognize $28 million or $0.07 per share of total incentive award in 2016 including the previously mentioned $0.05 per share in the third quarter and an additional $0.02 per share in the fourth quarter. We're pleased that we're able to reach agreement with the P.S.C. staff and the Office of Public Counsel on these incentive awards and believe this outcome reflects the tremendous success of the 2013-2015 energy efficiency program for our customers. Before moving on, let me briefly cover electric sales trends year-to-date compared to the prior year. Overall, we experienced trends similar to those discussed on our last two quarterly calls, although we did see some improvement in the third quarter. Weather normalized kilowatt-hour sales to Illinois and Missouri residential and commercial customers on a combined basis were up slightly year-to-date, as underlying growth and the Leap Day sales benefit more than offset energy efficiency impact. Kilowatt-hour sales to Illinois industrial customers decreased approximately 2% year-to-date primarily reflecting lower sales to several low margin Illinois customers including those in steel making, heavy equipment manufacturing, mining, and energy. However, we have seen improvement in the second and third quarters as industrial sales volumes appear to have bottomed out in the fourth quarter of 2015 and the first quarter of 2016. Finally, kilowatt-hour sales to Missouri industrial customers were down approximately half of one percent excluding lower sales to the New Madrid smelter. Turning to page 14 of our presentation, I would like to move from this discussion of sales to a discussion of our earnings guidance for the year. As Warner stated, we now expect 2016 diluted earnings to be in a range of $2.65 to $2.75 per share, an increase from our prior range of $2.45 to $2.65 per share and our original February guidance of $2.40 to $2.60 per share. The increased guidance from February reflects strong year-to-date results including the first quarter $0.09 per share tax benefit associated with share-based compensation and estimated $0.11 per share weather benefit compared to normal driven by warmer summer temperatures as well as disciplined cost management. Factors that are expected to have a favorable effect on year-over-year fourth quarter results include an assumed return to normal temperatures compared to much milder than normal temperatures in last year's fourth quarter, continued increased electric transmission and distribution infrastructure investment by ATXI and Ameren Illinois, as well as higher Illinois natural gas distribution rates in 2016. Factors that are expected to have an unfavorable effect on the earnings comparison include carryover impacts of Missouri's 2015 energy efficiency plan with the recognition of the majority of Ameren Missouri's 2015 energy efficiency performance incentive award in the third quarter; we revised the expected unfavorable year-over-year fourth quarter impact of the 2015 plan to $0.08 per share from our prior estimate of $0.03 per share. Further, we expected the year-over-year fourth quarter earnings comparison to be unfavorably affected by lower sales to the New Madrid smelter and regulatory lag related to increases to Missouri depreciation and transmission expenses. Moving to page fifteen. Here we highlight select pending regulatory matters. Starting with Missouri and our pending electric rate review we requested a $206 million annual revenue increase that is primarily driven by our need to recover and earn a return on important new infrastructure investments made for the benefit of our customers, adjust rates to reflect reduced customer sales largely driven by the suspension of operations at the New Madrid smelter, and recover increased MISO transmission charges. To address the last item, we have also requested the implementation of a new MISO transmission tracker in the rate review. We expect the Missouri P.S.C. to complete their review by late April of next year with new rates expected to be effective in late May. Moving on, Ameren Illinois made its required annual electric distribution rate update filing with the ICC in April of this year under Illinois' formula rate making framework. Our filing calls for a $14 million decrease in the net annual electric revenue requirement consisting of an increase reflecting 2015 actual costs and expected 2016 infrastructure investment that is more than offset by a decrease reflecting the completion of the recovery of 2014 actual costs by the end of this year. Last week, an ALJ proposed order recommended a $14 million net revenue requirement decrease in line with our filing. This recommendation is further evidence of the consistent constructive treatment Ameren Illinois is receiving under the state electric formula rate making framework, and I see the decision is expected in December of this year, with new rates effective early next year. Finally, in the first of two complaint cases, thought to reduce the base allowed ROE from MISO transmission owners, including Ameren Illinois and ATXI, the FERC issued its order in September, adopting a 10.32% base ROE in line with the ALJ's recommendation. In the second case, the first ALJ has recommended a 9.7% base ROE and first orders are expected in the second quarter of next year. As a result of these cases, we have accrued a reserve for an estimated refund of $61 million as of September 30, 2016. That is consistent with the FERC order in the first case and the ALJ's recommendation in the second case. In addition to the MISO base ROE, Ameren Illinois and ATXI receive a further approved ROE of up to 50 basis points effective in January 2015, for their participation in MISO. Moving now to Page 16. We plan to provide 2017 earnings guidance when we release the fourth quarter results in February of next year. However, using our 2016 year-to-date financial results and guidance as a reference point, we have listed on this page select items to consider if you think about our earnings outlook for next year. Beginning with the first item listed, earnings from our FERC regulated electric transmission activities are expected to benefit from additional investments in Ameren Illinois and ATXI projects made under formula forward-looking rate making. However, we expect these earnings to be unfavorably impacted by a projected lower weighted average allowed ROE in 2017 compared to 2016. For Ameren Illinois selected distribution services, we anticipate increased earnings in 2017 compared with 2016 reflecting additional infrastructure investments made there under Illinois formula rate making. The allowed ROE will be of course, the average of the 2017 30-year Treasury yield plus 5.7%. In addition, Illinois gas distribution earnings are expected to benefit from qualified investments that are included in a rate on a timely basis, under the state gas infrastructure writer. For Missouri, the 2017 earnings comparison is expected to be favorably affected by increased Missouri electric service rates to be implemented as a result of our pending rate review. These rates are expected to reflect recovery of and a return on new infrastructure investments, as well as more recent sales and cost levels. The incorporation of more recent sales levels is expected to remove the negative earnings effect from lower sales to the New Madrid smelter adding an estimated $0.12 per share to the year-over-year earnings comparison as we now expect an estimated $0.03 per share negative impact from the suspension of operations in the first five months of 2017. We expect Ameren Missouri's 2017 results to also reflect regulatory lag associated with increased depreciation, transmission, and property tax expenses, particularly in the first five months of the year before new rates become effective. Further, Ameren Missouri's electric service earnings will be negatively affected by the absence in 2017 of the $0.07 per share energy efficiency performance incentive award to be recognized in 2016 which I previously discussed. And a return to normal weather in 2017 would reduce combined Ameren Illinois and Ameren Missouri earnings by approximately $0.11 per share compared to 2016. Assuming of course normal weather in the last quarter of this year. Finally, we expect expenses associated with the Callaway nuclear refueling and maintenance outage, scheduled for the fall of 2017 to be comparable to those experienced in the spring outage this year. Moving then to Page 17 I will summarize. We continue to successfully execute our strategy and have delivered strong third quarter and year-to-date results. These results allowed us to increase our 2016 earnings guidance range to $2.65 to $2.75 per share. On a February call, we stated that we expected earnings per share to grow at a strong 5% to 8% compound annual rate from 2016 to 2020, using our then adjusted 2016 EPS guidance of $2.53 as a base. This earnings growth outlook was driven by 6.5% compound annual rate base growth over the 2015 to 2020 period, based on a mix of needed transmission, distribution, and generation investments across multiple regulatory jurisdictions made for the benefit of customers. Our recently increased dividend provides investors with a yield of approximately 3.6%, which is above average compared to fully rate regulated utility peers. When you combine our strong earnings growth outlook with this dividend, we believe our common stock provides a very attractive total return potential for investors. That concludes our prepared remarks, we now invite your questions.

Yes, thank you. I was wondering how the sale of Noranda's smelter will impact your case and ongoing operations and recovery.

Hi, Greg, this is Warner. Glad to have you join us, so in terms of the scale of the Noranda's smelter, frankly not sure if that has really any impact on the case. That sale has been completed, not sure exactly what the future is of the smelter at this stage, but we don't see it having any particular impact on the case. Michael Moehn, our President, Ameren; any further comment on that?

I think that's right, Warner. I mean we are in the process of sitting down with the new owners trying to really understand what those plans are. My sense is that it's all a long recovery and as Warner said I don't think there's an impact on this case.

Thank you.

Yes, we appreciate the comments and questions, Greg; and I know a number of you are probably holding your questions for next week. We as a management team look forward to seeing many of you down at EEI at the Financial Conference, and look forward to having further dialogue and answering your questions. With that, I will turn it over to Doug to wrap up the call.

Thank you for participating in this call. We remind you again that a replay of the call will be available for one year on our website. If you have questions, you may call the contacts listed on our earnings release. Financial analyst inquiries should be directed to me, Doug Fischer, or associate Andrew Kirk. Media should call Joe Mellencamp; our contact numbers are on the release. Again, thank you for your interest in Ameren and have a great day.