Ameren Corp (AEE) — Q3 2023 Earnings Call Transcript

Thank you, and good morning. On the call with me today are Marty Lyons, our Chairman, President, Chief Executive Officer; and Michael Moehn, our Senior Executive Vice President and Chief Financial Officer; as well as other members of the Ameren management team. 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. We have posted a presentation on the amereninvestors.com homepage that will be referenced by our speakers. As noted on Page 2 of the presentation, comments made during this conference call may contain statements about future expectations, plans, projections, financial performance, and similar matters, which are commonly referred to as forward-looking statements. Please refer to the forward-looking statements section in the news release we issued yesterday as well as our SEC filings for more information about the various factors that could cause actual results to differ materially from those anticipated. Now here's Marty, who will start on Page 4.

Thanks, Andrew. Good morning, everyone, and thank you for joining us today. We had a strong quarter, and we're excited to share an update with you on recent developments. But before I begin our quarterly update, I would like to take the opportunity to congratulate Warner Baxter, who retired as Executive Chairman on November 2. Over his 28-year career with the company, Warner has had a significant positive impact on our industry, company, and community. Under Warner's leadership, Ameren has successfully executed a strategy focused on robust energy infrastructure investments supported by constructive energy policies driving strong value for Ameren's customers, communities, and shareholders. Under his focus on sustainability, he leaves behind a strong team dedicated to maintaining that focus and continuously improving. Congratulations, Warner, and I wish you well in your retirement. Moving now to Page 5 and our quarterly update. Our dedicated team continues to execute our strategic plan across all of our business segments, which entails investing in energy infrastructure to deliver safe, reliable, clean, and affordable electric and natural gas services to our customers. Turning to Page 6. Our strategic plan integrates our strong sustainability value proposition balancing the four pillars of environmental stewardship, positive social impact, strong governance, and sustainable growth. Here, we summarize some of the many things we are doing for our customers, communities, coworkers, and shareholders. Today, we published our updated sustainability investor presentation called 'Leading the Way to a Sustainable Energy Future,' available at amereninvestors.com, which more fully details how we have been effectively integrating our sustainability value proposition. Unfortunately, the legislation supporting the timely and cost-effective construction of the MISO long-range transmission planning projects was vetoed by the governor in August and was not ultimately brought to a vote during the detail session. We will continue to work with key stakeholders to support this important piece of legislation in the spring legislative session. On Page 14, we look ahead to the next decade. We have a robust pipeline of investment opportunities totaling more than $48 billion that will deliver significant value to all our stakeholders by making our energy grid stronger, smarter, and cleaner. The $48 billion does not reflect the incremental investment opportunities included in the recently filed Integrated Resource Plan. We will provide an updated number on our call next February, along with the new five-year capital plan. Our investments create thousands of jobs for our local economies. Maintaining constructive energy policies that support robust investment in energy infrastructure to transition to a cleaner future in a responsible fashion will be critical to meeting our country's energy needs and delivering on our customers' expectations. Turning now to Page 15. In February, we updated our five-year growth plan, which included our expectation of a 6% to 8% compound annual earnings growth rate from 2023 through 2027. This earnings growth is primarily driven by strong compound annual rate base growth of 8.4%, supported by strategic allocation of infrastructure investment to each of our operating segments based on their constructive regulatory frameworks. Combined, we expect to deliver strong long-term earnings and dividend growth, resulting in an attractive total return that compares favorably with our regulated utility peers. I'm confident in our ability to execute our investment plans and strategies across all four of our business segments as we have an experienced and dedicated team to get it done. Again, thank you all for joining us today. I will now turn the call over to Michael.

Thanks, Marty, and good morning, everyone. Turning now to Page 17 of our presentation. Yesterday, we reported third quarter 2023 earnings of $1.87 per share, compared to $1.74 per share for the year ago quarter. This page summarizes key drivers impacting earnings at each segment. Under our constructive regulatory frameworks, we experienced earnings growth driven by increased investments in infrastructure in all of our business segments. The key quarterly drivers are largely consistent with the guidance considerations laid out in February and the supplemental considerations provided on the first and second quarter earnings calls. We were able to deliver strong earnings performance during the quarter as a result of our diverse business mix and disciplined cost management. Before moving on, I'll touch on sales trends for Ameren Missouri and Ameren Illinois Electric Distribution. Year-to-date, weather-normalized kilowatt-hour sales to Missouri residential, commercial, and industrial customers decreased 2%, 0.5%, and 2.5%, respectively, compared to last year. The year-to-date decrease in residential sales reflects an anticipated transition back to the office for many people. In addition, energy demand was lower as a result of the impacts from severe weather experienced in our service territory this quarter. That said, our residential sales remain a little over 3% higher than pre-COVID 2019 levels. For Industrial, we expect the year-to-date decline to moderate over the remaining course of the year as the UAW strike ends, coupled with increased demand, including from a General Motors plant expansion and a new graphics processing company. Year-to-date, weather-normalized kilowatt-hour sales to Illinois customers have declined about 3% on average compared to last year. Recall that changes in Illinois Electric sales, no matter the cause, do not affect our earnings since we have full revenue-to-cost pass-through. Moving to Page 18. I would now like to briefly touch on our 2023 earnings guidance. We delivered strong earnings in the first nine months of 2023 and are well-positioned to finish the year strong. As Marty stated, we have narrowed our 2023 earnings guidance to be in the range of $4.30 to $4.45 per share. This is in comparison to our original guidance range of $4.25 to $4.45 per share. On this page, we've highlighted slight considerations impacting our 2023 earnings guidance for the remainder of the year. These are supplemental to the key drivers and assumptions discussed on our earnings call in February. I encourage you to take these into consideration as you develop your expectations for the fourth quarter earnings results. Turning now to Page 19. In January, Ameren Illinois Electric Distribution followed its first multiyear rate plan or MYRP with the ICC. Our MYRP is designed around three key elements: providing safe and reliable energy to our customers, deploying capital in a way that achieves the climate and equitable job objectives included in our performance metrics, and fulfilling the clean energy transition by preparing our system to accept more renewables and electric vehicles over time. The MYRP details a grid modernization plan that includes our planned electric distribution investments and supports our annual revenue increase request for the next four years. In September, the ICC staff followed a brief recommending a cumulative increase of $322 million in revenue for 2024 through 2027. This includes a return on equity of 8.9%, reflecting the 2022 average 30-year treasury rate plus 580 basis points. It also includes a 50% equity ratio. Also in September, Ameren Illinois updated its request to reflect a cumulative increase of $444 million in revenues, which reflects a return on equity of 10.5% and an equity ratio of 54%. In October, the administrative law judges recommended a cumulative increase of $338 million in revenues, incorporating a 9.24% return on equity and a 50% equity ratio. Our brief on exceptions filed last Thursday calls for a return on equity of 9.85% and an equity ratio of 52%. We expect an ICC decision by mid-December, with new rates to be effective by January 2024. Turning to Page 20. In April, we saw that our electric distribution annual rate reconciliation to reconcile the 2022 revenue requirements to actual cost. In August, the ICC staff updated a recommended reconciliation adjustment to a $110 million base rate increase compared to our updated request of a $117 million base rate increase. The $7 million variance is driven by a difference in the common equity ratio as we have proposed a 52% compared to the ICC staff's recommended 50%. An ICC decision is required by December 2023, and the full amount would be collected from customers in 2024. Earlier this year, we also filed with the ICC for an annual increase in Ameren Illinois Natural Gas distribution rates using a 2024 future test year. In October, we filed an updated request for a $140 million increase based on a 10.22% return on equity and a 52% common equity ratio and a $2.9 billion rate base. In October, the ICC staff recommended a $127 million increase based on the 9.89% return on equity and a 50% common equity ratio, which is consistent with the ALJ proposed order issued in September. We expect an ICC decision by mid-November, with rates expected to be effective in early December this year. On Page 21, we provide a financing update. We continue to feel very good about our financial position. We were able to successfully execute two debt issuances earlier this year, which you've outlined on this page. Further, in order to maintain our credit ratings and a strong balance sheet while we fund our robust infrastructure plan, we expect to issue approximately $300 million of common equity, consisting of 3.2 million shares by the end of this year. These shares were previously sold forward under an ATM program with an average initial forward sales price of approximately $93 per share. Additionally, on September 30, we entered into forward sales agreements under an ATM program for approximately $92 million to support our 2024 equity needs with an average initial forward sales price of approximately $86 per share. Together with the issuance under our 401(k) and DRIP plus programs, our ATM equity program is expected to support our equity needs in 2024 and beyond. We continue to be strategic and thoughtful about our financing and our robust capital plan. Turning to Page 22. I'd like to briefly touch on our natural gas business as we head into the winter months. Both Ameren Illinois and Ameren Missouri natural gas commodity prices are approximately 91% price hedged based on normal seasonal sales and 100% volumetrically hedged based on maximum seasonal sales. I'm pleased to say, in light of the drop in natural gas prices, residential natural gas customers in Illinois and Missouri are expected to see total bill decreases of approximately 13% and 23%, respectively, compared to the 2022-2023 winter season. Turning to Page 23. We plan to provide 2024 earnings guidance when we release fourth quarter results in February next year. Using our 2023 guidance as a reference point, we've listed on this page select items to consider when you think about our earnings outlook for next year. Beginning with Missouri, earnings are expected to be higher in 2024 compared to 2023 due to new electric service rates effective in July 2023. We also expect increased investments in infrastructure eligible for plant and service accounting to positively impact earnings. Our return to weather in 2024 would increase Ameren's earnings by approximately $0.02 compared to 2023 results to date, assuming normal weather in the last quarter of the year. Next, earnings from our FERC-regulated electric transmission activities are expected to benefit from additional investments in Ameren Illinois projects made under forward-looking formula ratemaking. Ameren Illinois Electric Distribution, earnings are expected to benefit in 2024 compared to 2023 from additional infrastructure investments. The allowed return on equity under the new multiyear rate plan effective at the beginning of 2024 will be determined by the ITC as part of the pending rate review compared to the average 2023 30-year treasury yield plus 5.8%, which is currently in place. Ameren Illinois Natural Gas earnings are expected to benefit from higher delivery service rates based on a 2024 future test year. Moving now to Ameren-wide considerations. We expect increased common shares outstanding and higher interest expense at Ameren to unfavorably impact earnings in 2024 compared to 2023. Finally, consistent with past practice, our 2024 earnings guidance will include no expectation of COLI gains or losses. And turning to Page 24. We're well-positioned to continue executing our plan. We expect to deliver strong earnings growth in 2023 and over the long-term, driven by robust rate base growth and disciplined cost management. Further, we believe this growth will compare favorably with the growth of our peers. Ameren shares continue to offer investors an attractive dividend and total shareholder return story. That concludes our prepared remarks. We now invite your questions.

Hey everybody, it's Nathan Richardson on for Nick.

Hey, good morning, Nathan. This is Marty Lyons. Before you get to your question, I just want to let you know that, I think many of our participants that were participating on the webcast missed a portion of our prepared remarks because of a systems issue, but I just want to reassure everybody, we will post our replay of the entire conference call as soon as possible following the end of the Q&A session. So with that, please carry on with your question.

Got you. And I just want to talk about equity needs first. I'm sorry if I missed this, but in the September slide, you talked about $500 million of equity needs per year from 2024 to 2027. Would this still be the case? And would you mind maybe talking about how you're thinking about ATM versus block needs and what you would be open to?

Yes. Perfect. Good morning. This is Michael. Yes, our equity needs are really unchanged from where they were at the beginning of the year when we issued our five-year guidance. We talked about $300 million of equity that we needed to do in 2023 and then $500 million per year beginning in 2024 through the balance of 2027. I'm happy to report that we've taken care of those equity needs for 2023. Those have been done under an ATM forward sales, so we'll bring those down here at the end of the year. We've sold forward about $100 million of the $500 million need for 2025 through some forward sales. As we sit here today, we continue to find the ATM to be very effective and efficient. We'll continue to evaluate our needs. Since our capital comes in pretty regularly, the ATM works well from that perspective. But we're always open to other mechanisms if there are better options to continue to take advantage of.

Got you. Thank you. And then one last one. So sticking with financing. You have a robust IRP with a lot of renewables. Can you help me think about your position on transferability cash flow and whether that is something you would utilize and maybe a timeline for that?

Yes, you bet. I mean, it looks like the transferability market continues to evolve nicely, and we're seeing some deals starting to get done there, which is great. Yes. As we think about it, it's certainly something we could explore over time simply because we don't have necessarily the tax appetite to use all of those. And so as we think about from a financing perspective, I mean, there could be some positive impact here over time. Ultimately, you'll provide those back to customers, which is great because it ends up lowering the cost of those renewables, which is what we all want. There could be some positive temporary regulatory lag that we may experience from time to time. But not a huge replacement for any financing needs going forward, if that makes sense.

Got it, makes sense. Thank you very much.

You bet, thank you.

Hey guys, good morning.

Hey Shar, good morning.

Good morning. Let me just start with Illinois. Can you just maybe talk a little bit about the outlook for the balance of the process here on the multiyear? I mean, obviously, your neighbor in Chicago was very dissatisfied with the ALJ. You have briefs out there. I guess what's your expectation for the ICC to depart from the ALJ at this point? And what's the next step? Would you consider filing for a rehearing of the ALJ stands as is? Would you look to defer redeploy CapEx? I'm just kind of curious what the next step could be if you get an adverse decision.

Yes. Look, Shar, I think that's a great question overall. First of all, as you referred to, we filed our reply brief in September. We believe that what we filed there best supports the achievement of the State of Illinois goals captured in the Clean Energy and Jobs Act. And so if you look at that, that's where we really believe the state would be best served, including the customers of the state. To think about the process to date, we've been pleased that both the staff and now the ALJ have supported nearly 95% of our planned capital investments over the next four years. So I think that's a positive that has occurred through this process. As we stated in our prepared remarks, we are disappointed with the recommended return on equity and capital structure that came from the ALJ as well as the treatment of the OPEB asset. The case isn't over. Last week, we filed our brief on exceptions. We articulated our concerns and the reasons for seeking a better outcome from the commission. Reply briefs on exceptions are due on November 14, and then we'll expect a commission decision by mid-December. We continue to support our initial asks of a 10.5% ROE and 54% equity in the capital structure, but we did suggest an alternative that the commission could arrive at 9.85% ROE or a different equity structure of 52%. As we looked at the data and the record, we compared the averages of those in the industry related to capital structure. I would hope that the commission will reach a more constructive and fair outcome than that from the ALJ. At this point, I wouldn't comment on what action we may take post-commission ruling. Michael, do you want to add anything?

I agree with all those comments. Just to remind you, Shar, as you know, it's about 18% of our rate base today. And again, as we look at our overall capital plan, we've got $19.7 billion planned over the next five years and $48 billion over the next 10. We believe we have really constructive jurisdictions to continue to allocate that. We'll continue to be thoughtful about that. Given that we are at approximately 95% for both rate base and capital additions in the review process is positive. But we have some flexibility to pivot if needed.

And then just to confirm, just the equity ratio going into it, no block equity. So how do we think about the juicing of that?

Yes. As we sit here today, we'll continue to stand by the comments about the ATM itself. I think it provides us a great deal of flexibility. It's cost-effective. It's not to say that we wouldn't entertain something else if needed. But the capital is being laid in over time, and it's been an effective way to do it.

Yes. Shar, just to build on the answers that were provided, I mean, we have a robust portfolio of capital expenditures across all our segments. We feel very confident in our ability to grow at 6% to 8% in terms of our EPS compound annual growth rate. We've got a $48 billion infrastructure pipeline out through 2032, and we're confident in our ability to execute as a company.

Perfect, thanks very much, guys, and big congrats to Warner. I sense he is going to be as busy as ever anyway even in his retirement. Appreciate it, guys.

You're probably right. Thanks.

Hey guys, good morning. This is Darius on for Julien. Appreciate you taking the question. Maybe just to start with, you alluded to this. I appreciate that you don't have formal '24 guidance out there. But with the drivers and visibility that you have now and the ALJ decisions in both Illinois cases, can you comment on how you see that 6% to 8% shaping up on a year-over-year basis? Does the ALJ give you a basis to still hit that range in 2024?

Hey Darius, Michael here, thanks again for the question. Look, as we sit here today, we feel good about that 6% to 8%, thinking about that midpoint of $4.35. We've given you some select drivers impacting us year-over-year. But again, I feel good about the situation, particularly given the 8.4% rate base growth we have. We've had the updated IRP released in September discussing an incremental $1.5 billion of capital coming into the plan over time. So we feel very good about that 6% to 8% earnings per share growth.

Okay. Excellent. Thank you for the detail. And maybe if I can ask one on the competitive transmission projects. Just looking at your updated slide, it looks like the overall competitive opportunity is unchanged at a little bit under $1 billion, but the content, including Orientation, Fairport was slightly lower than in the previous estimates. Can you comment on other projects within that set of competitive opportunities? Do you see anything moving up or down as the estimates get refined?

Yes, happy to answer that question. This is Marty again. So with respect to the projects assigned to us in Tranche 1, the $1.8 billion, as we're getting underway with those, which is fantastic. Then there were about $700 million of competitive projects. We bid on the Orient to Denny Fairport project and are pleased that we were selected as the winning bidder on that project. The ultimate price that we bid was lower than MISO's original planning estimate, which is indicative of the effort we put into partnering with others, whether they be co-ops, munis in the area, or vendors to deliver a low-cost project. MISO's numbers are planning estimates and don't necessarily provide the rigor of our formal bids. But I wouldn't read too much into where that project ended up relative to MISO's estimates. Each project has unique routing issues, land acquisition requirements, partnering opportunities, etc. So you can't extrapolate that outcome to the entirety. Again, very pleased with where we are, and we submitted another bid for another project, Denny to Zachary Thomas Hill Maywood, and we've got one more planned to bid on as well, the Skunk River.

Great, thank you very much for the color. Appreciate it.

Hi, good morning.

Good morning.

I just want to come back to Illinois Electric. I realize questions have been asked, but maybe just to put a finer point on some of the questions here. Why do you think the ALJ's ROEs came out so different than your proposal? Are there any specifics in the ALJ filing that you see that justifies this difference or why they view the electric ROEs less than the gas ROEs?

This is Marty again. I really can't comment on why they reached that conclusion. They utilized discounted cash flow and capital asset pricing model calculations based on data in the record. In our reply briefs, we pointed out certain data that should be used in those calculations if they were taken into account. Staff used similar calculations and came up with a little over 10%. So I can't explain why, but we feel that inappropriate data points were used, which we have addressed in our reply briefs.

Got it. Understood. Maybe pivoting towards Missouri here and the IRP, what has been the reaction to the proposed Missouri IRP? How have conversations with stakeholders been trending over time?

Yes, I think the conversation within the state has been balanced. Some of the things in this IRP vs. our previous one include the addition of 800 megawatts of gas simple cycle in 2027. We've adjusted the timing of one coal-fired energy center to delay it a couple of years, which pushes out a 1,200-megawatt combined cycle plant. We also moved forward on some battery storage technology by about five years. The conversation is balanced because we stress our integrated resource plan presents the lowest cost approach to transitioning our portfolio while maintaining reliability. We're hitting our carbon emission reduction targets of 60% by 2030, 85% by 2040, and eventually net zero. So I believe our approach has facilitated positive and balanced dialogues regarding affordability, reliability, and environmental stewardship.

Got it. Makes sense. Very helpful. I'll leave it there. Thank you.

Thank you.

Thanks, Jeremy.

Hey, good morning. Thanks so much for taking my question. Wondering if you could just speak a little bit to the CCNs and renewables in Missouri. How competitive are renewables currently? And what's your latest in terms of how you're positioned to compete for company-owned generation versus contracting?

Yes. The Missouri Public Service Commission approved two solar projects we proposed earlier this year, both the Huck Finn and the Boomtown solar projects, together totaling about 350 megawatts of investment. These projects are expected to be constructed and owned by us, with a closing date anticipated in Q4 of 2024. We also filed for CCNs this year for an additional 550 megawatts of solar projects. We expect a commission decision on that early next year. We believe it's in the long-term best interest of our customers and communities for these projects to be constructed and owned by us. Our IRP anticipates renewable costs increasing, but those costs are offset by the higher production tax credits and investment tax credits available under the Inflation Reduction Act. Our IRP represents a good balance in the growth of renewable projects and investments in assets that preserve reliability.

Great. Thanks for all that color. Very helpful. Also, I was wondering if you could also touch on your expectations for load growth going forward. We've seen weather-normalized loads still trending down throughout the year. I'm curious when that might settle down and the outlook for industrial sales within that.

Yes, you bet. Good morning, David, this is Michael. This year has been interesting with decreases in residential sales primarily attributed to several significant storms over the summer and the transition back to in-office work, causing fluctuations. We believe the situation is beginning to level out. Our residential figures indicate about a 3% growth compared to pre-pandemic levels, and we also have year-to-date customer growth. On the commercial side, we see some positives, particularly in industrial with the conclusion of the UAW strike, coupled with a General Motors expansion contributing to increased demand. Given the current trajectory, we expect about 0.5% load growth over time, with potential for this figure to increase as industrial conditions improve.

Okay, great. Thanks so much. See you soon.

You bet.

Hey, good morning, guys.

Good morning, Paul.

I apologize if I missed this due to some technical issues. Darius was inquiring about competitive bidding, and I wanted to know if you have any data on the returns from competitive transmission compared to the overall returns.

Yes. Paul, first of all, I do apologize again for the technical difficulty you and others experienced. I don't think we have data that we could point to in terms of returns. But when we bid on these projects, we're very cognizant of our cost of capital and what return expectations are for these projects. So the assumption should be that as a winning bidder of this project, we expect to earn a fair return.

Sure. Okay. But could you tell us what that might be?

I think possibly not something we could delineate at this stage. Regarding the court cases, we are monitoring developments in Texas and other states. We've witnessed some challenges in Texas, but also success in other states. We'll adjust our approach if necessary in consideration of any legal rulings. We believe ROFRs in Illinois and Missouri are beneficial to our customers and communities. We'll continue to work on building a coalition and pushing for legislation supporting these rights as we move into the next legislative session.

I got you. I appreciate it. Thanks so much.

You bet. Thank you. See you soon.

Hey, good morning. Thanks for squeezing me in. Just hopefully an easy one. You talked a lot about the financing plan. It seems like it's intact. A lot of capital opportunities, rate base opportunities. I'm just wondering what you think is the most challenging part of the plan that you have?

Yes. Hey, Anthony, it's Michael. I think it's just about continued execution around all these projects, right? We've got robust rate base growth of 8.4%, as you've mentioned, and a $20 billion capital plan. We have to ensure we execute, get them into service, make sure we realize the benefits. We are in a different financing environment today than we were a couple of years ago, which creates some headwinds we need to navigate. But we have mechanisms to recover financing costs rapidly on the Illinois side. The focus remains on affordability and keeping costs low for customers as we navigate this important clean energy transition. Marty, anything to add?

I think that's well covered. Any other questions, Anthony?

No, I'm good. Thank you so much. I'll catch you guys up in Phoenix.

Look forward to seeing you.

See you next week.

Well, thank you all for joining us today. Once again, I apologize for the technical difficulties you experienced, and as I mentioned, we'll ensure the replay of this call is posted as quickly as possible. We had a strong start to 2023 and just a couple of months left. We remain confident in achieving our earnings per share growth goals for the year and the outlined earnings range. Our focus on delivering strong value for our customers, communities, and shareholders remains steadfast. We continue to expect 6% to 8% earnings per share growth from 2023 to 2027. This growth is supported by strong investment in rate-regulated infrastructure and rate base growth of 8.4% annually from 2022 to 2027. We feel confident in executing our plan, and I thank you all for joining us. We look forward to seeing you all soon. Have a great day.