Ameren Corporation
Q4 2019 Earnings Call Transcript

Published: 26 Feb 2020

[Operator:]

Greetings, welcome to Ameren Corporation’s Fourth Quarter 2019 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. It is now my pleasure to introduce your host, Andrew Kirk, Director of Investor Relations for Ameren Corporation. Thank you, Mr. Kirk. You may begin.

[Andrew Kirk:]

Thank you, and good morning. On the call with me today are Warner Baxter, our Chairman, President, and Chief Executive Officer; and Michael Moehn, our Executive Vice President and Chief Financial Officer; as well as other members of the Ameren management team. Warner and Michael will discuss our earnings results and guidance, as well as provide a business update. Then we will open the call for questions.

[Warner Baxter:]

Thanks, Andrew. Good morning, everyone, and thank you for joining us. This morning, I'm going to kick off our presentation by summarizing our team strong 2019 financial and operating performance, as well as highlight some of our key accomplishments, that will position Ameren for success in the future. Importantly, I will then look ahead and discuss how we plan to continue delivering superior long-term value in 2020 and beyond to our customers, communities and shareholders. I'll then turn it over to Michael to discuss key drivers of our 2019 earnings results, and 2020 earnings guidance, as well as some key regulatory matters. And as always, we will turn it over to you for Q&A after our remarks. Before I jump into the details of our accomplishments and strategic areas of focus, I want to reiterate that strategy that has been delivering significant long-term value to all of our stakeholders. Specifically, our strategy is to invest in a robust pipeline of regulated energy infrastructure, continuously improving operating performance, and advocate for responsible energy policies to deliver superior value to our customers and shareholders. As always, our customers continue to be at the center of our strategy. As a result, we're focused on meeting our customers energy needs and exceeding their expectations, and in so doing, delivering on our shareholders' expectations for sustainable and strong long-term earnings per share and dividend growth.

[Michael Moehn:]

Thanks Warner, and good morning, everyone. Turning now to Page 18 of our presentation, today, we reported 2019 core earnings of $3.35 per share, compared to core earnings of $3.37 per share in 2018. Ameren Missouri, our largest segment, experienced a decrease of $0.24 per share, from $1.98 per share in 2018, to $1.74 per share in 2019. This decrease was largely due to lower electric retail sales driven by weather, with reduced earnings by approximately $0.26 per share. In 2019, we experienced near normal summer and winter temperatures, compared to warmer summer and colder winter temperatures, in the year ago period. Ameren Missouri's results also reflected this year scheduled refueling outage at our Calloway Energy Center, which reduced earnings by $0.09 per share compared to 2018, when there was no refueling outage. The next Calloway refueling is scheduled for the fall of 2020. Higher property taxes also reduced earnings by $0.05 per share in 2019, when compared to 2018. These items were partially offset by the positive comparative impacts related to MEEIA performance incentives, which contributed $0.08 per share, in addition to lower other operations and maintenance expenses. Turning to other segments, Ameren Transmission earnings were up $0.08, which reflected increased infrastructure investments. Earnings for Ameren Illinois Natural Gas, were up $0.05, which reflected higher rates effective the November 2018, and increased infrastructure investments. In addition, Ameren Illinois Electric Distribution earnings were up $0.02 due to the increased investments, mostly offset by a lower-allowed return equity under formula ratemaking of 8.4% compared to 8.9% for the prior year. The 2019 allowed ROE is based on a 2019 average 30 year Treasury yield of approximately 2.6%, down from the 2018 average of 3.1%. Ameren parent and other results reflected higher tax benefits, primarily associated with share based compensation, and charitable donations returning to more normal levels. Before moving on, let me briefly cover electric sales trends for Ameren Missouri and Ameren Illinois Electric Distribution for 2019, compared to 2018. Weather normalized kilowatt-hour sales to Missouri residential and commercial customers on a combined basis, were up a little over a 0.5%, excluding the effects of the Missouri Energy Efficiency Plan under MEEIA. Sales to low margin Missouri industrial customers decreased about 4%, excluding the effects of our energy efficiency plan. We exclude MEEIA effects because the plan provides rate recovery to ensure that earnings are not affected by reduced electric sales resulting from our energy efficiency efforts. Weather normalized kilowatt-hour sales to Illinois residential and commercial customers on a combined basis, decreased 1.5% and sales to industrial customers decreased 2%. Recall, the changes on electric sales in Illinois, no matter the cause, do not affect earnings since we have full revenue decoupling. Moving to Page 19 of the presentation, here, we provide an overview of our $16 billion of plan capital expenditures for the 2020 through 2024 period, by business segment. That underlines the approximately 9% projected rate based growth that Warner discussed earlier. This plan includes an incremental $2.7 billion compared to the $13.3 billion five year plan for 2019 through 2023, that was laid out last February. Turning to Page 20, we outlined here the expected funding sources for the infrastructure investments noted on the prior page. We expect continued growth and cash from operations as investments are reflected in customer rates. We also expect to generate significant tax deferrals. The tax deferrals are driven primarily by timing difference between financial statement depreciation reflected in customer rates, and accelerated depreciation for tax purposes under makers. I should note, that over the five year time horizon of our plan, we expect to make income tax and payments, totaling $150 million to $200 million over our five year plan. In addition to the benefits of accelerated tax depreciation, as a result of our expected $1.2 billion investment and 700 megawatts of wind generation, we expect to begin generating production tax credits over this period. From a financing perspective, we expect to continue to issue long-term debt in Ameren parent, Ameren Missouri and Ameren Illinois, to refinance the maturing obligations and to fund a portion of our cash requirements. We also plan to continue to use newly issued shares from our dividend reinvestment employee benefit plans over the five year guidance period. We expect us to provide equity funding of approximately $100 million annually. Our plan also includes the settlement of the forward equity contract in 2020, to generate between $540 million and $550 million to fund in part in Missouri's wind generation investment, by the end of the year. In order for us to maintain a strong balance sheet while we fund our robust infrastructure plan, we expect incremental equity issuances of approximately $150 million a year, starting in 2021. All these actions are expected to enable us to maintain a consolidated capitalization target of approximately 45% equity. Moving to Page 21 of our presentation, I would now like to discuss key drivers impacting our 2020, earnings guidance. As Warner stated, we expect 2020 diluted earnings per share to be in the range of $3.40 to $3.60 per share. On this page and the next, we have listed key earnings drivers of and assumptions behind our 2020 earnings guidance broken down by segment and compared to the 2019 results. Beginning with Ameren Missouri, earnings are expected to rise in 2020. Earnings are expected to be favorably affected by the electric service rates that are expected to be effective as of April, as early as April 1. In addition, we also expect the deferral expenses for the fall 2020 scheduled Callaway refueling and maintenance outage to increase earnings by approximately $0.08 per share compared to the spring 2019 outage. Outage expenses will be differed and amortized over approximately 18 months after completion. Partially offsetting these favorable earnings drivers, we expect lower energy efficiency performance incentives in 2020 of approximately $0.09. Finally, In Ameren Missouri, we expect a 700 megawatt wind generation investment by the end of 2020, to not have a material impact on 2020 earnings. Ameren transmission earnings are expected to benefit from additional investments in Ameren Illinois and ATXI projects made under FERCs formula ratemaking. Our guidance assumes the current 10.38% FERC allowed ROE for the full year of 2020, which includes a 50 basis point adder for the MISO participation, except for the Mark Twain project, which assumes an allowed ROE of 10.88%. Turning to Page 22, for Ameren Illinois Electric Distribution, we anticipate increased earnings in 2020, compared to 2019, from additional infrastructure investments made under Illinois formula ratemaking. Our guidance incorporates a formula based ROE of 8% using a forecasted 2.2%, 2020 average yield for the 30 year treasury bond, which is lower than the allowed ROE of 8.4% in 2019. For Ameren Illinois Natural Gas distribution earnings, we expected benefit from qualified investments that are included in rates, on a timely basis under the state's gas infrastructure rider. Moving now to Ameren live drivers and assumptions, we expect lower tax benefits associated with share based compensation in 2020, compared to 2019. In addition, the increased number of shares outstanding as a result of issuance under our dividend reinvestment employee benefits plans is expected to unfavorably impact earnings, by $0.02 per share. I'd also like to take a moment to discuss our electric sales outlook. We expect weather normalized Missouri kilowatt-hour sales to customers to be up approximately 0.5% compounded annually, over our five year plan, excluding the effects of our MEEIA energy efficiency plan. Again, we exclude MEEIA effects, because the plan provides rate recovery to ensure that earnings are not affected by reduced electric sales, resulting from our energy efficiency efforts. Turning to Illinois, we expect our weather normalized kilowatt-hour sales to customers, including energy efficiency, to be flat to down slightly over our five year plan. Turning to Page 23, in Ameren Illinois regulatory matters, in December the ICC approved an electric distribution rate change consistent with our filing in our annual rate update proceeding, with new rates effective at the beginning of this year. In Ameren Illinois Natural Gas regulatory matters, last week we filed a request for $102 million annual increase in gas distribution rates, using a 2021 future test year with the ICC. This $102 million included an estimated $46 million of annual revenues that would otherwise were recovered in 2021, under Ameren Illinois qualifying infrastructure plant and other riders. The details of this gas rate case filing are noted on this page. And ICC decision is required by January 2021, with new rates expected to be effective in February of 2021. Finally, turning to Page 24, we delivered strong earnings growth in 2019 and we expect to again deliver strong earnings growth in 2020, as we continue to successfully execute our strategy. As we look ahead, we expect strong 6% to 8% compound earnings per share growth from 2020 to 2024, driven by robust rate base growth and disciplined cost management. Further, we believe this growth will compare favorably with the growth of our regulatory utility peers. And Ameren shares continue to offer investors an attractive dividend. In total, we have an attractive total shareholder return story that compares very favorably to our peers. That concludes our prepared remarks. We now invite your questions.

[Operator:]

Our first question is from Julien Dumoulin-Smith, Bank of America. Please proceed.

[Warner Baxter:]

Good morning, Julien.

[Julien Dumoulin-Smith:]

Good morning. Congratulations, what an update here. I appreciate it.

[Warner Baxter:]

Thanks, Julien. Thanks. Appreciate it.

[Julien Dumoulin-Smith:]

Absolutely. So perhaps just to kick it off here, first, I want to turn it back to Illinois and some of the legislative efforts you described here. Can you perhaps at least begin to allude to what the opportunity would be under the downstate element here, specifically, I think you highlighted in the transcript solar, EV and further distribution investments, but I just want to try to put of at least an initial number around what that totality could be. And I presume that's largely not reflected in your outlook, as you just updated. And I got a follow-up as well.

[Warner Baxter:]

Yes. So thanks. Look, a couple of things. Number one, we're excited about this legislation. We think it really has some really important elements in terms of trying to move Illinois to the cleaner energy future that they've been talking about, but also, doing the things that we have been doing for the past eight years, and that's modernizing the grid. So number one, one of the things in terms of trying to put some perspective on it, clearly, the grid modernization efforts, we talk a lot about those and those are, in some respects reflected back in the slide that we showed in terms of our 10 year outlook, some of those dollars are certainly a mirror. But I think, right now, it's premature for us to put a specific number on the solar and energy storage opportunities or electrification. I think clearly, as you've seen us too in Missouri, we see these solar plus battery storage projects and they've been really important to help reliability. Richard and his team in Illinois certainly see those same types of opportunities. And look, at electrification, I think across the country, we're just scratching the surface in terms of what those opportunities can be. So, I'd like to put something around that for you, but I think it's just a little early for us to do that. But clearly, we see this as an important opportunity for the State of Illinois and especially, downstate Illinois.

[Julien Dumoulin-Smith:]

Excellent. And just wanted to clarify a little bit more on your financing plan here. Two further points. When you talk and perhaps emphasize at points throughout the transcript dividend growth. And obviously, you're broadly at the lower end of your contemplated payout ratio. You also increased a little bit the equity funding plan through the outlook. How do you think about dividend growth given the pace of CapEx that you have? Do you think that ultimately, we're still looking at trending towards the lower end of that payout, just through at least the bulk of this high growth period?

[Warner Baxter:]

Yes. Thanks Julien. It's a great question. So look, we've talked a lot about the dividend and no doubt it's an important area of focus for our Board of Directors. I think what we did today, we pointed out the obvious, our execution of our strategy over the last several years has driven our dividend payout ratio down meaningfully, to the lower end or our 55% to 70%. And so as a result, as you look ahead, there's no doubt that we have been allocating a great deal of capital to rate based growth. And as you see in this plan, we continue to do that and we've had a solid dividend. And so, as we look ahead, I think the fact that we've been able to bring the dividend payout ratio down, it just gives us greater flexibility with respect to capital allocation, including from my perspective, position us well for future dividend growth.

[Julien Dumoulin-Smith:]

Excellent. Well, thank you. I'll leave it there.

[Warner Baxter:]

Thanks, Julien. I appreciate the time.

[Operator:]

Our next question is from Steve Fleishman with Wolfe Research. Please proceed.

[Warner Baxter:]

Good morning, Steve. How are you doing?

[Steve Fleishman:]

Hey, good morning Warner. So, I guess, first question just on the Illinois law proposal, could you just maybe give us a little bit color of kind of who's supporting that and how that - how, if at all that this proposal might interact with the clean air, clean jobs bill that's also going on?

[Warner Baxter:]

Look, couple of things to start there. The bill is sponsored by Senator Hastings and Senator Hunter on the Senate side and on the House side, it is - sponsors are a Representative Greenwood and Representative Huffman. So when you step back and you look at the fundamental elements of this bill in this legislation, number one, it's very consistent with things that have been talked about in Illinois really for the past 12 months in terms of trying to put greater levels of investment for solar, for battery storage, electrification. These are all things which are consistent with the governor's package. So, we think, as we've talked around with key stakeholders, these are important elements of any forward-thinking legislation. And so that's in this bill. Secondly, I think over time, you have seen the modernization of the grid and the legislation associated with that, how that has received widespread support for all the right reasons, for reliability purposes, for customer affordability purposes, for job creation. All those things are really spelled robust support for that. When you put these two things together, we think this legislation has really the opportunity to gain broad based support. Having said that, it's early in the session here, and so Richard and his team had done a fantastic job of educating key stakeholders, talking with many folks that are at the table, including those that are looking at other pieces of legislation. And so we're not done doing that. So, I would say that, a lot of these elements of this legislation are very consistent and much aligned with what key stakeholders want to see, but there's still more work to do. But we're pleased with where things are at today, and look forward to engaging with these folks in the future.

[Steve Fleishman:]

Okay, great. One other question, just have to ask that there's I guess, noise going on with your neighboring utility and begs the question kind of whether you would be interested or your policy on M&A activity?

[Warner Baxter:]

Sure. Of course, Steve, we don't comment on rumors or certainly speculate on any M&A transaction, but let's just be clear, our team remains very focused on executing our strategic plan. As you heard me just talk about a little bit earlier, that plan is based on strong organic growth across all of our regulated businesses. And as you've seen in our presentation, there is certainly delivered strong returns in the past through the execution of that strategy. And that is absolutely our focus going forward, because, we believe it's going to continue to deliver superior value, not just to our shareholders, but especially, to our customers. So we're going to continue to stay focused on that plan, because we think that's going to deliver superior value in the long-term for all of our stakeholders.

[Steve Fleishman:]

Okay, great. Thank you.

[Operator:]

Okay. We have reached the end of our question-and-answer session. I would like to turn the call back over to Andrew Kirk, for closing remarks.

[Andrew Kirk:]

Thank you for participating in this call. A replay of this 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 analysts' inquiries should be directed to me, Andrew Kirk. Media should call Erin Davis. Again, thank you for your interest in Ameren, and have a great day.

[Operator:]

Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.