Ameren Corporation (NYSE:AEE) Q3 2023 Earnings Call Transcript

Ameren Corporation (NYSE:AEE) Q3 2023 Earnings Call Transcript November 9, 2023

Operator: Greetings, and welcome to Ameren Corporation’s Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, 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 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.

Marty Lyons: 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. And frankly, each of us here this morning. 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.

And consistent with 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 summarized some of the many things we are doing for our customers, communities, coworkers and shareholders.

And 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, 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, co-workers and shareholders. And 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 transmission lines.

Such legislation would support the timely and cost-effective construction of the MISO long-range transmission planning projects and other need to transmission investments. Unfortunately, the legislation was vetoed by the governor in August, it 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. Of course, our investments create thousands of jobs for our local economies. Maintaining constructive energy policies that support robust investment in energy infrastructure and 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 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 4 of our business segments as we have an experienced and dedicated team to get it done. Again, thank you all for joining us today. And I will now turn the call over to Michael.

Michael Moehn: 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. As you can see, 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 kilo hour sales to Illinois customers have declined about 3% on average compared to last year. Recall that changes in electric — Illinois Electric sales, no matter the cause, do not affect our earnings since we have full revenue to cope in. 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 and 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 3 key elements: providing safe and reliable energy to our customers deploying capital in a way that achieves the climate and equitable job to act objectives as 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 reflect 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 it of 9.85% and an equity ratio of 52%. We expect an ICC decision by mid-December with new rates affected 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 $110 million base rate increase compared to our updated request of $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 52%. 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% ROE 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’ve 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 wearer months. Both Ameren Illinois and Ameren Missouri natural gas commodity prices are approximately 91% price edged 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 when 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, but 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 ROE 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% — 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, I would now 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.

See also Top 20 Diamond Producing Countries in the World and 20 States With the Highest Gas Prices in the US.

Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from Nicholas Campanella with Barclays. Please proceed with your question.

Unidentified Analyst: Hey everybody, it’s Nathan Richardson [ph] on for Nick.

Marty Lyons: Hey, good morning, Nathan. This is Marty Lyons. Before you get to your question, I just you may not have experienced this, but I think many of our participants that were participating on the webcast missed a portion of our prepared remarks because of 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.

Unidentified Analyst: 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 $24 million to $27 million. And 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?

Michael Moehn: Yes. Perfect. Good morning. This is Michael. Yes, our equity needs are really unchanged from where they were at the beginning of the year, we issued our five-year guidance. We talked about $300 million of equity that we needed to do in ’23 and then $500 million per year, beginning in ’24 through the balance of ’27, happy to report, I think we’ve said this before, we’ve taken care of those equity needs for ’23. 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 25 through some forward sales. As we sit here today, we continue to find the ATM to be very effective, efficient. We’ll continue to evaluate our needs. Our capital comes in pretty ratably. So the ATM works well from that perspective. And so — but we’re always open to, if there are better mechanisms to continue to take advantage of.

Unidentified Analyst: 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?

Michael Moehn: Yes, you bet. I mean, it looks like the transferability market continues to evolve here nicely and continue to see some deals get — starting to get done there, which is great. Yes. I mean as we kind of step back and think about it, it’s certainly something we could avail ourselves of over time just because we don’t have necessarily the tax appetite to use all those when we need to. And so as we think about from a financing perspective, I mean, there could be — it could be a slight positive, right, just over time? I mean ultimately, you’re going to end up providing those back to customers, which is great because it ends up lowering the cost of those renewables, which is what we all want. But there could be some positive temporary regulatory lag that we may experience from time-to-time. But not a huge, I think replacement any sort of financing needs going forward, if that makes sense.

Unidentified Analyst: Got it, makes sense. Thank you very much.

Michael Moehn: You bet, thank you.

Operator: Our next question comes from Shar Pourreza with Guggenheim Partners. Please proceed with your question.

Shahriar Pourreza: Hey guys, good morning.

Michael Moehn: Hey Shar, good morning.

Shahriar Pourreza: Good morning. Let me just starting with Illinois. I mean, 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, right? So 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.

Marty Lyons: Yes. Look, Shar, I think great questions overall. First of all, as you referred to, we filed our reply brief in September. And we believe that what we filed there really best supports achievement of the State of Illinois goals is captured in the Clean Energy and Jobs Act. And so if you look at that, that’s where we really believe that the state would be best served and the customers of the state. So look, I would say, as I think about the process to date, we’ve been pleased both the staff and frankly, now that in the ALJ as well, they’ve supported nearly 95% of our planned capital investments over the next four years. So I think that’s a positive that’s occurred through this process. We — as we stated in our prepared remarks 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.

But the case isn’t over. Like I said, last week, we filed our brief on exceptions. We articulated our concerns and the reasons for seeking a better outcome from the commission. And I’d say that’s really where you get to the next steps, reply briefs on exceptions or due on November 14, and then we’ll expect a commission decision by mid-December. As we said in our — again, in our prepared remarks, we continue to support our initial asks of a 10.5% ROE and 54% equity in the cap structure. But we did in our reply brief suggests an alternative that the commission could arrive at 9.85% ROE or an alternative equity structure of 52% equity. And in coming up with those, we looked at alternative data and the record looked at the averages of comparable utilities as it related to cap structure.

So again, I’d refer you to our filing for further details on those. But we remain hopeful at this point that the commission will meet — is going to reach a more constructive and fair outcome that came from the ALJ. And then at this point, I wouldn’t comment on what action we may take post the commission ruling. Michael, you want to make it count?