Yahoo Finance Ameren Corporation (NYSE:AEE) Q1 2024 Earnings Call Transcript
Ameren Corporation (NYSE:AEE) Q1 2024 Earnings Call Transcript May 3, 2024
Ameren Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to Ameren Corporation’s First Quarter 2024 Earnings Call. At this time, all participants are on 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 and Corporate Modeling 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 and 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: Thank you, Andrew. Good morning, everyone, and thank you for joining us today as we discuss our first quarter 2024 earnings results. Our team continues to successfully execute on our strategic plan across all of our business segments, allowing us to deliver for our customers, shareholders and the environment, while laying a strong foundation for the future. Turning now to Page 5. Yesterday, we announced first quarter 2024 earnings of $0.98 per share compared to earnings of $1 per share in the first quarter of 2023. The key drivers of our first quarter results are outlined on this slide. Overall, our operating performance was strong during the quarter. We had periods of extreme cold weather in January and our natural gas and electric systems and our operating teams performed well.
On balance, however, weather was mild during the quarter, marked by unseasonably warm temperatures in February and March. Despite the mild temperatures, our retail sales grew driven by encouraging signs of customer growth and usage. While we experienced higher operations and maintenance expenses, that was driven largely by a charge for proposed additional mitigation relief related to the Rush Island Energy Center New Source Review litigation. Despite the year-to-date weather headwinds and the Rush Island charge, our team is taking steps to contain spend, and we remain on track to deliver within our 2024 earnings guidance range of $4.52 per share to $4.72 per share. I’ll provide an update on our Rush Island Energy Center proceedings, and Michael will cover the first quarter and balance of the year earnings results in a bit more detail later.
Moving to Page 6. On our call in February, I highlighted some of our top priorities for 2024 as we invest strategically, enhance our operating jurisdictions and optimize our business processes. Our team’s unwavering commitment to these objectives has already begun to produce results, as you can see on Page 7. Our investments continue to improve the reliability, resiliency, safety and efficiency of our service to our customers. In the first three months of this year, we have invested significant capital for the benefit of our customers. During the quarter, Ameren Missouri installed over 55,000 smart meters, 60 smart switches, 15 miles of energized underground cable, 8 miles of hardened overhead lines and upgraded 5 substations. In Illinois, our first quarter investments included replacing 550 poles due to standard inspections and storm damage, replacing switchgear at a key substation and installing 30 miles of underground cable for relocations, new customers and aged cable replacement.
Further, our transmission business is on track to complete over 15 new or upgraded transmission substations and 45 miles of new or upgraded transmission lines in the first half of the year. These critical investments support our commitment to delivering safe and reliable energy for the benefit of our customers and we are seeing the benefit in 2024 in terms of reduced outages and shorter outage durations as a result of spring storms. For example, during the recent April storm, over 7,500 Missouri customer outages were prevented due to rapid detection, rerouting and restoration of power by automated switches across our system in over 2.3 million minutes of customer outages were avoided due to these investments. Moving on to first quarter regulatory and legislative outcomes.
In March, Ameren Missouri received Missouri PSC approval of our largest-ever solar investment, three projects representing a total of 400 megawatts capable of powering approximately 73,000 homes. The approval of certificates of convenience and necessity, or CCN, for these projects is another constructive step along the pathway to executing our Ameren Missouri Integrated Resource Plan, or IRP. On the legislative front, the Missouri General Assembly is addressing power quality and reliability by considering bills to enhance and extend the current plant-in-service accounting, or PISA, legislation that would support investment in dispatchable resources and reliability. PISA has supported much needed reliability investments in the state’s energy grid over the past five years.
While these bills, House Bill 1746 and Senate Bills 740 and 1422, have strong bipartisan support, time is short in the current general assembly session ends Friday, May 17. While the legislature has many priorities, we will continue to work with key stakeholders towards passage. At Ameren Transmission, progress continues to be made on the long-range transmission regional and beneficial projects, which I will cover in more detail in a moment. Turning to Illinois Electric delivery. We continue to diligently work for approval from the Illinois Commerce Commission, or the ICC of an electric grid investment plan, revised revenue requirements incorporating ongoing and prospective investments and an overall improved regulatory environment. In January, the commission granted a partial rehearing of our multi-year rate plan to address the base level of investment needed to operate the grid reliably.
Subsequently, in February, we filed an updated plan as part of the rehearing proceeding. Then in March, we filed our revised multi-year grid and rate plans to address the commission’s findings stated in their December order. The rehearing and revised multi-year grid and rate plan proceedings are operating in parallel and with update rates for 2024 through 2027. We expect a decision from the ICC on the rehearing in June, which would provide a 2024 interim rate adjustment by July. We expect an ICC decision on the revised multi-year grid and rate plans by the end of the year, which would revise rates beginning January 2025. We continue to work with all impacted stakeholders to advocate for constructive regulatory frameworks and outcomes that support the state’s energy transition goals.
Our ability to invest and deliver reliable and affordable energy is essential for our customers and the communities we serve and will support continued growth in our region. Moving on to operational matters. We remain committed to maintaining disciplined cost management to hold operations and maintenance expenses flat in 2024 to 2023 levels. I’d like to express my sincere appreciation to our Ameren team members who are working efficiently, collaboratively and safely to serve our customers. Now moving to Page 8 for details on the Rush Island securitization case at Ameren Missouri. Our request with the Missouri PSC to securitize the remaining balance of the Rush Island Energy Center and other related costs continues to make progress. In March, the Missouri PSC staff recommended securitization of $497 million as compared to our request of $519 million.
Refinancing these investments through the issuance of securitized bonds, versus financing and recovery through traditional ratemaking will save our customers millions of dollars. Hearings were completed in April, and we expect the PSC’s decision by June 21. Now turning to Page 9 for an update on the new source review proceeding for Rush Island. As previously reported in 2017, the U.S. District Court of Eastern Missouri issued an order requiring the installation of a flue gas desulfurization system or scrubbers on our Rush Island Energy Center for violating new source review provisions of the Clean Air Act and install a dry sorbent injection system at our Labadie Energy Center, as mitigation for excess emissions at Rush Island. Upon appeal, the A circuit upheld the district court’s ruling with respect to the installation of scrubbers at Rush Island, but overturn the decision with respect to Labadie.
Subsequently, we made the decision to accelerate the planned retirement of our Rush Island Energy Center, which was more economic for our customers than installing scrubbers. The District Court approved Ameren’s retirement proposal and established a retirement date of no later than October 15, 2024 to allow for the completion of various transmission reliability projects. The U.S. Department of Justice is seeking additional mitigation relief beyond the retirement of the energy center. In March of this year, the District Court ordered both parties to file proposals outlining additional mitigation relief for the court to consider. On Wednesday, Ameren Missouri and the DOJ filed their respective mitigation proposals. Ameren’s mitigation proposal consists of four essential elements: retirement of Rush Island, which eliminates all emissions through its previously planned 2039 retirement date, a school bus electrification program, including buses and charging stations, an air filter program geared towards underserved residential customers and surrender of sulfur dioxide allowances.
Collectively, these programs are estimated to cost approximately $20 million, which resulted in a first quarter charge to earnings. The Department of Justice mitigation proposal includes a significantly greater number of buses, charging stations and advanced filters. The DOJ estimates their aggregate program cost to be approximately $120 million. We expect an evidentiary hearing will be scheduled sometime this summer, and we expect the District Court will issue a final ruling during the second half of 2024 that could be subject to further appeals. Before moving on, I’d like to provide an update on the series of new rules issued by the Environmental Protection Agency last week. As you know, Ameren Missouri remain committed to investing in a clean energy transition in a responsible manner, balancing reliability and affordability.
The new rules expect generators to rely heavily on carbon capture and storage technologies, which are not ready for full-scale economy-wide deployment. These new rules apply not only to existing coal-fired units, but new gas-fired units with greater than 40% capacity factors as well, which would include the gas combined cycle facility called for in our current IRP in the early 2030s to maintain system reliability. In addition, for coal units retiring between 2032 and 2039, the rules will require natural gas co-firing by 2030. And as we noted in our comments to the proposed rules, co-firing with natural gas presents challenges from a permitting and construction standpoint. These requirements would most directly impact our Labadie Energy Center, which has units scheduled to retire in 2036 and 2042.
While we are still assessing the impact of the rules on our Integrated Resource Plan, these new rules are making it more challenging and costly to maintain existing dispatchable generation or build new dispatchable generation. These challenges come at a time when supply and demand is tight, and the industry has seen significant potential load growth, particularly from data centers, the manufacturing industry and through the electrification of transportation. We will continue to closely review the final regulations and as with many environmental regulations, litigation by various stakeholders is likely. These rules, if not modified, would require significant investments beyond what’s in our current 10-year pipeline to meet compliance obligations and maintain a reliable system.
Moving to Page 10. We look ahead to our future renewable generation developments. As I mentioned in March, the Missouri PSC approved CCNs for three Ameren Missouri solar projects totaling 400 megawatts. Split Rail, Vandalia and Bowling Green, all located in Missouri. The Missouri PSC in its March order also set terms upon which a fourth solar facility, the 150-megawatt Cass County, Illinois project could be approved if it is fully subscribed under Ameren Missouri’s renewable solutions program. The renewable solutions program is a subscription-based program that allows eligible businesses and organizations to manage their carbon footprint by replacing up to 100% of their total energy use with renewable sources. The online auction for customers to subscribe to the Cass County Solar Project is expected to take place in mid-May with Missouri PSC approval of the Cass County CCN expected following full subscription.
Initial non-binding notices of intent for the subscription auction will receive from interested businesses in early April and reflected strong interest. Investing in solar energy is part of Ameren Missouri’s plans to affordably meet the long-term energy and reliability needs of our customers. The IRP calls for new dispatchable energy resources, including an on-demand 800-megawatt gas simple-cycle energy center by 2027 which could be turned on as needed in a matter of minutes to ensure reliability of the energy grid during periods of peak energy demand. Later this month, we expect to file a request for a CCN for this simple cycle plant, Castle Bluff Energy Center, to be located on the site of our retired Meramec Energy Center. Moving to Page 11.
The Midcontinent Independent System Operator, or MISO, continues to advance its long-range transmission planning and project approval processes. For Tranche 1, we were pleased to be selected in April to develop the third and final competitive project in our service territory, which again emphasizes our track record of being able to deliver cost-effective, high-value projects to our communities. Ultimately, Ameren was assigned or awarded approximately 25% of total Tranche 1 portfolio projects addressing the MISO Midwest region in 100% of the projects in our service territory. We expect Tranche 1 construction to substantially begin in 2026 with completion dates through 2030. Looking ahead to Tranche 2, in March, MISO announced a long-range transmission Tranche 2 proposed project portfolio estimated to cost $17 billion to $23 billion, which included significant investments within our Ameren Missouri and Ameren Illinois service territories.
Since then, we, and other key stakeholders, have been working with MISO to evaluate and comment on the portfolio of projects to assist MISO in ultimately approving the most appropriate path forward. MISO expects to vote on Tranche 2 in the third quarter of 2024. Moving to Slide 12. Looking ahead over the next decade, we have a robust pipeline of investment opportunities of more than $55 billion that will deliver significant value to all of our stakeholders by making our energy grid stronger, smarter and cleaner. Of course, our investments also create thousands of jobs for our local economies. Maintaining constructive energy policies that support robust investment in energy infrastructure and a transition to a cleaner future in a responsible fashion will be critical to meeting our country’s growing energy needs and delivering on our customers’ expectations.
Turning to Page 13. In February, we updated our five-year growth plan, which included our expectation of 6% to 8% compound annual earnings growth rate from 2024 through 2028. The earnings growth is primarily driven by strong compound annual rate base growth of 8.2%, supported by strategic allocation of infrastructure investment to each of our business segments based on their regulatory frameworks. Combined, we expect to deliver strong long-term earnings and dividend growth, resulting in an attractive total return. 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’ll now turn the call over to Michael.
Michael Moehn: Thanks, Marty, and good morning, everyone. Turning now to Page 15 of our presentation. Yesterday, we reported first quarter 2024 earnings of $0.98 per share compared to $1 per share for the year ago quarter. The key factors that drove the overall $0.02 per share decrease are highlighted by segment on this page. We delivered solid earnings performance during the quarter as we continue to execute our strategy, including making infrastructure investments for the benefit of our customers. The first quarter included new service rates in Ameren Illinois Natural Gas and Ameren Missouri. In addition, strong customer growth and usage contributed to 3% higher electric weather-normalized retail sales at Ameren Missouri across all customer classes which were partially offset by milder weather impact.
In fact, the third one was first quarter in the past 50 years. Earnings were also reduced by an increase in O&M and Ameren Missouri, largely driven by a $0.04 charge for proposed additional mitigation relief related to the Rush Island Energy Center. Moving to Page 16. As we think about the remainder of the year, we remain confident in our 2024 guidance range, and we continue to expect earnings to be in the range of $4.52 to $4.72 per share. As we think about the first quarter results versus our expectations, we lost $0.07 compared to normal for weather and $0.04 for the charge related to Rush Island. But experienced $0.02 of favorable weather-normalized sales beyond our expectations. As we look ahead, we expect to see meaningful year-over-year O&M reductions in the second half of the year reflecting several cost savings initiatives instituted in 2024, which are expected to build throughout the year.
This includes hiring restrictions, reducing our contractor and consultant workforce, and deferring or eliminating discretionary spend. As we’ve discussed before, we have been actively managing costs for years and continue to create opportunities for further cost reductions through process redesign and digital technology investment leading to increased productivity and better experiences for our customers. In addition, we expect to benefit from higher earnings in Ameren Transmission over the balance of the year due to timing of financing and project expenditures. I encourage you to take these supplemental earnings drivers into consideration as you develop your expectation for quarterly earnings results for the remainder of the year. Finally, late last week, MISO concluded its planning resource auction for the 2024 to 2025 planning year, which assesses seasonal resource adequacy in each zone.
As a result of higher load requirements, changes to the accreted capacity of generation available and reduced import capability, Zone 5, Ameren Missouri’s territory showed a model capacity shortfall and prices went through the cost of new entry or CONE for the non-peak load fall and spring seasons. Clearing prices in all other zones within MISO remained relatively flat. Unlike what Ameren Illinois experienced a couple of years ago, we do not expect to see material customer bill impact at Ameren Missouri resulting from this auction because our generation resources available to serve customers, nor do we see any issues with providing reliable electric service throughout the year for our customers. The MISO auction results do reinforce a couple of things.
First, there is a strong need for us to continue to execute the generation plans called for an IRP. And second, the integration of new large electric loads and carbon-free renewable generation to the grid will require significant transmission expansion with some projects needed locally to ensure reliable service. We stand ready to work with stakeholders in our region to address the capacity needs. Before moving on, I’d like to provide an update on economic development. Through mid-April, we have successfully supported 21 new projects that have selected locations in our service territories which are expected to increase electric demand by almost 45 megawatts and natural gas issues by 1.6 million tons within the next few years. These projects will add an estimated 950 jobs across our service territories.
The majority of these projects are existing customer expansions in the manufacturing, aerospace, data center, food processing and mining industries. Ameren Missouri and Ameren Illinois are actively working with state, regional and local partners on more than 150 economic development projects that are considering on location in our service territories including large low data centers and manufacturers in the automotive, aerospace and agricultural industries, among others. We will continue to work on development opportunities to build thriving communities in our service territory. Moving to Page 17 on Ameren Illinois regulatory matters. We have several Ameren Illinois electric distribution regulatory updates to cover with you, including the 2023 annual reconciliation, the 2024 through 2027 multiyear rate plan rehearing as well as a revised grid and rate plan filings.
Starting with the 2023 annual reconciliation. Under Illinois formula ratemaking, which expired at the end of 2023, Ameren Illinois is required to file annual rate updates to systematically adjust cash flows over time for changes in cost of service and to true up any prior period over or under recovery of such costs. In April, we filed our electric distribution annual rate reconciliation requests for $160 million adjustment for the 2023 revenue requirement to reflect actual costs. The full amount would be collected from customers in 2025, replacing the prior period reconciliation adjustment of $110 million that is being collected during 2024. For a net customer impact of $50 million or an approximately 1.5% increase in the total average residential customer bill.
The ICC will review the matter once ahead with a decision expected in December of this year and new rates effective in early next year. Turning to the multiyear rate plan for 2024 through 2027 on Page 18. In January, Ameren Illinois has granted a partial rehearing by the ICC to address a base level of grid reliability investment and 2023 rate base additions. We filed our revised request enable for a cumulative annual revenue increase from 2023 rates of $305 million by 2027. Our request, which includes investments and costs related to preventive and corrective maintenance inventory, metering, new business and customer relocations would allow us to appropriately maintain the energy grid to preserve safety, reliability and day-to-day operations of our system.
The ICC staff recommends a cumulative increase of $283 million, with the variance driven primarily by the renewal of other post-employment benefits and certain 2023 projects from rate base, the latter of which the staff deemed to be outside the scope of this rehearing. We expect an ICC decision on the rehearing proceeding by June 20, which will allow new 2024 interim rates to be effective by July. Moving to Page 19. In March, Ameren Illinois filed its revised electric multiyear grid plan and revised multiyear rate plan. Our request for a $321 million cumulative annual revenue increase from 2023 rates with supersede revenues granted through rehearing. Request is based on a return on equity of 8.72% and an equity ratio of 50%. Annual revenues will based on actual recoverable costs, year-end rate base and a return on equity adjusted for any performance incentives or penalties, provided the actual revenue requirement does not exceed the reconciliation cap.
Our plans as proposed support an affordable, equitable energy transition, which we’ll advocate for over the remainder of the year. We expect the ICC staff and intervenor testimony in May and we expect an ICC decision by December with rates effective January 1, 2025. In other regulatory matters, last week, Ameren Missouri filed a 60-day notice with the Missouri PSC for our next electric service rate review. Moving to Page 20 to provide a financing update. We continue to feel very good about our financial position. On January 9, Ameren Missouri issued $350 million of 5.25% first mortgage bonds due 2054. And on April 4, Ameren Missouri issued $500 million or 5.2% first mortgage bonds due 2034. Net proceeds from both issuances were used to fund capital expenditures and/or refinance shorten debt.
Further, in order for us to maintain our credit ratings and strong balance sheet, while we fund our robust infrastructure plan, we expect to issue approximately $300 million of common equity in 2024. We sold for approximately $230 million under our at-the-market or ATM program, consisting of approximately 2.9 million shares, which we expect to issue by the end of this year. Together with the issuance under our 401(k) and DRPlus programs, our ATM equity program is expected to support our equity needs in 2024 and beyond. Finally, turning to Page 21. We’re off to a solid start in 2024 and well positioned to continue executing our plan. We expect to deliver strong earnings growth in 2024 as we continue to successfully execute our comprehensive business strategy.
Looking to the longer term, we continue to expect strong earnings per share growth driven by robust rate base growth and disciplined cost management. We also believe this growth will compare favorably with the growth of our peers. Ameren shares continue to offer investors an attractive dividend. In total, we have an attractive total shareholder return story. That concludes our prepared remarks. We now invite your questions.
Operator: Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Shar Pourreza with Guggenheim Partners. Please proceed with your question.
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