AEE Ameren Corp

Ameren Missouri, a utility company of Ameren Corporation (AEE), has filed for an electric rate increase of $376 million with the Missouri Public Service Commission (“MPSC”) to recover the costs incurred in infrastructure investment, to recover increase in net fuel costs due to fuel price increase and get reimbursement for the costs incurred for the energy efficiency programs.

The company’s request for a rate increase of $376 million mainly comprises approximately $85 million for the investments made primarily to improve the reliability of its aging infrastructure and to abide by environmental and renewable energy regulations, and about $103 million for higher net fuel costs incurred for running power plants. Higher costs for the company's recently proposed energy efficiency programs account for approximately $81 million of the request. The rest is for the additional cost increases incurred by the company, including those to meet renewable energy requirements, material costs and employee benefits.

The rate increase request is based on a 10.75% return on equity, a capital structure composed of 52% common equity, an aggregate electric rate base of $6.8 billion, and a test year that ended September 30, 2011. The company believes that if the rate increase is approved, assuming 1,100 kilowatt-hours of usage per month, the average residential electric bill would increase by about 46 cents a day.

The review process of 11 months will be taken up by the MPSC, staff, and many other parties. The company expects to hear a final decision from the MPSC by December 2012.

Currently, Ameren Missouri has the lowest electric rate in comparison to any investor-owned utility in Missouri, which is approximately 25% below the national average rate. Ameren Missouri aims to provide safe, affordable and environmentally responsible energy to its customers. Therefore, in order to accomplish its aim, the company has made significant investments in its energy infrastructure and has focused on energy efficiency programs. In fact, the rate increase request is due to these heavy spending made by the company.

The company has been making significant infrastructure investments. These investments include costs associated with the Ameren Missouri Maryland Heights Renewable Energy Center which will be the largest landfill gas-electric facility in Missouri. To generate clean, renewable electricity, the Center will utilize methane gas from decaying trash and meet the energy needs of about 10,000 homes.

Also, under the Missouri Energy Efficiency Investment Act, the utility has focused on energy efficiency programs which will provide approximately $500 million in total customer benefits over the next 20 years. The company’s proposal includes investments of approximately $145 million over three years, beginning January 1, 2013. Overall, the company expects these programs to provide annual energy savings of approximately 800 million kilowatt-hours. This is equal to the annual energy consumption of more than 60,000 average Missouri homes.

In order to continue to meet customers' expectations, the company is looking for reimbursement for more than $700 million of investments which are not currently included in rates. The utility is optimistic that under the regulatory framework, these investments will be recovered in rates over the service life of the investments.

Meanwhile, to compensate the customers, the company is taking several steps to manage its costs in a disciplined fashion. It has reduced its combined non-fuel related operating and capital expenditures. In late 2011, the company made job cuts and reduced approximately 340 employees through a voluntary separation program. Moreover, the company has budget billing and supports energy assistance programs for those customers who are least able to pay their bills. Nearly all these costs are excluded from customers' rates.

Ameren Corporation has a solid base of stable utility operations in the Midwestern market. We believe its key growth drivers include cost minimization and its strong balance sheet. However, we are concerned about its predominantly coal-based generation assets and pending regulatory cases. The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

The company mainly competes with CenterPoint Energy, Inc. (CNP) and Exelon Corporation (EXC).

 
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