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Ameren Corp. (AEE)

Ameren Corp. (AEE). December 4, 2008 Lucian Tira Keenan Johnston Pragnesh Podar Brad Johnson. Company Overview. Public utility holding company providing electricity and natural gas service to Missouri and Illinois ~2.5 million electricity, ~1 million natural gas

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Ameren Corp. (AEE)

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  1. Ameren Corp. (AEE) December 4, 2008 Lucian Tira Keenan Johnston Pragnesh Podar Brad Johnson

  2. Company Overview • Public utility holding company providing electricity and natural gas service to Missouri and Illinois • ~2.5 million electricity, ~1 million natural gas • Founded in 1881 and based out of St. Louis, MO. • Formed from merger of Union Electric and CIPSCO Inc. in 1997

  3. Subsidiary Companies • Illinois Regulated Services – 2nd largest • AmerenCILCO – Central Illinois Light Company, acquired in 2003, based in Peoria, 19 counties in East and Central IL. • AmerenCIPS – Central Illinois Public Service Company, based in Springfield • AmerenIP – Illinois Power Company, acquired in 2004, based in Decatur, over 600,000 customers

  4. Subsidiary Companies • Missouri Regulated Services • AmerenUE – Based in St. Louis, largest utility company in Missouri, 1.2 million customers • Non-Regulated Services • AmerenEnergy Generating Company – Power is marketed by non-regulated Ameren Energy Marketing, nearly all of AmerenCILCOs divested, coal fired power plants and turbines, sell to businesses, co-ops elsewhere in midwest, makes up 40% of earnings

  5. Earnings Breakdown

  6. Coverage Map

  7. Regulation • Rates are single most important factor to earnings and liquidity • Rates set by governmental entities - Missouri Public Service Commission, Illinois Commerce Commission and Federal Energy Regulatory Commission • Several factors – costs, quality, economic conditions, public policy • Allowed zero profit on the cost of power, make money on the delivery of power • Must receive FERC and state approval to issue debt and conduct mergers • Must adhere to many environmental regulations regarding air and water pollution

  8. Electric Rates • Missouri • May 2007, Missouri Public Service Commission (MoPSC) granted rate increase of 2.1%, had been frozen since 1987 • April 2008, AmerenUE file request with MoPSC for a 12.1% increase, continue reliability improvements and cover increased transportation costs, $251 million annual revenue boost • Illinois • Rates unfrozen Jan 2007, Illinois Commerce Commission (ICC) granted $97 million increase (40-50% for some customers) • Legislators attempt to restore pre-freeze rates • July 2007 – Comprehensive rate relief and customer assistance program, $1 billion in rate relief, $488 to Ameren Illinois customers, $150 paid by Ameren

  9. Natural Gas Rates • Missouri • April 2007, AmerenUE gained approval from MoPSC for $6 million natural gas rate increase • Illinois • ICC granted rate increases for CILCO and CIPS in 2003 and IP in 2005 • November 2007, CILCO, CIPS and IP requested $247 million annual increase in distribution and delivery rates • September 2008, ICC cuts request to $162 million annually – AmerenIP electric up $6-$16, natural gas up $4-$9

  10. Position • Purchased 400 shares on April 27, 2006, at $50.03 per share, total $20,012 • Current price is around $34 (12/2) • Quarterly dividend of $0.635 • Depreciation in price of 32% ($6412)

  11. Industry Trends • Big Push by Government and Environmental Agencies to Regulate Emissions (particularly Carbon Emissions) • Annual Energy Outlook predicts electricity sales to soar 40% by 2030 • As a result, AEE must invest about $4-5 Billion in Capital Expenditures to improve infrastructure and expand capacity …..However

  12. Credit is Tight • Poor Credit markets have made it risky and challenging to obtain debt. • AEE is deferring these expenditures or reducing plans • AEE reduced CAPEX by $400-500MM for 2009 • AEE is delaying $500MM of Environmental Capex to beyond 2012

  13. Competitor Analysis Data from Yahoo Finance and Onesource

  14. Multiples Analysis *Multiple Valuation of $41.85 *Valuation is closer to current price if look at Income Based Multiples *P/E gets right to the point of how much profit you are getting from investing in AEE.  *Price to Sales doesn’t incorporate capital structure *Price to Book is asset based

  15. Leverage Analysis

  16. Interest Coverage

  17. CDS

  18. Peer Comparison

  19. Price Volatility

  20. Seasonality

  21. DCF Analysis • DCF Model inputs • Free cash flows for the 2008-2013 fiscal years • Terminal value computed using • 2013 FCF of $757 million • Constant growth rate of 2.0%

  22. DCF Analysis • CAPM components • Risk free: 10 year note yield of 3.3% • Beta: Average of Google Finance, Yahoo Finance, MSN Money and CNBC online – 0.83 • Market Return: 9% • Market premium: 5.7% • Cost of equity: 8.03% • Cost of debt: 6.62%

  23. DCF Analysis • Weight of equity to EV: 55.34% • Weight of debt to EV: 44.66% • Tax rate: 30% • WACC = 6.53% • Total Equity Value = $7,174 • Price per share = $37.51 • Range: ($33.76 - $41.26)

  24. Sensitivity Analysis

  25. Recommendation • We recommend a HOLD position for the AEE holding. The stock price is sensitive to the rates charged, the company’s operating expenses, as well as future capital expenditures • The stock is a defensive play in today’s volatile market

  26. Questions?

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