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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) 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 • Founded in 1881 and based out of St. Louis, MO. • Formed from merger of Union Electric and CIPSCO Inc. in 1997
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
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
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
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
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
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)
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
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
Competitor Analysis Data from Yahoo Finance and Onesource
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
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%
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%
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)
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