ameren nyse: aee presented by: ed kennedy brandon honey march 12, 2009
TRANSCRIPT
AmerenNYSE: AEE
Presented by:
Ed Kennedy
Brandon Honey
March 12, 2009
Overview
Company Introduction Operations/Regulations Comps and DCF Analysis Final Outlook
Introduction Operations Comps/DCF Outlook
Company Overview
Public utility holding company formed as a result of Union Electric and CIPSCO, Inc. in 1997
Provides natural gas and electricity service to consumers in MO and IL
Headquartered in St. Louis, MO
Introduction Operations Comps/DCF Outlook
Business Segments Missouri regulated
Missouri Public Service Commission (MoPSC) Federal Energy Regulatory Commission
Illinois regulated Illinois Commerce Commission (ICC) Federal Energy Regulatory Commission
Non-rate regulated
Introduction Operations Comps/DCF Outlook
Subsidiaries Missouri regulated services
Union Electric (AmerenUE) Illinois regulated services
Central Illinois Light Company (AmerenCILCO) Central Illinois Public Service Company (AmerenCIPS) Illinois Power Company (AmerenIP)
Non-rate regulated services Genco, AERG, EEI
Ameren-owned electricity generating subsidiaries Ameren Energy Marketing Company
Introduction Operations Comps/DCF Outlook
Regulation
Rates are the most influential factor for performance and liquidity Allowed zero profit on the cost of power
Sell it what AEE bought it for Make profit on delivery of power
Regulated rates Rates are set by state and federal regulation entities
Increases occur upon Ameren’s request and regulator’s approval FERC approval needed prior to issuing debt, issuing equity,
merging, or acquiring utility companies Environmental regulation
Introduction Operations Comps/DCF Outlook
Electricity
Ameren Generates Electricity
Ameren Energy Marketing Company
Municipalities, commercial, industrial, other utilities, etc.
Consumer Demand
Ameren subsidiaries
Open Market competitors
*AEE subsidiaries either generate or buy their electricity. They can buy it from the open market or AEMC if it’s cheaper than generating it, there is excess demand, there are plant outages, or there are extreme weather conditions. The marketing company has agreed to purchase all Genco, AERG, EEI generation. If it needs more, it buys more from the market.
All Genco, AERG, EEI generation
Other AEE subsidiary generation
Excess demand only
regulated
non-regulated
76% of sales
24% of sales
Natural Gas
100% of natural gas revenues regulated in 2008 Any gas price fluctuations are reflected in customers’
bills Ameren files requests for rate changes and the MoPSC
and ICC either grant or deny the request No MO volume-based rate increases until March 15,
2010
Introduction Operations Comps/DCF Outlook
2008 Earnings Natural Gas Revenues
14% regulated by MoPSC 86% regulated by ICC
Electric Revenues 35% regulated by MoPSC 41% regulated by ICC 24% based on market
Inputs for electricity generation: Coal (85%), nuclear (12%), hydroelectric (2%), natural gas
(1%), oil (< 1%)
Introduction Operations Comps/DCF Outlook
2008 Earnings Revenues: $7.8 B
YOY Growth: 3.66% Operating Expenses: $6.5B
YOY Growth: 4.40% Net Income: $605 M
YOY Change: -1.945%
Introduction Operations Comps/DCF Outlook
2008 Margins Operating Margin: 17.375%
2007: 17.958% Net Profit Margin: 7.718%
2007: 8.159% Margins have gradually decreased since
2001 OPM: From 25% in 2001 NPM: From 12% in 2001
Introduction Operations Comps/DCF Outlook
SWOT
Introduction Operations Comps/DCF Outlook
Strengths Weaknesses
Revenue Dependability
Regulated Monopoly
Outdated Infrastructure
Dependency on Regulators
Opportunities Threats
Renovations could lead to greater efficiencies
Acquisitions upon recovery
Regulatory Lag
Environmental Regulation
Commodity Price Increases
Industry Issues
Political and Regulatory resistance to higher rates Obama looking to cap and tax carbon emissions by
auction Uncertainty in credit and capital markets Environmental awareness
Cap Ex, Taxes, Litigation costs
Introduction Operations Comps/DCF Outlook
Recent Rate Changes Missouri regulated
Increase of $162 million annually Based on allowed 10.76% ROE
Illinois regulated Increase of $161 million annually
Based on allowed 10.7% ROE
Management expects an ROE of 6% for both Illinois and Missouri regulated in 2009
Introduction Operations Comps/DCF Outlook
Industry Trends Returns expected are below the ROE’s allowed
Rates depend on historical costs and costs are expected to increase
Significant costs to update infrastructure to comply with environmental regulations 50% is expected to be recoverable in MO market
Environmental Cost Recovery Mechanisms Decreased plant availability during renovation Higher operating costs
Introduction Operations Comps/DCF Outlook
Macroeconomic Factors Higher income taxes for the wealthy
Lower P/E ratios in the market, lesser discretionary income Increased borrowing by US government provides competition
for funds, possibly resulting in lower overall share prices in the market
Flight to safety continues to hurt share prices Deteriorating International Market discourages foreign
investors
Introduction Operations Comps/DCF Outlook
Short Term Credit Facilities Total = $2.029B from 18 banks Revolving credit facilities up to:
$1B expire January 2010 $1.029B expire July 2010
Introduction Operations Comps/DCF Outlook
Short Term Credit Facilities Total = $2.029B from 18 banks End of 2008, $1.291B drawn from the banks
$584M/1.029B drawn from July 2010 expiration $707M/1B drawn from Jan 2010 expiration
Currently limited in commercial paper market because of downgrades on ST debt
Introduction Operations Comps/DCF Outlook
Long-Term Debt Maturities
Introduction Operations Comps/DCF Outlook
Year of Maturation Amount (in millions)
2009 380
2010 204
2011 154
2012 179
2013 355
Thereafter 5624
Credit Ratings Issuer/Corporate Credit Rating
Moody’s - Baa3 Senior Unsecured Debt
Moody’s - Baa3 Downgraded August 2008, affirmed afterward,
stable Liquidity concerns, costs rising faster than revenues, cap
ex, labor costs, lack of environmental cost recovery Affirmed only because reduced dividend will free up cash
flows Still likely to have interest rates reasonably higher due to market
uncertainty
Introduction Operations Comps/DCF Outlook
Equity Repurchase/Issuance Management issues shares through 401k plans Have not repurchased any common stock
Introduction Operations Comps/DCF Outlook
Year of Issue Number of Shares Price of Shares
2008 4 million $38.50
2007 1.7 million $53.53
2006 1.9 million $50.53
Capital Expenditures Plans $1.685B expenditure in 2009 Provided an estimated range of $6.6-8.7B total
expenditures 2010-2013 Expenditures will be funded by debt and equity
Targeted range 50-55% equity Expenditures will be towards infrastructure
improvements and environmental regulation compliance $4.5-5.5B towards environmental regulation until 2018 May be recoverable by 2.5% annual rate increases
Introduction Operations Comps/DCF Outlook
Commodity Risk UE is exposed to 5% of electricity price
fluctuations Genco, AERG, EEI are exposed to 100% of
electricity price fluctuations IP, CIP, CILCO also have certain cost recovery
abilities in electricity Natural Gas costs are passed directly to the
consumer Uses hedging strategies to mitigate risks
Introduction Operations Comps/DCF Outlook
Shareholder Makeup UE is exposed to 5% of electricity price
fluctuations Genco, AERG, EEI are exposed to 100% of
electricity price fluctuations IP, CIP, CILCO also have certain cost recovery
abilities in electricity Natural Gas costs are passed directly to the
consumer Uses hedging strategies to mitigate risks
Introduction Operations Comps/DCF Outlook
Shareholder Makeup
% held by insiders, 0.14%
% held by institutions, 56.60%
% held by others, 43.26%
Correlation
Introduction Operations Comps/DCF Outlook
Monthly Ameren Correlation (past 10 yrs)
Company Ticker Correlation
American Eagle AEO -0.0638
Copart CPRT 0.0762
Diamond Offshore DO 0.2685
First Industrial FR 0.5116
Jack Henry & Associates JKHY 0.1139
Kimberly-Clark KMB 0.3298
McDonalds MCD 0.3202
Stericycle SRCL -0.0140
Walgreens WAG 0.1551
MEMC Electronics WFR 0.0759
Average Correlation = .1898
Comparable Companies
Introduction Operations Comps/DCF Outlook
Centerpoint Energy Inc. Natural gas distribution, electric transmission and
distribution, approximately 3.2 million customers Consolidated Edison Inc.
Electric, gas, and steam service provider, approximately 1.1 million customers
Exelon Corp. Generation, distribution, transmission, and sale of
electricity, approximately 5.8 million customers
Comparable Companies
Introduction Operations Comps/DCF Outlook
Northeast Utilities Electric distribution, natural gas distribution, electric
transmission, approximately 2 million customers PG&E Corp.
Electricity and natural gas distribution, approximately 9.4 million customers
Public Service Enterprise Group Transmission, distribution, and sale of electric energy and
natural gas, approximately 3.8 million customers
Comparable Companies
Introduction Operations Comps/DCF Outlook
SCANA Corp. Generates, transports, and sells electric power,
approximately 1.8 million customers Wisconsin Energy Corp.
Electricity and natural gas provider, approximately 2.1 million customers in the Wisconsin and Michigan region
Comparable Companies
Introduction Operations Comps/DCF Outlook
Name Location Beta ROA ROE
Ameren Missouri 0.95 3.92% 8.82%Centerpoint Energy Inc. Texas 0.92 4.24% 23.24%Consolidated Edison Inc. New York 0.26 3.36% 9.82%
Exelon Corp. Illinois 0.81 7.07% 25.65%Northeast Utilities Massachusetts 0.7 3.89% 8.79%
PG & E Corp. San Francisco 0.45 3.65% 13.21%Public Service Enterprise Group New Jersey 0.59 N/A 13.13%
SCANA Corp. South Carolina 0.68 4.10% 11.52%Wisconsin Energy Corp. Wisconsin 0.43 3.39% 11.14%
Industry 0.64 4.20% 13.92%
Comparable Companies
Introduction Operations Comps/DCF Outlook
DCF Assumptions
Increased Corporate Taxes With the current changes in political climate, Ameren should expect to
see increases in corporate taxes over the upcoming five years Minimal Capital Expenditures
Ameren has recognized a decline in cash flows over the previous year that will likely diminish their plans for capital expenditures over the next five years. The firm continues to fund these capital expenditures through 50% equity and 50% debt, but this decrease in cash flows will make it tougher to fund these projects.
WACC Calculation Using ROE “Goal-Post” Theory, we came to a WACC calculation based
on the firms return on equity and CAPM analysis
Introduction Operations Comps/DCF Outlook
DCF Calculation
Introduction Operations Comps/DCF Outlook
Weighted-Average Cost of Capital (WACC)
Weight of Debt 61.20%
Weight of Equity 38.80%
Cost of Debt 7.44%
Cost of Equity 9.78%
β (Beta) 0.92
Risk-Free Rate (Rf) 4.00%
Market Return (Rm) 10.00%
Market Risk Premium (RPm) 6.00%
Tax Rate 35.00%
WACC 6.75%
Sustainable Growth 2.00%
Ameren Share Price = $19.22
Valuations CAPM DCF Valuation: $20.33 ROE DCF Valuation: $18.17 “Goal Post” Valuation: $19.22 Comparables Valuation: Slightly Overvalued Constant Dividend Discount Model: $15.74 Constant Growth Dividend Discount Model:
$19.78 Current Price: $19.78
Introduction Operations Comps/DCF Outlook
Final Outlook Costs are rising faster than revenues and will
continue to do so Credit will be more difficult to come by Equity investment is discouraged because of
higher taxes for the rich, international economic deterioration, and flight to safety due to uncertainty
Ameren will incur large capital expenditures to meet environmental regulations
During renovation, plants will be unavailable
Introduction Operations Comps/DCF Outlook
Final Outlook (cont.) Ameren will pay higher taxes due to higher
income taxes, carbon emission taxes, and elimination of tax breaks for corporations
Commodity prices will increase Regulatory agencies will be more hesitant to
increase rates due to economic circumstances and political views
Bad debt expense will increase due to economic conditions
Raising equity capital will be more difficult
Introduction Operations Comps/DCF Outlook
Holding Currently own 400 shares at $19.78
2.78% of the portfolio value Purchased 400 shares at $50.03 on April 27,
2006 Unrealized loss of 60.5%
Introduction Operations Comps/DCF Outlook
Proposal Ameren is currently overvalued and is exposed
to many risks Sell 200 shares at the market price
Introduction Operations Comps/DCF Outlook