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Ameren Corp (AEE)

Ameren Corp (AEE). Presented by Alex Ring April 25, 2006. Outline. Company Background & Structure Regulation and Operations Stock market prospects DCF Analysis Overall Portfolio Fit Recommendation. Company Background. Ameren Corp is an electric utility holding company

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Ameren Corp (AEE)

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  1. Ameren Corp(AEE) Presented by Alex Ring April 25, 2006

  2. Outline • Company Background & Structure • Regulation and Operations • Stock market prospects • DCF Analysis • Overall Portfolio Fit • Recommendation

  3. Company Background • Ameren Corp is an electric utility holding company • Headquartered in St. Louis, Missouri • Formed by the merger of Union Electric Company and the Central Illinois Public Service Company (CIPSCO) • Began trading on the NYSE on January 2, 1998 • Headed by Chairman & CEO, Gary Rainwater since January 1, 2004 • Has held numerous executive positions with the company and its subsidiaries since 1979 when he joined Union Electric as an engineer

  4. Company Background • Market Cap: $10.28 Billion • 2005 Net Income: $606 million • Stock Price: $50.60 • Beta: 0.62 • 2005 ROE: 9.52% • 2005 ROA: 3.34% • Debt/Equity: 46%

  5. Company Operations • Ameren is a Midwest public utility holding company • Its electric and gas utilities operate in much of downstate Illinois as well as Missouri • Provides both natural gas and electricity to 3.4 million customers

  6. Ownership Structure

  7. Ameren Subsidiaries • Union Electric Company represents the company’s rate-regulated natural gas and electric operations in Missouri • CIPS operates Illinois rate-regulated electricity and natural gas distribution business under the AmerenCIPS name • Genco, or Ameren Energy Generating Company, is responsible for generating non-rate-regulated electricity in Illinois and Missouri

  8. Subsidiaries continued • Central Illinois Light Company (CILCO) is an Illinois based subsidiary that distributes rate-regulated electricity and natural gas, and also generates non-rate-regulated electricity through Ameren Energy Resources Generating Company (AERG) • Illinois Power (IP) was acquired in 2004 and operates rate-regulated natural gas and distribution networks in Illinois under the AmerenIP name

  9. Outline • Company Background & Structure • Regulation and Operations • Stock market prospects • DCF Analysis • Overall Portfolio Fit • Recommendation

  10. Regulation • The public utility sector is highly regulated. • Greatest overall variable determining the company’s profitability • In most markets, there hasn’t been a rate increase in 20-25 years • A rate freeze in Illinois was placed in 1997 and will expire at the end of this year, meaning electricity rates will go up

  11. Significance of Regulation “Rates that UE, CIPS, CILCO and IP are allowed to charge for their services are the single most important influence upon their and Ameren’s consolidated results of operations, financial position, and liquidity.”

  12. Regulation Continued • Illinois based subsidiaries (CIPS, CILCO, IP) are regulated by the Illinois Commerce Commission (ICC) • Missouri based subsidiary Union Electric are regulated by the Missouri Public Service Commission (MoPSC)

  13. Regulation Continued • In the past, Ameren’s results have been constrained by its inability to recover investments and other costs through electricity and natural gas rates • But much progress has been made: • Proposals have been made to the ICC to increase electricity delivery service rates by $200 million dollars, with a decision expected in late 2006 • Under certain criteria, rates charged by UE, CIPS, CILCO, and IP can be adjusted without a rate proceeding • PGA clauses allow the costs to purchase natural gas to be passed on to customers in Missouri and Illinois, but not yet in effect • A new law passed in Missouri would allow the company to recover costs associated with fuel, purchased power, and the environment • Much of this progress has just recently came about and could be a source of additional profitability in the coming 3-5 years

  14. Commodity Price Risk • Ameren uses long-term purchase and sales contracts, derivatives including forward contracts, futures contracts, options, and swaps to manage price risk associated with purchasing these commodities

  15. Sources of Electricity • Peak electricity demand in 2005 was 17,563 megawatts vs. capacity of 20,567 megawatts • Nuclear energy is produced from its Callaway Plant in Callaway County, Missouri • 2005 coal costs were approximately 11% higher 2004 and 2003, due to a disruption in rail supply

  16. Recent Performance • 5 Year Compound Annual Growth Rates • Electricity Revenue 9.14% • Gas Revenue 31.5% • Total Revenues 11.94% • Net Income 5.26% • Stock Price 3.70% • Good buying opportunity

  17. Recent Acquisitions - CILCORP • On January 31, 2003, Ameren purchased CILCORP, the parent of CILCO, from AES Corp (AES) for $1.4 billion

  18. Recent Acquisitions - IP • Purchase Illinois Power (IP) on September 30, 2004 from Dynegy (DYN) • Ameren paid $2.3 billion for the company, financed by issuing 30 million shares of Ameren Corp in February and July 2004. • The acquisition increased the number of electric customers by 625,000 and the number of gas customers by 425,000 • Increased 2005 revenues by $1.3 billion • IP consists primarily of electric and gas transmission and distribution, and has no significant generation facilities • Therefore, most of electricity is purchased under short and long-term purchase agreements

  19. Outline • Company Background & Structure • Regulation and Operations • Stock market prospects • DCF Analysis • Overall Portfolio Fit • Recommendation

  20. DuPont Analysis ROE = PM * TAT * EM Where: PM = Profit Margin (NI/Sales) TAT = Total Asset Turnover (Sales/TA) EM = Equity Multiplier (TA/TE)

  21. Stock Performance vs. Competitors

  22. Outline • Company Background & Structure • Regulation and Operations • Stock market prospects • DCF Analysis • Overall Portfolio Fit • Recommendation

  23. DCF Analysis assumptions • Total Revenues will increase by 11% per year from 2006-2009 • Net income will increase by 10% per year for next four years, then level off for the terminal value • WACC of 7.0%, conservative relative to Bloomberg estimate of 6.6% • Reasonable sustainable growth rate of 3%

  24. DCF Results • DCF Value per share: $65 • Intrinsic value range of $58-$71

  25. Sensitivity Analysis

  26. Outline • Company Background & Structure • Regulation and Operations • Stock market prospects • DCF Analysis • Overall Portfolio Fit • Recommendation

  27. Correlation Matrix

  28. Overall Portfolio Issues • Great diversification with existing portfolio • Excellent dividend yield of 5.10% versus S&P 500 dividend yield of 1.78%, representing a payout ratio of 84%. • Should provide a source of consistent growth and will be a staple holding of our portfolio • Great time to get into a solid company, stock has been flat over past year, and P/E suggests company is slightly undervalued relative to peers and the market as a whole • Stock performance need not be spectacular to generate great returns • 5% per year CAGR in stock price will result in total return of 10% assuming constant dividend yield—greater than should be required given the level of risk embodied in beta

  29. Outline • Company Background & Structure • Regulation and Operations • Stock market prospects • DCF Analysis • Overall Portfolio Fit • Recommendation

  30. Recommendation • I recommend we purchase 400 Shares of Ameren Corp (ticker: AEE) at the market. • Approximate cost of position $20,200 • Total number of holdings to 11 securities, with AEE representing 6.4% of overall portfolio upon purchase

  31. Sources • 2005 Ameren Corporation Annual Report, http://phx.corporate-ir.net/phoenix.zhtml?c=91845&p=irol-reportsannual • 2003 Ameren Corp 10-K Filing • 2004 Ameren Corp 10-K Filing • 2005 Ameren Corp 10-K Filing • Yahoo Finance <http://finance.yahoo.com>

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