Ameren Corp AEE

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

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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

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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

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Ownership Structure
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Ameren Subsidiaries

• Union Electric Company represents the companys
  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

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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

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Outline

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

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Regulation

• The public utility sector is highly regulated.
• Greatest overall variable determining the
  companys profitability
• In most markets, there hasnt 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

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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 Amerens
  consolidated results of operations, financial
  position, and liquidity.

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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)

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Regulation Continued

• In the past, Amerens 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

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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

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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

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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

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Recent Acquisitions - CILCORP

• On January 31, 2003, Ameren purchased CILCORP,
  the parent of CILCO, from AES Corp (AES) for 1.4
  billion

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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

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Outline

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

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DuPont Analysis
ROE PM TAT EM Where PM Profit Margin
(NI/Sales) TAT Total Asset Turnover
(Sales/TA) EM Equity Multiplier (TA/TE)
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Stock Performance vs. Competitors
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Outline

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

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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

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DCF Results

• DCF Value per share 65
• Intrinsic value range of 58-71

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Sensitivity Analysis
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Outline

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

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Correlation Matrix
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Overall Portfolio Issues

• Great diversification with existing portfolio
• Excellent dividend yield of 5.10 versus SP 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
  yieldgreater than should be required given the
  level of risk embodied in beta

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Outline

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

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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

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Sources

• 2005 Ameren Corporation Annual Report,
  http//phx.corporate-ir.net/phoenix.zhtml?c91845
  pirol-reportsannual
• 2003 Ameren Corp 10-K Filing
• 2004 Ameren Corp 10-K Filing
• 2005 Ameren Corp 10-K Filing
• Yahoo Finance lthttp//finance.yahoo.comgt