ameren corp (aee)

Ameren Corp(AEE)

Presented by Alex RingApril 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 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

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%

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

Ameren Corporation

Union ElectricCompany

Central Illinois Public Service Company

Ameren Energy Development Company CILCORP

Central Illinois LightCompany (CILCO)

Illinois Power

Genco

Ownership Structure

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

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

Outline

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

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 ofthis year, meaning electricity rates will go up

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.”

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)

  MoPSC ICC

  Electric Gas Electric Gas

Ameren 40% 13% 45% 87%UE 80% 95% 1% 5%

CIPS 0% 0% 95% 100%

CILCORP 0% 0% 93% 100%

CILCO 0% 0% 93% 100%

IP 0% 0% 100% 100%

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

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

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

Source of Electricity Generation

  Coal Nuclear Natural Gas Hydroelectric Oil

Ameren:          

2005 86% 10% 1% 2% 1%

2004 86% 10% 1% 2% 1%

2003 85% 13% <1% 1% 1%

Cost per Mbtu $1.160 $0.421 $9.044    

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

Recent Acquisitions - CILCORP

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

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

Outline

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

DIRECT COMPETITOR COMPARISON  

AEE ILA EXC GXP Industry

Market Cap: 10.29B 1.58B 36.24B 2.12B 3.00B

Employ ees: 7,177 3,204 17,200 2,382 4.55K

Qtrly Rev Growth (yoy): 15.50% 43.00% 15.90% 8.60% 18.20%

Revenue (ttm): 6.62B 1.31B 15.36B 2.60B 3.46B

Gross Margin (ttm): 34.45% 34.28% 39.03% 33.67% 30.81%

EBITDA (ttm): 1.90B 142.00M 5.31B 463.31M 612.68M

Oper Margins (ttm): 19.39% -0.53% 25.60% 11.01% 10.08%

Net Income (ttm): 628.00M -145.40M 951.00M 162.56M 136.80M

EPS (ttm): 3.018 -0.598 1.365 2.154 1.51

P/E (ttm): 16.66 N/A 39.79 13.15 17.11

PEG (5 yr expected): 3.92 N/A 1.79 6.77 2.71

P/S (ttm): 1.55 1.21 2.32 0.82

ILA = Aquila Inc.

EXC = Exelon Corp.

GXP = Great Plains Energy Inc.

DuPont Analysis

Dupont Analysis 2001 2002 2003 2004 2005

Profit Margin 12.16% 9.95% 11.46% 10.32% 8.94%

Total Asset Turnover 0.37 0.32 0.32 0.29 0.37

Equity Multiplier 3.11 3.16 3.27 3.01 2.85

Return on Equity 14.00% 9.94% 12.03% 9.14% 9.52%

ROE = PM * TAT * EMWhere:

PM = Profit Margin (NI/Sales)TAT = Total Asset Turnover (Sales/TA)EM = Equity Multiplier (TA/TE)

Stock Performance vs. Competitors

Outline

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

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%

DCF Results

DCF Value per share: $65

Intrinsic value range of $58-$71

Weighted Average Cost of Capital  

Adjusted Beta 0.75

Risk Free Rate 5.00%

Market Risk Premium 5.00%

CAPM Required Rate of Return of Equity 8.75%

Weighted Average Cost of Debt 6.50%

Debt/(Debt + Equity) 46.00%

Equity/(Debt + Equity) 54.00%

WACC 6.97%

Sustainable Growth Rate 3.00%

Sensitivity Analysis

WACC/Sustainable Growth Rate          

  6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 9.0%

2.0% $ 67 60 54 49 45 42 39

2.5% 75 66 58 53 48 44 41

3.0% 85 73 64 57 52 47 43

3.5% 100 83 72 63 56 51 46

4.0% 121 97 81 70 62 55 50

4.5% 157 119 95 80 69 60 54

5.0% 230 154 116 93 78 67 59

5.5% 446 224 150 113 91 76 66

Outline

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

Correlation Matrix  AEE AEOS CPRT FR JKHY JPM KMB MS MVSN SRCL WAG Portfolio

AEE 1.0000

AEOS 0.0276 1.0000

CPRT 0.2157 0.2124 1.0000

FR 0.1762 0.1895 0.4220 1.0000

JKHY 0.0863 0.2493 0.3189 0.1310 1.0000

JPM 0.1874 0.3408 0.4069 0.3565 0.2812 1.0000

KMB 0.0284 0.0549 0.3972 0.2443 0.2040 0.3155 1.0000

MS 0.0884 0.2658 0.2704 0.2303 0.3241 0.5686 0.2592 1.0000

MVSN 0.1099 0.2345 0.1727 0.1254 0.2017 0.2886 0.0959 0.2906 1.0000

SRCL -0.0311 0.1212 -0.0156 0.0234 0.0912 0.0992 0.0977 0.0612 0.0329 1.0000

WAG 0.0381 0.2213 0.2714 0.1337 0.2472 0.2741 0.2609 0.2481 0.0349 0.2519 1.0000

Portfolio* 0.1764 0.6042 0.6570 0.4824 0.5502 0.6759 0.4449 0.6092 0.5632 0.2894 0.4752 1.0000

*assumes equal-weighted portfolio

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

Outline

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

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

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>