REAL CLIENT MANAGED PORTFOLIOS
TO: RCMP Fall 2008 Class
FROM: Lucian Tira, Brad Johnson, Keenan Johnston, Pragnesh Podar
DATE: December 4, 2008
RE: Ameren Corporation (AEE) Investment Recommendation
RECOMMENDATION: HOLD
Company Overview
Ameren Corporation (Ameren) is a public utility holding company. Ameren's asset base is the common stock of its subsidiaries, including Union Electric Company (UE), Central Illinois Public Service Company (CIPS), Ameren Energy Generating Company, CILCORP Inc. and Illinois Power Company. Ameren's subsidiaries operate rate-regulated electric generation, transmission and distribution businesses, rate-regulated natural gas distribution businesses, and non-rate-regulated electric generation businesses in Missouri and Illinois. The Company operates through three segments: Missouri Regulated, Illinois Regulated and Non-rate-regulated Generation.
Current Position
RCMP currently owns 400 shares of Ameren Corporation (AEE) as purchased on April 27, 2006 for $50.03 per share, $20,012 in total. Ameren Corporation pays a quarterly dividend of $0.635 and currently trades at $34.59, for a decline in price of 30.86%.
Recent Regulation
Ameren has benefited from electricity rates being unfrozen in both Missouri and Illinois. However, government regulation and customer rate relief programs may lower or even cancel future rate increase requests. For example, in September 2008, the Illinois Commerce Commission reduced a proposal of a $247 million annual rate increase to $162 million. Their non-regulated power generation is a growing part of their business and now makes up 40% of earnings. It will be important to the future profitability of Ameren that this operation remains unregulated.
Recommendation
Affirming the defensive nature of the industry, we believe that Ameren provides a degree of transparency in revenue going forward. However it is not a growth company and the valuation is not compelling enough to add to the present position. We feel that it is appropriate to hold Ameren as its fundamentals are relatively speaking unimpaired and it will continue to be a stable and profitable company over the medium to long term.
The discounted cash flow model, as well as the income based comparables analysis suggests a price per share very close to the December 3rd closing price of $34.59. The stock’s future movements depend on a series of variables that we are unable to presently estimate. The company has petitioned for further increases in the rates it charges customers due to higher costs of producing and delivering energy. Furthermore, the stock is sensitive to the amount of capital expenditures management plans in the next two years, as well as the price of fuel and purchased power. Consequently, we suggest holding our current position of 400 shares until the outcome of these several issues becomes more evident.