December 4, 2008Lucian Tira

Keenan JohnstonPragnesh Podar

Brad Johnson

Company OverviewPublic utility holding company providing

electricity and natural gas service to Missouri and Illinois~2.5 million electricity, ~1 million natural gas

Founded in 1881 and based out of St. Louis, MO. Formed from merger of Union Electric and

CIPSCO Inc. in 1997

Subsidiary CompaniesIllinois Regulated Services – 2nd largest

AmerenCILCO – Central Illinois Light Company, acquired in 2003, based in Peoria, 19 counties in East and Central IL.

AmerenCIPS – Central Illinois Public Service Company, based in Springfield

AmerenIP – Illinois Power Company, acquired in 2004, based in Decatur, over 600,000 customers

Subsidiary CompaniesMissouri Regulated Services

AmerenUE – Based in St. Louis, largest utility company in Missouri, 1.2 million customers

Non-Regulated ServicesAmerenEnergy Generating Company – Power is

marketed by non-regulated Ameren Energy Marketing, nearly all of AmerenCILCOs divested, coal fired power plants and turbines, sell to businesses, co-ops elsewhere in midwest, makes up 40% of earnings

Earnings Breakdown

$47

$281

$281

$9

Illinois Regulated

Missouri Regulated

Non-Rate Regulated

Other

Coverage Map

RegulationRates are single most important factor to

earnings and liquidityRates set by governmental entities - Missouri Public

Service Commission, Illinois Commerce Commission and Federal Energy Regulatory Commission

Several factors – costs, quality, economic conditions, public policy

Allowed zero profit on the cost of power, make money on the delivery of power

Must receive FERC and state approval to issue debt and conduct mergers

Must adhere to many environmental regulations regarding air and water pollution

Electric RatesMissouri

May 2007, Missouri Public Service Commission (MoPSC) granted rate increase of 2.1%, had been frozen since 1987

April 2008, AmerenUE file request with MoPSC for a 12.1% increase, continue reliability improvements and cover increased transportation costs, $251 million annual revenue boost

IllinoisRates unfrozen Jan 2007, Illinois Commerce Commission

(ICC) granted $97 million increase (40-50% for some customers)

Legislators attempt to restore pre-freeze rates July 2007 – Comprehensive rate relief and customer

assistance program, $1 billion in rate relief, $488 to Ameren Illinois customers, $150 paid by Ameren

Natural Gas RatesMissouri

April 2007, AmerenUE gained approval from MoPSC for $6 million natural gas rate increase

IllinoisICC granted rate increases for CILCO and

CIPS in 2003 and IP in 2005November 2007, CILCO, CIPS and IP

requested $247 million annual increase in distribution and delivery rates

September 2008, ICC cuts request to $162 million annually – AmerenIP electric up $6-$16, natural gas up $4-$9

PositionPurchased 400 shares on April 27, 2006, at

$50.03 per share, total $20,012Current price is around $34 (12/2)Quarterly dividend of $0.635Depreciation in price of 32% ($6412)

Industry TrendsBig Push by Government and Environmental

Agencies to Regulate Emissions (particularly Carbon Emissions)

Annual Energy Outlook predicts electricity sales to soar 40% by 2030

As a result, AEE must invest about $4-5 Billion in Capital Expenditures to improve infrastructure and expand capacity

…..However

Credit is TightPoor Credit markets have made it risky and

challenging to obtain debt.AEE is deferring these expenditures or

reducing plansAEE reduced CAPEX by $400-500MM for 2009AEE is delaying $500MM of Environmental

Capex to beyond 2012

Name P/EEnterprise Value ($B) Beta

Quick Ratio

Current Ratio

Operating Margin ROA ROE

Price/Sales

Price/Book

Ameren 11.35 7.5 0.74 0.55 0.87 18.69% 3.34% 9.51% 0.92 1.01

Black Hills 4.34 0.992 0.95 0.45 0.61 17.86% 2.47% 6.53% 1.23 0.84

CenterPoint 9.46 4.43 0.84 0.74 0.99 11.42% 2.58% 24.66% 0.37 1.97

Dominion Resources 11.95 21.4 0.51 0.8 0.91 44.41% 7.95% 33.58% 1.40 2.38

Exelon 14.39 36.98 0.8 0.82 1.02 25.70% 5.70% 23.56% 1.76 2.87 Great Plains Energy 9 2.23 0.65 0.34 0.47 16.65% 2.67% 7.67% 1.07 0.83

Integrys Energy 18.26 3.36 0.52 0.86 1.1 2.74% 1.66% 6.03% 0.24 1.04

Nicor 14.59 1.84 0.45 0.56 0.76 5.21% 3.05% 13.64% 0.49 1.86

The Laclede Group 14.72 1.16 0.15 0.98 1.32 5.68% 4.00% 13.36% 0.53 2.27

Industry 12.00 8.88 0.62 0.68 .89 16.48% 3.71% 15.39% .89 1.67

Competitor Analysis

Data from Yahoo Finance and Onesource

Multiples AnalysisIndustry Multiple Ameren

Share Value

P/E 12 3.136 $37.63

Price/Sales 0.89 36.13 $32.16

Price/Book 1.67 33.395 $55.77

$41.85

*Multiple Valuation of $41.85

*Valuation is closer to current price if look at Income Based Multiples

*P/E gets right to the point of how much profit you are getting from investing in AEE. 

*Price to Sales doesn’t incorporate capital structure

*Price to Book is asset based

Leverage Analysis

Interest Coverage

CDS

Peer Comparison

Price Volatility

Seasonality

DCF Analysis

DCF Model inputsFree cash flows for the 2008-2013 fiscal years

Terminal value computed using2013 FCF of $757 millionConstant growth rate of 2.0%

DCF Analysis• CAPM components

– Risk free: 10 year note yield of 3.3%– Beta: Average of Google Finance, Yahoo

Finance, MSN Money and CNBC online – 0.83– Market Return: 9%– Market premium: 5.7%

• Cost of equity: 8.03%• Cost of debt: 6.62%

DCF Analysis• Weight of equity to EV: 55.34%• Weight of debt to EV: 44.66%• Tax rate: 30%

• WACC = 6.53%

• Total Equity Value = $7,174

• Price per share = $37.51– Range: ($33.76 - $41.26)

Sensitivity AnalysisGROWTH RATE

  1.00% 1.25% 1.50% 1.75% 2.00% 2.25% 2.50% 2.75% 3.00%

4.50% $61.63 $68.23 $75.92 $85.02 $95.93 $109.27 $125.94 $147.37 $175.96

5.00% $49.56 $54.47 $60.08 $66.55 $74.10 $83.02 $93.73 $106.81 $123.17

5.50% $40.22 $44.00 $48.24 $53.06 $58.56 $64.91 $72.32 $81.07 $91.58

6.00% $32.78 $35.76 $39.08 $42.79 $46.95 $51.68 $57.08 $63.31 $70.58

WACC 6.53% $26.41 $28.79 $31.41 $34.30 $37.51 $41.09 $45.12 $49.68 $54.89

7.00% $21.71 $23.69 $25.85 $28.21 $30.81 $33.69 $36.88 $40.45 $44.46

7.50% $17.50 $19.14 $20.93 $22.87 $24.99 $27.31 $29.86 $32.68 $35.82

8.00% $13.90 $15.30 $16.79 $18.41 $20.17 $22.07 $24.15 $26.43 $28.94

8.50% $10.81 $12.00 $13.27 $14.64 $16.11 $17.70 $19.42 $21.29 $23.33

Recommendation

We recommend a HOLD position for the AEE holding. The stock price is sensitive to the rates charged, the company’s operating expenses, as well as future capital expenditures

The stock is a defensive play in today’s volatile market

Questions?