We maintained our long-term Neutral recommendation on Ameren Corporation (AEE) on May 17, 2013. The company’s stable first quarter 2013 earnings results are somewhat offset by the present unfavorable macro backdrop, its predominantly coal-based generation assets and pending regulatory cases. The company currently has a Zacks Rank #3 (Hold).
Why the Reiteration?
St. Louis-based Ameren Corporation is a holding company which operates in the generation and distribution of electricity and natural gas to residential, commercial, industrial and wholesale end markets in Missouri and Illinois.
Although the company’s first quarter earnings missed our projection, the quarterly result jumped 46.7% from the year-earlier earnings backed by higher contribution from the company’s Ameren Missouri and Ameren Illinois units.
This is supported by consistent performances from its utility operations in the Midwestern market, as well as its focus on cost minimization, strong balance sheet and above-industry average dividend yield. Ameren’s shares offer a high 4.52% yield with the $1.60 annual dividend.
Recently, Ameren announced its intention to exit unregulated generation and plans to sell its unregulated power generation business, Ameren Energy Resources Company or AER, to an affiliate of Dynegy Inc. (DYN). We view the divestiture as positive for the company as the profit from this business continues to be affected by low power prices. Ameren has already locked in some power prices for 2013 and beyond at even lower prices. Hence, the proposed agreement to exit this business is prudent.
Following the divestiture, we expect Ameren to witness modestly rising earnings at the core utilities, primarily in Illinois, over the long term. This is primarily due to the company’s addition in rate base through environmental spending, additions to transmission lines and basic maintenance and repair of infrastructure.
However, Ameren has a marked dependence on coal for generating electricity. This dependence on coal requires significant capital expenditure, such as installing scrubbers to comply with environmental standards set by federal agencies. The company has also taken innovative steps to control costs like using ultra-low sulfur coal for its regulated generation plants. However, management still estimates that it would have to shell out approximately $6.9 billion in the 2013 – 2016 period for complying with federal and state clean air standards.
Ameren’s fortunes also depend on the vagaries of weather. A particularly warm winter or cool summer could adversely affect the performance of the company's utility operations.
Given these headwinds, we see limited upside from current levels and expect Ameren’s shares to trade in line with the broader market indices.
Stocks to Consider
Stocks worth considering in the energy space are Empresa Nacional de Electricidad S.A. (EOC) and CPFL Energia S.A. (CPL), both with a Zacks Rank #1 (Strong Buy).
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