We maintained our long-term Neutral recommendation on
) 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).
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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
). 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
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
Stocks to Consider
Stocks worth considering in the energy space are
Empresa Nacional de Electricidad S.A.
CPFL Energia S.A.
), both with a Zacks Rank #1 (Strong Buy).