Ameren's 4.4% Yield Is Not Impressive

| About: Ameren Corporation (AEE)

Ameren Corporation (NYSE:AEE) was created in 1997 by the merger of Missouri's Union Electric Company and the neighboring Central Illinois Public Service Company. It is now a holding company for several power and energy companies. Ameren is based in St. Louis, Missouri, serving 2.4 million electric, and 900,000 natural gas customers across 64,000 square miles. The company's market capitalization is about $8.8 billion, and is traded on the New York Stock Exchange. At its current stock price, Ameren offers a dividend yield of 4.4% which may be attractive for income investors.

Company Overview

Ameren Corporation is among the nation's largest investor-owned electric and gas utilities, with about $23 billion in assets. It is largest electric utility in Missouri and the second-largest in Illinois, with over 9,000 employees. Ameren's primary assets are its equity interests in its subsidiaries, including Ameren Missouri, Ameren Illinois and AER. Its total electric generation capacity amounts to 15,800 megawatts. About 86% of Ameren's revenues come from electric operations and 14% from natural gas. Like most utilities, Ameren is heavily regulated and may only raise its rates for certain groups of customers with the permission of state regulatory agencies.

Ameren's strategy is to increase its rate-regulated operations, reducing its business risk profile. Reflecting that focus, the company announced at the end of 2012 its intention to exit the merchant generation business. The divestiture plan is clearly a positive factor for the company as the business is being affected by low power prices, hurting Ameren's growth and profitability. These operations sell their output on competitive markets, leading to much higher earnings and cash flow volatility than regulated activities and weren't therefore aligned with the business profile that management desire for the company's future. Ameren was able to reach a divestiture agreement back in March with Dynegy (NYSE:DYN) at no cost, which should be finalized until the end of the year. This deal includes five coal-fired plants in Illinois and total value benefits are expected to reach $900 million for Ameren.

Electric utility companies are under increasing legislative pressure to adopt cleaner electricity generation methods while maintaining competitive prices. This requires cleaner fuel sources, such as nuclear or wind power, instead of coal. On this point, Ameren has a long way to go, given that its sources of generation in 2012 were 81% coal, 15% nuclear, 3% natural gas, and only 1% renewables. Therefore, the company is much more susceptible to 'green legislation' than some of its peers, like NextEra Energy (NYSE:NEE) or Exelon (NYSE:EXC) that rely much more on cleaner fuel sources like natural gas and nuclear. Indeed, Illinois and Missouri have enacted laws requiring electric utilities to include renewable energy resources in their portfolios, with the required weight of renewable energy in production increasing considerably over the next few years to between 15% to 25%.

Regarding its financial performance, Ameren's revenues declined by 9.3% in 2012 to about $6.8 billion. The company's profitability is high, given that its EBITDA stood at $2.1 billion, or an EBITDA margin of 31% which is among the highest in its sector. However, its net profits were affected by the company's decision to exit the merchant generation business, leading to a non-cash impairment of $1.5 billion, or $6.42 per share. Therefore, Ameren reported an operating loss of $1.2 billion and a net loss of $4.01 per share for the year. Without these impairment charges, the company's 2012 adjusted earnings stood at $2.42 per share, an increase of 12% from the previous year. During the first six months of 2013, its earnings-per-share from continuing operations declined to $0.66, compared to $0.81 during the same period in 2012. This decline was the result of a planned nuclear refueling outage, impacts of a regulatory decision in 2012 and a court decision in 2013, as well as milder weather.

Going forward, Ameren's growth should come from transmission operations, including electric and natural gas transmission. The company intends to invest a total of about $2.3 billion until 2017 in regulated transmission projects. Following the divestiture of its merchant activities, Ameren will likely see only modestly rising earnings at the core utilities, over the long term. For 2013, its guidance is for earnings-per-share to be between $2 to $2.15, a decline of 11% to 17% compared to adjusted 2012 earnings.


Regarding its dividend history, Ameren has a good track record given its nine decades of uninterrupted cash dividend payments to shareholders. However, its dividend was cut by 40% in 2009, from $2.54 per share to $1.54. Since then, Ameren was able to increase its dividend but its growth is mediocre. In 2012, its dividend was increased by 2.9% to $1.60 per share, the highest increase of the past four years. Its dividend payout ratio based on adjusted earnings was 66%, which is in line with most of its peers.

In 2012, Ameren's cash flow from operations amounted to $1.7 billion, which were enough to fully finance its capital expenditures of $1.2 billion and dividend payments to shareholders of $382 million. However, its free cash flow after dividends should turn negative over the next few years as Ameren's cumulative capital expenditures are expected to range between $7.4 billion and $9.5 billion from 2013 to 2017, or about $1.5 billion to $1.9 billion annually. This will require higher debt levels to finance the company's growth and possibly constrain significance dividend growth.

The company's balance sheet is relatively sound, given that at the end of the second quarter of 2013 its net debt was about $5 billion or a net debt-to-EBITDA ratio of about 2.4x, which below the sector's average. For 2013, Ameren expects free cash flow to be $450 million negative which will lead to higher balance sheet leverage but still at reasonable levels.


Like many utilities, Ameren's most attractive factor is its dividend yield of 4.4%. Its high reliance on coal-fired plants, low growth and higher balance sheet leverage expected over the next few years are not particularly good value propositions. Therefore, I think income investors searching for yield on the utilities sector should instead look at NextEra Energy, as I discussed in my previous article, which is a quality utility with much higher growth prospects that offers a reasonable dividend yield.

Disclosure: I am long NEE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.