Ameren: Green Ambition Under High Voltage
Author: Stock Analyst Date: 2020/12/30
Ameren Corp. is an American chain holding headquartered in St. Louis, Missouri. The key activities of the company are the production, transmission and distribution of electricity, as well as the distribution of gas.
We have a Hold recommendation for AEE with a target price of $ 74.3, which is roughly the current price of $ 76.6. The shares are fairly priced, in our opinion.
- Ameren plans to achieve carbon neutrality by 2050, shutdown of coal-fired power plants by 2042, and increase renewable energy generation by 5,400 MW by 2040.
- Despite the company's ambitious plans for the development of renewable energy generation, the share of coal-fired power plants in the Ameren capacity portfolio at the end of 2019 was almost 50%.
- The company's dividend yield is low relative to the industry average: DYNTM is forecast to be around 2.8%, with a current median yield of 3.8% for key competitors.
- The company has prepared a large-scale CAPEX plan for 2020-2024 with a total investment of about $ 16 billion.
- The company is less likely to use debt financing relative to competitors: the Net debt / EBITDA ratio is 4.6x, with an average of 5.1x in the industry.
Ameren Corp. is an American chain holding headquartered in St. Louis, Missouri. The company is parent company to three divisions: Ameren Missouri, Ameren Illinois and Ameren Transmission Company (ATXI). The company's core activities are the production, transmission and distribution of electricity, as well as the transmission and distribution of natural gas. The company operates in four business segments:
- Ameren Missouri: Electricity generation and distribution and gas distribution in Missouri. The division's activities within the framework of approved tariffs and a number of other areas are controlled by the Missouri Public Service Commission. Electricity supplied to consumers is mainly generated at our own power plants;
- Ameren Illinois Electric Distribution: Electricity generation and distribution in the state of Illinois. As part of tariff regulation, the company is controlled by the Interstate Commerce Commission. In Illinois, electricity prices are not regulated, unlike electricity transmission and distribution services. Under such conditions, the generating capacity of Ameren Illinois Electric Distribution is a supply reserve resource, and consumers have the opportunity to choose another electricity supplier. In 2019, the company purchased 22% of the total electricity supplies on the open market on behalf of consumers. The cost of purchased electricity and associated costs (including amortization of capacities included in the tariff base, but not actually used) do not affect the financial result of Ameren, since they are reimbursed within the framework of the final tariff;
- Ameren Illinois Natural Gas: Illinois gas distribution. The Interstate Commerce Commission also acts as a gas supply regulator here;
- Ameren Transmission: Transmission of electricity between states and in southern Canada. The company's operations are not regulated in terms of pricing as the assets of Ameren Transmission do not distribute electricity directly to consumers.
The value of the company's assets at the end of 2019 was $ 28.9 billion, while the tariff base was fixed at $ 17.2 billion.For the 2019 financial year, Ameren received $ 5.9 billion in total revenue.
- From the point of view of the company's development strategy, it is advisable to single out the following structural components:
- Reduction of carbon dioxide emissions, gradual reduction of coal and a simultaneous increase in renewable generation.
- Extension of the licensing period for the Callaway nuclear station until 2044.
- Large-scale investments in the modernization of the infrastructure for the transmission and distribution of electricity and gas, ensuring the reliability of networks, as well as the acquisition of additional "green" capacities.
- Maintaining the policy of a stable increase in future dividend payments in favor of shareholders.
In September 2020, Ameren Missouri agreed with the Missouri Public Service Commission a new 20-year Comprehensive Resource Plan. According to the project, Ameren plans to achieve carbon neutrality by 2050, the closure of coal-fired power plants by 2042, and an increase in renewable generation by 5,400 MW by 2040. The company plans to achieve carbon neutrality on a progressive basis: Ameren expects to reduce CO2 emissions by 50% by 2030, by 85% by 2040 and by 100% by 2050 from 2020 levels. An important green target for the company is the closure of coal-fired power plants, which at the end of 2019 provided more than 63% of all Ameren's electricity supply.
By 2030, Ameren plans to ramp up renewable generation by 3.1 GW, with further addition of an additional 2.3 GW in 2030–2040. That said, on December 23, 2020, Ameren took the first step towards that goal by adding 400 MW of wind power to its portfolio of high Prairie Renewable Energy Center in northeastern Missouri. In addition, another 300 MW wind capacity is planned to be launched in the first half of 2021.
Despite the company's ambitious plans for the development of renewable generation, Ameren's capacity portfolio at the end of 2019 was far from the high ESG standards.
According to MSCI, a significant drawback of the company is the increased emission of waste, which is a by-product of the operation of coal-fired power plants. In addition, Ameren did not receive any leadership points in any component of the ESG.
With an emphasis on the development of renewable generation, Ameren plans to maintain the capacity of the Callaway nuclear power plant and extend the facility's license until 2044. Despite the refusal to expand nuclear capacity in 2015 in favor of renewable energy sources, the company's management stressed in the latest comprehensive resource plan that it does not intend to reduce generation from nuclear fuel. At the end of 2019, the station provided more than 11% of Ameren's capacity and generated about 8% of all electricity supplied to consumers. The company will continue to focus on the facility due to its zero emissions from the generation process, as well as the low operating risks of the power plant due to its advantageous geographic location.
The company plans to make capital investments of $ 16 billion in 2020-2024. and more than $ 39 billion in 2020–2029. The bulk of CAPEX will be occupied by the renewable energy investments of the Ameren Missouri division mentioned above. In addition, two key areas of investment will be:
- Modernization of the network infrastructure and increasing its reliability in accordance with the Smart Energy Plan. The program includes more than 2,000 projects during 2020-2024, including the installation of smart sensors and more than 800,000 smart meters, technologies for bypassing emergency network sections, strengthening infrastructure with protection from natural disasters, laying more than 400 miles of underground network cable, as well as renovation and construction of 70 electrical substations;
- Infrastructure development for EV charging stations: In 2020, Ameren spearheaded an initiative to build charging stations in the Midwest region. According to the Charge Ahead program, Ameren will participate in the construction of more than 1000 charging stations in the service region until 2022.
On December 31, 2020, Ameren will pay a quarterly dividend of $ 0.515 per share, marking a 4% growth rate for the 2021 dividend. NTM's dividend yield is projected at 2.8%. The company targets a payout rate in the range of 55–70%, while the median dividend rate over the past 4 years was only 57.4%, which gives the company an additional resource for increasing dividend payments.
Even in 2012, when the company received a negative financial result, the payment of dividends took place at the expense of retained earnings of previous years.
- Large-scale capital "green" investments of the company. The CAPEX plan for 2020-2024 provides for capital investments of $ 16 billion, a significant part of which will be directed to increasing renewable generation - by 2040 Ameren plans to acquire 5,400 MW of renewable energy capacity. In addition, Ameren will invest in smart meter and sensor installations, substations, operational infrastructure reliability and charging stations in Missouri.
- Decarbonization and reaching carbon neutrality. Simultaneously with the growth of renewable energy generation, the company expects to close coal plants by 2042, the total capacity of which at the end of 2019 was about 5,000 MW. In addition, by 2050, the company's management plans to bring Ameren to full carbon neutrality.
- Long-term growth potential for dividend payments. The low payout rate, with a median 57.4% over the past 4 years, gives the company significant headroom for future shareholder benefits. The company's dividend yield, however, is low relative to the industry average: DYNTM is forecast to be around 2.8%, with a current median yield of 3.8% for key competitors.
- According to EIA forecasts, the trend of closing coal-fired power plants will prevail in the US power industry until 2025. The place of the withdrawn capacities will be occupied by solar and wind power generation, as well as gas power plants. At the same time, in 2035–2050, about half of the new commissioning will fall on solar generation, while the remaining 50% will come from gas. This gives a significant advantage to companies investing in solar power, but maintaining a high percentage of gas generation. In general, the trend is characterized by the "green" focus of the American economy, with a focus on the development of renewable energy sources and reducing the carbon footprint.
- Taking into account the projected decrease in electricity consumption in 2020, the indicator is expected to increase in 2021. The economic recovery will stimulate one of the most fundamental industries and renew investment in the electricity sector. Reduced energy consumption in the commercial and manufacturing segments this year will be offset by lower fuel costs. According to the EIA, the cost of coal and gas will decline this year by 3.5% and 15.2%, respectively. At the same time, in 2021, EIA predicts stable prices for gas and coal generation relative to 2020: 1 MWh of coal generation next year will cost $ 16-20, gas generation - $ 17-24.
- AEE net profit for 9 months. 2020 grew by 3.0% y / y. This result was achieved primarily due to the regulator's increase in regulatory ROE for the Ameren Transmission segment, as well as the use of new infrastructure facilities of the Ameren Illinois Natural Gas division. In addition, for all segments for 9 months. there was a significant decrease in material costs (-11%). The key driver of this trend was the decrease in the cost of purchased fuel (-22.5%) and purchased capacity (-13%). A negative factor affecting the amount of net profit is the reduction in the key rate of the US Federal Reserve, to which ROE standards are tied in a number of AEE divisions, from 1.75% at the beginning of the year to 0.25% in March 2020.
- The pandemic did not have a negative impact on the AEE dividend payout dynamics. The company paid out quarterly dividends in equal installments: $ 0.495 per share. Thus, the annual growth of total dividends in 2020 was 4.2%. The dividend payment rate for 2020 is projected at 58.3%. In 2021, AEE expects a 4.0% y / y increase in dividends.
- The company rarely attracts debt financing relative to its main competitors: the Net debt / EBITDA ratio is 4.6x, with an average of 5.1x in the industry. The AEE debt / equity ratio is 1.2x, with a median of 1.6x for key competitors.
- Based on the results of 9 months. For 2020, the company narrowed its fiscal-end EPS forecast from $ 3.40–3.60 to $ 3.40–3.55. Management attributed this to a decline in electricity sales in the Ameren Missouri segment due to warm weather and the impact of the COVID-19 pandemic. The EPS forecast assumes that the temperature remains within the limits of climatic norms, as well as the preservation of the key rate of the US Federal Reserve System in the range of 0.00-0.25%.
In the comparative approach, we used two techniques - estimation by multiples relative to peers and value analysis by own historical multiples.
Valuation by multiples relative to peers implies a target capitalization of $17.4 billion, or $70.20 per share. The historical multiples analysis translates to a target capitalization of $19.4 billion, o$ 78.40 per share.
Combined target price of $74.30 per share for 12 months. with a negative potential of 3.0% to the current price. The full four-quarter dividend return (NTM) is minus 0.2%. Based on this, we are not yet ready to recommend AEE shares for purchase and assign them a HOLD recommendation.
Stock price performance
AEE shares are trading better than the industry average this year, but worse than the market. The S&P 500 has gained more than 14.5% since December 31, 2019, while AEE shares have lost 0.43%. The S&P 500 (Utilities) sectoral index fell 5.2% over the year.