Ameren Corporation’s (AEE) merchant generation subsidiary – Ameren Energy Resources Company, LLC has signed a cooperative agreement with the U.S. Department of Energy (DOE) to repower an oil-fired unit located at its Meredosia Power Plant near Jacksonville, Illinois. This would transform the unit as the world’s first, full-scale, oxy-combustion coal-fired plant designed for permanent carbon dioxide (CO2) capture and storage.
The project is part of the initiative known as FutureGen 2.0, which calls for transporting the captured CO2 over a new regional pipeline to a new, deep saline injection storage facility to be developed by others in Illinois. It is estimated that FutureGen 2.0 could eventually bring as many as 900 jobs to central Illinois.
As part of this new initiative, the Department of Energy will partner with the FutureGen Industrial Alliance, Inc, to select an Illinois host community for the carbon storage site as well as a geological sequestration research complex and a craft labor training center.
The FutureGen Industrial Alliance is a non-profit consortium of some of the largest coal producers and users in the world, formed to partner with the U.S. Department of Energy on the FutureGen project. The Department of Energy has signed final cooperative agreements with the FutureGen Industrial Alliance and Ameren Energy Resources that formally commit $1 billion in Recovery Act funding to build FutureGen 2.0.
Reining in greenhouse gas emissions is critical for Ameren. The company has a marked dependence on coal for generating electricity. Ameren produced 83% of its electricity in fiscal 2009 from coal-fired facilities. This dependence on coal requires significant capital expenditure, such as installing scrubbers to comply with environmental standards set by federal agencies. Management estimates that it would have to shell out approximately $1.6 billion – $1.9 billion in the period 2010 – 2017 for complying with federal and state clean air standards.
Ameren’s stable and regulated electric power operations in the Midwest market generate a relatively stable and growing earnings stream. Future growth will be guided by improved plant operations, higher rates in Missouri and Illinois, lower operations and maintenance expenses and installation of emissions reduction equipment (scrubbers) at its generation plants.
Currently, Ameren has a short-term (1 to 3 months) Zacks #1 Rank (“Strong Buy”) and a long-term (6+ months) Neutral recommendation.
Our cautious stance on Ameren takes into account its significant fossil fuel based generating units and uncertainty about the rate of recovery of the economy. To comply with state and federal regulations, the company has to invest a significant chunk to reduce emissions from its generation assets, including installation of selective catalytic reduction and overfire air to control nitrogen oxide emissions and the use of activated carbon injection to control mercury emissions.
While Ameren’s liquidity position is sound and growth potential is also attractive, we continue to believe that the near- to medium-term outlook for merchant power generators is tepid. Performance in the second quarter has been affected by lower power prices in the merchant power segment. In the near-term, the scenario is unlikely to change and the company will resort to hedging its power prices to a greater extent.
Given these headwinds, we believe that Ameren’s current valuation adequately reflects its fairly balanced risk/reward profile. As such, we see limited upside from current levels.
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