1 Regulator Could Kill This Dividend Stock Deal


Ameren is one step closer to switching to entirely regulated sales. The dividend stock just snagged approval to offload more assets, putting the company in a better position than ever to pull sustainable sales. But there's one regulator that's less than elated, and its rejection could pull the entire deal apart. Here's what you need to know.

Keeping out of competition
Ameren announced this week that the Federal Energy Regulatory Commission (FERC) has approved its request to divest its merchant generation business to ex-competitor Dynegy .

"Receipt of these FERC approvals and the agreement with Rockland are key steps forward in executing our plan to divest the merchant generation business," said Martin Lyons, Jr., Ameren executive vice president and CFO. "These divestitures are a key component of our strategy of focusing on our rate-regulated operations and allocating our growth capital to higher return opportunities. Our planned investments in transmission, distribution and generation infrastructure will help ensure reliable service for our customers and drive enhanced shareholder value."

Ameren and Dynegy operate in similar spots all over Illinois, and this latest move will allow Ameren its clean exit, while Dynegy will capture increasing economies of scale.

Source: Dynegy.com.

The move will add 4,119 MW of net capacity to Dynegy's Illinois operations, almost doubling its current fleet size. And while many companies are cutting out coal, Dynegy's latest additions are all coal-fired when operating as baseload plants.

Dynegy is pushing hard to keep coal, and spent around $1 billion on various emissions reduction technology between 2005 and 2012. While the deal is expected to be completed in Q4 2013, the utility will still need to secure approval from the Illinois Pollution Control Board before it's officially allowed to add on more coal.

But the deal ain't done yet
Ameren's switch to regulated earnings is enough to make any investor salivate, but its divestiture has been tough. Although financial details weren't disclosed in this latest press release, Dynegy is undoubtedly paying bottom dollar for these polluting power plants. Pleading tough times, Ameren has avoided adding on soot-control equipment to its coal plants, a move that the Pollution Control Board might not tolerate from "willing buyer" Dynegy.

If the Board doesn't extend the same waiver to Dynegy, the Associated Press reports that Dynegy's Board of Directors "would have to reevaluate" the seemingly solid deal.

Deal breaker?
The future of this deal relies on fickle regulators, which is never a good thing. Dynegy has proven that it's willing to pay to cut coal pollution, and its deal with Ameren should reflect those expected costs. American Electric Power won the Edison Award this year for one of the cleanest coal plants around, pulling a record-breaking 39% efficiency from low-sulfur coal at its $1.7 billion 600 MW plant. Duke Energy opened the doors on its own 618 MW coal-fired plant in June that uses advanced gasification technology to produce 10 times the power of its predecessor plant with 70% fewer emissions.

Cleaner coal is possible - but it comes at a price. Ameren is opting out, and for utilities like American Electric Power and Duke Energy, their willingness to pay is at least allowing them to use this energy source for the short-term future. But Dynegy's strategy is risky business, and investors would do well to wait this one out before making any major moves.

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The article 1 Regulator Could Kill This Dividend Stock Deal originally appeared on Fool.com.

Fool contributor Justin Loiseau has no position in any stocks mentioned, but he does use electricity. You can follow him on Twitter @TMFJLo and on Motley Fool CAPS @TMFJLo.The Motley Fool has no position in any of the stocks mentioned, either. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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