On Thursday, Dynegy announced it will pay $622 million through assumption of cash and debt to acquire Ameren’s 4.1-gigawatt merchant coal plant fleet in Illinois. Dynegy also acquired Ameren Energy Marketing and Homefield Energy, immediately establishing the company’s previously announced plan to develop a retail offering in Illinois.

Excluding the marketing business, the deal price implies a $150-per-kilowatt value for the coal plants. This compares to recent large deals involving Exelon and Dominion that implied about $300 per kilowatt for high quality Eastern U.S. coal plants and virtually nothing for marginal Midwest coal plants.

The transaction provides significant downside protection and further leverages the company to a recovery in power prices. Dynegy will create a nonrecourse subsidiary, Illinois Power Holdings (IPH), for the assets with no cash consideration. Dynegy forecasts $60 million in synergies mainly from fuel supply, maintenance, and overhead reductions.

Management expects the transaction to close in the fourth quarter. We also view the deal as a positive for Ameren, which had previously announced its plans to exit the merchant generation business in late 2012. The transaction allows management to focus on improving earned returns at the company’s core regulated operations. As part of the transaction, Ameren will exercise its put option with subsidiary Ameren Energy Resources to buy 1,166 megawatts of natural gas generation for the greater of $133 million or the appraised value.

The transaction reduces Ameren’s consolidated leverage and should generate an estimated $180 million in tax benefits in 2015. However, Ameren agreed to retain $5 million in liabilities for any environmental liabilities associated with coal ash disposal under $30 million, with 100% exposure for any liability greater than $30 million.


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