(Reuters) - Power company Ameren Corp (AEE.N) said it will sell its merchant generation business to Dynegy Inc (DYN.N) to focus on its rate-regulated electric, natural gas and transmission operations and remove about $825 million in debt from its balance sheet.
The sale of Ameren Energy Resources Co will create benefits of about $900 million, including an estimated $180 million in tax benefits, the company said.
Ameren will spend at least $133 million to buy back three natural gas-fueled plants from a unit being offloaded as part of the sale. Dynegy will pay no cash for the acquisition.
Ameren had $6.62 billion in debt as of December 2012. Its shares rose 2 percent to $34.69 on the New York Stock Exchange on Thursday.
Shares of Dynegy, which will add 4.2 gigawatts of coal-generation capacity in Illinois through the deal, rose as much as 10 percent to $22.17. Dynegy has said it expects the value of its coal-fired plants to grow as others shut their plants.
Several power companies are looking to spin off their merchant units to focus on their regulated operations as power prices touch their lowest in a decade.
"We expect that this transaction will reduce business risk and improve the predictability of our future earnings and cash flows, which is expected to strengthen Ameren's credit profile and support Ameren's dividend," Ameren Chief Executive Thomas Voss said in a statement.
Earnings and cash flow at Ameren's merchant businesses have fallen over the past three years as weaker power prices squeeze margins. The company took a $1.6 billion charge on the business in the fourth quarter.
A merchant business operates in a deregulated market and the owner must recover the cost of operating the plant from energy sales, not from ratepayers.
Power prices have been weak in many regions in the United States as record production from shale fields has pushed natural gas prices to decade lows. Gas produced about 30 percent of U.S. electricity in 2012, up from 25 percent in 2011, according to federal data.
Dominion Resources Inc (D.N) said on Monday it had struck a deal to sell three power plants and plans to invest the proceeds in its regulated businesses and to reduce debt.
California power company Edison International's (EIX.N) Edison Mission Energy filed for bankruptcy protection in December after its parent stopped supporting the merchant unit.
Ameren expects to record an after-tax charge of about $300 million to write down the carrying value of the divested business and transaction-related costs.
The sale will affect 2014 earnings per share by 10 cents, with the impact diminishing over time. Analysts, on average, are expecting the company to earn $2.23 per share, according to Thomson Reuters I/B/E/S.
Dynegy, which exited bankruptcy protection last year, is taking on additional coal generation capacity at a time when other power producers are retiring their coal plants.
U.S. power generators have announced plans to shut or convert over 40,000 MW of coal-fired generation as weak power prices have made environmental upgrades uneconomic for older, less efficient units.
Dynegy CEO Robert Flexon told Reuters in January that the company's plants would make more money in future years as power, capacity and natural gas prices rise.
The company said the deal will add to adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) in 2014 and free cash flow by 2015.
Dynegy will own more than 8,000 megawatts (MW) of generating capacity in Illinois and nearly 14,000 MW nationally after the deal closes, which is expected in the fourth quarter.
The deal more than doubles Dynegy's exposure to market recovery and Midwest coal plant retirements, the company said in a statement.
"Expect this transaction to create even more upside to a Midwest power market recovery," analysts at investment bank Tudor, Pickering, Holt & Co wrote in a note.
Lazard advised Dynegy, while JPMorgan was Ameren's lead financial adviser. Wachtell, Lipton, Rosen & Katz was Ameren's legal counsel.
Editing by Joyjeet Das and Sriraj Kalluvila