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Ameren Corp. (AEE - Analyst Report) was barred from transferring pollution variance to Dynegy Inc. (DYN - Snapshot Report) − required for the proposed divestiture of Ameren’s merchant generation business, Ameren Energy Resources Company or AER and its subsidiaries, to a Dynergy subsidiary.

The Illinois Pollution Control Board has rejected a request by Ameren to transfer a pollution-control waiver at five Illinois coal-fired plants to the Dynergy unit. The regulators voted 4-0 reflecting denial of the request from Ameren as well as Dynegy and indicated that Dynegy must make its own move for a request of variance relief.

In Mar 2013, Ameren announced its intention to divest its merchant generation business, AER, to an affiliate of Dynegy. AER consists primarily of Ameren Energy Generating Company or Genco, including Genco's 80% ownership interest in Electric Energy, Inc.; AmerenEnergy Resources Generating Company or AERG; and Ameren Energy Marketing Company. The transaction is subject to regulatory approvals, including transfer of the variance. The transaction is expected to close in the fourth quarter.

Illinois pollution controlling measures from coal-fired power plants were established back in 2006. This required Ameren to invest $1.6 billion to check emissions of mercury, sulfur dioxide and nitrogen oxides to levels below the required federal regulations.

Although Ameren agreed to step up reductions of the other pollutants, including sulfur dioxide, or soot, the company needed additional time to meet the mercury limits. However, after spending roughly $230 million in the venture to meet the sulfur dioxide limits by installing equipment at its largest Illinois coal plant – the 1,186-megawatt Newton plant – Ameren conveyed its inability to finish the project due to declining power prices and an ailing economy.

The pollution regulators thus granted Ameren the variance in September last year. This gave Ameren another five-year respite, lasting until 2020, to install equipment to control smog. The company had initially agreed to do it by 2015.

In spite of the denial from the Pollution Control Board, Ameren and Dynegy are committed to completing the transfer and will file a new request for a variance soon.

We believe Ameren's stable and regulated electric power operations in the Midwest generate a relatively steady and growing earnings stream. However, 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.

The company presently retains a short-term Zacks Rank #3 (Hold). There are other stocks in the energy space that are worth considering now. These include Zacks Ranked #1 (Strong Buy) CPFL Energia S.A. (CPL - Snapshot Report) and Companhia Paranaense de Energia (ELP - Analyst Report).

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