As a utility company primarily focused on North American markets, ATCO Ltd. (TSX:ACO.X) hasn’t been affected much by economic headwinds over the past few decades. In fact, the company has been able to grow earnings in all but four of the past 25 years. The dividend, meanwhile, has been even more stable; the company has raised its payout every year since 1993. Now that’s stability.

While the underlying fundamentals have almost always proven strong, that hasn’t stopped the market from throwing ATCO’s share price around, occasionally creating big bargains for opportunistic investors. In the past 12 months the company’s stock is down around 23%, roughly double the decline of the TSX overall. Has something changed in the long-term story, or is this a rare opportunity to buy into a typically stable outperformer?

Coal is to blame

As a utility, ATCO is not only involved in the transmission of energy, but the production itself. In return for building large generation plants and transmission lines, ATCO’s regulated utilities get guaranteed rates with predetermined step-ups for price increases. Historically, this has been a fairly attractive business in terms of stability and profitability as long as costs are maintained. However, that historical stability may be threatened.

Recently, Alberta government’s announced a plan to phase out coal generation and accelerate wind and solar power construction, which would give renewable energy producers an edge over competitors. Currently, about 32% of ATCO’s generation is coal based. If regulatory costs are raised and the useful life of these plants are limited, the company’s capital costs may unexpectedly rise, hindering what have been impressive financial returns over previous decades.

A plan is already in place

While the market is punishing ATCO in the wake of a new regulatory environment, company management doesn’t seem too concerned. The proposed guidelines target reducing Alberta’s coal exposure from its current 39% of generation to just 10% by 2034.

While it will take a different path to get there, ATCO’s own forecasts also show coal generation falling to just 10% of the total. In fact, the company’s proposal’s actually result in a higher emissions reduction than the government’s proposal with a heavier reliance on renewables such as hydropower.

ATCO’s in-house forecasts aren’t just for show either. To support the development, ATCO has invested over $9 billion in new utility infrastructure in the province since 2012. Much of this has gone towards natural gas projects (which is necessary for the government’s targeted boost in natural gas generation) and electricity transmission infrastructure (another necessary component for distributing the power from new, clean energy sources).

While the market has punished the company for its existing coal generation, it seems that ATCO has been planning on this transition for years, putting its development capital to work long before any major changes will take place. Over the next two years, the company anticipates spending an additional $3 billion to roll out growth projects, positioning the company for the long-term growth in renewables.

While you wait, you can receive a 3% dividend yield that was boosted by 15% just last month. Take advantage of the current price drop to buy into a proven long-term outperformer.


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Fool contributor Ryan Vanzo has no position in any stocks mentioned.