American Electric Power Co. Inc. sees the sale of its Kentucky assets as the latest step in its transformation to a cleaner energy provider.
AEP announced Oct. 26 that it has agreed to sell Kentucky Power Co. and AEP Kentucky Transmission Co. Inc. to Liberty Utilities Co., an indirect subsidiary of Ontario-headquartered Algonquin Power & Utilities Corp., in a deal with a $2.85 billion enterprise value. AEP tabbed the transaction at a $1.5 billion equity value when accounting for the assumption of about $1.3 billion in debt at closing.
Company management signaled the transaction builds on previous sales of its unregulated generation, River Operations and some hydroelectric facilities.
"[Y]ou're talking about $6 billion of assets that have been sold, but they fueled substantial, I mean, to the tune of $7 billion a year in capital," AEP Chairman, President and CEO Nicholas Akins said Oct. 28 on the company's third-quarter earnings call. "It's part of the process to determine what the portfolio needs to be in the future, and we'll continue to do that."
The CEO noted that the company used to focus on investing in coal units "no matter what," and its investment strategy has now made a significant turn.
"It's quite a move for AEP to get to a point where we're managing our portfolio in a way that, first of all, we became fully regulated and then we start to look at that portfolio to determine ... what's the best approach to fuel $20 billion in potential renewables investment," Akins said.
AEP announced a strategic review of its Kentucky assets in late April, as the company seeks financing for its robust renewable energy additions across its footprint over the next decade.
The investor-owned utility plans to add more than 16,500 MW of renewable capacity from 2021 to 2030. The company said about 10,000 MW is proposed through 2025 as part of its $37 billion capital plan that earmarks 72% of spending to transmission and distribution.
Management singled out the Kentucky utility based on its lower returns.
AEP said Oct. 28 that the earned return on equity, or regulated return, for Kentucky Power as of Sept. 30 was 6.9%, below the company's overall operations ROE of 9% and the lowest earned ROE of the company's seven electric utilities and AEP Transmission Co. LLC.
"If we have a chronically underperforming part of our portfolio, then it's important for us to take a look at it," Akins said when asked how the company is evaluating the remainder of its portfolio.
"We don't see any fundamental issues in any of the jurisdictions that are left that says that we have significant headwinds," the CEO said, adding the company believes "the fundamentals are there for continued improvement" in jurisdictions where there is regulatory lag.
AEP management also believes that the company's spending priorities and investments improve its funds from operations to debt ratio and returns for individual companies.
"So, all of the pieces are starting to fit together," Akins said.
As part of the Kentucky deal, AEP said it expects to net about $1.45 billion in cash after taxes and transaction fees, with proceeds used to eliminate $1.4 billion in forecast equity needs in 2022.
"We do lose the funds from operations as it relates to Kentucky and Kentucky Transco," AEP Executive Vice President and CFO Julie Sloat said on the call. "Although we've got to keep in mind that we also eliminate about $1.3 billion of debt associated with those assets, too, because that goes away. ... And then also keep in mind that Kentucky Power had very strained FFO to debt to begin with, so to eliminate that piece of, I guess, drag to the overall average FFO to debt for the organization is also a net positive for us."
Mitchell's future
Kentucky Power owns and operates the 260-MW Big Sandy natural gas plant in Lawrence County, Ky., and owns a 50% interest in the 1,560-MW Mitchell coal-fired plant in Marshall County, W.Va. AEP subsidiary Wheeling Power Co. also owns a 50% interest in the Mitchell plant and is expected to take over plant operations, according to AEP.
Liberty will assume ownership of Kentucky Power's portion of Mitchell through 2028, at which time the plant is expected to be transferred to Wheeling Power, management said.
The plant ownership and operations changes reflect decisions by Kentucky and Virginia regulators to reject cost recovery and upgrades at the Mitchell plant designed to comply with the U.S. Environmental Protection Agency's Effluent Limitation Guidelines. The Public Service Commission of West Virginia, meanwhile, agreed to approve the environmental compliance work and increased jurisdictional costs deemed necessary to keep the Mitchell plant and two other AEP coal-fired power plants online until at least 2040.
Q3 results
On Oct. 28, AEP reported third-quarter operating earnings of $717 million, or $1.43 per share, a slight drop from operating earnings of $728 million, or $1.47 per share, in the third quarter of 2020.
The S&P Capital IQ consensus adjusted EPS estimate for the quarter was $1.46.
The company also narrowed its 2021 operating earnings guidance range to $4.65 to $4.75 per share, raising the midpoint to $4.70.
In addition, AEP reaffirmed its 5% to 7% long-term earnings growth rate.
