American Electric Power (AEP) is shedding its Kentucky-based assets—including its longstanding regulated utility Kentucky Power and transmission business AEP Kentucky Transco—to better position itself to invest in projects that will support a resilient, cleaner energy system.
The Columbus, Ohio, headquartered company on Oct. 26 announced it has entered into an agreement for the sale of the two entities to Liberty, a regulated utility business owned by Ontario-based Algonquin Power & Utilities Corp. (AQN). AQN said the total purchase price is about $2.846 billion (about C$3.523 billion), and it assumes about $1.221 billion in debt. AQN said it obtained a $2.725 billion syndicated acquisition financing commitment from CIBC and Scotiabank to support the transaction.
AEP and AQN expect the sale will close in the second quarter of 2022, though the sale will first need to clear regulatory approvals by the Kentucky Public Service Commission (PSC) and the Federal Energy Regulatory Commission (FERC). The transaction is also subject to federal clearance pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and clearance from the Committee on Foreign Investment in the U.S.
AEP’s Sale of Kentucky Power: Parting with a Legacy
AEP’s Kentucky TransCo is a transmission business that operates a Kentucky portion of transmission infrastructure—including about 10,000 distribution and 1,200 transmission miles—that is part of the FERC-regulated PJM Interconnection.
Kentucky Power, a utility founded in 1919, is an Ashland-headquartered state-regulated utility that serves about 165,000 electricity customers in 20 eastern Kentucky counties. Kentucky Power notably also owns 1,075 MW of generation, including the 295-MW Big Sandy 1, a natural gas-fired plant, and a 780-MW interest in the 1.6-GW Mitchell coal-fired plant, which is located in Moundsville, West Virginia. (Wheeling Power, an AEP subsidiary affiliated with its Appalachian operations, owns the remaining 50% stake in the Mitchell Plant.) Kentucky Power also notably procures electricity under a unit power agreement (UPA) from Unit 2 at AEP’s twin-unit 2.6-GW Rockport coal generating facility in Indiana. That lease will expire when AEP shutters Rockport 2 next year; the full plant is slated to close by 2028.
As POWER has reported, AEP has sought cost recovery for environmental compliance projects at three major coal plants that provide regional reliability for West Virginia, Virginia, and Kentucky: Amos, Mountaineer, and Mitchell. While the Kentucky PSC in July approved only certain compliance projects at Mitchell—a decision that suggested the coal plant will close in 2028—the Kentucky PSC in August issued another order that demanded more details about the AEP subsidiaries’ plans regarding the Mitchell plant. These include how conflicting cost recovery decisions would affect AEP’s strategic review of Kentucky Power’s assets.
On Tuesday, AEP said that Kentucky Power and Wheeling Power plan to file new ownership and operating agreements for Mitchell with regulators to reflect that Liberty will own and obtain power from Kentucky Power’s 50% portion of the Mitchell Plant through 2028. The transaction approval process is separate from Liberty’s acquisition of AEP’s Kentucky assets. However, AEP’s filings will specifically request that Wheeling Power will operate the Mitchell plant. “The 200 employees who operate Mitchell Plant will be transferred from Kentucky Power to Wheeling Power upon approval,” AEP said. “The filings also will address environmental compliance cost allocations and plant ownership arrangements for the period after Dec. 31, 2028,” it said.
AEP’s sale of Kentucky Power and AEP Kentucky Transco stems from an April 2021–initiated strategic review of its Kentucky operations. The company said the agreement with Liberty announced Tuesday resulted from a competitive process that was part of the review. “Upon close of the sale, Liberty will acquire AEP’s Kentucky operations by purchasing all the stock of Kentucky Power and AEP Kentucky Transco,” it said. Liberty will also assume all liabilities of its Kentucky operations, “except for pension and other post-retirement benefit obligations for the period the impacted employees were employed by AEP,” the company said.
Proceeds Will Eliminate Near-Term Equity Needs for Renewables, Transmission
AEP expects to net approximately $1.45 billion in cash after taxes and transaction fees. The company intends to use proceeds from the sale to “eliminate AEP’s forecasted equity needs in 2022 as the company invests in regulated renewables, transmission and other projects,” it said.
AEP anticipates a total regulated renewable opportunity of 16.6 GW by 2030, according to its Oct. 28–released third-quarter 2021 earnings release. Currently projected renewable resource additions over the next decade include 5.9 GW of solar and 10.7 GW of wind. AEP also anticipates adding 2.3 GW of new natural gas capacity after 2026. However, the company said its operating companies “will continue to develop Integrated Resource Plans (IRPs) over the near-term and long-term in collaboration with stakeholders.”
For AQN, a diversified international generation, transmission, and distribution company that holds $16 billion of total assets that are largely in the U.S. and Canada, the acquisition of AEP’s Kentucky assets will continue a “disciplined growth strategy” that adds to the company’s regulated footprint in the U.S.
Kentucky Power offers an opportunity for AQN “to utilize its ‘greening the fleet’ capabilities in a complementary and constructive jurisdiction,” said Arun Banskota, AQN president and CEO, on Tuesday. “Including Kentucky Power under the AQN umbrella also enables AQN to leverage its operational experience to improve customer outcomes in Kentucky by executing on AQN’s core values of providing safe and reliable service to its customers,” he said.
AQN on Oct. 5 announced a target to achieve net-zero emissions by 2050, a target that is rooted in AQN’s purpose of “sustaining energy and water for life,” the company noted. “To support the expiry of the Rockport UPA in 2022 and the expected transfer or retirement (for rate-making purposes in Kentucky) of Kentucky Power’s 50% ownership interest (representing 780 MW) in the Mitchell facility in 2028, Kentucky Power is expected to have the opportunity to replace these fossil fuel generation sources with renewable generation,” it said. “The addition of this generation would support the transition of Kentucky Power’s generating mix to non-emitting generation sources and materially reduce the greenhouse gas emissions intensity of its generation output.”
AQN also noted it already has substantial experience in “greening” fleets of regulated fossil fuel generation.” While the company in 2017 acquired the Empire District Electric Co., a Missouri-based regulated electric, gas, and water utility, it recently completed a $1.1 billion investment in 600 MW of wind generation to support early retirement of the Asbury Coal Plant. “Similarly, at CalPeco, AQN’s electricity utility in California, the company has implemented similar initiatives, investing approximately $132 million in the addition of two utility-scale solar generation facilities in order to provide clean energy for its California customers, which has contributed to a 38% reduction in absolute emissions (scope 1 and 2) and a 47% reduction in emission intensity through the end of 2020 compared to 2017 levels,” it said.