Algonquin Power & Utilities Corp. could sell noncore renewable assets to help finance the cash purchase of American Electric Power Co. Inc.'s Kentucky utility and transmission businesses.
"From a business risk and credit profile perspective, whatever we do in terms of asset recycling probably will be more on the renewable side of the business," Algonquin Power President and CEO Arun Banskota said Nov. 12 on the Canadian company's third-quarter earnings call.
Under the $2.85 billion deal announced Oct. 26, AEP will offload its Kentucky Power Co. regulated utility and AEP Kentucky Transmission Co Inc. business to Algonquin subsidiary Liberty Utilities Co. Liberty will acquire all of the stock of the Kentucky assets for about $1.6 billion and assume more than $1.2 billion in debt at close.
To fund the acquisition, Algonquin announced an C$800 million bought deal offering of common shares and will explore the use or combination of hybrid debt as well as the "potential monetization of nonregulated assets or investments," Algonquin CFO Arthur Kacprzak said.
"The current low-cost capital environment continues to precipitate a strong valuation for quality renewable generation assets," Kacprzak told analysts and investors.
Banskota said a potential sale could involve "orphan assets" that are no longer a good strategic fit or "it may be opportunities to bring in low-cost capital while maintaining our strong development and operational levers."
Management did not confirm or deny that the company's 44% stake in Atlantica Sustainable Infrastructure PLC, formerly known as Atlantica Yield, could be part of the sale process.
"Atlantica remains a very attractive investment, especially given the price at which we are able to enter Atlantica," Banskota said. "It's also very aligned with our overall ESG poster."
Algonquin could drop-down renewable assets into Atlantica.
"As we think about doing possibly monetizing some of our renewable energy assets, we will do what's best from a balance sheet perspective, first and foremost, but also what is best in the context for our shareholders," the CEO said. "And if it is found that drop-downs into Atlantica is the best outcome, we will give that serious consideration as well."
A good strategic fit
Executives also touted the opportunities and growth potential of the Kentucky deal.
Banskota called the company's "greening the fleet" playbook an "important lever of growth" that involves including renewables in rate base, utilizing tax equity and shutting down fossil fuel generation.
Oakville, Ontario-headquartered Algonquin has applied this strategy to southwest Missouri utility Empire District Electric Co. following its $2.3 billion acquisition in 2017. The company moved up the retirement of Empire District's 200-MW Asbury coal plant and completed the purchase of three wind farms totaling 600 MW as part of its clean energy transition.
"We plan on leveraging this experience at Kentucky Power," Banskota said. "Given the state of the economy in eastern Kentucky, given the much lower [levelized cost of energy] of renewables, we believe that we should be able to start layering in renewables perhaps even as early as towards the end of 2024."
Generation shift
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 in 2028.
Under the transaction, 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.
The plant transfer is tied to the Kentucky PSC's decision to reject Kentucky Power's request to pursue construction projects and cost recovery to comply with the U.S. Environmental Protection Agency's Effluent Limitation Guidelines.
At Kentucky Power, Algonquin also sees an opportunity for rate-based renewables investment when a long-term contract for 390 MW from AEP's coal-fired Rockport plant expires in 2022.
"To replace the lost electricity supply from Rockport and Mitchell, we see an opportunity to utilize the integrated resource planning process to explore the potential to replace over 1,100 MW of fossil generation capacity with renewables," Banskota said, adding that cheaper power can also be procured from the grid, compared to the Rockport contract.
A constructive environment?
Algonquin said it sees Kentucky as a "very constructive regulatory state."
AEP, however, launched the strategic review of its Kentucky assets in April driven in part by concerns about the utility's lower returns.
"We see a compelling path forward to improving the earnings profile to achieve [a return on equity] that is closer to the authorized amount of 9.3% for the distribution rate base through the availability of certain key regulatory features," such as forward test years for cost recovery, Banskota said.
The Kentucky Power and AEP Kentucky Transco sale is expected to close in the second quarter of 2022.
Q3 results
Algonquin Power on Nov. 12 reported third-quarter adjusted net earnings of 15 cents per share, in line with third-quarter 2020 earnings of 15 cents per share.
The company reported third-quarter adjusted EBITDA of $252 million, an increase of 27% from $197.9 million in the third quarter of 2020.
The S&P Capital IQ consensus adjusted EBITDA estimate for the quarter was $272.6 million.