Algonquin Power & Utilities Corp T.AQN

BMO

[Dibah420]

December 15, 2022 | 15:44 ET~ Algonquin Power & Utilities AQN-NYSE AQN-TSX Rating Market Perform Price: Dec-14 $7.13 Target $11.00 Total Rtn 64% FERC Surprisingly Denies Kentucky Power Deal, but Comes With Silver Lining Bottom Line: In a surprise announcement, the Federal Energy Regulatory Commission denied regulatory approval of AQN's proposed US$2.646B acquisition of Kentucky Power. AQN could potentially re-file with FERC to advance the deal, which at a minimum would still push out the expected January 2023 close. However, the silver lining here is it provides AQN flexibility to "walk" and materially improve its balance sheet/funding position. Maintain Market Perform rating. Key Points FERC denies proposed US$2.646B transaction. The Federal Energy Regulatory Commission (FERC) has denied, pursuant to Section 203 of the Federal Power Act, authorization of the sale of Kentucky Power from AEP (US$98.49; Outperform rated by James Thalacker, BMO Capital Markets Corp.) to Liberty Utilities (subsidiary of AQN). This was the last regulatory approval needed following Kentucky PSC's approval of the sale, received in May 2022, and clearance from the Committee on Foreign Investment in the United States and Hart Scott-Rodino review, received in Q1/2022. Overall, this was a surprise development. Two possible paths forward. The first option is to re-submit to FERC an application for Section 203 authorization given that the denial was without prejudice; regulatory success would still be possible but the deal will likely be pushed out from the January 2023 expected close date. The second option is for AQN to terminate the transaction and pay a US$65M break fee, which we believe would go a long way to improving its funding position and reducing its variable interest rate exposure. We believe a dividend cut would likely still be required even if AQN walks away from the Kentucky deal. We understand the company will review the FERC order when issued (Docket EC22-26-000) and will work with AEP to determine next steps. Energy Infrastructure Ben Pham, CFA Analyst [e-mail] [phone] Alexandra Sharr, CPA Associate [e-mail] [phone] Legal Entity: BMO Nesbitt Burns Inc. 20 18 16 14 12 10 8 6 Jun Dec Jun Dec 30 20 10 0 LHS: Price ($) / RHS: Volume (mm) Source: FactSet 2YR Price Volume Chart