TD commentsAlgonquin Power & Utilities Corp. (AQN-N, AQN-T) US$7.27 | C$9.92
FERC Rejects Kentucky Power Acquisition; Reapplication Possible Sean Steuart, CFA John Mould, CFA
Event Yesterday during trading hours, the U.S. Federal Energy Regulatory Commission (FERC) disclosed via its December 15 meeting summary that it had denied the application for the acquisition by Liberty Utilities (Algonquin's regulated subsidiary) of the Kentucky Power electric utility from AEP. The ruling was released last night. The agreed consideration for Kentucky Power is an enterprise value of $2.6 billion, including $1.4 billion of equity.
Impact: POTENTIALLY POSITIVE
FERC appears to provide a path for reapplication. We believe the Kentucky Power acquisition is unpopular with many investors, given potential challenges in achieving allowed ROE, and a longer-than-expected closing that has exposed the company to variable interest rate pressure. Assuming a mid-2023 closing, Algonquin could potentially benefit from raising capital in a less onerous interest rate environment, a more measured pace for potential assets sales, and more time to consider financing options.
Details
Ruling summary. The ruling stated that the applicants had "failed to demonstrate that the Proposed Transaction will not have an adverse effect on rates." A June order added 180 days to FERC's original timeline, noting that it required "additional time to fully analyze the application". The ruling notes that the applicants could file a new application that provides adequate information regarding the transaction's impact on rates; we believe that a ruling could come within 180 days of such a filing (i.e., mid-2023 if refiled expeditiously).
This denial appears unusual. Two concurrences suggested that FERC could have approved the application on the condition that applicants specifically address potential rate effects and mitigation strategies (both were also critical of the yearlong length of the process). Commissioner Phillips believes that in the previous 10 years, FERC has denied only five applications of ~1,976 orders issued related to Federal Power Act Section 203 applications.
The transaction agreement appears to contemplate termination only due to a lack of regulatory approval once all denials are final and non-appealable. It is not clear to us whether the outside date referenced in the agreement (18 months from signing, i.e., April 26, 2023) would apply for cases where closing has been delayed by a lack of regulatory approval.