Algonquin Power & Utilities Corp T.AQN

Scotia comments

[incomedreamer11]

Initial Take: FERC Denies Aquisition of Kentucky Power

OUR TAKE: Mixed. The Federal Energy Regulatory Commission (FERC) has denied Algonquin’s proposed $2.6b acquisition of Kentucky Power (link). Algonquin’s shares were up slightly following the news, which is not a surprise as the termination would result in a stronger balance sheet, lower amount of floating rate debt, but at the cost of some EPS. At this point, we do not yet adjust our model to remove Kentucky Power given it is unclear what the path forward is.

KEY POINTS

What’s next? It is unclear what the next steps are for the deal as the full order from FERC is not yet available. We expect that American Electric Power (AEP) and Algonquin will work together to determine the path forward. That said, Algonquin, in its current state, could be willing to let the opportunity pass.

Would lower our EPS estimates, but strengthen the balance sheet. We initially saw the transaction as being $0.02 accretive to EPS (link), though this has been eroded away by the expectation of a higher interest cost. If the transaction is not completed, we see it being a ~$0.07 headwind to our EPS estimates. The downdraft in estimates is in part a result of Algonquin pre-funding the acquisition with US$650m of equity in late 2021. Removing the acquisition from our model keeps the dividend payout ratio above 100% of EPS in 2023 and 2024. On the other hand, if the transaction is not completed, it would result in a stronger balance sheet and also lessen its exposure to floating rate debt to ~20%, versus over 30% with Kentucky.

Relatively minor break fee. If the Acquisition Agreement is terminated in certain circumstances, including due to a failure to receive required regulatory approvals (other than the approval of the local regulators and FERC for the termination and replacement of the existing operating agreement for the Mitchell Plant), Algonquin may be required to pay to the Sellers a termination fee of US$65 million.