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AEP Agrees to Trim Purchase Price of its Kentucky Operations



October 2, 2022 - American Electric Power agreed to shave around $200 million off the purchase price of its Kentucky operations after conflicting regulatory decisions sent a pending acquisition deal back to the negotiating table.

Liberty Utilities, a regulated utility unit of Canada-based Algonquin Power, now will buy the stock of Kentucky Power and AEP Kentucky Transco for a reduced price of $2.646 billion. In October 2021, Liberty agreed to buy the assets for $2.846 billion, including around $1.221 billion in debt.

AEP said it now expects to receive around $1.2 billion in cash, net of taxes and transaction fees. It also expects to record a third quarter pre-tax GAAP loss ranging from $180 million to $220 million as a result of the amended sales agreement and a change to the expected timing of the completion of the transaction. 

AEP initially expected to net $1.4 billion in cash, which it said it would reinvest in renewable energy in other AEP subsidiaries, none of which are in Kentucky.

The deal is now slated to close in January, pending approval by the Federal Energy Regulatory Commission, which could issue a decision in December.

AEP also said that Brett Mattison, president and chief operating officer of Kentucky Power, would become president and COO of Southwestern Electric Power Co., effective Jan. 1. Mattison succeeds Malcolm Smoak, who is retiring. Liberty previously announced that David Swain will lead the Kentucky operations when the transaction is finalized. 

Last May, Kentucky utility regulators approved the acquisition, but required changes to the proposed operating and ownership agreements related to the 1,632 MW Mitchell coal generating facility in which Kentucky Power owns a 50% interest. 

On July 1, West Virginia regulators issued its own order on the power plant that differed from the Kentucky regulatory action. 

These discrepancies led AEP and Liberty to renegotiate the sales agreement, which both sides announced on September 30. 

Kentucky Power and Wheeling Power are both units of AEP, each owning a 50% interest in Mitchell, which is located in Moundsville, West Virginia. Kentucky Power’s interest falls under Kentucky regulatory jurisdiction while Wheeling Power’s interest is subject to West Virginia regulators oversight.

The underlying issue is complex. But under a 2014 operating agreement, Kentucky Power operated Mitchell held most of its permits. Kentucky Power filed a motion to revise the operating agreement in part due to conflicting regulatory decisions in Kentucky and West Virginia regarding projects to comply with coal combustion residuals (CCR) and effluent limitations guidelines (ELG).

In brief, environmental rules require a wastewater treatment upgrade for the plant to remain in operation past 2028. In 2021, Kentucky regulators rejected the wastewater project. But West Virginia regulators allowed the work to continue, with only West Virginia ratepayers paying for it.

Under ELG rules, the Mitchell power plant has to be compliant or retire by Dec. 31, 2028. Kentucky Power asserted that Wheeling Power expected to continue operating Mitchell through 2040, which is the retirement date based on Mitchell’s expected service life.

West Virginia regulators wrote that “prematurely shutting down used and useful power plants with many years of remaining life would require billions of dollars in replacement costs that would be in addition to the continuing recovery of unrecovered costs already expended on those power plants.” 

They determined that a plan to shut down Mitchell early was unreasonable and imprudent and “would greatly increase West Virginia’s reliance on purchases of energy.”

Liberty Utilities has said it will continue with the exit from the Mitchell plant in 2028. After that, Wheeling Power will take full control of the power plant and operate it until 2040.