Potential Algonquin Power deal may have American Electric singing a different tune

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American Electric Power Co. chief executive Nicholas Akins kicks off every quarterly earnings call with analysts by quoting a few lines from a hit song.

Back in April, Mr. Akins riffed off Marvin Gaye’s What’s Going On as he revealed the Ohio-based utility had launched a strategic review of its Kentucky Power subsidiary with a view to selling it. The unit provides electricity to 170,000 customers in the central and eastern parts of the state from coal- and natural gas-fuelled plants.

In July, the CEO played on Carly Simon’s Anticipation as the head of the US$45-billion utility (and drummer in a band) updated investors on a possible sale of Kentucky Power. Mr. Atkins said AEP had “credible interest” in the company and expected to conclude the review process by the end of the year.

Analysts say Kentucky Power could fetch up to US$2.8-billion. AEP has already said that if it sells the business, it will deploy the money into renewable power generation, including a planned US$800-million wind farm in Oklahoma.

Oakville, Ont.-based Algonquin Power & Utilities Corp. is among potential buyers circling Kentucky Power, according to numerous analysts and industry executives. While many utilities, including AEP, are cutting ties to coal, Algonquin sees an opportunity replacing these CO2-spouting plants with green power sources.

Algonquin chief executive Arun Banskota faced a series of questions on a potential Kentucky Power acquisition during an analyst call last Friday. The CEO began his response with a standard corporate line, declining to comment on the specifics of any one transaction.

However, rather than stop at that point, Mr. Banskota went to great lengths to explain that in the past, Algonquin acquired U.S. companies with coal plants, then “greened the fleet” by switching to renewable sources for power generation.

For example, in 2016, Algonquin spent US$2.4-billion on a U.S. utility powered in part by a 200 megawatt coal-fired plant in Asbury, Mo. It then built three wind farms, and shut down Asbury in the spring, 15 years ahead of the previous operator’s planned retirement date for the facility. After taking analysts through this case study on Friday’s call, Mr. Banskota said: “If there are similar kinds of opportunities where we can utilize our greening-the-fleet initiatives, we will take a hard look at that.”

Smart CEOs don’t surprise the market with acquisitions. After listening to Algonquin’s CEO, analyst Robert Hope at Bank of Nova Scotia said in a report: “Reading between the lines leads us to believe they are looking at potentially acquiring the assets.” He said there are few growth opportunities of this size available, and “given Algonquin’s very strong existing ESG profile, it would not shy away from acquiring an integrated electric utility with coal generation such as Kentucky Power.”

If a buyer can navigate the ESG issues around owning a coal plant in this era, analysts say Kentucky Power could be a classic turnaround story. The utility posted a relatively weak 4.8-per-cent return on equity in the most recent quarter because of a regional economic slowdown. However, Kentucky Power’s regulator allows the company to earn up to a 9.3-per-cent return. A new owner can look forward to far higher returns from this utility if business activity picks up in the eastern U.S. as is expected emerging from the worst of the COVID-19 pandemic.

In June, after the possible sale of Kentucky Power was announced, Algonquin raised $1-billion in an equity offering lead by JPMorgan, Wells Fargo Securities, BMO Capital Markets and Morgan Stanley. The Canadian utility is flush with cash, and an established track record on U.S. acquisitions.

If Algonquin wins the Kentucky Power derby, AEP’s Mr. Akins may want to consider quoting a few lines from one of the immortal Stompin’ Tom Connors’s lesser-known tunes, The Coal Boat Song. It’s about learning to love a Cape Breton guy who gets dirty at work.

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