AEP May Sell Kentucky Power Unit Facing Environmental Costs

American Electric Power Co. may sell its Kentucky Power utility if state regulators don’t approve a customer rate increase to help pay for added environmental costs.

It may make more sense to sell the utility if regulators balk at allowing American Electric to recover costs of upgrading or replacing a coal-fired power plant, President Nicholas Akins said in an interview today at an Edison Electric Institute meeting in Colorado Springs, Colorado.

It would cost $470 million to build a natural-gas fired plant to replace Kentucky Power’s 1,078 megawatt Big Sandy coal facility, scheduled to be retired by 2015, said Pat Hemlepp, a spokesman for the Columbus, Ohio-based company. The utility said last week it plans to shutter the plant in order to comply with a series of clean-air regulations proposed by the U.S. Environmental Protection Agency.

Kentucky Power “is a small company and it’s a sizable investment,” said Akins, who became president last year and is expected to take over as chief executive officer when Michael Morris retires in November. “When you make those kinds of investments, you want to make sure you can recover it and get an attractive return on equity.”

Other states may face similar pressure from generation companies seeking to recoup their compliance costs if proposed federal rules are passed to curb carbon and other emissions from coal-fired power plants, said Hugh Wynne, utilities analyst for Sanford C. Bernstein & Co. in New York who has a neutral rating on the shares and doesn’t own any.

Raising Rates

“It’s a question that a lot of regulators are going to face,” Wynne said. “Are they willing to raise electricity rates to pay for the upgrades to the fleet required by the new environmental regulations? Or do they say, ‘It’s not worth it. Shut these plants and go buy power from somebody else.’”

American Electric has yet to ask Kentucky regulators for a rate increase because the federal environmental rules have not yet been completed, Hemlepp said. The state may be hesitant to grant a large rate increase because Kentucky Power’s customers have been hit hard by the recession, Akins said.

“We are going to work with the regulatory agencies there,” Akins said. “That doesn’t stop us from thinking that this is one we should consider for a possible divestiture.”

American Electric’s Kentucky Power unit reported net income of $16.9 million for the first three months of this year, up 78 percent from $9.49 million a year earlier. The unit had revenue of $196.1 million, according to a filing with the Securities and Exchange Commission.

Likely Buyers

Kentucky Power delivers electricity to 176,000 homes and businesses, Hemlepp said. It had total assets worth $1.57 billion as of March 31, according to the filing.

Wynne, who rated shares of American Electric “market perform,” said the likeliest buyers for Kentucky Power would be PPL Corp., and Duke Energy Corp., which own power companies in Kentucky. “If AEP’s right, and there is no way to recover this cost, there may be no buyers,” Wynne added.

PPL executives aren’t pursuing additional deals after acquiring Kentucky-based Louisville Gas and Electric Company and Central Networks, the second-largest electricity distribution company in the United Kingdom, said George Lewis, spokesman for the Allentown, Pennsylvania-based utility. “Our executives made it very clear that our focus is going to shift to operating the Kentucky and U.K. acquisitions.”

A spokesman for Duke Energy, based in Charlotte, N.C., declined comment.

To contact the reporter on this story: Mark Chediak in San Francisco at mchediak@bloomberg.net.

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net.

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