Acquisitions and Dispositions |
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Acquisitions and Dispositions | ACQUISITIONS, ASSETS AND LIABILITIES HELD FOR SALE, DISPOSITIONS AND IMPAIRMENTS The disclosures in this note apply to AEP unless indicated otherwise. ACQUISITIONS Dry Lake Solar Project (Generation & Marketing Segment) (Applies to AEP) In November 2020, AEP signed a Purchase and Sale Agreement with a nonaffiliate to acquire a 75% interest in the entity that owns the 100 MW Dry Lake Solar Project (collectively referred to as Dry Lake) located in southern Nevada for approximately $114 million. In March 2021, AEP closed the transaction and the solar project was placed in-service in May 2021. Approximately $103 million of the purchase price was paid upon closing of the transaction and the remaining $11 million was paid when the project was placed in-service. In accordance with the accounting guidance for “Business Combinations,” management determined that the acquisition of Dry Lake represents an asset acquisition. Additionally, and in accordance with the accounting guidance for “Consolidation,” management concluded that Dry Lake is a VIE and that AEP is the primary beneficiary based on its power as managing member to direct the activities that most significantly impact Dry Lake’s economic performance. As the primary beneficiary of Dry Lake, AEP consolidates Dry Lake into its financial statements. As a result, to account for the initial consolidation of Dry Lake, management applied the acquisition method by allocating the purchase price based on the relative fair value of the assets acquired and noncontrolling interest assumed. The fair value of the primary assets acquired and the noncontrolling interest assumed was determined using the market approach. The key input assumptions were the transaction price paid for AEP’s interest in Dry Lake and recent third-party market transactions for similar solar generation facilities. The nonaffiliated interest in Dry Lake is presented in Noncontrolling Interests on the balance sheets. Subsequent to close of the transaction, the noncontrolling interest made additional asset contributions of $16 million. As of June 30, 2022, AEP recognized approximately $144 million of Property, Plant and Equipment and approximately $35 million of Noncontrolling Interest on the balance sheets. North Central Wind Energy Facilities (Vertically Integrated Utilities Segment) (Applies to AEP, PSO and SWEPCo) In 2020, PSO and SWEPCo received regulatory approvals to acquire the NCWF, comprised of three Oklahoma wind facilities totaling 1,484 MWs, on a fixed cost turn-key basis at completion. PSO and SWEPCo own undivided interests of 45.5% and 54.5% of the NCWF, respectively. In total, the three wind facilities cost approximately $2 billion and consist of Traverse (998 MW), Maverick (287 MW) and Sundance (199 MW). Output from the NCWF serves retail load in PSO’s Oklahoma service territory and both retail and FERC wholesale load in SWEPCo’s service territories in Arkansas and Louisiana. The Oklahoma and Louisiana portions of the NCWF revenue requirement, net of PTC benefit, are recoverable through authorized riders beginning at commercial operation and until such time as amounts are reflected in base rates. Recovery of the Arkansas portion of the NCWF revenue requirement through base rates was approved by the APSC in May 2022. The NCWF are subject to various regulatory performance requirements. If these performance requirements are not met, PSO and SWEPCo would recognize a regulatory liability to refund retail customers. In April 2021, PSO and SWEPCo acquired respective undivided ownership interests in the entity that owned Sundance during its development and construction for $270 million, the first of the three NCWF acquisitions. Immediately following the acquisition, PSO and SWEPCo liquidated the entity and simultaneously distributed the Sundance assets in proportion to their undivided ownership interests. Sundance was placed in-service in April 2021. In September 2021, PSO and SWEPCo acquired respective undivided ownership interests in the entity that owned Maverick during its development and construction for $383 million, the second of the three NCWF acquisitions. Immediately following the acquisition, PSO and SWEPCo liquidated the entity and simultaneously distributed the Maverick assets in proportion to their undivided ownership interests. Maverick was placed in-service in September 2021. In March 2022, PSO and SWEPCo acquired respective undivided ownership interests in the entity that owned Traverse during its development and construction for $1.2 billion, the third of the three NCWF acquisitions. Immediately following the acquisition, PSO and SWEPCo liquidated the entity and simultaneously distributed the Traverse assets in proportion to their undivided ownership interests. Traverse was placed in-service in March 2022. In accordance with the guidance for “Business Combinations,” management determined that the acquisitions of the NCWF projects represent asset acquisitions. As of June 30, 2022, PSO and SWEPCo had approximately $889 million and $1.1 billion, of gross Property, Plant and Equipment on the balance sheets, respectively, related to the NCWF projects. On an ongoing basis, management further determined that PSO and SWEPCo should apply the joint plant accounting model to account for their respective undivided interests in the assets, liabilities, revenues and expenses of the NCWF projects. The respective Purchase and Sale Agreements (PSAs) include interests in numerous land contracts, as originally executed between the nonaffiliated party and the respective owners of the properties as defined in the contracts. These contracts provide for easement and access rights to the land that Sundance, Maverick and Traverse were built upon. The lessee interests in the land contracts were transferred to Sundance, Maverick and Traverse (and subsequently to PSO and SWEPCo) as a part of the closings of the respective PSAs. The Current Obligations Under Operating Leases related to the NCWF projects were immaterial as of June 30, 2022 and December 31, 2021 for PSO and SWEPCo. See the table below for the Noncurrent Obligations Under Operating Leases for the NCWF projects for PSO and SWEPCo:
ASSETS AND LIABILITIES HELD FOR SALE Disposition of KPCo and KTCo (Vertically Integrated Utilities and AEP Transmission Holdco Segments) (Applies to AEP and AEPTCo) In October 2021, AEP entered into a Stock Purchase Agreement to sell KPCo and KTCo to Liberty Utilities Co., a subsidiary of Algonquin Power & Utilities Corp. (Liberty), for approximately a $2.85 billion enterprise value. In May 2022, the KPSC approved the transfer of KPCo to Liberty subject to certain conditions contingent upon the closing of the sale. Clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and clearance from the Committee on Foreign Investment in the United States has also been received. The sale remains subject to FERC approval and to the satisfaction or waiver of the Stock Purchase Agreement condition precedent requiring the issuance of orders by the KPSC, WVPSC and FERC approving a new proposed Mitchell Plant Operations and Maintenance Agreement and Mitchell Plant Ownership Agreement between KPCo and WPCo. Mitchell Plant Operations and Maintenance Agreement and Ownership Agreement KPCo currently operates and owns a 50% undivided interest in the 1,560 MW coal-fired Mitchell Plant with the remaining 50% owned by WPCo. As of June 30, 2022, the net book value of KPCo’s share of the Mitchell Plant, before cost of removal including CWIP and inventory, was $584 million. In November 2021, AEP made filings with the KPSC, WVPSC and FERC seeking approval of a new proposed Mitchell Plant Operations and Maintenance Agreement and Mitchell Plant Ownership Agreement. In February 2022, AEP filed a motion to withdraw its filing with the FERC. The KPSC and WVPSC issued orders addressing AEP’s filings in May 2022 and July 2022. Those orders approved agreements that differ in material respects. In July 2022, KPCo and WPCo made filings with the KPSC and WVPSC, respectively, informing the respective commissions that until consistent new agreements are approved by the two state jurisdictions and the FERC, the new proposed agreements cannot be entered into by KPCo and WPCo. The existing Mitchell Plant agreement remains in place in accordance with its terms as the document governing operations and the contractual relationship between the two owners, including CCR and ELG investments in accordance with each state commission’s directives. Transfer of Ownership FERC Proceedings In December 2021, Liberty, KPCo and KTCo requested FERC approval of the sale under Section 203 of the Federal Power Act. In February 2022, several intervenors in the case filed protests related to whether the sale will negatively impact the wholesale transmission rates of applicants. In April 2022, the FERC issued a deficiency letter stating that the Section 203 application is deficient and that additional information is required to process it. In May 2022, Liberty, KPCo and KTCo supplemented the application and in June 2022, the FERC issued an order formally notifying AEP that it was exercising its ability to take up to an additional 180 days to act on the application. An order from the FERC is expected on the matter in the third quarter of 2022. KPSC Proceedings In May 2022, the KPSC approved the transfer of KPCo to Liberty subject to conditions contingent upon the closing of the sale, including establishment of regulatory liabilities to subsidize retail customer transmission and distribution expenses, a fuel adjustment clause bill credit, and a three-year Big Sandy decommissioning rider rate holiday during which KPCo’s carrying charge is reduced by fifty percent. As a result of the conditions imposed by the KPSC, in the second quarter of 2022, AEP recorded a $69 million loss on the expected sale of the Kentucky Operations in accordance with the accounting guidance for Fair Value Measurement. AEP expects cash proceeds, net of taxes and transaction fees, from the sale of approximately $1.4 billion. Subject to receipt of FERC authorization under Section 203 of the Federal Power Act and satisfaction or waiver of certain conditions precedent in the Stock Purchase Agreement, including the approval of the proposed new Mitchell agreements mentioned above, the sale is expected to close in the third quarter of 2022 with Liberty acquiring the assets and assuming the liabilities of KPCo and KTCo, excluding pension and other post-retirement benefit plan assets and liabilities. AEP expects to provide customary transition services to Liberty for a period of time after closing of the transaction. AEP plans to use the proceeds to eliminate forecasted equity needs in 2022 as the company invests in regulated renewables, transmission and other projects. If additional reductions in the fair value of the Kentucky Operations occur, it would reduce future net income and cash flows. The Income Before Income Tax Expense (Benefit) of KPCo and KTCo were not material to AEP and AEPTCo for the three and six months ended June 30, 2022 and 2021, respectively. The major classes of KPCo and KTCo’s assets and liabilities presented in Assets Held for Sale and Liabilities Held for Sale on the balance sheets of AEP and AEPTCo are shown in the table below:
DISPOSITIONS Disposition of Mineral Rights (Generation & Marketing Segment) (Applies to AEP) In June 2022, AEP closed on the sale of certain mineral rights to a nonaffiliated third-party and received $120 million of proceeds. The sale resulted in a pretax gain of $116 million in the second quarter of 2022. IMPAIRMENTS Flat Ridge 2 Wind LLC (Generation & Marketing Segment) (Applies to AEP) In April 2019, AEP acquired Sempra Renewables LLC and its ownership interests in 724 MWs of wind generation and battery assets. The acquisition included a 50% ownership interest in five non-consolidated joint ventures, including Flat Ridge 2 Wind LLC (Flat Ridge 2), and two tax equity partnerships. The five non-consolidated joint ventures are jointly owned and operated by BP Wind Energy. Flat Ridge 2 sells electricity to three counterparties through long-term PPAs. Regarding AEP’s investment in Flat Ridge 2, in June 2022, as a result of deteriorating financial performance, sale negotiations AEP’s ongoing evaluation and ultimate decision to exit the investment in the near term, in June 2022 management determined a decline in the fair value of AEP’s investment in Flat Ridge 2 was other than temporary. In accordance with the accounting guidance for “Investments - Equity Method and Joint Ventures”, AEP recorded a pretax other than temporary impairment charge of $186 million in Equity Earnings (Losses) of Unconsolidated Subsidiaries in AEP’s Statement of Income in the second quarter of 2022. AEP’s determination of fair value utilized ASC 820 Fair Value Measurement market approach to valuation and was based on Level 2 pricing information from a third-party market participant. The carrying value of the investment in Flat Ridge 2 was not material to AEP as of June 30, 2022.
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