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Avista sale latest in trend of Canadian utility acquisitions

UPDATED: Fri., July 21, 2017

Avista’s headquarters are seen on Wednesday in Spokane. (Tyler Tjomsland / The Spokesman-Review)
Avista’s headquarters are seen on Wednesday in Spokane. (Tyler Tjomsland / The Spokesman-Review)

It was perhaps only a matter of time before Avista Corp. agreed to sell to a neighbor from the north.

Large Canadian power companies have been snapping up smaller American ones for several years, paying tens of billions of dollars to expand their geographic footprint into a country that offers lighter regulations and higher returns on investment.

Toronto-based Hydro One’s $5.3 billion pending purchase of Avista, announced Wednesday, follows major acquisitions by Canadian companies Enbridge Inc., TransCanada Corp., Fortis Inc., and Algonquin Power & Utilities Corp.

Each of those deals catapulted the buyer into the leading ranks of North American utilities. If the Avista purchase passes regulatory muster – a process that may take up to a year – Hydro One’s assets will total $25.4 billion.

With the industry consolidating, a Bloomberg report about a year ago placed Avista on a list of a dozen U.S. utilities that would be likely acquisition targets. In terms of size, Avista is ranked 46th of 50 publicly traded utilities in the U.S., said Scott Morris, the company’s chairman, president and chief executive officer.

Also on that Bloomberg list was WGL Holdings Inc., a Washington, D.C.-based utility holding company that announced in January it’s being acquired by Calgary-based AltaGas Ltd. for $6.6 billion.

Like other Canadian buyers seeking stable investments, Hydro One was willing to pay a premium for Avista. The all-cash deal includes the assumption of Avista’s $1.9 billion debt.

On Wednesday, Bloomberg reported that the price was too high for some analysts, with Hydro One paying about 11.2 times Avista’s earnings before interest, taxes, depreciation and amortization, more than the 9.3 average multiple for comparable deals.

Avista’s shareholders stand to receive $53 per share, about 24 percent higher than Wednesday’s closing rate.

“That would be the highest premium paid for any company in the electric space today, so we think we did a nice job for shareholders,” Morris said.

In an interview Thursday, Morris was vague when asked whether Avista initiated the acquisition talks with Hydro One, or if there had been other offers on the table. He said only that a number of companies had inquired about potential deals over the past year and a half.

“I wouldn’t say ‘offers,’ because we were never for sale,” he said. “We never put ourselves up for sale.”

Morris said even with rate increases, it has been challenging to cover the cost of replacing decades-old power poles and transmission lines, while developing new technology for a “21st century grid.”

“For 100 years, all of the investments that we made were pipes and wires and transmission lines and generation facilities,” he said. “Very expensive capital projects, but you could spread and depreciate the cost over 30, 40, 50 years. So it worked really well. You didn’t have to have quite the scale.”

Now, he said, “most utilities are consolidating because it’s a lot easier to spread those costs” over a wider customer base.

Hydro One has about 1.3 million customers in rural Ontario, and Avista has about 700,000 customers in Eastern Washington, North Idaho and parts of Oregon and Alaska.

Morris also said the combined companies could get “more bang for our buck” when purchasing materials.

In 2015, Ontario’s ombudsman called on Hydro One to “overhaul its corporate culture” after his office received more than 10,000 complaints from ratepayers about overbilling and estimated bills. The ombudsman, André Marin, said the company provided “outrageously bad customer service” as it scrambled to fix technical glitches in its billing system, according to the CBC.

Morris said he was unconcerned about the billing issue, which arose months before Mayo Schmidt took over as Hydro One’s CEO. The problem also resulted in a $125 million class action lawsuit, which is still being litigated, and the company says the glitches were quickly fixed.

“They installed their new customer billing system, much like we did,” Morris said. “Unfortunately for them – it was before Mayo’s time – it didn’t go very well. They made some mistakes. It was tough technology. … They are making it right with people.”

Morris also stressed that the acquisition would have no effect on electricity rates or jobs, and that it would more than double Avista’s charitable giving.

“Our intentions were to make sure that this gem of a company stayed a gem of a company, with local control, local management, making local decisions, for the right reasons for our customers,” he said. “In many ways, we have locked in our values, our culture.”

Editor’s note: This story was changed on July 21, 2017. A previous version incorrectly stated which day Morris was interviewed by The Spokesman-Review.

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