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Analysts: Hydro One shakeup could threaten or delay Avista sale

UPDATED: Thu., July 12, 2018

Avista Utilities headquarters in east Spokane. (Jesse Tinsley / The Spokesman-Review)
Avista Utilities headquarters in east Spokane. (Jesse Tinsley / The Spokesman-Review)

State regulators are asking for additional information about Avista’s proposed sale to Hydro One Ltd., after a political shakeup led to the departure of the Toronto-based utility’s CEO and its entire board of directors.

The upheaval’s timing could delay the $5.3 billion sale, or possibly even kill it, financial analysts said Thursday in market alerts.

Both companies say they remain committed to the deal, but the ousters at Hydro One come just weeks before regulators in Washington, Idaho and Oregon are expected to decide whether the sale is in the best interest of Avista’s customers.

“Increased political interference in Ontario could negatively impact Hydro One’s proposed acquisition of Avista Corp.,” wrote Jeremy Rosenfield, a Canadian analyst with iA Securities.

He said state regulators could require additional guarantees from Hydro One to protect Avista’s ratepayers, delaying the sale’s anticipated Sept. 30 closure. Or, “in an extreme case,” regulators could decide not to approve the sale, Rosenfield wrote.

Hydro One CEO Mayo Schmidt retired and the board of directors resigned Wednesday at the request of Ontario’s new premier, Doug Ford. With populist politics that earn him comparisons to President Donald Trump, Ford had criticized Schmidt’s $6 million compensation as excessive and said he would remove Schmidt and the board if his party prevailed in the June elections.

Ford didn’t mention Avista’s sale to Hydro One during the campaign, focusing instead on the province’s high electric rates.

The province of Ontario spun off Hydro One into a publicly traded company in late 2015, but kept a 47 percent ownership stake. The government retained authority to remove the utility’s board.

“Given the Ontario premier essentially forced out the CEO and board of directors of Hydro One, this development could have influence on merger approval in each jurisdiction,” wrote Shahriar Pourreza, a Guggenheim Partners analyst.

On Thursday, the Washington Utilities and Transportation Commission asked Avista and Hydro One to file comments on Hydro One’s leadership changes. Other interested parties were invited to submit comments as well.

The Idaho Public Utilities Commission has scheduled a July 23 technical hearing on the sale. Hydro One’s leadership change and the province’s influence is likely to prompt questions.

The Oregon Public Utility Commission already had told Hydro One it wanted an update if Hydro One’s management or board changed. Montana and Alaska regulators have approved the deal.

Paul Ridzon, an analyst for KeyBanc Capital Markets, said the ouster of Hydro One’s chairman and board puts state regulators in “a troubling spot.”

Avista and Hydro One have asked Washington and Idaho regulators to issue opinions by Aug. 14 on whether the sale benefits Avista customers. Hydro One’s new board is to be seated Aug. 15.

“Questions we imagine (regulators) will be asking themselves are: Who is the new board? What is the corporate strategy going forward?” Ridzon wrote.

While the deadline for approval and the sale’s closing date could be extended, “it’s unclear whether the new Hydro One board will have been seated long enough to formulate a strategy the U.S. regulators can be comfortable with,” he said.

Avista officials said the deal was crafted to protect its ratepayers. After the sale, Avista would be a Hydro One subsidiary, with utility operations continuing to be overseen by Avista’s management and its board of directors, said Casey Fielder, an Avista spokeswoman.

Avista’s new nine-member board of directors would contain a blend of Hydro One and Avista officers, along with three independent directors from the Pacific Northwest. Fielder said the board structure preserves Avista’s ability to make decisions “in the best interest of our stakeholders.”

Additional safeguards protect Avista’s ability to remain financially sound in the event that Hydro One has financial difficulties, Fielder said. And Avista’s electric and natural gas rates would continue to be set by state regulators, she said.

“Avista will have to continue to propose any rate changes with (state commissions),” Fielder wrote in an email. “ The commissions, not Hydro One, will continue to set customer rates and ensure that only Avista’s costs to serve customers are included in rates.”

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