20180126Avista to Staff_DR_118(H1) Attachment B.PDF

Date of Release: July 19, 2017

DBRS Comments on Hydro One Limited Acquiring Avista Corporation

Web: DBRS Comments on Hydro One acquiring Avista
Bloomberg: DBRS Comments on Hydro One acquiring Avista
Industry Group: Corporate
Sub-Industry: Utilities & Independent Power
Region: Canada

DBRS Limited (DBRS) notes that Hydro One Limited (HOL) the parent company of Hydro One Inc.
(HOI, rated A (high), Stable) has announced today that it has entered into a definitive merger agreement
pursuant to which it will acquire Avista Corporation (Avista), a regulated electric and gas utilities
holding company operating in the U.S. Pacific Northwest, for an all-cash purchase price of
approximately US$5.3 billion (C$6.7 billion) including the assumption of approximately US$1.9
billion (C$2.7 billion) of debt (the Merger). The transaction was unanimously approved by the Boards
of Directors of both companies and is expected to close in the second half of 2018, subject to Avista’s
common shareholder approval, regulatory and government approvals and clearances, and the
satisfaction of customary closing conditions. Avista will continue to operate as a standalone utility
following the closing of the transaction.
Avista is a Spokane, Washington headquartered utility serving 720,000 customers in five regulatory
jurisdictions of Washington, Oregon, Idaho, Motana and Alaska. HOL plans to finance the acquisition
through the issuance of US $2.6 of debt and C$1.4 billion of equity. HOL has concurrently executed a
bought deal of C$1.4 billion of contingent convertible debentures represented by instalment receipts to
satisfy the equity component of the acquisition.

DBRS rates HOI as a stand-alone entity does not assume any credit support from its owner, HOL,
which is approximately 50% owned by the Province of Ontario (the Province; rated AA (low) with a
Stable trend by DBRS). DBRS notes that the acquisition provides HOL with both diversification and
scale while expanding its regulated utility rate base to cover electricity transmission and distribution as
well as natural gas local distribution businesses. While recognizing the possible synergistic benefits of
the transaction, DBRS notes that HOI is insulated from the financing of this Merger as no debt is
proposed to be issued at HOI and HOL’s dividend payout guidance of 70-80% of earnings has not been
Staff_DR_118(H1) Attachment B Page 1 of 2
revised upward as a result of today’s announcement. Moreover, HOI’s capital expenditure needs
are largely met by the growing operating cash flow generated by its regulated utility operations in
Ontario without the need for equity injections from HOL. DBRS expects that the quality of the
regulatory regime in Ontario will continue to remain supportive, providing the regulatory ring-fencing
for the utility and allowing the Company to earn a fair rate of return while recovering costs on a timely
basis. DBRS views that should the acquisition be financed as contemplated in today’s announcement,
it will have no impact on HOI’s credit profile.

Notes:
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations
are hereby incorporated by reference and can be found by clicking on the link to the right under Related
Research or by contacting us at [e-mail].

For more information on this credit or on this industry, visit www.dbrs.com or contact us at [e-mail].

Ram Vadali
Tom Li
Jay Gu
Staff_DR_118(H1) Attachment B Page 2 of 2