20210325Avista to Staff 75 Attachment A7.pdf

Research Update:
DRAFT: Hydro One Ltd. And Hydro
One Inc. Placed On Watch Negative,
Avista Corp. On Watch Positive Ahead
Of Regulatory Approvals
Primary Credit Analyst:
Andrew Ng, Toronto + 1 [phone]; [e-mail]
Secondary Contacts:
Vinod Makkar, CFA, Toronto + 1 [phone]; [e-mail]
Obioma Ugboaja, New York + 1 [phone]; [e-mail]
Table Of Contents
Overview
Rating Action
Rationale
CreditWatch
RelatedCriteria
RelatedResearch
RatingsList
DRAFT
WWW.SPGLOBAL.COM/RATINGSDIRECT
S&P Global Ratings. All rights reserved. No reprint or dissemination without S&P Global Ratings
permission. See Terms of Use/Disclaimer on the last page.
JUNE 14, 2018 1
0571919U |Linx UserStaff_PR_075 Attachment A7 Page 1 of 6
Research Update:
DRAFT: Hydro One Ltd. And Hydro One Inc.
Placed On Watch Negative, Avista Corp. On
Watch Positive Ahead Of Regulatory Approvals
Overview
•Toronto-based utility Hydro One Limited (HOL) has made significant
progress in obtaining regulatory approvals on its pending acquisition of
U.S.-based utility Avista Corp. (Avista), announced on July 19,2017.
•This includes regulatory settlements in several states,including
Washington, Idaho, Oregon, and Montana.
•As a result, we are placing our ratings on Hydro One Ltd. (HOL) and Hydro
One Inc. (HOI) on CreditWatch with negative implications. This includes
our 'A' issuer credit rating (ICR) on HOL and HOI, and our 'A' rating on
HOI's senior unsecured debt.
•In addition, we are placing the 'A-1' global scale and 'A-1(Mid)'Canada
scale commercial paper ratings of HOI on CreditWatch negative.
•At the same time, we are placing our ratings on Avista on CreditWatch
with positive implications. This includes our 'BBB' ICR on the company
and 'A-' rating on its senior secured debt.
•The CreditWatch negative listing on HOL and HOI reflects the likelihood
of a one-notch ratings downgrade in the near term for both entities given
the extent of the regulatory settlements thus far and the increasing
expectation that the pending transaction with Avista will close.
•The CreditWatch positive listing on Avista reflects the increased
potential for higher ratings on Avista when the transaction closes.This
incorporates the higher ratings on HOL relative to Avista, and our
expectation that Avista will be a highly strategic subsidiary of HOL
post-acquisition.
Rating Action
On June 15, 2018, S&P Global Ratings placed its 'A' issuer credit rating (ICR)
on Toronto-based Hydro One Ltd. (HOL) and Hydro One Inc. (HOI) and the 'A'
rating on HOI's senior unsecured debt on CreditWatch with negative
implications.
In addition, we placed the 'A-1' global scale and 'A-1(Mid)' Canada scale
commercial paper ratings on HOI on CreditWatch negative.
At the same time, we placed the 'BBB' issuer credit rating on Avista Corp.and
Staff_PR_075 Attachment A7 Page 2 of 6
CreditWatch
We will resolve the CreditWatch placements on HOL, HOI, and Avista as we get
closer to the closing of the transaction, including final regulatory approvals
from key states, including Washington, Avista's largest regulatory
jurisdiction.
Hydro One Ltd.(HOL)
The CreditWatch negative listing on HOL and HOI reflects the increased
potential for a one-notch ratings downgrade in the near term for both entities
given the extent of the regulatory settlements thus far, and the likelihood
that the pending transaction with Avista will close.
Research Update: Hydro One Ltd. And Hydro One Inc. Placed On Watch Negative, Avista Corp. On Watch
Positive Ahead Of Regulatory Approvals
'A-' rating on its senior secured debt on CreditWatch with positive
implications.
Rationale
The CreditWatch negative listing on HOL and HOI reflects the increased
potential for a one-notch ratings downgrade in the near term given the extent
of the regulatory settlements thus far. We believe that these developments
have increased the likelihood that the pending transaction with Avista will
close as expected. Upon close of the transaction, we expect HOL's business
risk to weaken modestly, reflecting a shift in business strategy that
increases the company's operational and regulatory risks. Furthermore, we
expect HOL's financial measures to weaken upon close of the transaction,
including adjusted funds from operations (AFFO) to debt of about 10.0-10.5%
for 2019-2020.
Based on the company's current financing plan, which includes about C$1.4
billion of equity and C$3.4 billion (US$2.6 billion) of new debt, we expect a
one-notch downgrade to our ICRs on HOL and HOI to 'A-'. We rate the senior
unsecured debt at HOI the same as the issuer credit rating on HOI, because the
debt is issued by a qualifying investment-grade utility.
The CreditWatch positive listing on Avista reflects the potential for higher
ratings when the transaction closes. This incorporates our higher ratings on
HOL relative to Avista, and our expectation that Avista will be a highly
strategic subsidiary of HOL, post-acquisition. Upon close, our assessment
reflects that Avista is highly unlikely to be sold, and will be integral to
HOL's overall group strategy and operations. Avista will consist of about 20%
of HOL's consolidated EBITDA.
Staff_PR_075 Attachment A7 Page 3 of 6
Avista Corp.
The CreditWatch positive listing on Avista reflects the potential for higher
ratings on Avista when the transaction closes. This incorporates the higher
ratings on HOL relative to Avista, and our view that Avista will be a highly
strategic subsidiary of HOL,post-acquisition.
Related Criteria
•Criteria -Corporates -General: Reflecting Subordination Risk In
Corporate Issue Ratings, March 28,2018
•General Criteria: Methodology For Linking Long-Term And Short-Term Ratings
, April 7,2017
•General Criteria: Guarantee Criteria, Oct. 21,2016
•General Criteria: Rating Government-Related Entities: Methodology And
Assumptions, March 25,2015
•Criteria -Corporates -General: Methodology And Assumptions:Liquidity
Descriptors For Global Corporate Issuers, Dec. 16,2014
•General Criteria: Group Rating Methodology, Nov. 19,2013
•General Criteria: Country Risk Assessment Methodology And Assumptions,
Nov. 19,2013
•Criteria -Corporates -Utilities: Key Credit Factors For The Regulated
Utilities Industry, Nov. 19,2013
•Criteria -Corporates -General: Corporate Methodology, Nov. 19,2013
•Criteria -Corporates -General: Corporate Methodology: Ratios And
Adjustments, Nov. 19,2013
•General Criteria: Methodology: Industry Risk, Nov. 19,2013
•Criteria -Corporates -Utilities: Collateral Coverage And Issue Notching
Rules For '1+' And '1' Recovery Ratings On Senior Bonds Secured By
Utility Real Property, Feb. 14,2013
•General Criteria: Methodology: Management And Governance Credit Factors
For Corporate Entities And Insurers, Nov. 13,2012
•General Criteria: Use Of CreditWatch And Outlooks, Sept. 14,2009
•Criteria -Insurance -General: Hybrid Capital Handbook: September 2008
Edition, Sept. 15,2008
Research Update: Hydro One Ltd. And Hydro One Inc. Placed On Watch Negative, Avista Corp. On Watch
Positive Ahead Of Regulatory Approvals
Staff_PR_075 Attachment A7 Page 4 of 6
Related Research
Ratings List
Certain terms used in this report, particularly certain adjectives used to
express our view on rating relevant factors, have specific meanings ascribed
to them in our criteria, and should therefore be read in conjunction with such
criteria. Please see Ratings Criteria at www.standardandpoors.com for further
information. Complete ratings information is available to subscribers of
RatingsDirect at www.capitaliq.com.All ratings affected by this rating action
can be found on S&P Global Ratings' public website at
www.standardandpoors.com.Use the Ratings search box located in the left
column.
Research Update: Hydro One Ltd. And Hydro One Inc. Placed On Watch Negative, Avista Corp. On Watch
Positive Ahead Of Regulatory Approvals
Staff_PR_075 Attachment A7 Page 5 of 6
Copyright © 2018 by Standard & Poor's Financial Services LLC. All rights reserved.
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof
(Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system,
without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for
any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents
(collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any
errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or
maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR
IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING
WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no
event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential
damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by
negligence)in connection with anyuse of the Contenteven ifadvised ofthe possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and
not statements of fact. S&Ps opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase,
hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to
update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and
experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act
as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable,
S&P does not performanaudit andundertakesno dutyofduediligenceorindependentverificationof anyinformation itreceives.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain
regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion.S&P Parties
disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage
alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective
activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established
policiesand proceduresto maintain theconfidentiality of certain nonpublic information receivedinconnection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves
the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com
(free of charge), and www.capitaliq.com(subscription), and may be distributed through other means, including via S&P publications and third-party
redistributors.Additionalinformation aboutour ratingsfeesis available at www.standardandpoors.com/usratingsfees.
STANDARD & POOR’S, S&P and RATINGSDIRECT are registered trademarks of Standard & Poor’s Financial Services LLC.
WWW.SPGLOBAL.COM/RATINGSDIRECT JUNE 14, 2018 6
0571919U |Linx UserStaff_PR_075 Attachment A7 Page 6 of 6