20170914Lopez Direct.pdf

ON BEIIALE OE AVISTA CORPORATION
DAVID J. MEYER
VICE PRESIDENT AND CHIEF COUNSEL FOR
REGULATORY & GOVERNMENTAL AFFAIRS
P.O. BOX 3121
1,41,1 EAST MISSION AVENUE
SPoKANE, WASHTNGTON 99220-3121
TELEPHoNE: [phone]
FACSIMILE: [phone]
DAV] D. MEYERGAVI STACORP . COM
t-J
ON BETIAI,F OE HYDRO ONE I,IMTTED
ELIZABETH THOMAS, PARTNER
KARI VANDER STOEP, PARTNER
K&L GATES LLP
925 EOURTH AVENUE, SUfTE 2900
SEATTLE, WA 981014-1158
TELEPHONE: [phone]
FACSIMILE: [phone]
L]Z . THOMASGKLGATES. COM
KARI . VANDERSTOEPGKLGATES. COM
BEEORE THE IDAHO PT'BIJIC UTILITIES COMMISSION
IN THE MATTER OE THE JOINT
APPL]CATTON OE HYDRO ONE LIMITED
(ACT]NG THROUGH ITS IND]RECT
SUBSIDIARY, OLYMPUS EQUITY LLC)
AND
AVISTA CORPORATION
EOR AN ORDER AUTHORIZING PROPOSED
TRANSACT]ON
CASE NO.
CASE NO.
AVU-E- 17 --O3
AVU-G-17-_0_t
D]RECT TESTIMONY
OF
CHRISTOPHER F. LOPEZ
FOR HYDRO ONE LIMITED
1
2
3
4
5
6
1
8
9
I. INTRODUCTION
A. PJ.ease state your name and busin€:ss address.
A. My name is Christopher F. Lopez, and my business
address i-s 483 Bay Street, South Tower, Bth Floor, Toronto,
Ontario M5G 2P5.
A. By whom are you eq>loyed and in what capacity?
A. I am Senior Vice President of Ej-nance for Hydro One
Limited ("Hydro One"). Hydro One is a major North Ameri-can
electric transmission and distribution utility, serving more
than 1.3 mill-ion residential and business customers in
11 Ontario, Canada.
72 A. P1ease sumnarize your education and business
13 e:qrerience.
74 A. I received a Bachelor of Commerce in accounting and
15 finance from Edith Cowan University in 1,996. I qualified from
76 the fnstitute of Chartered Accountants in Australia in 7999.
L1 I received a graduate diploma in corporate governance and
1B directorships from the Austral-ian Institute of Company
19 Directors in 2001.
20 Prior to joining Hydro One, I was the Vice President of
2l Planning and Mergers & Acquisj-tions at TransAlta from 2011 to
22 2015. Prior to that, I was Director of Operations Finance at
23 TransAlta in Calgary from 2007 to 207L, and was Country
10
Lopez, Di
Hydro One Limited
1
1
2
3
4
5
6
1
8
9
Financial
2001 .
a.
A.
prior to
Schedule 1
Controller for TransAIta in Australia, from 2002 Lo
Have you provided a copy of your r6sum6?
Yes, a copy of my r6sum6 that covers my experience
10
joining Hydro One is included as Exhibit No. 4,
Summary of Testimony
A. Wtrat is the pua?ose of your direct testimony in this
proceeding?
A. The purpose of my testimony is as follows:
o describe the Proposed Transaction;
discuss Hydro One's corporate structure and where
Avista Corporation ("Avista") will reside within
that structure;
discuss Hydro One's capital structure and
financial strength;
15
76
72
13
T4
t1
1B
79
20
2I
22
ZJ
24
11
26
a
a
a
a
a
describe
mechanics
Hydro One's financing for, and the
of, the Proposed Transaction;
a
describe Avista's
capital;
post-transaction access to
enumerate certain financial, structural, and
ring-fencing commitments that Hydro One and
Avista are proposing as part of their request for
approval of the Proposed Transacti-on; and
describe the Rate Credits included as part of the
Proposed Transaction.
Lopez, Di 2
Hydro One Limited
21 A table of contents of my testimony is as follows:
28
Description Page1
2
3
4
trJ
6
1
8
9
I. SUMMARY OE THE PROPOSED TRANSACT]ON
IT. POST-TRANSACTION CORPORATE STRUCTURE
II]. HYDRO ONE'S CURRENT CAPITAL STRUCTURE AND EINANC]AL
STRENGTH
IV. PROPOSED TRANSACT]ON FINANCING
V. AVISTA' S POST-CLOSING ACCESS TO CAPITAL
VT. RATE CREDITS
Are you sponsoring exhibits with your testimony?
Yes. Attached to my testimony are:
3
5
1
a
A
10
11
15
a'1
4 Schedule 1: Christopher Lopez72
13
l4
15
76
71
1B
a
a
Exhibit No
R6sum6
Exhibit No.
Transaction
Limited
4, Schedule 2: Pre-
Corporate Structure of
and Post-
Hydro One
a Exhibj-t No. 4, Schedule 3:
Annual Report and 2016 Annual
Hydro One's 2016
fnformation Form
23
t9
20 I ST'MMARY OF THE PROPOSED TRJA}ISACTION
2t A. Please descriSe Hydro One's proposed acquisition of
22 Avista.
24
A. The boards of directors for Hydro One and Avj-sta
unanimously approved an all-cash transaction pursuant to
which Avista shareholders will- receive $53 per conrmon share,
representing a 24% premium to Avista's c.l-osing share price of
$42.14 on July 18, 2077. Avista sharehol-ders wiIl receive
cash consideration totaling approximately $3.4 billion.
25
26
21
Lopez, Di
Hydro One Limited
2B
3
1
2
3
4
5
6
1
8
9
Upon completi-on of the transaction, based on pro forma
financial information at March 31, 201'1, foflowing the merger,
Hydro One's total assets will increase from approximately
C$25.4 bil-lion to approximately C$34 . 9 bill-ion. Together,
Hydro One
customers 1 and will operate across muJ-tiple North Amer j-can
jurisdictions, including Ontario, Washington, Idaho, Oregon,
Montana and Alaska.
Once acquired by Hydro One, Avista wil-I be operated much
as it j-s today, with the same management team, and it will-
continue to be headquartered in Spokane, Washington.
The terms of the transacti-on are set forth in the
Agreement and Plan of Merger (the "Merger Agreement") dated
as of JuIy 19, 2011 among Hydro One Limited, Olympus Holding
Corp., Olympus Corp. and Avista which has been provided as
Exhibit No. 3, Schedule 3 to Avista Thies'testimony and in
Appendix 2 to the Joint Application. Under the terms of the
Merger Agreement, Hydro One would acquire Avista through the
merger of Olympus Corp. with and into Avista, with Avista as
and Avista wiII serve more than two million end-use
10
11
t2
13
t4
15
t6
71
18
79
20 the surviving corporation and a wholly-owned, indirect
27 subsidj-ary of Hydro One. No material- changes are expected to
1 Includlng 1.3 mil-fion Hydro One efectric customers, 378,000 Avista
electric customers, and 342,000 Avista natural- gas customers.
Lopez, Di 4
Hydro One Limited
1
2
3
4
5
6
1
8
9
the operations, management, or corporate structure of Avista
and its subsidiaries.
II.POST-TRA}ISACTION CORPORATE STRUCTURE
A. P1ease ortrr1ain Hydro One, s post-transaction
corporate structure.
A. Upon completion of the transaction, Avista will be
an indirect, wholly-owned subsidiary of Hydro One as
ill-ustrated in the following organrzational chart, which is
included in Appendix 1 to the Joint Application and is Exhibit
No. 4, Schedule 2 to my testi-mony:
72 I].].ustration No. 1
14
15
I6
l1
18
19
20
21,
22
23
10
IT
Lopez, Di
Hydro One Limited
24
5
One
13 Limited (Ontario
Corporation)
Hydro One lnc.
2486267
Ontario lnc.
Hydro One
Networks lnc.
Hydro
Remote
Communities lnc.
Olympus Holding
Corp. (Delaware
Olympus 1 LLC
(Delaware Limited
Company)
2 LLC
(Delaware Limited
Avista Corporation
(Washington
Avista Corporation
Subsidiaries
Hydro One
Telecom lnc.
(Ontario
(Delaware Limited
Equity LLC
1
2
3
q
5
6
7
U
9
A. IVhy is Hydro One omploying this tlpe of structure?
A. The structure has been set up to provide segregation
between the rate-regulated business in the United States and
the Ontario rate-regulated business, whj-ch j-s held by Hydro
One fnc. Subsequent to the transacti-on, Avista will be a
wholIy-owned subsidiary of Olympus Equity LLC, which is a
bankruptcy-remote entity with no debt. Together wj-th the
ring-fencing provj-sions described later in my testimony, this
structure insufates Avista and its customers from any
other10potential financial weakness at Olympus Equity
entities up the chain from Olympus Equity LLC.
A. T{hy is Hydro One creating three
subsidiaries between Avista / Olympus Equity
LLC or
11
T2 intermediate
13 LLC and the
74 Canadian Sub?
The entities
and to manage
wiII this
15 A are created for Canadj-an tax planning
76 purposes intercorporate funds flows.
71 a corporate structure result in any
18 additional costs that wiJ.J. be recovered through Avista
19 ratepayers?
20 A. No. This corporate structure will not result in
any additional costs to be recovered from Avista ratepayers.
9. Have Hydro One and Avista offered ring-fencing
conmritments to ensure that Avista ratepayers wiLl be protected
2t
22
Lopez, Di
Hydro One Limited
6
23
1 from any transactions that will occur in relation to these
2
3
4
trJ
6
1
9
subsidiaries?
A. Yes
explai-ned in
LLC will not
These ring-fencing commitments will be
more detail l-ater in my testimony. Olympus 2
operate or own any business and will limit its
10
activities to investing in and attending to its shareholdings
in Olympus Equity LLC, which, in turn, wil-I not operate or
own any business and wiII Iimit its activities to investing
in and attending to its sharehol-dings in Avista. Eurthermore,
there wil-I be no cross-subsidization of unregulated
activities by Avista customers, and Avista will- provide access
to books and records required to verify or examine
transactions with Avista or that result in costs that may be
11
t2
13
74 allocable to Avista
15
16 III.HYDRO ONE' S CT'RRENT CAPITAI STRUCTURE A}ID FINA}ICIAL
71 STRENGTH
18 A. Does Hydro One have financial statements that are
79 simiJ.ar to a 10K or 10Q in the United States?
20 A. Yes. Exhibit No. 4, Schedule 3 to my testimony
27 contains Hydro One's 2016 Annual Report and 2016 Annual
22 Information Eorm filed with Canadj-an Securj-ties regulators.
23 These are also contained in Appendix 6 to the Joint
24 Application.
Lopez, Di 1
Hydro One Limited
1
2
3
q
5
6
1
B
9
A. Please describe Hydro One's current capital
structure.
Hydro One's balance
a capital structure
equity.
A. Tabl-e 1 below shows thatr oD a consolidated basis,
sheet as at December 31, 2016, reflecLs
that is approximately 53% debt and 41%
Teble r.
10
As at DeEnberil,ZO!S:
torg-termdElfr paptle uithh om yerr
Shrt-Erm mEsFal@lE
torE-term dEtt
t-ess: dl utdcdt eqriralents
Tots: oett
Scas foftotdc{itJ
502
4@
r.op7E
{50}
s39611,O99
11 rotel shrye lmHers' fqdty lop17 4796
72 Totel capital 21,116
13
1,4 A. To what extent has Hydro One at[r].ey6d long-ter:n debt
15 in its capital structure?
1,6 A. As at December 31, 201,6, of the 533 debt j-n Hydro
t7 One's capital structure, approximately 51% is long-term debt,
1B which is defined as debt j-nstruments with maturity of t2
1,9 months or greater.
20 a. Given its bal.ance sheet, how would you ctraracterize
2l the financial strength of Hydro One?
22 A. As shown in the financial statements contained in
23 my Exhibit No. 4, Schedule 3, Hydro One maintains a strong
24 balance sheet providing it with access to capital. This is
Lopez, Di B
Hydro One Limited
1
2
3
4
q
6
1
B
9
recognized by the rating agencies, as reffected in the strong
ratings of Hydro One
A. What are the credit ratings that arc! curently
assigned to Hydro One by the rnajor credit rating agencies,
and hotl did the ratings agencies respond to announcement of
the transaction?
A. On July 79, 2071, following the announcement of
the transaction, Standard and Poors ("S&P") affirmed an 'A'
long-term corporate credit rating for Hydro One and revised
l-0 the outlook to Negative from Stable. It mentioned the
11 negative outlook on Hydro One reflects its view that the
L2 Avista acquisition signals a shift in Hydro One's business
13 strategy, which will align the company with its global peers.
74 On July 79, 2071, following the announcement of the
15 transaction, Moody's affirmed the ratings of Hydro One Inc.'s:
16 (i) senior unsecured regular bonds (A3); (ii) senior unsecured
L] medium-note program ( (P)A3); and (iii) senj-or unsecured
18 commercial paper (P-2). At the same time, Moody's changed
79 the outl-ook on Hydro One fnc. to Negative from Stable. It
20 mentioned that the negative outl-ook on Hydro One Inc. ref .l-ects
27 its view that the probability of extraordinary support from
22 the Province of Ontario ("Province") will be reduced following
23 the transaction.
Lopez, Di
Hydro One Limited
9
1
2
3
4
5
6
7
U
9
The rating agency DBRS (originally known as Dominion Bond
Rating) rates Hydro One Inc.'s long-term debt at A (High) and
its short-term debt at R1 (Iow). It expressed its view that,
should the merger be financed as contemplated in the
announcement, it will have no impact on Hydro One Inc.'s
credit profile.
A. How much equity does the Province own in Hydro One?
A. As of June 30, 20L7, the Province owns approximately
49.9% of Hydro One's common shares.
A. Please errplain the J.aws that govern the level of
equity that the Province must maintain in Hydro One.
A. The Province has a preemptive rj-ght to subscribe to
up to 452 of any new equity. If the Province's ownership in
Hydro One drops below 40%, then the Province has an obli-gatj-on
to increase ownership to meet or exceed 402. No other
shareholder may own more than 10% of Hydro One, so Hydro One
is essentially take-over proof.
A. How do the provincial laws requiring the Government
of Ontario to maintain a 40t equity interest in Hydro One
impact Hydro One's abiJ.ity to issue additional. equity?
A. Under the Electricity Act, 7998, i-f as a resul-t of
the issuance of additional- voting securities by Hydro One
Limited, the Province of Ontario owns less than 40q6 of the
outstanding number of voting securities of Hydro One Limited,
Lopez, Di
Hydro One
10
Limited
10
11
t2
13
74
15
t6
71
1B
t9
20
2l
22
23
24
1 the Province is required to take steps to increase its
2
3
4
5
6
1
B
9
ownership to not Iess than 40% of the outstanding voting
securities. In order to assj-st the Province in meeting its
ownership obligations under the Electricity Act, 7998, under
the governance agreement with the Province, Hydro One has
granted the Province a preemptive right to subscribe for and
purchase up to 452 of any proposed issuance by Hydro One
Limited of voting securities or securities that are
convertible or exchangeabl-e into voting securities (other
than certain specified excluded issuances). Any offered
securities not subscribed for and purchased by the Province
pursuant to its preemptive right may be issued to any other
person pursuant to the proposed offering.
Hydro One is permitted to issue voting securities or
securities that are convertible into or exchangeabl-e for
voting securities at any time, provided that j-t must first
gi-ve the Province the opportunity to subscribe for the number
of securities to which it is entitled to pursuant to its
preemptive right before offering them to others.
A. Does the fact that Hydro One is onJ.y traded on the
Toronto Stock Exchangre iryact its access to capital?
A. Hydro One Limited's listing on the Toronto Stock
Exchange (TSX) requires it to comply with applicab1e TSX rules
regarding additj-onal listings in the event that the company
Lopez, Di
Hydro One
11
Limited
10
11
t2
13
T4
15
76
71
1B
19
20
27
ZZ
23
24
1
2
3
4
5
6
7
B
9
proposes to issue additional- common shares in the future. Any
such listing wiII require prior approval of the TSX and,
depending on the size of the issuance or other factors, the
TSX coufd reguire shareholder approval of the issuance as a
condition of its approval. However, listing on the TSX in
and of itself does not limit the company's access to equi-ty.
Hydro One Limited may in the future determine that listing
its coflrmon shares on a second exchange would increase its
access to equity. Under the governance agreement with the
Province, Hydro One Limited is required to maintain a listing
of its common shares on the Toronto Stock Exchange, but it is
not prevented from listing on any other stock exchange in the
13 future (so long as it maintains its TSX listing
(*oEB")
as weff)
t4 A. Is the Ontario Electric Board required to
15 approve Hydro One's proposals to issue more equity?
A. No, the OEB has no jurisdiction to review and
approve issuance of new equity by Hydro One.
A. Does the OEB have jurisdiction to review and approve
Hydro One's acquisition of Avista?
A. No, the OEB has no jurisdictj-on to review and
approve Hydro One's acquisition of Avista.
A. Iilhat style of rate regulation does OEB use to
regrulate Hydro One?
t6
t1
1B
19
10
11
t2
20
27
22
Lopez, Di
Hydro One
72
Limited
23
1
aL
3
4
q
6
1
8
9
A. The OEB's scheme for regulatj-ng Hydro One Networks
Inc. is a hybrid of cost-based rates with an al-Iowed equity
return and performance-based regulation.
PROPOSED TRJNISACTION EINAIICING
A. Please describe the steps that will be taken to
effectuate the transaction.
A. Olympus Holding Corp., a Delaware Corporation, and
an indirect wholly-owned subsidiary of Hydro One, proposes to
acquire aIl
wholIy-owned
of the shares of Avista through a merger of a
indirect subsidiary,
IV
10
11
t2
13
t4
15
76
71
18
79
20
27
22
After the merger,
and Olympus Corp.
A. P1ease
Hydro One will be
Olympus Corp., and Avista.
the survj-ving corporationAvista wil-I be
Hydro One is planning to issue the
dollars totaling US$2.6 biflion
will cease to exist.
describe how the acquisition of Avista by
financed
with a convertibl-e debenture instaflment receipts
financing
A. Hydro One is committed to maintaining an
investment-grade balance sheet through and after completion
of the acquisition. Hydro One plans to fj-nance this al-I-cash
transactj-on using a mix of long-, medium- and short-term debt
together
offering.
in U.S.
debt
(and issued
23 convertible debenture installment receipts in Canada of
24 C$1.54 bill-ion or approximately US$1.2 billion). We expect
Lopez, Di
Hydro One
1?
Limited
1
2
3
4
trJ
6
1
B
9
t4
the convertlbfe debenture to be fulIy converted to equity
around the time of the closing of the transaction. The
planned US$ debt financing contemplates a combj-nation of 5-
year, 10-year and 30-year US$ denominated notes.
A. Will Avista pledge any assets or grrarantee any of
these transaetions for the pul?ose of the acquisition of
Avista by Hydro One?
A. No. Avista has not and will- not pledge any assets
or guarantee any of the transactions necessary for this
acquisition.
A. Ifltrat is Hydro One's current estimate of the excess
of the purchase price over the value of Avista as of the
expected closing' date?
A. The boards of directors for Hydro One and Avista
15 approved an
shareholders
all--cash transaction through which Avista
t6 will receive $53 per common share, representing
71 a 24% premium to the market value of Avista's shares of $42.14
18 on July 18, 2077. The estimated excess of the purchase
19 price over the book vafue of Avista's net assets is
20 approximately $1.7 billion as of June 30, 2071.
2l A. In and of itself, as a result of the cJ.osing of this
22 transaction, will Avista's financiaJ. statements change?
23 A. No. Avista's U.S. financial statements, prepared
24 using generally accepted accounting principles (*GAAP"), wiII
10
11
72
13
Lopez,
Hydro
Di
One
I4
Limited
1
2
3
4
5
6
1
9
not be impacted by the closing of this transaction. Avista
wil-I maj-ntain its own accounting system, separate from Hydro
One's accounting system. The acqui-sition wil-I be accounted
for in accordance with GAAP. The premium paid by Hydro One
for Avista wiII be recorded in the accounts of the acquisition
company and not in the utility accounts of Avista.
As indicated in the merger commitments described be1ow,
Hydro One and Avista wiIl not propose to recover the
acquisition premium in Avista's regulated retail rates.
A. WilJ. the proposed transaetion have any irpact on
11 the availability of Avista's books and records?
t2 A. No. AIl Avista financial books and records will
13 continue to be available to the Commission. As indicated by
14 the commitments described be1ow, Olympus Holding Corp. and
to all books of15 Avista will- provide the Commission access
10
L6
l1
1B
account, as well- as al-l documents, data, and records of their
affiliated interests, which pertain to transactions between
Avista and its af f il-iated i-nterests.
19
20 AVISEA' S POST-CIJOSING ACCESS TO CAPITAI'
21 9. How will the acquisition by Hydro One affect
22 Avista's access to capital?
A. We believe Avista's access to capital wil-1 be
enhanced in light of Hydro One's strong balance sheet. On JuIy
v
Lopez, Di
Hydro One
15
Limited
24
7 19, 2011, S&P affirmed j-ts BBB' issuer rating on Avista and
2 revised the outlook to positive from stable. S&P noted that
3 the positive outl-ook reflects the potential- for higher ratings
4 on Avista i-f the acquisition j-s completed as proposed. Higher
5 ratings would provide Avista with enhanced access to debt
6 capital.
1 Q. IViII Avista maintain its own capital structure and,
B if sor how will that affect its cost of capital for
9 ratemaking?
10 A. Yes, Avista wiII maintain its own balance sheet.
11 We have committed that Avista's cost of capital for ratemaking
L2 purposes will be no greater than it woul-d have been absent
13 this transaction.
L4 9. WilI Avista maintain separate credit ratings?
15 A. Yes, Hydro One and Avista wilf seek a separate
16 rating for Avista from at least one nationally recognized
71 statistj-cal rating agency ("Rating Agency").
18 A. Please describe opportunities for Hydro One and
19 Avista to share certain costs.
20 A. Initially, Hydro One and Avista do not expect there
21- to be significant opportunities for cost sharing. Over time,
22 however, Hydro One and Avista will look for opportunities to
23 share certain costs such as IT investments. Eurther, Hydro
24 One and Avista wilf benefit from increased purchasing power.
Lopez, Di
Hydro One
l6
Limited
1 Q. Does Hydro One make any cornmitment with respect to
2 }row corlporate costs will be alJ.ocated?
3 A. Yes. Comitment 23 provides that Avista wil-I file
4 cost al-Iocation methodologies used to allocate to Avista any
5 cost related to Olympus Holding Corp. or its other
6 subsidiaries and that Avista will bear the burden of proof in
7 any general rate case that any corporate and affiliate cost
B al-location methodology it proposes is reasonab.l-e f or
9 ratemaki-ng purposes. AIso, Avista witness Ehrbar sponsors as
10 Exhibit No. J, Schedule 3, the "Protocol for Direct Assignment.
11 of Costs Between Avista and Hydro One".
1-2 Avista wil-I notify the Commission of any change in
13 corporate structure that affects Avista's corporate and
74 affiliate cost allocation methodologies and wj-ll- propose
15 revisions to such cost alfocation methodologies to
!6 accommodate such changes.
Ll A. Do the iloint AppJ.icants make any comaitnent with
18 respect to Conmission auditing of such allocations?
19 A. Yes, Olympus Holding Corp. and Avista commit to
20 provide audit rights with respect to the documents supporting
2I any costs that may be allocable to Avista. Please refer to
22 "Access to and Maintenance of Books and Records" (Comnitment
23 No. 22) in Appendix B (Master Lj-st of Commitments) to the
Lopez, Di
Hydro One
71
Limited
24 Joint Appli-cation
1
2
3
4
5
6
1
B
9
Ring- Eencing lvIergelCornmi tments
A. Please describe the \\ring-fencing" protections the
Joint Applicants wiLL eqrloy to isolate Avista from Hydro One
and Hydro One's other subsidiaries.
A. Hydro One commits
protections to isolate
other subsi-diaries.
to the following ring-fenclng
from Hydro One and Hydro One's
The following descriptions are merely
summaries of these commitments. The complete text of these
ring-fencing commitments is set forth in Appendix B to the
Joint Applicatj-on and in Exhibit No.
by Avista witness Thies.
o Ofympus Equity LLC: Comnitnent
3, Schedule 4 sponsored
42 provides that Hydro
Avista
10
11
t2
13
T4
15
76
l1
1B
t9
20
27 a
One will j-nclude an entity, designated as "Olympus Equity
LLC," between Avista and Olympus 2 LLC. Following closing
of the Proposed Transaction, all of the coflrmon stock of
Avista wifl be owned by Olympus Equity LLC, whj-ch is a
Delaware l-imited liability company. Olympus Equity LLC
is a wholly-owned subsidiary of Olympus 2 LLC. Olympus
Equity LLC is a bankruptcy-remote special purpose
entity, and will not have debt.
Independent Directors and l4anagers: Cormitnent 40
22 provides that at least one of the nine members of the
23 board of directors of Avista will be an Independent
Director who j-s not a member, stockhoJ-der, director
Lopez, Di
Hydro One
1B
Limited
24
1
2
3
4
q
6
1
o
9
(except as an independent director of Avista or Olympus
Equity LLC), officer, or employee of Hydro One or its
affiliates. At least one of the members of the board of
directors of Olympus Equity LLC will be an independent
director who is not a member, stockholder, director
(except as an independent director of O1y:npus Equity LLC
or Avista), officer, or employee of Hydro One or its
affilj-ates. The same individual may serve as an
independent director of both Avista and Olympus Equity
LLC.
a Bankruptcy Protections :Conmritment 40 provides that the
10
11
72
13
74
15
t6
l1
18
79
20
2t
ZZ
23
a
organizational documents for Avista wilf not permit
Avista, without the consent of a two-thirds majority of
all its directors, including the affirmative vote of the
independent director (or if at that time Avista has more
than one independent director, the affirmative vote of
at Ieast one of Avista's independent directors), to
consent to the institution of bankruptcy proceedings or
the j-nclusion of Avista in bankruptcy proceedings.
Non-Consolidation Opinion: Comitnent 41 provides that
within ninety (90) days of the Proposed Transaction
cJ-osing, Avista and Olympus Holding Corp. wil-I f il-e a
non-consol-idation opinion with the Commlssion which
concludes, subject to customary assumptions and
Lopez, Di
Hydro One
19
Limi-ted
24
1
2
3
4
trJ
6
1
9
exceptions, that the ring-fencing provisions are
sufficient that a bankruptcy court would not order the
substantive consolidation of the assets and liabilities
of Avista with those of Olympus Holding Corp. or its
affiliates or subsidiaries (other than Avista and its
subsidiaries).
oS rate Books and Records:Conunitment 21 provides that
a
Avista will maintain separate books and records.
Restriction on Pl-edge of Utifity Assets: Couunitment 43
provides that Avista wiff agree to prohibitions against
Ioans or pledges of utiJ-ity assets to Hydro One, OJ-ympus
Holding Corp., or any of their subsidiaries or
affiliates, without Commissj-on approval.
11
72
13
74 o HoLd Harmless Notice to Lenders Restriction on
15 Acquisitions and Dispositjons: Conrnitment 44 includes
10
76
l1
1B
t9
20
21
22
23
a number of provisions designed to ensure Avista's
customers are held harmless from certain events and that
such events are subject to regulatory supervision:
o Avista customers must be held harmless from
any business and financial risk exposures
associated with Olympus Holding Corp., Hydro
One, and Hydro One's other affiliates.
. Prospective lenders must receive a notice
explainj-ng the ring-fencing provisions.24
Lopez, Di 20
Hydro One Limj-ted
1
2
3
4
5
6
1
B
9
a
a
Avista commits that Avista's regulated utili-ty
customers wil-I be held harmless from the
liabil-ities of any unregulated activity of
Avista or Hydro One and its affiliates. In any
proceeding before the Commission involving
rates of Avista, the fair rate of return for
Avista wil-I be determined without regard to
any adverse consequences that are demonstrated
to be attributable to unregulated activities.
Measures providing for separate financial- and
accounting treatment wilI be established for
each unregulated activity.
Olympus Holding Corp. and Avista wil-l notify
the Commission subsequent to Olympus Holding
Corp.'s board approval and as soon as
practicable following any public announcement
of: (1) any acquisition by Olympus Holding
Corp. of a regulated or unregulated business
that is equival-ent to five (5) percent or more
of the capj-talization of Avlstai or (2) the
change in effective control or acquisitj-on of
any material part of Avista by any other firm,
whether by merger, combination, transfer of
stock or assets.
Lopez, Di
Hydro One
2T
Limited
10
11
)-z
13
t4
15
76
t1
18
19
20
2t
22
23
24
1
2
3
4
5
6
1
B
9
a
a
Neither Avista nor Olympus Holding Corp. wil-I
assert in any future proceedings that, by
virtue of the Proposed Transaction and the
resulting corporate structure, the Commission
is without jurisdictj-on over any transaction
that results j-n a change of control of Avista.
Within sixty (60) days following the notice
required by this subsection (c) (ii) (2), Avista
and Olympus Holding Corp. or its subsidiaries,
as appropriate, will seek Commission approval
of any sale or transfer of any material- part
of Avista. The term "material part of Avista"
means any safe or transfer of stock
representing ten percent (10%) or more of the
equity ownership of Avista.
If and when any subsidiary of Avista becomes
a subsidiary of Hydro One or one of its
subsidiarj-es other than Avista, AvJ-sta wilI so
advise the Commission within thirty (30) days
and will- submi-t to the Commission a written
document setting forth Avista's proposed
corporate and affifiate cost alfocation
methodologies.
Lopez,
Hydro
Di 22
One Limited
10
11
t2
13
74
15
t6
l1
1B
t9
20
27
22
23
1
2
3
4
5
6
7
B
9
a Corporate Structure Cost ALl-ocation: Conunitment 23
establishes that Avista will provide cost alfocation
methodologies used to all-ocate to Avista any costs
related to Olympus Holding Corp. or its other
subsj-diaries, and commits that there will- be no cross-
subsidization by Avista customers of unregulated
activities.
Avista will- notify the Commission of any change in
corporate structure that affects Avista's corporate and
10 affiliate cost alfocation
11 propose revisions to such
72 to accommodate such changes.
13 a OTympus 2 LLC and OTympus Equity LLC Sub-entities:
t4 Consnitment 45 provides that Olympus 2 LLC wil-l- not
operaLe or own any business and will- limit its activities
to i-nvesting in and attending to its shareholdings in
Olympus Equity LLC, which, in turn, will not operate or
own any business and will limit its activities to
investing in and attending to its sharehol-dings in
Avista.
Access to and Maintenance of Books and Recordsz
1trJ.J
76
t1
1B
20
methodologies. Avista wilI
cost allocation methodologies
I9
2t a
))Corunitment 22 provides that Olympus Holding
23 its subsidiaries, including Avista,
reasonable access to Avista's books and
wiII
Corp. and
provide
records; access
Lopez, Di
Hydro One
23
Limited
24
1
2
3
4
5
6
'7
8
9
to financial information and fi-1ings; audit rights with
respect to the documents supporting any costs that may
be allocabfe to Avista,' and access to Avj-sta's board
minutes, audit reports, and information provided to
credit rati-ng agencies pertaining to Avista.
a Utility-Leve7 Debt,Preferred Stock and Ratings:
Conmrit-ment 34 provides that Avista will maintain
separate debt and preferred stock, if dny, to support
its utility operations.
a Ratemaking Cost of Debt and EquitV:10
of debt or equity capital as compared
Cornmitment 24
for a higher cost
to what Avista's
cost of debt or equity capital would have been absent
Hydro One's ownership. Eor future ratemaking purposes:
(a) Determination of Avista's debt costs wiIl be no
higher than such costs would have been assuming Avista's
credj-t ratings by at l-east one industry recognized rating
agency, including, but not limited to, S&P, Moody's,
Fitch or Morni-ngstar, in effect on the day before the
Proposed Transaction cl-oses and applying those credit
ratings to then-current debt, unless Avista proves that
a fower credit rating is caused by circumstances or
developments not the result of financial risks or other
characteristics of the Proposed Transaction; (b) Avista
11
t2
13
I4
15
t6
l1
1B
19
20
27
22
provides that Avista wil-I not advocate
Lopez,
Hydro
Di
One
24
Limited
24
1
aZ
3
4
trJ
6
7
I
9
bears the burden to prove prudent in a future general
rate case any pre-payment premium or increased cost of
debt associated with existing Avista debt retired,
repaid, or replaced as a part of the Proposed
Transaction; and (c) Determination of the allowed return
on equity in future general rate cases wilI include
sefection and use of one or more proxy group (s) of
companies engaged in businesses substantially si-mil-ar to
Avista, without any Iimitation related to Avista's
ownership structure.
e: Cormiturent 25 provides that
at all times following the closing of the Proposed
Transaction, Avj-sta wil-l have a common equity ratio of
not less than 44 percent (as calculated for ratemaking
purposes) except to the extent the Commission
establishes a Iower equity ratio for Avista for
ratemaking purposes.
10
11
l2
13
74
15
L6
22
23
a
l1
18 o Restrictions on Upward Dividends and Distributions:
79 Conunitment 35 imposes the following restrictions on
Avista's upward dividends and distributions:
o ff either (i) Avista's corporate credit/issuer
rating as determined by at l-east one industry
recognized rating agency, including, but not
limited to, S&P, Moody's, Eitch, or
20
27
Lopez, Di
Hydro One
25
Limited
24
1
2
3
4
5
6
1
I
9
Morningstar is investment grade or (ii) the
ratio of Avista's EBITDA to Avista's interest
expense is greater
distributions from
than or equal to 3.0, then
Avista to Olympus Equity
LLC shall not be limited
equity ratio is equal to
so long as Avista's
or greater than 44
of such Avistadate
giving effect to such
except to the extent the
Commission establj-shes a lower equity ratio
for ratemaking purposes. Both the EBITDA and
equity ratio shall be calculated on the same
basi-s that such cafculations woul-d be made for
ratemaking purposes for regulated utility
operations.
o Under any other circumstances, di-stributions
percent on the
distribution after
Avista distribution,
10
11
72
13
74
15
1,6
71 from Avista to OJ-ympus Equity LLC are allowed
Commission approval-.
Cormnitment 35 provides that
1B only with prior
79 . Continued Credit Ratings:
20 each of Hydro One and Avista will continue to be rated
by at l-east one nationally recognized statisticaf
"Rating Agency. " Hydro One and Avista will use
reasonabl-e best efforts to obtain and maintain a separate
credit rating for Avista from at least one Rating Agency
2t
22
23
Lopez, Di
Hydro One
26
Limited
Z4
1
2
3
4
tr
6
1
9
within the ninety (90)
Proposed Transaction.
to obtain or maintain
days following the cJ-osing of the
If Hydro One and Avista are unab1e
the separate rat j-ng f or Avista,
they wilf
the basis
separate
make a filing with the Commj-ssion explaini-ng
for their failure to obtain or maintain such
credit rating for Avista, and parties to this
proceeding will have an opportunity to participate and
propose additional commitments .
a No Amendment of Ring Fencinq Provisions: Conmritment 45
provides that Olympus Holding Corp. and Avj-sta commj-t
that no material amendments, rev-isions or modifications
will- be made to the ring-fencing provisions as specified
in these regulatory commitments without prior Commission
approval pursuant to a limited re-opener for the sol-e
purpose of addressing the ring-fencing provisions.
10
11
T2
13
t4
15
16
L1 VI R]ATE CREDITS
18 A. Will Avista provide Rate Credits to customers as
19 part of the Proposed Iransaction?
20 A. Yes. Customers will see immediate financial-
21 benefits in the form of proposed retail Rate Credj-ts ("Rate
22 Credits") beginning at the cfose of the Proposed Transactj-on.
23 Through Conunitment 18, Avista and Hydro One are proposing to
24 ffow through to Avista's retail customers in Idaho,
Lopez,
Hydro
Di
One
a1LI
Limited
1
2
3
4
5
6
1
B
9
Washington, and Oregon a Rate Credit of $31.5 million over a
10-year period, beginning at the time the merger closes. The
Rate Credit consists of two components, and reflects an
j-ncreased leveI of savings in years 6-10 as il-l-ustrated in
the table bel-ow.
Two-Step Rate Credit Proposal
Annual Crcdit
Years 1-5
Annual Credit
Yean 6-10
TotalCredit
Total Credit
52.65 Million $3.65 Million $31.50 Million
10 Offietable Credit $1.70 Million $2.70 Million $22.00 Million
11
t2 Comnitment 18 further provides that the Total Rat.e Credit
13 to customers for the first five years following the closing
and the credit would i-ncrease74 would be $2.65 million per year,
15 to $3.65 million per year for the last five years of the 10-
Rate Credit would16 year period. A portion of the annual total
18
be offsetable, as indicated in the table above. During the
10-year period the financiaf benefits will- be flowed through
to customers either through the separate Rate Credit described
above or through a reduction to the underlying cost of service
as these benefits are reflected in the test period numbers
used for ratemaking. At the time of the cl-ose, the $2.65
million benefit wiII be provided to customers through a
separate Rate Credit, ds long as the reduction j-n costs has
19
20
2t
22
23
71
Lopez, Di
Hydro One
2B
Limited
24
1
aZ
3
4
tr.
6
1
B
9
not already been reflected in base retail- rates for Avista's
customers.
Comitnent 18 also provides that to the extent Avj-sta
demonstrates j-n a future rate proceeding that cost savings,
or benefits, directly rel-ated to the Proposed Transaction are
already being flowed through to customers through base retail
rates, the separate Rate Credit to customers would be reduced
by an amount up to the offsetable Rate Credit amount. The
porti-on of the total Rate Credit that is not offsetable
effectively represents acceptance by Hydro One of a lower rate
of return during the 1O-year period.
Comitnent 18 finally provides that the $31.5 million
represents the "fJ-oor" of benefits that will be flowed through
to Avista's customers, either through the Rate Credit or
through benefits otherwise included in base retail rates. To
the extent the identifiable benefits exceed the annual
offsetabl-e Rate Credit amounts, these additional benefits
will- be flowed through to customers in base retail rates in
general rate cases as they occur.
Credits for years 6-10 wil-1 provide
The increase in total Rate
ti-me for Avista
10
11
L2
13
l4
15
t6
71
1B
t9
20
2I One to identify and capture over time an increased
and Hydro
l-evel- of
22 benefits, directly related to the Proposed Transaction, that
23 can be flowed through to customers. Avista and Hydro One
24 believe additional efficiencies (benefits) will- be realized
Lopez, Di
Hydro One
Z9
Limited
1
2
3
4
5
6
1
B
9
over time from the sharing
innovation between the two
of best practices, technology and
companies. It wilf take time,
however, to identify and capture these benefits. The level
of annual net cost savings (and/or net benefits) wilI be
tracked and reported on an annual basis, and compared against
the offsetabl-e IeveI of savings. Mr. Thies provides additional
detail-s rel-ated to the proposed Rate Credit.
A. Does this conclude your direct testimony?
A. Yes, it does.
Lopez, Di
Hydro One
30
Limited