20170914Morris Direct.pdf

ON BEIIAI,E OE AVISTA CORPORATION
DAVID J. MEYER
VICE PRES]DENT AND CHIEE COUNSEL FOR
REGULATORY & GOVERNMENTAL AEEA]RS
P.O. BOX 3721
74LI EAST MISSION AVENUE
SPOKANE, VIASHTNGTON 99220-3121
TELEPHoNE: [phone]
EACSIMILE: [phone]
DAVI D. MEYERGAVISTACORP . COM
ON BEIIALE OE HYDRO ONE IJIMITED
ELIZABETH THOMAS, PARTNER
KARI VANDER STOEP, PARTNER
K&L GATES LLP
925 EOURTH AVENUE, SUITE 29OO
SEATTLE, WA 981014-1158
TELEPHONE: [phone]
EACSIMTLE: [phone]
L]Z . THOMASGKLGATES. COM
KART . VANDERSTOE P G KLGATES . COM
IN THE MATTER OF THE JO]NT
APPL]CATION OF HYDRO ONE L]M]TED
(ACTING THROUGH ITS TNDIRECT
SUBSIDIARY, OLYMPUS EQUITY LLC)
AND
AV]STA CORPORATION
EOR AN ORDER AUTHOR]ZING PROPOSED
TRANSACTION
FOR AVISTA CORPORATION
(ELECTRIC AND NATURAL GAS)
BEFORE THE IDAHO PT'BLTC (ITILITIES COMMTSSION
CASE NO
CASE NO
AVU-E-17-_Q_?
AVU-G-17-05
D]RECT TESTIMONY
OF
SCOTT L. MORRIS
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I. INTRODUCTION
A. Please state your nane, eq>Ioyer and business
address.
A. My name is Scott L. Morrj-s and f am employed as
the Chairman of the Board, President and Chief Executive
Officer of Avista Corporation (Company or Avista), at 147L
East Missj-on Avenue, Spokane, Washington.
A. DIouId you pJ.ease briefly deseribe your educational
background and professional experience?
A. Yes. I am a graduate of Gonzaga University with
a Bachelors degree and a Masters degree in organi-zational
Ieadership. f have also attended the Kidder Peabody Schoo.l-
of Einancial Management.
I joined the Company in 1981 and have served in a number
of roles incl-uding customer service manager. In 1991, I was
appointed general manager for Avista Util-ities' Oregon and
Cal-ifornia natural gas utility business. I was appointed
President and General Manager of Avista Utilities, an
operating division of Avista Corporation, in August 2000.
In February 2003, I was appointed Senior Vice-President of
Avista Corporation, and in May 2006, I was appointed as
President and Chief Operating Officer. Effective January 1,
2008, I assumed the position of Chairman of the Board,
President, and Chief Executive Offj-cer.
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I am a member of the Edison Electric Institute board of
directors, a member of the American Gas Association board of
directors, a member of the Washi-ngton Roundtable, and I al-so
serve on the board of trustees of Greater Spokane
Incorporated. f am also on the board of directors of the
Federaf Reserve Bank of San Erancisco, Seattle Branch, and
Gonzaga University board of trustees. I currently serve as
Chair for both organizations.
A. Please provide an overview of your testimony.
A. I wil] provide an overview of the Proposed
Transaction through which, if approved by this Commission,
Avista would become a who11y-owned indirect subsidiary of
Hydro One. My testimony wil-l- also provide a brief
introduction to the organization and operations of Hydro
One. I will explain that Avista's decision to merge with
Hydro One was driven by the unique partnership that will-
allow Avista and its customers to benefit from being part of
a larger organization (the benefits of scale), whil-e at the
same time preserving Iocal control of Avista and the
preservation of Avista's culture and way of doing busj-ness.
Agreements to preserve Avista, essentially as it is today,
for the long-term are memorialized in the Merger Agreement.
f wil-I summarize how the Proposed Transaction provides
benefits to what I have often referred to as the four legs
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of the stool: customers, employees, shareholders, and the
communities Avista serves, and provj-de an overview of the
numerous commitments Avista and Hydro One have proposed as
part of our request for approval of the Proposed Transaction.
I wilI also bri-efly summarize Avista and Hydro One's proposal
to provide immediate financial benefits to Avista's
customers at the closing of the Proposed Transaction.
Finally, I wil-l- explain our request that the Commission
schedule a review of the Proposed Transaction in a time frame
that would aflow a decision by the Commission on or before
August 14, 20lB .
A table of contents for my testimony is as follows:
Description Page
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I.
II.
Introduction
Joint Applicants' Proposal and
Request of the Commission
Joint Applicants' Witnesses Sponsoring
Testimony
Descriptj-on of the Proposed Transaction
Avista's Reasons for the
Proposed Transaction
Hydro One's Reasons for the
Proposed Transaction
Overview of Hydro One
Overview of Avista
Post-Cfosing Corporate Structure
Post-Closing Governance, Management and
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VIII.
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Operations of Avista
Benefits to Customers from the
Transaction
Satisfacti-on of the Public Interest
and Joint Applicants' Commitments
Required Approvals
Conclusion
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A. Are you sponsoring: exhibits with your direct
10 testimony?
11 A. Yes. Exhibit I, Schedule 1 includes a bar chart
72 that is indicative of investor owned utilities in North
13 America, ranked in size from Iargest to small-est, showing
L4 Avista as one of the smal-Iest investor-owned utilities in
15 North America. Exhibit l, Schedule 2 includes a diagram
L6 showing Avista's current corporate structure. Exhibit !,
1,1 Schedul-e 3 incl-udes a map of Avista's electric and natural
18 gas service area in the Pacific Northwest.
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II. iIOTNT APPLTCAIITS' PROPOSAT AIID REQTEST
OE THE COMMISISON
A. Please identify the dloint Applicants in this
fiJ-ing.
A. Joint Applicants include Avista Corporation, doing
business as Avista Utilities (hereinafter referred to as
"Avista"), and Hydro One Limited (hereinafter referred to as
"Hydro One"), acting through Olympus Equity LLC, an
indirect, wholJ-y-owned subsidiary. Avista and Hydro One
wiIl be referred to as Joint Applicants.
Avj-sta is an investor-owned utitity providing electric
generation, transmission, and distribution service to
approximately 378,000 retail customers in Idaho, Washington
and Montana, and the distribution of naturaf gas to
approximately 342t000 retaif customers in Idaho, Washington
and Oregon. Alaska Electric Light and Power ("AEL&P"), a
wholly-owned indirect subsidiary of Avista, also provides
electric generation, transmission and distribution service
to approximately 1'l ,000 retail customers in the City and
Borougth of Juneau, Alaska.
its subsidiary
transmission
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22 Hydro One, through
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companies, is an
and di-stribution
utility headquartered in Toronto, Ontario,
One provides electric distribution servj-ce
Canada. Hydro
to approximately
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1.3 milfion retail end-use customers, as weII as electric
transmission servj-ce to many Iocal distribution companies
and Iarge industrial- customers. Approximately 98% of Hydro
One's business consists of regulated utility operations,
which is regulated by the Ontarj-o Energy Board. Additional-
detaj-Is related to both Avista and Hydro One will be provided
later in my testimony.
A. I{hat are iloint Applicants proposing in this
fiJ.ing, and what is the reguest of this Comnission?
A. On JuIy !9, 201'1, Avista, and Hydro One, Olympus
Holding Corp. (*US Parent"), and Olympus Corp. ('tMerger
Sub") entered into a Merger Agreement. Followi-ng aII
approvals, at the effective date, Avista wj-lI become a
wholly-owned indirect subsidiary of Hydro One. Through this
filing, Joint Applicants request an order of the fdaho Public
Utilities Commission (the "Commission") authorizing the
Proposed Transaction.
III. JOINT APPLICAI{TS' WITNESSES SPONSORING TESTIMONY
9. P1ease identify the Avista and Hydro One witnesses
sponsoring testinony on behalf of iloint Applicants, and a
brief sufitrary of their testimony.
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A. fn addition to myself, the following
representatives of Avista and Hydro One are sponsoring
testimony on behalf of Joint Applicants:
For Avista:
l{ark Thies, Seni-or Vice Presi-dent, Chief Ej-nancia}
Officer and Treasurer of Avi-sta, wi-II describe Avista
from a financial perspective and will testify about the
financial details of the Proposed Transaction. Mr.
Thies wiIl al-so describe the corporate and f j-nancial
structure and commitments that will be in place after
completion of the Proposed Transaction, and how the
Proposed Transaction provides protection for customers
by "Ring Fencing" Avista and j-ts customers from Hydro
One and its affiliates.
Kevin Christie, Vice President of Customer Solutions,
wiII provide testimony describing how the Proposed
Transaction wil-I be beneficial to Avista's customers.
He will also explai-n Hydro One's commitment to j-ncrease
funding for Avista's philanthropic initiatives and
maintain the support of economic development
initi-atives, as well as a $Z million annual
contribution to the Avista Eoundation.
Patrick Ehrbar, Director of Rates at Avista, will
describe some of the regulatory commitments being
offered by the Joint Applicants, including testimony
regarding proposed Rate Credits that would be provided
to customers j-f the Proposed Transaction is approved.
He wilI also discuss the assignment of any costs between
Avista and Hydro One before and after the Proposed
Transaction, to prevent cross-subsidization. FinaIly,
he wilI provide testimony related to the interaction of
thj-s applicatj-on and the Proposed Transaction with the
pending general rate case currently before the
Commission.
Eor Hydro One:
t'tayo Sclrmidt, President and Chief Executive Office of
Hydro One, wilI describe Hydro One and its business
platforms, with a specific focus on its utility
business. He wiIl describe the Proposed Transaction,
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explain the reasons for Hydro One's proposed purchase
of Avista, and describe the corporate structure of
Hydro One and Avista after closing. Mr. Schmidt will
al-so explain why the Proposed Transaction is consistent
with the public interest and provides a net benefit to
Avista's customers, and wilf explain that Avista's
operations, once the Proposed Transacti-on closes, will
essenti-alIy be no different than Avista's current
operati-ons.
Christopher Lopez, Senior Vice President, Finance of
Hydro One, wilI provide details regarding Hydro One's
corporate structure, Avista's place within that
structure, Hydro One's capital structure, the fi-nancial
and accounting aspects of the Proposed Transaction, how
Avista wil-I become a ring-fenced business under Hydro
One, incl-uding the structuraf and financial commitments
to be provided by Hydro One, to ensure that the Proposed
Transaction will not expose Avista's customers to any
risk of harm.
Eerio Pugliese, Executive Vice President, Customer Care
and Corporate Affairs wilf provide an overview of Hydro
One from a customer care perspecti-ve, describing, among
other things, the various customer initiatives Hydro
One has put into place to provide and enhance service
to i-ts customers.
29 IV. DESCRIPTION OE THE PROPOSED TRAI{SACTION
30 A. Please sunmarize the proposed transaction.
31 A. On JuIy L9, 2011, Hydro One, Olympus Holding
32 Corp., and Olympus Corp. entered into the Merger Agreement
33 with Avista which provides for, among other things, the
34 acquisition of Avista by Hydro One through Olympus Equity
35 LLC. The proposed merger was unanimously approved by the
36 Boards of Directors of both companies.
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Eollowing the receipt of all approvals and the closing
whoIly-
closing,
of the Proposed Transaction, Avista wil-I become
owned j-ndirect subsidiary of Hydro One. At the
Avista's common stock wil-l- be delisted from the
shareholder i.e., Olympus Equity LLC, which is an
who1ly-owned subsidiary of Hydro One.
a
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have one
indirect,
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Under the terms of the aIf-cash transaction, Avista
shareholders wil-I receive $53 per common share, representing
a twenty-four percent (24%) premium to Avistars last sale
price of $42.14 per share on July 18, 2077. The aggregate
purchase price is approximately $5.3 bilIion, comprised of
an equity purchase price of $3.4 biflion and the assumption
of approximately $1.9 billion of debt. Hydro One's financi-ng
plan j-s designed to maintain a strong investment grade
balance sheet following completion of the acquisition, and
Hydro One's regulated utility profile wilf remain intact
with approximateJ-y ninety-eight percent (98%) j-n regulated
earnings. Hydro One wiIl finance the Proposed Transaction
through a combination of medium and long-term borrowings
amounti-ng to approximately C$3.4 biIlion, including C$1.54
billion convertible unsecured subordinated debentures, which
will form the permanent equity component of the financing
plan upon conversion at closing of the Proposed Transaction.
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1 Hydro One's common shares are l-isted on the Toronto Stock
2 Exchange (*TSx") under the ticker symbol \\H'l.
3 Following the cl-osing of the Proposed Transaction, the
4 customers, employees and communities Avista serves will see
5 littIe or no change in Avista's operations. Avista will-
6 maintain its existing corporate headquarters in Spokane,
7 Washington, and will continue to operate as a standal-one
B utility in ldaho, Washington, Oregon, Montana and Alaska. Tt
9 will maintain its other office focations throughout its
10 service areas, continue to operate under the same Avista
11 name, and seek to retain its existing employees and
L2 management team. AII of these e1ements together with other
13 provisions embedded within the Merger Agreement are designed
L4 to ensure that Avista's culture and its way of doing business
15 will continue for the long-term. In addition, Avista will
76 continue to have a Iocal Board of Directors consisting
L1 primarily of either board members chosen by Avi-sta, and/or
18 members who resi-de i-n the Pacific Northwest.
79 Avista and Hydro One bel-ieve this preservation of
20 Avista's name, its headquarters, its culture and its way of
21, doing business, among other things, is important to Avista's
22 customers, in that customers can continue to expect and
23 experience rel-iabIe service and a high l-evel- of customer
24 satisfaction. In addition, customers wiIl see immediate
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1 financial benefits in the form of proposed retail rate
2 credits beginning at the close of the Proposed Transaction.
3 Furthermore, over time the merger will- provide increased
4 opportunities for innovation, research and development, and
5 efficiencies by extending the use of technology, best
6 practices, and business processes over a broader customer
7 base and a broader set of infrastructure between the two
B companies. Through this unique arrangement with Hydro One,
9 Avista's customers can recei-ve the benefits of scale that
10 come with joining a larger organizatj-on whife al-so avoiding
11 the risk of a potential subsequent acquisition by another
L2 party that may not share Avj-sta's culture and values. These
13 immediate and longer-term benefits to Avista's customers are
74 benefits that will otherwise not occur absent the merger.
15 Following completion of the
Avista serves will- see increased
merger, the communities
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71 and a continuation of the strong support Avista provides in
18 economic development and innovation. Finally, Avj-sta and
79 Hydro One employees will- experience career development,
20 professiona1 employment opportunities and personaf growth as
the two companies pursue efficiencies and innovation through
the use of technology, best practices and business
processes.
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V. AVISTA' S REJASONS FOR THE PROPOSED TRA}ISACTION
A. I[try did Avista choose to enter into the Merger
Ag'reement with Hydro One?
A. Avista's decision to merge with Hydro One was
driven by the unique partnership that is possible with Hydro
One. The merger wj-th Hydro One will- a1low Avista and its
customers to benefit from being part of a larger organization
(the benefits of scale), while at the same time preserving
locaf controf of Avista and the retention of Avista's
employees and management team, as well as its culture and
its way of doing business.
V[ith regard to scafe, the number of investor-owned
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15 consolidation. When comparing an:
utilities from largest to smallest,
L1 smallest investor-owned utiliti-es
electric and/or naturaf gas util-ities in
decreased significantly over the
North America has
years through
of investor-ownedSfZC
76 Avista is one of the
remaining in North
of the investor-owned1B America.l A bar chart indicative
19 utilities in North America, from Iargest to smal-1est, is
20 attached as Exhibit 7, Schedule 1. The merger of Avista and
27 Hydro One will pJ-ace the combined company toward the middle
22 of the range of investor-owned utili-ties, in terms of size.
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I As measured by equl-ty value
1 Through consolidation, Iarger utilities have the opportunity
2 Lo spread costs, especi-aI1y the costs of new technology,
3 over a broader customer base and a broader set of
4 infrastructure which inures to the benefit of customers.
5 Hydro One has more than 1.3 million electrj-c
6 distribution customers, and Avista has approximately 378r 000
7 electric customers and approximately 342,000 natural gas
8 customers. This combination wiII provide opportunitj-es for
9 efficiencies in the long-term through the sharing of best
10 practices, technology and innovation. The merger wil-l-
11 provide benefits to Avista's customers that otherwise woufd
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13 These benefits of scale will- not occur in the near-term
14 following the closing of the transaction, but some are
15 expected to occur over the long-term. After al-I approval-s
16 are received and the companies merge, both companies wil-l-
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18 opportunities
among other
to reduce costs for both companies through,
things, the sharing1,9
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practices, and business processes.
cost savings will- be flowed through
general rate cases.
of technology, best
The benefits from these
to customers in future
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A. How was the Merger Agreement structured in order
to preserve Avista's culture and its way of doing business,
for the benefit of Avista's customers and the conmrunities?
A. The specific provisions in the Merger Agreement
will aflow Avista to preserve
Iong-term,
its culture and the way it
does business for the including the retention of
This includes a continuedits employees and management team.
focus on providing reliab1e service to customers and high
customer satisfaction at a reasonabl-e cost. Provisions in
10 the Merger Agreement are also designed to increase the l-evel
11 of support provided by Avista to the local- communities it
12 serves, including, among other things, charitable giving and
13 continued support of economic development. The combination
74 with Hydro One accomplishes al-l- of these important goals for
15 the indefinite future.
16 The agreements between Hydro One and Avista for
L1 operation of the business post-closing were memorialized in
1B Exhibi-ts A and B to the Merger Agreement, hereafter referred
19 to as the "Delegation of Authority" (see Appendix 5 in the
20 Joint Application). Under the Delegation of Authority,
27 Avista's Board of Directors retains its authority to review,
22 authorize and approve certain specified matters related to
23 Avista, without any obligation to obtain separate
24 authorization or approval from the Hydro One Board. Among
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the matters decided by the Avista board pursuant to the
Merger Agreement are the following:
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Keeping Avista's headquarters in Spokane;
Keeping Avista's brand the samei
Keeping Avista's office l-ocations in each of its
service areas, with no less of a significant presence
in each location than that j-n place prior to the
mergeri
Preventing workforce reductions resulting from the
Proposed Transaction;
Retaining Avista's existing management team,'
Maintaini-ng exj-sting compensation and benef it
practices;
Negotiating and entering into agreements with
bargaining unit employees,'
Maintaining Avista's safety and rel-iability standards
and policies and servi-ce quality measures in a manner
that is substantially comparable to, or better than,
those prior to the merger;
Maintaining Avj-sta's community involvement and
support inj-tiatives at levels equal to or greater than
those prior to the merger;
Maintai-ning a $4.0 milfion annual budget for
charitable contributions (funded by both Avista and
the Avista Foundation), as compared to an approxj-mate
$2.5 mil-Iion fevel prior to the merger;
Making a $2.0 million annual- contribution to the
Avista Eoundation (following a contribution to the
Foundation of $7.0 million at the time the merger
closes ) ,'
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Maintaining at least the l-evel- of economic development
that existed prior to the merger, including the
expenditure of funds to support regional economic
development and rel-ated strategic opportunities
consistent with past practices;
Maintaining existing levels of capital- al-locations for
capital- investment in strategic and economic
development, includj-ng property acquisitions in the
university district, support of locaI entrepreneurs
and seed-stage investments;
Continued devefopment and funding of Avista's existing
and future innovation activities; and
Maintaining dues paid by Avista to varj-ous industry
trade groups and membership organizations.
Changes to these provisions in the Merger Agreement
the Avista board. In16 requj-re a two-thirds majority vote of
Ll addition to these and other commitments, the
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1B of Directors wil-l- f urther
makeup of the
reinforce and
t9 way Avista currently does business. After
20 the merger, Avista will be governed by a nine
2I of Directors, with myself serving as the
22 Chairman of the Board. Three additional board members wiII
23 be chosen by Avista and these four board members will be
24 ref erred to as Avj-sta "designees . " There wil-I always be a
25 total of four members chosen by Avista designees, and these
26 Avista board members wil-l- choose their successors. Of the
21 five board members chosen by Hydro One, three
Avista Board
preserve t.he
completion of
member Board
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1 wiII reside in the Pacific Northwest. The remaining two
2 board members wil-l be executives of Hydro One or one of its
will- be a local boardsubsidiaries. The Avista board3
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primarily consisting of
Avista, and/or members who
The Joint Applicants'
Agreement and the makeup
either board members chosen by
reside in the Pacific Northwest.
agreements included
of the Avista Board
in the Merger
of Directors
10
are designed to
doing business
the benefit of
ensure that Avista's culture and its way of
wiII continue for the J-ong-term, inuring to
customers. The Proposed Transaction is not
to target the elimination of lobs, or cost11
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designed
that may
customer
Iead to a deterioration of customer
cutting
service,
13 satis faction,
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reliability, or a
economic development or
serves. 2
safety,
giving,
15 innovation in the communities Avista
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I1
2On July 19, 20L1, S&P affj-rmed its ratings, including the 'BBB'issuer
credit rating, on Avista and revlsed the outfook to positive from stabfe.
The positj-ve outfook reffects S&P's view of the potentj-a1 for hj-gher
ratings on Avista if the merger is completed as proposed based on its
view that Avj-sta w111 be an important member of the Hydro One group,
highly unlikely to be sol-d and j-ntegral to overall group strategy and
operations. In addition, on JuIy 19, 2011, Moody's afflrmed the ratings
of Avlsta's (f) issuer rating (Baa1); (il) multj-p]e seniority medium-
term note program ( (P)A2); (i-ii) senior secured medium-term notes (A2);
(iv) senj-or secured first mortgage bonds (A2); (v) senior secured medium-
term note program ((P)A2); and (vi) senlor unsecured medium-term note
program ((P)Baa1) and kept the outfook at stabfe. Moody's lndicated that
the stable rating outJ.ook on Avista refl-ects its view that the merger
will not materiafly affect the credlt quality of Avista.
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VI. HYDRO ONE'S REASONS EOR THE PROPOSED TRAI{SACTION
A. I[try did Hydro One choose to enter into the Merger
Ag'reement with Avista?
A. Mr. Schmidt, Hydro One's Chj-ef Executive Officer
(CEO), wiII explain in his testimony why the proposed
transaction was attractive to Hydro One. He will discuss
how the Proposed Transaction with Avista achieves Hydro
One's goal-s by providing diversification both in terms of
jurisdiction and service area. The Proposed Transaction
wilI deliver the increased scale and benefits that come from
11 being a larger player in the utility industry. Hydro One
12 anticipates over tj-me that there wilI be savings through
13 scale and collaboration in supply chain activity, IT
74 development and implementation, innovation, and potentially
15 other areas.
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71 VII. OVERVIEW OF HYDRO ONE
1B
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A. Please provide
its operations.
A. I wiII provide
Hydro One's witnesses Mr.
a brief overview of Hydro One and
a brief overview of Hydro One, and
Schmidt, Mr. Lopez and Mr. Pugliese
22 will provi-de more details.
Hydro One is an investor-owned electric transmission
24 and dj-stributj-on utility headquartered in Toronto, Ontario,
Morris, Di 18
Avista Corporation
1 Canada. Through its subsidiaries, Hydro One provides
I
3
4
5
6
1
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9
electric distribution service to more than 1.3 mil-Iion
retail end-use customers, as well as el-ectric transmissj-on
service to many IocaI distribution companies and Iarge
industrial customers.
Hydro One connects to generating
del-ivers the
facilities owned and
operated by others and power to its retail
customers. The costs of these power purchases are a "pass-
through" to Hydro One's retail customers, i. e. , these
10 customers pay a commodity power cost equal to that paid by
11 Hydro One. Hydro One's wholesal-e customers and its large-
72 use customers that are market partj-cipants purchase
13 commodity directJ-y and do not rely on Hydro One to purchase
74 commodity for them. Therefore, Hydro One has no material
15 exposure to variations in the commodity cost of power.
76 Like Avista, Hydro One is committed to the communities
71 it serves, and has been rated as the top utility in Canada
1B for its corporate citizenship, sustainability, and diversity
19 initiatives. It is one of only four utility companies in
20 Canada to achieve the Sustainable Energy Company designation
2l from the Canadian Electrical Association.
22 Hydro One has approximately 5,400 fulf-time employees
23 and 3r 300 casual and temporary employees (not including
24 external contractors) with total assets of C$25 bill-ion,
Morris, Di 19
Avista Corporation
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annuaf revenues over C$6.5 biIlion, and with a market
capitalization of C$14 bil-l-ion. As explained by Mr. Lopez,
Hydro One maintains strong credj-t ratings from both Standard
and Poors (S&P) and Moody's.
VIII. OVERVIEVT OE AVISTA
10
A. Please provide an overview of Avista and its
operations.
A. Avista, headquartered in Spokane, Washington,
operates a vertically-integrated electric system in fdaho,
Washington, and western Montana. Avista's owned generating
resource portfolio includes a mix of hydroelectric
generation projects, base-load coal- and base-load natural
gas-fired thermal generation facilities, wood-waste-fired
generation, and natural gas-fired peaking generation.
Avista-owned generation facil-ities have a total capacity of
7,925 MW, which includes 56% hydroelectrj-c and 442 thermal-
resources. Avista has approximately 18r300 mil-es of primary
and secondary electric distribution l-ines, and an electric
transmission system of 685 miles of 230 kV lines and L,534
mil-es of 115 kV l-ines.
Avista provides natural gas distribution service in
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20
21,
22
23 northern Idaho, eastern Viashington and in southwestern and
24 northeastern Oregon. Avista owns and maintains a total of
Morris, Di 20
Avista Corporation
L 7 r 650 miles of natural gas distribution lines, and is served
2 off of the W1l-l-iams Northwest and Gas Transmission Northwest
3 (GTN) pipelines. The Company is al-so one of the three
4 original developers of the underground storage facility at
5 Jackson Prairie, which is Iocated near ChehaIis, Washington.
6 Of Avista's 378,000 el-ectric and 342,000 natural gas
7 customers (as of June 30, 2077) , 1,29,000 and 81,000,
B respectively, are Idaho customers. Avista serves
9 approximately 30 retail electric customers in western
10 Montana, many of whom are our employees who operate our Noxon
11 Rapids generating facility. In 20L4, Avista acquired AEL&P,
72 which serves electric power to approximately 17,000
13 customers in the City and Borough of Juneau, Alaska. A
1-4 diagram of Avista's current corporate structure is provided
15 in Exhibit 7, Schedul-e 2
t6 A map showing the Company's electric and natural gas
Ll service area in the Pacifj-c Northwest is provided below in
18 fl-l-ustration No. 1 below, as weII as in Exhibit t, Schedule
193
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Morris, Di 2l
Avista Corporation
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Illustration No. 1
11 As of December 31, 2076, Avista Utilities had total-
12 assets (efectric and natural- gas) of approximately $5.0
13 billion (on a system basis), with electric retail- revenues
74 of $760 mill-ion (system) and natural gas retail revenues of
15 $294 mill-ion (system). As of December 20L6, the Utility had
16 7,1 42 employees .
71 Avista's credit rating's, assigned by S&P and Moody's are
18 as follows:
79 Table No. 1
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23
S&P Moody's
Comorate Crcdit Rating BBB Baal
Senior Securcd Debt A-A2
Outlook Positive Stable
Morris, Di 22
Avista Corporation
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IX. POST-CI.OSING CORPORATE STRUCTT'RE
A. Eollowing the closing, where wiJ.J. Avista reside
within the corporate structure of Hydro One?
A. After the closing, Avista will be owned by Hydro
One Li-mited, through a series of wholIy-owned subsidiaries,
as depicted in the Illustration No. 2 befow:
I].].ustration No. 2
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22
Morris, Di 23
Avista Corporation
23
Can
Hydro One lnc.(Ontario
Hydro One
Networks lnc.
Hydro One Remote
Communities lnc.
Olympus Holding
Corp. (Delaware Hydro One Telecom
lnc.
Olympus 1 LLC
(Delaware Limited
Liability Company)
Olympus 2 LLC
(Delaware Limited
Liability Company)
Olympus Equity LLC
(Delaware Limited
Liability Company)
Hydro One Limited
(Ontario
Corporation)
2486267
Ontario lnc.
Avista Corporation
(Washington
Corporation)
Avista Corporation
Subsidiaries
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Avista will continue to issue debt financing, as
needed. Hydro One will provide equity to support Avista's
capital structure that is designed to allow Avista access to
debt financing under reasonabl-e terms and on a sustainable
basis. Mr. Thies and Mr. Lopez provide additional detail-s
related to the post-closing corporate structure, as weIl as
the continuing financial strength of Avista following the
closing of the transaction.
X. POST-CIJOSING GOVERNA}ICE MA}IAGEMENT
AIID OPERATIONS OE AVISTA
a PJ.ease describe the governance, management and the
of Avista following the close of the Proposedoperations
Transaction
A. As explained earlier, foflowing completion of the
merger, Avista's customers and the communities Avj-sta serves
will see little or no change in the operations of Avista, as
compared to Avista's operations prior to the Proposed
Transaction. Customers wiIl, however, see immediate
financial benefits in the form of proposed retail rate
credits (the "Rate Credits") beginning at the closing of the
transaction, as wel-l as opportunities for additional longer-
term benefits from efficiencies gained through the sharing
of best practices, technology and innovation. Avista's
Morris, Di 24
Avista Corporation
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customers can receive the benefits of scale while also
avoiding the rj-sk of a potential- subsequent acquisition by
another party that may not share Avista's culture and val-ues.
The communities Avista serves will see increased
charj-table contributions and a continuation of the strong
support Avista provides in economic development and
innovation. Avista and Hydro One employees wil-I see
increased opportunities as the two companies pursue
efficiencies and innovation through the sharing of
technoJ-ogy, best practices and business processes.
The Merger Agreement provides for the retention of
Avista's existing employees and management team. FoIl-owing
completion of the merger, Avista will be governed by a nj-ne
member Board of Directors, as explained earl-ier, with myself
as the Chairman of the Board.
State regulators and other stakeholders wiII see a
continued focus by Avista on providing refiabl-e service to
customers, hiqh customer satisfaction, and enerqy service to
customers at a reasonable cost. The various provisions of
the Merger Agreement are designed to enable Avista to do so
for the indefinite future.
Morris, Di 25
Avista Corporation
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XI. BENEEITS TO CUSTOMERS EROM THE TRJANSACTTON
A. Are the Joint Applicants proposing inmediate
benefits to customers following the cJ.osing of the
transaction?
A. Yes. There will be some immediate cost savings
followi-ng the closing, such
with Avista no longer having
as reduced expenses associated
10
Some savings wiII materiafize
the Secur j-ties and Exchange
Iegal and accounting costs.
publicly traded common stock.
with respect to filings with
Commission (*SEC"), including
In addition, the post-closing
L2 Avista Board of Directors will- have fewer non-empJ-oyee
13 members whi-ch wiIl result in fower costs.The total
a system
Mr. Thies
with the
74 estimated annual-
15 basis, for Avista
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cost savings to customers, on
is approximately $1.7 miIlion.
on the cost savings associatedprovides
Proposed
detai l- s
Transaction.
18 Avista and Hydro One are proposing to flow through to
79 Avista's retail customers in Idaho, Washington and Oregon a
20 Rate Credit of $31.5 million over a 10-year period, beginning
27 at the time the merger closes.3 The Rate Credit consists of
3The AELcP operations in the City and Borouqh of Juneau, Alaska, operate
substantially independent of Avista Utllities, and the costs from whj-ch
the merger-related cost savings are derived, are currently not being
charged to AEL&P. Therefore, there are no financial cost savlngs to
ffow through to AEL&P customers. For Avista's retaif operations in
Montana, Avista has approximately 30 retail customers and total retail
Morris, Di 26
Avista Corporation
1 two components, and reflects an increased level of savings
in years 6-10 as illustrated in Tabl-e No. 2 below.
Table No. 2
Two-Step Rate Crcdit Proposal
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Annual Credit
Yean 1-5
Annual Crcdit
Yean 6-10
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Total Credit
TotalCredit $2.65 Million $3.65 Million $31.50 Million
Offietable Credit $1.70 Million $2.70 Million $22.00 Million
The total Rate Credit to customers for the first five
years fol-Iowing the closing would be $2.65 million per year,
and the credit would increase to $3.65 million per year for
the last five years of the 10-year period. During the 10-
year period, the financial benefits of the Rate Credit wil-f
flow through to customers either through a separate tariff
revenue of approxlmately $74,000. Due to the very limited retaj-f
operations by Avista in Montana, for administrative efflclency the past
practice by the Montana Public Service Commission has been to review the
flnal- rates recently filed and approved in the State of Idaho, and
approve those for Avj-sta's Montana customers, when a request is made by
Avista. The date of the last approved retail rates i-n Montana for Avista
was April 21, 2077. Since that time electrj-c retaif rates have increased
in the State of Idaho, but Avista has not proposed simifar increases for
its Montana customers. Because Avista's current retaif rates for its
Montana customers are already befow its cost of servlce, and for the
sake of adminj-strative efficj-ency, Avj-sta and Hydro One are not proposing
to flow through the smaff financiaf benefi-t to Avista's Montana customers
related to the Proposed Transaction. (If a proportlonate benefit to
Montana customer were to be calcufated based on the l-evel of retaif
revenue, the total- annual Rate Credit for all customers combined woufd
be approximately $190. )
Morris, Di 21
Avj-sta Corporation
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1 schedul-e or through a reduction to the underlying cost of
2 service as these benefits are reflected in the test period
3 numbers used for ratemaking as described more fully befow.
4 At the time of the closing, the $2.55 million benefit wil]
5 be provided to customers through a separate Rate Credit, as
6 long as the reduction in costs is not already refl-ected in
7 base retail rates for Avista's customers.
8 A portion of the annual- total Rate Credit would be
9 offsetable, as indicated in the table above. To the extent
10 Avista demonstrates in a future rate proceeding that cost
11 savings r or benefits, directly related to the Proposed
72 Transact j-on are already being f l-owed through to customers
13 through base retail rates, the separate Rate Credj-t to
14 customers would be reduced by an amount up to the offsetabfe
15 Rate Credit amount. The portion of the total Rate Credit
76 that is not offsetable effectively represents acceptance by
Ll Hydro One of a lower rate of return during the 1O-year
1B period.
19 The $31.5 mill-ion represents the "floor" of benefits
20 that will be flowed through to Avista's customers, either
27 through the Rate Credit or through benefits otherwise
22 included in base retail rates over time. To the extent the
23 identifiable benefits exceed the annual offsetable Rate
24 Credit amounts, these additional benefits wifl be flowed
Morris, Di 28
Avista Corporation
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through to customers in base retail rates in general rate
cases as they occur. The increase in total benefits to
customers for years 6-10 provide time for Avista and Hydro
One to identify and capture an increased level of benefits,
directly related to the Proposed Transaction, that can be
flowed through to customers. As explained earlier, we
bel-ieve additional efficiencj-es (benefits) will be real-ized
over time from the sharing of best practices, technol-ogy and
innovation between the two companies. It will take time,
however, to identify and capture these benefits. The l-evel
of annual net cost savings (and/or net benefits) wilI be
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tracked and reported on an annual basis,
the of f setable l-evel of savings.
Avj-sta and Hydro One are not aware
and compared against
of
15 in costs to Avista's customers related
76 Transaction.a Therefore, the annual Rate
any net
to the
Credits
increase
Proposed
proposed
by the companies represent an
customers. Mr. Ehrbar explains
immediate net benefit to
in his testj-mony the manner
L9 in which the Rate Credit is proposed to be fl-owed through to
20 Avista's efectric and natural gas customers.
27
a None of the costs associated with the Proposed Transaction wj-11 be
flowed through to the customers of Avista or Hydro One.
Morris, Di 29
Avista Corporation
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XII. SATISEACTION OE THE PI'BLIC INTEREST AND
iTOINT APPLICANTS' COMMITT{ENTS
A. T{trat are the standards for approval of the
transaction by the Cornnission?
A. The Commission has jurisdiction over this
transaction pursuant to fdaho Code S 6L-328. This section
prohibits Hydro One from acquiring
written authorizati-on of the Commission.
Avista without the
10 such a transaction, the Commission must
Before authorizLng
find that: (1) the
11 transaction is consistent with the publj-c interest; (2) the
transaction will not cause the cost of or rates for supplying
service to increasei and (3) that Hydro One has the bona
fide intent and financial ability to operate and maintain
Avista's operations in fdaho.
As explained above, Avista and Hydro One have proposed
immediate financial net benefits for Avi-sta's customers, as
well as presenting the opportunity for longer-term benefits
for customers from efficiencies gained through best
practices, technology and innovation. It is consistent with
the public interest and the transaction will- not cause the
cost of or rates for supplying service to increase.
A. P1ease explain why the Proposed Transaction is
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Avista Corporation
24 in the public interest
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A. As explained earlier, Avista's choice to merge
with Hydro One wil-I allow Avista and its customers to benefit
from being a part of a larger organization (the benefits of
scale), whj-l-e at the same time preservi-ng l-ocal control of
Avista and the retention of Avista's culture and its way of
doing business. Following completion of the merger, Avista
will- continue to have a focal Board of Directors consisting
primarily of either board members chosen by Avista, and/or
members who reside in the Pacific Northwest. The Avista
board will have the authori-ty to maintain Avista's
headquarters in Spokane, Washington, to maintain its other
office locations throughout its service areas, to continue
to operate under the same Avista name, to retain its existing
employees and management team (al-though CEO selection is
subject to Hydro One approval), and otherwise to ensure that
Avista's culture and its way of doing business will- continue
for the long-term. FoIl-owing the closing of the transaction,
Avista's customers and the communities it serves will see
little or no change in the operations of Avista, as compared
to Avista's operations prior to the transaction.
Avista and Hydro One befieve this preservation of
22 Avj-sta's name, its headquarters, its culture and
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doing business, among other things, is important
customers, in that customers can continue to
its way of
to Avista's
expect and
Morris, Di 31
Avista Corporation
1 experience reliable servj-ce and a high leveI of customer
2 satisfaction. fn addition, customers will see immediate
3 doll-ar benefits in the form of proposed retail rate credits
4 beginning at the closing of the Proposed Transaction, as
5 well as opportunities for additional- J-onger-term benefits
6 from efficiencies gained through the sharing of best
7 practices, technology and innovation. These immediate and
B Ionger-term benefits will- not otherwise occur absent the
9 proposed merger.
10 Following the closing of the Proposed Transaction, the
11 communities Avista serves wilI see increased charitable
72 contributions and a continuation of the strong support
13 Avista provides j-n economic deveJ-opment and innovation.
74 Furthermore, Avista and Hydro One employees wj-Il- see
15 increased opportunities as the two companies pursue
76 effj-ciencies and innovation through the use of technology,
11 best practices and business processes.
18 Commj-tments between the two companies embedded in the
79 Merger Agreement, including the Delegation of Authority, and
20 the make-up of the post-closing Avista Board of Directors
21 are all- designed to ensure that Avista's cufture and its way
22 of doing business can continue for the indefinite future,
23 for the benefit of customers. Under the Delegation of
24 Authority, Avista's Board will retain the authority to
Morris, Di 32
Avista Corporation
1 review, authorize and approve certain specific matters
2 related to Avj-sta, without any obligation to obtain separate
3 authorization or approval from the Hydro One Board. These
4 commitments are set forth in Exhibits A and B of the Merger
5 Agreement, which is attached to Mr. Thies' testimony as
6 Exhibit No. 3, Schedule 3.
7 Q. Are Hydro One and Avista offering' additional.
B conmitments through this fiJ.ing as part of your request for
9 approval of the Proposed Transaction?
10 A. Yes. As part of the Joint Applicants' request for
11 approval of the Proposed Transaction, Hydro One and Avista
12 are offering other commitments in addition to the Delegation
13 of Authority in the Merger Agreement. The commj-tments
74 included in the Joint Application tota1 55 commitments
15 offered by Hydro One and Avista rel-ated to approval of the
L6 Proposed Transaction. The 55 commitments are grouped
71 together into the categories identified below. The master
1B list of all- 55 commitments is attached as Exhibit 3, Schedule
4 to Mr. Thies' testimony.
A. Reservation of Certain Authority to the Avista
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Board of Directors
1. Governance
2. Business Operations
3. Local Presence/Community Involvement
Rate Commitments
Regulatory Commitments
Morris, Di 33
Avista Corporati-on
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Einancial- Integrity Commitments
Ring-fencing Commitments
Environmental, Renewable Energy, and Energy
Ef ficiency Commitments
G. Community and Low-Income Assistance Commitments
10
11 xrrr. REQUIRED APPROVAIS
1-2 A. Iflhat approvals must be received prior to the
13 Proposed Transaction closing?
74 A. The Proposed Transaction was unanimously approved
15 by the Boards of Directors of both companies. The merger
L6 must be approved by Avista's sharehol-ders, which involves a
11 majority vote (50% of shareholders voting, plus 1). A proxy
18 statement will- be filed by Avista with the SEC in September
19 2071, in preparation for a vote of Avista's shareholders.
20 Approvals are required by this Commission, the Washington
2l Utilities and Transportation Commission, the Public Utility
22 Commission of Oregon, the Publj-c Service Commission of the
23 State of Montana, the Regulatory Commission of Alaska, and
24 the Federal Energy Regulatory Commj-ssion. At1 of these
25 filings with state commissions and FERC requesting approval
26 are expected to be made on or around the same date.
21 A filing for approval from the Federal Communications
28 Commi-ssion will be made related to Avista's radio ficenses.
Morris, Di 34
Avista Corporation
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In addition, clearance is required by the Committee on
Eoreign Investment in the United States,and compliance with
. Hart-Scott-Rodinoapplicable requirements under the U.S
Antitrust Improvements Act of L916, as amended, and the
satisfaction of customary closing conditions. Mr. Thies
wil-l- provide additional details rel-ated to these required
approvals.
Joint Applicants are anticipating receiving alI
approvals in a time frame that would aIlow the Proposed
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10 Transaction to cfose in the second half 2078.
XIV. CONCLUSION
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A. Please briefly surnmarize why the proposed merger
is in the public interest.
A. Avista's choice to merge with Hydro One wil-I allow
Avista and its customers to benefit from being a part of a
larger organization (the benefits of scale), whife at the
same time preserving Iocal contro.l- of Avista and the
preservation of its culture and its way of doing business.
Agreements to preserve Avista, essentially as it is today,
for the long-term are memorj-alized in the Merger Agreement.
The Proposed Transaction provides benefits to Avista's
customers, employees, shareholders, and the communities
Avj-sta serves; including immediate financial benefits to
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Avista's customers. Avista and Hydro One have proposed
numerous commitments as part of the Joj-nt Application,
including ring fencj-ng commitments and other protections for
various stakeholders.
Avista and Hydro One request that the Commission
schedule a review of the Proposed Transaction in a tj-me frame
that wil-f aIIow approval by the Commj-ssion on or bef ore
August L4, 20IB .
A. Does this conclude your pre-filed direct testimony?
A. Yes.10
Morris, Di 36
Avista Corporation