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HomeMy WebLinkAbout20180917Supplemental Report.pdfliiirrtsra 26 Avista Corp. 141 1 East Mission P.O. Box 3727 Spokane. Washington 99220-0500 Telephone 509-489-0500 Toll Free 800-727-9170 loN Via Electronic and Overnight Mail September 14,2018 Commission Secretary Idaho Public Utilities Commission 472W. Washington St. Boise,lD 83702 RE: Case Nos. AVU-E-17-09 and AVU-G-17-05 Enclosed for filing in the above-referenced Case Nos. are an original and 7 copies of the S&P Ratings Report on Hydro One dated September 13, 2018. A service list is attached, with the parties receiving a complete electronic copy of this filing. If you have any questions, please do not hesitate to contact David Meyer on behalf of Avista Corporation at 509-495-4316 or david.meyer@avistacorp.com or Liz Thomas on behalf of Hydro One Limite d, at 206-37 0-7 63 1 or liz.thomas@klgates.com. Sincerely q^h,A<qJ^,tWW David Meyer Vice President and Chief Counsel for Regulatory and Governmental Affairs Enclosures CERTIFICATE OF SERVICE I HEREBY CERTIFY that I have this 14th day of September,2018, served the foregoing S&P Ratings Report on Hydro One in the Merger Case Nos. AVU-E-17-09/AVU-G-17- 05, upon the following parties, by sending a copy via electronic mail: Diane Hanian, Secretary ldaho Public Utilities Commission 472 W. Washington Street Boise, !D 83720-5983 diane. hanian@puc. idaho.qov Brandon Karpen Deputy Attorneys General ldaho Public Utilities Commission 472W. Washington Boise, lD 83720-0074 brandon. karpen@puc. idaho.qov Danielle Franco-Malone Schwerin Campbell Barnard lglitzin & Lavitt LLP 18 W. Mercer St., Suite 400 Seattle, WA 98119 franco@workerlaw.com Larry Crowley The Energy Strategies lnstitute, lnc. 5549 S. Cliffsedge Ave Boise, lD 83716 crowlevla@aol.com Dr. Don Reading 6070 Hill Road Boise, lD 83703 dreadinq@mindspring.com Norman M. Semanko Parsons Behle & Latimer 800 West Main Street, Suite 1300 Boise, lD 83702 NSemanko@parsonsbeh le. com ecf@parsonsbehle.com Brad M. Purdy Attorney at Law 2019 N 17th Street Boise, lD 83702 bmpurdv@hotmail.com Peter J. Richardson Richardson Adams PLLC 515 N. 27th Street Boise, lD 83702 peter@rich nadams.com Ronald L. Williams Williams Bradbury, P.C. P. O. Box 388 802 W. Bannock, Suite LP 100 Boise, lD 83702 ron@wil I iamsbrad bu rv. com Ben Otto ldaho Conservation League 710 N. 6th St. Boise, lO 83702 botto@idahoconservation. oro Dean Miller 3620 E Warm Springs Ave Boise, lD 83716 Deanimiller@cableone. net 4 P Kimball Sr. Regulatory Analysist David J. Meyer Chief Counsel for Regulatory and Governmental Affairs Avista Corporation l41l E. Mission Ave., MSC-27 Spokane, WA 99220-3727 David.meyer@avistaco{p.com In the Matter of the Joint Application of HYDRO ONE LIMITED (acting through its indirect subsidiary Olympus Equity LLC) BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION r-r !.: f i: l\/ F nI1,1-''Jt- Elizabeth Thomas, pfritndi{P i I &14 l0: 3 | Kari Vander Stoep, Part4er : :, jtr:_i,I; K&L Gates LLP ,' ''i 'l :;:., ,',,:ifililCi.l On Behalf of Hydro One Limited Olympus Equity LLC 925 Fourth Avenue, Suite 2900 Seattle, WA 98104-1158 Liz.thomas@klgates. com kari.vanderstoep @kl gates. com CASE NOS. AVU-E-I7-09 AVU-G-17-05 and AVISTA CORPORATION SUPPLEMENTAL REPORT ON HYDRO ONE MANAGEMENT CHANGES For an Order Authorizing Proposed Transaction As required by the Idaho Public Utilities Commission's (the "Commission") July 20, 2018, Order No. 34lll ("July 20th Order"), Hydro One Limited ("Hydro One") provides this Supplemental Report on Hydro One Management Changes. On September 13, 2018, S&P Global Ratings ("S&P") issued the attached report titled "Hydro One Ltd. And Subsidiary Downgraded To 'A-' On Lower Governance Assessment; Ratings Remain on Credit Watch." S&P lowered its issuer credit ratings on Hydro One and its 2 SUPPLEMENTAL REPORT ON HYDRO ONE MANAGEMENT CHANGES - I I 3 subsidiary Hydro One Inc. to oA-' from oA'. It also lowered the issue-level rating on Hydro One Inc.'s senior unsecured debt to 'A-', the rating on its commercial paper program to o A-2' , and the global short-term and Canadian National Scale ratings to 'A-l (Low)'. All ratings remain on CreditWatch with negative implications. S&P explained the one-notch downgrade as follows: The Government of Ontario recently implemented legislation, requiring Hydro One's board of directors to establish a new executive compensation framework for the board, CEO, and other executives. The legislation also amends the current Ontario Energt Board Act, requiring the Ontario Energt Board to exclude any compensation paid to the CEO ond other executives from consumer rates. We consider such action as a governance deficiency related to Hydro One's ownership structure and are lowering our manogement and governance (M&G) assessment on Hydro One Ltd. (HOL) and Hydro One Inc. (HOD to fair from satisfactory. t Hydro One's credit rating remains investment grade. Further, the legislation cited by S&P as the reason for the downgrade,the Hydro One Accountability Act, 2018, applies only to Hydro One's subsidiaries in Canada, and therefore, would not apply to Avista if the proposed merger is consummated. DATED: September 14, 2018. SUPPLEMENTAL REPORT ON HYDRO ONE MANAGEMENT CHANGES - 2 K&L GATES, LLP Elizabeth Thomas, Partner (admitted pro hac vice) Kari Vander Stoep, Partner (admitted pro hac vice) K&L Gates LLP On Behalf of Hydro One Limited Olympus Equity LLC 925 Fourth Avenue, Suite 2900 Seattle, WA 98104-1158 Liz.thomas@klgates.com kari.vanderstoep@kl gates.com AVISTA CORPORATION David J. Meyer, ISB No. 8317 Chief Counsel for Regulatory and Governmental Affairs Avista Corporation 1411 E. Mission Ave., MSC-27 Spokane, WA 99220-3727 David.meyer@avistacorp. com lr ' ''lrt BY: SUPPLEMENTAL REPORT ON HYDRO ONE MANAGEMENT CHANGES - 3 S&P Gtobat Ratings RatingsDirect' Research Update: Hydro One Ltd. And Subsidiary Downgraded To 'A-' On Lower Governance Assessment; Ratings Remain On CreditWatch Primary Credit Analyst: Andrew Ng, Toronto + 1 (416) 507 2545; andrew.ng@spglobal.com Secondary Contacts: Vinod Makkar, CFA, Toronto + I (416) 507 3271; vinod.makkar@spglobal.com Obioma Ugboaja, New York + I (212) 438 7406 obioma.ugboaja@spglobal.com Table Of Contents Overview Rating Action Rationale CreditWatch Ratings Score Snapshot(Hydro One Ltd.) Ratings Score Snapshot(Hydro One Inc.) Issue Ratings-Subordination Risk Analysis Related Criteria Ratings List WWW,STAN DARDAN DPOOBS, CO IV/BATIN GSDIRECT SEPTEMBER 1,3,2018 1 Research Update: Hydro One Ltd. And Subsidiary Downgraded To 'A-' On Lower Governance Assessment; Ratings Remain On CreditWatch Overview o The Government of Ontari-o recently implemented legislation, requlring Hydro Oners board of directors to establish a new executive compensat.i-on framework for t.he board, CEO, and other execut.ives. The legj-slation also amends the current Ontario Energy Board Act, requiring the Ont.ario Energy Board to exclude any compensation paid to the CEO and other executives from consumer rates. o We consider such action as a governance deficiency related to Hydro One's ownership structure and are lowering our management and governance (M&G) assessment on Hydro One Ltd. (HOL) and Hydro One Inc. (HOI) to fair from satisfactory. . At. the same time, we are lowering Ehe issuer credit ratings on both HOL and HOI by one notch to 'A-' from'A', reflecting the change in our M&G assessment. . We are also lowering Ehe issue-1eve1 rat.ing on HOI's seni-or unsecured debt to 'A-', the raEing on its commercial paper program to 'A-2', and the g1obal short-Eerm and Canadian National Scale ratings to 'A-l- (Low) '. o A1l ratings remain on Creditwatch with negatiwe implicat.ions. Rating Action On Sept. 13, 2OL8, SaP G1oba1 Ratings lowered j-ts issuer credit ratings on Hydro One Lt.d. (HOL) and subsidiary Hydro One Inc. (HOI) to 'A-t from 'A'. At the same time, we lowered the short-term issuer credit rating on HOf to tA-21 f rom 'A-l-' . We also lowered the issue-Ieve1 rating on HOI's senior unsecured debt by one notch to 'A-' from'A' and lowered the rating on HOI's commercial paper program by one notch to 'A-2r from 'A-1' on the g1oba1 scale and to 'A-1(Low)' from 'A-1(MID) on the Canadian National Sca1e. All ratings remain on Credtt.Watch where we placed them wit,h negative implications on .fune 15 , 2018. WVWV.STANDABDANDPOOBS,COM/BATINGSDIBECT SEPTEMBER 13,2OI8 2 Research Update: Hydro One Ltd. And Subsidiary Doungraded To 'A: On Louer Gouernance Assessment; Ratings Remain On CreditWatch Rationale The one-notch downgrade reflects our reassessment of HOL's management and governance structure, which has weakened following the government of Ontario's decision to exert its influence on the utility's compensation structure through legislaLion, potentially promoting the interests and priorities of one owner above those of other stakeholders. Ontario recently passed the Hydro One Accountability Act that a11ows the government to j-ssue directives governing HOL's compensati-on of the board, CEO, and other executives. In addition, Ontario also amended the Ontario Energy Board Act (OEBA) to exclude any amount in respecE of compensation paid to HOL's CEO and executlves from consumer rates. Although the financial impact of the compensat.ion disallowance is minimal, we think the legislative actions taken reflect a governance defici-ency related to HOL's ownershi-p sEructure because ontario j-s exercising its legislatiwe authority to lower electricity rates, consistent with the government's election campaign promises. In our view, the use of this legislative authority to influence HOL's compensation structure for some executives undermines the effectj-veness of the company's governance sEructure, and potentially promotes the interests and priorj-ties of the OnLario government above those of other stakeholders. We also note that these events followed the recent resignation of the entire previous board of Hydro One. our view of HoL's business and financial risks is unchanged. The business risk profile continues to reflect the utili-ty's large electricity distribution and transmission operations that serves about 1.3 million electric customers covering approximately 75? of the geographic area of Ontario. The company historically benefited from supportive regulation in Ontario that has enabl-ed utilities to earn close to their authorized return on eguity through the use of a forward-Iooking test year, multiyear rate-settj-ng that. adjusts to keep costs and rates aligned, decoupling, and various variance accounts that foster ful1 cost recovery. Furthermore, we expect HOL's consolidated business risk profile will not be affected because of the Avista Corp. acquisition. we believe the jurisdicti-ons in which Avista operates benefit from reasonably supportive regulation. In addition, the purchase gives HOL some geographlc diversity and entry into low-risk natural gas distribution operatj-ons. From a financial risk perspective, we expect credit metrics to remai-n weak for 2018 due to timing of the closing of the Avi-sta transacEion. Under our base case scenario, which i-ncludes the current financing plan of Avista that comprises about C$1.54 bllIion of equity and C$3.4 billion (US$2.5 billion) of new debt, capltal spending of about C$2 bi11ion, and dj-vidend payments of about C$530 mil1ion, we forecast adjusted funds from operations (AFFO) to total debt for HOL, to consistently reflect about 10? for the 2019-2020 period, after the transaction closes. In addition, we do not expect the compensation disallowance to have any significant impact on HOL's cash flow. Our base case scenario also reflects the acguisition of PeLerborough Dist.ribution Inc. for about C$105 mi11ion, incremental executive compensation WWW.STAN DABDAN DPOOBS.CON//BATI NGS DI BECT SEPTEMBER 13, 2018 3 Research Update: Hydro One Ltd. And Subsidiary Downgraded To 'A-' On Louter Gouernance Assessment; Ratings Remain On Creditwatch costs of about C$20 mi11ion, and capit.al spending of about C$2.5 billion each year. Liquidity We assess HOL's liquidi-ty as adequate. We expect liquidity sources to exceed uses more than 1.1x over the next L2 months. In t.he event of a 10t drop in the company's EBITDA, we also expect liguidity sources will cover uses. In our view, the company has sound relationships with banks and generally saEj-sfactory standing in the credit market.s. In the unlj-ke1y event of liquidity distress, we expect HOL to scale back j-ts capital spending t.o preserve credit metrics. Principal liquidity sources include: o Cash of about C$1.25 billion as of \Tune 30, 2018 o Committed credit facilities availabili-ty of about C$7.43 billion as of \Tune 30, 201-8, including that of Avista and the commi-tted bridge facilities for the Avista transacti,on. . Cash FFO of about C$1.9 billi-on over the next 12 months Principal liquidity uses include: . Debt maturities of about C$981 million over the next 12 monEhs. o Maintenance capital spending of about C$1.3 billion over the next 12 months. o Di-vidend pa)ments of about C$600 million over the next l-2 months. . Acquisitions of about C$5 billion, incl-uding Avista and PDI. CreditWatch We will resolve the CreditWat.ch placements of the ratings on HOL and HOI as we get closer to Lhe Eransaction's closing, including final regulatory approvals from key states, including Washington, Avista's largest regulatoryjurisdiction. In addition, the resolution of our CreditWatch placement will depend on our confirmation of the company's forward strategy after the board appoints a new permanent CEO for HOL. Ratings Score Snapshot(Hydro One Ltd.) Issuer Credit Rating: A-lWatch Neg/- Business risk Excellent . CounEry risk: Very low . Industry risk: Very low WWW,STAN DABDANDPOOBS,COM/BATINGSDIBECT SEPTEMBER 13,20t8 4 Researcb Update: Hydro One Ltd. And Subsidiary Doungraded To 'A-' On Louter Gouernance Assessment; Ratings Remain On CreditVlatch . Competitive position: Excellent Financial risk Significant Cash flow/Leverage: Slgnificant Anchor: a- Modifiers o Diversificat.ion/Portfoli-o effect: Neutral (no impact) . CapiEaI structure: Neutral (no impact) o Financial policy: Neut.ral (no impact) . Liquidity: AdeguaEe (no impacE) . Management and governance: Fair (-t notch) . Comparable rating analysis: Positive (+1 notch) Stand-alone credit profile: a- Group credit profile: a- Status within group: Parent Ratings Score Snapshot(Hydro One Inc.) Issuer Credit Rating: A-lWatch Neg/A-2 Business risk Excellent . Country ri-sk: Very 1ow . Industry ri-sk: Very low . Competitive position: Excellent Financial risk Significant oCash flow/Leveralle3 Significant Anchor: a- Modifiers o Diversification/PorEfoli-o effect: Neutral (no impact) . Capital structure: NeuEraI (no impact) o Financial poli-cy: Neutral (no impact) o Liquidity: Adequate (no impact) . Management and governance: Fair (-1 notch) o Comparable rating analysis: Positive (+L notch) WWW.STAN DABDAN DPOOBS.COM/BATINGSDIBECT SEPTEMBER 13,2018 5 Research update: Hydro One Ltd. And Subsidiary Downgraded To 'A-' On Louer Gouernance Assessment; Ratings Remain On CreditWatch Stand-alone credit profile: a- Group credit profile: a- Status within group: core (no impact) Issue Ratings--Subordination Risk Analysis Capital structure HOL's capital structure consj-sts of about $10.5 billion of senior unsecured long-term debt, all of which are issued by subsidiary HOI. There is currently no debt at the HoL 1eve1. Analytical conclusions We consider HOI as a qualifying utility in accordance wiLh our criteria. As such we rate the senior unsecured debE aE HOI the same as our issuer credit rating on HOI. Related Criteria o Criteria - Corporates - General: Reflecting Subordi-nation Risk In Corporate Issue Ratings, March 28, 201-8 o General Criteria: Methodology For Linking Long-Term And Short-Term Ratings , Apri-1 7, 20L7 o General Criteria: Rat.ing Government-Re1at.ed Entities: Methodology And Assumptions, March 25, 2Ol5 o Criteria - Corporates - General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 15, 201-4 o General Criteria: Methodology: Industry Ri-sk, Nov. a9, 20L3 o General Criteria: Group Rating Methodology, Nov. L9, 20]3 . Criteria - CorporaEes - Utilities: Key Credit Factors For The RegulaEed Utilities Industry, Nov. L9, 2013 . Criteri-a - Corporates - General: Corporat.e Met.hodology: Ratios And Adjustments, Nov. L9, 20L3 o CriEeria - Corporaues - General: Corporate Methodology, Nov. 19,201-3 o General Criterla: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2Ol3 o General CriLerla: Methodology: Management And Governance Credit Factors For Corporat.e EntiEies And Insurers, Nov. 13, 20]-2 o General Criteria: Use of Credltwatch And Outlooks, Sept. 14, 2OO9 WWW,STANDABDANDPOOHS,COM/RATI NGSDIBECT SEPTEMBER 13,2018 6 Research Update: Hydro One Ltd. And Subsidiary Doutngraded To 'A-' On Louer Gouernance Assessment; Ratings Remain On CreditWatch Ratings List Downgraded From Hydro One Limited fssuer Credi-t Rating A-lwatch Neg/-- A/watch Neg/-- Hydro One Inc. Issuer Credit Rating A-lwatch Neg/A-2 A/wat.ch reg/a-r To Hydro One Inc. Senior Unsecured Commercial Paper Commercial Paper A-,/watch Neg A/watch Neg A-2/watch Neg A-1,/wat.ch Neg A-l- (LOW)/watch Neg A-1(MID)/watch Neg Certain terms used in this report, particularly certaj-n adjectives used to express our vj-ew on rating relevant factors, have specific meanings ascribed Eo them in our criteria, and should Eherefore be read in conjunction with such criteria. P1ease see Ratings Crit.eria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of Ratj-ngsDirect at www.capitaliq.com. A11 ratj-ngs affected by this rating actj-on can be found on s&P G1oba1 Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. WWW,STANDABDANDPOOBS, COIV/BATI NGSDIRECT SEPTEMBER 13,2018 7 Copyright O 201 B by Standard & Poor's Financial Services LLC. 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