20180924Lopez Supplemental Direct.pdf

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ldaho Public Utilities Commission
BECEIVED
SEP 2 tr 2018
ON BEIIALF OF AVISTA CORPORATION
DAVID J. MEYER
V]CE PRES]DENT AND CHIEF COUNSEL FOR
REGULATORY & GOVERNMENTAL AFFA]RS
P.O. BOX 3121
I47I EAST MISS]ON AVENUE
SPOKANE, WASHINGTON 99220_3121
TELEPHONE: [phone]L6
FACSIMILE: [phone]
DAVI D . MEYERGAVI STACORP . COM
Boise, ldaho
ON BEIIALF OF HYDRO ONE LIMITED
ELIZABETH THOMAS, PARTNER
KARI VANDER STOEP, PARTNER
K&L GATES LLP
925 FOURTH AVENUE, SUrTE 2900
SEATTLE, WA 981014-1158
TELEPHONE : [phone]
EACSIMILE: [phone]
LIZ . THOMAS GKLGATES . COM
KARI . VANDERSTOEPGKLGATES. COM
BEFORE THE IDAIIO PUBLIC UTTLITIES COMMISSION
]N THE MATTER OE THE JOINT
APPLICAT]ON OF HYDRO ONE LTMITED
(ACTING THROUGH ]TS INDTRECT
SUBS]DIARY, OLYMPUS EQU]TY LLC)
AND
AV]STA CORPORAT]ON
FOR AN ORDER AUTHOR]ZING PROPOSED
TRANSACT]ON
CASE NO.
CASE NO.
AVU-E-71 -09
AVU-G-17-05
SUPPLEMENTAL TESTIMONY
OE
CHR]STOPHER F. LOPEZ
FOR HYDRO ONE LIMITED
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I. INTRODUCTION
A. Please state your narne, business address and
present position with Hydro One Limited.
A. My name is Christopher F. Lopez, and my business
address is 483 Bay Street, South Tower, Bth Efoor, Toronto,
Ontario M5G 2P5 . On September 6, 2078 I was appointed as
Acting Chief Flnancial Officer (*CFO") for Hydro One Limited
("Hydro One"). Prior to September 6, 20IB f was Senior Vice
President of Finance for Hydro One.1
A. Have you fiJ-ed testimony in this proceeding?
A. Yes. My prior testimony describes the proposed
merger ("Proposed Transactj-on"), the corporate structure,
financing arrangements, ring-fencing, access to capital, rate
credits, cost afl-ocations and rel-ated benefits to Avista's
customers.
A. Are you sponsoring any exhibits that accompany your
testimony?
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A. No.
A tabl-e of contents for my testimony is as fol-l-ows:
I. INTRODUCTION
II. SUMMARY OE RECENT
]II. EINANC]AL STRENGTH
IV. AVISTA' S ACCESS TO
DEVELOPMENTS
OF HYDRO ONE
CAPTTAL
IN ONTARIO
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1 See AVU-E-17-09, AVU-G-17-05, Supplemental Report on Hydro One
Management Changes (Sep. 7, 2018) .
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Hydro One Limited
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V. RING_FENCING COMM]TMENTS
V]. PROPOSED TRANSACT]ON FINANCING. . .
V]]. AVISTA' S FUTURE FINANC]AL HEALTH.
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Surmnary of feElirlterry
A. Please sununarize your testimony.
A. My supplemental testimony wiII describe recent
events and demonstrate that the benefits of this transaction
for Avista ratepayers remain unchanged since the parties'
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10 settl-ement documents were f il-ed2 and that recent political
l-l- developments in Ontario create no risks f or Avista or its
L2 customers. Specifically, T will:
13 . Summarlze the recent developments in Ontario;
L4 o SummarLZe and reaffirm my previous testimony explaining
15 how Hydro One is financially healthy and Avista will
L6 benefit from having a parent with strong access to
t1 capit.al markets;
18 o Review the merqer commitments relati-ng to Hydro One's
L9 financial support for Avista;
20 o Confirm that Hydro One stands by these commitments and
2L continues to provide the benefits associated with having
22 a financially heal-thy parent. company; and
2 AVU-E-1'7-09, AVU-G-17-05, Stipulation and Settlement (Apri-1 13, 20L8)(incl-uding Appendix A, "Master List of Commitments in Idaho") i see a7so,
AVU-E-17-09, AVU-G-17-05, Avista and Hydro One Joint Comments in Support
of Stipulatlon and Settl-ement (June 20, 2018).
Lopez, Supp 2
Hydro One Limited
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a Explain why the Ontario el-ect j-on, the July 11 , 201,8
Letter Agreement between the Province of Ontario (the
"Province") and Hydro One (the "JuIy 20lB Letter
Agireement") and subsequent events have no effect on
these commltmenLs and benefits.
II. SUM!{ARY OF RECENT DEVELOPMENTS IN ONTARIO
A. Please sununarize recent developments relating to
management of Hydro One.
A. There are four developments that I wil-l- summarize:
the June 7, 20L8 el-ection; the JuIy 2078 Letter Agreement;
the Hydro One Accountability Act, 2018; and the August 74,
20LB appointment of new board members.
A. Please describe the June 7, 2OLB election as it
relates to Hydro One.
A. On June '7, 201,8, voters in the Province el-ected a
new majority government led by Premier Doug Ford of the
Progressive Conservative Party, which replaced the previous
Liberal government fed by former premier Kathfeen Wynne. The
new government was sworn in on June 29, 2078. During the
campaign, Mr. Ford stated that he wanted to remove Hydro One's
chief executive officer (*CEO") Mayo Schmidt and some or al-l-
of the members of Hydro One's Board of Dj-rect.ors ("Board") .
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Hydro One Limited
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Durlnq the campaiqn, members of a different political
party, the New Democratic Party or "NDPsr " stated that they
woul-d try to "bri-ng Hydro One back into public hands" by
buying back some or all of Hydro One's shares held by entities
other than the Province. The NDPs did not win enough seats
to form the provincial g:overnment. Mr. Ford and other members
of the Proqresslve Conservative Party (the "Conservatives"),
by contrast, made no sugg,estion that they woul-d support
returning Hydro One to Crown Corporation status. Although the
10 NDPs and the Conservatives were essentially tied in vot.ing
11 poIls, the Conservatives won a majority of seats in the
72 legislature.o 13 A. Please describe the JuIy 20Lg Letter Agreement
74 A. On JuIy 7I , 2078, the 1st Sess j-on of the 42nd
15 Parl-iament of the Legislative Assembly of Ontario commenced.
L6 The same day, Hydro One, on behaff of itself and its wholly-
71 owned subsldiary, Hydro One Inc. (*HOf"), announced that
1B following an approach by Hydro One to the Province, they had
19 entered into an agreement for the purpose of the orderly
20 replacement of the Hydro One and HOf boards and the retirement
27 of Mayo Schmidt as the CEO effective July LI, 20L8. See
22 prefiled Supplemental Testimony of James Scarl-ett ("Scarlett
23 Testimony") and Exh. No. 10, Schedule 1 thereto (July 2078
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Hydro One Limited
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2078 Letter Aqreement in detail.
A. Please describe the Hydro One Accourttability Act,
2078.
A. On July 76, 2018, the new Provincial government
introduced Bill 2, the Urgent PriorrL:.es Act, 2078, which
enacts or amends various stat.utes via Schedul-es t.o the Bi]I.
It received Royal Assent on July 25, 20L8, and is therefore
in fufl- force and effect. The Schedules come into force as
10 provided in each Schedul-e. Schedule 1 1s a new Act entitled
11 the Hydro One Accountabifity Act, 2018 (the "Act") and took
72 effect on August 15, 20!8. This Schedule deals with the
compensation framework (and relat.ed disclosure obligations)
for the directors, CEO and executives of Hydro One and its
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15 subsidiarles (except subsidiaries incorporated in
76 jurlsdictions outside Canada). The Scarlett Testimony
77 describes the Act. in detail. Exh. No. 10, Schedule 2 Lo t.he
18 Scarl-ett Testimony contains a copy of the Act
t9 This legislat.ion has no impact on (1) Hydro One's
20 contractual commitment to proceed with its acquisition of
2L Avista, (2) the settlement stipulations Hydro One negotiated
22 with parties in Idaho and other states, or (3) the
23 Commission's authority to continue to regulate Avista if the
Lopez, Supp 5
Hydro One Llmited
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A. Please describe the new Hydro One Board.
A. The new Hydro One Board was announced on August 14,
20L8. The members of the Board and the process for their
appointment are described in detail in the prefiled
Supplemental Testimony of Hydro One Chair Thomas Woods and
the Scarlett Testimony
A. Do any of these developments affect Hydro One's
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proposed acquisition of Avista?
A. No, they do not affect the Proposed Transaction,
10 and Hydro One remains commj-tted to the Proposed Transaction.
11 The transaction was designed to stand the test of time,
72 through chanqes in personnel at any levef. The Hydro One
13 AccountabiTity Act has no application to Avista because it
L4 specifically refers to Hydro One and its subsidiaries (except
15 subsidiaries incorporated IN jurisdictions outside Canada) .
76 The appointment of the new Hydro One Board, consistent with
71 the Governance Agreement,3 demonstrates that Hydro One is
18 continuing to operate as it has in the past. Hydro One 1s
79 stable and financially stronq. Hydro One remains fully
20 capable of performinq aII of its obligations under aII the
27 merger commitments.
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Hydro One Lj-mited
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3 See Scarlett Testimony, Exh. No. 10, Schedule 3.
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III. EINATiICIAI STRENGTH OF HYDRO OIIE
A. You previously testified that Hydro One was
financially strong and is viewed by credit rating agencies as
a prudent, well-managed company. Is that stiJ.J. the case?
A. Yes, the credit rating agencies continue to view
Hydro One as a prudent, well-manag,ed company. This is
demonstrated by stronq investment grade credit ratings from
Moody's Investors Service ("Moody's") , Standard & Poor's
("S&P"), and Dominion Bond Rating Service ("DBRS") : (i) HOI
has an "A- (CreditWatch Negative) " long-t.erm credit rating
from S&P, a "Baa1 (Stabl-e Outl-ook)" rating on senior unsecured
debt from Moody's, and an "A (High) (Stab1e Outlook) " rating
from DBRS; and (ii) Hydro One has an "A- (CreditWatch
Negative) " issuer credit rating from S&P. By comparison,
Avista's credit ratings are "BBB (CreditVf,atch Positive) " from
S&P and "Baa1 (Negative Outlook) " from Moody's. Hydro One's
investment grade credit ratings indicate that the company has
access to capital on reasonabl-e terms and conditions.
A. Have rating agencies conmrented on the recent
developments that you describe?
A. Yes, several- have commented. For exampler ofl July
L6, 20L8, Moody's published its "Credit Outfook" report. This
is a bi-weekly report outlining Moody's outlook on credit
implications of currenL events. The July 16, 20L8 report
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includes a sectj-on on Hydro One entitfed "Hydro One's Board
and CEO Are Forced Out, a Credit Negative." The report
concl-udes that "Ontario's willingness to force out the
current board clearly demonstrates t.hat the utility is not
j-mmune to direct political interference/ a credit negative."
The report al-so concludes that if the Province follows through
on its promi-se to reduce some customer rates by 72%, and that
reduction reduces Hydro One's revenue and cash flow, it would
be materially credit negative for Hydro One. Reiterating
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11 One's completion of the acquisition of Avista is credit
L2 negative for both Hydro One and HOI. Finally, the report
13 notes that Hydro One woul-d be following an established process
74 for establ-ishment of a new board.
15 On September 13, 2018, S&P issued a report titl-ed "Hydro
L6 One Ltd. And Subsidiary Downgraded To 'A-' On Lower Governance
11 Assessment; Ratings Remain on Credit Watch."s S&P l-owered
18 its issuer credit rat.ings on Hydro One and its subsidiary
a .9ee Moody's Investor Service, Rating Action: Moody's downgrades HOI to
Baal from 43; rating outl-ook stabLe (June 20, 2078),
https : / /www. moodys. com/research /Moodys -downgrade s -Hydro-One - I nc - to -Baal-from-A3-rating--PR 385523 ;see a7so, Moody's Investor Servi-ce,
Rating Action: Moody's Affirms Hydro One's senior unsecured 43 ratings;outlook changed to negative (July 19, 20L1) ,https : / /www.moodys. com/research,/Moodys-Affrrms-Hydro-Ones-senior-
unsecured-A3-ratings -outlook-changed--PR 3 7 0 02 1 .s Avista filed a copy of this report in this docket on September 17 , 2078.
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Hydro One Limited
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Hydro One fnc. to 'A-' from 'A'. A11 ratings remain ono
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CreditWatch with negative implications.
S&P explained the one-notch downgrade as fol-Iows:
The Government of Ontario recently impJemented
TeqisLation/ requiring Hydro One's board of
directors to estabLish a new executive compensation
framework for the board, CEO, and other executives.
The TegisTation also amends the current Ontario
Energy Board Act, requiring the Ontario Energy
Board to excLude any compensation paid to the CEO
and other executives from consumer rates -
We consider such action as a qovernance deficiency
refated to Hydro One's ownership structure and are
lowering our manaqement and governance (M&G)
assessment on Hydro One Ltd. (HOL) and Hydro One
Inc. (HOI) to fair from satisfactory.
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3B Hydro One's credit rating remains investment grade.
79 Further, the legislation cited by S&P as the reason for the
20 downgrade, the Hydro One AccountabiTity Act, 2078, applies
2L only to Hydro One/ s subsidiaries in Canada, and t.herefore,
22 would not apply to Avista if the proposed merger is
23 consummated.
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25 A. Did the pubJ-ication of Moody's Credit Outlook
26 change Moody's credit rating of HOI or Hydro One?
21 A. No, it did not.
28 A. Have the recent developments you described resulted
29 in any changes to credit ratings of Hydro One by Moody's or
30 DBRS?
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A. No, they have not. Neither Moody's nor DBRS have
ratings for Hydro One (that is, Hydro One Limited) . HOI, the
company that holds our regulated utility in Ontario, has
ratings from Moody's and from DBRS. Those ratings l-ikewise
have not changed as a result of recent developments.
A. Are these sorts of conunents from rating agencies
cause for concern about the financial health of Hydro One and
its suitability as a parent company for Avista?
A. No, they are not.
A. Please explain.
A. Eirst, the ratings themselves demonstrate that the
rating agencies bel-ieve Hydro One remains financially sound.
None of the issues that the agencies commented on resulted in
a change to the actual ratings. Strong i-nvestment grade
credit ratings indicate that the company has access to capital
on reasonable terms and conditions.
Hydro One's second quarter resul-ts, announced on August
14, 20L8, underscore its financial stabillty. Hydro One
reported earnings per share (EPS) of Canadian $0.34 and
adjusted EPS of Canadian $0.33, compared to Canadian $0.20 in
the prior year, dfl increase of 10% and 65e,, respectively.6
Our "cufLure of continuous improvement yielded high
6 News Release, Hydro One, Hydro One Reports Strong Second Quarter ResuJ-ts,(Aug. 14, 2018), http://hydroone.medj-aroom.com/2018-08-14-Hydro-One-
Reports-Strong-Second-Quarter-Resul-ts (Iast visited Aug. 14, 201,8)
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2 tn excess of regulatory requirements and a further Canadian
3 $6 mil-Iion decrease in overdue accounts receivable due to
4 proactive support progrrams. "T Paul Dobson, our Acting
5 President and CEO, stated that, "'Hydro One's stronq second
6 quarter financia.l- results coupled with continuously improving
7 operational and customer service metrics hiqhliqht the
8 underlying strength of the business as well as the Company's
9 positive momentum since the Initial Public Offering in
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11 In Q2, Hydro One obtained Canadian $4.4 billion in credit
72 l-ines. HOI obtained Canadian $1.4 billion in long-Lerm debt.o 13 The long-term debt. j-ncluded a Canadian $750 million 31-year
1,4 tranche that was lssued at a 3.63%, the l-owest interest rate
15 in the history of the company.
L6 Second, Hydro One remains a very suitable parent company
71 for Avista for all the reasons discussed in prior testimony.
1B The companies are culturally aligned. Hydro One's market
79 capital-ization is approximately three times the size of
20 Avista and wil-1 provide Avista with improved access to capital
27 markets as described in Section IV below. Hydro One is a
22 strat.egic investor, rather than a financial investor, and 1ts
1 rd.I rd.
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interests are aligned with Avista's for long-term success.
Hydro One has made a number of commitments to preserve
Avista's abil-ity to run its own business on an ongoing basis,
for the benefit of Avista's customers.
Fina11y, Avista is who1Iy protected from any potential
financial- turbul-ence at Hydro One by the financial- and ring-
fencing commitments described in Section V bel-ow
A. Have the recent developments you described resulted
in any chang'es to Hydro One's stock price?
One's stock price decreased Canadian $7.21 (or 6.0%) in the
month ended July 31 to close at Canadian $19.0. This decline
was greater than the average decline of 3.9% in the Utilities
- Regulated sector for the same period.e During the month of
10 A. Hydro One's stock price has changed, although it is
11 imposslble to know al-l the causes for the changes. Hydro
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L6 August, Hydro One's stock price stabilized, and closed at
11 Canadian $79.28 on August 31. The stock price has continued
18 to firm, closing at $19.85 on September 18.
19 A. Are changes in Hydro One's stock price cause for
finance the Proposed20 concern about Hydro One's ability to
2L Transaction and to satisfy such merger conmritments as
22 providing equity on an as-needed basis and maintaining
e News Bites Canadian Markets, MonthTy: Hydro One -Zoses CAD620 miffion
(US$474 niffion) in MCap in JuJy, biggest drop in Util-ities - ReguJated
sector (Ju1y 31, 20L8), LexisNexis Newsdesk (subscription req'd).
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investment-grade ratings for Hydro One and Avista?
A. No, the changes in Hydro One's stock price have no
meaningful impact on the Proposed TransacLion.
A. Please explain.
A. Since May 20L8, Hydro One's access to capital and
it.s abil-ity to finance Avista remains largely unchanqed. The
decline in Hydro One's stock price does not impact Hydro One's
ability to finance t.he Proposed Transaction. We expect the
convertible debenLures to be fuI1y converted to equity at the
previously agreed equity price around the time of the closing
of the Proposed Transaction. The equity from the convertibl-e
debentures, and the planned US$2.6 bil-lion debt financing',
whj-ch is supported by the US$2.6 billion in bridge financing,
is sufficient to fund the transaction.
Within our current plans we have sufficient financing
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76 flexibility to satisfy the merger commitments. Shoufd Hydro
71 One need to access equity markets to meet the merger
commitments, it would issue new equity at the prevailing price
at that time.
A. Is the L2Z electricity rate reduction proposed by
the Provincial govertrment cause for concern about Hydro One's
ability to finance the Proposed Transaction and to satisfy
its merger conunitments?
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A. No, this proposal has no impact on the Proposed
Transaction.
A. Please explain
A. First, it shoul-d be noted that Hydro One has not
proposed any rate reductions. Moreover, Hydro One does not
anticipate that any e.Iectricity rate reductions proposed by
the Province of Ontario wifl have any impact on Hydro One's
abll-ity to elther: a) operate and maintain Avista operations
1n Idaho, or b) fund the rate credit and other commitments
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11 Hydro One does not intend its acquisition of Avista to
1,2 supplement Hydro One's rate revenue in its Ontario service
13 terri-tory. To the contrary, the acquisition of Avista is a
74 strategic investment: (a) it expands Hydro One's reach into
15 a new geographj-cal- market and into the gas distribution
16 business, (b) it creates geographic diversification and (c)
11 it increases scale. Like Avista, Hydro One earns a regulated
18 rate of return and the regulatory constraints on rates are a
19 universal fact of the utility business, noL something
20 specific to Hydro One. This deal is in no way intended to
21, subsj-dize the rates of Hydro One customers, but rather, it i-s
22 part of a strategy of diversification and growth with a
23 partner that is a strong cul-tural match.
24 With respect to operations in Idaho, Hydro One remains
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Hydro One Limit.ed
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2 numerous ring-fencing commitments agreed to in Idaho were
3 developed t.o ensure, among other things, that Avista would
4 not be subjected to influence by t.he Province of Ontario.
5 Indeed, Avista's ability to operate and maj-ntain its business
6 would not have been directly affected by any of the recent
7 actions by the Province of Ontario.
B Q. Several of the conunitments (coJ.J.ectively,
9 "Stipulated Conunitments" and individually, " Stipulated
10 Commitment") in the Idaho Stipulated Settlement require
11- Avista's shareholder, Hydro One, and not Avista's ratepayers,
72 to provide funding for certain programs (Stipulated
13 Conrnitment Nos. 11 Cottununity Contributions ; L9 - Rate
t4 Credits; 58 - Funding for Energy Efficiency, Weatherization,
15 Conservation, and Low-Income Assistance Programs; 6L
L6 Cormnunity Contributions; 70 - Montana Corununity Transition
11 Fund). How can the Idaho Public Utilities Corunission (the
18 "Corunission") be certain that funding will be available for
79 these Stipulated Cormnitments in light of the developments
20 described above?
27 A. First, with respect to the $15. B miflion rate
22 credit provided in Stipulated Commitment No. L9, that credit
23 wilf simply flow through to Avi-sta customers in the biffs
24 issued by Avista without Hydro One having to take any action.
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Hydro One Limited
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2 requesting approval, which will ensure Avista's Idaho
3 customers begin receiving the benefit of the rate credit
4 immediately. Although no funds will- flow from Hydro One to
5 Avista, Hydro One will bear the burden of these rate credits,
6 as they will reduce the earninqs potentially available to
7 Hydro One as dividends. The rate credit constitutes the bulk
8 of Hydro One's funding commitments.
9 Second, Stipulated Commitment No. 66 establ-ishes that if
10 Avista has retained earningis that would otherwise be
l-1 avail-able to Hydro One as dividends, those retained earnings
72 can be used to fund Stipulated Commitment Nos. 11, 58, 6L,
l-3 and 70: "To the extent Avista has retaj-ned earningis that are
L4 avail-abl-e f or payment of dividends to Olympus Equity LLC
15 consistent. with the ring fencing provisi-ons of this l-ist of
1,6 merger commitments, such retained earnings may be used. Funds
1,7 available from other Hydro One affiliates may be used without
18 l-imitation." 10 In essence, funds otherwise avail-abIe for
19 payment of dividends to Olympus Equity and on up the chain
20 wil-l- instead be directed to funding these commitments: (i)
27 $5, 308,841 over 10 years to fund energy efficiency,
22 weatherizaLion, conservation, and low-income assistance
10 Avista's abillty to use retained earnings to meet these commitments
also wil-I be governed by Hydro One's commitments 1n Stlpulated Commltment
Nos . 25, 34, 36-3'l .
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programs (Stipulated Commitment No. 5B); (ii) $4,500,000 for
a Colstrip community transition fund (Stipulated Commitment
No. 10); and (ii-i) the charit.able contributions in Stipulated
Commitment Nos. 11 and 51. Wit.h this approach, there is no
need for cash to ffow from Hydro One to Avista.
Third, as discussed above, Hydro One remains flnancially
healthy and f have no reason to think that will change
Fourt.h, the Commission wifl have fulI enforcement
authority over the binding commitments included 1n the
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11 Scarlett Testimony.
t2 Fina1ly, to the extent that. there is concern that the
13 Province will not provide the funding for these commitments,
L4 the Province wil-l- not be involved in meeting these commitments
15 the obligations are those of Hydro One, not of its
76 sharehofders.
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1B IV. AVISTA'S ACCESS TO CAPITAT
79 A. How wiJ-l having Hydro One as a parent affect
20 Avista's access to capital?
2L A. By being part of a larg'er, financially strong
holding company, Avista's access to capital wifl improve.
Avista is a relatively sma11 utility company as compared with
other utility companies in the U.S. As shown in Avista CEO
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Scott Morris's testimonyr ll Bank of Amerj-ca Merrill Lynch
determined that at. the time the Hydro One acquisition was
announced in July 2071, Avista's market capitalization of
$2.1 billion was smaller than all but four publicly-traded
U.S. electric utilities covered by Vafue Line. Post-merger,
the combined Hydro one/Avista company would have a market
capitalization of approximately $13 bilfion, placing the new
combined company near the middle of U.S. electric utilities
by market capitalization.
Being part of the Iarger Hydro One organization will-
11 provide Avista with increased scafe that may enhance its
72 ability to compete for capital wit.h larger utility holding
13 companies in the U.S. Hydro One has deep and broad banking
14 relationships. Banks aqqressively pursue Hydro One's
15 business. Once Avista is part of Hydro One, it too may
L6 realize the benefit.s of Hydro One's strong financial
Ll rel-ationships. Many smalf and medium size utility companies,
18 such as Avista,are finding that mergers that allow t.hem to
19 increase their size and financial strength are important in
20 order to affow them continued access to capital markets on
2I reasonable terms to finance the ongoing capital- needs
22 associated with serving their customers.
11 Morris Exh. No. 1, Schedufe 1
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V. RING-FENCING COMMITMENTS
A. Please describe the merger conmritments that "ring-
fence" Avista's financial position and insulate Avista's
customers from any adverse financial impacts associated with
the Proposed Transaction.
A. Hydro One, Avista, and all- parties (collect.ively,
the "Parties") fil-ed a Stipulated Settlement on April 13,
20L8. The Parties negotiated numerous commitments designed
to provide separate governance and flnancial ring-fencing
between Avista and Hydro One. Certain of these merger
commitments were developed to ensure that Avista cannot be
subjected to political int.erference or influence by the
Province. Key provisions include:
Avista Board Composition. Avista wil-I have a nine-
member board separate f rom Hydro One that wil-l- govern Avista's
management and operations. Three of the flve Avista directors
selected by Hydro One (not by t.he Province ) must be
independent under NYSE rules. Eurther, those three directors
must be resldents of the Pacific Northwest. See Stipulated
Commitment No. 3.
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24 dlrector. See Stipulated Commitment No. 43.
Lopez, Supp L9
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Avista Executive Management. Avista will seek to retain
the executive manaqement currently in place, and replacements
must be selected by Avista's board
Stipulated Commitment No. 2.
not Hydro One. See
Employee Retention.Avista's employees will be
retained. See Stipulated Commitment Nos. 9, 10.
Equity Support from Hydro One. Hydro One is required to
provide Avista with enough equity so that. Avista can access
debt on reasonable terms. See Stlpulated Commitment No. 34.
10 Therefore, neither Hydro One, nor the Province, can deprj-ve
11 Avist.a of its capital- and assets.
72 Separate Avista Credit Ratings. Avista will- continue to
13 have its own credit ratings. Hydro One and Avista agiree to
L4 notify the Commission wj-thin two business days of any
15 downgrade of Avlsta's credj-t rating to a non-investment grade
76 status. See Stipulated Commitment Nos. 36, 31. Therefore,
l1 agaln, neJ-ther Hydro One, nor the Province, can deprive Avista
18 of its capital and assets.
79 Restrictions on Dividends. Avista wil-l- be prohibited
20 from issuing dividends if certain financial- metrics relating
27 to the equity floor, credit ratings and debt coveraqe are not
22 met. Basically, this operates to keep retained earnings at
23 the Avista level- where they will improve Avista's financial-
24 strength. See Stipulated Commitment No. 38. This too
Lopez, Supp 20
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Proceedings.Several of the Stipulated Commitments protect
Avista from belng drawn into bankruptcy proceedings that are
not in the best interest of Avista and its customers. Avista
will- issue a single share of preferred stock referred to as
the Gol-den Share to an independent third party (see Thies
Exh. No. 72, Schedule 1). The vote of this share wifl be
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11 Stipulat.ed Commitment No. 42. Eurther, Avista's entry into
72 voluntary bankruptcy would require the consent of a two-
13 thirds majority of all of its directors, including the
L4 affirmative vote of at feast one of the Independent Directors
15 at Avista. See Stipulated Commitment No. 43. Hydro One and
76 Avista must also provide a non-consolidation opinion to
71 confirm the effectiveness of the ring-fencing measures to
1B prevent the substantive consolidation of the assets and
19 liabilities of Avista with those of the entit.ies above it. in
20 t.he corporate chain of ownership. See Stipulated Commitment
2L No. 44 . The corporate struct.ure afso includes Olympus Equity
22 LLC, a bankruptcy-remoLe special purpose entity that will
23 have no debt. ,See Stipulated Commitment No. 45. Therefore,
24 neither Hydro One, nor the Province/ can obtain Avista's
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capitaf and assets through a bankruptcy proceeding unl-ess
that would be in the best interests of Avlsta's customers.
Restriction on Pledge of Assets Avj-sta's utility
assets can be pledged only for the benefit of Avista, not
Hydro One. See Stipulated Commitment No. 46. Therefore,
neither Hydro One nor the Province can strip Avista of its
capital and assets.
a. In light of recent events, have Hydro One and Avista
proposed any additional corunj-tments?
10 A. Yes, Avista and Hydro One have agreed upon an
11 additional commitment to provide further protectJ-on to
L2 Avista's employees, such that Avista wj-l-l be abfe to continue
o 13 to recrult and retain the most highly qualified employee
74 tal-ent base for our customers:
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Avista Employee Compensatj-on: Any decisions regardlng
Avista employee compensation shal-l- be made by the Avj-sta
Board consistent with the terms of the Merger Agreement
between Hydro One and Avista, and current market
standards and prevalling practices of relevant U.S.
efectrlc and gas utility benchmarks. The determination
of the level of any compensation (including equity
awards) approved by the Avista Board with respect to any
employee in accordance with the foregoing shall not. be
subject to change by Hydro One or the Hydro One Board.12
25 A. In addition to the above cornnritment which Hydro One
26 and Avista have already proposed, would you adopt any
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12 AVU-E-17-09, AVU-G-17-05, Letter from Joint Applicants Regardlng
Update on Recent Changes in Hydro One Management (Jufy 18, 2018), pp
5-6.
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additional conunitments relating to financial matters?
A. Yes, although Hydro One and Avista believe the
current Idaho commitments are sufficiently robust to insulate
Avista's customers in Idaho from any potential effects of
political-, management, or rate changes at Hydro One, Hydro
One and Avista would be wiffing to adopt any of the following
Oregon commitments in Idaho.
Oregon StipuJ,ated Com,nifuent No. 39 (no comparable colarnifuent
Eoreign Exchange and Hedging on Dividends Payments and
ATTocations
Avista and Parent agree that Avista ratepayers will- be
hefd harmJ-ess from any currency exchange or related cash
fl-ow smoot.hing or hedging costs pertaining to activities
beyond Avista's Oregon utility operations and not usual
and customary pri-or to cfose of the Proposed
Transact.ion.
Oregon Stipulated Com,nituent No. 43 (coryare ldaho StipuJ,ated
Comnitnent No. 25)
Cost of Capital
Avista and Parent agiree that Avista's Cost of Capital,
including Avista's Rate of Return (ROR) , common equlty,
and Long-Term Debt, shall not be more costly after the
cl-ose of Proposed Transaction than they would have been
absent the Proposed Transaction. Consistent with
Commitment. 35 (a), Avista bears the burden of proving
that increases in Avj-sta' s Cost of Capltal, incJ-uding
Avista's ROR, common equity, and Longi-Term Debt, is
caused by clrcumstances or developments that are
unrelated to the financial risks or other
characteristics of the Proposed Transactlon.
Oregon StipuJ,ated Comrnifuent No. 54 (no comparable cowituent
Lopez, Supp 23
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Awista Cash Flows
Avista commits, and Parent agrees, that. prj-or to upward
dividends from Avista to Olympus Equity LLC, Avista cash
fl-ows wilI not be comingled in common accounts with cashffows for other purposes at either of Olympus Equity,
LLC or Hydro One, including al-I Hydro One subdivlsions
and affil-iates. Hydro One wiII ensure that all of theParent's corporate entities maintain accounts and
subaccounts that are separate from Avista accounLs and
subaccounts, sufficient to cause handllng of cash flowsto be entirely consistent with Avista's corporate
purposes.
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L4 VT. PROPOSED TRJAI{SACTION FINANCTNG
15 A. Please describe how the acquisition of Avista by
76 Hydro One will be financed.
l1 A. As I previously testified, Hydro One j-s committed
18 to maintainlng an investment-grade bal-ance sheet through and
79 after completion of the acquisition. Hydro One plans to
20 finance this al-1-cash transaction using a mix of long-,
27 medj-um- and short-term debt together with a convertible
22 debenture installment receipts offering. Hydro One is
23 planning to issue the debt financing in U.S. do1fars totaling
24 US$2.6 bil-lion (and issued convertible debenture installment
25 receipts in Canada of Canadian $1.54 bill-ion or approximately
26 US$1.2 billion) . We expect the convertibl-e debenture to be
27 fuI1y converted to equity around the time of the closing of
28 the Proposed Transaction. The planned US$ debt financing
29 contemplates a combination of 5-year, 1O-year and 3O-year US$
30 denominated notes.
Lopez, Supp 24
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A. Have recent developments led to any changes in this
A. No, the financing plan descr.ibed above is stil-l- in
VII. AVISTA'S FT'TI'RE FINAI{CIAI HEAITH
A. Do the conunitments in the Application ensure that
Hydro One wilL preserve Avista's financial health?
A. As previously dlscussed, there is evj-dence t.hat.
plan?
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10 Avista's credit rating may be improved as a result of the
11 Proposed Transaction in fact, Avista's credit rating
12 outlook was revised from Stabl-e t.o Positive by S&P upon
13 announcement of the deal. Further, Hydro One has specifically
74 committed to maintain AvisLa's actual common equity ratio at
15 a level no less than 44 percenL. See Stipulated Commitment
L6 No. 25. Hydro One is committed to provide equity t.o support.
Ll Avista's capital structure designed to aIlow Avista access to
18 debt financing under reasonable terms and on a sustainabl-e
19 basis. See St.ipulated Commitment No. 34. An interlocking
20 provislon, Stipulated Commitment No. 25, provi-des that,
27 "Avista will not advocate for, and Hydro One agirees Avista
22 will not advocate for, a higher cost of debt or equity capital
23 as compared to what Avista's cost of debt or equity capital
24 would have been absent Hydro One's ownership." Thus, Hydro
Lopez, Supp 25
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One has fu1Iy protected Avista's f inancial heal-th ag.ainst any
negative effects from the Proposed Transaction.
O. Does this conclude your supplemental test5rnony?
A. Yes it does.
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