20180924Reed Supplemental Direct.pdf

ldaho Pubtic Utilities Commission
Office of the SecretaryRECEIVED
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ON BEIIALF OF AVISTA CORPORJATION
DAVID J. MEYER
VICE PRES]DENT AND CHIEF COUNSEL FOR
REGULATORY & GOVERNMENTAL AEEAIRS
P.O. BOX 3721
L477 EAST MISS]ON AVENUE
SPOKANE, WASHTNGTON 99220-3121
TELEPHONE: [phone]L6
FACSIMILE: [phone]
DAV]D. MEYERGAVISTACORP . COM
ON BEHATF OF HYDRO ONE LIMITED
EL]ZABETH THOMAS, PARTNER
KARI VANDER STOEP, PARTNER
K&L GATES LLP
925 FOURTH AVENUE, SUITE 29OO
SEATTLE, WA 981014-1158
TELEPHoNE: [phone]
FACSIMILE: [phone]
LIZ . THOMAS GKLGATES . COM
KAR] . VANDERSTOEPGKLGATES . COM
IN THE MATTER OF THE JOINT )
APPLICAT]ON OF HYDRO ONE LIMITED )
(ACTING THROUGH ]TS INDIRECT )
SUBS]D]ARY/ OLYMPUS EQUITY LLC) )AND )
AVTSTA CORPORATTON )
FOR AN ORDER AUTHORIZING PROPOSED )TRANSACTION )
BEEORE THE IDAHO PT'BLIC UTILITTES COMMISSION
CASE NO.
. A QI' I\IN
Boise, ldaho
AVU-E-1 1 -09
AVU-G-17-05
SUPPLEMENTAL TESTIMONY
OE
JOHN R. REED
EOR CONCENTR]C ENERGY ADV]SORS
ON BEHALF OF HYDRO ONE LTD.
AND AVISTA CORPORATION
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I. INTRODUCTION
A. PLease state your nerme and business address .
A. My name is John J. Reed. I am President and Chief
Executive Officer of Concentric Energy Advisors, Inc.
("ConcenLrLC") and CE Capital Advisors, Inc. (*CE Capital"),
which has its headquarters at 293 Boston Post Road West, Suite
500, Marfborough, Massachusetts 0I152.
A. On whose behalf are you submitting this testimony?
A. f am testifying on behalf of Hydro One Limlted
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10 ("Hydro One") and Avista Corporat.ion ("Avista") . Hydro One
11 filed an Application seeking an order authorizinq Hydro One,
12 acting through its indirect subsidiary Olympus Equity LLC, to
13 acqulre alf of the outstanding common stock of Avista and
74 Avista would become a direct, who11y-owned subsldlary of
15 Olympus Equity LLC and an indirect, wholly-owned subsidiary of
76 Hydro One (the "Proposed Transactj-on" and "Application for
!1 Approval of Transaction"). Hydro One and Avista subsequently
1B executed a stipulation and settlement ("SettlemenL
19 Stipulation") with the Staff of the ldaho Public Utilities
20 Commission ("Staff"), Clearwater Paper Corporation
27 ("Cfearwater"), fdaho Eorest Group, LLC, Idaho Conservation
22 League ("fCL"), the Community Action Partnership Association
23 of Idaho ("CAPAI"), and the Washi-ngton and Northern Idaho
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District Council of Laborers ("WNIDCL") (individually a
"Party" and collectively the "Parties") . The Settlement
Stipulation was filed with the Idaho Public Utilities
Commission ("Commi-ssion" ) on ApriJ- L3 , 2078 .
A. PLease describe your educational background and
professional experience in the energy and utiJ-ity industries
A. I have more than 40 years of experience in the
energy industry and have worked as an executive in, and
consult.ant and economist to, the energy j-ndustry. Over the
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10 past 29 years, I have directed the energy consultlng services
11 of Concentric, Navigant Consulting, and Reed Consulting Group.
72 I have served as Vice Chairman and co-CEO of the nation's
13 largest publicly-traded consulting firm and as Chief Economist
L4 for the nation's largest gas utility. I have provided
15 regulatory policy and regulatory economlcs support to more
L6 than 100 energy and utility clients and have provided expert
71 test.imony on regulatory, economic, and financi-al- matters on
18 more than 150 occasions before the Federal- Energy Regulatory
79 Commission (*EERC"), Canadian regulatory agencies, state
20 utility regulatory aqencies, various state and federal courts,
27 and before arbj-tration panels in the United States and Canada.
22 As an industry expert, I have been involved in numerous
23 utility transactions over the past 20 years, including
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mergers /divestitures,asset acquisitions,and
reorg'anizations. In addition to this transaction, f have
advised clients invofved in utility transactions in Arrzona,
Connecticut, Defaware, the District of Columbia, Hawaii,
Kansas t lll-inois, Indiana, Iowa, Louisiana, MaryJ-and,
Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey,
New York, Pennsylvania, Rhode Is1and, Texas, Utah, and
Wisconsj-n. I have appeared as an expert witness in several
jurisdictions on the topics of merger policy standards,
10 acquisition financing plans/ merger benefits analyses,
11 affiliate codes of conduct, impacts on competition and enerqy
o 72 markets, and mergier-related commitments or conditions. I am a
13 graduate of the Wharton School- of Business at the University
L4 of Pennsylvania, and previously attended the University of
15 Kansas. My background is presented in more detail in Exh. No
16 13, Schedule 1
71 A. Please describe Concentric's activities in energy
18 and utility engagements.
19 A. Concentric provides financia1 and economic advisory
20 services to many energiy and utillty cli-ents across North
2l America Our regulatory, economic, and market analysis
22 services incfude utility ratemaking and regulatory advisory
23 services, enerqy market assessments, market ent.ry and exit
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2 demand forecasting, resource planning, and energy contract
3 negotiations. Our financial advisory activities include both
4 buy- and sel-l--side merger, acquisition and divestiture
5 asslg-nments, due diligence and valuati-on assignments, pro j ect
5 and corporate finance services, and transaction support
7 services. In additionr we provide litigation support services
B on a wide range of financial and economic issues on behalf of
9 clients throughout North America. CE Capital is a fuIly
10 registered broker-dealer securities firm specializ:-nq in merger
11 and acqui-sit.ion activitj-es. As CEO of CE Capital, I hol-d
L2 several securiti-es licenses that cover aII forms of securiti-es
13 and invesLment banking activities
1,4 A. What is the purpose of your testimony?
15 A. The purpose of my testimony is to provide my
16 assessment of the reasonabl-eness and suf f ici-ency of the
I1 governance, financial integrity and ring-fencing provisions of
1B the Commitments attached as Exhibit A to the Sett.l-ement
L9 Stipulationl in light of the recent political- devel-opments j-n
20 the Province of Ontario (the "Province") and changes in Hydro
27 One's execuLive manaqement and board of dj-rectors.
1 AVU-E-1'7-09, AVU-G-17-05, Stipulation and Settl-ement (April 13, 2018)
(j-ncluding Appendlx A, "Master Llst of Commitments ln Idaho") ("Settfement
Stipulation").
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A. Iilhat is your understanding of the recent poJ-itical-
developments in the Province and the governance changres at
Hydro One?
A. Hydro One aqreed on JuIy 7L, 20L8, that its existing
Board of Directors wou1d resign by August 15, 20L8, and Hydro
One's President and Chief Executive Officer (the "CEO") would
retire, effective immediatefy. On August 74, 2078, Hydro One
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8 announced its new 1O-member Board of Directors (the "Board") .
9 Hydro One's new Board is in the process of selecting a new
10 CEO. It is my understanding that the replacement of Hydro
11 One's Board was generally consj-stent wlth the Governance
72 Agreement (the "Governance Agreement") between Hydro One and
13 Her Majesty the Queen in Right of Ontario, provided as Exh.
L4 No. 10, Schedufe 3, as described j-n the Supplemental- Testimony
15 of James Scarlett ("Scarlett Testimony"), and with the July
16 71, 2078 Letter Agreement between Hydro One and the Province
71 ("Ju1y 2078 Letter AgreemenL"), provided as Exh. No. 10,
1B Schedule 1 and as an attachment to the Letter from Joint
L9 Applicants Regarding Update on Recent Changes in Hydro One
20 Management (JuIy 18, 20LB) ("Avista and Hydro One Comments").
27 On July 15, 2018, the new Provincial government
22 introduced the Urgent Priorities Act, 2078, which, included as
23 Schedule t, the Hydro One Accountability Act, 2078, provided
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as Exh. No. 10, Schedule 2 The Urgent Priorities Act
received Royal Assent on July 25, 2078, which is the day it
came into force as faw in the Province. Schedule L, the Hydro
One AccountabiLity Act (the "Act") came into force on the day
named by proclamation of the Lieut.enant Governor, which
occurred on Augrust 15, 2078. The Act requires, among other
things, the Board of Hydro One to establish a new compensation
framework for t.he Board, CEO, and other executives in
consultation with the Provj-nce and the other five largest.
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10 shareholders. The Act wiff not apply to Avista if Avista
11 becomes a subsidiary of Hydro One.
t2 Please refer to the Scar1ett Testlmony and the Avista and
13 Hydro One Comments f or a more i-n-depth discussion of t.hese
L4 recent developments at Hydro One.
15 A. How is the remainder of your testimony organized?
76 A. Section II summarizes my key concfusions.In
11 Section ffI, f evaluate the governance-relat.ed commitments
1B made by Hydro One and Avista in the Settlement St.ipulation.
79 Section lV provides my evaluation of the ring-fencing
20 commitments made by Hydro One and Avista. In Sectlon V, I
27 evaluate the financial integrity commitments made in the
22 Settlement Stipulation. Eina11y, Section VI presents my
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o 23 concl-usions regarding the Proposed Transaction.
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A. Are you sponsoring any exhibits as part of your
testimony?
A. Yes. Attached to my testimony are:
o Exh. No. 13, Schedule 1 Resume and testimony
listing
o Exh. No. 13, Schedule 2 Recent Merger
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Governance-ReIated Conditions
o Exh. No.13, Schedule 3 Recent Merger Ring-
Fenclnq Condltlons
o Exh. No. 13, Schedule 4 Recent Merger Financial-
Integrity-ReIated Conditions
A tabl-e of contents for my testimony is as fol-lows:
]. INTRODUCTION 1
]I. SUMMARY OF KEY CONCLUS]ONS . .
]I]. THE SETTLEMENT
]V. THE SETTLEMENT
V. THE SETTLEMENT
.......8
COMM]TMENTS
VI. CONCLUS]ONS
ST]PULATION'S GOVERNANCE COMM]TMENTS . .12
STIPULATION/ S R]NG_FENCING COMMITMENTS 23
ST]PULATION/ S F]NANCIAL INTEGRITY
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II. SI'MUIARY OE KEY CONCLUSTONS
A. Please begin by providing your general observations
about the recent political developments in the Province and
the governance changes at Hydro One
A. While changes in Directors and executives are part
of t.he normal course of business, simuJ-taneously changing both
the Board of Directors and the CEO is unusual. It is
important to consider the pot.ential implicatlons of these
chanqes for the Proposed Transaction, Avista, its ratepayers
10 and the public j-nterest. I have reviewed the Settlement
l-1 Stipulation, which includes an integrated and comprehens j-ve
o L2 set. of gtovernance, ring-fencing, financial integrity and other
13 regulatory commitments (individually "Stipulated Commitment
14 No. ", col-lectiveIy, the "Stipulated Commitments") The
15 Part.ies to the Settlement Stipulation aqree that the
16 Settfement Stipulation "represents a fair, just and reasonable
1'l compromise of all- the issues raised in the proceeding and its
18 acceptance by the Commission represents a reasonabfe
19 resolution of the multiple issues identlfled in this case.
20 The Parties, therefore, recommend t.hat. the Commission, in
2l accordance with RP Ll4, approve the Settlement. StipuJ-at j-on and
22 all of its terms and condltions without material change or
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condition."2 Nothlng in the recent political changes in t.he
Provlnce and governance changes at Hydro One shoufd change
that conclusion. The Stipulated Commitments made in the
Settlement StipuJ-ation, in particular the Avista governance,
ring-fencing and financial integrity commit.ments, provide
significant protections for customers and support the public
interest. There is nothing to suggest that once the Proposed
Transaction closes, Avista customers or the public int.erest in
Idaho wifl suffer any i11 effect.s from the recent events
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11 Provincial government.
L2 O. P1ease sununarize your key conclusions regarding the
13 Avista Board of Directors, ring-fencing, financial integrity
14 and other Stipulated Conunitments in the Settl-ement
15 Stipulation.
L6 A. The Settlement Stipulation provides a robust, state-
Ll of-the-art set of governance, ring-fencing, and other
1B St.ipulated Commitments both to provide the appropriate
79 separation of Avista from Hydro One and its other affifiates
20 and subsidiaries, and to protect Avista customers from
2L potential future risks. The Stipulated Commitments are very
22 robusL and weII in excess of industry norms established by
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o 2 Settlement Sti-pulatlon at p. 2
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commitments made in other recent utility mergers and
acquisitions.
The Stipulated Commitments were specifically designed to
address Hydro One's ownership of Avista and the Province's
role as the largest investor in Hydro One. The Stlpulated
Commitments al-so address the regulation of Hydro One by the
Ontario Energy Board (the *OEB"), an agent of the Province
which regulates naLural gas and electricity utilities in
Ontario. Amonq other things, the OEB sets rates and licenses
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10 aII participants in the Province's electricit.y and natural- gas
11 sectors. While the OEB is an independent aqency, it is st.il1
L2 subject to provincial legislation.fn summary, these
13 Stipulated Commitments provide for:
L4 o The independence of Avlsta's Board of
15 Directors, CEO, and executives whereby seven of
Avista's nine Directors wil-l- ei-ther be
independent as defined by the New York Stock
Exchange (*NYSE") rules ("Independent
Directors") or appointed by Avista, making it
impossible for Hydro One, the Province r ox any
sharehol-der to direct the governance or
manaqement of Avista;
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. The Avista Board of Directors to make aII
decisions regiarding the governance/ business
operations and local- presence/community
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involvement St.ipulated Commitments;
o Continued capital investment in strateqic and
economic development items;
a Hydro One's provision of equity to support
Avista's capitaf structure; and
o Ensuring Avi-sta's fi-nancial int.egrity by
maint.aining separate credit. ratings and debt.
11 instruments, prohibit.ing inter-company debt and
72 lendinq, restriction on pledging utility
13 assets, and restrictions on Avista's upwards
74 dividends and distributions, ds well as
15 restrictions and protections in the unlikely
76 event of a bankruptcy.
71 The efficacy of the Stipulated Commitments made as part
1B of the Settlement Stipulation is unchanged by recent events
79 If anything, recenL events highlight the validity of these
20 Stipulated Commitments and the unusuaf fevel of separation
2L they provide between Hydro One and Avista and restrictions on
22 Hydro One and the Province as it pertains to Avista.
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Taken as a whole, and in combination with the
Commissi-on's on-going regulatory oversight and authority over
Avista, Lhese Stipulated Commitments are appropriate and fulJ-y
address potential risks by ensuring that customers are
protected from potential- risks of the Proposed Transaction and
wiIl continue to enjoy safe and refiable electric service.
III. THE SETTLEMENT STIPUI,ATION' S GOVERNAI{CE COMMII!{ENTS
A. P1ease briefly highlight the Stipulation
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10 Settlement's governance-related commitments.
11 A. The Settlement Stipulation's governance-rel-ated
!2 commitments start with specific requirements regarding
13 Avista's Board of Directors As discussed by Hydro One's
L4 Executive Vice President and Chief Legal Officer James
15 Scarlett,3 if the Proposed Transactj-on is approved and closes
76 Avista wilf continue to be governed by its own/ independent
11 Board of Directors, separate from the Hydro One Board.
1B Stipulated Commitment No. 3 requires that Avista's Board of
19 Directors consist of nj-ne members: ( 1 ) three Independent
20 Directors, as def ined by t.he NYSE rul-es, and who are also
27 residents of the Pacific Northwest, (2) three Directors who
22 are members of AvisLa's current Board, (3) AvisLa's CEO, and
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o 3 Scarfett Testimony, S VIII
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(4) two execuLives of Hydro One or any of its subsidiaries.
The implementation of Stipulated Commitment No. 3 wil-1 result
in seven of the nine members of Avista's post-closing Board of
Directors being either NYSE-independent UL designated by
Avlsta, ensuring continued Avista focus for its Board of
Dlrectors.
a. How do the NYSE rules define "Independent" and what
is its import for Avista's post-closing governance?
A. The NYSE rules define "independent" as "no material
10 rel-ationship" with the company "either directly orasa
11 partner, shareholder or officer of an organization that has a
L2 refationship with the company"In establishing this4o13 definition, the NYSE noted that " Ie] ffective boards of
74 dj-rectors exercise independent judgment in carrying out their
15 responsibilitles. Requirlng a majority of independent
16 directors will increase the quality of board oversight and
71 lessen the possibility of damaging conflicts of interest. "s
4 NYSE, Inc., Llsted Company Manual Section 303A.02 (2018) ,http: / /wallsLreet. cch. com/LCMTool-s,/PlatformVj-ewer. asp?selectednode:chp%5F1%
5F4%5E3emanuaf:%2Fl-cm%2Fsections%2Fl-cm%2Dsectlons%2F (l-ast visited Sept. 5,
20L8, 4:17 PM) .s NYSE, Inc., Listed Company Manuaf Sectlon 303A.01 Commentary (2018),
http: / /wa1\sLreet. cch. com,/LCMTools/platformViewer. asp?selectednode:chp%5F1%
5F4%5F3emanual:%2F1cm%2Esections%2FIcm%2Dsections%2F (1ast visited Sept. 5,
2078, 4:18 PM) .
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A. I,ilere conunitments made to ensure that the composition
of Avista's Board of Directors provided in Stipulated
Conunitment No. 3 wi]-]- be maintained in the future as
individual Directors may turn over?
A. Yes. Stipulated Commitment No. 3 specifically
provides that if any Avista designee resigns, retires or
otherwise ceases to serve as a director of Avista for any
8 reason, the remaininq Avista designees shal1 nominate a
9 replacement director to fill such vacancy. Nomlnations are
10 approved by the Avista Board of Directors.
11 The Delegation of Authority ( see Appendix 5 of the Joint
o L2 Application) 6 provides that Hydro One may replace the Hydro One
13 designated Directors, provided that three are Independent.
74 The Delegation of Authority also provides Hydro One with some
15 fimited latitude in sati-sfying thls commitment: if it were
76 unabl-e to appoint an Independent Direct.or residing in the
Ll Paciflc Northwest 1n a timely manner, Hydro One could appolnt
18 an interim Director for no more than a six-month term who is
79 an employee of Hydro One or one of its subsidlaries while it
20 found a suitabl-e fndependent Director.
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6 AVU-E-7'7-09, AVU-G-17-05, Jolnt Application for order Authorlzi-ng
Proposed Transaction, Appendix 5 Delegation of Authority to Avista Board ofDirectors (Sep. l-4, 20L7).
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l1 A. Wtrat is the importance of this amendment to the
18 Delegation of Authority?
L9 A. This proposed amendment to the Delegation of
20 Authority provides extra protectJ-on for the independence of
2L the Avista Board in the event that t.he Province takes some
22 action in the future to control- a majority of the Hydro One
23 Board. If that event occurs, this amendment is triggered and
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1 Q. Are you aware of Hydro One and Avista's proposal to
2 limit Hydro One's latitude with respect to Hydro One's
3 designated Independent Directors on the Avista post-merger
4 board?
5 A. Yes. Hydro One and Avista propose to amend the
5 Delegation of Authority to eliminate this limited latitude
7 under certai-n circumstances. As discussed in t.he Scarlett
B Testimony, Hydro One and Avista propose that this exception
9 shal-I not apply Lf , at any time a circumstance ar j-ses, and
10 during the pendency of any such circumstance, whereby the
11 Province exercises 1ts rights as a shareholder of Hydro One,
72 or uses legislative authority, or acts in any other manner
13 whatsoever, that resultsr or woul-d result, in Ontario
1,4 appointing nominees to the Board of Directors of Hydro One
15 that constitute, or would constitute a majority of t.he
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blocks Hydro One's limited right. to replace any of its three
Independent Director designees on t.he Avist.a board with a
Hydro One executive or employee. This limitation makes clear
that there are no circumstances under which the Province or
Hydro One can control the Avista Board
A. Does the Settlement Stipulation include any other
specific governance conunitments?
A. Yes. Stipulated Commitment No.2 provides that
Avi-sta wiII seek to retain its current executives post-closing
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11 and Avista's ability to select and retain personnel- best able
t2 to meet its needs over time. The Avista Board of Directors
13 retains the abitity to dismiss executive management of Avista
74 and other Avista personnel for standard corporate reasons.
15 This commitment reinforces Avista's control over its
16 executives.
11 A. Has Hydro One made any additional- governance-related
18 corunitments incremental to those made in the Settlement
79 Stipulation?
20 A. Yes. In response to recent events, Hydro One and
2L Avista have proposed an additional commitment to provide
22 additional- clarity regarding the responsibility of the Avista
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1 Board of Directors. In the Avista and Hydro One Comments,
2 Hydro One made the foffowlng additional commitment:
Avista Employee Compensation: Any decisions
regarding Avista employee compensation shal-1 be
made by the Avista Board consistent with the
terms of the Merger Agreement between Hydro One
and Avista, and current market standards andprevailing pract.ices of ref evant U. S. e.Iectric
and gas ut.ility benchmarks. The determlnation of
the l-evel- of any compensation (including equity
awards) approved by the Avista Board with respect
to any employee in accordance with the foregoing
shall not be subj ect t.o change by Hydro One orthe Hydro One Board.T
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15 This new commj-tment makes cfear that the Avista Board,
L6 and not the Hydro One Board, the Province, or any other party,
Ll wi-l-l make decisions reqarding Avista employee compensation.
18 A. Did you evaluate how the Settlement StipuJ-ation's
L9 governance conunitments compare to other recent utiJ-ity mergers
20 and acquisitions in the U.S.?
27 A. Yes. f consi-dered 40 transactions involving the
22 mergier or acquisition of a U.S. investor owned utility (*IOU")
23 that have been completed slnce 2010. My review was based upon
24 publicly-availabfe information about these transactions
25 including state commission orders and information published by
26 SNL Einancial,an industry-specific financial market data
21 source for public and private companies worldwide.
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o 7 See Avista and Hydro One Comments at pp.5-6
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a. How do the governance Stipulated Connnitments compare
to governance corunitments made in these other IOU
transactions?
A. The qovernance Stipulated Commitments compare very
favorably with the governance commitments made in t.hese other
IOU transactj-ons. Exh. No. 13, Schedule 2 provides a sunimary
of the governance conditlons in these transactions. As shown
in that exhibit, none of t.he transactions I reviewed included
all of the governance commitments made by the Parties in the
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11 regarding executive compensation was only made or required in
72 one other transaction I revlewed or have been involved in
13 Further, commitments simifar to Stipulated Commitment No. 3,
74 Board of Directors, and Stipulated Commitment No. 2, Executive
15 Management, are rareJ-y used or required.
L6 A. Why is comparing the Stipulated Conunitments made by
Ll Hydro One and Avista to the conunitments made by counterparties
18 to IOU transactions informative?
79 A. Whil-e the commltments made in a qiven transaction
20 shoul-d be specific to that Lransaction's specific
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27 circumstances, Lhere are cl-ear industry norms regarding the
22 nature of merger commitments. Some amount of governance-
23 related commitments, ring-fencing-related commitments, and
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financial integrity commitments are seen in many transactions.
The Parties' Stipulated Commitments, however, are well beyond
indust.ry norms. I discuss this further in my review of ring-
fencing commitments. The import of this observation is simply
t.hat more restrictive commitments are belng made by Hydro One
and Avista through t.he Settlement Stipulation to ensure that
Avlsta and its fdaho cusLomers are protected from risk.
A. Did your comparison include foreign acquisitions of
U.S. IOUs?
10 A. Yes. Eleven of the transactions I reviewed invofved
11 the acquisition of a U.S. IOU by a foreign ent.ity. Of these
L2 eleven transactions, ten involved a Canadian acqulrer. See
13 Exh. No. 73, Schedule 2. None of these transactions included
1,4 aII of the Parties' governance Stipulated Commitments. Only
15 two, Al-ta Gas' acquisition of WGL and Eortis' acquisition of
16 CH Energy, contained both a majority Independent Board
71 requirement and a commitment to offer employment to executives
18 of the acquired utility.
t9 A. Are there exampJ.es of mergers involving the
20 acquisition of a U.S. IOU by a foreign government?
27 A. Yes. Whlfe less common, there are examples of
22 foreign qovernment ownership of U.S. IOUs. EPCOR Utilities
23 Inc., an Edmonton, Alberta-based water and wastewater utility
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company owned by the City of Edmonton, has acquired four U.S
water utilities collectively servlng approximately 175,000
customers for a combined transaction val-ue of approxlmately
$510 milfion.s Each of these transactions was approved by the
Arizona Pubflc Service Commission (*APSC"). No governance
commitments were made, nor were any governance conditions
required by the APSC in these t.ransactions.
I Q. Does the Settlement Stipulation include other
9 Stipulated Conunitments supportive of its governance
10 cormnitment,s?
11 Several- other Stipulated CommltmentsA. Yes.
o 12 pertaining to Avista's business operations and local
13 presence/community involvement post.-merger make cfear and
L4 binding Hydro One's commitment to Avista's manaqement and
15 provislon of safe and reliable utility service regardless of
76 chanqes at Hydro One or the Province. Stipulated Commj-tment
71 No. 4 specifies t.hat Avj-sta wiff maintai-n its brand and Avista
1B wilf estabf ish the plan for its operat j-on. Avista wiII a.l-so
79 maintain both its staffing and presence in the communit.ies in
20 which Avista operates at leveIs sufficlent to maintain the
27 provision of safe and refiable service and cost-effective
22 operations, consistent wj-th pre-merger l-eveIs (Stlpulated
8 2077 acquisition of Chaparall, 2012 acquisition of Arizona-AmericanWater, 2013 acquisition of North Mohave, and 20L6 acquisitlon of Wi1low
Va11ey Water Company. Source: SNL.
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Commitment No. 10) and its headquarters in Spokane, Washinqton
and office locations in each of its other service terrltories
(Stipul-ated Commitment No . 9 ) . St.ipulated Commitment No . 5
specif ies Avista wif I ma j-nta j-n existing levels of capital
allocations for capital investment in strategic and economic
development items. Avista has specific safety and reliability
standards and policies and serv.ice quality measures in place
in Washington and is working with the Staff t.o develop similar
performance standards, customer guarantees and a reporting
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10 mechanism for its customers in Idaho, which will include
11 penalty provisions (Stipulated Commitment 15) . Eina11y,
72 Stipulated Commitment No. 1 reserves aIl decision-making
13 authorit.y over the governance, business operations and l-ocal
l4 presence/community involvement Stipulated Commj-tments to
15 Avista's Board of Directors. Any chanqes to policies provided
76 for in these Stipulated Commitments requires a two-thirds vote
1,1 of the Avista Board and approval from the Commission and all
1B regulatory bodies with jurisdiction over the Stipulated
19 Commitments (Stipulated Commit.ment No . 1 ) . Col-lecti-ve1y,
20 these Stipulated Commitments support the Settlement
2L Stipulation's governance Stipulated Commitments and make cfear
22 that Avista's governance wil-l- be independent of Hydro One and
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AvisLa's focus wil-1 be on the provision of safe and reliable
service to its cusLomers.
A. Do the recent political developments in Ontario and
changes in
Settlement
governance at Hydro One have any impact on the
Stipulation' s governance conmritments?
A. No. The governance Stlpulated Commitments clearly
separate and insulate Avista from the governance of Hydro One
and its largest shareholder, the Province. The efficacy of
this separation and insulation was demonstrated through the
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10 recent developments in the Province, in particular in the
11 acknowledgement and commitment that the Hydro One
t2 AccountabiTity Act, 2078 wil-I not apply to Avj-sta if Avista
13 becomes a subsidiary of Hydro One, as di-scussed in the
L4 Scarlett Testimony (Exh. No. 10, Schedule 2) . The governance-
15 refated Stipulated Commitments provj-de Avista and its Idaho
t6 cust.omers with appropriate independence and protections;
11 recent events have not created any need for modifications to
1B these commitments. Eurther, these governance Stipulated
79 Commitments are binding (Stlpulated Commitment No. 33), the
20 Commission has the authority to enforce them (Stipulated
21, Commitment No. 30) and Avista and Hydro One and/or it
22 subsidiaries submit to state court jurisdiction for
23 enforcement of the Commission's orders (St.ipulated Commitment
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No . 31 ) . Taken as a whol-e, and in combination with the
Commission's on-going regulatory oversight and authori-ty,AS
well as the ring-fencing and financial integrity Stipulated
Commitments that I discuss later in my Lestimony, the
Settlement Stipulation's governance Stipulated Commltments
provide customers with appropriate protections and assurances
that they wil-1 continue to en j oy saf e and rel-iable electric
service at rates that reffect their Commission-approved cost
of service.
13 Conunitments, have you also reviewed the
Stipulated
ring-fencing
74 Stipulated Conmitments?
15 While the giovernance-related
10
77 IV. THE SETTLEMENT STIPUI,ATION'S RING-FENCING COMMIIMENTS
72 A. In addition to its g'overnanceo
A Yoc T haVe.rvU,
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Ll forward governance of Avista under Hydro One ownership, the
1B ring-fencing Stipulated Commitments provide clear objectives,
19 practices and policies, and restrictions to protect Avista and
20 its Idaho customers from the unlikely event of a bankruptcy
27 and other potential risks, including potential risks perceived
22 with the recent governance changes at Hydro One and political
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23 changes in the Province.
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A. Please briefly highlight the Settlement
StipuJ-ation's bankruptcy-related ring-fencing Stipulated
Commitments.
A. Stipulated Commitment. Nos. 42 t.hrough 45 are
intended to protect Avista in the unlikely event of a
bankruptcy. Stipulated Commitment No. 42 provides for a
"Golden Share" in the event Avista were to declare voluntary
bankruptcy. The "Golden Share" is the sole share of Preferred
Stock authorized by the Commisslon and held by an independent
10 third-party with no financial stake, affiliation,
11 relationship, interesL, or tie to Avista or any of its
o 12 affiliates. The hofder of the Gol-den Share must be authorized
13 by the Commission. Any declaration of voluntary bankruptcy
74 woul-d requj-re the vote of the hofder of the Golden Share and
15 in any matters of bankruptcy the Golden Share wiIl override
16 afl other outstanding shares of all types or cfasses of stock.
71 fn addition to the holder of the Golden Share, a two-thirds
18 majority vote of Avista's Board of Directors, including the
L9 affirmative vote of the Independent Director at Avista, is
20 required for Avista to enter into voluntary bankruptcy
2l (Stipul-ated Commitment No. 43).
ZZ Stipulated Commitment. No. 44 requires Hydro One and
23 Avista to file wlth the Commission within 90-days of the
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closinq of the Proposed Transaction a non-consol-idation
opinion, which is a 1ega1 opinion addressing the likelihood of
the utility becoming an invol-untary party to the bankruptcy of
an afflliate, concludlng that the ring-fencing Stipulated
Commitments are sufficient that a bankruptcy courL would noL
order the substanti-ve consolidation of the assets and
fiabilities of Avista with Hydro One or any of its other
affifiates or subsidiaries in the unlikely event of
bankruptcy. If the Settfement StipuJ-ation's ring-fencing
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10 commitments are not sufficient to secure such a non-
11 consol-idation opinion, then Hydro One must propose and
72 implement upon the Commission's approval addltional ring-
13 fencing protections sufficient to obtain a non-consofidation
14 opinion. Further, Hydro One and Olympus Holding Corp. must
15 f i-l-e an af f ldavit with the Commission statlng that neither
76 Hydro One, Olympus Holding Corp nor any of their
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77 subsidj-aries, will seek to include Avista in a bankruptcy
18 without the consent of a two-t.hirds majority of Avista/s board
19 of directors including the affirmative vote of at least one of
20 Avi-sta's independent directors.
27 Flnally, Stipulated Commitment No. 45 provides that aII
22 of the common stock of Avista wilf be owned by Olympus Equit.y
23 LLC, a bankruptcy-remote special purpose entity, with no debt
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A. Please briefly highlight the Settlement
Stipulation' s other ring-fencing Stipulated Conmritments.
A. StipuJ-ated Commitment Nos. 46 through 51 work
together to provide for the separat.ion and independence of
Avista from Hydro One and Hydro One's other affifiates.
Stipulated Commitment No. 48 provides that Olympus Equity LLC
will not operate or own any business and will limit its
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8 activities to investing in and attending to its sharehol-dings
9 in Avista. Stipulated Commitment No. 49 commits Hydro One and
10 Avista to making no material- amendments to the ring-fencing
11 provisions without the approval of the Commission. Stipulated
L2 Commitment No. 41 requires that Avista customers be hel-d
13 harmless from any business and financial risk exposure
14 associated with Hydro One and its other affiliates and any
15 liabilities of any unregulated activity of Avista or Hydro One
L6 and its af f iliates. Notice wil-I be provided to al-I current
7'7 and prospective l-enders describing the ring-fencing Stipulated
1B Commitments and stating that there is no recourse to Avista
19 assets as collateral- or security for debt issued by Hydro One
20 or any of its subsidiaries. Olympus Holding Corp. and Avista
2L will notify the Commission of any acqulsition by Olympus
22 Holding Corp. of a regulated or unregulated business that is
23 equivalent to 5% or more of the capitalization of Avista or
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Commission approval wifl be sought of any sal-e or transfer of
any material part (i.e. 10% or more) of Avistar or of any
transaction or series of transactions, regardless of si-ze,
that would result in a person or entity, other than a wholly
owned subsidiary of Hydro One, directly or indirectly,
acquiring a controlling interest in Avista or Olympus Holdlng
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B Corp. Einally, Commission approval wil-l- be sought of any
9 divestj-ture, spin-off, or sale of any integral Avista asset as
10 required by ldaho Code 6L-328 and neither Avista nor Hydro One
11 wiII assert in any future proceedings that, by virtue of the
L2 Proposed Transaction, t.he Commission is without jurisdiction
13 over any transaction that resulLs in a change in control of
74 Avista.
15 Stipulated Commitment Nos. 46 and 51 prohibit the
76 pledging of Avista utility assets and inter-company lending
71 wit.hout prior Commj-ssion approval. St.ipulated Commitment No.
18 50 prohibits inter-company debt without prior notification t.o
79 the Commission.
20 A. How do the Settlement Stipulation's ring-fencing
27 Stipulated Corunitments compare to other recent utility merg'ers
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22 and acquisitions?
o 1 A. The Settl-ement Stipulation's ring-fencing Stipulated
2 Commitments compare very favorably with the ring-fencing
3 commitments made in other IOU transactions effectuated since
4 2010. Exh. No. 13, Schedul-e 3 provides a summary of the ring-
5 fencing conditions in these 40 recent transactions. As shown
5 in that exhibit, the ring-fencing Stipulated Commitments made
1 by the Parties are rarely offered or required. As shown in
I that exhibit, only one of the transactions I reviewed included
9 al-l- of the ring-f encing commitments in the Settlement
10 Stipulation. In fact, most transactions included none or very
11 few of the ring-fencing Stipulated Commitments. These ring-
L2 fencing Stipulated Commi-tments, in combination with the
13 g'overnance Stipulated Commitments made by the Parties, provide
14 a very stronq deqree of separation of Avista from Hydro One
15 post-merger. The efficacy of this separation and insulation
16 is unaffected by the recent developments in the Province.
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V. THE SETTLEMENT STIPUI,ATION'S FINAI{CIAI INTEGRITY
COMMITMENTS
20 A. P1ease briefJ.y highlight the Settlement
2L Stipulation's financia1 integrity Stipulated Conunitments.
)a A. Financial integrity Stlpulated Commitment Nos. 34
23 through 47 work together to ensure that Avista's financial-
24 integrity, lncluding its access to capital and ability to make
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2 with safe and refiable service, wj-11 be maintained post-
3 merger. Stipulated Commitment No. 34 addresses Avista's post-
4 closing access to capital, commi-tting Hydro One to providing
5 Avista with equity to support Avista's capital structure and
6 al-l-ow it to access debt fj-nancing on reasonable terms and on a
7 sustainable basis. Avista wil-l- also maintain separate debt
8 and preferred stock (Stipul-at.ed Commitment No. 35) . Hydro One
9 and Avista wiII use reasonable best efforts t.o ensure that
10 Avista's debt will- continue to be separately rated by at feast
11 one nationally recoqnized ratings agency (Stipulated
o 12 Commitment No.36) and will notify the Commission of any
13 downgirade of Avlsta's credit rating to non-investment. grade
L4 status (Stipulated Commitment No. 37).
15 Stipulated Commitment No. 38 ensures that dividends paid
1,6 by Avista to Hydro One cannoL be financially detrimental- to
11 Avista. If Avlsta does not have an investment-grade credit
1B rating and the ratio of earnings before interest, taxes,
79 depreciation and amortization (*EBITDA") to Avista/s lnterest
20 expense is l-ess than 3.0, then no dividend distribution to
27 Olympus Equlty LLC will occur.
ZZ Einally, Hydro One will not seek to change Avista's
23 pension funding policy and Avista wiII maj-ntain this policy ino
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accordance wlth sound actuarial practlce (Stipulated
Commit.ment 39) , and Avista wif 1 continue to fil-e reports with
the Securities Exchange Commission (Stipulated Commitment No.
40) and comply with the Sarbanes-Oxley Act (Stipulated
Commitment No. 4I) .
a. Are there any other Stipulated Cormnitments which
support the financial integrity conrnritments that you would
like to highlight?
A. Yes. In addition to the ring-fencing Stipulated
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10 Commitments which insulate Avista and its customers from Hydro
11 One, a number of ot.her regulatory Stipulated Commitments were
72 made in the Settlement Stipulation that provide addit.ional-
13 protections from potential financiaf risks. Avist.a will- not
74 advocate for a higher cost of debt or equity capital as
15 compared to what Avj-sta's cost of debt or equity capital would
16 have been absent Hydro One's ownershlp (Stipulated Commitment
71 No. 25). fn addition, Avista's actual common equity ratio
1B will- be maintained at a l-evel- no less than 44% (Stipul-ated
1,9 Commitment No. 26) . Finally, as I noted earl-ier in my
20 testimony, Avista will hofd Avista customers harmfess from any
21, business and financlaf risk exposures associated with Olympus
22 Holding Corp Hydro One, and Hydro One's other affiliates
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23 (Stipulated Commitment No. 41) .
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A. How do the Settlement Stipulation's financial
integrity Stipulated Conunitments compare to other recent
utiJ.ity mergers and acquisitions?
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A. The Settfement Stipulation's flnanclal integrity
Stipulated Commitments compare favorably with financial
integrlty commltments made in other fOU transactions
effectuated since 2070. Exh. No. 13, Schedule 4 provides a
summary of the financial integrity conditj-ons in these 40
recent transactions. As shown in that exhibit, none of the
10 transactlons I reviewed included aII of the financial
11 integrlty commj-tments in the Settlement Stlpulation. In fact,
o 72 most transactions included only a few of the financial
13 integrity Stipulated Commitments. These financial integrity
L4 Stipulated Commitments, 1n combinat.ion with the governance and
15 ring-fencing St.ipulated Commitments made by the Parties,
76 provide for the continued prudent financial management of
Ll Avista and ensure that Avista's financj-al- management cannot be
18 harmed by Hydro One ownershi-p.
79 A. Do the recent political developments in the Province
20 and changes an governance
Stipulation's
at Hydro One have any impact on the
financial integrity Stipulated27 Settlement
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A. No. The financial integrity Stipulated Commitments
agreed to by the Parties provide Avista and its Idaho
customers wlth appropriate assurances, independence and
protections. These Stipulated Commitments insulate Avista and
its Idaho customers from Hydro One and anythlng the Province
may do j-n its role as an investor in Hydro One. As I
discussed earlier, the dividend restrictions and commitment
that Hydro One wil-l- provide equity to Avista to support
Avj-sta's capital structure aqreed to by the Parties to the
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11 of its capital (Stipulated Commitment 3B).
72 Recent events have not created any need for modifications
13 to these Stipulated Commitments. Any recent or fut.ure changes
14 at Hydro One or in the Province have no impact on the facts
15 that the Stipulated Commitments are binding (Stipulated
L6 Commitment No. 33) and the Commission has the authority to
11 enforce them (Stlpulated Commitment No. 30).
1B A. Are the financial integrity Stipulated Conunitments
19 included in the Settlement Stipulation appropriate for the
20 Proposed Transaction?
27 A Yes. Taken as a whole, and in combination with the
22 other StipuJ-ated Commitments and t.he Commission's on-going
23 regulatory oversight and authority, the financial integrity
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Stipulated Commitments provide customers with appropriate
assurances that they wilf continue to enjoy safe and rellabfe
electric service at rates that reflect their Commission-
approved cost of service.
VI. CONCLUSIONS
A. Do the recent deveJ-opments at the Province and Hydro
One have any impact on the public interest in ldaho?
A. No, these developments do noL affect. the public
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10 interest. For al-l the reasons described above, the Stipulated
11 Commitments are fu11y protective of the public interest in
12 Idahor ds weff as the j-nterests of Avista's Idaho customers.
13 A. If the Province took action in the future to
L4 exercise influence over or control of the Board of Hydro One,
15 would that negatively impact Avista and its customers or the
L6 public interest in Idaho?
I1 A. No. The governance, bankruptcy and financial ring-
18 fencing and other Stipulated Commitments, coupled with the
19 Commission's on-going requlatory oversight of Avista and the
20 laws of the United States in the five states in which Avista
27 operates (fdaho, Oregon, Washington, Montana, and Alaska) put
22 parameters around how Avista will be owned and operated post-
23 merger. As I discussed earfier, the Stipulated Commitments
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in the future. The Province has no ability to dlrectly
lnfluence Avista. The Province cannot pass laws that apply to
Avista. Further, even in the speculative scenario where the
Province took control of Hydro One and directed the two Hydro
One executives on Avist.a's post-merger board to pursue
initiatives that would benefit Hydro One and/or Ontario to the
detriment of Avista's financial resources or service, the
remai-ning seven independent or Avista-designated directors on
suggests that Avista's financial management, access to
capitat, cost of capital, quality of service, rates, or Hydro
One's attention to Avista's needs wil-l- be adversely affected.
The Settlement Stipulation provides a comprehensive set of
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10 Avista's post-merger board could override that. direction.
11 A. Are the Stipulated Corunitments included in the
L2 Settlement Stipulation appropriate for the Proposed
13 Transaction?
L4 A. Yes. The Stipulated Commitments are robust and
15 ensurer ds intended, that recent developments at Hydro One and
L6 the Provincer dS well as potentiaf future changes, can have no
Ll adverse effect on Idaho customers or on the interest of the
1B public in Idaho. Nothing in the recent developments even
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o 23 Stipulated Commitments that collectively ensure the
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appropriate l-eve1 of separation between Avj-sta and Hydro One
and Hydro One's other affiliates. The package of StipuJ-ated
Commitments exceeds lndustry norms established by the 40
utility transactions completed since 2070 that I reviewed.
These Stipulated Commitments insulate Avista, protect its
customers from potential risks, and support the public
interest.In combination with the Commission's on-going
B regulatory oversiqht and authority, the Stipulated Commitments
9 ensure that stakehol-ders will- experience the benefits from the
10 Proposed Transaction, will be insulated from potential risks,
11 and wil-l continue t.o ensure safe and reliabl-e service at rates
o L2 that refl-ect their Commission-approved cost of service.
13 A. Does this conclude your testimony?
l4 A. Yes, it does.
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