20170925Decision Memo.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLANDER
COMMISSIONER RAPER
COMMISSIONER ANDERSON
COMMISSION SECRETARY
COMMISSION STAFF
LEGAL
FROM:BRANDON KARPEN
DEPUTY ATTORNEY GENERAL
DATE: SEPTEMBER 25,2017
SUBJECT :JOINT APPLICATION OF HYDRO ONE LIMITED AND AVISTA
CORPORATION FOR APPROVAL OF MERGER AGREEMENT
CASE NOS. AVU.E.17.O9 AND AVU.G-17-05
On July 19,2077, Avista announced that it had entered into a merger agreement with
Hydro One ("Applicants"). On September l4,2017,the Applicants filed the above captioned
joint application for approval of the merger. Approval of the Application would result in Avista
becoming a wholly owned subsidiary of a Hydro One holding company. The Applicants have
requested approval by August 14, 2018, and have made the same request in other state
jurisdictions.
BACKGROUNI)
Avista is a public utility engaged in the generation, ffansmission and distribution of
electricity and natural gas. Avista's service area includes eastern Washington, nofthern ldaho,
and parts of southern and eastern Oregon. Avista's existing base rates and charges for electric
and natural gas services were approved by the Commission in December 2016 for electric
service, and December 2015 fbr gas service. Order Nos. 33682 & 33437. Avista has a pending
general rate case now before the Commission. See Case Nos. AVU-E-17-01, AVU-G-17-01.
Hydro One Inc., is an investor owned electric transmission and distribution utility
headquartered in Toronto, Ontario, Canada. It provides electric distribution service to over 1.3
million customers, and transmission service to local distribution companies, and large customers
in Canada. The Province of Ontario owns a large minority share of the Company's shares, with
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the remainder of shares held by private investors. Hydro One's stock are listed on the Toronto
Stock Exchange (TSX: H).
The Companies report that Avista stock will be purchased by Hydro One at $53 per
comnon share, or $5.3 billion. Hydro One will finance the transaction through medium and
long-term borrowing, and proceeds from a completed issue of $1.54 billion of convertible
unsecured subordinated debentures. After the closing, Avista would be owned by Hydro One,
through a series of wholly-owned subsidiaries.
JURISDICTION
The Commission has jurisdiction over this matter pursuant to Idaho Code $ 6l-
328. Section 6l-328 prohibits Hydro One fiom acquiring Avista without the written
authorization of thrs Conrmission. Before authorizirrg such a transaction, tlre Corrrmission must
llnd that: ( I ) the transaction is consistent rvith the public interest; (2) the transactiotr will not
cause the cost olor rates tbr supplying electricily to increase; and (3) that I'lyclro One has the
irrtent arrd flnancial abilitl,' to operate and maintain Avista's operations in ldaho. More. the
Comnrission may attach conditions to its authorization, and enter any final Order consistent witlr
its authority under Title 61, Idaho Code.
THE APPLICATION
The Applicants claim that Avista customers will benefit from the merger through
scaling that come with joining a larger organization, and avoid the risk of acquisition by another
party that nlay not share Avista's culture and values. Thus, the Applicants state that custonters
can expect the same or better levels of service and customer satisfaction. Customers will also see
financial benefit through retail rate credits upon the closing of the transaction. Finally, the
Applicants claim that, overtime, the merger will provide superior innovation, research and
developrnent, and efficiencies over a broader custolner base infrastructure.
The Proposed Transaction is subject to significant oversight: Avista shareholder
approval; the Hart-Scott-Rodino Antitrust Improvements Act, clearance by the Committee on
Foreign Investment in the US, approval by each state regulator, FERC, the SEC, and the FCC.
No additional approval is required from Canadian authorities. According to the Applicants, the
closing of the transaction is expected to occur in the second half of 2018.
Included with the proposed agreement, the Applicants submitted detailed evidence in
support, including memorialized agreements relating to "Governance Requirements" (Exhibit A),
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"Post Closing Matters," and "Approval Requirements" (Exhibit B). Pointedly, the agreement
includes a provision that Avista's Board of Directors will retain authority to review, authorize
and approve certain matters related to Avista, without the obligation to obtain authorization or
approval from Hydro One. Further, the companies agreed that: l. Avista's headquarters will
remain in Spokane; 2. Avista's branding will remain the same; 3. Avista's office locations in its
service areas will remain; 4. There will be no workforce reductions resulting from the merger; 5.
Avista's existing management team will remain; 6. Existing compensation and benefit practices
will remain; 7. Avista will retain authority to negotiate and enter into agreements with bargaining
unit employees; 8. The merged company will maintain or improve safety and reliability
standards; and 9. The merged company will maintain Avista's community involvement and
support initiatives at levels equal to, or greater than, those prior to the merger.
Additionally, the Applicants state that the Avista Board of Directors will be a local
board consisting of board members chosen by Avista designees, and who reside in the Pacific
Northwest. After closing, the new Avista will be governed by a nine member Board of Directors,
with Scott Morris serving as the Chairman of the Board. Applicants estimate that the total annual
cost savings to customers on a system basis is approximately $1.7 million. The Companies are
proposing to flow through a rate credit of $31 .5 rnillion over a I 0-year period,
STAF'F RECOMMENDATION
Staff recommends that the Commission issue a Notice of Application and set a 21-
day intervention deadline. Then, direct Staff to confer with the parties about scheduling,
discovery, testimony, technical hearings, and other matters that may arise.
COMMISSION DECISION
Does the Commission wish to issue a Notice of Application, establish a 2l-day
intervention deadline, and direct Staff to confer with the parties about scheduling and other
matters?
M:AVUE 1 709_AVUG I 705_bk(memo I )
JDECISION MEMORANDUM
Attorney General