20180917Supplemental Report.pdf

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