20180924Thies Supplemental Direct.pdf

ldaho Public Utilities Commission
Office of the SecretarvRECEIVED
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Boise, ldaho
ON BEIIA],E OE AVISTA CORPORATION
DAVID J. MEYER
V]CE PRESIDENT AND CHIEF COUNSEL FOR
REGULATORY & GOVERNMENTAL AFEAIRS
AV]STA CORPORATION
P.O. BOX 3121
1411 EAST MISSTON AVENUE
SPOKANE, VIASHTNGTON 99220-3121
TELEPHoNE: [phone]
EACSIMILE: [phone]
DAVI D . MEYERGAVI STACORP . COM
ON BEIIALE OE HYDRO ONE LIMITED
ELIZABETH THOMAS, PARTNER
KARI VANDER STOEP, PARTNER
K&L GATES LLP
925 FOURTH AVENUE, SUrrE 2900
SEATTLE, WA 981014-1158
TELEPHoNE: [phone]
EACSIMILE:. [phone]
L] Z . THOMASGKLGATES . COM
KARI . VANDERSTOEPGKLGATES . COM
BEEORE THE IDAHO PT'BLIC UTILITIES COMMISSION
]N THE MATTER OF THE JOINT
APPLICAT]ON OE HYDRO ONE L]MITED
(ACTING THROUGH ITS INDIRECT
SUBSID]ARY, OLYMPUS EQUITY LLC)
AND
AVISTA CORPORAT]ON
FOR AN ORDER AUTHORIZING PROPOSED
TRANSACTION
CASE
CASE
NO.
NO.
AVU-E- L7 _09
AVU-c-17-05
SUPPLEMENTAL
TESTIMONY
UT
MARK T. THIES
EOR AVISTA CORPORAT]ON
(ELECTRIC AND NATURAL GAS)
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o 1 Q. Please state your nane, business address, and present
2 position with Avista Corp.
3 A. My name is Mark T. Thies. My business address is 1411
4 East Mission Avenue, Spokane, Washington. f am empJ-oyed by
5 Avista Corporation ("Avista") as Senior Vice President, Chj-ef
6 Financiaf Offi-cer and Treasurer.
1 Q. Are you the sane l'tark T. Thies who sponsored pre-
B filed direct testimony, on behalf of Avista Corporation
9 (Avista) ?
10 A. Yes, I sponsored Direct Testimony and Exhibit No. 3,
11 Schedule 1 through Schedule 4 in this Docket.
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Are you sponsoring any exhibits in this testimony?
Yes, I am sponsoring Exhibit No. 72, Schedule 1, which
74 is the Golden Share agreement
Holdings
( " Services
15 Agreement") between GSS (AGS ) , Inc.
76 Delaware corporation, Gl-obal Securitj-zation
71 ("Globa1"), a Delaware
18 HoldCo is an affil-iate
and Indemnity
("Hol-dCo" ) , a
Services, LLC
limited Iiabili-ty company, and Avista.
of GIobaI. GIobaI formed HoldCo, as a
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of hol-ding one share
on July t7 , 2078 for the sol-e
20 purpose of Iimited voting preferred stock
2I in Avista.
22 A. I{trat is the put?ose of this Supplenental Testimony?
23 A. The purpose of this SuppJ-emental Testimony is to
24 reconfirm the benefits of this transaction (the "Proposed
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Transaction") from a financial perspective and highlight the
extensive financial safeguards incorporated into the agreed
upon commitments (each, a "Stipul-ated Commitment", coll-ectively
"stipulated Commitments") in the Settlement Stipulation
("Stipulation") filed on April 13, 201-8, which were designed to
protect and insufate Avista and its customers from a change in
management at Hydro One or changes in the political landscape
of the Province of Ontario (the "Province") and ensure Avj-sta's
ability to continue as a financi-a}1y sound, stand-alone
utility.
As I wil-I discuss further be1ow, neither Hydro One, nor
72 the Province, can deprive Avista of its necessary capital and
One is duty-13 assets; indeed, quite the opposite is true. Hydro
74 bound to provide suffj-cj-ent capital to alIow Avista to provide
safe, reliable, and cost-effective service.
A. Have any of the benefits of the Proposed Transaction
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I7 to Avista and its stakeholders changed as a result of recent
18 developments in Ontario?
79 A. No, the benef its highlighted j-n both my and Mr
20 Morris' direct testimony
investor-owned electric
have not changed. The number of
and natural gas utilities in North
22 America has decreased significantly
consol-idat j-on. Through consof idation,
have the opportunity to spread costs,
over the years through
23 these Iarger util-ities
especially the costs of
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1 new technology, over a broader customer base and a broader seL
2 of infrastructure. The partnership of Avista and Hydro One will
3 provide opportunities for efficiencies in the long-term through
4 the sharing of best practices, technology and innovation. The
5 Proposed Transaction wiII provide benefits to Avista's
6 customers that otherwise would not occur. These benefits will-
7 not only be viewed favorably by customers, but also by debt
B holders and rating agencies. An efficient, well-run business
9 increases the opportunity to achieve financial metrics to
10 support favorabfe credit ratings.
11 The merger with Hydro One will not only allow Avista and
1,2 its customers to benefit from being a part of a larger
13 organization (the benefits of scale), but at the same time
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cul-ture
Iocal control- of Avista and the retention of Avista's
15 and its
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way of doing
IocaI control and management of Avista is
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important to many stakeholders including, among others, our
customers, our employees, the communit,ies we serve, the vendors
we do business wi-th, lenders, and rating agencies. None of
this has changed as a result of recent developments in Ontario.
A. Are there any new financial risks to Avista in J.ight
of the recent management changes at Hydro One?
A. No. As I will discuss in further detail below, there
are extensive financial safeguards and ring-fencing Sti-pulated
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business. We believe this
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Commitments agreed to by a1I parties as part of the Stipulation
that were intentionally designed to ensure Avista will- continue
as a financially sound, stand-a1one utility.
A. WiJ.J. Avista continue to maintain its own capital
structure foJ.J.owing the closing of the Proposed Transaction?
A. Yes. Avista will maintain its own capital structure
after the Proposed Transaction is consuflrmated and will continue
to fund its ongoing operations with both debt and equj-ty
sources.
10 9. Does Hydro One, or
withhold equity contributions
A. No. As described
the Province, have the ability to
to Avista?
IN Stipulated Commitment No. 34,
injections to support Avista's
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74 capital structure. This commitment to maintain a strong equity
15 component in Avista's capital structure plays a significant
76 role in supporting financial metrics that ensure Avista's
71 access to its usual and customary financial markets under
18 reasonable terms and on a sustainable basis.
79 A. Are there protections buiJ-t into the StipuJ.ated
20 Comitments regrarding dividends from Avista to O11q>us Equity
2I LIJC. ?
22 A. Yes. As agreed to in Sti-pulated Commitment No. 38,
23 certain conditions must be met in order for Avj-sta to provide
24 a dividend to Olympus Equity LLC. If either (i) Avista's
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corporate credit/issuer rating as determined by both Moody's
Investors Service ("Moody's") and Standard & Poor's ("S&P"), or
their successors, is investment grade, oL (ii) the ratio of
Avista's EBITDA to AvisLa's interest expense is greater than or
equal to 3
LLC shall
0, then distributions from Avista to Olympus Equity
not be limited so long as Avista's equity ratio is
equal to or greater than 44 percent on the date of such Avista
distribution after giving effect to such Avista distribution.
If any of those conditions are not met, and Avista desired to
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10 distribute a dividend to Olympus Equity LLC, such distribution
11 would require approval from the Idaho Public Utilities
72 Commission (the "Commission").
13 If Avista does not have an investment-grade rating from
74 both Moody's and S&P, or from one of these entitj-es t or its
15 successor, if only one issues ratings with respect to Avista,
16 and the ratio of EBITDA to Avista's interest expense is less
I7 than 3.0, no dividend distribution to Olympus Equj-ty LLC or its
1B successors will occur.
19 A. Are there Stipulated Comitments that protect
20 Avista's customers' assets from being pledged as collateral?
21, A. Yes. Avista's utility assets can be pledged as
22 col-lateral only for the benefit of Avista, not Hydro One, as
23 agreed to in Stipulated Commitment No. 46. Therefore, neither
24 Hydro One, nor the Province, can strip Avista of its capital or
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1oan, pledge r or transfer Avista's assets to Hydro One or any
affiliates of Hydro One.
A. Could Hydro One cut Avista's capital budget?
A. Avista will have necessary funds available to provide
safe and reliable service to customers. Avista and Hydro One
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agree that neither the proposed merger,
acquisj-tions, may diminish the delivery of safe
utility service in Idaho as compared to Avista's
nor future
and reliable
performance
Avista will,
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prior to the closing of the Proposed Transaction.
under the leadership of the Avista Board, make the necessary
11 investments in order to ensure safe and rel-iabl-e utility
12 servj-ce, and will- make the necessary capital expenditures to
13 effectuate that.
74 A. Are there any other safeguards that maintain the
15 integrity of Avista's financial. health?
16 A. Yes. There are several- other financial obligations
71 included in Stipulated Commitment Nos. 34-47 that provide
1B Avista adequate protecti-on of its financia] health. I wiII
19 highlight a couple be1ow, having already discussed Stipulated
20 Commitment Nos. 34 and 38 earlier.
27 As outlined in Stipulated Commitment No. 35, Avista wj-II
22 maintaj-n separate debt and preferred stock, if any, to support
23 its utility operations. Eurther, Stipulated Commitment No. 36
24 states that each of Hydro One and Avista wil-I continue to be
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rated by at ]east one nationally recognized statistical "Rating
Agency." If Hydro One and Avista are unable to obtain or
maintain the separate rating for Avista, they will- make a filing
with the Commission explaining the basis for their fail-ure to
obtaj-n or maintain such separate credit rating for Avista.
Stipulated Commitment No. 37 states that Hydro One and
Avista agree to notify the Commission within two business days
of any downgrade of Avista's credit rating to a non-investment
grade status by S&P, Moody's, or any other such ratings agency
that issues such ratings with respect to Avista. Additionally,
Avista and Hydro One have agreed that Avista will maintain its
present pension funding policy, continue to file required
reports with the U.S. Securities and Exchange Commission, and
comply with applicable Sarbanes-Ox1ey Act requirements.
A. Are there protections in place to protect Avista from
being drawn into bankruptcy proeeedings that are not in the
best interest of Avista and its customers?
A. Yes, there are various bankruptcy ring-fencing
provisions. First, as outlined in Stipul-ated Commitment No. 42,
Avista wilI issue a single share of preferred stock referred to
as the Golden Share to an independent third party. The vote of
this share wiIl be required to place Avista into voluntary
bankruptcy. Additionally, as outlined in Stipulated Commitment
No. 43, Avista's entry into voluntary bankruptcy woufd require
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the consent of a two-thirds majority of all of its directors,
including the affirmative vote of at Ieast one of the
independent directors (as defined by the New York Stock Exchange
rules). Stipulated Commj-tment No. 44 further requires a non-
consolidatj-on opinion
effectiveness of the ring-fencing measures
substantive consolidation of the assets and
filed with the Commission to confirm the
to prevent the
Iiabilities of
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Avista with those of Hydro One or any of its affiliates or
subsi-diaries.
10 A. Has the holder of the \\GoLden Share" been selected?
11 A. Yes. Avista and Hydro One have selected HoldCo as
12 the holder of the "Golden Share".
13 A. Please o<plain how you believe HoIdCo meets the
74 definition and purpose of the Golden Share holder as provided
15 in Stipulated Cormnitment No . 42.
76 A. Certainly. Stipulated Commitment No. 42, reads, in
71 pertinent part, as follows:
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Enteri-ng into vol-untary bankruptcy shall- require the
affirmative vote of a "Golden Share" of Avista stock.
The Golden Share shall mean the sole share of
Preferred Stock of Avista as authorized by the
Commission. This share of Preferred Stock must be in
the custody of an independent third-party, where the
third-party has no financial stake, affiliation,
relationship, j-nterest r or tie to Avista or any of
its affiliates, or any l-ender to Avista r or any of
its affiliates. This requirement does not preclude
the thi-rd-party from holding an j-ndex fund or mutual
fund with negligible interests in Avista or any ofj-ts affiliates. In matters of voluntary bankruptcy,o
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thj-s Go1den Share wilI override aII other outstanding
shares of all types or classes of stock.
The f ol-l-owing information describes the holder of this share:
1. HoIdCo is an affil-iate of GIobaI. Founded in L996,
Global is a privately held fimited liability
company owned by its senior management.
2. Gl-obal is a member of the Structured Finance
Industry Group, and the firm is dedicated to
provj-ding professional and responsible management
of special structures such as the Gol-den Share (see
attached Exhibit No. 72, Schedule 1 for more
information about Gl-obal) .
3. HoIdCo does not and will not conduct any business
activities other than holding the GoIden Share,
wil,l- not incur any liabilities other than those
necessary to carry out the duties of holding the
Gol-den Share, and wiII not se1I, assign, transfer,
pJ-edge, hypothecate or otherwise convey the Golden
Share.
4. GSS Holdings (CHGE), Inc., another affiliate of
Globa1, holds a simil-ar GoIden Share for Centra]
Hudson Gas & Electrj-c Corporation.
5. cSS Holdings (NY Utility), Inc., another affifiate
of G1oba1, holds similar Golden Shares for New York
State Electric & Gas Corporation and Rochester Gas
and Electric Corporation.
6. GSS Holdings (NG) , Inc. , another affiliate of
Global, holds similar Golden Shares for National
Grid pfc companies Keyspan Gas East Corporation,
Niagara Mohawk Power Corporation, and The Brooklyn
Union Gas Company.
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7. Closer to home,
by the Oregon
an affiliate of GlobaI was approved
Publ j-c Utili-ty Commission as the
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2 Golden Share.
3 A copy of the Services and Indemnity Agreement has been
4 provided as Exhibit No. 72, Schedul-e 1. Avista and Hydro One
5 request that the Commission expressly approve HoldCo as the
6 hol-der of the Golden Share as part of its approval of the
7 Proposed Transaction itsel-f.
B Q. From Avista's perspeetive, why is it beneficial to
9 close the Hydro One transaetion by the end of the year?
10 A. There are a number of reasons why closing this
11 transaction at the end of a month, and especially at the end of
12 a cal-endar year, is beneficial. As you can imagine, Avista
13 will be required to have certain procedures completed as of the
74 day that the transaction closes. A year-end transaction close
15 date has several advantages. Eirst, Avista will be required to
76 a have an audit of its financials as of the transaction close
I7 date. If that date is different than December 31st or January
1B 1st, multiple audits woul-d be requj-red. This resul-ts in
1,9 significant effort on the part of Avista staff as well as third
20 party costs to have an audit completed by an independent
21, auditor. Next, there is less risk involved with a month-end
22 close, ds the month-end close j-s part of our normal- process,
23 whereas, a mid-month close is outside of normal- operating
24 procedures and introduces a higher chance for potential error
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(as system and report modifications would need to be configured
shoul-d closing occur in the middfe of any month). Third, more
accurate val-uation information is available at year-end cutoff
for purchase accounting, than would occur in a mid-month, or
non-end of the year closing. fn addition, a valuation of the
pension will be required as of the transaction close
date. Avista would not need to have a mid-period pension
valuation completed by a third party actuary as well as the
normal- year-end pension valuation. Finally, Avista would avoid
a "stub period" federal tax return, which again would help save
costs and minimize potential errors. In the end, a c.l-osing at
the end of the year woul-d provide limited disruption to normal
closi-ng and reporting cycles, which saves costs and resul-ts in
more accurate financial reporting.
A. Do you have any concluding remarks?
A. Yes. A11 of the benefits of the Proposed Transaction
and structured safeguards remain intact, notwithstanding
political- developments in Ontario and management changes at
Hydro One. The Stipulated Commitments negotiated by the parties
were designed to achieve these protectj-ons and preserve the
benefits. Nothing has changed in that regard.
A. Does that conclude your Supplemental Testinony?
A. Yes, j-t does .
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