Sale of Avista would require ‘net benefits’ to ratepayers, Washington regulators say

The proposed sale of Avista Corp. to Hydro One for $5.3 billion would chart new territory for customers of the Spokane-based utility.

Here are a few answers to questions about what protections are in place for customers and how Canadians are reacting to the news.

Q: What’s the story behind the sale?

A: Avista Chairman and CEO Scott Morris declined to answer direct questions about which company initiated the negotiations, or whether the deal is a “white knight sale,” where Avista recruited Hydro One as a buyer. Talks started this year.

Morris did say that Avista is being purchased at “a time of strength” for the company.

Over the years, Avista has been approached by other companies about potential mergers or acquisitions. In the mid-1990s, Avista – then known as Washington Washington Power – proposed a merger with Sierra Pacific Resources of Reno, Nevada, but that deal fell through.

Avista is among the smaller investor-owned utilities left in the nation. Analysts say it’s a prime takeover target in a rapidly consolidating industry.

The sale to Hydro One will allow Avista to keep a high level of local autonomy while being part of a larger organization, Morris said.

Q: Will Avista executives benefit from the sale?

A: “Well, I’m a big shareholder,” Morris said Thursday, in response to questions about the deal’s financial implications for him.

Part of Morris’ executive compensation is paid in stock awards. That gives him and other top executives a direct interest in how Avista’s stock performs, according to the company’s executive compensation committee.

Morris has 188,730 shares of Avista stock, according to a report filed in March with the U.S. Securities and Exchange Commission. Hydro One is buying Avista stock for $53 per share. So, if Morris holds on to his stock until the sale is finalized next year, the shares would be worth $10 million.

Avista’s four senior vice presidents also own a large number of shares. Based on stock ownership listed in public documents, the value of their shares at the time of the sale would be:

Mark Thies, chief financial officer and treasurer, about $4.5 million.

Marian Durkin, general counsel and chief compliance officer, $3.9 million.

Dennis Vermillion, environmental compliance officer, $1.74 million.

Karen Feltes, corporate secretary, $1.43 million.

Q: What is Hydro One?

A: Hydro One serves 1.3 million rural and suburban utility customers across vast geographic areas of Ontario. The company’s headquarters are in Toronto.

Hydro One buys electricity and delivers the power to customers on its 95,000 miles of transmission and distribution lines. The government of Ontario phased out coal-fired electricity in 2014, so the province relies on hydro, wind, solar, biomass and nuclear for its energy.

The government of Ontario once owned 100 percent of Hydro One’s assets but sold off a 51 percent stake in late 2015, which led to the publicly traded company. The province netted $9 billion from the sale, which it used to pay off debts and invest in transportation infrastructure.

The Ontario government retains a 49 percent stake in Hydro One.

Q: What are Canadians saying about the deal?

A: The proposed sale is attracting quite a bit of interest north of the border. Canadians are worried that Hydro One’s purchase of Avista could raise their electric rates.

The Toronto Star quoted Progressive Conservative Leader Patrick Brown as saying, “Hydro One is gouging ratepayers while using our money to buy up foreign companies.” Brown also criticized Avista’s ownership stake in a coal-burning plant in Montana.

Officials from both companies said the purchase will not affect rates for their customers.

Hydro One’s stock initially slid on news of the sale, but share prices rallied Thursday.

A stock analyst at Guggenheim Securities in New York called the $53 per share price a “very rich valuation” for Avista.

“While the acquisition provides Hydro One with exposure in the U.S., which seems to be in vogue with various foreign buyers, the terms are a bit of a head-scratcher,” wrote Shahriar Pourreza in a research note.

Avista’s growth potential is modest and it operates in a state with a “challenging regulatory” environment, the analyst said. However, Pourreza expected the sale to go through.

Q: What regulatory approvals are needed for the sale?

A: In addition to shareholder approval, the sale requires a sign-off from state and federal authorities.

In Washington, the state Utilities and Transportation Commission will evaluate the deal and decide whether it’s in the best interest of Avista ratepayers. Members of the public will have a chance to weigh in. Public utility commissions in other states where Avista operates – Idaho, Oregon, Alaska and Montana – will conduct similar reviews.

The transaction will be reviewed by U.S. authorities for potential national security implications. The U.S. Federal Energy Regulatory Commission also must give its approval.

Q: What protections are in place for Avista’s Washington customers?

A: For Avista’s sale to go through, Hydro One has to demonstrate that ratepayers would not be harmed, and would actually benefit from the sale.

“We have a statute called ‘the net benefit’ standard,” said Amanda Maxwell, a UTC spokeswoman.

The Legislature passed the requirement after an Australian company purchased Puget Sound Energy, the state’s largest utility, in 2009.

The net benefit can be expressed in a variety of ways, such as credits on bills for ratepayers, increased consumer protections or financial incentives for energy conservation, Maxwell said.

If Hydro One buys Avista, the company will remain a regulated utility, she said. Requests for higher electric and natural gas rates would continue to be reviewed by the UTC, she said.

Q: How will the new company rank in size?

A: Avista and Hydro One say the sale will create one of North America’s largest regulated utilities. After the acquisition, the company would have about 2 million customers and a market capitalization in the $14 billion range, based on current share prices.

That’s still much smaller than utilities such as Duke Energy Corp., Southern Company, Exelon and PG&E Corp., which have market caps in the $30 billion to $60 billion range, according to the Edison Electric Institute.