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Jul 12, 2018

Hydro One board turmoil adds risk to Avista deal, analysts warn

Hydro One stock under pressure as executive overhaul rattles Bay Street


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A shuffle among the top brass of Hydro One Ltd. poses a threat to the timely completion of its US$3.4 billion acquisition of U.S. power supplier Avista Corp., analysts say.

Hydro One’s Chief Executive Officer Mayo Schmidt retired and its entire board resigned late Wednesday, leaving questions unanswered about the fate of Hydro One’s largest deal since the Toronto-based company went public in 2015.

The ouster came as Ontario Premier Doug Ford fulfilled an election promise to shake up the utility’s executive team. Schmidt was the driver of the deal announced a year ago that would add Avista’s energy production and distribution operations in Washington, Idaho, Oregon and Alaska to Hydro One’s transmission network in Ontario, creating one of North America’s largest regulated utilities, with assets totaling C$32 billion (US$24 billion).

“Increased political interference in Ontario could negatively impact Hydro One’s proposed acquisition of Avista, either by necessitating further guarantees to secure regulatory approvals, or in an extreme case, leading to regulatory denial of the transaction,” Jeremy Rosenfield, an analyst at Industrial Alliance Securities, wrote in a note. “At a minimum, the transaction could be delayed.”

Shares of Spokane, Washington-based Avista fell 2.6 per cent to $51.33 in New York on Thursday, the most since 2016, with volume 20 times its 20-day average. That widened the spread to Hydro One’s US$53 offer price to the most in three months, according to data compiled by Bloomberg. Hydro One shares sank 4 per cent to  $19.38, after falling a record 7.9 per cent at the open in Toronto.

The shake-up “does not bode well for the Avista acquisition, which does not yet have all required regulatory approvals,” Robert Catellier and Archit Kshetrapal, analysts at CIBC World Markets, wrote in a note. “We expect the existing executive to continue pursuing this acquisition, but Avista’s regulators may hesitate in light of the new uncertainty surrounding Hydro One’s board and CEO turnover.”

The deal has faced delays already. When it was announced, the companies expected to complete the merger by the end of the second quarter. Hydro One said a day before the management changes that it expected to complete the deal this year, having received federal regulatory clearances and approvals in Alaska and Montana. It still awaits approvals from Oregon, Idaho and Washington.

“The negotiated agreement and the proposed legislation do not in any way impact U.S. operations,” Ontario’s Energy, Northern Development and Mines Ministry said in an emailed statement.

"We wish Mayo Schmidt well," an Avista spokesperson said in an emailed statement to BNN Bloomberg. "We are monitoring developments at Hydro One and continue to work through the regulatory process for the merger."

Hydro One didn’t respond to a call from Bloomberg News and an emailed request for comment. 

With files from BNN Bloomberg