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Essential Energy Insights - January 2021


Hydro One CEO Schmidt sees investor appetite for $5.3B Avista buy

Investors have snapped up securities being offered by Hydro One Ltd. to finance the company's US$5.3 billion takeover of utility owner Avista Corp., according to the CEO of the former Ontario government-owned electricity distributor.

An offering of C$1.4 billion in convertible debentures that will be used as part of the all-cash offer for Avista has been favorably received, Hydro One CEO Mayo Schmidt said on a conference call. Hydro One announced its bid for the Spokane, Wash.-based utility July 19, as it works to increase its presence beyond its home province.

"The convertible debentures offered in our [C]$1.4 billion bought deal was oversubscribed with strong demand from both retail and institutional investors." Schmidt said on the Aug. 8 call. "The securities sold out within an extremely short period, a great testament to the investor support that we have received on the Avista transaction."

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Mayo Schmidt

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Hydro One was formerly owned by Ontario, which sold shares in the company in 2015 and hired Schmidt to guide the transition from government to public ownership. In the early days of his leadership, Schmidt vowed to grow earnings for the company through beneficial acquisitions. The positive initial response to the Toronto-based company's offerings in support of the deal will help meet its financial targets for the transaction, he said.

"Locking in our equity portion we will be able to realize mid-single-digit accretion in the first full year post-close, while retaining a strong investment-grade rating for Hydro One," Schmidt said. "Further, we anticipate an improvement in credit ratings at Avista."

The upbeat tone of the Avista discussion was offset by a quarter that saw revenue slip to C$1.37 billion from C$1.55 billion a year earlier as unseasonably mild temperatures, storms and an undecided rate case hurt income. Hydro One's allowed rate of return was also hurt by an adjustment to reflect lower interest rates, Schmidt said. Diluted earnings per share slipped to 20 Canadian cents from 25 Canadian cents in the year-earlier quarter.

"For the transmission segment we are expecting to receive a decision on our rate filing for 2017-2018 during the third quarter," Schmidt said. "We are already working to prepare the planned five-year [incentive rate-setting mechanism] filing in that segment early next year. We intend to continue to invest in rate base to drive earnings in both our transmission and distribution businesses."

Schmidt said the Avista transaction should enable Hydro One to increase in dividend payments. That would benefit the company's largest shareholder, which is still the Ontario government.

"The transaction is accretive to EPS and gives us further headroom for continued dividend growth, consistent with our long-term intention of continuing Hydro One's dividend payout at 70% to 80% of earnings," Schmidt said. "The combination gives us a strong position in the Pacific Northwest, which is a region of opportunity and experiencing growth."