Avista could face limited options in the wake of the Washington Utilities and Transportation Commission's (UTC) rejection of its proposed merger with Hydro One, analysts say. The two utilities are considering next steps and could file for reconsideration, but the order issued on Wednesday makes a reversal seem unlikely.
While the rejection opens the possibility that another suitor could arise to replace Hydro One, analysts say the UTC's ruling could cool the ardor of potential suitors.
The merger of Avista and Hydro One would have moved Avista from one of the smallest utilities in the United States to one of the largest in North America.
But "size is not an impediment to being a utility," Chris Ellinghaus, an equity analyst with Williams Capital, told Utility Dive. "There is no great benefit to scale in terms of financial costs." Ellinghaus said "the real question is what Avista does in response if the Hydro One deal doesn't close."
"If the commission was looking for better terms, they could have done it without issuing an order."
Chris Ellinghaus
Equity analyst, Williams Capital
For years Avista had resisted pressure to merge, but when Hydro One came calling, Avista CEO Scott Morris saw a company that shared his vision. Morris worked closely with Mayo Schmidt, then-CEO of the Canadian utility, who agreed to honor Morris' non-negotiable terms such as maintaining the company's headquarters in Spokane and maintaining current employees and reliability of service.
In the end, it didn't matter: Schmidt and the entire Hydro One board resigned in July under pressure from Ontario's newly elected premier, Doug Ford, who had made reform of the utility one of his top campaign promises. The provincial government owns 47% of Hydro One.
Ford's July coup made it clear that "Hydro One's directors cannot be considered independent and the province's role is not limited to that [of] a minority shareholder in a publicly traded corporation," the Washington Utilities and Transportation Commission wrote in its decision denying the proposed merger. In the end, the prospect of government interference injected too much political and financial uncertainty for the UTC to get comfortable with the proposed deal.
The Ontario situation essentially "threw a curve ball into the mix," Travis Kavulla, vice chairman of the Montana Public Service Commission, told Utility Dive. The Montana PSC earlier this year signed off on the Avista-Hydro One merger.
Avista and Hydro One now have 10 days to file for reconsideration or clarification, which resets the clock, and they have 30 days to file an appeal in the courts.
It is not as if the UTC's decision relies on terms that could be negotiated further to ultimately reach a deal. The Washington regulators did a good job and were clear in their decision, Kavulla said. In the end, "I think they chaffed at the idea that a utility they closely control would be servant to a different political master."
"[A] recent rejection from state regulators may cause a company to think twice about what kind of an acquirer or transaction makes sense from a regulatory perspective."
Paul Patterson
Analyst, Glenrock Associates
"As I read it, there is zero percent chance" that the UTC would reverse its decision, Ellinghaus said. "If the commission was looking for better terms, they could have done it without issuing an order."
Nonetheless, "Avista is still for sale," Kavulla said. "I imagine some other buyer could come along."
"In general, it seems that in recent years most U.S. utilities would quickly find a buyer, if they were inclined to be sold," analyst Paul Patterson at Glenrock Associates, told Utility Dive. "However, a recent rejection from state regulators may cause a company to think twice about what kind of an acquirer or transaction makes sense from a regulatory perspective."
Ellinghaus also questions if a suitor is likely to emerge. "Someone would have to determine if the commission is in the mood for a merger," he said. "The commission's denial could make it harder to find other partners."
Ellinghaus also is not convinced that Avista needs to bulk up by merging with another utility. The company could use some regulatory clarity or legislative assistance, according to him.
The utility also serves seven other states, but the Avista is "stuck on a treadmill" in Washington, Elinghaus said, because it files annual rate cases there, which makes it difficult to have stable earnings. Ellinghaus suggested that Avista might be able to leverage the UTC's rejection in the merger case into winning concessions on other fronts.
