For Hydro One, costs of failed Avista deal go well beyond US$103 million break fee

Hydro One Ltd. is paying a US$103 million break fee to scuttle its acquisition of a U.S. energy company, but the ultimate cost of the failed deal is likely to be much higher than that for the Ontario electrical utility.

Toronto-based Hydro One said in a press release Wednesday evening that it had agreed to scrap its proposed takeover of Spokane, Wash.-headquartered Avista Corp., an approximately $6.7-billion deal that was announced in July 2017.

The decision was not unexpected as it came after state regulators in the United States rejected the arrangement, citing concerns about political interference by the Ontario government, Hydro One’s biggest shareholder.

“After careful consideration and analysis of the likelihood of achieving a timely reversal of those orders, the Boards of Directors of Hydro One and Avista each individually determined that termination of the merger agreement is the best course of action for the companies and their respective shareholders,” a press release said.

Hydro One said that, under the terms of the merger agreement, it would pay Avista a US$103-million termination fee.

That, however, comes on top of numerous costs Hydro One has already reported in connection to the Avista transaction, as well as concerns as to what it will mean for its future capacity to make deals.

In its year-end financial filings for 2017, Hydro One reported $36 million in costs related to the proposed acquisition, such as consulting fees or other expenses.

Last year, the numbers bounced around because of fluctuations in the value of a foreign-exchange contract tied to the deal. For the three quarters Hydro One has reported so far for 2018, the net cost is approximately $15 million.

There were deferred financing costs associated with the deal as well, as Hydro One conducted a sale of convertible debentures that was to help fund part of the acquisition.

The debentures (which were represented by instalment receipts that traded on the Toronto Stock Exchange) were priced at $1,000 apiece, with $333 to be paid up front and the remaining $667 to be paid by investors after all conditions to the closing of the Avista deal were met. The total principal amount was $1.54 billion and the debentures carried a coupon rate of four per cent. Hydro One says it will redeem those debentures on Feb. 8.

Holders of the instalment receipts would be paid back nearly $513 million, plus accrued and unpaid interest, for their first instalment.

“Hydro One intends to fund the redemption of the Debentures through cash on hand and available credit facilities,” the company said.

In its financial filings for the three months ended Sept. 30, 2018, Hydro One had warned that the redemption of the convertible debentures would result in $24 million in deferred financing costs being expensed immediately. There would also be a revaluation, to zero from $22 million, of “previously recorded unrealized gains” from the “deal-contingent” foreign-exchange contract.

…any costs incurred due to the move ‘will not be paid by Ontario electricity customers.’

Ontario Energy Minister Greg Rickford

Ontario Energy Minister Greg Rickford said in a statement Wednesday that the provincial government accepted Hydro One’s decision to scuttle the takeover, but warned any costs incurred due to the move “will not be paid by Ontario electricity customers.”

Hydro One said in a statement to the Financial Post on Thursday that “no costs associated with the transaction, including the break fee, will be recovered from Hydro One customers.”

There has already been a cost to investors during the Avista dealings — including Ontario, which owns 47 per cent of Hydro One — with Hydro One shares down nine per cent since the acquisition was announced. The stock closed up 1.38 per cent on Thursday, to $20.50.

The upside for Hydro One investors may be limited by the province’s power politics. BMO Capital Markets analyst Ben Pham wrote in a note that “we expect continued Ontario political interference (or at least the perception of it) to weigh on the H (Hydro One) relative valuation.”

The Ontario government — led by Premier Doug Ford, who campaigned on firing Hydro One’s previous CEO — has also vowed to cut electricity rates even further in the province.

“The continuing risk that the Ontario Government will impact the company’s rates in an effort to achieve the Government’s goal of reducing power costs by 12 per cent keeps us on the sidelines,” wrote CIBC World Markets analyst Robert Catellier​.

• Email:[email protected]| Twitter:GeoffZochodne

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