◊ Updated March 2, 2019 to add financial details of the failed acquisition ◊
In a news release December 5, 2018, the Washington Utilities and Transportation Commission announced that it has denied the proposed $6.7 billion acquisition of Avista by Hydro One.
“The proposed transaction cannot be said to be consistent with the public interest when it is evident that decisions affecting Hydro One’s and Avista’s business operations and financial integrity are subject to political considerations that may motivate one provincial leader or another to make decisions and take actions in the future that may cause harm instead of promoting the best interests of Avista, its customers, and Hydro One’s non-government shareholders”, the commission stated in its order.
What does this mean?
Ontario taxpayers lose a substantial amount of money. The contractual terms require Hydro One to pay a significant cancellation penalty.
The revenue from Hydro One shares owned by the government will be reduced by the financial loss associated with the failed Avista acquisition. It will hit the corporate ledgers in 2019.
In 2017 Hydro One paid out $243 million to the Ontario government through dividends
Electricity rates in Ontario are not affected since the Avista purchase is outside of the regulated part of Hydro One’s business.
The loss will be borne by the shareholders of Hydro One through dividends and share value. The Ontario government owns 47% of Hydro One and will feel the pain of the loss of annual revenue.
The growth of the Hydro One business has been severely hampered by the government interference. Hydro One is an investor-owned utility and acquisitions are an important aspect of the company’s development.
What will this cost?
The final numbers are in.
The failure of the deal will mean a loss of the money invested in researching, scoping the purchase, preparing proposals, attending meetings, hearings and associated legal costs. It is most likely in the 6-digit cost range.
There is a $136 Million cancellation clause in the Avista deal
The most costly part of the cancellation is the $103 million US charge which may be claimed by Avista. That’s $136 million in Canadian dollars. Hydro One paid Avista on January 24, 2019.
That’s not all…
In July of 2017 Hydro One sought to raise funds for the acquisition by offering convertible debentures. The sale was for $1.4 billion, of which one-third would be paid up front with the balance due on closure. The total offering was raised to $1.54 billion and Hydro One had over $500 million in hand to fund the deal. Now that the transaction has been cancelled, the money must be refunded plus accrued and unpaid interest.
In a February 2019 news wire release, Hydro One announced that it had completed the redemption which included a $6.58 million interest payment to investors. That’s an additional cost to Hydro One for the failed deal.
Hydro One paid $6.58 million in interest to refund investors who bought debentures up-front to fund the Avista acquisition
So far we have accounted for $142 million dollars plus some undetermined amount for the financial analysis and preparation of the deal. Those are 2019 expenditures. The government is a 47% shareholders in Hydro One. That’s a $68 million share in the debacle.
The stock price saga
When the Avista deal collapsed, the Avista stock price tumbled and the Hydro One stock went up.
Does that mean the Avista deal was bad?
Not really. Investors interpret things in mysterious ways. By that, I mean they are looking at their own criteria for buying or selling and it is difficult to know what that may be at any point in time. If you had the ability to understand that aspect of investment you would have already made a fortune on the stock market.
The decline of the Avista stock was reasonably predictable. The acquisition by Hydro One was sweetened for Avista by guaranteeing the takeover share price of $53 US which is above market value. Prior to the 2017 announcement of the Hydro One purchase, Avista stock was worth about $44 US. Investors were no doubt expecting to capitalize on the share sale upon closure of the deal. Share prices were pushed up to the $50 US range.
When the deal tanked, those investors moved their money elsewhere and the stock value returned to the $40 US range. Case closed.
Hydro One investors would not enjoy the immediate benefit like the Avista shareholders. For Hydro One the deal represented an opportunity for expansion in a low-risk, steady income business. It would have increased share value and dividends over the long-term. For Hydro One investors (banks, pension funds and government) that’s why they invested in the utility business.
The failure of the deal represents a one-time write-off in an otherwise low-risk investment that provides solid, predictable dividend income. It isn’t something to panic about.
So, why did the share price go up? Perhaps it went up as skeptical investors returned to buy up Hydro One because the Avista deal was bad? Maybe they just wanted the final year-end dividend of 23 cents per share?
The announcement of the rejection by US regulators was on December 5, 2018. Volumes peaked on the day after the announcement. The share price rose by 6% in the days following the announcement. Shares were already increasing in value from $19.35 on November 26, 2018 to a peak of $21.53 on December 6, 2018. That’s an 11% gain in 2 weeks.
Almost as quickly as it rose, the share price dropped back to $19.55 by December 24, 2018.
The blip in share price seems to indicate that more investors wanted in than wanted out. Presumably that indicates investors are comfortable with the failed deal even though it will negatively impact the dividends in 2019.
Why this is completely ridiculous
The purchase of Avista would have netted Ontario taxpayers a steady source of revenue far into the future. This is the kind of venture that makes good business sense for a cash-strapped government.
The Government interference shows incompetence at the highest level. None of this was necessary. It’s a valuable lesson in how not to conduct business.
No competent business person would publicly undermine their own business would they?
Question asked.
Question answered.
If there was a problem within the business, you would seek a remedy that wouldn’t cost over $142 million dollars.
There was such a remedy available.
You would follow a strategy that would minimize any financial impact. If you were competent.
Apparently that’s not how our government conducts business.
A stark contrast
Ontario Power Generation (OPG) is expanding their business by buying utilities in the United States. In August 2018, OPG announced the purchase of Eagle Creek Renewable Energy LLC – which owns 63 small hydroelectric stations in 13 states − for US$298-million. It is good for Ontario as it provides a steady source of revenue. Something that Ontario needs desperately. Sound familiar?
Nobody interfered with that deal.
Ridiculous.
The takeaway
Ontario is not really open for business unless you have friends in the government. The Avista deal would likely have gone through in September 2018 had Doug Ford not made a spectacle of Hydro One operations. Instead of following business protocol and relying on the shareholders to determine how the business should run, it turned into an ugly circus show with a cost rivaling the Liberal’s gas plant scandal (see my $600 Million Dollar Gong Show commentary).
It shows that the government puts vengeance before business. The Washington Utility Commission wasn’t shy about spelling that out in their ruling.
Now the government should wear this. They are continuing to rack up hundreds of millions in costs when they are supposed to reduce our rates by 12%.
We are currently in the midst of government cutbacks that are impacting education and health care. The money wasted on the bungled energy portfolio could have gone to better things, perhaps sparing those hurt by the cost cutting.
I hope the votes were worth it.
Derek
