Hydro One Ltd. formally called off its planned $4.4-billion takeover of Avista Corp. on Wednesday and will pay the U.S. utility a US$103-million termination fee for a deal that failed due to perceived political interference from Ontario’s Progressive Conservative government.
The decision to kill the takeover ends a U.S. expansion strategy championed by former Hydro One chief executive Mayo Schmidt, who struck an agreement to buy Spokane, Wash.-based Avista in the summer of 2017. The takeover required approval from regulators in states such as Washington and Idaho, where Avista runs electricity and natural gas transmission networks. As part of the transaction, Hydro One agreed to pay Avista a predetermined fee if the deal did not close by March, 2019, to cover legal and investment banking expenses and the opportunity costs that come with a failed transaction.
The two companies, which together would have had two million customers and ranked among the 20 largest North American utilities, said Wednesday that they “mutually agreed” to call off their merger. Paul Dobson, acting president and CEO of Hydro One, said in a news release: “Hydro One’s Board, management and employees remain focused on delivering safe and reliable power, providing exceptional customer service and driving shareholder value.”
Hydro One is 47-per-cent owned by the government of Ontario after being partly privatized in 2015. In Ontario’s provincial election last year, Progressive Conservative Leader Doug Ford made rising power prices and Mr. Schmidt’s $6-million in annual compensation part of his campaign, promising to fire the Hydro One CEO and bring down power prices by 12 per cent if elected. In October, after Mr. Ford was elected Premier, Mr. Schmidt departed and the entire Hydro One board resigned.
Two state regulators subsequently turned down Hydro One’s takeover bid. In explaining its decision in December, the Washington Utilities and Transportation Commission said: “Provincial government interference in Hydro One’s affairs, the risk of which has been shown by events to be significant, could result in direct or indirect harm to Avista if it were acquired by Hydro One.”
In January, the Idaho Public Utilities Commission said: “It is abundantly clear that the province does not have to own 51 per cent of Hydro One in order to effectively control the company. Based on the recent events surrounding the province’s intrusions into Hydro One corporate affairs, any other conclusion would be unreasonable and ignorant in light of the uncontested facts and evidence.”
Ontario Energy Minister Greg Rickford noted in a statement Wednesday that Hydro One under Mr. Schmidt agreed to pay the US$103-million termination fee and said any costs incurred by the deal’s cancellation “will not be paid by Ontario electricity customers.” He added the failure of the deal “doesn’t change our focus on bringing down hydro rates by 12 per cent.”
In the wake of the U.S. regulators' announcements, Mr. Ford had defended his government’s decision to intervene in Hydro One’s governance and the Avista takeover. In December, Mr. Ford said: “This is a deal that was put together by the former board and former CEO of Hydro One – a deal that did nothing to lower hydro rates for Ontario residents.”
Hydro One earned a profit of $194-million on revenues of $1.6-billion in the most recent quarter, the three months that ended Sept. 30, which means the US$103-million termination fee to Avista will amount to approximately 70 per cent of the Canadian utility’s quarterly income. Hydro One also announced on Wednesday that it will redeem $1.54-billion of debentures issued in 2017 to fund the Avista acquisition.
Hydro One is currently searching for a new CEO, with the provincial government and company sending different messages on what the next boss could earn. Hydro One chairman Tom Woods, who was appointed by the provincial government, said in testimony last fall to U.S. regulators that the next CEO could earn up to $4-million. However, the Progressive Conservatives have indicated the new CEO’s compensation should be capped at $1.5-million.