Power lines run out of the the Hydro One Claireville Transfer Station in Vaughan, Ontario on Monday March 9, 2015.Tim Fraser/The Globe and Mail
Ontario utility Hydro One Ltd. moved into the U.S. natural gas and electrical transmission business Wednesday by acquiring Washington-based Avista Corp. for $4.4-billion.
Toronto-based Hydro One, which was privatized by the Ontario government in 2015, is making its first foray outside the province by buying a utility that supplies electricity to 379,000 customers and gas to 342,000 clients across five western U.S. states. Hydro One has 1.3 million customers in Ontario.
Hydro One is the latest in a series of Canadian utilities to acquire an American rival, with six domestic companies collectively committing $87-billion to U.S. takeovers over the past 18 months.
Read more: Why Hydro One is eyeing U.S. takeovers to fuel expansion
The common theme in these transactions is a perceived lack of growth opportunities in Canada.
Hydro One chief executive officer Mayo Schmidt began highlighting the potential for expansion into U.S. markets after taking the helm in 2015. The utility dominates electrical transmission in its home market after consolidating 90 Ontario electrical transmission and distribution companies.
Mr. Schmidt previously built a global grain handling business as CEO of Viterra Inc. by doing two dozen acquisitions over 12 years.
"Our shareholders will benefit from geographic, economic and asset regulatory diversity that this transaction will provide," Mr. Schmidt said on Wednesday during a conference call with analysts. "The markets that we are entering have expanding economies, positive and growing customer demographics and constructive regulatory environments."
"Ancillary gas fits very nicely in terms of distribution for our customer base, so it's a natural fit for us," Mr. Schmidt added at a press conference on Wednesday. "And we do have deep experience in natural gas in our leadership team. Particularly our Chief Operating Officer who has come out of PG&E, Greg Kiraly, has a history of operating in the gas business."
The prospect of expanding outside Ontario, and away from electrical transmission, was warmly received by analysts ahead of Wednesday's announcement. In a report in June, CIBC Capital Markets analysts Robert Catellier and Ian Woodward said: "Diversification into other utility lines, such as gas distribution, could also be attractive in providing larger growth opportunities while not greatly changing the character of the company's operations."
Avista's CEO and president Scott Morris said he expects the deal to bring savings for the firms.
"There's tremendous opportunity to share ideas, share information technology – which has become a huge expense for all utilities in North America – and we can spread those costs over a wider base," Mr. Morris said at the press conference. "With their purchase power and our purchase power, we hope to buy our materials and equipment at a better rate."
Rising power prices in Ontario are a hot-button political issue and Hydro One and Avista both stated that rates will not rise as a result of the deal.
The two utilities also said no layoffs are expected across a combined work force of 7,500.
The all-cash, friendly transaction will see Hydro One pay $53 (U.S.) for each Avista share, a 24-per-cent premium to the company's share price prior to announcement of the takeover.
The total value of the transaction is $6.7-billion (Canadian), as Hydro One assumes the U.S. utility's debts.
Hydro One will pay for the acquisition by borrowing $3.4-billion and by issuing $1.4-billion of debentures that are convertible into Hydro One common shares. The province of Ontario owns 47 per cent of Hydro One, after raising more than $9-billion by selling down its stake in the company over the past two years.
"One of the benefits of broadening the ownership of Hydro One was to unlock the potential for precisely this sort of transaction," Ontario Energy Minister Glenn Thibeault said in a statement.
"As the single largest shareholder in Hydro One, the Ontario government would benefit from the company's receipt of additional regulated returns expected to begin in 2019. Those benefits will be above and beyond the proceeds already attributed to the Ontario Trillium Trust as a result of the IPO and subsequent secondary offerings."
The takeover requires approval from U.S. regulators and Avista shareholders, and is expected to close in the second half of 2018.
Avista sells electricity and gas in Washington, Oregon, Idaho, Montana and Alaska. The company was founded in 1889 and will keep a regional identity as a wholly-owned subsidiary of Hydro One, with its own board of directors and a head office in Spokane, Wash.
Andrew Willis