Mounting Costs for Hydro One's Failed Merger with Avista


The 6.7 billion merger announced in July 2017 between Avista and Toronto-based Hydro One was rejected by the U.S. government, citing concerns over political interference by the government of Ontario, Hydro's biggest shareholder (the government of Ontario owns 47% of Hydro One). While the terms of the merger agreement required Hydro One to pay an exit cost of US$103 million, the actual costs to Hydro One are much greater. 2017 tax filings by Hydro One reported $36 million in costs related to the proposed acquisition, such as consulting fees. Additional costs of $15 million have thus-far been reported by Hydro One for the first three quarters of 2018. 

As Hydro One conducted a sale of convertible debentures to fund part of its acquisition of Avista, some deferred financing costs were also incurred. The debentures were prices at $1,000 apiece - $333 was to be paid upfront, and $667 was to be paid to investors after all conditions of the Avista acquisition were met upon closing. The total principal amount was $1.54 billion and the debentures in question carried a rate of 4%. Hydro One stated it would redeem the debentures in question on February 8, 2019. Those in possession of the instalment receipts associated with the debentures would be repaid close to $513 million, plus accrued and unpaid interests, for their 1st instalment. Hydro One also stated that it intended on funding the redemption of the Debentures through cash on hand and available credit facilities, and warned that the redemption in question would result in $24 million in deferred financing costs being expensed immediately. There would also be a revaluation - to 0 from $22 million, of what it categorized as "previously recorded unrealized gains" from the "deal-contingent" upon the foreign-exchange contract. 

Greg Rickford, Ontario's Energy Minister, made a statement to the effect that Ontario electricity customers will no bare any responsibility for any costs associated with the failed deal. That no costs associated with the brea fee would in any way be recovered from Hydro One customers was also echoed by Hydro One. Hydro One investors have already incurred a cost as Hydro One shares dipped 9% since the acquisition was first made public. Furthermore, the Ontario government has also vowed to cut electricity rates in Ontario.

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