The cancellation of the Avista Corp merger is a good thing for investors interested in Hydro One (Hydro One Stock Quote, Chart TSX:H) but even they should be leery of the Ontario government’s messing about with the company, says analyst Jeremy Rosenfield of Industrial Alliance Securities.
As expected, the proposed $6.7-billion merger between Hydro One and US energy company Avista, first announced in July of 2017, was cancelled on Wednesday by the two parties following rejections of the deal by state regulators in Washington and Idaho.
The merger had required approval from five state regulatory commissions in total, including also Oregon, Montana and Alaska, with commissions from the latter two having given their approvals for the deal and Oregon having deferred its decision to a later date.
Regulators in Washington had pointed to the potential for further political interference from Hydro One’s largest shareholder, the province of Ontario, as a significant deterrent, saying,
“The commission found that the proposed merger agreement did not adequately protect Avista or its customers from political and financial risk or provide a net benefit to customers as required by state law.”
In a research update on Thursday, Rosenfield said the termination should allow investors to refocus on Hydro One’s fundamentals, which include a four to six per cent organic growth rate over the medium term, driven by rate base investments in its core regulated Ontario transmission and distribution businesses, says the analyst, who nonetheless notes the lingering risks.
“Although H’s fundamentals remain healthy, we continue to be cautious on any investment due to lingering risk factors, notably: (1) the potential for further interference from the Government of Ontario (~47 per cent ownership), either political or regulatory; (2) the absence of a permanent CEO; and (3) potential headwinds for growth/diversification outside of Ontario going forward following the failed H/AVA transaction,” Rosenfield states.
The analyst is maintaining his “Hold” rating and $21.00 target price, representing a projected return including dividend of 8.4 per cent at the time of publication.