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Hydro One shopping for deals among Ontario's municipal utilities

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Hydro One shopping for deals among Ontario's municipal utilities

Hydro One Ltd.,the electricity transmission and distribution company that is mostly owned by theOntario government, said it is on the lookout for small utility acquisitions thatit can make to bolster its dominant position in Canada's most-populous province.

As the company digestsits acquisition of Great Lakes PowerTransmission from Brookfield Infrastructure Partners LP for C$222 millionin cash plus debt, CEO Mayo Schmidt said Toronto-based Hydro One is in talks withmunicipal utilities about possible takeovers. The complex nature of buying city-or town-owned local distribution companies means deals evolve over a long period,with regional politics and concerns playing a big role. Hydro One has acquired about90 local distribution companies since it was spun from the government's OntarioHydro portfolio in 1999.

"We continue to find them approaching us to say, 'How canHydro One integrate these businesses?'" Schmidt said during a May 6 earningscall. "It's not an overall large initiative by the organization. Frankly, it'ssomething that we do as a matter of a natural course. We are also in discussionswith Orillia and Peterborough, as we speak, a couple local municipalities that havebeen in touch with us to see what Hydro One can do for the business."

Schmidt described the company's first full quarter as a stand-aloneentity with the provincial government as its major shareholder "as an intensefew months since the IPO." The province has increased stock sales since itsold a 15% interest inthe company in November 2015, lowering its stake in the company to about 70%, halfwayto its goal of ultimately owning 40%, he said.

Along with the sale of the stake in Hydro One, the province hasurged municipal LDCs to bulk up to provide better service and increased reliabilityin the provincial power grid. It started the process by agreeing to merge with a group of city-owned LDCs in a transaction separate from the Hydro One IPO.The proposed deal is underconsideration by the Ontario Energy Board.

Among the incentives Ontario has provided for utilities to mergeis a three-year window of provincial tax relief related to the transactions. Schmidtsaid the program does not seem to have boosted merger activity.

"The issue really is the complexity of what the municipalityneeds or requires to create a transaction and that might be what they are lookingfor is, obviously job stability, and additional capital for infrastructure in theirparticular community so they can redeploy their capital," Schmidt said. "Itseems to me, just the view that we've had, is there is a consistent number of approachesover a period of time."

Hydro One, which will control about 98% of Ontario's transmissioncapacity once the Great Lakes deal is complete, expects to close that acquisitionlate this year. In addition to the cash, Hydro One will assume about C$151 millionin debt through the transaction. The purchase requires approval from both the OEBand the federal Competition Bureau.

"This transmission asset is strategic to Hydro One, directlycontiguous on both ends with Hydro One's own transmission network," Schmidtsaid. "This acquisition squarely aligns with our stated objective of maximizingopportunities within Ontario in our core electrical transmission and distributionbusinesses."