Guelph Hydro Merger

December 6th, 2017

Guelph Hydro Proposed Merger

With Alectra Utilities Inc.

December 4, 2017

Background Observations (updated):

This backgrounder contains summary information from the City of Guelph released report on December lst, 2017.   The report is 231 pages long and can be found here:

https://guelph.ca/wp-content/uploads/Council_agenda_121317-1.pdf

report starts at page 13 of the council agenda

Corporate Analysis

Guelph Hydro is an independent Electrical Utility with 55,000 customers, serving Guelph and Rockwood. It is growing quickly, and will have an estimated additional 10,000 to 15,000 customers in the next ten to fifteen years. There are presently three major commercial users – Linamar, The Guelph Hospital, and the University. It has an asset value of $228,000,000.00 and a market value estimated at $250,000,000.00. Guelph Hydro is a solely owned subsidiary of GMHI, as is Envida Community Energy Inc., responsible for green energy innovation. They both report directly to the City and are administered by a board of directors, appointed by the City. Last year Guelph Hydro Systems Inc. reported a $3,000,000.00 surplus paid to the city, representing a return of 10.57% on investment. It provided $65,200,000.00 in direct economic benefits to the City and Province last year. It is ranked as a well-run utility in the Province. It has an overall customer satisfaction rating of 89%. According to their annual report:

“Guelph Hydro continues to facilitate the adoption of alternative energy sources in the community. In 2016, the company connected five Feed-in-Tariff (FIT) and 45 microFIT solar installations to the grid bringing the total of such connections in the City of Guelph and Village of Rockwood to 38 FIT and 365 microFIT installations with a nameplate capacity of more than 8 megawatts and 3 megawatts respectively. Solar installations on the rooftops of Guelph Hydro’s head office and service centre, and the Arlen transformer station generated 139 megawatt-hours of electricity for the Ontario grid. With an eye on the future, Guelph Hydro has established new partnerships and will be conducting research and development work associated with smart grids, microgrids, energy storage, and electric vehicle charging stations and networks.”

This means that Guelph Hydro already has the expertise and experience necessary to implement alternative energy sources and smart grids.

“Guelph Hydro’s operation, maintenance and administration costs per customer in 2015 were

about average when compared against the 69 other utilities in the province.” (Annual report)

79% of the billing cost comes from generation controlled directly by the Province, and 21% comes from distribution (Guelph Hydro). Guelph Hydro provides over 120 local jobs.

Alectra Utilities Inc. is a private corporation formed jointly by Horizon Utilities Corp., Collus Powerstream Holdings Inc., Enersource Corp., and Hydro One Brampton Networks Inc. It is the second largest publicly owned electric utility in North America. It has over 1 million customers, and 1,600 employees.

According to the President and CEO Brian Bentz (formerly CEO of PowerStream) the company wants to grow bigger through additional mergers and acquisitions. Every time they acquire more assets the shares held by Guelph will be diluted. Alectra can also debt finance, in other words acquire more private investors who can supply additional capital.

The Deal:

Cash and Shares There is a cash settlement paid to the City of $18.5 million involved, and shares in Alectra Utilities – 4.63%. It has cost the City approx. $2,500,000.00 to arrange the deal. Alectra will acquire all of the assets and the workforce.

Jobs:   While Alectra has promised to safeguard jobs, they estimate a loss of around 40 – 49%.  There will be two call centres for help located in Vaughan and St. Catharines, for the 1 million customers of Alectra.  Staff will be able to apply for jobs in these locations; there are no guarantees. In addition, the senior management of Guelph Hydro will get a golden handshake estimated at around $500,000.00 each.

Guelph will become a minority shareholder in Alectra, effectively locked in to this deal, as we cannot sell our shares without incurring a 22% tax, and the majority shareholders (Horizon, PowerStream, Enersource, and Brampton) hold most of the shares and therefore will dictate policy. Obviously, the company is run entirely by the management team, headed up by Brian Bentz, the CEO and President.

The Green  Energy & Technology Centre

Currently located in Vaughan – who seem to be quite willing to give it up.  It MAY bring 8-10 new jobs to Guelph – see page 3 for the catch to this.

Supposedly Council and city staff considered other offers, but we have no information about this. It is apparently confidential, so there is no way of assessing the quality or quantity of other options.   Kitchener/Wilmot Hydro, run by the City of Kitchener, has 90,000 customers and is considered the best municipal utility in the Province. They already have a co-operative arrangement with Cambridge, Waterloo North, and with Guelph Hydro, and are considered by the Ontario Energy Board as one region. This would have been a logical alternative, in which these utilities could have pooled resources and maintained corporate integrity. This would not have been a sell-off and Guelph could have achieved economies of scale, and maintained its independence. Instead we face the prospect of being at the mercy of a large private utility. This is not what we signed up for.

The Future:  The 3 biggest changes that are coming are electric cars, local alternative energy generation (most likely solar and batteries for storage), and smart control technology. They will be phased in over the next ten to fifteen years. Electric cars will need to be charged – usually overnight. The additional cost in electricity will spur people to start to generate their own electricity through solar generation and battery storage, so they will be tied together. Guelph Hydro already has the ability and experience to accomplish this change at the local level. Installing charging outlets and solar systems in private homes will be largely sustained by the homeowner. Here is a part of the business case taken from European electrification researchers:

“This business case aims at deferral of grid reinforcements and enhancement of network utilization. The need clearly arises in areas with a large amount of DG [distributed generation – e.g. cities] near one location. Non-coordinated control of (new) electric devices (e.g., heat pumps and electric cars) may lead to a sharp rise in needed capacity on lines and transformers. By coordination of these devices, there can be allocated timeslots for operation that are spread out over time. Furthermore, coordination can increase the simultaneousness of local supply and demand in case local generation is integrated. Congestion management as a service can be used to better match own generation and consumption for prosumers [pro-active consumers]; also, distribution system operators (DSOs – local utilities) may be interested in improving the quality of supply in areas with restricted capacity in lines and transformers.” (Smart Houses in the Smart Grid: Developing an Interactive Network, IEEE Electrification Magazine, Volume: 2, Issue: 1, March 2014)

The Green Energy & Technology Centre promised by Alectra is not a research facility, since the research is already being done elsewhere. The implementation process is already established, so what will they do exactly? It seems as if they will act like a ‘big box store’ (think Walmart) which will absorb all of our smaller local initiatives, and will focus on its major customers. It will create a few jobs (8 – 10) and Guelph will lose all of the independent development and research already going on.

Alectra has the capacity and framework to channel much of this green energy business growth into subsidiaries of Alectra Utilities, which are unregulated, and the relationship to the parent company stays at arm’s length. Much of the increased revenue generated by these subsidiary companies will most likely go towards their own business development, at the expense of shareholders in Alectra Inc.

A recent study in the US has concluded that, in the last ten years, all public utilities that have been privatized have resulted in a 43% average increase in rates. A similar scenario has happened in Europe, and many utilities have been ‘de-privatized’ (taken back by municipalities) as a result.

PLEASE NOTE: Canada has just signed a trade agreement with Europe:  Canada European Trade Agreement.  This is the first such international trade agreement in which what are called sub-national levels of government must adhere to the terms of the agreement.

What that means for Guelph, is that once we have ‘merged’ with Alectra we can leave the agreement (with a 22% penalty), BUT we cannot put our hydro services back into public hands we MUST sell to another private company.

Here is what City Council agreed in February of  2017

Council Meeting held on Wednesday, February 15, 2017 Resolutions:

Clause 1 (b)

1.

That the Strategies and Options Committee (the “SOC”) of Guelph Municipal Holdings Inc. (“GMHI”) further examine a merger of Guelph Hydro with one or more publicly-owned

local electricity distribution companies (“LDCs”) as an option for Guelph Hydro Electric Systems Inc. (“Guelph Hydro”).

Voting in Favour: Mayor Guthrie, Councillors Allt, Downer, Gibson, Gordon, Hofland,

MacKinnon, Piper, Salisbury, Van Hellemond and Wettstein (10)

Voting Against: Councillors Bell, Billings, and Salisbury (3)  Carried

Clause 2

Third Amendment

7. Moved by Councillor Downer

Moved by Councillor Billings That reference to “sale” be removed from clause 2.

Voting in Favour: Mayor Guthrie, Councillors Allt, Bell, Billings, Downer, Gibson,

Gordon, Hofland, MacKinnon, Piper, Salisbury, Van Hellemond and Wettstein (13)

Voting Against: (0)

Carried

2.

That in carrying out Recommendation 1, the SOC: (a) conduct an environmental scan of potential transaction partners and potential transactions, with the assistance of an independent advisor, in order to compare merger options against maintaining full ownership; (b) enter into preliminary discussions with potential transaction partners to discover whether a merger could satisfy the decision-making criteria adopted by the SOC; and Wednesday, February 15, 2017 Guelph City Council Meeting as Shareholder of GMHI

(c) continue its public and stakeholder engagement to inform its work, but, without receiving further Council direction, SOC shall not make commitments to any potential transaction partner, whether binding or not, apart from entering into confidentiality agreements and other ancillary agreements to complete its preliminary assessment of a potential transaction.

Voting in Favour: Mayor Guthrie, Councillors Allt, Bell, Billings, Downer, Gibson,

Gordon, Hofland, MacKinnon, Piper, Van Hellemond and Wettstein (12)

Voting Against: Councillor Salisbury (1)      Carried

Who is Alectra?

Alectra is a private company which is governed by the business corporations act of Ontario.

It is not listed on the TSX or with the Ontario Securities Commision.

It’s energy business is governed by the Ontario Energy Board

As a private company it will have shares and it may distribute them as it pleases, with a majority of the board of directors (shareholders) voting in favour.

Basically, as a private company they can do whatever they wish within the boundaries of  the Business Corporations Act:  the act is not designed to ensure that private businesses act with in the law.  However, selling off shares in whole or in part is an option.   Vaughan and Mississauga between them own in excess of 50% of the share in Alectra Utilities and there is no mention of minority share holder protection in the report provided by the company that the city hired to do the due diligence on their behalf (Aird Berlis).  Essentially Guelph will have no power in the decision making process.

The sweetener for Guelph is the $18.5 million cash settlement up front, plus  4.63% of the shares.  There are 2 sets of value for Guelph Hydro

  1. the book value – this is what Guelph citizenry would get if they sold off the    infrastructure if Guelph Hydro – the lines, Eastview and Southgate nodes  and related business – Envida

Estimated book value between $150 million and $200 million

  1. Market value  – this is what Guelph citizenry would get if they sold the asset

and includes all of the infrastructure above PLUS – that it has 55,000 customers

which will grow over time and has a track record of providing a good return for

its shareholders (the citizenry of Guelph – stewarded for them by the GH board)

Estimated market value:  between $200 and $250 million

TO BE CLEAR THAT IS BETWEEN $1.5 AND $2MILLION FOR EVERY MAN WOMAN AND CHILD LIVING IN GUELPH

The proposed merger agreement document compares a possible merger with Alectra, as opposed to standing alone as Guelph Hydro. However the comparison figures presented  are not for the same thing.

For Alectra they are averaged over a 24 year period

For Guelph Hydro it is only ‘as is’ and does not take into account its growth potential over a similar period. There are so many variables to be accounted for with changing technology that it is a very optimistic review for Alectra and does not provide an equally strong case for Guelph Hydro.

Most likely, once the technological and green energy transformation kicks in (the so-called death spiral for existing utilities) the conditions outlined in the current agreement concerning return on shares will alter so radically that the agreement can no longer stay in force. Technological change will quickly overtake this agreement and make it redundant, and Guelph as a minority shareholder with no control over the outcome will quite likely lose its investment.

In Summary

  1. The public who are owners of Guelph Hydro have been provided with ONE option.  Since council made its decision in February 2017, the public have not been provided with substantive information to allow them to make a considered and educated decision on this “merger”

There is no information on the quality of alternatives – the experts Aird Berlis were only brought in to consider the offer from Alectra not any other options.  The report does not do an analysis of the potential of Guelph Hydro as a stand alone or in collaboration or partnership with other providers.

  1. Factual Information – there is a dearth of factual information on what Alectra will provide, the information provided indicates that there is no real alternative – ‘this is the best deal and the only deal’.
  1. The political climate:  the province is committed to merging utilities in Ontario with the assumption that bigger is better and that economies of scale will keep hydro rates low. Unfortunately, the energy sector experts are telling anyone who will listen that the old system is in a death spiral and that the future will be small and nimble and local – many of the current energy customers will be generating their own power – this includes both industrial, commercial and residential customers.

Ron East

Chair, Council of Canadians

Guelph Chapter

Posted in Energy, General, Latest News, P3s | Comments (0)

Leave a Reply