Hydro One earnings surge clouded by fears of government interference

Hydro One Ltd. has begun to rebuild after a management shake-up at the hands of Ontario Premier Doug Ford, but the company still faces the spectre of political interference, including new government controls that it warns could tamp down earnings and make it difficult to recruit executives.

The Toronto-based electricity utility reported Tuesday that profit was $200 million for its second quarter ended June 30, up from $117 million a year ago. The increase was due in part to greater energy use because of warm weather, as well as the favourable impact of a regulatory decision.

However, Hydro One’s latest results also come after the sudden retirement of former chief executive Mayo Schmidt and the replacement of its board of directors.

The moves were made under pressure from Ford, whose successful campaign for the premier’s office in Ontario’s June election included a vow to fire both the board and Schmidt, who Ford dubbed the “Six Million Dollar Man” over his approximately $6.2-million compensation package for 2017.

Moreover, the Ford regime recently passed legislation that gives Ontario — which remains Hydro One’s largest shareholder, even after the previous Liberal government sold approximately 53 per cent of the once provincially owned utility — greater control over the company’s C-suite.

The Doug Ford regime recently passed legislation that gives Ontario greater control over Hydro One’s C-suite.

Among other provisions in Bill 2, the legislation sets out that the Ford government can issue orders regarding compensation for directors and certain executives of Hydro One, Ontario’s largest distributor and transmitter of electricity.

“The introduction of Bill 2 may adversely impact the company’s ability to continue to attract and retain executives,” warned Hydro One in its latest financial filings.

Hydro One already has another executive they must replace. On Tuesday, Paul Dobson, Hydro One’s acting CEO, said the company is losing Ferio Pugliese,​ executive vice-president of customer care and corporate affairs, as of the end of this week. Pugliese is leaving for another opportunity, Dobson said during a conference call with analysts.

“We are pleased to have significant bench strength and management depth within Hydro One and we are confident that we will be in a position to appoint a well-qualified and experienced replacement in the near future,” he added.

Bill 2 also allows for the Ontario energy regulator to keep the cost of Hydro One’s executive pay out of the electricity rates charged to customers, which the utility said is estimated to reduce net income for 2018 by around $9 million.

A new board of directors at Hydro One was named Tuesday as well, which will be chaired on an interim basis by provincial nominee Thomas Woods, the former vice chairman of Canadian Imperial Bank of Commerce.

Hydro One has a new board after the last one resigned en masse.

Other directors named Tuesday include interim Canada Post Corp. president and CEO ​Jessica McDonald, who was also previously CEO of the British Columbia Hydro and Power Authority, and Russel Robertson, the former head of the anti-money laundering unit at Bank of Montreal.

Under the terms of an agreement between the company and the Ford government, the transition to a new board of directors was to be finalized by Wednesday. Ontario nominated four replacement directors for the company. Another six nominees were put forward by an ad hoc nominating committee made up of four of the company’s other largest shareholders.

The new board will be tasked with finding a successor to Schmidt.

Still, the turmoil atop Hydro One has jolted the utility’s nearly $7-billion takeover of northwestern U.S. energy company Avista Corp. Reviews of the Avista deal by some state regulators in the U.S. have been delayed, with the leadership changes at Hydro One cited as a cause.  

Hydro One’s financial filings warned: “If the closing of the merger does not take place as contemplated, the company could suffer adverse consequences, including the loss of investor confidence, and may incur significant costs or losses, including an obligation to pay or cause to be paid to Avista corporation a termination fee of US$103 million.”

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Unveiling of Ontario’s buck-a-beer scheme expected today

Ontario Premier Doug Ford is expected to roll out the provincial government’s buck a beer plan when he visits a brewery early today in Picton, Ont.

The move was one of Ford’s promises during the spring election campaign. He has also vowed to expand the sale of beer and wine to corner and box stores in Ontario.

A source with knowledge of the plan told The Canadian Press last week that the Progressive Conservative plan will lower the minimum price of a bottle or can of beer to $1 from $1.25 by the Labour Day weekend.

Brewers would not be required to charge less, however, and the lower minimum price would not apply to draft beer, nor would it include the bottle deposit.

The source said the government hopes to get brewers on board by launching what it calls a “buck-a-beer challenge” with incentives for those who cut prices to $1.

The Tories have said a return to buck a beer would see more competition in the beer market without affecting the province’s revenues from beer and wine taxes, which government documents show brought in roughly $589 million in 2016-2017.

Ontario previously had buck-a-bottle beer but the Liberal government quietly hiked the minimum price in 2008, citing its “social responsibility” mandate.

Hydro One pushes ahead to buy Peterborough utility amid political turmoil

As it tries to move past politics and get back to business as usual, Hydro One Ltd. announced Wednesday that it has finally secured a long sought-after deal to buy a Central Ontario utility.

Under the terms of the transaction, Hydro One said its wholly owned subsidiary agreed to pay $105 million to the city of Peterborough, Ont. for the business and distribution assets of Peterborough Distribution Inc., the local power company that serves approximately 37,000 customers.

The announcement comes after months of negotiation and pushback from some Peterborough residents over the sale of PDI. A Hydro One spokesperson said in an email that the city would receive all cash for the utility’s assets, and that the deal would be financed with the Toronto-based company’s existing resources. No equity will be issued, the spokesperson added.

However, the transaction also follows the retirement of Hydro One’s chief executive and comes amid an overhaul of the company’s board of directors. Both moves were made under pressure from new Ontario Premier Doug Ford, whose campaign for the office included pledges to fire both the board and CEO of Hydro One. The Ontario government is still the largest shareholder of the company, which was partially privatized by a Liberal regime that was ousted by Ford in the province’s June election.

National Bank Financial analyst Patrick Kenny called the PDI transaction “one small step forward” after the July shake-up of Hydro One’s board and C-suite. The deal also comes as Hydro One is pursuing a much bigger fish: a nearly $7-billion takeover of U.S.-based energy company Avista Corp.

“We continue to view the heightened uncertainty facing investors, pending the appointment of a new Board of Directors and CEO (and ultimate direction of the company and Avista transaction), as a net near-term negative for the stock,” Kenny wrote in a note.

Shares of Hydro One were down approximately 0.84 per cent as of 11:11 a.m. on Wednesday, trading at $18.84.

The PDI acquisition is still subject to approvals from the Ontario Energy Board, the provincial regulator of the electricity industry that previously quashed an attempt by Hydro One to buy an Orillia, Ont.-based utility. Both Hydro One and Orillia Power Distribution Corp. are appealing that decision.

“This merger is structured to benefit all stakeholders and provides us the opportunity to leverage our scale to positively impact distribution rates and quality of service,” said Patrick Meneley, executive vice president and chief corporate development officer at Hydro One, in a release.

The release from Hydro One said that base distribution rates at PDI will be cut by one per cent and frozen for five years, and that PDI workers will receive employment offers to move to Hydro One.

Hydro One is Ontario’s largest distributor and transmitter of electricity. As part of a separate agreement, Hydro One said it would also build an operations centre and fleet maintenance facility in Peterborough.

“Hydro One’s investment in Peterborough secures its existing jobs in our community, provides guarantees for Peterborough Distribution workers, and creates new jobs through the opening of a new regional operations centre in Peterborough,” said Peterborough Mayor Daryl Bennett in a release.

A news release from PDI said that there “should be no changes to your electricity account with PDI for approximately one year as the purchase of PDI awaits approval by the Ontario Energy Board…followed by deal closing.”

Until then, the utility added, it is “Business as Usual.”

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Ontarians may see a $7 reduction in their monthly bills as gas utilities halt cap-and-trade

Ontario’s biggest natural gas distributors are halting activities related to the provincial carbon-pricing program dismantled by Premier Doug Ford, a move that could remove costs for both the companies and their customers.

The Ontario Energy Board, which regulates the province’s electricity and natural gas industries, issued an order on July 6 asking Enbridge Gas Distribution Inc., Union Gas Ltd. and Epcor Natural Gas Limited Partnership to send a letter by Friday “confirming that they have ceased cap and trade activities.”

Both Enbridge Gas Distribution and Union Gas are owned by Calgary-based Enbridge Inc.

The order from the OEB followed Ontario’s recently installed Progressive Conservative government announcing on July 3 that it had revoked the province’s cap-and-trade regulation and that it would begin “an orderly wind-down” of the variety of green programs funded by the carbon-pricing system.

Another regulation filed on the same day states that “no registered participant (of the cap-and-trade system) shall, on and after the day this regulation comes into force, purchase, sell, trade or otherwise deal with emission allowances and credits.”

The gas companies are registered participants in the cap-and-trade program.

“Union confirms that it has been in compliance with Ontario Regulation 386/18, prohibition against the purchase, sale and other dealings with emission allowances and credits, since it was issued on July 3, 2018,” said a July 12 letter from Union Gas to the OEB.

Epcor also confirmed it had ceased ceased cap and trade activities in compliance with the new regulations in a July 13 letter.

Also called off by the OEB was a nearly completed review of the utilities’ projected costs of complying with cap and trade in 2018.

“The OEB recognizes that the Climate Change Act currently remains in effect, and that elements of the government’s approach to winding down the cap and trade regime are not yet known,” said the July 6 procedural order. “However, given the revocation regulation the OEB considers it appropriate to suspend its review of the gas utilities’ 2018 cap and trade compliance plans.”

Ontario Premier Doug Ford.

Businesses have been seeking answers ever since the Ford government decided to toss out Ontario’s cap-and-trade system. Under cap and trade, the province’s largest producers of carbon emissions had to buy permits for those emissions.

“Cancelling the cap-and-trade carbon tax will result in lower prices at the gas pump, on your home heating bills and on virtually every other product that you buy,” trumpeted Ford in a press release.

Ontario had raised approximately $2.9 billion in proceeds from the cap-and-trade system’s allowance auctions before Ford’s election, although the carbon-pricing plan’s cancellation has put a number of related programs in jeopardy.

“The government made a clear election platform commitment to end the cap and trade program; the regulation effectively ends the program,” said the notice posted to Ontario’s environmental registry.

But the program is being ended after a lot of money was spent meeting its obligations, and it’s unclear how, or if, companies will be reimbursed for the incurred costs.

Natural gas is used for heat by approximately three-quarters of Ontario households, and gas companies in the province had been responsible for covering carbon emissions paid for by their customers.

The distributors, however, were allowed to recoup cap-and-trade-related costs through the rates they charged. A spokesperson for the OEB said those charges represented approximately $6 to $7 per month in costs for a typical residential customer, depending on the utility and the amount of gas used.

“The OEB is actively monitoring further developments from the government to inform next steps in relation to the gas utilities’ costs and cap-and-trade charges on utility bills,” the spokesperson said in an email.

Based on a carbon price of $18.99 per tonne, Union Gas projected total cap-and-trade obligation costs of $282.8 million for this year, according to its OEB application. In 2017, Union — now part of Enbridge after the Calgary-based company’s $37-billion merger with Houston-based Spectra Energy Corp. — said its total cap-and-trade obligations cost $275.3 million, a table in the application showed.

Enbridge Gas Distribution estimated in its application to the OEB that its customer-related carbon costs for 2018 would be approximately $377 million. The company also forecast $4.6-million in facility-related costs.

“The cap and trade charges approved by the OEB in respect of the gas utilities’ 2017 cap and trade compliance plans currently remain in effect, as the OEB denied the gas utilities’ requests to charge their higher proposed 2018 cap and trade charges on an interim basis effective January 1, 2018,” noted the OEB’s procedural order.

Doug Ford to officially wind down green programs funded through cap-and-trade

TORONTO — Ontario Premier Doug Ford says his government will officially begin winding down all green programs funded through the province’s cap-and-trade system this week.

In a statement released Tuesday, Ford says he has revoked the regulation that kept the carbon pricing system in place.

The Progressive Conservative leader, who was officially sworn in as premier Friday, had promised that cancelling cap-and-trade would be his first order of business.

Ford says the province will nonetheless honour contracts and orders that have already been signed for projects funded by cap-and-trade, such as energy efficient insulation and window retrofits.

Some rebates for energy-efficient renovations that were financed through cap-and-trade revenues — such as the GreenON rebate program — were already being phased out before Ford officially took office last week.

The premier says the government will decide on a case-by-case basis whether some initiatives previously funded by the program will be paid for using tax base revenue.

He says those decisions will factor in his overall plan for the province and the results of an upcoming value-for-money audit of government spending.

Ford’s office did not immediately respond to a request for comment Tuesday but the premier said in the statement that he believes scrapping cap-and-trade will put money back in Ontarians’ pockets.

“I promised that the party with taxpayers’ dollars was over and that this would include scrapping the cap-and-trade carbon tax slush fund. Today we are keeping that promise,” he said.

The government’s website does not list contact information for the newly appointed minister of the environment or any other cabinet members.

Doug Ford’s stance on tougher securities laws unknown as he takes power

TORONTO — The election that brought Doug Ford and the Progressive Conservatives to power in Ontario has thrown some policies of the soon-to-be former Liberal government into limbo. Included among them, it turns out, are previous promises to toughen up the province’s securities laws and introduce new regulations around benchmarks referenced by trillions of dollars in financial instruments.

In March, the then-Liberal government at Queen’s Park tabled a budget that included a section on “updating” the laws of the capital markets — the largest of which in Canada is in Ontario.

“Fair, vigorous and timely enforcement of Ontario’s securities laws is essential to protecting investors and fostering confidence in the capital markets,” the budget said. It added that the government “plans to propose” new tools for the Ontario Securities Commission “to enhance and expand its existing enforcement activities.”

Among those planned tools was a new offence for obstruction of an investigation in both Ontario’s Securities Act and Commodity Futures Act, as well as allowing for the OSC to make “reciprocal” orders when certain sanctions and other “key” orders are issued by another securities regulator.

The budget also said that the government was proposing “to establish a regulatory regime for financial benchmark administrators, contributors and users to reduce the risk of manipulation of those benchmarks and to align with international requirements.”

“New rules for benchmarks would improve protection for investors and capital markets against misconduct,” the budget added.

But none of this was included in the Liberal government’s budget bill. Nor was any legislation related to those proposals passed before a provincial election swept the Liberals from power, a finance ministry spokesperson confirmed. 

Meanwhile, the budget legislation was passed and received royal assent on May 8, the same day the June 7 election was called. Ford and the PC Party went on to win a majority of seats in the election, with the Liberals relegated to third place.

A spokesperson for Ford, who is to be sworn in as premier on Friday, said in an email that they would “have a better sense of things once we are in government and have sworn in our cabinet.”

If the changes are ultimately not made, the Ontario government’s previous plan to further regulate the world of financial benchmarks will have fallen by the wayside at a particularly sensitive time.

Confidence in the benchmarks in general was already rattled after a scandal related to alleged manipulation of the London Interbank Offered Rate. Moreover, the Canadian reference rates have been targeted by the Bank of Canada for potential tweaks, which is part of a global move to reform benchmarks that underpin trillions of dollars in financial contracts.

Canada’s main benchmark is the Canadian Dollar Offered Rate, or CDOR. The rate is used for derivatives, in addition to floating-rate notes and loans, and was referenced by more than $13 trillion in financial instruments as of the end of 2017, according to the Bank of Canada.

CDOR is a lending-based rate, however, unlike Libor. It is set daily using a survey of the Big Six banks, which submit the rate at which they would be willing to lend funds to corporate clients using bankers’ acceptances, a type of short-term credit instrument.

Bank of Canada deputy governor Lynn Patterson noted in a speech earlier this month that CDOR had been “strengthened in a number of ways” since 2014, such as by the appointment of Thomson Reuters as administrator of the rate, and with the Office of the Superintendent of Financial Institutions regulating the governance and risk controls around the banks’ submission processes.

Yet at the Ontario level, the financial benchmarks are not subject to as much regulatory scrutiny.

“The Ontario Securities Commission (OSC) does not have the express authority to regulate financial benchmarks and benchmark administrators, contributors and users in a comprehensive manner,” an Ontario Finance Ministry spokesperson said in an email. “However, the OSC does have regulatory authority over securities and derivatives tied to certain benchmarks and the market conduct of capital market participants.”

While its claims have not been proven in court, there has been at least one lawsuit launched over CDOR. In that case, a Colorado pension fund alleged several banks had engaged in an “unlawful conspiracy to increase the profitability of their derivatives trading business by manipulating” the Canadian dollar rate.

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Doug Ford to scrap Ontario’s cap-and-trade program, fight Ottawa’s carbon tax

TORONTO — Doug Ford said Friday he will scrap Ontario’s cap-and-trade system and fight a federal carbon tax as soon as his Progressive Conservative cabinet is sworn in later this month because the measures hurt families and do nothing for the environment.

To that end, the incoming premier said he will give notice of Ontario’s withdrawal from the carbon pricing market it shares with Quebec and California when he takes office on June 29.

Ford, whose party won a majority of seats in last week’s election, said the government will provide clear rules for an “orderly wind down” of cap and trade, but did not specify when the legislature will be recalled to implement the bill needed to dismantle the system put in place by Kathleen Wynne’s Liberal government.

“Today, I want to confirm that in Ontario the carbon tax’s days are numbered,” he said. “In fact, upon the swearing in of my new cabinet, at the top of our agenda the very first item will be to pass an order to cancel the Liberal cap-and-trade carbon tax.”

Ford also said he would challenge the federal government’s rules requiring provinces to have carbon pricing in place.

“I will (be) directing my attorney general to use all available resources, to use every power at the government’s disposal, we will officially challenge the federal government carbon tax on Ontario families,” he said. “Because the cap and trade and carbon tax does nothing for the environment.”

During the spring election campaign, Ford’s team estimated challenging the federal carbon tax in court would cost taxpayers $30 million over four years.

Environment Minister Catherine McKenna fired back, saying Ottawa is considering all options, including giving revenues from the carbon tax directly back to Ontario residents instead of the provincial government.

“Climate change is real and its impacts do not stop with a change in government. Canadians expect us to take serious action to protect our environment and grow our economy,” McKenna said in a statement Friday evening.

“Ontario’s premier-elect gave notice today that he is not interested in fighting climate change and is effectively withdrawing from Canada’s national climate change plan.”

Eliminating cap and trade will help deliver on a campaign promise to cut gasoline prices by 10 cents per litre, Ford said, while adding that he was putting gas distributors “on notice” about price fluctuations ahead of holiday weekends.

The cap-and-trade system aims to lower greenhouse gas emissions by putting caps on the amount of pollution companies in certain industries can emit. If they exceed those limits they must buy allowances at quarterly auctions or from other companies that come in under their limits.

Ontario has made close to $3 billion in a series of cap-and-trade auctions since the system was introduced by the Liberals last year. Ford has consistently opposed carbon pricing and has come under fire for failing to explain how he would make up for the lost revenue.

Trevor Tombe, an economist with the University of Calgary, said if Ford’s goal is to drive down gas prices he didn’t have to scrap the entire cap-and-trade system to achieve it. The Tories could have kept the program in place but exempted gas distributors who could have then lowered their prices by four or five cents.

That combined with a cut to the provincial excise tax on fuel would lead to a 10-cent-per-litre cut at the pumps, he said.

“Exempting fuel distributors would effectively turn cap-and-trade into a large emitter carbon pricing system,” he said.

Tombe said there are no “insurmountable hurdles” that would keep Ontario from scrapping the system, but the government will need to address the billions in permits sold in previous auctions.

“The money raised is earmarked for a number of spending initiatives,” he said. “The government could simply not proceed with those initiatives and instead return the money.”

The opposition parties expressed concern about the loss of revenue from cap and trade and the programs the money would have supported.

“How will Mr. Ford replace the $1.9 billion per year that the cap-and-trade auction brings in for the province?” said NDP legislator Peter Tabuns. “Will he be making another $2 billion in cuts to programs Ontarians count on”?

Ontario Green party Leader Mike Schreiner, who was elected to the legislature last week, said cancelling pollution pricing without a backup plan would send a signal to clean companies that the province is not open for business.

“It is unfortunate to see Mr Ford’s sloganeering and back-of-the-napkin ideas continuing post-election,” he said.

Environmental groups panned the move, calling it a bad idea for the environment and Ontario’s economy.

“By abandoning action on climate change, Doug Ford is simply raising the extreme weather tax which is already wrecking homes, crops and public infrastructure,” said Keith Stewart, a senior energy strategist with Greenpeace Canada.