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Posted in: Energy Policy | Utility Mergers | Dillon Collett

Jul 25, 2016

First Nations and Ontario Strike Agreement-in-Principle for Sale of Hydro One Shares

On July 12th, the Province of Ontario and First Nations, represented by the Chiefs-in-Assembly,  announced an agreement-in-principle for Ontario to sell up to 15 million shares of Hydro One Limited to First Nation communities in the province. The Liberal government in Ontario has partially privatized the public utility, and so far 30% of Hydro One's shares have been sold. If the 15 million shares are sold to First Nations, it would constitute another 2.5%.

The Chiefs-in-Assembly established a Chiefs Committee on Energy to undertake this initiative on behalf of the 133 First Nation communities in Ontario. Each First Nation would have up to two years from the signing of binding agreements to decide whether to participate in the deal. A base threshold of 80% First Nation participation by the end of 2017 is needed before the transaction can close.

If the agreement is ratified, Ontario would sell the shares to a new investment vehicle owned collectively by First Nations. The purchase would be financed with a 25-year loan from Ontario of up to $268 million, depending on the number of First Nation communities participating. The shares for the loan would be sold at $18 per share, which is above the province's book value for the shares, but below the $24 to $26 range the stock has been trading in recent months. Ontario would also provide seed capital to a new First Nation investment fund of up to $45 million over the first three years, depending on the degree of First Nation participation.

The agreement-in-principle between Ontario and First Nations is part of the Wynne government's controversial plan to sell off 60% of Hydro One. Both opposition parties have warned that the sell-off of Hydro One will drain Ontario of revenue while increasing the cost of electricity for consumers. The governing Liberals, on the other hand, have said that the proceeds from the sale will stimulate the economy and help fund important infrastructure projects.

The sale of Hydro One is the largest sell-off of a Canadian crown corporation in 20 years, however the Ontario government will remain the largest shareholder of the public utility, and by law, no other shareholder or group of shareholders is permitted to own more than 10%. Ontario's decision to partially privatize Hydro One stems in part from the report of the Advisory Council on Government Assets. Led by Ed Clark, the Advisory Council was appointed by the Premier in April 2014 to "consider various options to generate better returns and revenues to maximize the value of" Hydro One (along with the LCBO and Ontario Power Generation). The Advisory Council recommended that the government dilute its interest in Hydro One's distribution business by bringing in private capital and retaining a minority share of 40% to 45%.

In the meantime, Ontario is promoting the sale of Hydro One shares to First Nations as a sign of a strengthening relationship between First Nation communities and the province. Energy Minister Glenn Thibeault, for instance, has stated that the agreement will give economic development opportunities to First Nations across Ontario. On behalf of the Chiefs-in-Assembly, Ontario Regional Chief Isadore Day referred to the sale as an example of the province and First Nations reconciling their interests: "Having meaningful equity participation in Hydro One is a unique long-term wealth creation opportunity for our collective First Nations. More significantly, we now have the opportunity to secure our rightful place not only in the energy sector but in the economy as a whole."

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