Hydro One earnings clouded by shakeup
TORONTO • 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 profit of $200 million for its second quarter ended June 30, up from $117 million a year ago. Adjusted earnings of 33 cents a share beat analysts’ estimates. 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.
His 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 $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 53 per cent of the once provincially owned utility — greater control over the company’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 filings.
Hydro One already has another executive it 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 CIBC.
Other directors named Tuesday include interim Canada Post Corp. CEO Jessica McDonald, who was previously CEO of the B.C. Hydro and Power Authority; and Russel Robertson, former head of the anti-money laundering unit at BMO.
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. 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 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.”
RBC Dominion Securities Inc. said solid results will continue to be overlooked.
“With the political uncertainty with respect to the environment for Hydro One in Ontario in addition to uncertainty with respect to the Avista transaction, we believe these items will overshadow” the results, analyst Robert Kwan said in a note.
Hydro One shares rose 1.2 per cent to close at $19.33 in Toronto and are down 14 per cent this year.
UNCERTAINTY WITH RESPECT TO THE AVISTA TRANSACTION.