Hydro unions get $87M loan

The citizens of Ontario will be taking a more than passing interest in the upcoming initial public offering of Hydro One.

First they’ ll want to know that the public assets being sold are attracting the highest possible price.

And they’ll be interested because the citizens, through the government, will also become lenders in the IPO.

The prospectus indicates the provincial government will make $87 million in loans to two unions whose members are employed in the electricity sector, specifically at Hydro One (the distribution and transmission arm) and Ontario Power Generation (the production arm). In turn those two unions will use the cash advanced by the government to purchase common shares in Hydro One’s IPO. (At $87 million the investment could be five per cent of the IPO.)

But the Power Workers Union and the Society of Energy Professionals plan to purchase more shares in the offering than what the $87 million loan from the province will buy. For those additional purchases, they will use their own funds.

The document details the terms of the two loans, of which $75 million will make its way to the PWU and $12 million to the Society of Energy Professionals. The loans run for 15 years and the interest rate will be the government of Ontario borrowing rate plus 0.15 per cent. (That rate is dependent on the term of the loan.) The loans are secured (by the common shares owned by the unions) and interest will be paid on a quarterly basis out of the quarterly dividends. Those dividends are set, at least initially, at $0.21 a share, or a yield of 4.2 per cent if the shares are sold at $20, the mid-point of the marketing range.

The loans come with one major restriction: the unions are not allowed to vote the shares provided the loans remain outstanding. In addition the unions can’t sell, for at least a year, the shares bought with its own funds.

So how did the $87 million in loans emerge?

The prospectus indicates it bubbled up, with the PWU taking the lead, after the province decided to sell off part of Hydro One. That union “expressed an interest in investing in the common shares, in order to invest in high-quality jobs for Ontarians.”

In turn the province agreed. “The province believes that the investment would be consistent with the purpose of this offering and will better align the interests of the members of the unions with the interests of other investors in Hydro One.”

A spokesperson for Ontario’s Ministry of Energy said the agreements proposed by PWU and the Society means the unions are “all-in on Hydro One’s future success. As shareholders, employees and unions have a strong incentive to see the company’s performance continue to improve.”

So what are the merits of the situation?

At the outset it’s a little different from the norm where employees of the entity being sold are often given the opportunity to buy shares on attractive terms. One such term could be a loan, or a loan guarantee, from the entity going public.

But it may not be groundbreaking. Since Britain’s Margaret Thatcher led the way in selling public assets more than three-plus decades back, there are probably examples from around the world where unions have been given loans to buy stock.

BARRY CRITCHLEY