With Hy­dro One stuck at the in­ter­sec­tion of pol­i­tics and com­merce, the hunt for a new CEO is an up­hill bat­tle

The Globe and Mail (Prairie Edition) - - REPORT ON BUSINESS - ANDREW WILLIS

The act­ing CEO of Hy­dro One

Ltd., Paul Dob­son, said all the right things last week, when On­tario’s elec­tri­cal trans­mis­sion util­ity re­ported strong fi­nan­cial results and steady progress on its $6.7-bil­lion takeover of Avista Corp., a U.S. com­pany that pro­vides power in Idaho, Wash­ing­ton State, Ore­gon and Alaska.

No one took Mr. Dob­son at his word. He’s the lamest of lame ducks. Ev­ery­one is wait­ing for the ap­point­ment of a new chief ex­ec­u­tive for Hy­dro One. Who­ever steps into this meat grinder of a job will dic­tate the fu­ture of a com­pany that keeps the lights on for 1.3 mil­lion Cana­di­ans, yet is stalled at the cross­roads of pol­i­tics and com­merce.

Mr. Dob­son is Hy­dro One’s for­mer chief fi­nan­cial of­fi­cer, a vet­eran fi­nancier dropped into the top job in July af­ter On­tario Premier Doug Ford turned ex-CEO Mayo Sch­midt into his per­sonal pinata. On­tario owns 47 per cent of the partly pri­va­tized com­pany. Af­ter an elec­tion cam­paign that some­how man­aged to link ris­ing power prices to ex­ec­u­tive com­pen­sa­tion – the po­lit­i­cal equiv­a­lent of ty­ing stock-mar­ket per­for­mance to the team that wins the Su­per Bowl – Mr. Ford forced Mr. Sch­midt’s re­tire­ment over a $6.2-mil­lion pay pack­age, a sum that is less than what CEOs take home at com­pa­ra­ble do­mes­tic util­i­ties.

Af­ter the elec­tion, Hy­dro One’s board re­signed, Mr. Dob­son got a tem­po­rary pro­mo­tion and new directors stepped up. The board is now split be­tween nom­i­nees from On­tario’s new Pro­gres­sive Con­ser­va­tive govern­ment and the util­ity’ s in­sti­tu­tional in­vestors – groups with vastly dif­fer­ent agendas. Be­cause their dif­fer­ences are ir­rec­on­cil­able, one side is go­ing to come out on top when the next CEO is an­nounced, while the other stands to be deeply dis­ap­pointed.

Un­cer­tainty around Hy­dro One’s lead­er­ship and gov­er­nance al­ready hangs over the com­pany’s stock price, as do a se­ries of reg­u­la­tory set­backs in On­tario. Mr. Dob­son an­nounced a $194-mil­lion quar­terly profit on Thurs­day that ex­ceeded an­a­lyst ex­pec­ta­tions. CIBC World Mar­kets an­a­lyst Robert Catel­lier re­sponded by knock­ing back his tar­get price on the stock, to $19.75 from $20.50, say­ing strong op­er­at­ing results “are largely masked by the machi­na­tions of the Avista takeover and con­cerns about the out­look in On­tario.”

The choice of a new CEO will de­ter­mine whose vision drives Hy­dro One – Mr. Ford’s or that of the in­vestor-ap­pointed directors at a com­pany that is ma­jor­i­ty­owned by the pri­vate sec­tor. Mr. Ford’s pri­or­ity is meet­ing a prom­ise to cut elec­tric­ity bills by 12 per cent. In­vestors, on­theother­hand, want Hy­dro One to pump up prof­its and raise div­i­dends.

The Premier’s ideal can­di­date is some­one who de­liv­ers lower power prices for a pay packet in the $400,000 to $600,000 range, ac­cord­ing to sources in the govern­ment. That’s what the top dog gets at Crown cor­po­ra­tions Hy­dro-Québec and Man­i­toba Hy­dro. To steal a phrase from Win­ston Churchill, at a large pub­lic com­pany, for $600,000 you get a mod­est CEO with much to be mod­est about.

In­vestors want the next CEO to keep build­ing the busi­ness by clos­ing the Avista takeover, then plow­ing the cash gen­er­ated from a $32-bil­lion leader into ex­pand­ingU.S. op­er­a­tions. Achiev­ingthis goal means push­ing reg­u­la­tors for higher rates. It also means pay­ing for a CEO with proven M&A skills.

The cul­ture of Hy­dro One hangs in the bal­ance. The cur­rent man­age­ment team was hired with a growth man­date, as the Toronto-based util­ity knocked off more than 90 suc­cess­ful ac­qui­si­tions on Mr. Sch­midt’s watch. Aban­don­ing that strat­egy will mean more man­age­ment turnover and will be ex­pen­sive. If the new CEO and board were to drop the Avista acquisition, Hy­dro One would have to pay a US$103-mil­lion ter­mi­na­tion fee to the Spokane, Wash.-based util­ity.

Hy­dro One’s goal was to an­nounce a new CEO by the end of the year, ac­cord­ing to sources who work for the On­tario govern­ment and at Hy­dro One. But th­ese sources say the board is still strug­gling to set­tle on a com­pen­sa­tion scheme that sat­is­fies the Premier while mak­ing the job at­trac­tive to proven can­di­dates, in­clud­ing in­ter­nal ones. Af­ter go­ing pub­lic in 2015, Hy­dro One’s goal was to be­come a ma­jor North Amer­i­can en­ter­prise. Un­der this govern­ment, with a new boss, the com­pany’s strat­egy may be far more mod­est.

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