Hydro One Secondary Share Offering at a Glance
Ontario is proceeding with a secondary share offering of Hydro One Limited. This will be the second offering of common shares of Hydro One on the public market, as the Province continues to broaden ownership of the company and will invest the net proceeds in infrastructure. Once the offering has been completed, approximately 30 per cent of Hydro One's common shares will be publicly held.
The process for this offering differs from the Initial Public Offering (IPO) in fall 2015. This secondary share offering will be undertaken as a "firm commitment offering".
Protecting Electricity Consumers
Province's Ongoing Oversight of Hydro One
The government has placed restrictions on Hydro One through legislation and outlined the relationship between Ontario and Hydro One with respect to the Hydro One board of directors through a robust governance agreement.
- By law no other shareholder or group of shareholders is permitted to own more than 10 per cent of the company
- The Province is prohibited by law from reducing its ownership below a 40 per cent threshold
- Hydro One's head office, Ontario grid control centre, CEO, and substantially all strategic decision-making management and functions must be maintained in Ontario
- Hydro One cannot sell substantially all of either the transmission or distribution assets regulated by the Ontario Energy Board (OEB)
A Strengthened Regulator
The government has passed legislation that enhances the Ontario Energy Board's powers to continue to protect electricity ratepayers with respect to cost, consumer protection and reliability. These changes provide the OEB with:
- Stronger compliance and enforcement powers by increasing penalties to companies that are not complying with the OEB's rules and directions
- Enhanced ability to ensure reliability and continuity of service if distribution or transmission companies are unable to fulfil their licence obligations
- Enhanced oversight for ensuring best practices on utility consolidation activities
- Stricter oversight of retailers and more protection for consumers who sign energy retail contracts
Hydro One does not set its own electricity rates. Rates continue to be set by the independent OEB.
Applications for electricity rates from companies like Hydro One are reviewed by the OEB and they - not the companies themselves - make the final decision. This process applies to both electricity and natural gas utilities in Ontario.
As the new management team strengthens the company's performance, any efficiencies should be reflected in downward pressure on rates.
Improvements in Customer Service Experience at Hydro One
In proceeding to broaden the ownership of Hydro One, one of the Province's objectives was to promote improved corporate performance, including customer service. Hydro One has indicated it has improved the quality of its call centre interactions through improved training, staffing and performance management. Hydro One's new leadership has put an emphasis on customer service and delivery. In December, it became the first electrical utility in Canada to launch a service guarantee. As a result, customer satisfaction with Hydro One's call centre has improved from 77 to 90 per cent - a 13 per cent improvement compared to October 2014. Hydro One guarantees that it will return calls promptly, keep its service appointment promises and fulfill new connection requests on time, or customers will receive a $50 credit on their account.
Hydro One has taken steps to also improve billing performance. The company stated it has significantly improved the accuracy of bills by reducing reliance on estimated meter reads. Hydro One reports that 98.7 per cent of bills issued to time-of-use customers are based on actual reads, up from 92 per cent in December 2014. The company has also reported that it has launched new service level guarantees for appointments, call returns and new connects.
Secondary Offering Process
Secondary Share Offering and Firm Commitment Offering Defined
A Firm Commitment Offering means that a group of underwriters commits to buy the entire offering from the selling shareholder (as in this case) or the issuer (company) at an agreed price before the underwriters undertake any public sales or marketing of the offered shares. This eliminates the marketing risk for the selling shareholder (the Province) or company (Hydro One) and transfers it to the underwriters who, in turn, then sell the offered shares to the public.
A secondary offering is distinguished from a "new issue" or "treasury offering" in that the proceeds generated by the sale of the shares go to the selling shareholder rather than the company. Secondary offerings, while benefiting the selling shareholder, do not financially benefit the issuing company.
During the secondary share offering, the government is in a quiet period in accordance with securities laws that will restrict any public comments regarding Hydro One that go beyond what Hydro One has already publicly disclosed.
Hydro One Limited common shares will be sold by underwriters led by RBC Capital Markets and Scotiabank, including an over-allotment option, if exercised.
Underwriting fees will be calculated as a percentage of sales to investors. The fees earned by the underwriters for the secondary share offering are 1 per cent for sales to institutional investors and 3 per cent for sales to retail investors.
This is significantly lower than what underwriters have typically earned on firm commitment offerings and consistent with the fees earned in the Initial Public Offering.
Ontario Business Corporations Act (OBCA) and Canadian Securities Law Requirements
As an OBCA company and a reporting issuer subject to Canadian securities laws, Hydro One will continue to comply with rigorous disclosure and governance requirements that include:
- Disclosure of board approved audited annual financial statements and quarterly unaudited financial statements, with related management discussion and analysis
- Annual Information Form providing updated details about the company and its business
- CEO and CFO certifications and associated controls to ensure that there are no misrepresentations in the annual or quarterly materials
- Management Information Circulars (released ahead of shareholder meetings) including information about senior management, such as share ownership, any indebtedness to the company and any interest in material transactions, as well as compensation disclosures including salary bonus, share awards, perks and incentives
- Event-driven disclosure requirements to issue material change reports
- Governance rules and guidelines under corporate and securities laws and stock exchange rules