The future of Ontario’s partially privatized utility is again uncertain after political intervention prompted the resignation of the company’s board 16 years after another mass departure.
Hydro One’s 14-member board resigned en masse last week after the sudden retirement of chief executive officer Mayo Schmidt, labelled “the six-million-dollar man” on the campaign trail by Premier Doug Ford for his hefty compensation.
The premier made it clear that he wanted changes, including reduced electricity rates and lower compensation for the CEO — even though 92 per cent of shareholders other than the province supported Hydro One’s executive compensation approach.
However, the move will come with costs of its own.
Political interference and a lower pay package will make it more difficult to attract a quality chief executive and directors willing to serve, said Jeremy Rosenfield of Industrial Alliance Securities.
“It’s clearly going to have to be somebody who will be able to work with the province and I believe many CEOs will not accept the level of potential political interference that would be required to take this role.”
A Ford spokesman declined to confirm a published report that the government threatened to rip up the board’s executive employment contracts unless they negotiated their departures.
In addition to dealing with a large activist investor, the new board faces uncertainty about what the new government actually intends to do with its investment, since no strategy was outlined in the campaign, Rosenfield added.
Schmidt, who earned a $6.2-million salary last year, became a lightning rod for resentment during the election over rising electricity rates in the province. He would have been entitled to at least $10.7 million in severance if he were to be removed from his job by the board of directors, according to the company’s annual shareholders report released on March 29.
According to a statement from Hydro One, Schmidt will not be entitled to severance, and will instead receive a $400,000 lump sum payment in lieu of all post-retirement benefits. But he still stands to earn millions from deferred stock options.
Schmidt’s compensation was comparable to the heads of large private utilities like Fortis Inc., Atco Ltd. and Emera Inc. but more than 10 times the payout to Canadian electrical utilities in Quebec and British Columbia.
The government will select four board members. A committee of the outgoing board, working with its largest shareholders, will name six others with the new CEO making up the 11th member. The transition to a new board is expected to be completed by Aug. 15.
Changing Hydro One’s board alone won’t reduce electricity rates, which are set by the provincial energy regulator.
To remain a viable public company, Hydro One has to charge rates to recover costs and be able to make long-term investments, said Rosenfield.
“Hypothetically, the government could install a CEO of its choosing who would choose to argue in favour of much lower hydro rates, but it would have to build a business case that would support much lower hydro rates.”
While questions about Hydro One’s future remain unanswered, there is a precedent at the power company itself.
“We’ve seen this movie once before,” said University of Waterloo professor Jatin Nathwani.
In 2002, the utility’s board quit before Ontario’s Progressive Conservative government fired CEO Eleanor Clitheroe over alleged personal spending.
“To the extent that the board resigned and there was CEO compensation (issues) it’s similar,” said Radcliffe Latimer, a former board member.
“But at the time our board resigned we were a Crown corporation and totally at the pleasure of the minister. Hydro One now is a public corporation so I suspect there are significant governance differences that apply in the two cases.”
Hydro One was partially privatized in November 2015, and by December 2017 the province had sold off 53 per cent of its stake.
The former Liberal government said privatization would raise $9 billion to fund transit and infrastructure projects. Privatization was also aimed at driving down costs by spinning it off into the hands of private investors.
“The whole purpose was to say if we run this as a profit-oriented business then we could cut costs and we can save money for customers in Ontario,” said Nathwani.
Investors responded to the latest resignations by sending its shares to an all-time low of $18.57 on Thursday before closing the week down 1.8 per cent to $19.17 in Friday trading on the Toronto Stock Exchange.
“It will take a hit on its valuation for sure with this kind of chaos,” Nathwani said.
Some of the concern is whether leadership turmoil at Hydro One could prompt U.S. regulators to hesitate about the planned $6.7-billion takeover of U.S. utility Avista Corp.
A series of analysts including Rosenfield downgraded the company after the move despite its stable earnings, healthy earnings growth and attractive yield.
“The heightened potential for further political interference in the province’s electricity market and regulated utility framework represent key risk factors that are likely to outweigh Hydro One’s fundamentals over the near term.”
Companies in this story: (TSX:H, TSX:FTS, TSX:ACO.X, TSX:EMA)