Canada: LDC Consolidation And Valuation: Blind Faith

Last Updated: April 16 2015
Article by Rob Blackstein

Most Read Contributor in Canada, October 2018

The potential sale by the province of all, or a portion of, Hydro One by way of private sale or initial public offering (or both) is sparking renewed interest in the broader consolidation of local distribution companies in Ontario, most of which are owned by municipalities or, in the case of Hydro One, by the Province. One key aspect that will need to be explored within the broader context of consolidation is the valuation of LDCs themselves.      

Blind Auction Process and Historical Value Setting

Recent consolidation activity in Ontario's LDC sector involved the acquisition of Norfolk Power and Haldimand Hydro by Hydro One, the acquisition by Cambridge and North Dumfries Hydro of Brant County Power and Hydro One's proposed acquisition of Woodstock Hydro Services. As we previously discussed in our article "Hydro One's Acquisition of Norfolk Power, and the "public interest", these recent transactions were the result of a competitive bidding process known as a "blind auction", where the number and identity of bidders is unknown to all participants other than the selling shareholder and its advisors. A blind auction process is intended to yield an optimal result for the seller with respect to purchase price and can also incentivize prospective buyers to include "sweeteners" (e.g., additional promises or commitments) to induce a seller to choose its bid over another. The purchase prices for Norfolk Power, Haldimand Hydro, Woodstock Hydro and Brant County Power that resulted from the blind auction process included significant premiums above the "net book value" of the assets of those utilities, approximately 42% in the case of Norfolk Power, 32% in the case of Haldimand Hydro, 56% in the case of Woodstock Hydro and 40% in the case of Brant County Power. The successful bids also included additional contractual promises and commitments from the purchasers of those utilities to the divesting municipality.

A typical definition of a properly functioning market is one that is open and unrestricted between informed and willing buyers and sellers who are under no compulsion to act. As noted above, the number and identity of bidders in connection with the sale of Norfolk Power, Woodstock Hydro and Brant County Power is not publically known. However, the existence of a "transfer tax" on municipalities that divest their LDCs to buyers other than to other municipally-owned LDCs or Hydro One would logically result in an auction process dominated by those public sector participants. In that sense, it may be fair to state that the purchase prices for Norfolk Power, Woodstock Hydro and Brant County Power may not be reflective of a "pure" enterprise value of those utilities, one that would be arrived at using the open and unrestricted model. The additional contractual promises and commitments noted above may also result in additional distortions to value and price that are unreflective of a pure market model.

As we previously noted in our article "The OEB approves Hydro One's acquisition of Norfolk Power: A new market standard for the next wave of LDC consolidation in Ontario?"  the Ontario Energy Board (in approving the acquisition of Norfolk Power) rejected the argument from the intervenors that significant the purchase premium paid for Norfolk Power would result in Hydro One becoming the "dominant buyer" and would therefore compromise the rational consolidation of the LDC sector on the grounds that any purchase price premiums paid by acquirors over book value are not allowed to be included in electricity rates. Hydro One was the successful proponent in three of the four LDC acquisitions referred to above, and, given its size vis a vis other municipally owned competitors (and the potentially narrow field of bidders), may further distort the LDC valuations that have emerged to date.

Orderly LDC Consolidation and Pricing 

Economic theory tends to focus on the open and unrestricted model as yielding the optimal result for both the buyer and the seller (in other words, at the time the deal is made, buyers generally want to know they are not overpaying for assets while sellers want to know that they are not needlessly selling at a discount). So why does price matter in the context of broader LDC consolidation? One may be tempted to look at the historical prices of Norfolk Power, Woodstock Hydro and Brant County Power as establishing a benchmark range for LDCs (i.e., 40% – 56% above "net book value"). However, if we make the reasonable assumption that those auction processes were dominated by other LDCs and Hydro One (and if we assume the Province eliminates the "transfer tax" to encourage an open and unrestricted bidding process, something which has been strongly hinted at recently) such historical LDC pricing may be of limited relevance. Prices may be higher or lower – we simply do not know as there is not enough information flowing from an optimal market model.

While a potential sale of a portion of Hydro One through an IPO may arguably facilitate some level of market pricing for LDCs (assuming the offering is made widely) a partially privatized Hydro One may not be an optimal proxy for the rest of the sector as it includes 97% of the Province's transmission capacity and its cost structure is higher than the rest of the sector in certain respects (at the very least those factors would need to be accounted for in any comparison).

In addition to other benefits, the orderly consolidation and continued viability of the LDC sector could be well served by introducing a greater degree of private participation, not only in terms of more reliable LDC valuations but also through continued and sustained investment in a sector that is confronting unprecedented technological transformation and shifts in demand. As we previously noted in "Hydro One's proposed privatization: Knowing the past, understanding the present and a glimpse into a possible future" – the limited report by the Premier's Advisory Council on Government Assets noted that "...The system needs more capital, which is unlikely to be available from the public sector owners given other pressing needs." LDCs will be facing a number of challenges and opportunities in the upcoming years (i.e., capital re-investment, distributed generation, micro-grid management, to name a few). Private sector owners of LDCs (especially those with long term investment strategies) may be more incented to tackle these challenges and capitalize on opportunities for future growth.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions