Ford's Pledge to Fire Hydro One Chief, Scrap Board Won't Be Easy

(Bloomberg) -- Doug Ford pledged during the Ontario election campaign to fire the “six-million-dollar” man who runs Hydro One Ltd. and scrap the utility’s board. Following through on the promise may not be so easy.

Though Ford was swept to power with a decisive election win Thursday, the premier-elect has no authority to replace Chief Executive Officer Mayo Schmidt since the company is now controlled by investors. And the utility’s governance statutes dictate that even if the board was replaced, non-government shareholders would appoint the new directors.

Hydro One “will continue to be caught in the political cross hairs,” Credit Suisse analyst Andrew Kuske wrote in a research note Friday. However, the protections provided under its governance agreement with the province “should allow reason to prevail and the rhetoric to be separated from the reality.”

Ford’s Progressive Conservatives easily won the Ontario election, taking 76 of 124 districts and defeating the deeply unpopular Liberals, who privatized Hydro One in 2015. The province is still the utility’s largest shareholder with a 47 percent stake, according to data compiled by Bloomberg.

Hydro One shares slipped 0.1 percent to C$19.48 at 10:38 a.m. in Toronto.

Ford's Pledge to Fire Hydro One Chief, Scrap Board Won't Be Easy

The Toronto-based utility bore the brunt of voter unhappiness with high electricity prices during the election, even though the distribution company doesn’t set power rates in the province. Ford called CEO Schmidt the “six-million-dollar man,” referring to his annual compensation, including bonus and stock awards. The second-place New Democratic Party had vowed to return the company to public hands.

The governance agreement states that the province can “seek to remove and replace the entire board,” an all-or-nothing proposition, with the exception of the CEO. If this process is launched, the top five shareholders, excluding the province, then have the ability to form a nominating committee, meaning the province won’t get to choose the nominees.

On a May 15 conference call with investors, Schmidt said the province is a “shareholder, not a manager of the business.”

“Our view would be once we clear (the election) and the hydro or electricity becomes less of let’s say a lightning rod, that things will smooth out, but we’re not losing our focus as an organization in the meantime,” he said.

The uncertainty has pressured Hydro One’s shares, with the stock down 13 percent year-to-date. The shares are now little changed since Hydro One went public three years ago. Kuske said the risk-reward profile looks attractive and the recent decline is “overdone.” He rates the stock outperform with a C$22 price target, 13 percent above Thursday’s close.

Robert Kwan, an analyst at RBC Capital Markets, said last month the share price may be “capped over the next several months due to headlines” stemming from the election, but he views any weakness as a good entry point. Kwan rates Hydro One outperform with a C$25 price target.

Another electricity issue facing Ford is the Fair Hydro Trust, a borrowing program that allowed the former government to subsidize rate cuts with long-term bonds. The program was criticized by the province’s auditor general and some bond investors for its complexity and excessive costs.

“Defeasement could be an option, effectively bringing this debt onto the province’s books,” Warren Lovely, Toronto-based head of public sector research at National Bank Financial, said in a note.

©2018 Bloomberg L.P.