Barker, Dunn

1
Impact of Privatizing Hydro One

• presented to
• EDA 2002 Annual General Meeting
• by
• Jan Carr

2
Comments

• method of privatization
• options
• advantages
• recommended choice
• impact on Hydro One
• breakup of transmission from distribution or not
• specialized activities over wide geographic area
  or full service provider in a smaller region

3
Privatization Methods Trade Sale

• sell whole enterprise to a single buyer
• maximizes proceeds
• eliminates need to set a value and potentially
  leave money on the table
• maximum in your face impact on opponents to
  privatization
• minimum transaction cost
• change to existing management likely change in
  directions likely

4
Privatization Methods Initial Public Offering
(IPO)

• creation and sale of shares to individuals and
  institutions
• lower value than trade sale
• requires estimating price exposure to capital
  market changes during process
• existing management most likely to stay in place
  change in directions less likely
• high transaction costs
• great flexibility multiple tranches,
  preferential pricing for identified buyers etc.

5
An Approach for Ontario

• multi-tranche IPO with trade sale element
• Tranche 1 20 - sale to individuals,
  conservative value
• Tranche 2 20 - trade sale, international RFP
  and auction
• Tranche 3 40 - open conventional IPO,
  aggressive value, institutional investors
• Tranche 4 20 - retained by Government for
  future divestment

6
Advantages

• allowing small investors in first reduces
  opposition to privatization
• conservative pricing for initial tranche
• gives feedback on capital market appetite
• money left on table goes to the general public
• trade sale block boost proceeds and value for
  later IPO tranche
• traditional IPO tranche done at peak of market,
  any political and management concerns have been
  dealt with
• government-owned tranche allows choice of timing
  of final sell-off to maximize proceeds

7
Disadvantages

• non-broker sale to public may require special
  arrangements under securities laws and is not
  popular with Bay Street
• most purchasers in a trade sale would want at
  least a majority interest
• unsold government shares reduce speed of paydown
  of stranded debt and continue existing political
  risk

8
Impact on Hydro One

• breakup of transmission from distribution or not
• specialized activities over wide geographic area
  or full service provider in a smaller region

9
Specialization versus Comprehensive Service
Provider

• most, but not all, electricity restructuring has
  resulted in specialization
• TransAlta vertically integrated utility is now
  only in the generation and wholesale energy
  trading businesses
• distribution sold to UtiliCorp who immediately
  sold retail and customer service operations to
  EPCOR
• transmission sold to AltaLink a custom-made
  consortium
• TransAlta now owns generation in Canada, US,
  Mexico, Australia trading in Canada and US
• Texas Utilities (now TXU) vertically integrated
  utility is still in generation, transmission,
  distribution and retail
• 60 of its customers and 40 of its assets
  outside of North America
• US22 billion annual revenue

10
Transmission vs Distribution

• similarities
• regulated, wires, geographically dispersed
• differences
• closeness to public
• optimal geographic size
• planning, design and approvals processes
• maintenance and construction skills
• move toward Regional Transmission Organizations
  (RTOs)

11
Prediction

• H1 will separate transmission from distribution
  businesses after privatization
• privatizing H1 as-is will provide a potential
  value boost when it is restructured
• e.g. split-up of Canadian Pacific Limited into
  rail, ships, mining, oil/gas, hotels (oil/gas now
  merging with another major oil/gas specialist)
• if Ontario public and government own significant
  block of shares, the benefit will go to them