On a day when the overall Canadian equity market fell 0.75 per cent, Thursday proved a rewarding first day in public trading for shareholders in Hydro One Inc., with the beneficiaries of the 5.5 per cent jump including the Power Workers’ Union (PWU) and the Society of Energy Professionals (SEP).
The two unions, whose members work at either Hydro One or Ontario Power Generation, made out particularly well because they were able to buy shares largely with loans received from the province. And at some point before trading began, the province handed over far bigger loans to the unions than its original public plans had stated.
In early October, when Hydro One filed its amended and restated preliminary prospectus, it was stated the Ontario government would advance $87 million in loans to the two unions, of which $75 million would flow to the PWU and $12 million to the SEP.
When Hydro One recently filed its final long-form prospectus, however, the total loan amount had ballooned by nearly 30 per cent, to $111 million. The PWU received its original $75 million loan, but the SEP loan was tripled from the earlier plan, to $36 million.
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The unions were to use the 15-year loan, held in trust, to buy Hydro One shares on the same terms and conditions as the public, including the pre-trading price of $20.50 (shares closed Thursday at $ 21.62). But the sale was to occur outside the normal distribution process, meaning the shares purchased by the two unions are over and above the 81.1 million placed with the public. If the underwriters exercise the so-called over-allotment option, the company would be diluted by another 8.15 million union-held shares.
The loans were made because the province believes it “will better align the interests of the members of the unions with the interests of other investors in Hydro One.”
As part of the deal, the unions would also set up another trust where they would use their own funds to buy Hydro One shares also at $20.50. The additional money invested beyond the loans seems to have been fairly small: According to a Thursday filing, the PWU in total bought 3,756,097 shares, for $77 million — $2 million more than the loan — while the SEP bought 1,890,243 shares, for $38.750 million, just under $3 million more.
“Each borrower Trust will use its loan to acquire common shares and to pay for certain expenses incurred for professional services provided in relation to these transactions and the labour agreements,” said the final prospectus, which indicated the loan amounts “were agreed based on the number of members that each of the Power Workers’ Union and The Society of Energy Professionals has employed at Hydro One and at Ontario Power Generation.”
Aside from the larger loan to the SEP, there is a slight difference in wording between the two documents.
Earlier we were told the loans would “finance a portion of the share purchase and certain related expenses.” Now the loans are to be used for share purchases, funding professional services associated with the purchase and “the labour agreements.”
So what’s going on?
A spokesperson for Bob Chiarelli, Ontario’s Minister of Energy, said the $24 million increase in the loan to the Society of Energy Professionals occurred because of a labour-contract agreement the union has reached with Ontario Power Generation (OPG). The loan has increased significantly because there are considerably more SEP members working at Ontario Power Generation than at Hydro One.
The SEP’s members haven’t ratified the labour agreement, the spokesperson said: if it is not ratified then the loan will be reduced to the original $12 million.
The spokesperson said the loan agreements are separate from the labour agreements. Accordingly the costs in the $36 million loan refer to the financial-services expenses incurred in setting up the trust that will hold the loan and purchase the Hydro One shares. As such, the costs don’t include the expenses incurred by the SEP in its recently completed labour negotiations. (The Liberal government has admitted lately to paying millions to public sector unions for unspecified negotiating costs).
In this case, the government says the SEP is getting a fully secured loan to purchase shares and the associated financial services — not a payment.
Calls to the Society of Energy Professionals seeking a comment weren’t returned.
The Ontario Liberal government has said it would use the $1.66 billion generated by selling 13.6 per cent of its stake in Hydro One to spend on infrastructure and transit projects.
Heavy volumes and a decidedly different share register at the end of the day, compared to the beginning of trading, suggest that many investors who were allowed to by at the pre-trading $20.50 share price, took advantage of the excitement leading up to the debut, and sold, or flipped, their holdings to capture early profits. About a third of Hydro One shares transferred ownership on Thursday, much of it from investors holding large blocks of shares. The unions are prevented from selling their shares, which are non-voting, until the loans mature in 15 years.
The government has said there will be three more share offerings of roughly the same size.