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November 1, 2004 Report - Special COW Meeting
Agenda :
http://www.city.hamilton.on.ca/clerk/agendas-minutes-reports/
committee-of-the-whole/2004/Nov01/Agenda.pdf
No transcription will be available of this meeting.
Presentations:
3.1 Hamilton Utilities Corporation (HUC) - Presentation of Business Case respecting Merger between Hamilton Hydro Inc. and St. Catharines Hydro Utilities Services Inc.
http://www.city.hamilton.on.ca/clerk/agendas-minutes-reports/
committee-of-the-whole/2004/Nov01/Item%203.1.pdf
There was an introduction by Chuck Hantho , one of 5 of HUC's Board Steering Committee. Art Leitch , President and CEO of HUC (there are 6 on the Management Steering Committee) gave the power point presentation (CATCH has a hard copy) and answered questions.
Exerpts from Power Point document:
'.new LDC (MergeCo).jointly owned.HUC will own 78.9%.
The merger of HHI and SCHUSI will deliver significant benefits to both customers and municipal shareholders as follows:
Future distribution rate increases will be mitigated by achieving cost savings of approximately $5.4MM per year ($3.9MM through reductions in payroll costs) through economies of scale that will result in;
Customers -
- A 10% reduction of controllable costs.
- Mitigating and otherwise 5-10% rate increase.in 2007.
- Integration of management, billing, and record systems.
- Enhanced customer service at competitive rates that will make our communities attractive to investors.
- Provide a larger and more stable source of financing for sustainable investment in utility infrastructure.
Shareholders -
- Continued public ownership in an even more valuable financial assest for the ratepayers due to its increased financial strength.
- Ability to maintain high credit quality and rating among the best for a utility in North America by Standard and Poor.
- Increased and more stable dividends.
- A one-time pre-merger capital adjustment flowing to the respective shareholders. ($10M)
- Merged company will continue to recognize unique requirements for each community it services.
Business Principle and Objectives for MergoCo: (1-12)
#9 MergoCo will endeavour to achieve the cost savings of any HR downsizing without resorting to across the board layoffs.
MergoCo Strategic Goal: The principal.goal.will be to drive further economies of scale through consolidation with other LDC's. .will deliver customer value.. MergoCo has a 5 year goal to achieve a customer base of over 600,000 and a create base of over $2 billion by 2010. It is expected that in time, as a result of regulatory incentives and cost pressures, only 7 regional utilities will exist (and they plan to be one of them). Number of utilities in existence: Pre 1999 = 308, Currently = 92, Future = 7.
.Tentative date of December 31, 2004 for closing date of Merger (delayed now, because of St. Catharines Council delay in approving it. Can take up to 60 days to get regulatory approval.)..
Board Nominating Committee: .Hamilton Mayor shall be member. Review Board composition and identify qualifications with preference to residents of Hamilton ..
.Decision on Hydro One distribution assets expected in next 2-4 months. Potential opportunity to acquire 25,000 Hydro One customers in Hamilton ..
.Current Estimate Merger Recapitalization Dividend - $10MM payable Q1 of 2005.
Discussion:
McCarthy indicates approval, and recalls a speech given by Hazel McCallion that she heard a few years back where she lauds the value of such mergers. She asks for clarification on the future dividends.
Collins is concerned about the staff cuts and asks for numbers (about 50 altogether). He asks what savings will the average ratepayer expect to see. Leitch indicates that rates are expected to go up and the merger will 'mitigate the impact of this' by "achieving the maximum allowable (by Provincial law) rate of return" of dividends to the municipality, reminding Council that HUC is "only responsible for 20% of the hydro bill (distribution). Collins asks for clarification on the one-time $10 million dividend and is told that a "larger company is a less risky company from a lender's point of view" and the merged company's debt to equity ratio will be 55/45. He wants to know what the difference in rates between Hamilton and St. Catharines is now (ours are higher), and what will be done about an auditor for the new entity (stay with Hamilton 's auditor - KPMG). The issue of water billing comes up. Hamilton Hydro has assumed responsibility for this for the past 3 years "at a savings of $350,000/year", and it "still makes a profit". Collins questions about the profit and is told that "Council directed them to act as a profit company", and that the profits come back to Hamilton (the City is the only shareholder). Collins asks for staff to report back on any dividends, or profits, that can be used in the 2005 budget process.
Whitehead is concerned about the decision-making process, wondering if it will be "compromised". He asks for examples of other communities that have merged utilities successfully (or not), and is given three examples (Ajax etc, Sarnia etc, and Vaughan etc). He is told by HUC that they "expect to see consolidation and rationalization be the norm across the province". Whitehead questions about the $5.4 million/year savings and the affect on HUC's credit rating (excellent now, should stay the same) "Standard and Poor recognized the financial strength of this (merger)" An interesting comment is made in reference to Whitehead's questions about tree trimming responsibility (Hydro lines etc). Either Leitch or Hantho says "The City makes an outrageous profit on these services". At first it appears that he is speaking in jest, and some people laugh, but then he goes on to reinforce his comment saying "the City should be able to make a return on this service". Whitehead then goes on to ask about the status of the Mayor on the Board (ex-officio, along with the CEO) and suggests that because the Mayor is "busy - although I know he attends most of the meetings" that another Councillor should be appointed, just for "continuity". It is unclear how this is received.
Although McHattie states that it "appears we have a good business case", he is concerned about the employee loss and wonders how if this can be done with early retirement etc. He is reassured that "yes", MergeCo hopes to "be able to accomplish (this) without wide spread lay-offs" McHattie refers to a letter he received from the Electrical Worker's Union and DiIanni suggests that this will be taken up 'in camera'.
Mitchell wonders about MergoCo acquiring Hydro One's assets and is told that HUC's conversation with Energy Minister Dwight Duncan indicate that they (the Ministry) will be "addressing Hydro One's involvement in the distribution business" soon.
Ferguson asks a few probing questions. How did they come up with the Board's balance of power figures (78.9 Hamilton , 20.1 St. Catharines )? This was done based on relative assets. Will MergoCo be bidding on Haldimand (hydro - up for sale)? (No answer.) Will the merger impede our ability to acquire Hydro One's Hamilton assets? (No) Are there Hydro One assets in St. Catharines too? (Yes, acquisition anticipated). Should we "not count on dividends if you are to use them for acquisitions?" (Dividends will still be forthcoming). What is the status of Stelco's outstanding hydro bill (ALL of which HH has been handed the responsibility for - not just the outstanding distribution charges)? (The Minister informed that upcoming bill 100 will deal with this). Ferguson (jokingly?) wants to know when HH gets payment, "what percentage on the dollar" (interest?). Laughter and no answer.
Bruckler says he's pleased, and that they've "had two good news stories today" (I think he's referring to the GTA Fare System Project Update, from the Public Works meeting earlier that day).
New Councillor Sampson wonders if "the Province wants us to go this way"? HUC officials indicate that the Ontario Energy Board prefers less, rather than more hydro utilities due to increased ease in regulation as the number decreases, saying it's "inevitable" and "we're well placed". Sampson then questions as to "whether the Province will (be taking the initiative to) divide up the Province"? The answer comes back that the Province may "manage forced amalgamation" (of utilities), but that it's better that "we handle this ourselves".
Collins has another round inquiring again about comparables (have other communities experiences been looked at?). Joe Rinaldo (Finance Manager for the City) tells him "Peter and I will provide this information in the next meeting". The question of when this (the merger) is to be signed off on by Council then arises: "Then we don't have to decide on this today?", Collins asks, indicating concern re cost among other things. (While Collins is speaking Art Leitch approaches DiIanni to have a private word.) It is unclear what the response to Collin's concerns is.
Not enough power is being created, which is why the prices are fluctuating wildly, posits Whitehead . Has HUC thought about getting into the power creating business? HUC reminds him about Hamilton Community Energy (http://www.hamiltonce.com/).
New Councillor Bratina jokes about the recent Future Cities Charette (http://virtualcities.mcmaster.ca/) idea of diverting water to create a waterfall in central Hamilton , saying that maybe HUC could use it as a power source.
3.2 City of Hamilton - Presentation of Business Case respecting Merger between Hamilton Hydro Inc. and St. Catharines Hydro Utilities Services Inc. (Link to full City report)
Staff recommendation:
- That the amalgamation of Hamilton Hydro Inc. ("HHI") and St. Catharines Hydro Utility Services Inc. ("SCHUSI") be approved and authorized based on the general (this word changed to read : material before vote ) terms and conditions as set out in the documents (including the business case) submitted to Council November 1, 2004;
- That the Mayor and City Clerk are hereby authorized to execute and deliver all agreements, documents and instruments,s required to implement the amalgamation, in a form and content satisfactory to the General Manager of Finance & Corporate Services and the City Solicitor;
- That the presentation of the business plan summary be received for information;
- That the revised Dividend Policy, as approved by the Board of Directors of Hamilton Utilities Corporation, (attached as Appendix "A") be approved;
- That dividends received from HUC in excess of $3 million be earmarked for Capital purposes and reducing the city's reliance on long term debt.
Power Point Presentation by Joe Rinaldo (Finance Manager) (CATCH has hard copy).
Discussion:
Collins: "How have you decided this.comparisons report prepared without.?" He's concerned about approving this without the alternatives being presented. Rinaldo replies that they didn't do an alternatives study, but they can do this if it's the will of Council. Again, this seems not to be resolved.
Ferguson offers to move the staff recommendation, but DiIanni mentions that they are to go in camera first to "deal with property matters".
Committee of the Whole goes in camera at about 2:45 pm .
When open session reconvenes, the staff recommendation is approved, with the minor change of the one word in a) from 'general' to 'material'.
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