Risks, benefits of PowerStream merger weighed in Markham

Yorkregion.com
Nov. 13, 2015
By Amanda Persico

Markham is on the cusp of approving a major deal with PowerStream, which will see several local electrical distribution companies merge to become one of the largest in Ontario.

However the move comes with many in Markham questioning the risks.

The city hosted a meeting Wednesday to discuss the potential merger of PowerStream, owned by Vaughan, Markham and Barrie, with Horizon Utilities Corp. (Hamilton and St. Catharines) and Enersource (Mississauga) and the purchase of Brampton’s hydro utility.

All the other parties have approved the merger. The deal now hinges on Markham’s support.

After hearing presentations from the city’s CAO, PowerStream and independent consultant Navigant, the one thing on everyone’s lips was how much risk is involved in the venture.

“People hear the word risk, but don’t hear low risk,” Mayor Frank Scarpitti said.

There is risk on both sides of the deal, both merging and sticking with the status quo, said Benjamin Grunfeld, energy analytical expert with Navigant, hired as a consultant by Markham, Vaughan and Barrie.

One of the bigger risks of a merger this size is ensuring the synergies, such as cost savings, are met.

One of the synergies proposed would be a 17 per cent reduction in operational costs matched by a reduction in employee head count, said PowerStream president and CEO Brian Bentz.

That means the new company with some 1,700 employees could see the loss of 250 to 270 jobs over three years.
About 80 per cent of the job losses could be done through early retirement buyout packages.

Another risk could be an emerging culture clash between the existing companies.

But both can be mitigated by good management practices, Grunfeld said.

There are risks of sticking with the status quo, including damaged relationships with Barrie and Vaughan which both voted to support the merger as well as a risk to PowerStream’s reputation as a leader in the industry.

“A no outcome would impact being invited back to the table,” Grunfeld said. “The window of opportunity could shrink.”

Some councillors took this as a bullying or scare tactic for a vote in favour of the deal.

Others saw it as a dose of reality.

“If we go with the status quo then ask to continue our plan of burying the hydro lines, they won’t co-operate with us,” Councillor Colin Campbell said. “We can kiss that good-bye.”

Through Markham Enterprises Corp., the city owns about 34 per cent of PowerStream.

Under the merger, Markham’s share would decreased to about 16 per cent. Markham goes from being a part owner to an investor in the new company.

But the initial PowerStream trio - Vaughan, Barrie and Markahm - make up about 46 per cent of the new company.
Also part of the deal is purchase of Hydro One Brampton for about $607 million, of which Markham would have to invest about $43 million. City staff is working on different funding options to cover Markham’s portion.

Under the new deal, Markham residents are set to save between $24 to $30 a year, which won’t materialize on your hydro bill until year five or six.

The city is posed to save about $60,000 on energy costs annually in its buildings.

Basically, Markham is buying into a $607 million mortgage with the other municipalities all for less than 1 per cent of the total hydro bill for Markham residents, said Michael Gannon, a Markham resident and a director of Markham Citizens Coalition for Responsive Government.

“This is a no brainer,” he said. “There lots of risks and the costs outweigh the benefits.”

Markham would then own about 16 per cent of the mortgage and would also have to help pay down that debt, Gannon said.

“You’re giving up management rights for an unknown future,” said Thornhill resident and MCCRG director Marilyn Ginsburg. “All for the price of a Tim Hortons coffee of $2 a month.”

Regional Councillor Joe Li agreed and hinted there might not be enough support to proceed.

“I’m not satisfied,” he said of the potential savings to the customer.

At the end of the day, this is still a savings for customers, Scarpitti argued.

“I don’t know of any company that could offer this amount of savings unless you bundle up a bunch of services,” he said.

The mortgage analogy is missing a key component, said Grunfeld.

“You are getting a mortgage, but the house is occupied,” he said. “Brampton is the tenant.”

He also noted whatever debt is incurred by the new local distribution company, which is allowed to carry about 60 per cent debt, does not show up as municipal debt.

“This will not be a line on a balance sheet in Markham,” he said.

Residents also argued Hydro One Brampton deal is part of the province’s privatization project.

It is dealt with in detail in a report from the Premier’s Advisory Council on Government Assets, headed by Wynne advisor Ed Clark, formerly of TD Bank, where it is suggested a moratorium be brought in for three years on a transfer tax that could come into play in a merger, saving the parties involved millions.

“The province is divesting its stake in exchange for cash for infrastructure,” said Robert Mok. “We’re better off not jumping on the bandwagon.”

Bentz argued the merger is not prescribed by the province, but in fact was sought after by PowerStream over the last decade.

This merger was more good timing than coincidence, Bentz said. The province is giving PowerStream an exclusive deal.

“This is our deal. Not the province of Ontario deal,” he added. “This is part of our history. This is part of our DNA.”

PowerStream was a product of consolidation, with seven acquisitions and two mergers under its belt.

And part of the PowerStream mandate, which Markham bought on to in 2004, was to grow through organic growth and by merging with neighbouring utilities, Bentz said.

Having a larger balance sheet also allows for expansion into other areas, such as renewable energies and smart technology.

“We could not have built PowerStream Solar if we remained Markham Hydro,” Bentz said.

A final decision by Markham is expected at a special council meeting Nov. 19 at 7 p.m.

For more information, visit markham.ca