The government of Ontario, Canada's most populous province, is eager to bring down electricity costs for customers. To achieve that, the province is encouraging Hydro One to obtain customers through acquisition, according to sources.

"We believe this consolidation of our business benefits the community, Ontario and Hydro One as it makes the provincial grid more efficient, while reducing costs across the system," the Hydro One spokeswoman said.

Dealmaking will mainly focus on expanding service areas and customers, replacing aging infrastructure and improving grid reliability, said one of the sources.

Ontario's electricity distribution network is highly fragmented with 60 companies, 55 of which hold less than a 2% share of the industry, according to data from provincial regulator the Ontario Energy Board (OEB).

Hydro One, which has a market value of C$17.9 billion, declined to say how much it plans to increase its customer base from the current 1.4 million.

While the company has by far the largest market share in the province, with 35.5% of the industry total, Toronto Hydro-Electric System Ltd and Alectra Utilities Corp are top competitors, with 21.8% and 18.1% of the market, respectively.

LOWER BILLS

Two of Hydro One's smaller deals, worth a total C$132 million, won regulatory approval last year, encouraging the company to hunt for more opportunities.

"I think government over time has been trying to encourage consolidation," said Gavin MacFarlane, vice president-senior credit officer at Moody's.

The company, which had over C$2 billion in net cash as of December 31, 2020, according to its last annual report, plans to fund acquisitions using its balance sheet, said the spokeswoman.

Hydro One last month estimated spending of C$1.91 billion on capital investment for 2021, but the spokeswoman declined to comment on how much would be spent on mergers and acquisitions.

Dealmaking in Canadian power companies has accounted for $2.3 billion this year to date compared with $4.3 billion for the entirety of 2020, with Hydro One making up 2% of deals, according to data from Dealogic.

Hydro One most recently acquired the business assets of Peterborough Distribution Inc and Orillia Power Distribution Corp for a total value of C$104 million.

Hydro One told Reuters that customers in Peterborough and Orillia saw a 1% reduction in the base distribution part of their bills after the acquisitions.

"We believe there are further opportunities in Ontario for consolidation and we are open to pursuing these opportunities as they arise," said the spokeswoman.

Hydro One, 47.3% owned by the government of Ontario, has been beefing up its mergers and acquisitions team by hiring experts from banks and other advisory firms, three sources told Reuters and the company confirmed.

Among Hydro One's recent hires was new Vice President, Growth Matt Vines, an investment banker hired from Bank of Montreal in August who previously worked in M&A for Canadian Imperial Bank of Commerce.

While the spokeswoman for Hydro One said the company was "strengthening" its corporate strategy team, she declined to share the size of the current team with Reuters.

($1 = 1.2635 Canadian dollars)

(Reporting by Maiya Keidan in Toronto and Shariq Khan in Bengaluru; Editing by Denny Thomas and Steve Orlofsky)

By Maiya Keidan and Shariq Khan