Enwave's evolution: A case study in utility transformation

As readers will know, Ontario's power distribution sector is poised for significant transformation in the coming years. All levels of government recognize the need to unlock private investment in Ontario’s local distribution companies (“LDCs”), creating opportunities to modernize grid infrastructure, foster innovation and accelerate the energy transition. As discussed in our previous article, there is a clear need for the federal government of Canada to address the 90% municipal ownership threshold.

One compelling example of how this can be done and what can happen if it is done right is the story of the Toronto District Heating Corporation, now Enwave Energy Corporation (“Enwave”).

Municipally owned legacy

Enwave began life as a municipally owned district energy system in downtown Toronto, first established as the Toronto Hospitals Steam Corporation in 1970 to provide heating services for the major hospitals along University Avenue.^[1] It became the non-profit Toronto District Heating Corporation (“TDHC”) in 1980 when it acquired the steam utility then operated by Toronto Hydro. Subsequently, it underwent another major restructuring in 1999, transitioning to become a for-profit share capital corporation called Enwave.^[2] That reorganization altered its ownership structure, with equity held by the City of Toronto and Borealis Infrastructure (“Borealis”), the infrastructure arm of OMERS.^[3]

That 1999 reorganization also shifted Enwave away from being a non-profit public service utility into becoming a more commercially oriented enterprise and gave Enwave the runway to successfully finance its deep lake cooling mega-project, a technology that has significantly reduced electricity usage and has eliminated tonnes of carbon dioxide from the City of Toronto’s carbon footprint.^[4] It’s estimated that deep lake water cooling currently saves Toronto 90,000 mega-watt hours of electricity use annually.^[5]

Another pivotal moment in its history occurred in 2012 when the City of Toronto, which owned 43% of the company, and Borealis, which owned 57%, sold their equity stakes to Brookfield Infrastructure (“Brookfield”) for $480 million.^[6] That sale generated net proceeds of $167 million for the City of Toronto and $222 million for Borealis.^[7] At the time, Toronto was facing budgetary pressures, and the sale marked a very successful exit for Borealis. Under Brookfield's subsequent ownership, Enwave experienced rapid expansion, acquiring operations across North America and further developing its innovative technologies^[8]. Brookfield's strategy focused on both organic growth and strategic acquisitions, transforming Enwave into one of the largest commercial operators of community based thermal energy systems in North America.

Less than a decade later, in February 2021, Brookfield sold Enwave to IFM Investors and Ontario Teachers' Pension Plan Board for $4.1 billion, nearly nine times the original purchase price.^[9] This transaction, completed in June 2021, saw IFM Investors and Ontario Teachers Pension Plan each acquire a 50% stake in Enwave for C$2.8 billion on an enterprise value basis. The sale delivered net proceeds of approximately $950 million to Brookfield Infrastructure, demonstrating the success of their investment strategy but also highlighting a massive opportunity.

Today, Ontario's 59 remaining electricity distribution utilities are facing challenging financial hurdles, with substantial capital expenditures required to both maintain existing operations and respond and adapt to the substantial system upgrades required as part of the energy transition. The Independent Electricity System Operator (“IESO”) estimates that the cost of energy transition in Ontario could reach $400 billion, with a potential annual funding shortfall of $14.8 billion. That funding shortfall presents a complex problem for the province (and for Canada): utilities must invest billions in grid modernization and infrastructure resilience, yet a great many of them lack the requisite capital to do so. This scenario mirrors the opportunity that made Enwave attractive to institutional investors – the potential for transformative infrastructure investment with a long-term strategic value proposition. Pension funds view regulated utility sector investments as both financially attractive and well-aligned with their investment horizons.

To address these challenges, Ontario's energy sector will likely need a multi-pronged approach. It will include regulatory reform and tax reform to unblock pension and private sector investment and innovative financing models to mitigate operational risk and provide current municipal shareholders with the right incentives to allow for outside investment. The success of Enwave demonstrates that, with the right strategic approach, significant value can be unlocked to the benefit of ratepayers, municipal owners and the general public.

Regulatory changes and the challenges ahead

Ontario's recent regulatory amendments aim to attract private sector investment and encourage consolidation in the fragmented LDC market. Proponents argue that larger utilities can better invest in infrastructure, improve efficiency, achieve economies of scale and maintain affordable electricity rates. However, the current 90% municipal ownership threshold (required for tax-exempt status) severely restricts private capital investment. To potentially address this, the federal government announced in its 2024 Fall Economic Statement that it is exploring ways to lower the 90% threshold. This change would allow Canadian pension funds (also typically tax-exempt entities) to hold larger stakes in LDCs without significant added tax leakage, unlock capital to expand electricity grids and meet growing demand and drive innovation in the sector and, perhaps most importantly, introduce the creative drive, ingenuity and discipline of the pension investment industry into the utility sector.

While Enwave's success offers valuable lessons, replicating its model across Ontario's diverse LDCs is not straightforward due to unique challenges of the LDC sector. Some municipalities may welcome the cash infusion from selling their equity stake in an LDC, while others may prefer to explore strategies to retain some portion of ownership and income over time. Policymakers will need to strike a balance between addressing the substantial capital costs that will be required over the next decade and maintaining stable electricity rates for consumers. Collaboration between the public and private sectors will be critical in fostering a regulatory environment that encourages innovation while ensuring reliability and affordability. The success of Enwave, coupled with proposed federal reforms, and potentially additional provincial reforms offers a compelling pathway to modernizing Ontario's energy sector. By leveraging private investment, Ontario can position its utilities to overcome the challenges of the energy transition while generating significant economic benefits for investors.

Gowling WLG's Energy Group will continue to follow federal and provincial legislative proposals regarding measures to promote LDC consolidation closely in the coming months and look forward to answering reader questions as the processes continue to move forward.

*The contents of this article are based on publicly available information. Parties named were not contacted in advance with respect to its content nor given an opportunity to comment prior to publication.