Paul Vieira and Robert Benzie
National Post
June 8, 2002

 Two major credit rating agencies said yesterday that the uncertainty surrounding Hydro One Inc. – particularly the future of its executive team and possible erosion of investor confidence – could threaten the utility’s financial health and increase its cost of raising money in the markets.

Moody’s Investors Service said it will review the transmitter’s debt rating after the board of directors quit en masse this week following a showdown with the Ontario government over executive compensation.

The New York-based agency said the province’s attempt to resolve the matter could lead to "attrition among the company’s senior management team, the erosion of investor confidence and uncertainty surrounding the government’s intention to proceed with the privatization of Hydro One."

Moody’s said it could not speculate on the results of its review, but a downgrade would add to the utility’s cost of raising money in the capital markets – and that extra cost would likely be passed on to Ontario electricity consumers, according to one industry observer.

"This is a danger sign for high distribution and transmission rates," said Tom Adams, executive director of Energy Probe. "This reveals the seriousness of the situation. The chaos around Hydro One is not just political – it will have implications for ratepayers."

Meanwhile, Dominion Bond Rating Service, while confirming its rating on Hydro One’s bonds, lowered the trend for the utility to "stable" from "positive."

The move was necessary, DBRS said, because of Hydro One’s stalled privatization and legislation allowing the province to fire the board and roll back the wages of senior executives. "This created significant uncertainty with respect to Hydro One’s future direction," DBRS said.

The statements from Moody’s and DBRS are yet another setback for the provincially owned transmitter. A planned initial public offering, which would have raised $5.5-billion, was derailed in April by an Ontario Superior Court ruling, and the company still has no board of directors. This has sparked severe criticism on Bay Street.

"What’s amazing me is that we still have this problem of the governance. Who’s managing this company and who are the board of directors going to be?," said one Bay Street insider. "I don’t think the government has thought this through. These guys are developing policy on an ad hoc basis in front of the media – on a daily basis."

However, Ernie Eves, Ontario’s Premier, appeared nonplussed yesterday about Hydro One.

"The organization . . . is in good shape and it will continue to go forward under new direction with the new board," Mr. Eves said.

He warned he will not be pushed into deciding whether the utility should be privatized through an initial public offering or set up as an income trust, which sources say is now most likely. "The IPO option is still an option but there are many options that are competing . . . including an income trust."

Mr. Eves said he expected a new board to be named on Monday. The premier made his comments at a media conference promoting biotechnology investment, which, by coincidence, was hosted by Cal Stiller, the financier who first broached the income trust scheme with the provincial government.

The income trust scheme has gathered steam this week after the Financial Post reported that the Ontario Teachers’ Pension Plan Board told the government it was willing to invest up to $2-billion in Hydro One if it was converted into an income trust. Also, meetings are scheduled between Hydro One representatives and institutional investors to assess interest in the utility, and gauge which corporate structure the funds prefer.

The Premier said he would not discourage such meetings. "It’s a free country. People are free to associate and discuss and exchange ideas, I think that’s a healthy thing."

Jim Flaherty, the Minister of Enterprise, Opportunity and Innovation and a backer of a Hydro One IPO, said he believes the transmitter’s uncertain future was having little impact on the province’s economy. "The atmosphere, the attitude toward Ontario, is very positive."

However, sources close to the Minister expressed dismay at the "lack of clarity on the hydro file because it distracts attention from other important government initiatives."