Paul Vieira – with files from Robert Benzie
National Post
May 1, 2002

Chris Stockwell, Ontario’s Energy Minister, has further complicated the Hydro One Inc. privatization saga by saying the government is toying with turning the electricity transmitter into an income trust.

"We’re going to look into it," Mr. Stockwell said yesterday. "I don’t claim to be an expert on this, but it seems to accomplish both our goals: it gets us the capital dollars and it puts it in the private sector with shareholders … which will make it a more efficient operation."

One Bay Street insider disagreed. "This is a truly stupid idea," the source said, saying income trusts are beginning to lose their lustre and would tie the utility’s hands by distributing its cashflow to unitholders, instead of spending it on much-needed infrastructure maintenance and transmission links with U.S. states.

Industry observers were also miffed, saying it demonstrates a lack of leadership. "For the Minister to fasten on to this idea, without any analysis or consultation, just shows that this government is winging it," said Tom Adams, executive director of Energy Probe, a hydro industry watchdog. "It suggests they don’t have a game plan."

Mr. Stockwell’s remarks are the latest development in Ontario’s plan to privatize Hydro One through an initial public offering. An Ontario Superior Court put the IPO – which financiers have said could raise up to $5.5-billion – on hold last month after ruling that the provincial government lacked the legal authority under the Electricity Act to sell the company.

Just last week, the Premier, Ernie Eves, said the government would appeal the ruling and amend the law to give it the right to sell the utility. Mr. Eves also said it would hold public hearings to discuss the sale – but yesterday, during the first session in London, Ont., Mr. Stockwell adjourned the proceedings following disruptions from privatization opponents.

Myriad businesses, from fast-food operations to energy producers to coal miners, have reorganized recently into income trusts. Instead of ploughing most of their cash flow back into operations, income trusts use most of it to pay unitholders regular distributions. Retail investors have flocked to trust units because the relatively stable businesses have provided a much higher yield than most bonds, given low interest rate levels.

The income trust idea was floated by Cal Stiller, the chief executive of Canadian Medical Discoveries. In a letter to Mr. Stockwell, he said an income trust "meets the objectives of many Ontarians and most thoughtful critics. Given the strength and consistency of the cash flow generated by Hydro One … I suggest that the government might look carefully at this kind of structure."

One financier with knowledge of income trusts said the vehicles are suitable for low-growth businesses that have a steady income stream and predictable capital spending patterns. However, it may not work for companies whose spending patterns fluctuate or for companies seeking growth.

In the prospectus filed in connection with Hydro One’s IPO, the Toronto utility said it would need to set aside significant amounts of cash for capital spending because the old Ontario Hydro failed to invest in needed repairs to the transmission grid. Moreover, the prospectus said Hydro One wanted to embark on an aggressive growth strategy, namely acquiring transmission assets in the United States.

Units in an income trust would still be sold through an offering. But the Bay Street insider said it would raise less money than selling Hydro One stock through an IPO.

Moreover, the insider said Mr. Stockwell’s comments undermine all the work done to date by the underwriting syndicate employed to sell Hydro One shares.

"It’s the last thing you ever, ever, ever do – is speculate about a different structure than the one under consideration. This is an inane, unsophisticated and damaging thing to do."