Paul Waldie
The Globe and Mail
February 18, 1998

Ontario Hydro lost $6.3-billion last year, the biggest annual loss in Canadian corporate history.

The loss included a onetime charge of $6.6-billion that is largely related to a restructuring program for Hydro’s nuclear operations.

"Hydro gets the gold medal for corporate losses," said Tom Adams, an analyst at Energy Probe, a Toronto-based environmental group. "But they also hold the silver medal for corporate losses."

He and other analysts predicted the loss ultimately will be borne by consumers.

Ontario Hydro lost $3.6-billion in 1993, the second-highest corporate loss. The utility lost $2-billion in 1996.

The utility, Canada’s largest, was pounded by problems last year, including a scathing internal report, which rated its nuclear operations minimally acceptable. In response, Hydro laid up seven of its 19 reactors and began a four-year program to overhaul the operations.

The reactors account for about half of Hydro’s electricity production.

Hydro’s operating profit, which excludes the writeoff, fell to $254-million last year from $572-million in 1996.

A year ago, Hydro officials forecast an operating profit of $740-million for 1997.

"We have to do the appropriate accounting in respect of the circumstance that we find ourselves in," Eleanor Clitheroe, Hydro’s chief financial officer, said yesterday.

The $6.6-billion writeoff includes $5.6-billion to refurbish the reactors, buy replacement power and increase provisions for decommissioning reactors. Last summer, Hydro estimated that the nuclear recovery program would cost between $5-billion and $8-billion.

The remaining $1-billion writeoff includes $50-million for costs related to January’s ice storm in eastern Ontario, $340-million to upgrade the utility’s transmission system, $185-million for environmental contingencies and $147-million for costs to prepare the utility for deregulation.

The 1997 loss won’t affect Hydro’s credit rating because the utility’s debt is guaranteed by the provincial government. Ontario currently has a rating of double-A minus.

"There is no effect on the rating," said Stephen Dafoe of Standard & Poor’s Corp.’s Toronto office. "But does it constrain their business position? Absolutely."

Mr. Dafoe said the Ontario government has announced plans to deregulate the province’s electricity market by 2000 and split Hydro into two operating companies — one for power transmission and one for power generation.

The writeoffs, he added, "will have to in some way be borne by electricity users in the province, either through rates charged by the generating company and transmission company or through some sort of stranded cost recovery mechanism that the province will probably have to institute as it moves to opening up competition."

The stranded costs relate to Hydro’s $31.1-billion debt. About half of it is expected to be included in the two new Hydro companies. The remainder will be financed in some other way, Mr. Dafoe said.

"The most obvious way to do this is to simply have a surcharge on electric use," Mr. Dafoe said, adding the government is considering other options.

Hydro was hoping to cut its debt by $4-billion to around $27-billion by 1999 but that was before the problems emerged in the nuclear division. Now that money will be diverted to the nuclear recovery program.

Other analysts said yesterday’s writeoff was done now to prepare the utility for deregulation and competition.

"But there is a long way to go and a lot to be done," an analyst said.

Ms. Clitheroe said the government hasn’t yet decided how the utility’s debt will be paid off. She added that Hydro is sticking to its commitment not to raise electricity rates for two years. Analysts say rates could fall in 2000 as deregulation kicks in.

"The reason that we are taking the loss is because when we look at the future expenditures we don’t expect those costs will be recovered through rates so they represent a loss and that’s the reason they should be provided for now in a writeoff," she said.

"We think that this puts the company in a position to generate the net income over the next three to five years to move the company back into a profitable situation."

Because the writeoff accounts for expenditures that will occur over the next four years, Hydro estimates it will report profits of $640-million in 1998, $750-million in 1999 and $645-million in 2000.