(April 27, 2015) Hydro One Inc. will face private-sector challenges from which it is currently immune when Ontario’s government sheds a 60% stake in the electricity transmission and distribution utility in an IPO.
By Gene Laverty
This article originally appeared on snl.com.
Hydro One Inc. will face private-sector challenges from which it is currently immune when Ontario’s government sheds a 60% stake in the electricity transmission and distribution utility in an IPO.
A credit rating downgrade is likely for the province-owned company once its shares are sold to the public, according to Moody’s. The loss of government backing is likely to lead to a one- to two-notch downgrade in Toronto-based Hydro One’s investment-quality credit ratings, Moody’s Vice President Gavin MacFarlane wrote in an April 17 note.
Moody’s affirmed its A1 ratings on Hydro One’s senior unsecured debt and P-1 commercial paper but changed its outlook on the debt to negative, meaning a downgrade is possible. About C$9 billion in debt would be affected, the rating agency said.
Investors and consumers might find an upside in more costly borrowing terms as the company rethinks risky capital programs that were previously backstopped by the provincial government, Brady Yauch, an economist and executive director at the Consumer Policy Institute in Toronto, said.
“The current borrowing programs are being subsidized by taxpayers as opposed to ratepayers,” Yauch said. “It means that Hydro One can take on particularly risky capital spending programs knowing that the province is going to back it up if anything goes wrong.”
Ontario’s government announced April 16 its plan to sell most of Hydro One and invest an estimated C$4 billion gained through the IPO and restructuring of other government assets to finance transit, transportation and other priority infrastructure projects. Limitations on ownership will leave the government with control of the company even though it will only hold a 40% stake.
“The negative outlook for Hydro One reflects the likely reduction in the probability of extraordinary support from the province of Ontario,” MacFarlane said in his note. “This follows from the government’s stated intention to gradually reduce its ownership position in Hydro One to about 40% from 100% over the next several years and to make changes to the governance structure, reducing the direct control that the province exerts over Hydro One.”
Ontario Premier Kathleen Wynne said the share sale will be conducted in phases to maximize the value for the province. A legislative change needed to enable the sale is expected to be introduced by Wynne’s government this spring and a new board for Hydro One would be appointed by the summer. The company’s structure could pose a problem for investors, Yauch said.
“There’s going to be a lot of lawyers in this deal,” he said. “If I was an investor and the province was still in the driving seat, certainly you would ask, ‘How are we going to make this into a profitable vehicle if you’re going to be dictating and still using the utility sector as a policy instrument?’ There are going to be concerns over if this is going to be a policy instrument still, or is it going to be a well-run company that acts in the interest of consumers and still acts in the interest of investors. I imagine there will be a lot of haggling over how much they can maneuver within the political environment.”
The amount of government involvement in the restructured company will dictate the likelihood of a change in its credit ratings, Moody’s said. The ratings could be returned to a stable outlook if the government continues to extend “extraordinary support” to the company.
“The ratings could return to stable at the current rating level based on upgrades to the BCA [baseline credit assessment] offsetting the reduction in the probability of extraordinary support,” MacFarlane’s note said. “Likewise, clear indications that government direction of Hydro One will not change, which would imply no changes in the probability of extraordinary support, could also return the outlook to stable.”
The change from full government control to partial control isn’t likely to impact consumer prices, Yauch said. The Ontario Energy Board, which sets rates for consumers and rates of return for the company, has already approved a series of increases in the coming years.
“In the last 10 years, or at least for a long time, Hydro One has had increases, so rates will continue to go up regardless of who is the owner, government or private,” Yauch said. “In the last rate application Hydro One has asked for a 6% rate increase on average for the next five years. So even if it is public, all ratepayers’ rates are going to go up under the current environment. If it’s privatized they might continue to go up, but that’s already been happening.”
Concerns have been raised that the restructured company would fall outside of the jurisdiction of Ontario’s Office of the Ombudsman, which said in March that it was investigating more than 10,000 complaints about Hydro One, which it accused of issuing “cruel and deceitful threats” to customers. Hydro One said in response that a new customer information system implemented in May 2013 led to billing issues for about 6% of its 1.3 million customers. The company said it had completed 99% of the 3,395 complaints it received from the ombudsman’s office. The other roughly 6,000 complaints will not be transferred to the utility because no action is required.
Yauch said the Ontario Energy Board, which regulates other energy utilities in the province, has a good track record of dealing with complaints.
“There is an example in this province of natural gas utilities that are run pretty well, pretty ethically, if that’s a concern,” Yauch said.
Still, it will be difficult to separate politics from business if the government retains control of the company, he said.
“The government is saying, ‘We’re going to be the 40% main shareholder, so we’re still going be in the driving seat when all the decisions are made,'” Yauch said. “The government is saying that to ease the public’s mind. If you have an investor’s mind, that’s really uneasy. I would be leery of investing in a company where the government says, ‘We’re going to control all of the policies of this company.'”
This article originally appeared on snl.com.
Brady Yauch is an economist and Executive Director of the Consumer Policy Institute (CPI), a division of Energy Probe Research Foundation. You can reach Brady by email at: bradyyauch (at) consumerpolicyinstitute.org or by phone at (416) 964-9223 ext 236