Experts predict protracted sell-off for Hydro One

Facing a $300-billion burden of public debt, the pressure is mounting for Ontario Premier Kathleen Wynne to bolster provincial coffers by off-loading some or all of Hydro One. Potential cash proceeds of a sale of Hydro One, Ontario’s transmission utility and its largest electric power distributor, are estimated somewhere between zero and about $12 billion, depending on whom you believe.

In the optimistic scenario, a Hydro One sale – likely in stages over several years – would pay for a lot of badly needed infrastructure upgrades in the province. And any disposition in excess of 50 per cent would remove all of Hydro One’s $9.1-billion debt from provincial books, providing a total benefit near $21 billion. “Presumably the ratings agencies would love to see that occur,” says Paul Harricks, a partner and energy advisor with Gowling Lafleur Henderson LLP in Toronto.

Decidedly less cheery is the view that Hydro One is legally obligated to pay the huge debts of its predecessor, Ontario Hydro, leaving nothing for Premier Wynne’s infrastructure fund. Harrick concedes the size of the legacy debt is “a bit of a mystery” and that the Electricity Act currently directs “all proceeds from the sale of Hydro One into the
OEFC,” the Ontario Electric Financing Corp. But he says the debt is forecast to be paid off by 2018 and, regardless of how the government allocates the proceeds of any Hydro One sale, “financing of needed infrastructure can only be easier with more cash on hand and less existing debt to fund.”

Harricks says he sees distribution and transmission assets being sold in a two-track process that will “probably move along in parallel.” Much of the distribution side, he notes, is in small, rural pieces that have been subsidized by the transmission side of the business, and that the government will likely have to continue to own and support. Urban distribution assets have value, but potential private investment will likely be constrained to some degree by a 10-per-cent cap on private ownership of any municipal distribution company wishing to maintain its tax-free status.

The main event will be a transmission
IPO, most likely for a minority share of the business, Harricks says. Details are expected in the spring budget, with the actual sale proceeding sometime thereafter. He says the size of the deal will likely be determined by a measure of the market’s appetite and a reading of voters’ tolerance for the sale of a profitable asset. As with Ottawa’s sale of Petro-Canada, he says, he expects a complete privatization once the public has had time to accept the idea.

Harricks dismisses public concerns about losing control of utility rates as largely a red herring. Transmission rates are closely regulated by the Ontario Energy Board, he notes, and in any event the largest, most volatile portion of electric bills don’t come from electrical transmission, but rather from the generation side, or Ontario Power Generation
(OPG).

Barbara Doherty, a senior partner with Miller Thomson LLP in Toronto, says the transmission business makes up 55 per cent of total Hydro One assets and could be very attractive to potential investors, based on a regulated rate of return somewhere around 11 per cent.

“You’re not going to get that kind of [guaranteed] rate of return anywhere else,” Doherty observes. But she adds that she’s not convinced the Wynne government is ready to pull the trigger. “My sense is that they’re not.”

“We live in a cold climate where you need electricity, and people get sort of irrational about it,” says Dohert, who adds that “all positions tend to be very predictable,” and there’s likely to be strong opposition from unions, which would much rather negotiate for wages and benefits with a government that fears the power of bloc voting than with corporate ownership.

Doherty confirms the Electricity Act definitely says in Part
IV, Section 50.3, that proceeds of any Hydro One asset sale must go to pay down outstanding debts of Ontario Hydro. But she notes the Act goes on to say that such payments can be made “less any amount the Minister of Finance considers advisable.” She says a decision to redirect the money to infrastructure spending would have to be justified, but there’s little doubt Ontario needs cash to refurbish transportation systems.