Hydro One sees profit fall on weather
The elements have not been kind to Hydro One Ltd., as milder-than-expected weather and Canada’s current low interest rate environment have soaked up some of the Ontario electricity provider’s profits.
Hydro One saw its shares skid somewhat on Tuesday, after the Toronto-based utility reported net income attributable to common shareholders of $ 117 million for the second quarter of 2017, a 23- per- cent drop from the same period last year. Yearto- date, net i ncome was down 21.1 per cent, to $ 284 million.
“The three most impactf ul f actors affecting results were: Unseasonably mild weather and multiple storms, the time required for the Ontario Energy Board to process the decision on our transmission rate filing, and a reduction in the regulatory allowed ( return on equity) associated with lower interest rates,” said Hydro One CEO Mayo Schmidt.
Hydro One’s revenue declined by 11.3 per cent in the second quarter compared to last year, to about $ 1.37 billion from nearly $ 1.55 billion. Net of purchased power, revenue was down 2.8 per cent for the second quarter of 2017, to $ 722 million, “primarily reflecting a lower average Ontario peak demand due to milder weather,” the company said in its second- quarter results. Hydro One faced higher stormrelated repair costs as well.
“About half ” of the difference in revenue was due to the weather — warmer temperatures can mean less electric heating, while cooler ones can mean less power needed for air conditioning — and the other half was connected to the return- onequity adjustment, according to senior- vice president of finance, Chris Lopez.
T he Ontario Energ y Board, which sets Hydro One’s rates, last year cut its return- on- equity ( ROE) value for 2017 to 8.78 per cent from 9.19 per cent. Hydro One called it an “interest rate driven reduction in allowed ROE.”
The forecasts for interest rates could change, though, as the Bank of Canada will make its next rate announcement on Sept. 6. That will come after a series of strong economic signs, such as July jobs numbers showing that Canadian unemployment had fallen to its lowest level since October, 2008. The central bank increased its key interest rate to 0.75 per cent from 0.5 per cent on July 12.
“Needless to say, the performance of the economy over the first half of this year has been a lot stronger than anyone expected and will undoubtedly reinforce the Bank of Canada’s confidence in the economy and hawkish stance on interest rates,” said an Aug. 4 report from Capital Economics.
Hydro One shares fell 2.35 per cent on Tuesday to $22.06, down from a peak of $ 26.59 in July of 2016. The Ontario government is still the utility’s biggest shareholder, owning just short of half the stock. The province sold another tranche of Hydro One shares during the second quarter.
The company’s l atest results also follow Hydro One’s announcement of a $ 6.7 billion acquisition of northwestern U. S. energy company Avista Corp. While Hydro One says the deal contributed to higher consulting costs for the second quarter, Schmidt said in a statement that it is a “high-quality, strategic transaction that will enable us to further enhance customer and shareholder value as we go forward together.”
A recent Desjardins Capital Markets research note on the power and utilities sector said solid acquisitions were one of the “key value drivers” in those stocks.
Hydro One also says it is awaiting a regulatory decision on its 2017-18 transmission rate application, a delay that has “impacted revenues” but is expected to be resolved shortly.
“Hydro One anticipates the revised rates will be effective from Jan. 1, 2017 and as a result would book the increased revenue up to the date of the decision at that time,” the company said.