Hy­dro One fac­ing $885M charge

Reg­u­la­tory rul­ing could force util­ity to take big one-time loss

The Beacon Herald - - BUSINESS - GE­OFF ZO­CHODNE FI­NAN­CIAL POST gzo­chodne@post­media.com

TORONTO — Hy­dro One Ltd. said Fri­day that it will have to book an $885 mil­lion loss if it is un­able to over­turn a rul­ing made by On­tario’s en­ergy reg­u­la­tor with re­gards to ex­pected sav­ings gen­er­ated by go­ing pub­lic.

The com­pany, On­tario’s largest dis­trib­u­tor and trans­mit­ter of elec­tric­ity, has been locked in a reg­u­la­tory bat­tle over $2.6 bil­lion in ex­pected tax sav­ings trig­gered by the com­pany’s Novem­ber 2015 ini­tial pub­lic of­fer­ing. The On­tario En­ergy Board is­sued a rul­ing in Septem­ber on Hy­dro One’s 2017 and 2018 trans­mis­sion rates that would give some of the an­tic­i­pated sav­ings to ratepayers, not just share­hold­ers, as Hy­dro One had pro­posed. Hy­dro One said in its third-quar­ter man­age­ment’s dis­cus­sion and anal­y­sis that the de­ci­sion could cause a one­time drop in net in­come of up to $885 mil­lion, “re­sult­ing in an an­nual de­crease to (funds from oper­a­tions) in the range of $50 mil­lion to $60 mil­lion.”

Hy­dro One, how­ever, is fight­ing the On­tario En­ergy Board’s rul­ing, and filed a mo­tion to re­view and vary the de­ci­sion in Oc­to­ber. The com­pany is also ap­peal­ing the de­ci­sion to the Divi­sional Court of On­tario, with the case stayed pend­ing the out­come of the OEB mo­tion, said Chris Lopez, Hy­dro One’s se­nior vice pres­i­dent of fi­nance, on the com­pany’s third-quar­ter con­fer­ence call.

“With re­spect to the De­ferred Tax As­sets, in both the Mo­tion and Ap­peal, the Com­pany’s po­si­tion is that the OEB made er­rors of fact and law in its de­ter­mi­na­tion of al­lo­ca­tion of the tax sav­ings be­tween the share­hold­ers and ratepayers,” said Hy­dro One’s MD&A.

Mayo Sch­midt, pres­i­dent and chief ex­ec­u­tive of Hy­dro One, said on the con­fer­ence call that “we feel strongly about our po­si­tion.“

Lopez said Hy­dro One would de­fer any im­pair­ment charge un­til the ap­peals of the tax dis­pute are de­cided.

Shares of Hy­dro One were trad­ing down 0.87 per cent at $22.78 in Toronto on Fri­day af­ter­noon.

But is­sues like the tax fight and ex­ec­u­tive pay at Hy­dro One have at­tracted po­lit­i­cal at­ten­tion from Queen’s Park, as the com­pany’s largest share­holder re­mains On­tario. As of Fri­day, the province’s Lib­eral gov­ern­ment had sold just over 50 per cent of Hy­dro One to other in­vestors.

Hy­dro One in­cluded some of the ef­fects of the OEB’s trans­mis­sion rate de­ci­sion in its third-quar­ter re­sults, say­ing it had pro­vided $55 mil­lion in “catch-up” rev­enue for the year. Quar­terly rev­enue net of pur­chased power was up by 1.3 per cent, to $847 mil­lion, mostly be­cause of higher trans­mis­sion rev­enues brought on by the OEB’s rate de­ci­sion, Hy­dro One said.

The rev­enues were tem­pered by lower en­ergy use due to milder weather, in ad­di­tion to a weaker re­turn on eq­uity caused by lower in­ter­est rates.

Mean­while, Hy­dro One is still mov­ing for­ward with an ap­prox­i­mately $6.7-bil­lion pur­chase of Avista, an en­ergy com­pany based in the north­west­ern United States. In its third-quar­ter re­sults, Hy­dro One re­ported $18 mil­lion in Avista-re­lated ad­vi­sory ex­penses, mak­ing for $21 mil­lion in those costs for the year.

Due in part to the Avista-re­lated costs, Hy­dro One re­ported a six per cent drop in net in­come at­trib­ut­able to com­mon share­hold­ers for the third quar­ter, to $219 mil­lion from $233 mil­lion for the same pe­riod last year. Net in­come yearto-date was down 15.2 per cent, the com­pany said, to $503 mil­lion from $593 mil­lion.

As part of the deal, which was an­nounced in July, Hy­dro One is­sued ap­prox­i­mately $1.5 bil­lion in con­vert­ible deben­tures, “which were over­sub­scribed,” the util­ity said, “re­flec­tive of the mar­ket’s con­fi­dence in the com­pany’s growth strat­egy.”

If not for the Avista deal, Hy­dro One would have seen an im­prove­ment in its third-quar­ter re­sults. Earn­ings per share were down, to 37 cents from 39 cents. But ad­justed earn­ings per share, which do not in­clude the Avista costs, were 40 cents for the third quar­ter, ac­cord­ing to Hy­dro One.

The two com­pa­nies filed ap­pli­ca­tions for reg­u­la­tory ap­proval of the deal in Septem­ber. Hy­dro One said the ap­pli­ca­tions, which were filed with U.S. util­ity com­mis­sions and the U.S. Fed­eral En­ergy Reg­u­la­tory Com­mis­sion, are seek­ing to ap­prove the trans­ac­tion by Aug. 14, 2018.

Spokane, Wa.-based Avista also filed a pre­lim­i­nary proxy with the U.S. Se­cu­ri­ties and Ex­change com­mis­sion in Oc­to­ber to be­gin the process of win­ning share­holder ap­proval of the deal, Hy­dro One said.

TARA WAL­TON/THE CANA­DIAN PRESS

Hy­dro One work­ers gather at the Husky Travel Cen­tre in Ni­a­gara-on-the-Lake, Ont. on Sept. 11. De­spite a reg­u­la­tory bat­tle with the On­tario En­ergy Board, Hy­dro One is mov­ing for­ward with an ap­prox­i­mately $6.7-bil­lion pur­chase of Avista, an en­ergy com­pany based in the north­west­ern United States.

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