Milder weather, low interest rates help put a dent in Hydro One earnings
The elements have not been kind to Hydro One Ltd., as milder-thanexpected 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. Year-to-date, net income was down 21.1 per cent, to $284 million.
“The three most impactful factors 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 president and chief executive officer Mayo Schmidt on a conference call.
Hydro One’s revenue declined by 11.3 per cent in the second quarter compared to last year, to $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 milder weather — warmer temperatures mean less electric heating, while cooler ones mean less power needed for air conditioning — and the other half was connected to the return on equity adjustment, according to senior vice-president of finance, Chris Lopez.
The Ontario Energy Board, which sets Hydro One’s rates, last year reduced its return-on-equity value for 2017 to 8.78 per cent from 9.19 per cent. The provincial regulator’s decision was influenced by interest rate forecasts.
Those forecasts could change, though, as the Bank of Canada will make its next rate announcement on Sept. 6. That will come after 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 research note from Capital Economics.
Hydro One shares were down 2.35 per cent Tuesday, closing at $22.06, down from a peak of $26.59 last July.
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 latest 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 resulted in 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.
“Generally speaking, the best performance in recent periods has been achieved by those companies that have provided dividend increases, delivered accretive growth through acquisitions and/or success on development projects, or derisked their valuations through improved scale, diversity and duration of cash flows.”
Hydro One says it is awaiting a regulatory decision on its 201718 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,” said the company in its second-quarter results.