Hydro One’s curious third-quarter results (and why you should worry)

Hydro One’s third quarter earnings fall     

                                                                            

Ontario ratepayers should be worried about bad planning and whether the Ontario Energy Board will protect us from more rate increases

Why is the title above practically the opposite of Hydro One’s November 8, 2018 press release headline which claimed “Hydro One Reports Strong Third Quarter Results”?

While gross revenues for both the distribution and transmission businesses were up—quarter over quarter, by 6.1% ($63 million) and 4.7% ($22 million) respectively—Net Income for the quarter was actually down 11.4% or $25 million compared to the same quarter in 2017.

The revenue gains were a reflection of prior rate application approvals by the OEB (Ontario Energy Board) coupled with increased demand and the revenue was provided by the ratepayers of the province.

So, if revenue was up, what caused net income to fall?

Here is a partial explanation from Hydro One’s quarterly financial statement:

“The increase of $35 million or 30.7% in financing charges for the quarter ended September 30, 2018 was primarily due to the following: • an unrealized loss recorded in the third quarter of 2018 due to revaluation of the deal-contingent foreign exchange forward contract related to the Avista Corporation merger”. [emphasis added]

It appears previous management believed finalizing the Avista purchase would occur sooner and that the Canadian dollar would remain where it was when the purchase offer was originally accepted by Avista’s shareholders. That would suggest poor planning!

As ratepayers in Ontario, we should be concerned about Hydro One’s financial results and how their spending impacts us via rate increases.

The Ontario Energy Board (OEB) on an annual basis sets the acceptable RoE (Return on Equity) for all distribution and transmission companies. The current RoE is 9% and Hydro One expects it will remain at that level. Right now, Hydro One has two pending transmission and one distribution rate application(s) before the OEB, and will file one transmission and five distribution rate application(s) later this year and into early 2019.

Here’s the question we ratepayers should ask: will the OEB protect us by ensuring we will not be picking up any of the costs associated with the Avista purchase such as the “foreign exchange forward contract” loss or the “financing charges” referenced above? Ratepayers should not be penalized for bad planning!

Hydro One’s quarterly statement under the heading ‘Risk Management” notes:

“Market risk refers primarily to the risk of loss which results from changes in costs, foreign exchange rates and interest rates. The Company is exposed to fluctuations in interest rates, as its regulated return on equity is derived using a formulaic approach that takes anticipated interest rates into account. The Company is not currently exposed to material commodity price risk.”

The “increased financing charges” and the “foreign exchange forward contract” costs related to the Avista merger were clear “risks” management should have foreseen!

On the surface, they could suggest part of the fall in net income is attributable to Canada’s inability to sell its oil at market prices which had a detrimental effect on the Canadian dollar’s exchange rate. But that claim would ignore the fact it was Hydro One’s management decision (blessed by former Ontario Energy Minister Glenn Thibeault) that led to the “foreign exchange forward contract” loss and the increased “financing charges.”

The blame should be shouldered by past management decisions.

Many said, at the time the planned acquisition of Avista was announced, that it made no sense. With that in mind, one would expect the OEB will indeed make the right decision and not allow rate increases that fail the test of bringing value to Ontario ratepayers.

We can only hope.

PARKER GALLANT

 

Advertisements

Author: parkergallantenergyperspectivesblog

Retired international banker.

One thought on “Hydro One’s curious third-quarter results (and why you should worry)”

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s