Reading the news releases since Hydro One was privatized by the Wynne government one would think the company is trending up. A rate-paying customer, or even an early investor in Hydro One shares, however, might not agree, especially with some recent claims in their second quarter news release.
Right after Hydro One announced plans to spend $6.7 billion (CAD) to acquire Avista Corporation of Spokane, Washington, credit rating agencies Moody’s and Standard and Poor’s revised their outlook to “negative” from stable, citing concern about cash flow and increased debt. Fast forward to August 8, 2017 and the second quarter results demonstrated more negative news as earnings dropped $34 million (21.7%) to $123 million or 20 cents per share. Back on May 4, 2017 Hydro One had increased their dividend payment to 22 cents per share so they paid out $135 million in the Q2, or $12 million more than their after-tax income.
I wonder how long the credit rating agencies will allow that to happen without a downgrade.
It appears that management of Hydro One at least recognized the “outlook” downgrade as, buried in the notes in their Q2, was this : “The change in the capital structure of Hydro One as a result of the Merger and the Debenture Offering could cause credit rating agencies which rate the outstanding debt obligations of Hydro One and Hydro One Inc. to re-evaluate and potentially downgrade their current credit ratings, which could increase the Company’s borrowing costs.”
The news release also featured this back-pat from president and CEO Mayo Schmidt, despite the bad news of the quarter and the potential of an upcoming credit downgrade: “We continued to deliver on enhancing customer satisfaction and value while implementing operational improvements and efficiency gains across the organization, despite unseasonably mild weather during the second quarter.”
Not too bright a future
So, let me get this straight: a possible credit downgrade, higher borrowing costs, declining income and lower demand — those don’t add up to “enhancing customer satisfaction and value.” And, with nine rate applications to be filed in the next four years, the future doesn’t look great for Hydro One’s customers.
Hydro One’s distribution revenues (net of purchased power) were flat at $349 million compared to the same 2016 Quarter. However, they actually delivered 4.5% (276,000 MWh) fewer MWh. What that means is Hydro One’s distribution rates for their most recent quarter were 4.5% higher than the comparable quarter in order to make up for the lower demand while maintaining revenue levels.
To make matters worse, the takeover of Avista will put Hydro One into the coal business facing a $100 million dollar cost of cleaning up a toxic waste site partially owned by Avista in Montana.
Effective management and efficiency gains, coupled with lower distribution rates should be the focus for Hydro One before they get to claim they are “enhancing customer satisfaction.” As well, claiming that electricity rates are lower by actually deferring costs for four years via the Fair Hydro Act just proves Hydro One’s existence as a monopoly should be controlled, rather than allowed to spin tall tales.