Hydro One latest financials look positive — until you look beneath the surface

Lots of “spin” in a recent news release. 2019 doesn’t look so rosy

On February 21, 2019 Hydro One issued a press release announcing their fourth quarter and year-end 2018 results.

The market shrugged.

That was in spite of the spin of the release titled “Hydro One Reports Positive Fourth Quarter Results”. Some media reports echoed the Hydro One press release without, I presume, looking at the financial statements.

Because if one were to examine their results for the quarter, it is obvious why the market shrugged. Revenue (net of purchased power) was up by $41 million (5.3%) due to higher demand for electricity for the transmission (up 2.5%) and distribution (up 3.2%) businesses. Offsetting the increased demand and related revenue, was a year over year $64 million increase (26.2%) in OMA (operations maintenance and administration) costs for the comparable 2017 quarter.

The jump in after-tax net income to $162 million from$155 million, attributable to shareholders, was up $7 million or 4.5%. However, if it hadn’t been for a huge drop in income taxes (from $38 million in 2017 to only $1 million in 2018’s fourth quarter), Hydro One’s results would have been upsetting to shareholders.

If Hydro One had taken the hit related to the “termination fee” (US$ 103 million) payable to Avista shareholders on the failed acquisition of that company, Hydro One would have reported a loss for the quarter. This is based on Note 4 which stated: “On February 1, 2019, Hydro One entered into a credit agreement for a $170 million unsecured demand operating credit facility (Demand Facility) for the purpose of funding the payment of the termination fee payable to Avista Corporation as a result of the termination of the Merger Agreement and other Merger related costs.”

The first Quarter results of 2019 will presumably reflect the unaccounted-for cost of the termination fee.

While year-over-year results report a favourable trend with revenues (net of purchased power) up 6.5% or $204 million, it was mainly driven by higher demand for distribution customers (revenue up 2.1 %) and higher peak demand for transmission clients (revenue up 11.1%).  If Hydro One had taken the Avista “termination fee” hit of $170 million, net income for shareholders would have been below 2017’s reported $658 million instead of the $778 million (up 18.2%) claimed for 2018.  It’s all about the spin!

Needless to say, scanning the notes to the financial statement indicates Hydro One received rate application approvals from the OEB (Ontario Energy Board) that will affect both their distribution and transmission customers on a go-forward basis. Additional rate applications await rulings from the OEB.

It would appear Hydro One may well experience a decline in profitability in 2019 due to the $170 million Avista termination fee. Additionally, the possibility of reduced demand may surface as ratepayers will not see a repeat of the 25% Fair Hydro Act’s deferral which may have played a role in increased consumption.

We shouldn’t expect the Ford government to deliver the other 12% reduction promised leading up to their election in June 2018 as their accomplishments so far, on this file, have been quite disappointing. They failed to cancel wind and solar contracts that will impact future rate increases.

It appears the former Hydro One CEO has impacted shareholders and possibly ratepayers considerably more than the “Six-Million-Dollar” cost suggested by Premier Ford. While the current Hydro One’s Board of Directors has agreed to restrict the pay to a new CEO to a maximum of $1.5 million per annum it would take 35 years to recoup just the Avista termination costs. An unlikely event!

An ongoing concern is the possible effect on ratepayers, should Hydro One submit a request for a rate increase to the OEB (Ontario Energy Board) to cover the above Avista termination fee and other (already expensed) related costs for the boondoggle.

Ratepayers should hope — and expect — the Minister responsible (Greg Rickford) will issue a clear directive to the OEB instructing them to not grant a rate increase to cover those costs! He should do that despite the province still being a 47% shareholder of Hydro One.

PARKER GALLANT

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