A Pig In A Poke Or A Sweet Deal?

The Ontario government seems on a path to sell 60% of Hydro One for $9 billion.  Hydro One is the grid operator in the province and is a valuable utility asset.  There is some thought that a new operator would gouge the public, but our beloved and glorious premier seems to think she can prevent that.

There are few details about the utility’s real value and we can be sure that none will be apparent to the public.  There are some questions whose answers are to be discovered.

  1. Will debt be part of the deal?  Will all of the debt presently owed by Hydro One and the sister company Ontario Power Generation (OPG) attach only to OPG after the sale?  The premier has said that $5 billion of the $9 billion proceeds will be applied to the $27 billion debt but her word is not provably valuable.
  2. Is $9 billion a good price for 60% of the asset?  Given its opaque finances, no one in the public knows.  The income is purported to be $700 million but the accounting for provincial crown corporations is arcane.  So who knows?
  3. Most utilities are valued on cash flow rather than income.  What is the present and projected cash flow?
  4. What value must be given up to get a private sector business to be interested in being in business with the current operator.  Weak partners always reduce the price.
  5. Another similar snag is the tie to OPG.  A private operator would prefer to negotiate the price it pays its suppliers.  If the foolishly created burden of OPG pricing is to drag over to Hydro One, then no sane purchaser will pay top dollar.  Probably not even middle dollar.
  6. Is there a time when the owners of Hydro One could acquire electricity from another supplier?  If so, who eats the OPG debt?
  7. Will the existing union contracts continue?  If not who buys them out?
  8. How will the new entity work?  It does not look like it will be a crown corporation any more so it must be some sort of regular corporation.  If so, the federal government will become entitled to income taxes.  At current rates about $105 million on the supposed operating profit of $700 million.  Has the province negotiated a new deal with the federal folks or is this just a gift from the people of Ontario?

I would like to believe that the provincial government is working in the best interest of the people, but its history is not supportive of trust.  As a friend expressed, “I would not give the premier or any of  her cabinet $5,000 to buy a used car for my daughter.  I can’t see why I should trust them to sell part of a $15 billion business.”

Trust is hard to regain once lost.  For the premier and her helpers, the trust ship has long since sailed.  If we cannot trust, then we most demand transparent accountability.

Do you see any reasonable hope of that happening?

Contact: don@moneyfyi.com  

Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

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