Toronto Hydro says it is slashing the dividend it usually hands over to the city in order to deal with a cash-flow problem caused as the utility dramatically boosts spending on its aging power grid.
But the decision, announced by Toronto Hydro's board of directors on Monday, comes amid mounting talk of a possible sell-off of the publicly owned utility, which has been floated as a way for the city to raise money for public transit or affordable housing.
The dividend decision will cap the annual cheque the utility hands to the city, which is its sole shareholder, at $25-million for both this year and next. That's less than half the dividend from last year, which came in at $56-million.
The move leaves a sizable hole in the cash-strapped city's budget. But it has also raised questions about Toronto Hydro's financial management, and whether the move is partly aimed at smoothing the path toward the sale of at least part of the utility.
Toronto Hydro has reportedly hired political consultants who worked on Mayor John Tory's election campaign to drum up support for a sale. A city staff report on whether to sell part of the utility or other city assets, as well as to raise new fees or taxes, is due next week.
A key argument for city councillors who oppose a sale is the city's financial dependence on the dividend, which is used every year to plug holes in the operating budget.
Speaking to reporters on Monday, Toronto Hydro chief executive officer Anthony Haines denied that there was an ulterior motive behind the dividend decision, or that the move was part of a conspiracy designed to make privatization easier: "It's not the case. You asked me about a conspiracy theory and I am saying I am not aware of any."
Incoming Toronto Hydro board chairman David McFadden, an energy lawyer with Gowling WLG, said the board's move to slash the dividend was driven by its need to keep its debt-to-equity ratio in check. In order to keep its lenders and its regulators happy, the utility is supposed to maintain a 60-40 debt-equity ratio.
But Mr. McFadden said that, with the intense borrowing for plans to both fix aging infrastructure and meet the power needs of Toronto's growing downtown, the debt-equity ratio had deteriorated, with its debt sitting at 63 per cent.
The issue had been discussed at the board for almost a year, he said. Bond-rating agencies had warned Toronto Hydro in the spring that it faced a downgrade – meaning borrowing money would become more expensive – if it did not address the problem.
With the city unlikely to pitch in more equity, Mr. McFadden said, Toronto Hydro was left with the option of cutting the dividend. However, within three years, he said, the utility would likely be able to return to providing Toronto with a full dividend.
"We were stuck in a really difficult situation," he said. "… This is a short-term issue to try to get our debt-equity ratios in line."
According to a set of shareholder instructions approved by city council, Toronto Hydro's board of directors is obligated to either hand over a dividend of a minimum of $25-million a year or half of its net income, whichever is greater. But the declaration of dividends is still subject to the board's fiduciary duty to act in the utility's best interest.
Mr. Tory, who has ensured the appointment of numerous allies to Toronto Hydro's board, was in Israel on a trade mission on Monday. His spokeswoman, Amanda Galbraith, said in a statement that the mayor was concerned about the effect of the dividend cut on the city's budget, and that staff and the budget committee would review the move.
Councillor Gord Perks, a left-leaning critic of the centre-right mayor and a former Toronto Hydro board member, said the dividend cut would make the city's 2017 budget much harder to balance without a steeper hike in property taxes.
He also said it appeared that the utility had dropped the ball on its own finances: "Two years in, and the mayor's hand-picked board of Toronto Hydro doesn't seem to know what they're doing."