The largest Canadian privatization in decades is off to the races, despite growing concerns about investor appetite for new offerings.
On Friday, the Ontario Liberals filed paperwork for Hydro One Ltd.'s initial public offering, valuing the public utility at roughly $11-billion. The government is selling 15 per cent, or $1.62-billion to start, but one-time gains from $1-billion in special payments and a $2.2-billion tax benefit push its total haul to $4.82-billion.
Because the government is desperate to fund its expansive transit infrastructure program, and because the nearly $5-billion up front is so enticing, there is little incentive to wait out the recent market volatility.
CPI Card Group's IPO was cut in half this week and in late September, Tricon Investment Partners Inc. postponed an IPO of its own, citing "adverse market conditions."
Although these are worrying signs, the Ontario government hopes that the Hydro One IPO will be immune from the recent woes. It is extremely rare to see such a sizable utility hit the market, especially one that pays an expected 4.2-per-cent dividend yield, and that is expected to generate significant investor interest.
Emera Inc.'s recent financing offers some hope. The Nova Scotia utility announced a $6.5-billion (U.S.) acquisition in the United States in September, and successfully sold $1.9-billion (Canadian) worth of new securities to finance the purchase.
Ontario is looking to sell 81.1 million Hydro One shares for between $19 and $21 apiece. At the midpoint of this range, the deal will bring in $1.62-billion. The marketing roadshow begins Tuesday.
Ontario Premier Kathleen Wynne has a long list of transit projects she has promised to build, but limited money to pay for them and no interest in raising taxes. The province's most recent fiscal deficit amounted to $10.9-billion.
In the last year-and-a-half alone, Ms. Wynne has promised to build light rail lines in Mississauga, Brampton and Hamilton, and electrify the entire GO regional rail network in order to run more frequent trains. Those commitments are on top of earlier promises to build light-rail transit (LRT) lines on Finch and Sheppard avenues in Toronto, and to help fund an extension to the Bloor-Danforth subway line.
The Premier has also said she would make billions of dollars available outside of the Greater Toronto and Hamilton areas to build more roads and bridges in the rest of the province.
The infrastructure commitment, particularly in public transit, is Ms. Wynne's signature policy and the government is eager to show progress.
Over the long term, Ontario has targeted raising $9-billion from selling 60 per cent of Hydro One's shares. The government has promised to hold on to 40 per cent of the shares itself so that it still has some say in how the company is run. In total, $5-billion will be used to pay down Hydro One's debt, while the other $4-billion will go toward transit and transportation.
Straight share sales will bring in roughly $6.5-billion. The government is planning to put the $2.2-billion one-time tax haul into the Trillium Trust, to pay for transit, and will dedicate an additional $1-billion in miscellaneous gains, which include an $800-million dividend, to paying down debt. The money from the share sale itself would be split, with 56 per cent going to debt payments and 44 per cent to transit.
Currently, Hydro One is a Crown corporation that handles nearly all the transmission of electricity in Ontario, as well as local distribution to 1.4 million customers. The privatization of Hydro One is the largest in Canada in a generation, and may end up being the largest to date.
By comparison, selling all of PetroCanada netted the federal government $5.7-billion between 1991 and 2004. Ottawa's sale of Canadian National Railway in 1995 netted $2.2-billion. Ontario's Progressive Conservative Party tried to take Hydro One public 13 years ago, but cancelled the plans in the face of stiff opposition.
RBC Dominion Securities and Bank of Nova Scotia are serving as co-lead underwriters for the Hydro One IPO. Torys LLP, Osler Hoskin & Harcourt LLP, and Blake Cassels & Graydon LLP are offering legal advice to the province, Hydro One and the underwriters, respectively.