The new narrative for Hydro One's contentious privatization suggests the deal will be bad for Ontario's books. So says the province's budget watchdog in a fresh report.
About that argument.
If you only read the summary, which came out last Thursday, you'd have no choice but to buy this conclusion. By unloading 60 per cent of Hydro One, "the province's net debt would initially be reduced, but will eventually be higher than it would have been without the sale," the auditor states.
Scour the full report and you won't be nearly as convinced of the deal's detrimental debt effects. Over 41 pages, the text offers a much more nuanced take.
Four crucial tables in the appendix illustrate just how confusing the short conclusion can be. According to the auditor's own calculations, of the four scenarios he modelled out to 2025, two suggest the initial public offering will ultimately add to the province's net debt burden – and two suggest the province's debt load will be better off because of the deal.
Whether the deal adds to or lowers Ontario's debt depends on how investors value the utility once it starts trading, and whether the province scraps a debt retirement charge it currently forces all electricity users to pay monthly. If the shares trade up and the debt retirement charge is kept in place, the deal is likely to be beneficial to the province; using the auditor's analysis, it could lower Ontario's debt burden by $2.5-billion by 2025.
When the Financial Accountability Office of Ontario (FAO), which produced the analysis, replied to a request for comment asking why sums such as this one weren't used to soften the report's strong conclusion, especially considering there is a decent chance the scenario comes true, a spokesperson said the report speaks for itself.
The report's summary also does not mention the many "what ifs" that could eventually alter the numbers. The auditor addresses some of these in the full text, especially the effect that higher Hydro One profits would have on the province's debt burden.
Broadly speaking, the more money the utility makes, the higher its shares should trade in the market. Investors reward better profits by agreeing to purchase shares at a higher multiple to earnings.
If this happens, Hydro One's valuation will rise, likely allowing Ontario to sell future stakes for more money than it currently projects. The more money the province makes on future sales, the better off its debt total will be.
Ontario's auditor ignored the issue altogether. "Given the uncertainty associated with forecasting future changes at Hydro One, the FAO has not assumed any increases in profitability as a result of new ownership," the report stated.
In some ways, that makes sense; there's nothing to say profits will surely rise. Although there seems to be a ton of fat that can be trimmed to make Hydro One more efficient, the utility has a highly unionized work force that makes labour a rather tough thing to cut.
And Mayo Schmidt, Hydro One's new CEO, used to run agricultural companies – a much different sector.
There's also a decent chance that, even if better profits are produced, Hydro One may not be rewarded. If the broad stock market sells off, investors will be less willing to buy shares of any company, which could dent Hydro One's valuation no matter how well the company performs.
It's impossible to account for every potential scenario when summarizing what taking Hydro One public will do to Ontario's debt. But a little nuance would have gone a long way. To understand why, take a look at the force with which most of the media and opposition parties pounced on the report's conclusion.
To the average news reader or television viewer – pretty much anyone who doesn't have time to read the full report – the takeaway is that Hydro One's initial public offering will definitely be bad for the province.
Smelling blood, both the Progressive Conservatives and the NDP have piled on, because opposition parties will stop at nothing to score political points. The PCs tried to say this would be the "worst deal in the province's history" – rather rich coming from the party that botched the privatization of Highway 407.
All this consternation is not new for such a big privatization. For fun, I went back and read some news stories in our archives before Canadian National Railway was taken public in 1995.
Before the deal, the expectation was that no one would buy the new shares and that going public wouldn't do much to its value.
In the end, the deal was oversubscribed. And since CN hit the market, its shares are now worth 45 times more.
If Hydro One has only a tiny fraction of this success, Ontario could very easily be better off.
Hydro One IPO almost did not happen
The initial public offering of Hydro One almost never happened because of strong interest from Canadian pension funds in buying out the entire government-owned electricity distributor, Ontario's Finance Minister said on Monday.
The IPO, which is expected to close later this week, is set to raise up to $1.83-billion for Canada's most populous province, which is only selling a roughly 15-per-cent stake in the utility.
"If the pension funds had their way, the broadening of the ownership structure in Hydro One wouldn't have occurred, because they wanted to take it all," Finance Minister Charles Sousa told media on the sidelines of the P3 2015 investment conference in Toronto.
Hydro One shares priced near the top-end of their expected pricing range, making the IPO one of the largest in Canadian history.
The stock is set to list on the Toronto Stock Exchange under the ticker symbol "H" and begin trading on Nov. 5.
During the drawn-out IPO exploration process however, Mr. Sousa said the government attracted "lots of interest" from pension funds interested in buying out the asset.
Canadian funds such as the Canada Pension Plan Investment Board and its peers such as the Ontario Teachers' Pension Plan and Caisse de dépôt et placement du Québec have been among the world's most active deal makers in recent years, making major bets in sectors such as energy, infrastructure and real estate.