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Sell Toronto Hydro, because we’ll get top dollar

Hydro towers are seen over a golf course in Toronto on Wednesday, November 4, 2015.


Because it's so easy to get trapped in downtown Toronto's elitist bubble, I pay attention to what relatives in the suburbs grumble about at family gatherings. For years, I endured speculation, and questions, about interest rates and house prices; today, they're prone to gripe about their hydro bills.

Such anger has become common. Across Ontario, people are plain mad because electricity costs have soared. Years ago, the province implemented green energy policies that promised clean electricity producers, such as wind farms, elevated rates to entice them to set up shop here. Taxpayers are now on the hook.

Somehow, Hydro One's recent privatization has been roped into the diatribes. The provincial Liberals took the province's massive electricity distribution utility public last year, valuing it at $12-billion, and now you can find lawn signs insinuating the deal somehow screwed us.

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These rumours, partly stoked by Hydro One's exasperated union, are wrong. The IPO was a home run – so much so that Toronto Mayor John Tory has every reason to consider selling the city's own hydro utility, something he now says is on the table.

Talking about privatization in Ontario is tricky because people are quick to call out the province's sale of the 407 toll highway in 1999 as proof that taxpayers are bound to get screwed by asset sales. At the time, the ruling Progressive Conservatives sold the 407 at a cut-rate price – only to find out just a few years later that it was worth much more.

To prevent this from happening again, Ontario Premier Kathleen Wynne wisely listened to her advisers and decided to sell 60 per cent of Hydro One in chunks. By unloading four 15-per-cent blocks, the government stood to benefit if the utility's value rose over time, because future chunks would sell at higher prices. (The province would also suffer if the value dropped.)

Although there was no guarantee public investors would be comfortable owning only a 15-per-cent stake at first, the government rolled the dice and won. Taxpayers did, too. Investor demand for utilities is incredibly heavy right now, helping Hydro One's shares jump 27 per cent since they hit the market last November. That rise allowed the utility to sell a second 15-per-cent chunk ahead of schedule, and to earn even more for it than the first piece brought in.

If Toronto was considering selling a stake in its hydro utility in a fire sale, that would be stupid. But it isn't. Demand for utility assets is so strong – influencing the likes of Fortis to buy Michigan-based ITC Holdings for $6.9-billion (U.S.) in February – Toronto Hydro is likely to get a premium valuation.

How much it's worth is hard to pinpoint. However, hydro assets are commonly valued at a multiple of their rate base, or the net book value of their assets. The most expensive utilities will sell for 1.5 times their rate base. Being conservative and assuming Toronto Hydro is worth 1.2 times its own, that would equate to roughly $3.8-billion (Canadian), based on its recently approved rates.

One of the biggest misconceptions about power utilities is that privatizing them guarantees higher electricity costs, because private companies are profit-sucking beasts. In Ontario, though, the OEB, or Ontario Energy Board, sets the rates, and utilities must make their case whenever they want to raise prices. Toronto Hydro is no exception.

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I'd rather not see public assets sold off, because it forces governments to forfeit future dividends in favour of a lump-sum payment up front. Last year, Toronto Hydro paid $56-million in dividends to the city, and $61-million the year before, the type of recurring revenue that will be desperately needed in years to come.

Privatization opponents often cite this very issue when they pipe up. Here in Ontario, they love using the provincial Auditor-General's report on Hydro One's sale, which suggested the province's net debt will be worse off in the long run, because we'll need to eventually borrow more to offset the missing dividends.

The problem with this conclusion is that it's, well, wrong. Read the full report and you'll see the Auditor-General acknowledges the answer isn't black and white. In four different scenarios, two result in higher debt long-term, while the other two result in lower debt – it all depends on what Hydro One fetches in future sales

So far, it's gotten more than expected.

This may not even be an issue for Toronto Hydro, because half of the company could arguably get sold in one block. But even then, there's no escaping that the city needs funds now. We've got huge transit funding woes, and our community housing program – the largest in North America – is in a state of disrepair. The money's got to come from somewhere. And if we can get top dollar, why wouldn't we sell?

Getting approval won't be easy. Unlike Hydro One, whose privatization was backed by a majority government, Toronto Hydro's must be approved by a fickle city council. Even if councillors eventually give their blessing, it might come too late and the city could miss its window to obtain the best price.

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But at the very least the mayor ought to try. The business case is there. We just need the political will.

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About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More


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