Hydro One Updated Financial Analysis of the Partial Sale of Hydro One Technical Briefing
Background In the 2015 Ontario Budget, the Province announced its o intention to sell up to 60 per cent of Hydro One Targeted $9 billion in sale proceeds o $5 billion to reduce debt o $4 billion to infrastructure investment o In December 2017, the Province completed its final sale o of Hydro One, generating $9.2 billion in proceeds by selling only 53 per cent Financial Accountability Office of Ontario | fao-on.org February 12, 2018 2
Report Outline Follow-up to the FAO’s October 2015 report o Updated fiscal impact estimate 1. Tracking sale proceeds and allocations 2. Impact on electricity rates 3. Hydro One’s purchase of Avista 4. Financial Accountability Office of Ontario | fao-on.org February 12, 2018 3
1. Updated Fiscal Impact Estimate
Fiscal Impact Near-term benefits Long-term costs $4,000 $3,089 Impact to Annual Surplus / (Deficit) $ millions $3,000 $2,000 $1,000 $408 $298 $0 ($254) ($250) ($265) ($268) ($271) ($274) ($1,000) ($1,108) ($2,000) 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 Total benefits of $3.8 billion through 2017-18 o Financial Accountability Office of Ontario | fao-on.org February 12, 2018 5
Fiscal Impact Cont’d Benefits Costs Gains on Sale Net Income Deferred Tax Electricity PILs Corporations Tax DRC Revenue Interest Savings Corporations tax revenue < forgone Electricity PILs Financial Accountability Office of Ontario | fao-on.org February 12, 2018 6
Alternative Financing Scenario Sale of Hydro One vs. Alternative Financing Scenario $3 Lower net debt near-term $2 Impact to Net Debt $ billions $1 $0 ($1) ($2) ($3) Higher net debt long-term ($4) ($5) 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 2027-28 2028-29 2029-30 2030-31 2031-32 2032-33 2033-34 2034-35 Cost of $1.8 billion on a discounted cash flow basis… o …when compared to the alternative financing scenario of o issuing debt to fund infrastructure investment Financial Accountability Office of Ontario | fao-on.org February 12, 2018 7
2. Tracking Sale Proceeds and Allocations
Proceeds & Allocations First Sale Second Sale Third Sale Deferred Tax OEFC Trillium Trust Total $10 $9.2 $9.2 $9 $2.4 billion Sale Proceeds & Allocations $ billions in non-cash $8 $2.4 proceeds $7 $4.6 $6 $9.2 billion $3.0 $5 in cash $6.8 billion allocations $4 in cash proceeds $3 $1.9 $4.6 $2 $1 $1.9 $0 Proceeds Allocations Province required to borrow $2.4 billion to finance o Trillium Trust infrastructure investments Financial Accountability Office of Ontario | fao-on.org February 12, 2018 9
OEFC Debt Reduction BV Shares Departure Tax Special Dividend Deferred Tax Electricity Act Total $14 $11.7 $12 Benefits to OEFC $ billions $1.1 $3.5 billion in non-cash $10 benefits $2.4 $8 $0.8 $6 $2.8 $8.2 billion $3.5 $4 in cash benefits $1.1 $4.6 $2 $2.4 $0 Benefits Unfunded Liability Reduction $3.5 billion reduction to OEFC unfunded liability (net debt) o Financial Accountability Office of Ontario | fao-on.org February 12, 2018 10
Trillium Trust Gains from Sale Capital Expense $3,500 $3,175 Trillium Trust Allocations and Connected Capital $3,000 $2,500 Expense $ millions $2,000 $3.9 billion net fiscal benefit $1,500 $1,000 $719 $538 $500 $289 $250 $0 $0 2015-16 2016-17 2017-18 $3.9 billion net fiscal benefit to 2017-18 o Net fiscal loss in future years o Financial Accountability Office of Ontario | fao-on.org February 12, 2018 11
3. Impact on Electricity Rates
Electricity Rates Areas where ratepayers will / could be affected: o Operating expenses / efficiencies 1. Cost of capital 2. Allocation of the deferred tax benefit 3. Debt retirement charge 4. Financial Accountability Office of Ontario | fao-on.org February 12, 2018 13
Operating Costs Hydro One OEB Approved and Actual OM&A Expenses $490 OM&A Expenses ($2017 millions) $470 $450 $430 $410 $390 $370 $350 2012 2013 2014 2015 2016 2017 2018 OEB Approved Actual Potential for operating efficiencies to decrease rates o Financial Accountability Office of Ontario | fao-on.org February 12, 2018 14
Cost of Capital Downgrade to Hydro One’s debt rating as a result of the o sale Negative outlooks to Hydro One’s debt rating as a result o of the pending purchase of Avista Potential for higher debt costs to increase rates o Financial Accountability Office of Ontario | fao-on.org February 12, 2018 15
Deferred Tax + Debt Retirement Charge Hydro One recorded a $2.8 billion tax benefit when it o became a publicly traded company The OEB has ruled that a portion of the benefit, estimated o by the FAO to be approximately $900 million , should be given to ratepayers Early retirement of the debt retirement charge (DRC) to o save non-residential electricity ratepayers approximately $465 million Financial Accountability Office of Ontario | fao-on.org February 12, 2018 16
4. Hydro One’s Purchase of Avista
Avista Acquisition Hydro one intends to purchase Avista Corporation for $4.4 billion o FAO estimates a $5 million deterioration to Province’s annual o surplus / (deficit) in 2019-20. Going forward, fiscal impact to the Province will depend on profitability of Avista Avista acquisition should not have a direct impact on electricity o rates in Ontario because the OEB sets rates based on regulated assets in Ontario. However, If the Avista acquisition increases Hydro One’s cost of debt, then o electricity rates could increase in Ontario If the Avista acquisition results in Hydro One cost efficiencies, then o savings could lower electricity rates in Ontario Avista acquisition will dilute Provincial ownership of Hydro One o from 47 per cent to 42 per cent Potential for provincial ownership to fall below 40 per cent if Hydro o One makes another similar acquisition Financial Accountability Office of Ontario | fao-on.org February 12, 2018 18
Thank you 2 Bloor Street West Suite 900 Toronto, Ontario M4W 3E2 416.644.0702 fao-on.org info@fao-on.org
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