Hydro One Updated Financial Analysis of the Partial Sale of Hydro - - PowerPoint PPT Presentation

Hydro One

Updated Financial Analysis of the Partial Sale of Hydro One Technical Briefing

Background

• In the 2015 Ontario Budget, the Province announced its

intention to sell up to 60 per cent of Hydro One

• Targeted $9 billion in sale proceeds
• $5 billion to reduce debt
• $4 billion to infrastructure investment
• In December 2017, the Province completed its final sale
• f Hydro One, generating $9.2 billion in proceeds by

selling only 53 per cent

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Report Outline

• Follow-up to the FAO’s October 2015 report

1.

Updated fiscal impact estimate

2.

Tracking sale proceeds and allocations

3.

Impact on electricity rates

4.

Hydro One’s purchase of Avista

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• 1. Updated Fiscal Impact Estimate

Fiscal Impact

February 12, 2018 Financial Accountability Office of Ontario | fao-on.org 5 $3,089 $298 $408 ($1,108) ($254) ($250) ($265) ($268) ($271) ($274) ($2,000) ($1,000) $0 $1,000 $2,000 $3,000 $4,000 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25

Impact to Annual Surplus / (Deficit) $ millions

Near-term benefits Long-term costs

• Total benefits of $3.8 billion through 2017-18

Fiscal Impact Cont’d

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Benefits Costs Gains on Sale Net Income Deferred Tax Electricity PILs Corporations Tax DRC Revenue Interest Savings

Corporations tax revenue < forgone Electricity PILs

Alternative Financing Scenario

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($5) ($4) ($3) ($2) ($1) $0 $1 $2 $3 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 Impact to Net Debt $ billions

Sale of Hydro One vs. Alternative Financing Scenario

Lower net debt near-term Higher net debt long-term

• Cost of $1.8 billion on a discounted cash flow basis…
• …when compared to the alternative financing scenario of

issuing debt to fund infrastructure investment

• 2. Tracking Sale Proceeds

and Allocations

Proceeds & Allocations

February 12, 2018 Financial Accountability Office of Ontario | fao-on.org 9 $1.9 $1.9 $3.0 $2.4 $4.6 $4.6 $9.2 $9.2 $0 $1 $2 $3 $4 $5 $6 $7 $8 $9 $10 Proceeds Allocations

Sale Proceeds & Allocations $ billions

First Sale Second Sale Third Sale Deferred Tax OEFC Trillium Trust Total

$2.4 billion in non-cash proceeds $6.8 billion in cash proceeds $9.2 billion in cash allocations

• Province required to borrow $2.4 billion to finance

Trillium Trust infrastructure investments

OEFC Debt Reduction

February 12, 2018 Financial Accountability Office of Ontario | fao-on.org 10 $4.6 $2.8 $0.8 $2.4 $2.4 $1.1 $1.1 $11.7 $3.5 $0 $2 $4 $6 $8 $10 $12 $14 Benefits Unfunded Liability Reduction

Benefits to OEFC $ billions

BV Shares Departure Tax Special Dividend Deferred Tax Electricity Act Total $8.2 billion in cash benefits $3.5 billion in non-cash benefits

• $3.5 billion reduction to OEFC unfunded liability (net debt)

Trillium Trust

February 12, 2018 Financial Accountability Office of Ontario | fao-on.org 11 $3,175 $538 $719 $0 $250 $289

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500

2015-16 2016-17 2017-18

Trillium Trust Allocations and Connected Capital Expense $ millions

Gains from Sale Capital Expense

$3.9 billion net fiscal benefit

• $3.9 billion net fiscal benefit to 2017-18
• Net fiscal loss in future years

• 3. Impact on Electricity Rates

Electricity Rates

• Areas where ratepayers will / could be affected:

1.

Operating expenses / efficiencies

2.

Cost of capital

3.

Allocation of the deferred tax benefit

4.

Debt retirement charge

February 12, 2018 Financial Accountability Office of Ontario | fao-on.org 13

Operating Costs

February 12, 2018 Financial Accountability Office of Ontario | fao-on.org 14

• Potential for operating efficiencies to decrease rates

$350 $370 $390 $410 $430 $450 $470 $490 2012 2013 2014 2015 2016 2017 2018

OM&A Expenses ($2017 millions)

Hydro One OEB Approved and Actual OM&A Expenses

OEB Approved Actual

Cost of Capital

• Downgrade to Hydro One’s debt rating as a result of the

sale

• Negative outlooks to Hydro One’s debt rating as a result
• f the pending purchase of Avista
• Potential for higher debt costs to increase rates

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Deferred Tax + Debt Retirement Charge

• Hydro One recorded a $2.8 billion tax benefit when it

became a publicly traded company

• The OEB has ruled that a portion of the benefit, estimated

by the FAO to be approximately $900 million, should be given to ratepayers

• Early retirement of the debt retirement charge (DRC) to

save non-residential electricity ratepayers approximately $465 million

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• 4. Hydro One’s Purchase of Avista

Avista Acquisition

• Hydro one intends to purchase Avista Corporation for $4.4 billion
• FAO estimates a $5 million deterioration to Province’s annual

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

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

electricity rates could increase in Ontario

• If the Avista acquisition results in Hydro One cost efficiencies, then

savings could lower electricity rates in Ontario

• Avista acquisition will dilute Provincial ownership of Hydro One

from 47 per cent to 42 per cent

• Potential for provincial ownership to fall below 40 per cent if Hydro

One makes another similar acquisition

February 12, 2018 Financial Accountability Office of Ontario | fao-on.org 18

2 Bloor Street West Suite 900 Toronto, Ontario M4W 3E2 416.644.0702 fao-on.org info@fao-on.org

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