Are 11 years of active depressing value to end?
What spurred the decision by Ontario’s Finance Minister, Charles Sousa to announce on April 11, 2014 that the Ontario Government is appointing a council to “recommend ways to improve the efficiency and optimize the full value of Hydro One, Ontario Power Generation (OPG) and the Liquor Control Board of Ontario (LCBO”? Was it a sudden realization that Ontario had undervalued assets? Or, was it an attempt to deflect attention from the gas plant scandal?
I’m betting the latter. Why? The shareholder value of the first two Crown corporations listed have been continually interfered with by this government. Everything from “smart meters” to coal plant closures, multi-billion dollar tunnels, run-of river hydro and coal plant conversions (to biomass) have played a big role in the current value of both OPG and Hydro One. Add that to above-market rates for wind and solar developments, and billion dollar transmission spending to hook them to the grid—the only reason OPG and Hydro One have any value is that electricity rates in the monopolistic electricity sector have been allowed to rise by over 100%. Four Long-term Energy Plans in 11 years and several dozen “directives” on how the businesses should operate have done nothing to enhance the value of those two entities.
Under the benign governance of the Ontario Energy Board (whose role was eviscerated by the government), electricity prices have increased at an average annual rate over 10% and driven well paying jobs from the province, as a result. Creating value seems to have been overlooked in the process. Is this another “Council” that will present a report that will simply be ignored as in the past?
What does Sousa expect?
Already, I see problems: Minister Sousa seems unaware the Auditor General in his 2011 report noted that Ministerial (Energy) directives to contract for above market priced wind and solar generation were executed without a cost benefit analysis.
He is also either unaware or in direct conflict with his party’s Energy Minister, Bob Chiarelli, who, just two days before Sousa’s announcement said, “The government is not currently looking at the disposing of any of our energy companies.” So, why “enhance value” if there is no plan to sell? Was Premier Wynne aware of this conflict or did she endorse both positions hoping that the new council would confuse the issue, and the electorate? Perhaps the gambit is to gain credibility to reduce or freeze energy sector salaries, or force a change in the way pensions and benefits are paid, to enhance value?
As recently noted OPG, had 77% of their employees on the “2013 Sunshine list” and Hydro One 67%; both have unfunded positions in the pension and benefits programs. A council isn’t necessary to figure that out!
So exactly what is Minister Sousa expecting from the council? OPG and Hydro One are both taxpayer owned institutions with one (Hydro One) holding a monopoly on the transmission business and on distribution of electricity to one quarter of Ontario’s ratepayers. OPG on the other hand has seen its share of the generation market fall since the PC government split old Ontario Hydro into five entities.
The final annual report of Ontario Hydro had this to say about their contribution to Ontario’s electricity supply: “ OPG facilities now supply about 85% of the province’s electricity demand. Under an agreement with the provincial government, that proportion will be gradually reduced so that by about 2010, OPG will control no more than 35% of the province’s total supply options.”
By the end of 2013 (three years later than planned) OPG had come close to achieving the “agreement” with 16,229 MW of installed capacity compared to total Ontario capacity (per recently “revised” Long-Term Energy Plan) reported as 38,374 MW giving OPG about 42% “of the province’s total supply.” That OPG capacity of 42% produced 80.3 terawatts (TWh), equal to 57 % of Ontario’s demand in 2013 and in 1999 had produced 136.2 TWh equal to 85% of demand.
The bottom line
On the financial side, OPG’s first full year of operation (2000) generated a profit, net of PIL (payments in lieu of taxes), of $605 million; by 2013 their profit had fallen to $135 million. So, OPG, based on history reflects itself as a business in decline. OPG are also about to undergo costly retrofits of their nuclear plants which have traditionally gone over budget. If Ontario sold OPG at, say, a 12 times multiple on earnings, it would net them only $1.4 billion. The best the province could hope to generate in a sale of OPG would be its current book value of $8.3 billion, but any buyer would demand guarantees on pricing of generation of all capacity and a guarantee of grid rights to ensure production is purchased. What is good for wind, solar and gas plant generators would be demanded by any new private sector owners of OPG! One also suspects a buyer would seek to cover any anticipated cost overruns on existing projects including nuclear refurbishments, biomass conversions, etc. In other words, it is likely the “Council” will recommend keeping OPG—it may not be sellable!
Hydro One, on the other hand looks like the star with Net Profit (after PIL) of $803 million for 2013 up from $378 million in 2000 (+112%), while Gross Revenue (net of Power Purchased) increased from $1,728 million in 2000 to $3,054 million in 2013 (+77%), despite a drop in terawatts (TWh) transmitted. An increase in employees of 1,173 however is cause for concern in respect to the transmission and distribution businesses. If, as suggested by Jan Carr in an article in the Toronto Star, Hydro One gets split into two entities—transmission and distribution—the breakout (2012 year-end) in Net Profit for the “transmission” business is $488 million and for “distribution,” $258 million providing a Return on Equity (ROE) on the former of 18.1% and 12.5% on the latter. The Return on Revenue (RoR) would be 32.9% and 25.8% respectively and above the comparable at, say, Enbridge with an ROE of 12.8% and an RoR of 18.8%.
Assuming the Council will suggest the two Hydro One businesses be split and could generate say 12 times their earnings in a sale, Ontario might generate $9 billion. That would come from approximately $3 billion for the distribution side and $6 billion for the transmission business. The sale would generate a one-time gain of about $2.5 billion for the province, or less than 25% of the current budget deficit. The sale would cause grief for the Liberal Party from the unions within the Hydro One family and so might prove unpalatable.
I am betting the Finance Minister’s appointed “Council” will deliver bad news but probably not until after an election. This is simply another exercise to deflect from the numerous scandals and the mismanagement of the energy file overall that are sure to be the message from opposition parties in a provincial election campaign.
April 14, 2014
The views expressed here are those of the author and not Wind Concerns Ontario policy.