Hydro One prices IPO at $20.50 a share with proceeds for infrastructure investment, debt repayment

TORONTO • Against a backdrop of considerable political intrigue in Ontario, Hydro One, the former provincially owned transmission and distribution company, priced its initial public offering Thursday.

The entity will sell a minimum of 81.1 million shares at $20.50. That’s in the upper end of the $19-$21 range set when the marketing period started a couple of weeks ago, but in the middle of the revised range ($20-$21) set this week. Forty per cent of the shares – they pay an annual 84-cent dividend – were placed with retail investors.

There’s a possibility Hydro One could sell another 8.15 million if the underwriters exercise the over-allotment option. The province would then have received gross proceeds of $1.83 billion. As part of restructuring Hydro One prior to its IPO, Ontario also received $1 billion from the company through a cash dividend and payment in lieu of taxes.

Bob Chiarelli, Ontario’s Minister of Energy said, “broadening ownership in Hydro One will provide billions towards the single largest investment in transportation infrastructure in the province’s history — in municipal public transit, GO Transit, bridges, and highways in communities right across Ontario, which we will do without raising taxes, increasing borrowing, or cutting public services.”

In a statement, Chiarelli said Ontario “remains on track to realize the financial target of $9 billion ($4 billion for infrastructure investment and $5 billion for debt repayment).”

But had the company – which has a relatively new chief executive officer and chief financial officer – and the government listened to the views of the province’s Financial Accountability Office (FAO), the initial public offering would have been called off.

In a report released Thursday, the FAO warned the province will be in even “worse” shape after the sale of the Crown utility. “In the years following the sale of 60 per cent of Hydro One, the province’s budget balance would be worse than it would have been without the sale,” the FAO said in its 41-page report

“By 2019–20 once the full 60 per cent has been sold, the Province would experience an ongoing negative impact on budget balance from forgone net income and payments-in-lieu of taxes from Hydro One,” it added.

Not everybody agrees with that assessment. Ed Clark, chair of the Premier’s Advisory Council on Government Assets and a former investment banker and former chief executive officer of TD Bank, said Thursday the FAO report fails to take into account three factors:

• Ontario is constrained in its borrowing capacity. It does not have “an infinite borrowing capacity,” said Clark.

• The need to compare the return the province will generate from investing in infrastructure with maintaining its full ownership in Hydro One. To the extent infrastructure returns are greater then there will be an overall net economic benefit.

• As a public company, Hydro One will presumably be more dynamic than as a wholly owned unit of the Ontario government. The FAO report “works on the assumption that the old management team and the old board would produce the same earnings as the new management team and new board,” said Clark. “You get huge benefits because the earnings are better,” he added, referring to other successful privatizations including Canadian National, Petro Canada and Potash Corp. And to the extent that Hydro One follows those examples, the government will be able to sell its remaining interests at higher prices than $20.50.