Hydro One facing $885 million charge as regulator upholds tax decision forcing it to share savings with customers

Hydro One facing $885 million charge as regulator upholds tax decision forcing it to share savings with customers


Hydro One Ltd. said Monday that it is again facing a one-time hit to profit of as much as $885 million after a regulatory review panel upheld a decision forcing the Ontario electrical utility to share some future tax savings with its customers.

It was the latest slight for Toronto-based Hydro One, which has fought losing battles recently over its executive pay and a major merger attempt in the United States.

On March 7, the Ontario Energy Board (OEB) issued a ruling involving a dispute between the regulator and Hydro One over the plans for approximately $2.6 billion in future tax savings.

Those savings arose out of Hydro One’s initial public offering in 2015, which was followed by subsequent share sales that left the Ontario government holding an approximately 47-per-cent stake in the once provincially-owned utility.

The OEB decision upheld an initial ruling from 2017 that had determined some of those tax savings should effectively be passed on to ratepayers.

Hydro One, Ontario’s biggest electricity transmitter and distributor, had wanted all of the savings allocated to shareholders and filed an appeal over the decision with the OEB.

After a review panel said it found errors and ruled that the tax savings merited a second look, another panel determined the outcome of the original decision was “reasonable” and upheld it.

“In consideration of all the above, the OEB finds that the Original Decision results in an allocation of the Future Tax Savings (62 per cent to shareholders and 38 per cent to the ratepayers) that is within the realm of reasonable outcomes,” the March 7 decision added.

Hydro One said Monday that the ruling, as it had previously predicted, was expected to result in a one-time decrease to net income of up to around $885 million, as well as “an annual decrease to funds from operations in the range of $50 million to $60 million.”

“The company continues to consider appropriate next steps relating to the OEB’s decision on the deferred tax asset,” a release said.

However, Hydro One filed an appeal with the Divisional Court of Ontario in Oct. 2017, which it has said was being suspended while the regulatory efforts played out.

The utility had said the decision was unreasonable and asked the court to set it aside, with one reason being that it “resulted in a windfall to ratepayers” that violated a “fair return” standard.

The OEB’s latest tax-asset decision follows Hydro One’s failed attempt to acquire U.S. energy company Avista Corp., a deal that had been blocked by state regulators citing concerns of political interference.

It also comes as Hydro One is still searching for a permanent CEO, after its previous one (as well as its board of directors) departed under pressure from Premier Doug Ford, whose Progressive Conservative government came to power in Ontario last summer vowing changes.

The PCs and Hydro One recently clashed over plans for executive compensation, which saw the government ultimately get its way on a $1.5-million cap on CEO pay.

Hydro One saw an application for electricity distribution rates for 2018 to 2022 trimmed by the OEB on March 7 as well.

“Overall, the OEB’s decisions regarding Hydro One’s distribution rate application in addition to the negative decision regarding the Deferred Tax Asset is yet another setback for the company,” wrote National Bank Financial analyst Patrick Kenny in a March 8 note. “Based on the impact to our estimates … we will be reassessing our valuation after further discussion with the company with respect to any potential mitigation.”

• Email:[email protected]| Twitter:GeoffZochodne

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