Hydro One Pitched as Higher Dividend Payout Than Utility Peers

  • Company will yield as much as 4.4%, ahead of Fortis, Enbridge
  • Electricity utility's shares priced cheaper than competition

Hydro One Ltd.,  Ontario’s largest electricity transmission and distribution utility, is being pitched to investors as a cheaper stock with a bigger dividend yield than Canadian energy utilities including Fortis Inc. and Enbridge Inc., according to initial public offering documents.

Hydro One plans to have quarterly payouts, initially at 21 Canadian cents a share, to offer a 4 percent to 4.4 percent dividend yield, depending on the amount shares are priced at, according to sale documents. That yield will be higher than Canadian Utilities Ltd., which has a dividend yield of 3.2 percent, Enbridge, at 3.3 percent, and Fortis, at 3.8 percent, and possibly surpass Emera Inc.’s 4.3 percent yield, the documents show. TransCanada Corp. has a 4.5 percent yield.

Ontario’s provincial government is seeking to raise as much as C$1.7 billion ($1.3 billion) from selling about 14 percent of Hydro One, offering 81.1 million shares for C$19 to C$21 apiece in an IPO, according to an Oct. 9 regulatory filing. The amount could rise to C$1.87 billion for a 15 percent stake if underwriters led by Royal Bank of Canada and Bank of Nova Scotia exercise an option to sell an additional 10 percent of the offering.

The utility is being marketed to institutional and retail investors this month, with a roadshow starting in Vancouver on Oct. 15 before heading to Winnipeg, Toronto and Montreal. The IPO is expected to be priced the week of Oct. 26 and close the week after that. At least 25 percent of the IPO will be sold to retail investors, the province said last month.

Anticipated Earnings

Shares of Toronto-based Hydro One would be valued at 16.3 times 2014 annual earnings if priced at C$19, less than average 21.5 percent earnings ratio of peers Enbridge, TransCanada, Fortis, Canadian Utilities and Emera, the document shows. At the top end of C$21 a share, Hydro One would trade at 18.1 times earnings, below all the other companies except Canadian Utilities.

Hydro One, led by Chief Executive Officer Mayo Schmidt, would be valued at as much as C$12.5 billion, based on 595 million shares outstanding. That would make the provincially owned utility larger than Fortis yet smaller than Enbridge with a C$48.2 billion market value and TransCanada’s C$32.5 billion size as of Oct. 8, documents show.

Hydro One had C$23.9 billion of assets and C$10.1 billion of long-term debt as of June 30 when accounting for a recapitalization and sale of its Brampton unit as part of the process, the documents said.

Hydro One’s transmission and distribution businesses are fully rate regulated and represent 99 percent of the company’s overall revenues, according to the documents. The company anticipates net income compound annual growth rate of 9.7 percent on a five-year basis and 4.1 percent over 10 years.

Hydro One had net income of C$708 million after a recapitalization and Brampton unit sale for 2014. The company will have one of the strongest credit profiles of any public regulated electricity utility in Canada, with a debt rating of A (stable) by Standard & Poor’s and A2 (negative) with Moody’s Investors Service.

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