Hydro One Drops on Report C$4.5 Billion in Repairs Needed

  • Transformers, wood poles, circuit breakers need replacing
  • Reliability worsening and costs increasing, auditor says

Hydro One Ltd., which went public last month in Canada’s largest initial stock offering in 15 years, slumped after a provincial auditor’s report warned the power utility’s transmission system was increasingly unreliable and will cost the province billions to fix.

The report, from Ontario Auditor General Bonnie Lysyk, said the number of key components of Hydro One’s transmission network -- including transformers, circuit breakers and wood poles -- that were in service past their normal replacement date ranged from 8 percent to 26 percent and would cost the company about C$4.47 billion ($3.34 billion) to replace. That’s more than 600 percent more than the $621 million the company spent on maintenance for 2014.

Shares of Hydro One dropped 3.9 percent to C$21.95 at 4 p.m. in Toronto, compared with the company’s initial offering price of C$20.50. The stock debuted at C$21.50 a share Nov. 5. Four analysts rate the stock a buy, four a hold and one a sell with a 12-month price target of C$23.61, implying about a 7.6 percent increase from current levels.

“Reliability is worsening while costs are increasing,” the report said. “Hydro One’s risk of power failures can increase if it does not have an effective program for replacing transmission assets that have exceeded their planned useful service life.”

‘Helpful Road Map’

Hydro One customers, government, and the auditor general all agree Hydro One can be a better-run, better-managed company, Jordan Owens, press secretary for Ontario Energy Minister Bob Chiarelli, said in an e-mailed statement. The report is a “helpful road map” for Hydro One’s new management team, which has indicated it will be bringing private-sector management and “much-needed” fiscal discipline to the company, Owens said.

“The new board and management team at Hydro One are dedicated to improving overall performance, enhancing system reliability and strengthening customer service,” Daffyd Roderick, a spokesman for Hydro One, said by e-mailed. “There are several initiatives under way to ensure investments strike the appropriate balance between reliability and cost.”

In the five years from 2010 to 2014, outages lasted 30 percent longer and occurred 24 percent more frequently, the report found. The backlog of preventative maintenance orders ballooned 47 percent to 4,730 in 2014 from 2012 levels while the cost to clear this backlog has jumped 36 percent to C$8.3 million as of the end of 2014, the report said.

The Ontario government raised C$1.83 billion after selling a 15 percent stake in the electricity distributor and transmission utility in Canada’s largest IPO since 2000. Premier Kathleen Wynne said in April she aimed to sell as much as 60 percent of Hydro One over the next four to five years to raise money for infrastructure and debt repayments in Canada’s most-populous province.

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