Its no secret that the City of Toronto does a terrible job at maintaining its key physical infrastructure. Take a look at the Gardiner, Toronto Hydro, and the TTC. Each of these municipally controlled entities are in dire need of investment. Now the Toronto Star is reporting that there has been talk of what role a partial sale of Toronto Hydro could do to improve this situation.
The Province of Ontario recently sold a minority stake in Hydro One. This was a great move by the province because it accomplished a few different objectives including raising money that could be used by the province to fund other current priorities, putting a market value on Hydro One, providing Ontario investors with a solid blue chip stock to add to their portfolios, providing Hydro One with more market discipline, and creating a platform for Hydro One to grow and become a provincial champion.
The Ontario government is running deficits, and it needs cash to fund current priorities. The sale of Hydro One allows it to get cash now that can be used to fill budget shortfalls.
Putting a market value on Hydro One allows the province to better plan for its next steps. A market value gives the province more information about what its remaining stake in Hydro One is really worth. It can then make a better decision on the next steps it will take in terms of further sales or Hydro One raising more funds from the public.
Ontario retirees are in desperate need of income producing investments, particularly from dividends. Hydro One is a great fit in many portfolios. It is still mostly owned by the province, so its dividend should be considered very safe, and it pays dividends instead of interest income, which is helpful from an individual tax perspective.
Privatizing part of Hydro One will also provide management with more market discipline. Its a different kind of incentive when management of Hydro One is reporting to a board composed entirely of provincial appointees compare to a board that is ultimately responsible to public shareholders. Even though most of the shares of Hydro One are still owned by the province, public shareholders will voice their opinions.
Another benefit to the privatization of Hydro One that is often overlooked is the potential for it to become a growth engine and a provincial champion. Take the example of Emera. Emera is the holding company that the province of Nova Scotia created to hold the assets of Nova Scotia Power. Thru this structure, Emera was better able to access capital markets and diversify its holdings. It was also able to take on bigger projects such as the cable to Newfoundland. Even though the main driver of Emera is still NSP, it now also owns transmission lines to New Brunswick and Maine, gas pipelines, a transmission system in Maine, and now a transmission system in Florida thru a recent purchase. With the Province of Ontario as a core shareholder, there are good reasons to think that Hydro One should not be able to get a lot bigger, to the benefit of Ontario tax payers and shareholders.
Now when it comes to Toronto Hydro, many of the same advantages apply. Selling even 10% of Toronto Hydro to public shareholders would bring much needed liquidity to the city. Toronto Hydro could then also access public markets to raise more funds in order to re-invest in its core transmission business which is is desperate need of repair. I think the sale of Toronto Hydro would be appealing to a lot of investors as Toronto Hydro has a virtual monopoly on a fast growing urban market. With the need for investment in all sorts of transmission systems across Ontario, as a public company Toronto Hydro would be well positioned to help with this investment thru M&A and various financing partnerships.
http://www.thestar.com/news/gta/2016/01/09/mayor-tory-staff-were-briefed-on-toronto-hydro.html
