Fitch: Hydro One Sale Improves Ontario's Debt Position

NEW YORK--(BUSINESS WIRE)-- Ontario's partial sale of its electric transmission and distribution company, Hydro One, will lower the province's operating revenues from assets while improving its balance sheet and consolidated debt positions, Fitch Ratings says. The sale also supports the province's capital improvement plan (CIP).

Hydro One's initial public offering carved out a 15% stake in the company, netting approximately C$800 million in proceeds for Ontario. The province plans to sell an additional 45% of Hydro One in the coming years. Additional and fairly substantial one-time accounting benefits to the province from the IPO will increase the estimated total benefit to about C$2.7 billion.

With Hydro One's sale, the province reports progress toward a better than expected fiscal 2015-2016 deficit of C$7.5 billion, improved from C$8.5 billion at budget enactment. Absent the province's asset optimization program, which included the sale of its shares in General Motors and some real estate assets in recent years, Fitch estimates Ontario's deficit would approximate C$8.8 billion at the end of fiscal 2016. In our view, the province is on track to eliminate its deficit by fiscal 2018.

The net gain from the sale will be deposited into the province's Trillium Trust. The trust is a dedicated revenue account created to finance infrastructure projects, including those for transit and transportation. The trust does not supplement the province's CIP but will be used to fund it, enacting a policy decision of the province to sell assets in support of its CIP.

The sales of shares in Hydro One and General Motors and of real estate assets are part of a plan announced in the province's 2014 budget. Once that plan is complete, the province will have fewer assets generating annual revenues but improved consolidated balance sheet and consolidated debt positions. The plan allows the province to lower its annual debt service costs by reducing current borrowing.

Fitch will monitor whether Ontario's debt position and annual debt service costs related to capital borrowing will increase after the program concludes, an outcome that will depend on the province's future capital needs and priorities. After the asset optimization program finishes, the province's sizable accumulated deficit will continue. However, so long as budgets remain balanced, the province will no longer have to borrow to fund annual deficits.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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View source version on businesswire.com: http://www.businesswire.com/news/home/20151221006029/en/

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Source: Fitch Ratings

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