In a period of just under one year, Hydro One (TSX: H) has pivoted from being one of the most promising energy sector investments on the market to one that has many investors now questioning the continued feasibility of investing in Ontario’s largest power generator and distributor.
Let’s do a quick recap of how much the playing field has changed in that time, and what, if anything investors can come to expect from Hydro One moving forward.
The opportunity, the problem, and the solution
For those who are unaware, Hydro One’s standing within Ontario’s market is one of a near monopoly; the share of the market still owned by other parties is so insignificant that it’s perceived more as a rounding error than as any real competition. Furthermore, after a much-hyped IPO and the emergence of the company as an incredible income-producing investment, there wasn’t much to hinder Hydro One from being branded as a great investment opportunity.
Unfortunately, that opportunity came with increasing costs, higher executive pay and an aggressive approach to expansion outside of Ontario, all of which translated into significantly higher rates for consumers. Hydro One’s expansion plans included a multi-billion deal for Washington-based Avista, which was touted at the time to provide both cost-saving synergies and the type of growth that would provide a healthy return for several years.
To finance those initiatives, as well as the rapidly growing level of executive compensation, Hydro One pushed for rate hikes on consumers that proved to be both substantially higher than previously expected, which proved to be incredibly unpopular with consumers. This made Hydro One a hot-button issue in Ontario’s election, with Premier Ford making good on an election pledge to oust the board at Hydro One and replace it with one that was more focused on the interests of Ontarians.
While Ford kept that promise within a few weeks of coming to power, the consequences of that action have now come back to haunt Hydro One.
More bad news, this time on the Avista deal
Hydro One’s deal for Avista appears to have now fallen out, with Washington regulators citing political considerations that ultimately resulted in the regulator rejecting the proposed sale of Avista to Hydro One.
Interference by the Ontario government in the operation of Hydro One, and by extension, Avista was apparently concerning enough for the regulator to reject the deal, which could now see Hydro One liable to pay a break-up fee of over $100 million.
The announcement has had a mixed effect on both stocks, with Hydro One trading up by over 5% at the end of the day while Avista reported its steepest loss in over a decade that by mid-day amounted to a drop of over 15%.
What should investors do?
Despite Washington’s regulator citing what amounts to political interference in the stock, Ontario’s 47% share in the ownership of the company provides a healthy source of income for a cash-strapped government. If anything, this news could be interpreted as an opportunity for Hydro One to tighten its belt and rein in costs to keep both Ontarians and investors happy.
The bump we saw in Hydro One’s price this week effectively erases most of the losses that the stock incurred over the course of the past year, and will result in a gain to any investor that bought in after February of this year.
Investors should keep in mind, however, that short-term gain is not the focus here- it’s long-term growth and income-generating potential, and in those respects, Hydro One remains a promising long-term investment option.
