The stock of Hydro One Ltd. (TSX:H) has fallen 4% in 2017 and 12% year over year. It will be two years since the initial public offering on November 5, 2015, with a starting price of $20.50. The stock was an early favourite for investors for its wide moat and attractive dividend. It catapulted to an all-time high of $26.59 in July 2016. Investors began to regard the stock with some skepticism as some projected a cap on its consistent growth prospects.
The company made a big splash when it announced the $6.7 billion acquisition of the U.S. utility Avista Corp. This deal allows Hydro One to pick up over 700,000 customers who are supplied electricity and gas by the company. The deal is pending approval by U.S. regulators and Avista shareholders; if it passes through without incident, it should close midway through 2018.
Hydro One announced its second-quarter results on August 8. It posted earnings per share of $0.20, which were down compared to the $0.26 in Q2 2016. According to CEO Mayo Schmidt this was due to milder weather conditions, stormy weather, a delay in the transmission rate filing, and a reduction in the regulatory allowed ROE which had to do with lower interest rates. Revenues also declined 11.3% to $1.37 billion.
The East-West Tie line was delayed as cost estimations grew to $777.2 million from the $419 million projected earlier. The Ontario government is squeezed after its commitment to foot the bill to lower hydro rates for provincial consumers. An election is looming in 2018, and the project is now open to competition which poses a threat to Hydro One.
Positive developments on the horizon?
The Bank of Canada is set to make its next rate announcement on September 6. Although experts expect that if a rate increase is to occur, it will be in October, the meeting should give investors an insight into whether or not a second is forthcoming in 2017. Hydro One has called the actions of The Ontario Energy Board in cutting its return-on-equity value an “interest rate drive,” meaning that a steady climb would bode well for Hydro One.
The closure of the Avista deal in 2018 is going to bring in hundreds of thousands of customers to boost revenue. The fate of the East-West Tie is still uncertain, which has generated downward pressure. It is difficult to predict the political calculations of an incumbent party under intense pressure, but conventional wisdom would lead one to believe that Ontario will still pull the trigger on the project.
More power is typically used in the summer months due to air conditioning use. However, as mentioned, the milder weather has put a dent in Hydro One profits. It remains to be seen if the upcoming winter will be mild as 2016-2017.
The company will be hard pressed to challenge 2016 highs this year as a multitude of developments have pulled down the share price. Still, Hydro One boasts a tasty dividend yield of 3.89% and an incredibly stable long-term outlook.
