The Single Biggest Risk for Hydro One Ltd. Rears its Ugly Head, Again

Regulated utilities such as Hydro One Ltd. (TSX:H) are often at the whim of provincial governments in terms of how quickly or aggressively these utilities can raise rates. Here’s a look at what the recent OEB decision means for Hydro One.

| More on:
The Motley Fool

I, for one, am still a believer in the income-generation power (pardon the pun) and long-term capital appreciation ability of regulated utilities. With a regulated utility comes a sense of security and long-term stability — factors investors hoping for a relatively smooth stream of future cash flows prefer.

That said, some regulated utilities such as Hydro One Ltd. (TSX:H), have experienced weakness this year on investor concerns that raising utilities rates over time may prove to be much more difficult than anticipated following the company’s initial public offering (IPO) approximately two years ago.

Hydro One’s IPO was one which brought newfound optimism to a sector which has remained relatively subdued in terms of growth expectations in recent years. With a large percentage of Canadian power generation still government owned and operated, the move for the Ontario government to cede control of the power generation of the country’s most populous province was a move which brought investors ready to reap the long-term benefits of privatization in an industry which many saw as poorly run. After all, taking some of the best minds in the industry, attracting them to the utility, and generating synergies from the IPO should be easy, right?

The concept of the privatization of public utilities is one which, in my opinion, should continue to be given credence by investors. The art of streamlining operations, exploring strategic opportunities and partnerships, and attracting private money should, in theory, lead to growth above and beyond what a government-run monopoly could provide.

That said, a recent decision from the Ontario Energy Board (OEB) in which the regulator has stymied Hydro One’s plans of increasing rates by 0.5% and 4.8% in 2017 and 2018, respectively, has brought concerns that the utility may not be as readily able to raise rates at will as once was thought to be the case.

The regulator went one step further in its assessment of Hydro One’s proposed rate increases, linking the increases to unnecessary improvements in infrastructure and compensation package increases — two factors which may continue to be put under the microscope as the Ontario government attempts to make good on its pledge to create a “fair” Ontario. With Hydro One’s profitability in direct conflict with a government mandate to lower rates for consumers, investors will need to assess what price makes sense for Hydro One’s shares — a share price which has dipped nearly 5% year to date already.

Bottom line

Hydro One is likely to experience continued medium-term volatility given the Ontario government’s need to fulfill its mandate to lower energy bills for the average Ontario resident, while simultaneously raising revenue by issuing new shares in secondary offerings over time.

As a long-term holding, Hydro One may indeed make sense. I would wait for a more attractive entry point, however.

Stay Foolish, my friends.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Chris MacDonald has no position in any stocks mentioned in this article.

More on Dividend Stocks

hand stacking money coins
Dividend Stocks

Invest $500 Per Month to Create $335 in Passive Income in 2025

By investing $500 per month into a high yield stock like First National Financial (TSX:FN), you could get $337 in…

Read more »

The sun sets behind a power source
Dividend Stocks

Fortis Stock: Buy, Sell, or Hold?

Fortis has delivered attractive long-term total returns for investors.

Read more »

worker carries stack of pizza boxes for delivery
Dividend Stocks

Is Restaurant Brands International Stock a Buy for its 3.3% Dividend Yield?

QSR stock still trades near 52-week highs yet offers a pretty good dividend as well. So, is it worth it,…

Read more »

a man relaxes with his feet on a pile of books
Dividend Stocks

Easiest Monthly Paycheck: 2 Canadian Stocks to Buy Now

These two Canadian dividend stocks could help you easily earn monthly passive income for years to come.

Read more »

hand stacks coins
Dividend Stocks

3 Dividend Stocks to Double Up on Right Now

Dividend stocks like Telus Corp, with its 7.4% yield, are good buys right now for their generous payouts.

Read more »

how to save money
Dividend Stocks

This Billionaire Sold BAM Stock and Picking Up This TSX Stock

Brookfield's CEO isn't trying to say BAM stock is lesser than but that BN perhaps has even more to come.

Read more »

Confused person shrugging
Dividend Stocks

Is Power Corporation of Canada Stock a Buy for Its 4.9% Dividend Yield?

Power stock is a stellar stock with long payouts, but recent dividends bring up a few questions. So is it…

Read more »

dividends grow over time
Dividend Stocks

Buy 1,386 Shares of This Top Dividend Stock for $140/Month in Passive Income

You don't need to start a business to earn passive income. You only need to invest in businesses doing well…

Read more »