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Toronto Hydro debt move alarms privatization foes

Wed Mar 24 2010

Toronto Hydro will shrink its relationship with the City of Toronto – its sole shareholder – by paying off the remainder of the debt it owes the city.

Some observers wonder if the move could smooth the way for a complete privatization of the utility, which has already been proposed by mayoral candidate Rocco Rossi.

Toronto Hydro has issued a prospectus to sell $490.1 million worth of debentures on public debt markets. The money raised will be used to repay what hydro owes the city.

"Following the completion of the offering, the corporation will have no further indebtedness outstanding to the City of Toronto under the terms of the City Note," the prospectus says.

Transferring that debt from the city to private investors is a warning flag to Paul Kahnert, chair of the Ontario Electricity Coalition, which opposes privatizing the power system.

"Once it's all farmed out, it certainly makes it easier to sell," he said in an interview.

The coalition's members include the Canadian Union of Public Employees (which represents Toronto Hydro workers), the Toronto Environmental Alliance and the Council of Canadians.

Selling off the utility would be a short-sighted move, he argued. Private owners would lobby to charge higher rates, and earn higher returns, than allowed by current regulations, he said.

The debentures on offer will pay 6.11 per cent interest, which is above market rates. As a result, they will sell at a premium to their face value and the city hopes to raise up to $530 million from the sale, according to Cam Weldon, Toronto's chief financial officer.

The money will be used to pay down debt, so the city can stay within its declared target of using no more than 15 per cent of tax revenue for debt servicing.

Clare Copeland, chair of Toronto Hydro, said the debt repayment was at the request of the city. The money had been scheduled for repayment in two sections, in 2011 and 2013.

The debt was created in 1998, when the Ontario government gave the city direct ownership of Toronto Hydro. The city chose to hold its interest as 40 per cent in shares and 60 per cent in debt.

Toronto Hydro has already repaid about half the debt, raising the money through previous debenture issues.

Copeland said he's had no talks with the city about the possibility of selling off the city's equity. He noted that one obstacle to privatizing Toronto Hydro is a 35 per cent provincial tax imposed on the sale of a municipal electric utility. The city could sell up to 10 per cent of its shares without triggering the tax.

John McNeil, president of BDR Energy, which advises energy and utility firms, said privatizing the debt could be a precursor to a sale of the remainder of the city's stake.

"It kind of paves the way," he said. "If the city wants more money, they have to start thinking about parting with 10 or 20 or 50 or 100 per cent of their equity interest in Toronto Hydro."

Weldon said that city staff will bring forward a report later this spring about options for turning city assets into cash.

As published: http://www.thestar.com/business/article/784286--toronto-hydro-debt-move-...

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