Ontario Hydro's Loss Puts New Pressure on Utility

CANADA'S largest electric utility is in hot water.

Ontario Hydro, which serves 3.7 million customers in Canada's largest province, is in the midst of a radical restructuring that could make or break the company, many observers and critics agree.

"Ontario Hydro by its own admission is in critical condition," says Al Gleeson, assistant general manager at London Hydro, a utility in London, Ontario. "They're in what I would call survival mode."

Last week the company announced that it was facing an estimated $1.6 billion [Canadian; US$1.25 billion] loss for 1993. Many already knew, based on March estimates, that the company would be hit with a $1.3 billion "one-time" restructuring charge to pay severance to 4,500 employees and pay off uranium contracts. Officials say the move will take the company a long way toward a sound fiscal footing.

"Anytime you're doing restructuring there are some pretty substantial costs as you get your business ready for future challenges," says Terry Young, a Hydro spokesman. "It's not unforeseen, not unexpected."

But analysts were shocked last week when the June revision added $100 million to the restructuring charge and predicted a $200-million operating loss compared with previous estimates of a $261-million operating profit. It would be the first time the company has lost money on its operations since 1975.

The company was early held out as a model for hydropower generation and gained renown for "clean, cheap" hydropower spun from its vast network of hydroelectric dams. That reputation, however, was muted in recent decades as new supplies of cheap hydropower were exhausted. The utility first moved into coal, then poured billions into nuclear stations. Meanwhile, debt rose to dangerous levels - about $36.1 billion at present.

As a result of high debt service and continued costs from the nuclear program, company operating costs have risen and electric rates have shot up 33 percent in the last three years, analysts says. Rising rates, negative weather patterns, and an economic slump have combined to cut power demand and company revenues.

STRUGGLING to right itself, the company last year brought in a new chairman, Maurice Strong, who promised rate payers that 1994 rates would remain at 1993 levels, despite the restructuring. Some think the rising losses may force him to break his pledge. But Mr. Strong restated his commitment last week.

Still, Ontario Hydro faces a long-run danger that it will price itself out of the power market, analysts say. Hydro has had four years of power-volume decline as consumers find more efficient ways to use electricity and many switch to natural gas. But critics say the company's biggest challenge will be simply getting through the year.

"I think the crunch is not off in the future - I think it's now," says Thomas Adams, at Energy Probe, a Toronto environmental and consumer watchdog group. "They're forecasting a $1.6 billion loss.... They clearly cannot sustain a hit that big."

The company has a $1.642 billion equity reserve, with which it can pay for most of the year's loss. But with that reserve gone, critics like Mr. Adams question where the company will find the funds to cover debt retirement of $572 million which it is required by law to pay.

Malen Ng, a financial controller with the company's corporate finance division, says the debt retirement obligation is $556 million and does not require a cash outlay. It is purely an internal bookkeeping matter that does not diminish the company's equity position, which will be an estimated $5.3 billion by year's end, compared with $6.9 billion last year, she says.

Ontario Hydro has another problem. The cash-strapped province of Ontario wants the utility (a government-affiliated Crown corporation that operates virtually tax and dividend free) to give back $100 million. Ontario Hydro officials refused comment, saying talks with the government are proceeding.

Even critics agree the utility is basically doing the right things to get back on its feet. But many ask whether the energy giant can strip off its bureaucratic structure quickly enough. "Hydro is rolling the dice hoping the things they're doing are going to work," Mr. Gleeson says. "If the weather is bad and revenues turn out to be less than planned, that could sneak up and bite them."