NDP MPP and Energy Critic Peter Tabuns has been asking some very pertinent questions on the sale of Hydro One, particularly the $2.6 billion the government has given Hydro One which matches a $2.6 billion “Departure tax” that will be due when the company ceases to have an ownership that is greater than 90% public.

From October 6:

Mr. Peter Tabuns: I’m going to go back to the $2.6-billion payment that Ontario makes to Hydro One for their departure tax. Supplementary estimates show that $2.6 billion is coming from the Ministry of Energy and will go to Hydro One. Is that correct?

and so on, until this one passage I will interpret – by highlighting the key words and adding my commentary:

Mr. Serge Imbrogno: I’ll just say that the $2.6 billion goes towards paying down the stranded debt, so that transaction is targeted towards stranded debt. Putting in the additional capital increases our value, and then when we sell the portion of Hydro One, that’s what we’re using to put towards infrastructure. That’s maximizing the amount we can get for infrastructure from that transaction.

The “stranded debt” is not a line item that can be paid down. It is a calculation made by subtracting the assets of the Ontario Electricity Financial Corporation (OEFC) from the liabilities.

Current assets of the OEFC include a note from the government representing, in part the original owner’s equity in Hydro One, and ~$5 billion due from the province of Ontario.

due to confusion between “stranded debt” and “residual stranded debt”, I prefer to use the term “unfunded liability” instead of stranded debt, which matches its appearance on the OEFC balance sheet.

Mr. Peter Tabuns: In part you’re maximizing it Mr. Serge Imbrogno: So we’ll be paying down the stranded debt and we’ll be reinvesting the proceeds in infrastructure

Mr. Peter Tabuns: But you’re maximizing by reducing the cash that we have available. You’re not going to be paying down more debt than you would have otherwise. Your goal, as stated previously, is $5 billion for debt reduction. Correct? Mr. Serge Imbrogno: That’s not changing. The $2.6 billion is separate from paying down the debt related to the transaction Mr. Peter Tabuns: So actually $7.6 billion will be plowed into debt reduction in the aggregate. Correct?

The Unfunded Liability was reported as $8.185 billion as of March 31, 2015 – since which time another ~.5 billion of debt retirement charges were collected. If this were true, there is no unfunded liability

Mr. Serge Imbrogno: Well, the $2.6 billion is a payment towards OFEC’s stranded debt.

no, it’s really not – but assume it is handed as an asset to the OEFC, if only as an IOU

Mr. Peter Tabuns: Right. So that’s $2.6 billion plus $5 billion that’s going into debt reduction, is it not? Mr. Serge Imbrogno: One is debt reduction and one is stranded debt reduction. One is towards the ratepayers through the OEFC and one is debt of the taxpayer. Maybe that’s not a distinction you necessarily want to make, but I think it’s important from a ratepayer perspective.

I believe the distinction Imbrogno would like to avoid making is $2.6 billion will be to solely a book value benefit to the OEFC, whereas $5 billion will reduce government debt – possibly without reducing net debt anywhere.



The debt of the province of Ontario, as reported on the Consolidated Financial Statement for 2014-2015, is $314.96 billion. Total liabilities are $367.627 billion.

The province reports Financial Assets of $83.051 billion and Tangible Capital assets of $97.065 which makes the net debt – the figure most often reported – $287.576 billion.

Hydro One comprises $8.072 billion of those tangible financial assets, so a sale of 60% would, if it was sold at book value, reduce the provincial assets by $4.84 billion. This means that paying down $5 billion in debt will have essentially no impact on the net debt of the province – it will simply keep pace with the reduction in asset value.

Now, to the OEFC, which is all grey money (not real). The debts on the OEFC balance sheet are included in the province’s $315 billion of debt, and the province’s balance sheet doesn’t include as a liability the “due from Province of Ontario” asset of the OEFC – in fact that line refers to profits at Hydro One and Ontario Power Generation, legislatively required to pay down OEFC debt (revised by Dwight Duncan to only be payable when the entire OEFC debt could be retired) which have been spent by the government while being added to the owner’s equity of OPG and Hydro One.

If one actually treats the OEFC as separate from the Province there will be a lot of double accounting.

When the OEFC was created it was financed by a note from the Province representing the $8.885 billion of equity the province accounting itself in the new companies (relevant section of 1999-200 reporting). That note represented a $3.8 billion value for Hydro One comprised of $3.4 billion in common shares and $323 million in preferred shares.

The preferred shares are noted in the prospectus, but can be ignored for my purpose here.

I expect the Provinces’ $8.885 billion note to the OEFC will no longer be backed by the Hydro One asset, reducing the value of that asset by as much as $3.4 billion.

I believe what an informed honest, forthright Mr. Imbrogno should say is debt will be reduced by $5 billion, but assets will be reduced by roughly that amount too – at the provincial level.

The same will likely be manufactured to be true at the OEFC grey play level – remembering everything at the OEFC is not separate from the province ($5 billion province + $2.6 billion OEFC = $5 billion).

Discussions about debts are not illuminating without discussions of assets.

This is why net debt is a broadly used figure – and the discussions on Hydro One’s sale should proceed using that convention.