A Valuation of Toronto Hydro

Valuation of Crown Corporations, Crown Corporations, Ian Madsen

Keeping Toronto Hydro or having an additional 15,000 teachers, nurses, or paramedics? This is a choice Toronto citizens may welcome if the asset were sold.

There are two generally accepted methods for valuing a company: its intrinsic value as a cash-generating enterprise, and its standard market value in comparison with similar companies. This study used both methods to value Toronto Hydro Corporation (THC).

Using an intrinsic value method, and discounting to the present, the City of Toronto’s interest in THC’s projected future free cash flows, as the company is today (not taxed at statutory rates) could range from a median of $2,117M to a mean of $2,611M. It would range between a median of $1,966M and a mean of $2,425M if the company was to become taxed in the usual, statutory way. This had the effect of decreasing the estimate for free cash flow, upon which the intrinsic value is based.

This is abnormal. Generally, a public sector firm usually pays a higher rate of tax once it is no longer owned by a government. In the case of THC, it would pay a higher rate (in most years; its ‘payment in lieu of taxes’ rate of payment was inconsistent in the past several years), and thus has a lower valuation than its current ‘as is’ valuation. Another wrinkle is that the firm only just became free cash flow-positive, at a relatively low value compared to its net income and it is unclear how or whether it will stay positive or either grow strongly or decline once more. Hence, it may not be a reliable approach. Indeed, for the first nine months of 2017, free cash flow was barely positive, perhaps why the company received proceeds of a $250M share offering the City took up (i.e., paid for) to maintain its liquidity and, presumably, to ensure it could fund its impending capital expenditures.

Read the entire Valuation here: VS02_TorontoHydroValuation_MR0818_F2