Hydro-Electric Securities and the Power Surplus

JOHN E. LANGDON October 15 1932

Hydro-Electric Securities and the Power Surplus

JOHN E. LANGDON October 15 1932

Hydro-Electric Securities and the Power Surplus



Hundreds of thousands of dollars arc lost annually in Canada through careless investment. Fraudulent and worthless securities arc being constantly poured on to the market to trap the unwary. A general observance of this simple maxim will assist in the reduction and elimination of this economic waste— “BEFORE YOU IN V EST—IN V ESTI G AT E’’

FOR the first time, certain parts of Canada appear to have in the making very large surpluses of electrical energy developed from water power. Canada today has available more electric power than she can use. A return to livelier trade conditions would absorb a large part, if not all, of the present surplus. But we are proceeding with large scale power developments in almost every part of Canada, and new energy will be brought into production over the term of the next few years more rapidly than it is likely to lx: absorbed. We have planned our jxiwer (developments for hxxim conditions and hxxmi conditions are not in early prospect.

'1'he situation is one that calls for analysis, not only by taxpayers and governments, but by holders of hydro-electric securities bonds and stocks.

1 lydro-electric securities, as a class, have always stood alone both in respect to income, safety and appreciation of principal. Their record is not without blemish, of course, but the mortality rate has been so low as to be negligible.

Power companies deal in an essential commodity, the demand for which is increasing year after year; increasing not only because of the wider needs of industry but also because of the growing use of electrical appliances combined with the growth of population. And as additional transmission land distribution lines are built into new areas, this increase in consumption of electrical energy is accelerated.

Conditions in this country are peculiarly favorable to the growth of the water power industry. The lack of coal resources in the three central provinces. Quebec, Ontario and Manitoba, and the accessibility of water powers have been the principal incentives to the upbuilding of the power industry.

Until 1910 most of the industry’s growth tcx)k place in Ontario and Quebec, but since then developments have been general.

Rig Supply, Small Demand

AN EXAMINATION of the industry’s ■ growth brings an appreciation of the vast expansion which has taken place. In 1900. Canada’s turbine installation amounted to only 173,323 horsepower. Five years later capacity had increased nearly threefold to 454,209 horsepower. When the war started in 1914 installations totalled 1,951,244 horsepower. There was no let-up during the war years, and in 1920 turbine capacity totalled 2,515,157 horsepower. Growth was then implemented by abnormal Ixxxn conditions, and at the beginning of 1932 Canada had a turbine installation of 6,666.337 horsepower.

This is a brief outline of the growth of installations over the past three decades. It is a truly remarkable one. unequalled in any other country in the world.

This expansion has not been accomplished without capital. Canadians have subscribed heavily to the industry’s requirements. A large proportion of the capital employed has come from domestic sources, while

investors in the United States, the United Kingdom and other countries have also dipped deep into their pockets.

What is the position of the industry today?

The capital invested in lands, plant, machinery, transmission, distribution lines, etc., totals over $1,500,000,(XX). In other words, there is an installed capacity today of about six-tenths of one horsepower, representing a capital investment of about $150, for each man, woman and child in the Dominion.

This growth, of course, has been coincident with steadily mounting consumption of electric energy. Between 1922 and 1930 the demand for power was largely influenced by the uncontrolled expansion of the newsprint industry. Upon the building of pulp and pajxtr plants, over 1,(XX),000 horsepower was added to power plant installations. The mining industry also needed more power to meet its needs, while the expansion of industry was not without effect on demand. The growing use of electrical appliances added to the domestic load. Until about two years ago, therefore, consumption kept pace with new installations.

Since 1930 the relationship between demand and supply has undergone a reversal of form. Capacity has outstripped consumption, and the lag between supply and demand in certain areas is causing concern at this time. This problem is intensified, moreover, by the fact that further large installations are coming into operation in those areas mostly concerned with the prospect of unpnxluctive surplus capacity.

Taking into consideration those plants scheduled to come into operation over the next six months, it is estimated that about twenty-five per cent of the installed capacity has no market. Again, considering the fact that the industry is unlike others in that no material improvement in the earnings or finances can be effected by a partial or complete closing down of plant, it is little wonder that serious consideration is being given to the problem of surplus power.

This condition does not apply to all areas. In some instances the supply of power is not greatly in excess of demand. In others, however, there is an actual and potential surplus which presents a worrisome problem to the oixirators concerned.

Holders of hydro-electric securities, therefore, are interested in any change in the industry’s position which may affect the value of their holdings or continuance of interest or dividends. A brief review of the power situation in the different areas is of value at this time.

Situation in Ontario

TN BRITISH COLUMBIA the power -*• industry is in a sound position. Not long ago there was an actual shortage of energy, but the building of new plants has eliminated this factor and created a moderate reserve which will take care of normal growth.

Conditions in Alberta and Saskatchewan

do not call for comment, but Manitoba is faced with a surplus of power which is causing embarrassment to the privatelyowned companies. To all intents and purjxses the Manitoba jxnver industry centres on Winnipeg. Two systems supply the territory with energy -Winnipeg HydroElectric System and Winnipeg Electric ! Co., the former publicly and the latter privately owned. In the last few years three large power plants have been brought into operation; consequently there is more power than the area will need for many years to come. Northwestern Power Co., a subsidiary of Winnipeg Electric Co., which built the Seven Sisters Falls plant, has had to default its bond interest, owing to the inability of the parent concern to market the output. Its plant is idle as this is written. What a spectacle—Canada’s newest and most modern power plant not even running!

The knottiest problem in relation to excess power exists in Ontario. Here the Ontario Hydro-Electric Commission, a public organization, is confronted with a falling off in demand and an increasing supply of energy. Not many years back the Commission’s own power supply became inadequate, and in order to meet immediate and future needs contracts were entered into with several private companies operating or building plants on or near the Ontario-Quebec boundary line. These contracts aggregated nearly 900,000 horsepower, of which over 300,000 horsepower is being delivered. This leaves about 600.000 horsepower to be marketed by the Commission between now and 1937. Considering the fact that there is already a large surplus, due to a lag between present demand and supply, it will require strenuous efforts to market the additional supplies of energy as they become available at regular intervals over the next five years. In addition, the Commission has undertaken to find a market for St. Lawrence Seaway power, if and when developed.

Turning to Quebec, one does not find such an acute situation, though it is generally admitted by Quebec operators that there is plenty of power now available, or due to come into service shortly, to take care of the normal increase in demand for several years. Most of the large developments in this province, recently completed or about to be completed, are linked up with Ontario Hydro. Half of Beauhamois capacity is contracted for by Hydro. All of the Chats Falls output, as well as about half of the MacLaren development, goes to the same outlet. The Rapids Blanc plant of 160.000 horsepower capacity is scheduled to come into operation next year, and the owner, Shawinigan Water and Power Co., does not expect any immediate market for the additional power as it already has a surplus.

In the Maritimes, power developments have been limited until of late, when considerable expansion took place with the establishment of newsprint mills at Dalhousie and Liverpool.

From the foregoing, hydro-electric security holders will see that the sore spots in the industry centre in Manitoba. Ontario and Quebec. The Manitoba situation is in process of being clarified by writing down security values, but this does not restore the investors’ capital nor does it hasten the absorption of the surplus power. Ontario’s problem is one which will take time to correct. It appears that the excess power will prove a burden to the Commission and one which may have a marked bearing upon earning power. Though Quebec has all the power that it will ordinarily need in the near future, the point of interest is the relationship between the privately owned operators and Ontario Hydro, in the event that carrying the excess power proves to lx? too heavy a load for the latter.

Canada brought its flourishing pulp and paper newsprint industry to financial ruin by over expansion. It is the duty of all concerned with the development of power in Canada to save the hydro-electric industry from a similar fate, in the areas now threatened with over development.