Hydro One Earnings: Management Successfully Executing on Transmission Opportunities

We are maintaining our CAD 33 per share fair value estimate for Hydro One H after the company reported second-quarter operating earnings of CAD 0.44 per share compared with CAD 0.43 in the same year-ago period.

Strong management execution continues as Hydro One identifies and gains approval for additional transmission capital investments beyond the company’s approved plan under the 2023-27 Joint Rate Application, or JRAP. The company filed an application with regulators for approval of the CAD 1.2 billion Waasigan Transmission Line Project, which will be completed in two phases in 2025 and 2027.

The company also began construction of the CAD 268 million Chatham to Lakeshore Transmission Line project. We previously incorporated higher capital investment attributed to additional transmission investment in our forecasts, adding CAD 2 per share to our fair value estimate. These investments support our expectations for Hydro One to achieve the upper half of management’s 5%-7% earnings growth guidance. Management continues to progress on several additional capital investment opportunities, which could support higher earnings growth and be accretive to our fair value estimate.

In the second quarter, capital investments and in-service additions were CAD 649 million and CAD 413 million respectively, putting the company on track to meet our full-year expectations. These investments are part of Hydro One’s CAD 11.8 billion core JRAP application.

Municipal consolidations continue to be an opportunity for the company. These provide economic benefits to both the municipality and Hydro One. No new acquisitions have been announced thus far, but we expect management to continue to identify opportunities.

Earnings in the quarter were supported by higher approved transmission rates and lower storm asset replacement costs. Partially offsetting these benefits were higher operating and maintenance charges and increased interest costs.