Hydro One Earnings: Strong Management Execution Leads to Constructive Regulatory Environment

We are maintaining our CAD 31 per share fair value estimate for Hydro One H after the company reported first-quarter operating earnings of CAD 0.47 per share compared with CAD 0.52 in the same year-ago period. Our economic moat rating of none remains unchanged.

We applaud management’s recent execution, which has resulted in a constructive joint rate application with the Ontario Energy Board and key stakeholders, providing significant regulatory clarity and investment opportunities for investors. However, we currently view Hydro One’s valuation as rich, trading at 22 times our 2023 earnings estimate, a 21% premium to its North American utility peers.

In the first quarter, capital investments were CAD 499 million, up from CAD 449 million in the same year-ago quarter but below our expected run rate for the year. We expect capital investments to accelerate in the remaining quarters for the company to invest CAD 2.5 billion. Our expectations are for the company to invest at least CAD 12.5 billion through 2027, supporting our expectations for the company to achieve the midpoint of its 5% to 7% earnings guidance through 2027. Additional capital investment opportunities, particularly transmission, could push earnings growth higher.

The company announced several executive management appointments, all of which are internal, highlighting the company’s strong bench of talent. We think this is an important announcement as the company had previously had higher-than-average turnover of its management team.

Earnings in the quarter were lower because of increases in operating and maintenance charges, increased interest costs, and higher depreciation from investments. Most of the operating expense increases were due to timing and will smooth out as the year progresses. Partially offsetting these negatives were higher approved transmission rates.