Hydro One Initiates Long-Term Guidance

We are maintaining our CAD 31 per share fair value estimate for Hydro One after the company reported full-year 2022 adjusted earnings of CAD 1.67 per share compared with CAD 1.61 in 2021. Our no-moat rating and stable moat trend rating remain unchanged.

Earlier this year, Hydro One announced that David Lebeter would become president and CEO, replacing Mark Poweska, who resigned last year to take a leadership position at another utility. Director William Sheffield had been interim CEO. Lebeter comes with extensive experience in utilities and previous executive management roles in the forest industry. Lebeter was previously Hydro One’s chief operating officer and an executive at Canadian utility BC Hydro.

We view Lebeter as a strong replacement. We expect him to continue Poweska’s focus on investments in Ontario and improving relationships with its customers, regulators, and government officials. To a lesser extent, we think he might pursue acquisitions of small Canadian municipal utilities.

The company also reached a constructive regulatory settlement for its 2023-27 Joint Rate Application, or JRAP, in 2022. The settlement supports nearly CAD 13 billion of capital investments, including additional opportunities outside the approved JRAP.

This supports our 5.5% annual earnings growth outlook, in line with management’s 6% rate base growth target and 5%-7% earnings growth target through 2027 off normalized 2022 earnings per share. Additional investment opportunities could provide growth upside. Management’s ability to work with numerous stakeholders to receive a constructive outcome is a positive for shareholders.

In 2022, the company invested CAD 2.1 billion, in line with 2021. Earnings in 2022 benefited from higher rates at the transmission and distribution segments, lower earnings sharing, and regulatory benefits. Higher work program expenditures partially offset these benefits.