Executive Summary / Key Takeaways

• Hydro One Limited ($HRNNF) is strategically positioned to capitalize on Ontario's projected 70% electricity demand growth by 2050, driven by electrification and economic expansion, with its extensive transmission and distribution network.
• The company's investment thesis is underpinned by a robust capital program, including significant new transmission projects designated under Ontario's Integrated Energy Plan, and a commitment to modernizing its distribution grid with technologies like the AMI 2.0 System.
• Recent financial performance demonstrates solid growth, with Q2 2025 basic EPS increasing to $0.54 from $0.49 year-over-year, and a revised 2027 EPS outlook of $2.15 to $2.37, representing an annualized growth rate of 6% to 8% from a normalized 2022 base.
• Hydro One differentiates itself through its industry-leading 50-50 First Nations Equity Partnership model, fostering community engagement and securing project financing, as exemplified by the Chatham Lakeshore Transmission Line.
• Key risks include managing significant costs from unforeseen events like the March 2025 ice storm ($225 million in costs to be recovered via Z-factor application) and mitigating supply chain pressures and tariffs through strategic sourcing and productivity initiatives.

Powering Ontario's Future: A Foundation for Growth

Hydro One Limited stands as Ontario's largest electricity transmission and distribution provider, a critical backbone for the province's economic vitality and ambitious electrification goals. Operating approximately 30,000 circuit kilometers of high-voltage transmission lines and 125,000 circuit kilometers of primary low-voltage distribution lines, Hydro One serves 1.5 million customers across residential, small business, commercial, and industrial sectors. The company's strategic focus is deeply intertwined with Ontario's energy future, aiming to deliver clean, affordable, secure, and reliable energy. This commitment is particularly pertinent as energy demand in Ontario is projected to surge by 70% by 2050, with the Independent Electric System Operator (IESO) even forecasting a 75% increase over the next 25 years, driven by data centers, commercial electrification, and electric vehicle production.

The company's history, incorporated in 2015, has been marked by a consistent dedication to safety, customer experience, and community partnerships. This includes a long-standing partnership with the Advanced Coronary Treatment (ACT) Foundation, which has trained over 3 million students in CPR and AED skills since 2000. Hydro One's strategic responses to market dynamics are shaped by its regulated utility status and its deep regional expertise.

In the competitive landscape, Hydro One operates within a highly regulated environment that inherently creates significant barriers to entry due to high capital requirements and the need for extensive regulatory approvals. While direct comparisons with all competitors are challenging, Hydro One's primary competitive advantage lies in its vast, established network infrastructure and its role as the incumbent electricity provider in Ontario. This contrasts with specialty contractors like MYR Group Inc. (MYRG), which focuses on construction and maintenance services, or broader multi-state utilities like Duke Energy (DUK), which operates on a larger scale in the U.S. Hydro One's regional dominance and integrated service model provide a stable revenue base, potentially offering more consistent profitability in a regulated environment compared to the project-based revenue streams of MYR Group. However, companies like Duke Energy, with their emphasis on advanced grid modernization and storm resilience, or Everus Construction, specializing in data center infrastructure, may exhibit greater agility in capitalizing on emerging technological trends.

Technological Edge and Operational Excellence

Hydro One's strategic initiatives are increasingly focused on leveraging technology and innovative business models to enhance grid reliability and efficiency. A key aspect of its distribution segment modernization includes investments in the Advanced Metering Infrastructure (AMI 2.0 System) and upgrades to distribution automation systems. While specific quantitative performance metrics for these technologies are not publicly detailed, their strategic intent is clear: to create a more intelligent, resilient, and responsive grid capable of meeting escalating demand and integrating new energy sources. These advancements are foundational to supporting economic growth by ensuring a robust "artery" system that feeds electricity to businesses and homes.

Beyond core grid technologies, Hydro One has demonstrated operational innovation through its strategic sourcing initiative. This program aims to diversify the company's supply base, reduce reliance on U.S.-based manufacturers, and prioritize Canadian and Indigenous suppliers. This proactive approach helps mitigate the impact of tariff pressures and secure manufacturing slots for long lead-time items like transformers, which are critical for ongoing construction and maintenance activities. The company's procurement team actively works with vendors and other Canadian utilities to find alternative sources and incentivize Canadian manufacturing, providing longer-term demand forecasts to encourage domestic investment.

A significant differentiator for Hydro One is its industry-leading 50-50 First Nations Equity Partnership model for new transmission lines exceeding $100 million. This innovative business model allows Indigenous communities to acquire a 50% equity stake, providing generational own-source revenues. The Chatham Lakeshore Transmission Line project, completed and energized at the end of 2024, one year ahead of schedule and $30 million under budget, stands as the first successful project under this model. This partnership approach not only aligns with reconciliation efforts but also facilitates project financing and community engagement, strengthening Hydro One's social license to operate and build critical infrastructure. The federal government's proposed doubling of the Indigenous loan guarantee program is expected to further ease financing for these partners, allowing Hydro One to redeploy its capital more effectively.

Financial Strength and Growth Trajectory

Hydro One's financial performance reflects its strategic investments and operational discipline. For the second quarter of 2025, the company reported basic earnings per share (EPS) of $0.54, an increase from $0.49 in the same period of 2024. This growth was primarily driven by higher revenues net of purchased power, attributable to increased 2025 Ontario Energy Board (OEB)-approved rates and higher energy consumption. These gains were partially offset by higher depreciation, amortization, and asset removal costs, largely due to storm restoration efforts and the growth in capital assets, as well as increased interest and income tax expenses.

Segment-wise, Transmission revenues in Q2 2025 increased by 6.7% year-over-year, benefiting from OEB-approved rates and contributions from the newly energized Chatham x Lakeshore Transmission Line and the investment in the East-West Tie Limited partnership. Distribution revenues net of purchased power grew by 7.9% year-over-year, also driven by OEB-approved rates and higher energy consumption.

Looking at the full year 2024, Hydro One achieved an EPS of $1.93, up from $1.81 in 2023, with net income growing by 6.5%. The company deployed over $3.1 billion in capital in 2024 and placed approximately $2.5 billion of assets into service, supporting Ontario's electrification and economic growth. Hydro One also realized $150 million in productivity savings in 2024, weighted more towards capital expenditures, demonstrating its commitment to cost management.

Hydro One maintains a robust balance sheet and strong creditworthiness, with its annualized Funds From Operations (FFO) to net debt metric consistently above the threshold limits used by rating agencies, standing at 13.6% in Q2 2025. The company has actively managed its financing, with Hydro One Inc. pricing an offering of $1.1 billion Medium Term Notes in August 2025 under its Sustainable Financing Framework. This follows over $2.75 billion raised in medium-term notes in 2024, all under the same framework, underscoring its commitment to sustainable finance.

Strategic Initiatives and Future Outlook

The future growth trajectory for Hydro One is significantly shaped by the Ontario government's first Integrated Energy Plan (IEP), "Energy for Generations," released in June 2025. This long-term roadmap to 2050 unifies planning across various energy sources and explicitly calls for the acceleration of transmission infrastructure development and modernization of the distribution grid. This plan is a critical catalyst for Hydro One, providing additional growth opportunities and a favorable regulatory backdrop for future investments.

Several new priority transmission projects have been identified, including the Barrie to Sudbury Transmission Line, a new Bowmanville to Greater Toronto Area transmission line, the Greenstone Transmission Line, and the Windsor to Lakeshore Transmission Line. The Windsor to Lakeshore line, previously designated in March 2022, is now moving into delivery as a priority project. Construction on the Waasigan Transmission Line Project in Northwest Ontario commenced in December 2024, with full completion expected in 2027 and an estimated investment of $1.2 billion to bring an additional 350 megawatts of electricity to the region. Hydro One was also chosen to develop and construct the Wawa and Porcupine transmission line, expected in service by the end of 2030.

Hydro One has revised its earnings per share outlook for 2027 to $2.15 to $2.37, an increase from the previous range of $2.05 to $2.26. This new range represents an annualized growth rate of 6% to 8% through 2027, based on a normalized 2022 EPS of $1.61. This upward revision is attributed to strong earnings growth in both segments, the inclusion of $300 million in rate base growth for the rural broadband program, and earnings from the East-West Tie acquisition. The company anticipates an acceleration in capital expenditures and assets placed in service beyond 2027, which will drive incremental funding needs, including the issuance of equity in the next rate period (JRAP '28 to '32). Hydro One plans to file its next Joint Rate Application in the fall of 2026, with the new rate period commencing January 1, 2028.

Navigating Challenges and Competitive Dynamics

Despite a strong growth outlook, Hydro One faces several challenges. The severe March 2025 ice storm caused widespread damage, with costs estimated at approximately $225 million. Hydro One plans to recover these costs through a Z-factor application with the OEB, a mechanism for unforeseen events beyond utility control. The company also introduced the Ice Storm 2025 Recovery Grant, providing up to $10,000 to 50 Indigenous communities and municipalities for recovery efforts.

Ongoing tariff pressures and supply chain uncertainties pose another challenge, particularly in securing manufacturing slots for long lead-time equipment. Hydro One is actively mitigating these impacts through strategic sourcing, increasing Canadian purchases, and standardizing equipment to offset cost increases. Management has stated that while some cost pressures exist, they are not a significant concern due to these proactive measures and aggressive productivity initiatives.

The development of the "Ring of Fire" mineral area, a significant long-term opportunity, faces complexities due to recent legislation (Bill 5 in Ontario and Bill C5 federally) that some Indigenous nations believe may impact their consultation rights and participation. This could slow the project's progress.

In the competitive arena, Hydro One's extensive network and regulatory position provide a strong moat. While the IEP allows for some competitive procurement of transmission lines, Hydro One remains confident in its ability to win these bids, citing its deep territorial knowledge and ownership of over 92% of Ontario's transmission assets. The company's demonstrated success in delivering projects like Chatham Lakeshore ahead of schedule and under budget further reinforces its competitive edge. The IEP's acknowledgment of Local Distribution Company (LDC) consolidation also presents an opportunity, as smaller utilities may struggle more with rising costs and capital access, potentially accelerating sales or mergers that Hydro One is actively exploring.

Conclusion

Hydro One Limited is firmly positioned as a cornerstone of Ontario's energy transition and economic expansion. Its strategic alignment with the province's Integrated Energy Plan, coupled with a robust capital investment program in both transmission and distribution infrastructure, underpins a compelling growth narrative. The company's commitment to technological modernization, exemplified by AMI 2.0 and distribution automation, along with its innovative 50-50 First Nations Equity Partnership model, strengthens its operational capabilities and social license.

With a clear path to 6-8% annual EPS growth through 2027 and a significant pipeline of future transmission projects, Hydro One offers investors exposure to a stable, regulated utility with substantial growth catalysts. While challenges such as storm recovery costs and supply chain dynamics require diligent management, the company's proactive strategies and strong financial health mitigate these risks. Hydro One's dominant competitive position in Ontario, reinforced by its extensive network and proven execution, positions it favorably to continue energizing the province's future.