$3 Billion Investment Will Meet Ontario's Growing Clean Energy Demand

Key Takeaways

• Strategic capital investments and acquisitions aim to boost future revenues and earnings growth in Ontario's energy market.
  
• Enhanced operational efficiency and customer satisfaction suggest improved net margins and increased customer retention.
  
• Uncertainty from trade tensions and higher costs may impact Hydro One's revenues and margins, while executive changes introduce execution risk.

Catalysts

Through its subsidiaries, operates as an electricity transmission and distribution company in Ontario.

• Hydro One's focus on capital investments, with over $3 billion deployed in 2024 and plans for new transmission projects, positions the company to meet the growing demand for clean electricity, thereby potentially increasing future revenues.
  
• The anticipated acquisition of a 48% interest in the East-West Tie transmission line is expected to be accretive to earnings, strengthening Hydro One's position in the Ontario energy market and potentially boosting earnings growth.
  
• The continued focus on operational efficiency and the achievement of $150 million in productivity savings in 2024 suggest potential improvements in net margins as capital and operating costs are reduced.
  
• The significant growth in customer satisfaction scores across various segments indicates a strengthened customer base, which could lead to increased retention, reduced churn, and ultimately, higher revenues.
  
• Planned expansion projects (such as the Wawa to Porcupine transmission line) and the strategic positioning to capitalize on Ontario’s electrification efforts are expected to drive future rate base growth, which can lead to increased earnings over time.

Hydro One Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hydro One's revenue will grow by 2.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.6% today to 15.3% in 3 years time.
• Analysts expect earnings to reach CA$1.4 billion (and earnings per share of CA$2.33) by about April 2028, up from CA$1.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.2x on those 2028 earnings, down from 26.0x today. This future PE is about the same as the current PE for the CA Electric Utilities industry at 23.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.82%, as per the Simply Wall St company report.

Hydro One Future Earnings Per Share Growth

Risks

• The evolving tariff situation and trade tension between Canada and the U.S. could introduce uncertainty, potentially impacting Hydro One's costs and revenues negatively.
  
• Concerns over lower peak demand in the transmission segment may affect future revenue growth and earnings stability, despite higher OEB-approved rates.
  
• Higher costs due to depreciation, amortization, and asset removal could put pressure on net margins and future earnings.
  
• Rising interest expenses from increased long-term debt may impact net income by increasing financing costs, potentially squeezing margins.
  
• The retirement and transition of key executives, such as the departure of the Executive Vice President of Capital Portfolio Delivery, could introduce execution risk and affect future project performance and earnings.

Valuation

• The analysts have a consensus price target of CA$45.731 for Hydro One based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$49.0, and the most bearish reporting a price target of just CA$38.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$9.1 billion, earnings will come to CA$1.4 billion, and it would be trading on a PE ratio of 23.2x, assuming you use a discount rate of 5.8%.
• Given the current share price of CA$50.05, the analyst price target of CA$45.73 is 9.4% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.