Electricity Demand Trends Will Strengthen Stability Amid Shifting Market Dynamics

Key Takeaways

• Government policy and grid modernization initiatives position Hydro One for sustained, regulated earnings growth through expanded capital investment and increased rate base.
  
• Supportive regulatory environment provides cash flow stability, lowers earnings volatility, and underpins long-term dividend growth.
  
• Rising capital needs, regulatory uncertainty, competitive pressures, cost inflation, and geographic concentration threaten Hydro One's profitability, growth potential, and shareholder returns.

Catalysts

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

• Surging electricity demand in Ontario, projected to grow 70% by 2050, along with government policy accelerating transmission and distribution infrastructure expansion, position Hydro One for sustained, rate base-driven revenue and earnings growth as electrification of transportation and industry advances.
  
• The provincial Integrated Energy Plan explicitly prioritizes new transmission and grid modernization projects for Hydro One, enhancing multi-year capital investment visibility and supporting higher regulated asset base, which should boost future allowed revenues and long-term EPS growth.
  
• Grid modernization and digital infrastructure investments (including Advanced Metering Infrastructure) enabled by policy support will improve network reliability and efficiency, potentially expanding Hydro One's rate base while lowering operating costs and supporting net margin expansion.
  
• Distribution segment growth, previously overshadowed by transmission, now benefits from explicit recognition in government energy planning, opening incremental investment opportunities in local grid modernization and innovation that can drive additional regulated earnings growth and long-term cash flow.
  
• Stable and constructive Ontario regulatory environment, combined with supportive mechanisms for major storm recovery and forward-looking rate applications, lowers earnings volatility and enhances Hydro One's ability to fund long-term dividend growth from predictable, inflation-protected cash flows.

Hydro One Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hydro One's revenue will grow by 2.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.3% today to 15.3% in 3 years time.
• Analysts expect earnings to reach CA$1.5 billion (and earnings per share of CA$2.43) by about September 2028, up from CA$1.3 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.3x on those 2028 earnings, up from 23.8x today. This future PE is greater than the current PE for the CA Electric Utilities industry at 21.2x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.97%, as per the Simply Wall St company report.

Hydro One Future Earnings Per Share Growth

Risks

• Rising capital expenditures for storm restoration, infrastructure renewal, and grid modernization (with $3.1 billion invested in 2024 and further acceleration anticipated) will significantly increase Hydro One's funding requirements, leading to higher debt levels and upcoming equity issuances; this may put downward pressure on earnings per share growth and dilute shareholder returns.
  
• Long-term regulatory uncertainty around the approval and timing of major rate applications (such as the upcoming multi-year joint rate application), as well as unpredictable allowed returns on equity, could constrain Hydro One's ability to earn favorable returns on investment and negatively impact net margins and future revenue growth.
  
• Intensifying competition from potential province-initiated competitive procurement for transmission projects, and possible LDC consolidation, may introduce price pressure and limit Hydro One's ability to maintain historic win rates or lucrative project economics, threatening long-term earnings and growth prospects.
  
• Cost inflation for materials, tariffs, supply chain challenges, and shifting supplier bases (including the need to secure Canadian sourcing and diversify away from US suppliers) could erode operating margins and increase capital project costs over time, impacting net profitability.
  
• Significant reliance on large, regulated projects and geography-specific demand in Ontario-with limited diversification outside the province and slow progress on external/adjacent growth opportunities-makes Hydro One vulnerable to province-specific risk, shifts in regional electricity demand, and regulatory/political headwinds, potentially constraining revenue and long-term earnings potential.

Valuation

• The analysts have a consensus price target of CA$49.679 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$59.0, and the most bearish reporting a price target of just CA$40.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$9.5 billion, earnings will come to CA$1.5 billion, and it would be trading on a PE ratio of 24.3x, assuming you use a discount rate of 6.0%.
• Given the current share price of CA$49.84, the analyst price target of CA$49.68 is 0.3% 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.