HYDRO ONE INC Annual Report Summary - A Clear Picture for Investors

Considering an investment in Hydro One? This summary breaks down their past year, offering a clear, straightforward look at their performance and outlook. We'll cover how they generated revenue, their successes, challenges, and future prospects, all without confusing financial jargon.

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1. Business Overview

Hydro One Inc., Ontario's largest electricity transmission and distribution utility, operates from its base in the province. This report details their performance for the fiscal year ending December 31, 2025. As a rate-regulated utility, the Ontario Energy Board (OEB) sets their prices.

Hydro One plays a critical role in Ontario's energy infrastructure. They own and operate approximately 91% of the province's electricity transmission capacity – a slight increase from 90% in 2024. As Ontario's largest electricity distributor, they serve about 1.5 million customers. Their vast network includes about 30,000 circuit kilometers of high-voltage transmission lines and 126,000 circuit kilometers of low-voltage distribution lines.

David Lebeter serves as President and Chief Executive Officer. The company maintains robust corporate governance. Its independent Audit Committee includes Chair Helga Reidel and members David Hay, Stacey Mowbray, and Mitch Panciuk, all recognized financial experts. The company reported no major leadership changes for fiscal year 2025.

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2. Financial Performance

Let's examine Hydro One's financial results for 2025 compared to 2024:

• Total Revenues: Grew by a healthy 6.5% to $8,993 million, up from $8,447 million in 2024.
• Revenues, net of purchased power: This key utility metric, representing the revenue Hydro One keeps after buying electricity, increased by 4.7% to $4,507 million (from $4,304 million). OEB-approved rate increases for 2025 and higher electricity demand primarily drove this growth.
• Profit (Net Income): Profit attributable to common shareholders rose significantly by 15.3% to $1,354 million, up from $1,174 million in 2024.
• Earnings Per Share (EPS): Also increased by 15.3%, reflecting strong profit growth.
• Operating, Maintenance, and Administration (OM&A) Costs: These costs decreased by 8.0% to $1,158 million (from $1,259 million), a positive sign mainly due to lower spending on work programs and corporate support.
• Depreciation, Amortization, and Asset Removal Costs: These costs increased by 4.2% to $1,101 million, an expected rise as the company invests in and brings new assets into service.
• Financing Charges: The cost of borrowing increased by 8.8% to $671 million, largely due to higher outstanding debt.
• Capital Investments: Hydro One invested $3,349 million in its infrastructure in 2025, a 10.0% increase from $3,045 million in 2024.
• Assets Placed In-Service: New infrastructure completed and operational jumped by 17.7% to $2,881 million.

A crucial point for investors: Hydro One's distribution business passes the cost of purchased power directly to customers. This means the company avoids exposure to volatile wholesale electricity prices, contributing to more stable revenues. As a regulated utility, Hydro One also focuses on providing consistent returns to shareholders, typically through regular dividend payments.

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3. Risk Factors

Investors should understand these potential risks:

• Regulatory Environment: As a regulated utility, Hydro One's revenues and profits depend heavily on Ontario Energy Board (OEB) decisions. While this provides stability, it also limits their control over pricing. Regulatory adjustments can impact their bottom line, and OEB decisions will continue to shape investment opportunities and revenue streams, particularly for rate-setting and major infrastructure project approvals.
• Auditor Attestation: The absence of an external auditor's attestation report on internal controls over financial reporting could concern some investors, as it removes an independent layer of assurance regarding financial reporting integrity.
• Interest Rate Fluctuations: With significant debt levels, Hydro One is sensitive to interest rate changes, which could increase financing costs and impact profitability.
• Climate Change and Extreme Weather: As a critical infrastructure provider, Hydro One faces physical risks from climate change. Increased frequency and intensity of extreme weather events (e.g., ice storms, wildfires, severe winds) can damage infrastructure, disrupt service, and raise operational costs.
• Operational Risks: The complex nature of electricity transmission and distribution involves inherent risks like equipment failure, major outages, and safety incidents. These can lead to service disruptions, reputational damage, and increased costs.
• Cybersecurity: As a critical infrastructure provider, Hydro One faces ongoing cybersecurity threats. These could disrupt operations, compromise data, or impact grid reliability.
• Economic Conditions: Electricity demand depends on economic activity. A significant economic downturn in Ontario could impact demand and, consequently, revenues.

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4. Management Discussion and Analysis (MD&A) Highlights

Management's discussion highlights a strong year, driven by strategic execution and favorable market conditions, while also acknowledging the inherent challenges of a regulated utility.

Results of Operations: Hydro One delivered a strong performance in 2025. Profit (net income) jumped 15.3% to $1,354 million, and total revenues grew 6.5% to $8,993 million. OEB-approved rate increases for 2025 and increased electricity demand primarily drove this growth. Transmission peak demand rose 3.6%, and distributed electricity increased 5.6%, reflecting healthy and growing demand for services. The company also achieved an 8.0% reduction in Operating, Maintenance, and Administration (OM&A) costs, demonstrating effective cost control. However, higher depreciation and financing charges, stemming from increased capital investments and outstanding debt, naturally led to higher overall expenses. While revenues increased, "earnings sharing" (a regulatory adjustment) partially offset some revenue gains, a common aspect of being a regulated utility.

Liquidity and Capital Resources: The company generated strong cash, with Cash from Operating Activities increasing 3.0% to $2,671 million and Funds From Operations (FFO) rising 15.2% to $2,627 million. This robust cash flow supported significant capital investments of $3,349 million, a 10.0% increase, and a 17.7% jump in Assets Placed In-Service to $2,881 million. These investments are crucial for maintaining and expanding Ontario's electricity network. The company's Net Debt to capitalization ratio slightly increased to 58.4%, reflecting higher debt to finance these capital-intensive projects, typical for the sector. However, the Annualized FFO to Net Debt ratio, which assesses debt-servicing capacity, improved to 14.5%.

Key Developments and Trends: Increased average monthly peak demand and electricity distributed to customers suggest a growing need for power in the province, a positive trend for Hydro One. The broader shift towards decarbonization and cleaner energy solutions in Ontario presents both opportunities and challenges, with Hydro One actively integrating new renewable energy sources and adapting its grid. Management confirmed effective internal controls for financial reporting and disclosure controls as of December 31, 2025, indicating sound operational governance. However, the absence of an independent auditor's attestation report on the effectiveness of internal controls over financial reporting warrants attention.

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5. Financial Health

Hydro One generates strong cash from its operations:

• Cash from Operating Activities: Increased 3.0% to $2,671 million in 2025, up from $2,593 million, showing robust cash flow from its core business.
• Funds From Operations (FFO): This non-GAAP measure, reflecting cash-generating ability, saw a strong 15.2% increase to $2,627 million.
• Debt Levels: Like most capital-intensive utilities, Hydro One uses debt to finance its extensive infrastructure. Its Net Debt to capitalization ratio slightly increased to 58.4% in 2025 from 57.2% in 2024, indicating a slightly higher, yet typical for the sector, reliance on debt.
• Their Annualized FFO to Net Debt ratio, which assesses debt-servicing capacity, improved to 14.5% in 2025 from 13.8% in 2024 – a positive sign.

Hydro One maintains a robust liquidity position, supported by strong operating cash flow and access to capital markets, ensuring it can meet financial obligations and fund ongoing investments.

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6. Future Outlook

Hydro One's strategy focuses on maintaining and modernizing its vast network, enhancing grid reliability, and supporting Ontario's transition to a cleaner energy future. Key strategic pillars include significant capital investments in infrastructure renewal and expansion, leveraging technology for grid modernization (e.g., smart grid initiatives), improving operational efficiency, and fostering strong relationships with regulators and communities. The company commits to delivering safe, reliable, and affordable electricity while driving sustainable growth and integrating environmental, social, and governance (ESG) considerations into its operations.

Significant capital investments and the increase in assets placed in-service suggest a continued focus on expanding and modernizing their transmission and distribution networks. Growth in electricity demand (both peak and distributed) indicates a healthy underlying need for their services.

While this summary does not provide specific financial guidance for the upcoming year, Hydro One's consistent capital investment program signals continued growth. The company anticipates ongoing investments in projects aimed at enhancing grid resilience, connecting new renewable energy sources, and meeting growing demand across the province. Their ongoing rate applications with the OEB will be key to future revenue growth. Given its stable, regulated business model, Hydro One typically delivers consistent returns to shareholders as a reliable dividend payer. The regulated nature of their business means that while they have stable revenue streams, their growth potential closely ties to OEB approvals, the province's energy policies, and the broader shift towards decarbonization.

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7. Competitive Position

Hydro One holds a very strong, almost monopolistic, position in Ontario's electricity market:

• Dominant Market Share: They own and operate approximately 91% of Ontario's electricity transmission capacity and are the largest electricity distributor by customer count. This makes them an indispensable part of the province's energy infrastructure.
• Regulated Monopoly: As a rate-regulated utility, they face limited direct competition in their core transmission and distribution businesses. Their revenues are largely predictable, based on OEB-approved rates.
• Segment Breakdown: Their business primarily splits between Transmission (54% of revenues net of purchased power, 60% of assets) and Distribution (46% of revenues net of purchased power, 38% of assets), providing a diversified utility structure for stability.
• Strategic Partnerships: They also hold interests in various partnerships, such as Chatham x Lakeshore Limited Partnership (CLLP), B2M Limited Partnership (B2M LP), and Niagara Reinforcement Limited Partnership (NRLP) in the transmission segment, and a minority interest in East-West Tie Limited Partnership (EWT LP). These partnerships allow participation in broader infrastructure projects.