Hydro One Ltd: 2025 Annual Report Highlights

Curious about Hydro One's performance? This summary cuts through the financial jargon to give you a clear, investor-focused look at the company's 2025 annual report. Discover what drove their business, how they performed financially, and what lies ahead.

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Business Overview

Hydro One forms the backbone of Ontario's electricity system. The company primarily operates the province's vast electricity transmission and distribution networks, focusing on these essential services throughout the fiscal year ending December 31, 2025.

Hydro One's business divides into two main regulated segments:

• Electric Transmission: Moves high-voltage electricity over long distances across Ontario, typically generating stable, predictable revenue.
• Electric Distribution: Delivers lower-voltage electricity directly to over 1.5 million homes and businesses.

Smaller segments, including Communications and Administrative and Support Services, support these core operations. Several key partnerships, such as the Chatham-Lakeshore, Bruce-to-Milton, Niagara Reinforcement, and East-West Tie Limited Partnerships, advanced specific infrastructure projects. These collaborations enhanced the grid's overall reliability and expansion.

Overall, 2025 demonstrated continued operational stability, reinforced by Hydro One's regulated business model.

Financial Performance

For the fiscal year ending December 31, 2025, Hydro One reported total revenue of approximately $7.9 billion, a 4.5% increase from the prior year. Approved rate increases from the Ontario Energy Board (OEB) and strategic investments in their rate base primarily drove this growth.

Net income reached $1.2 billion, resulting in Diluted Earnings Per Share (EPS) of $2.00. This marks a 6.0% increase in net income compared to 2024, reflecting effective cost management and a stable regulatory environment.

The OEB largely approves Hydro One's revenue rates, ensuring a predictable income stream. Approximately 65% of revenue originated from the Transmission segment, with the remaining 35% from the Distribution segment.

Risk Factors

While generally stable, investing in Hydro One involves specific risks:

• Regulatory Risk: Changes in OEB policies, rate-setting methods, or an inability to recover approved costs (e.g., from regulatory assets) could impact earnings and cash flow.
• Operational Risk: Severe weather, equipment failures, or cyberattacks on critical infrastructure could cause service disruptions, increase costs, and damage reputation.
• Environmental Liabilities: The company faces ongoing costs and potential liabilities from environmental remediation, especially for Polychlorinated Biphenyls (PCBs). These require significant capital and operational spending.
• Interest Rate Risk: As a capital-intensive business, rising interest rates could increase borrowing costs, affecting profitability and future investment costs.
• Economic Conditions: Although regulated, economic downturns in Ontario could reduce electricity demand and impact customer payment reliability.

Management's Discussion and Analysis (MD&A) Highlights

Operational and Financial Achievements:

• OEB Rate Approvals: The Ontario Energy Board (OEB) approved Hydro One Networks' revenue requirements for 2023-2027 on November 29, 2022. This multi-year approval provides crucial financial certainty and a clear roadmap for capital investments. Similarly, key partnerships like Bruce-to-Milton, Chatham-Lakeshore, and Niagara Reinforcement also secured OEB revenue approvals in late 2024, effectively de-risking these projects.
• Strong Internal Controls: Management confirmed effective internal controls over financial reporting and disclosure as of December 31, 2025. This indicates robust and reliable financial processes, with no significant changes occurring during the year.
• Collective Bargaining Agreement: Hydro One successfully negotiated a new collective bargaining agreement with the Power Workers' Union in early 2025. This ensures labor stability for the next four years and avoids potential disruptions.

Challenges and Management's Response:

• Rising Operating Costs: Hydro One faced ongoing pressure from inflation and supply chain disruptions, which increased material and service costs. Management implemented diligent cost management strategies to mitigate impacts on profitability.
• Regulatory Scrutiny on Capital Projects: While OEB approvals offer certainty, large-scale capital projects continued to undergo rigorous regulatory review. Management focused on careful planning and robust justification to navigate these processes and manage project timelines.
• Extreme Weather Events: Ontario experienced several severe weather events in 2025, leading to higher restoration costs and temporary service disruptions. The company's operational teams demonstrated resilience, and grid hardening investments remained a priority.

Leadership and Strategy: A seasoned team of directors and executive officers leads the company, focusing on long-term value creation. No significant changes in executive leadership occurred during 2025.

Hydro One's strategy rests on three key pillars:

1. Grid Modernization and Reliability: The company invests approximately $2.5 billion annually in infrastructure upgrades, smart grid technologies, and asset replacement. These efforts enhance grid resilience, reduce outages, and prepare for future energy demands.
2. Sustainable Growth: Hydro One expands its transmission and distribution network to support economic growth, connect new renewable energy sources, and facilitate electrification across Ontario. This includes projects under the "Getting Ontario Connected Act" to expand broadband infrastructure.
3. Operational Excellence and Customer Focus: The company drives efficiency through technology adoption, optimizes operations, and improves customer service by leveraging digital tools and enhancing outage response.

The Province of Ontario remains Hydro One's principal shareholder, holding approximately 47% of common shares. This relationship influences governance and strategic direction, aligning with provincial energy policy objectives.

Market Trends and Regulatory Changes: Hydro One operates within a highly regulated environment, making market trends and regulatory decisions paramount.

• OEB Approvals: Multi-year OEB approvals for revenue requirements (2023-2027) provide a stable foundation. However, future rate applications will remain a key focus for management.
• Electrification and Decarbonization: Government policies promoting electrification of transportation and industry, alongside climate change goals, create significant investment opportunities for Hydro One. The company expands and upgrades its grid to accommodate increased demand and integrate more clean energy sources, actively pursuing these opportunities.
• "Getting Ontario Connected Act": This government initiative directly impacts Hydro One. It involves leveraging their infrastructure to expand broadband access to rural and remote communities, creating new revenue streams and investment opportunities that management integrates into its capital plans.
• "Rural And Remote Rate Protection (RRRP)": This program, managed through specific variance accounts, underscores the government's focus on energy affordability for all Ontarians. This can influence rate-setting decisions, and management actively participates in regulatory proceedings to ensure fair and balanced outcomes.
• Grid Modernization: The OEB and government increasingly emphasize smart grid technologies, cybersecurity, and grid resilience. This requires Hydro One to continuously invest in advanced operational technologies.

Understanding these trends is crucial, as they directly shape Hydro One's operational priorities, investment plans, and financial performance.

Financial Health

Hydro One maintains a strong financial position, bolstered by its regulated cash flows. The company holds investment-grade credit ratings from major agencies (e.g., A- from S&P, A (low) from DBRS), reflecting its stable business model and prudent financial management.

Its capital structure combines common shares, preferred shares, and various debt instruments. For short-term liquidity, Hydro One uses a Revolving Credit Facility (with approximately $1.5 billion available at year-end) and Commercial Paper programs.

The company primarily secures long-term funding through Medium Term Notes (bonds) with staggered maturities and varying interest rates. For example, notes mature in 2025 (e.g., 1.76%, 2.97%, 5.54%), 2030 (e.g., 3.50%), and extend to 2046 (e.g., 3.91%, 5.00%). This diversified debt portfolio helps manage interest rate risk.

Hydro One actively manages regulatory assets and regulatory liabilities. These are accounts the OEB approves to defer certain costs or revenues, which the company then recovers or pays back over time. For instance:

• Regulatory assets include deferrals for broadband projects, pension costs, and environmental restoration, totaling approximately $1.5 billion.
• Regulatory liabilities, such as unbilled revenues or specific government initiatives like "Getting Ontario Connected Act" deferrals, amounted to roughly $800 million.

These accounts are crucial for how Hydro One manages its regulated earnings and cash flow, ensuring the company eventually recovers approved costs from customers. Variance accounts, like those for distribution rate riders or cloud computing costs, track differences between actual and approved costs. Hydro One typically adjusts future rates to reconcile these differences.

Future Outlook

Looking ahead, Hydro One anticipates continued capital investment in its transmission and distribution networks. This investment addresses the need to modernize aging infrastructure, support population growth, and facilitate Ontario's transition to a cleaner energy future. The company expects to invest approximately $12 billion in capital projects over the next five years (2026-2030).

Key focus areas include integrating more renewable energy, enhancing grid reliability against extreme weather, and expanding capacity to meet increasing electricity demand from electrification initiatives. The stable regulatory framework provided by the OEB will continue to support predictable earnings and cash flow generation, underpinning Hydro One's ability to execute its long-term investment plans.

Competitive Position

Hydro One operates as a regulated monopoly for electricity transmission and a significant portion of electricity distribution in Ontario. This limits direct competition in its core business.

Its competitive advantage stems from its essential role as Ontario's primary grid operator, its extensive infrastructure, and its stable, regulated revenue model. The company focuses on efficient operations, reliable service, and strategic infrastructure investments to meet Ontario's growing energy needs and support the province's electrification goals.